Employees Are Your Future

The British Investment Association, with encouragement from the British Government, is now advocating against corporate "short-termism" while encouraging long-term investments.

At first glance one can only applaud. Short-termism has become the Achilles Heel of free market capitalism. For too long our public corporations have been chasing higher profits from quarter to quarter will too little regard for how that pursuit is undermining our economic future. Too often we're doing whatever it takes -- laying off loyal workers, mothballing R&D, buying back shares of stock -- to create an illusory sheen of growth where it doesn't exist.

But as you read through the terms of the resolution, it becomes clear that the most important step -- paying employees a fair wage -- never comes up. Fair wages are the fulcrum of any forward-thinking strategy that hopes to build new markets with new products and services. Long-term thinking is about little else: how to bolster core competencies with expansion into new, related areas. That's where creative thinking, in real time, on the job, is most important -- where the minds of workers, constantly looking for improvements in the way a company reaches and retains customers, become the fuel for growth. If those workers aren't compensated in a way that gives them the good cheer that comes from economic security, their creativity will shut down. And so, eventually, will customer loyalty. A loyal workers draws loyal customers. Unhappy workers repel them.

Many of the suggestions in this report are sound. It advocates a closer scrutiny of executive pay, in the perspective of long-term performance. It encourages financial reporting that would allow investors to monitor investment in R&D. It stressed the need for investors to demand reporting that clearly depicts whether or not a company is thinking about increasing long-term value, in real terms: new products and services. And, to be fair, it actually talks, in the most abstract financial -speak about a company's commitment to its employees -- its "human capital," a term that is becoming more popular, but which I dislike. It's accurate -- investment in employees is probably the most important investment a company can make now -- and yet it's ridiculously impersonal.

Here is the crucial passage in the report, which may make you laugh, it's so convoluted and eager to avoid saying simply that companies need to be required to invest more in workers:

Therefore, an important factor for improving company productivity is neither being reported on by companies nor sufficiently integrated into analysis by investors... a material contributor to company productivity is not being recognized... This is despite investors being prepared to apply a market premium to those companies that successfully demonstrate improvements or make appropriate long-term investments in human capital. The lack of focus on this issue is also in contrast to the increasing significance of human and intellectual capital to the functioning of the economy... research predicts that intangible investment will soon be 50 percent higher than investment in tangibles.

In other words, success if business now is directly proportionate to the way a company compensates its employees. "Human capital" -- skilled workers, intellectual property, and the intangible good will that strengthens a creative workplace -- have become far more significant than physical assets. What's inside the hearts and minds of a workforce controls the future of company far more than a current bottom line.

If only this report had made this its primary, core message, rather than one among many. If only investors had been told that effective management for the long term depends entirely on how workers are trained, paid, and treated as the source of success rather than just another costly resource.

We must be on guard for an attempt to appear to address the main problem without in fact doing it at all. So, what appears to be good news, is in fact a little worrisome to me. The truth is in this report, but so well hidden that most of our CEOs may miss it entirely. In business, there are simple truisms that actually work. One, if you don't measure it, it won't happen. Boards and investors must agree on appropriate targets. Yet it will have to be a journey. And it should start with paying people well, which has salutary outcomes for both the corporation and the shareholders, yet also to the nation and our economy. So let's get real. Have courage. Put it out there clearly. Measure it and then measure its impact. The current shareholder primacy culture is a disaster. Let's just admit it, and then move on. It's time for business to do the right thing for itself and everyone else.

Peter Georgescu is the author of The Constant Choice. He can be found at Good Reads.