Upgrade to the Human Operating System

The governance operating system is based on an underlying assumption that employees act in their self-interest. This operating system worked perfectly fine for decades, until leaders began calling on employees for other things besides productivity.
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When I think of how we've successfully taken the humanity out of business, I often think of what Michael Corleone tells his brother Sonny in the movie The Godfather: "It's not personal, Sonny. It's strictly business."

For much of the 19th and 20th centuries, chief executive officers managed their workforces with a similarly unsentimental (if not lethal) approach. But as behavior has become the 21st century's killer app, the coldly rational operating system of governance no longer computes.

Instead, organizations should a) introduce a human operating system, a model with a culture that values humans and behavior at its core; b) reduce their reliance on the traditional governance operating system; and c) harmonize the two models to more effectively put humanity back at the center of business. Doing so will successfully generate the "Big Asks" that leaders want and need, their employees to deliver.

Governance is concerned with control, with preventing unwanted behavior by drawing lines -- e.g., authority to make decisions; lines of reporting and approval; or decision-making process. A human operating system, by contrast, revolves around unleashing employees to accomplish objectives set and objectives not even imagined.

Beyond Productivity
The governance operating system is based on an underlying assumption that employees act in their self-interest. This model includes formal policies, procedures, processes, financial objectives and performance targets; leaders use rewards and punishments to motivate employees to adhere to these rules and to achieve these objectives. When employees become more productive, we boost their salary or give them a bonus. When employees fall short of performance objectives or break the rules, we take away their bonus, freeze their salary or fire them.

This operating system worked perfectly fine for decades... until leaders began calling on employees for other things besides productivity. Today, we are asking more of our employees than we have ever asked in the past. We want employees to relate to colleagues around the world who come from different cultures and speak different languages. We want employees to go beyond merely serving customers by cultivating unique, delightful and genuine customer experiences. We expect employees to take on much greater workloads as we shrink their teams. We ask employees to represent the company and nurture its brand, not only when they're on the job, but whenever they publicly express themselves in tweets, blog posts, e-mails, or any other interaction. We increasingly ask employees to go beyond continuous improvement by conceiving and implementing disruptive innovations that deliver the step changes our companies need to thrive amid global competition.

These are not only Big Asks, they are numerous asks. As I've argued before, carrots and sticks, while still necessary, are no longer sufficient. Instead, we as leaders need to inspire the game-changing behaviors we're asking our employees to produce and operationalize our values so that we can scale our businesses sustainably through a human operating system that when brought to life through an organizational culture clearly identifies and pursues meaningful endeavors that satisfy employees' human desire for significance. In a governance operating system an employee will see herself as a production-line worker who performs tasks in exchange for a paycheck.

In a human operating system this same worker views herself as helping to limit human suffering by working with colleagues to produce a medicine that combats asthma, for example. This employee still needs to be paid and still needs to adhere to certain rules, but she's much more engaged and much more willing to innovate, collaborate and commit to the organization's mission if she is supported by a human operating system 90 percent of the time and governance 10 percent of the time than vice versa.

Employee Engagement
Leading companies and most innovative leaders are beginning to understand the need for a human operating system. "... [W]e are a people-based company," Starbucks CEO Howard Schultz said in a recent interview. "You couldn't find another consumer brand that is as dependent on human behavior as we are. We built Starbucks not through traditional marketing or advertising but through the experience. And that experience can come to life only if the people are proud, and if they respect and trust the green apron and the people they are representing."

Cultivating the pride and trust necessary to produce the customer experience Schultz describes requires much more than carrots and sticks. This is why so many companies now place less emphasis on productivity measures (what employees produce) and more emphasis on measuring how employees behave (i.e., engagement). Best Buy, for example, recently quantified a link between improvements in employee-engagement measures and revenue increases: The electronics retailer reports that a 0.1 percent increase in employee-engagement scores leads to a $100,000 boost to a store's annual operating income.

The "human capital management" movement, an approach that seeks to more effectively measure and track the value of "human resources," also reflects a desire of leaders to move to a Human Operating System; the phrase "human capital management" itself also exposes the flaws of a governance model that treated people as machinery or office buildings (capital). Unlike tangible assets, employees do not depreciate; in fact, the value most employees provide to organizations appreciates over time. One of the most pressing challenges that management accountants currently face is how to account for ideas, interactions, social networks, behaviors and other intangible assets whose value has soared as knowledge workers have led the transition to a service-based economy.

If the human operating system sounds like a stretch right now, consider how odd e-business sounded 15 years ago. In the mid- to late 1990s as business began to explore the Internet, "electronic business" was treated as a separate entity. Some companies even legally separated their "brick and mortar" business from their "e-business." Today, the term "e-business" is hardly even uttered because it has lost its previous meaning by becoming a natural part of the way almost every company does business.

Very soon, I expect that humanity (call it "h-business") will become a natural part of the way organizations do business, much in the same way that measuring and managing quality progressed from an idea to an integral part of the organizational fabric in the 1980s.

Rebalancing and Harmonizing
Just as carrots and sticks will always have their place within organizations, so, too, will the governance operating system. I'm not suggesting that the human operating system replace governance; instead, I'm proposing a rebalancing and harmonization of the two systems: How would our companies look if our employees were informed and guided by governance 5 percent of the time and guided and inspired by values (that espouse innovation, hard work, principled performance, creative solutions, etc.) 95 percent of the time?

I believe our companies would look more successful over the long term, and also much more efficient under this scenario. After all, at a time of diminishing resources, organizations that harness and support the most inexpensive and abundant source of energy -- human energy -- will generate the ideas, connections, collaborations, behaviors and innovations they need to mitigate the threats and maximize the opportunities that our morally and ethically interdependent marketplace poses.

To succeed at rebalancing our governance and human operating systems, we need to harmonize them. By that, I mean we need to remove the conflicts between formal governance levers (such as rules and financial objectives) and values (such as trust and integrity). When company values espouse employee innovation but company policy requires an employee to obtain three different signatures to gain approval to spend a modest amount of company money to foster innovation, a conflict exists. Or, when company values espouse honesty but quarterly earnings pressure nudges salespeople and accountants to exploit gray (or black-and-white) areas of revenue-recognition rules, a conflict exists.

Focusing More on Humans
How do we harmonize our operating systems? By focusing more on humans and less on governance, according to United Airlines CEO Jeff Smisek. Asked by a Wall Street Journal reporter if he agreed that the Obama administration has been unnecessarily tough on the industry, Smisek responded that the question was essentially off the mark.

"This administration is the first to really begin focusing on modernizing the air-traffic control system," Smisek responded. "I applaud them for that. In terms of the various [new] consumer rules, my own goal is to have an airline where all of that is irrelevant. If you have the right culture, the right folks and you've given them the right tools, they'll exceed whatever regulations or laws or whatever the government can dream up."

The right culture, humans, and tools can address any regulatory risk. This approach should jolt most CEOs. Regulatory and compliance concerns currently rank as the top business risk in the U.S., according to a recent survey by Ernst & Young. Concerns about following current and future rules keep CEOs -- besides Smisek, at least -- awake at night more frequently than concerns about innovation, talent, emerging markets, and other risks.

Smisek seems to understand that his company's operating system should focus more on humans than it does on rules and other governance levers. By creating the right culture and equipping his people with the right tools, Smisek rightly believes that regulatory and compliance risks will barely rate a blip on United's radar.

Michael Corleone never would have made it as the head of a criminal or corporate organization in a century in which business is personal.

This story appeared in, and was written for, Bloomberg Businessweek.

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