As an HR professional, you have likely run up against what is often called “shareholder democracy.” Need resources for that new engagement initiative? The answer might be “The board has not allocated funds for that effort during this fiscal year.” Want to implement that fancy new software? “Unfortunately, first-quarter results say we are going to go in a different direction.” That approach might be desirable to a board, but it makes other aspects of an organization very challenging.
I recently discussed this topic with David Hassell, cofounder and CEO at 15Five, and Shane Metcalf, cofounder and Chief Culture Officer at 15Five.
HR Daily Advisor: What is a shareholder democracy, and how has it influenced businesses in general?
Hassell: Shareholder democracy was the principle dictating that investors have a say in corporate governance—the power they took away from management—but it morphed into shareholder supremacy, whereby a corporation’s only responsibility is to its shareholders.
Before this, corporations were operating under the principle of managerialism, a more inclusive approach wherein communities, employees, customers, and other stakeholders were considered, not just the shareholders. With shareholder democracy, executives are now essentially forced by shareholders to make business decisions focused solely on return on investment.
Metcalf: In the 1970s, when these new ways of being were adopted, employees were immediately impacted by layoffs and the end of pensions. Still today, shareholder “democracy” creates all of these externalities and enforces short-term thinking. This means that leaders are not investing in their employees’ long-term development and growth and create more exploitative companies.
Hassell: People are reduced to line items on the P&L that can easily be cut to improve profits and shareholder dividends. So loyalty and trust have been greatly diminished. When companies are not loyal to their people, those people don’t feel loyalty to their companies.
HR Daily Advisor: To what degree would you say shareholder democracy has steeped company culture in the United States?
Metcalf: The prevailing narrative is that the highest purpose of a company is to make money; therefore, intrinsic motivation has been all but eliminated. We now know that money is far from the best motivator, but companies are using it as their primary method of motivating the workforce. Without intrinsic motivation, employee engagement decreases. And we see that engagement has been hovering at around 30% for at least a decade.
HR Daily Advisor: Is there a better model?
Hassell: We are talking about an evolution of capitalism that is a call to return to the corporate values from before the wide adoption of maximizing shareholder value. In the ’80s, when this took hold, we saw leverage buyouts, the rise of corporate equity, and corporate raiders’ trying to extract as much value as they could from businesses. There were tons of layoffs, and these companies were destroyed in the process.
This is the dark side of capitalism—value extractors versus value contributors. This created a real distrust of businesses and corporations in our society, but we can reverse that. All of this stemmed from a really bad idea. It was probably well-meaning, but it was a really bad idea and very harmful.
HR Daily Advisor: What is the driving force behind an employee-centric approach? Will employees really benefit from such an approach? How can upper management justify ignoring the maximization of profits?
Metcalf: It’s proven that when you invest in your people and have a good culture, you will significantly outperform your competitors that are not doing those things. It’s not about making the choice between maximizing people or maximizing profits; maximize your people and therefore your profits. Put people first as the pathway to greater, sustainable profitability. A business can’t reach its full potential unless it helps its people realize theirs.
Hassell: We practice what we call “Best-Self Management,” which we describe as “not a purely philanthropic endeavor.” Such an approach can improve business outcomes by treating people better and actually guiding them through a process whereby they contribute more, are intrinsically motivated, and have access to their highest creativity.
We are seeing a potential return to “managerialism,” the system that preceded shareholder supremacy—managing companies for the employees, customers, and community. It seems that at a time when there is record-low unemployment and Millennials and Gen Z employees are looking to fulfill purpose and align their values with a corporation, top business leaders are seeing a need to focus on other stakeholders, not just shareholders.
HR Daily Advisor: Any final thoughts you would like to add?
Metcalf: A higher purpose of capitalism is to be regenerative, take care of people, and take care of the planet. As a people-first company, we’ve had 1% turnover in 8 years. Knowing what it costs to replace an employee, consider the immense savings of that.
Hassell: Businesses can also be more profitable by doing this and not less so. There’s a zero-sum-game thinking of, if I’m going to invest more in my people and my community, then profits will be lower. But that investment actually creates more income, more customers, longer-lasting customers, and more sustainable profitability.