HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business.
What does it take to succeed as a business an do well by your employees? Harvard Business School professor emeritus Mike Beer has studied firms who invest in building long-term social value, and he says they do a few things differently.
In this episode, you’ll learn how these companies set their strategies for new products and services, hiring, and even how much debt they take on by first considering their company’s larger identity and higher purpose. Beer calls this strategic identity.
You’ll also learn how they manage the short-term pressures from Wall Street analysts and investors through storytelling that emphasizes long-term results.
This episode originally aired on HBR IdeaCast in October 2011—in the wake of the Great Recession. Market conditions have shifted since it was released, but the insights in this conversation are still relevant.
And just a note, we recorded this by phone. While the audio quality is not great, the conversation is. I think you’ll enjoy it. Here it is.
SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green. In an economy with high unemployment, the possibility of a double dip recession looming, and debt crises going on over the world, we’re in a pretty tough moment. And it has some people wondering if business can even be a force for good anymore.
I’m talking today with Harvard Business School’s Mike Beer who has some opinions on that. He’s the co-author of the new book Higher Ambition: How Great Leaders Create Economic and Social Value. Mike, thanks so much for coming on the program.
MIKE BEER: Happy to be with you.
SARAH GREEN: So what do you think? Can businesses still do well while doing good, really?
MIKE BEER: Well, absolutely. There’s evidence in many firms, although they’re in the minority, that they are able to run their firms over long periods of time by doing good and doing well. However, it’s important to understand that this is not something a CEO can decide to do in the midst of a depression or a recession, or I should say, the Great Recession, because the things that these firms do are very much long term oriented.
So for example, these firms invest a tremendous amount in building both human and social capital. Which means that they are very careful about hiring, and then they create a culture that motivates people and keeps them attached to the firm and so on. And one of the ways they’re able to maintain the human capital and social capital they build is to prevent doing some bad things in downturns. For example, they generally do not have large amounts of debt.
I’ll give you an example. Southwest Airlines has virtually no debt. They promise their employees they’ll never be laid off in a downturn. They’re able to do that because they have low levels of debt, so they’re not forced into decisions by external stakeholders, shareholders and so on, that they don’t want to make, because they’re too short term.
And they also limit their growth. Their policy for years has been two cities a year, no more, even though they had many opportunities to grow faster. Because growing too fast prevents them from building human capital, that is, hiring people who really fit the firm from a values point of view and have the capabilities required. So their selection ratio is great. They are able to select 1 out of 100 applicants. And secondly, so the limits on the rate of growth allows them to basically get the best people that fit, and also prevent them from overextending themselves, both through debt and too many people that they have to cut back in downturns.
SARAH GREEN: So I want to get in a little bit deeper to this topic. Tell me a little bit more about what they do.
MIKE BEER: Sure. Sure. in. The book, we talk about one of the key disciplines they have is what we called forging a strategic identity. So what does that mean? It means that they, first of all, start the process of deciding what they’re going to do, what services or products they’re going to offer, who they are, what markets they will go into, and what they’re going to do from a business point of view, by first asking themselves, who are we? They start from the inside out, go out, rather than from the outside in.
So what do the worst firms on Wall Street do? They chase profits, profits that were not necessarily in their core area of capabilities or their long term path. They just chase profits. These firms don’t chase profits. They expect profits. They get profits. But they start by saying who are we? What are the capabilities we have? What are people in our organization are passionate about? What do we care about? What are our values? And then now let’s find the intersect between market opportunities and who we are to take advantage.
So again, that also contributes to a somewhat steadier– if you will, slower but steady rate of growth, rather than taking big opportunities, running after them, and finding yourself out on a limb during bad times. So they start by asking themselves who we are and having a view of wanting to leave a legacy. The CEOs in those companies care about building an institution. And by caring about building an institution, that helps them take a longer view.
Now, they also understand, by the way, that if they’re a public company they have to earn quarterly earnings, and a rate of growth in their earnings that’s acceptable to a market. But they manage that tension as best as they can, always understanding they’re building an institution. So part of it is a mindset of how they approach what the purpose of the firm is.
The firms that are not higher ambition firms approach the problem as saying, my job is to satisfy shareholders. That’s where it stops. the firms that we’re talking about, the leaders we’re talking about, have a multi-stakeholder view. They understand that they have to serve the community, the customer, the employee, and the investor.
And by the way, they value investors who are long term investors. That’s another thing they do. So I’ve talked to CEOs who understand clearly that they want to go after investors who have a long view and are going to hold the stock as opposed to buy and sell their stock at the slightest change in value in the market. So it’s the perspective they start with that’s the most important element of how they end up. And then they fashion policies to match that perspective.
SARAH GREEN: I want to talk a little bit more about those short term, stock market driven pressures, because those I know are very real, especially as we’ve seen over the last several weeks now. I mean, the market’s up 100 points one day. It’s down 300 points the next day. You know, it gets really hard to sort of take a long term view, I think, when you have this constant sense of crisis.
And I know that even though you may have the best of intentions towards managing towards long term , a disappointing quarter, just from a stock analyst point of view, even if your company grew, can be really devastating. How do these leaders really push back on that?
MIKE BEER: Well, as I say, it starts, first of all, with the perspective. And what they do is they tell Wall Street the long story, not the short story. Tell the right story to Wall Street, and in most cases that story actually does sell. Most Wall Street analysts understand that long story and are willing to tell that story to the potential investors.
And this is important. I haven’t mentioned it. Another discipline that these companies have is essentially creating a performance-driven culture. When things are tough, figuring out ways to do better in tough times, to be inventive, to be innovative about what they do is by essentially creating high standards and enrolling people in those high standards. Now how do they enroll people in the high standards? They enroll people in high standards by articulating higher purpose.
So using that higher purpose, by people identifying with the company and seeing that it has a higher purpose beyond simply the financial results of the company, they also understand and want to enable the company to be successful in those shorter term financial results. And as a result, they exert extra effort, more innovation, more problem solving to try to do the best they can in those tough times.
So for example, United Stationers is a company not in our book, but we’ve discovered since finishing the book it’s very much a higher ambition company. So first of all, their strategic intent has nothing to do with profit. I mean, they don’t say profit is their first motive. It’s an outcome they seek. Their strategy is to enable their partners to succeed, their suppliers and their customers to succeed. That’s what their strategy is.
And they keep working with those stakeholders, including by the way the community, to try to create a win-win proposition for everyone. And they’ve taken on a higher purpose of serving the community, of doing good in the community. They’ve enrolled their customers and their suppliers. And that gives people a great deal of meaning.
SARAH GREEN: So I want to just get your take on the sort of apparent paradox we have here. Because we have on the one hand these sort of paragon examples of great companies that we all sort of wish we worked for. At the same time, when the rubber meets the road, the majority of companies still seem to pursue these sort of short-sighted strategies. And they really see doing good at odds, I think, with doing well. And they think it’s got to be trade-off, always. How can an idea like this one ever really go mainstream? How do you get more companies to see the value of an idea like higher ambition?
MIKE BEER: It’s a great question to which I don’t have an easy answer. But I do have some answers. First of all, we’re dealing with a very long term proposition of changing the mindset of business, the mindset of business leaders, about what firms are about, what their purpose is. So how do we do that? Well, first of all, to create more linkages between CEOs who are like-minded, and begin to create a movement.
Actually, my colleagues and I at TruePoint are in the process of– have founded a not-for-profit TruePoint Center for Higher Ambition Leadership, whose aim is to create a movement. We’re going to bring CEOs together around this book to begin with, in November at Harvard. We want to put them together in a constructive dialogue. We want them to find other CEOs who are also potentially interested and build a set of norms, a different way of thinking about this that becomes the conventional wisdom as opposed to the unconventional wisdom, which it is now. So one way is to create a movement.
The other way is to begin to use that movement and other forces to try to change elements in the context in which business operates. So i think, for example, we need to rethink some public policy, particularly around the areas of investing and long term and short term investing. We’ve become a speculative society. Investing is out and speculation has been in. And that’s a problem.
So the Aspen Institute, for example, has written papers on this, and has brought CEOs together, and other thought leaders, to begin to think about how various policies with respect to buying and holding stock might be changed to enable more investment, as opposed to short term speculation. So that’s a reform that also has to occur.
Reforms have to exist at the level of boards of directors. Boards of directors, too many of them– the best companies have very good boards. But many boards have a relatively short term focus as well. They focus on their fiduciary responsibilities, the financial results of a firm, but not so much on building a great firm. That’s just not in their vocabulary. They never think about that. They never ask their CEOs about it. They never ask what, in fact, the culture of the company internally is, and getting the truth to speak to power. And that’s required.
And thirdly, and we talk about this in the book as well, is business schools have to reframe leadership, what they’re trying to do. They all say they’re trying to develop leaders, but they never really define what leadership means in the context of building an institution. So the argument I made in a recent blog is that basically what we call in the book integrity is not really what we teach at the schools.
The word integrity means honesty, but the most important honesty is integration. Integration between elements of the firm, finance, marketing, human resource, for example. And integration between who you are and what you’re doing. And that requires an honest, open conversation and transparency about who we really are and how we function.
SARAH GREEN: At the end of the day, though, higher ambition has to be driven by a leader. And a leader is a person. It’s an individual. So what about on the personal level? If you’re one on one with a CEO, and he or she is skeptical about the value of this, what would you say to them about why they should change as an individual and what they would need to change in order to do this?
MIKE BEER: Well, the first thing you do is you talk at the level of performance, OK? The evidence is overwhelming that taking a long view, following some of the policies and practices I’ve described, leads to long term performance gains. It’s just overwhelming. It doesn’t mean, by the way, that you’re always the highest performer every quarter. But on the average, you’re sustained, compounded performance over a long period of time works out to be above average– if not always the highest, above average in your industry.
And so the first thing you want to do is start with that evidence. Now, people’s believability of that evidence is partly related to evidence, but we also know that people don’t always pay attention to evidence, right? so. Part of is related to who the person is. I think a lot of the CEOs we talked about do start with a certain perspective coming from who they are. Whether it’s family, religion, or otherwise, they start with a perspective of wanting to contribute to the larger good.
It doesn’t happen all at once. It happens over a long period of time. I mean, it’s taken us years to build up conventional wisdom. And particularly the last 30 and 40 years, which has been dominated by economists’ theory about agency theory formulated by economists. That has driven us shorter and shorter and shorter and shorter. Well, it took 30 or 40 years to do that. We’re going to have to spend an equal amount of time undoing it and moving to a different plane.
SARAH GREEN: Well, Mike, that is an excellent, excellent point. Thanks again so much for coming on the program today.
MIKE BEER: Happy to do it.
HANNAH BATES: That was Harvard Business School professor emeritus Mike Beer in conversation with Sarah Green on HBR IdeaCast.
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