Developing trust.

CEOs with winning records in the creation of shareholder value are likely to be those who have built and maintained strong trust relationships with their workforce

Business magazines, newspapers, and journals are replete with articles exhorting managers to adopt the creation of shareholder value as their prime directive. The concept of shareholder value is not new. It is the concept of productivity repackaged to appeal directly to the investor. To develop an effective strategy for growing shareholder value, there is a need to first, understand the factors that determine shareholder value, then assess how managers can create an environment where increased shareholder value is made possible.

Increased productivity has been understood as both the increase of worker output, and the achievement of productive efficiencies through the mechanization and the automation of labour. Through the latter, the output of the individual worker is leveraged, so that fewer employees are required to achieve higher levels of production. The ultimate outcome has generally been lower production costs and increased profit potential.

As western economies have shifted emphasis from industrial to post-industrial or service-based production, information has become the primary product and worker knowledge the primary means of production. Managers of these "knowledge workers" are faced with the problem of identifying and implementing means of increasing output where industrialization or mechanization is not possible. The challenge for economists, politicians, and business leaders is to support the development of a response to the problem of static productivity.

The productivity paradox Operating within this context has been a frustration for a generation of economists. The term "the productivity paradox" has been coined to describe the lack of significant improvement in North American productivity since the mid-1980s, in spite of cost-cutting programs, including downsizing, as a dominant management theme.

Management experts such as Stephen S. Roach, chief economist of investment banking giant Morgan Stanley, ("The Hollow Ring of the Productivity Revival" Harvard Business Review, November 1996) are now beginning to assert that cost cutting is exactly the wrong way to proceed. Roach suggests that cost cutting in general and downsizing in particular lead, at best, to a one-time-only increase in industrial efficiency as the full burden of production falls on the shoulders of a smaller and demoralized workforce. On the other hand, as we approach the end of the 1990s, the cutting of costs seems to be the standard response of North American professional management, in spite of the spectacular failures of supply- side managers such as At Dunlap, formerly of Sunbeam Corporation.

If the cutting of costs achieves no lasting increase in productivity, why are so many managers following this example? Jeffrey Pfeffer of the Stanford University Graduate School of Business offers some insight in his article, "Six Dangerous Myths about Pay" (Harvard Business Review, May 1998). Pfeffer asserts that managers tend to be overly influenced by the following five factors:

* Reliance on conventional wisdom, instinct and "gut-feel" rather than empirical research to support management decisions;

* Economic theories that suggest the interests of labour and business are diametrically opposed;

* Consultants whose economic interests lie in perpetuating particular, narrowly defined solutions;

* The seductiveness of the simple fix;

* The sheer weight of collective peer pressure from managers who have committed to supply side management.

Add to these, the short-term increases in share value following the announcement of cost-cutting initiatives that achieve market approval, and cost-focused management responses can be better understood.

Even if the rationalization of costs had the potential to bring about long-term productivity increases in the manufacturing sector, what would be the corresponding outlook for the new service sector? Roach ("In Search of Productivity" Harvard Business Review, September 1998) has found no data supporting any significant increase in productivity resulting from massive investments in information technology for workers whose value depends upon their mental acumen and creativity.

Factors supporting shareholder value Over the past several years, a new management doctrine has taken shape at the heart that a business is as much a social as an economic enterprise.

Fredrick F. Reichheld and Thomas A. Teal in Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value (Harvard Business School Press, 1996) demonstrate that there is enormous potential for improving a company's performance by increasing customer loyalty, investor loyalty, and employee loyalty.

Conventional wisdom maintains that increasing customer; investor and employee loyalties are three separate and distinct business objectives. It is our view that these three objectives are achievable through the implementation of a single common business strategy.

A review of leading-edge literature on these issues strongly suggests that customer loyalty, the outcome of superior customer service, and investor loyalty, the outcome of protected and enhanced shareholder value, are each dependent upon the business gaining the commitment and loyalty of its employees.

The model presented in Results of Behaviours expresses the role of the trust relationship and the achievement of both shareholder value and employee productivity.

North American business expends billions of dollars annually on employee and executive training. Over the past several years, a large proportion of those annual expenditures have been directed toward both leadership and communications training. Our philosophy is in diametrical opposition to those expenditures.

Leadership does not occur as a unique and unilateral expression of learned managerial behaviour, but is the outcome of a relationship of mutual trust and respect between employee and supervisor at every level in the organization. The trust relationship provides the foundation for both individual employee excellence through commitment, and the creation of shareholder value as the natural outcomes of this behaviour.

The most significant obstacle to communication in the organization is not the absence of basic communication skills, but rather the failure to make time for communication to occur and the lack of an agenda designed to build the employee/supervisor relationship. Recent surveys of the Canadian workforce suggest that significantly less than half of workers report regular communication with their supervisor regarding their work performance.

Employee empowerment Few business management topics over the past few years have received the vigorous attention directed at empowerment. While it's detractors regard it as a business philosophy that encourages employee anarchy; others see it as an organizational environment where employees at all levels take full responsibility for their own, and the organization's performance.

Two pre-eminent proponents and practitioners of employee empowerment are Roger Sant and Dennis Bakke, respectively chairman of the board and CEO of AES Corporation of Arlington, VA. AES is a global electrical power producer that operates approximately 90 plants in 13 countries, and employs about 40,000 people. Neither AES's mission statement (to help serve the world's need for electricity), nor their goal statement (to be the leading global power company) distinguishes it from other global enterprises. The difference at AES Corporation becomes apparent in their guiding principles (fairness, integrity, social responsibility, and fun).

If the AES statement of guiding principles seems remarkable for a business enterprise, so are the results the enterprise has achieved. AES was listed on the NYSE in mid-1991 and has consistently outperformed the S&P 500 since mid-1996. As of mid-February 1999 the share value of AES has performed better than the S&P average by between 200% to 600%.

To implement their vision of "an engaged and accountable workforce", AES's Sant and Bakke have radically departed from conventional management wisdom and practice through the following innovations:

* Elimination of hierarchy in favour of small work teams;

* Elimination of the majority of staff positions (e.g. no human resources department) through the development of "employee generalists";

* Recruitment for organizational fit rather than technical competence, with a strong bias in favour of internal promotion;

* Driving of responsibility for decision making down to the team level, and the overall reduction of necessary management "approvals" for the implementation of team decisions;

* Team-based performance management focusing on achieved results;

* Complete sharing of all information, to the extent that all employees are considered insiders by the U.S. Securities and Exchange Commission (SEC) for stock-trading purposes;

* Bottom-up, employee-led, strategic, operational and capital allocation planning processes.

Future AES targets for change include the elimination of all approval processes, the integration of operations and maintenance, the elimination of hourly work in favour of salaried positions, as well as the devolution of responsibility for setting compensation rates to the individual employee level.

Sant and Bakke have developed the AES organization structure and management practices, (e.g., hiring, compensation, information flow etc.), to support the empowerment of their employees. "Everything about how we organize gives people the power and the responsibility to make important decisions, to engage with their work as business people, not as cogs in a machine."

Chris Argyris (Harvard Business School Professor Emeritus) is one of the more outspoken critics of employee empowerment programs. In his article "Empowerment: The Emperor's New Clothes" (Harvard Business Review, May 1998) he indirectly highlights the reason for the success of AES Corporation's approach to empowerment.

Argyris accounts for the overall disappointing record of employee empowerment programs in most organizations by suggesting that management, from the CEO down, often subtly but effectively undermines the objective of the empowerment process. In other cases, Argyris says, employees are not ready or willing to assume the responsibilities that accompany empowerment.

On the other hand, Sant and Bakke, when they undertook to create AES Corporation, knew that employee empowerment would be the dominant characteristic of their enterprise. That objective has been reflected in each step they have taken to build AES (see 5 steps to success).

The program must go as far, and no farther than the ability of all the parties to sustain the initiative. This includes the CEO, the senior management team, middle managers, and the front line.

While few CEOs would attempt to implement a change program which is as comprehensive as that of AES, even more modestly conceived programs have the potential to increase employee commitment and productivity.

Factors underlying productivity and commitment. In 1981, Fred K. Foulkes reported a study of 26 large, non-unionized American companies (Harvard Business Review, September, 1981). The objective of the study was to identify, where possible, factors that have the potential to improve employee relations and boost productivity.

The following factors have been identified as supportive of a climate of co-operation between employees and management:

* A sense of caring, as demonstrated by the absence of symbols of rank and status (e.g., reserved executive parking, special executive benefits packages, separate executive cafeteria services, and lavishly decorated executive offices);

* Internal promotion as a dominant theme for filling supervisory and management vacancies where possible;

* Management that listens and demonstrates their openness to employee input

* Managers who are carefully trained and keenly aware of the importance of good employee relations;

* Other factors, including convenient location, growth and profitability, employment security, an influential human resources department, and competitive pay and benefits.

To Foulkes' list the implementation of an internal, bottom-up communications program of face-to-face, non-judgmental discussions between individual employees and their supervisors, outside of the traditional performance management model, could be added.

Such programs recognize that employees at all levels are so burdened by the daily details of the modern business enterprise that they do not focus adequate attention on the development of their working relationships.

Each of these factors is important in defusing the climate of adversarial labour relations in North America in favour of a relationship where trust becomes part of organizational culture.

Richard Bachman, Cahner-Rabb Professor of Social and Organizational Psychology at Harvard University describes trust as the cornerstone of employee commitment. Bachinan states that trust in organizations does not appear by mandate, but as a carefully developed outcome in organizations that are well designed and well led at each level of management.

Key to that winning formula will be the empowerment of employees through building communication and trust between supervisors and their direct reports, which is the fundamental business relationship within the organization. Building employee commitment is central to the creation of customer loyalty. Building customer loyalty creates a sustainable future for the enterprise and strong shareholder support.

5 steps to success

The following success factors need to be understood by any CEO or management team considering implementing an employee empowerment program.

1 The CEO must be committed to achieving authentic empowerment objectives. Employees understand the difference between genuine commitment to empowerment and techniques designed to manipulate.

2 The CEO must lead and senior managers have a personal stake in the success of the initiative. Consultant-led initiatives tend to fail at a higher rate, and sooner than initiatives which have active and unequivocal internal support at the top.

3 Objectives must be achievable. Nothing succeeds like success, and early failure is likely to cause early and wholesale abandonment of the initiative.

4 The CEO must take rapid steps to ensure that the employees understand the objectives of the program. In the early stages of implementation, most employees are likely to be suspicious of overtures toward empowerment and resist change. Some employees will inevitably ascribe ulterior motives to the CEO and management. Managers at all levels must share the CEO's understanding of and commitment to the program and be prepared to communicate this to the employees.

5 Employees must be ready and willing to assume the levels of responsibility implied by the empowerment initiative.

Tom Davis is president of TDI International Inc., a firm specializing in changing the labour relations dynamic in organizations, and increasing productivity. Michael J. Landa is president of OAC Organization Assessment and Change.