Companies as Living Beings

Companies should be seen essentially as biological organisms, thriving, like any other living entity, on growth with an organic pace – evolutionary and relatively stable growth with a lot of experimentation an offshoots at the margins. If you treated your company as a living thing, it could outlive most of its competitors. This meant giving up the “economic” model of corporate success.

The conventional way of regarding companies, as purely economic constructions with the purpose of returning the investment to shareholders, was not just inaccurate, but shortsighted. It led to a lot of short-lived companies. The death of a company is not gratuitous. People suffer. Companies are like people – they get wiser and better as they grow older. Then the death of a company is a tragic loss of knowledge and wisdom.

Therefore the most effective way to think of companies is as organic beings, evolving in natural ways and looking out for their own longevity. A company’s first loyalty is not to any individual stakeholder, but to itself.

Institutions have an urge. They have basic driving forces as institutions: They want to survive, and they want to develop their potential. These driving forces exist independently of what these commercial institutions are doing. This is contrary to the standard way in which people talk about commercial institutions.

People will say Hertz or Avis exist to rent cars. But in reality, Avis and Hertz rent car to exist. Profits, to an institution, are like oxygen to a human being. Oxygen is absolutely essential to live. But it is not the purpose of life.

As an institution tries to prolong its life expectancy, it will do whatever economic activity will allow it to continue to exist. There are many examples of institutions that have completely changed their economic activity in order to continue living. This desire to survive is a basic force in every living system. And companies are living systems. Therefore how organizations survive, how they manage for change, is of great importance.

The average life expectancy of commercial organizations is very low. Lots of organizations die, especially if there are fundamental changes in their world. Very few succeed in living through all the completely fundamental changes in their worlds. If you are three hundred years old like the Japanese Mitsui Company, or two hundred years old like DuPont in the U.S., you have seen changes in the world which are considerably deeper than anything that is happening presently. Yet these companies survived. They must have been good at managing for change. Human work community aimed at continuity from generation to generation. Goal is survival and self-development in a changing world.

This institutional urge to survive has interesting consequences in the world that is changing rapidly. If the world is changing around you, it may actually mean your profits are disappearing. You may be doing an economic activity that does not allow you to survive anymore. The institution’s urge to survive will cause it to look around for another activity.

A study of the long survivors in the business world (>100 years old) shows that these old companies share these traits:

1) A frugal financial approach. Financially conservative. This is a bad news for investment bankers. These companies want to keep their own money in their own pocket, and don’t want someone else’s money. Surviving for centuries means never having a banker pull the rug out from under you. Such conservatism gives you flexibility. You are a master of your own time and timing. You have many more options if you have money in the kitty.

2) Sensitivity to the environment. The leaders of these companies are sensitive to the world around them. Leaders are outward looking people, and are often highly active in the society around the company. Fundamental changes in any industry always take place in the context of the larger world. And that context is not necessarily observable inside your own world, your own institution or industry. It’s what is happening out there in the larger world that in the end will really make the fundamental changes in your industry. If your leaders are out there in the world, active, they will note changes in society and keep asking, “what will this mean for the company?”

3) A cohesive identity. Strong sense of cohesion and company identity. These companies were much more communities that machines to make money. They were communities that had a value system, which believed, that they had a pretty good idea of who they were. Leaders and staffs know what the company stands for, and are happy to identify with those values. That gives cohesion. Cohesion is important because cohesion creates trust.

If I have value system and I am fairly certain that you, my boss, have a similar value system, that leads to a much higher level of trust between the two of us. This trust increases institutional effectiveness, that is, it makes you better at what you are doing and increases your chances of survival considerably.

A lot of that sense of trust flows from knowing who you are. Together we know what our institution is about. If there is higher level of trust, you need considerably less controlling management. That further increases the effectiveness of the institution. Furthermore, your customers and your potential customers will know who you are, and will recognize it immediately because you are consistent in your actions.

4) Management style of tolerance. Tolerance of experimentation and eccentricity. There are lots of spaces on the margins for new or different activities. These companies just permit certain activities to take place in the margin of their main corporate activity, their core business. They let certain experiments go on. They don’t kill them straight away. They seem to be tolerant. These companies never insisted on a central control of starting a new activity somewhere in the margin of the business. They allowed things happen. They might not put tremendous resources into that activity. They just allow it to happen.

If you live in the world that changes, you may find in ten years time that your present core business no longer what it was, because you are catering to the wrong demands, to a world that doesn’t exist anymore. You may find that other activities that have been going in and around you; you may find these shoots are growing. The original shoot may get woodier and carry fewer roses. In the end you may even cut out the original shoot, but you have lots of new shoots. And as organization you continue. This is how these long-term survivors work.

The organizations that stick religiously to the one goal, who mix up their basic economic activity with the existence of the organization, are the organizations that die.

Low tolerance is efficient, but it requires a strong set of hierarchical controls in order to minimize the use of resources. And it needs a stable world.

Tolerance for change. Each of these companies had made at least one complete change in the activities that they were executing. The oldest ones had made several changes. Mitsui started as drapery business, and eventually went into banking, then mining, and finally manufacturing. Stora was first mentioned in the records in 1288 as a cooper mine. From mining it branched into forestry, hydroelectric, and paper. DuPont was gunpowder firm first. Overtime it became a major investor in General Motors, and it branched into chemicals.

For these companies, their current assets were only the means to survive. If a company puts the emphasis the other way around – the asset base is the essence of the company, then when they get in trouble, they scuttle the people.

If you start from the basis assumption that companies are not there to do a particular activity, rather they exist because they want to survive and to live up to their potential, it means that if you live long enough you may have to start doing totally different activities than you were doing at the time that you were born, in order to continue to exist. This was a very consistent pattern.

These characteristics of the long survivors led to a new definition of a corporation: A good firm is financially conservative, has staffs that identify with the company values, and has management that is tolerant and sensitive to the world in which they live.

A study done at Stanford in the early 1990s (Good to Great, Jim Collins) showed that long-living companies produced, on average, 15 times more profit over 60 years than the stocks market average. Human work community meets the goals of life expectancy, profits, and shareholders value.

In common with their peers, these companies occasionally go through difficult periods; but their cohesion allows them to steer themselves out of difficulty. The shared values and sense of community mean that employees all pull together.

In an economic company (money machine), when problems emerge, those at the center frequently tend to look out for themselves, discarding those at the periphery. It says that the relationship was only a matter of a contract, trading skills for money. There was no community. This lead automatically to lower trust levels. And lower trust levels have tremendous consequences. You need considerably higher hierarchical control, and you still do not achieve the highest institutional effectiveness.

Organizations that built on contracts that simply trade skills for money, as in - “I pay you for this service.”- have lower levels of trust and tolerance, require more controls, and lower learning abilities.

An organization that takes on people on the basis of making them a member of a community does that with a long-term relationship in mind. The underlying agreement says, “I take you in principle, not for the skills that you offer at this particular moment, but for the potential that is inside you. I will help you develop your own potential. There is a harmony between the long-term development of your potential and the long-term development of the organization. We have a contract in which we both have an interest in developing you to the maximum of your potential over your career” This is totally different contract.

There is a profound difference between managing to maximize profit and managing to survive and thrive for the long term.

Where there is a strong value system, recruiters tend to choose people who are happy to accept this value system as happens at Shell. Shell typically loses up to 15% of new recruits in their first five years. What happens is that within this period either the company decides that an individual does not ‘fit’ or that person decides that this is not the place he or she wants to work. The remaining 85% are people who are happy in their chosen workplace. This poses question. What happens to diversity in such cases?

The reality was that Shell recruited up to 50 different nationalities in the top echelons alone, and that Shell managed to find people from all these different nationalities, who, despite cultural diversity, were prepared and happy to share a particular value system. The same is true of many companies identified in Collins and Porras studies (Build to Last).

The example of British Medical Association. When new members apply, their professional qualifications are not discussed because they are essential – without them you cannot join. The second most important criterion for membership is signing of the BMA’s statement of ethical and moral principles.

In a living company outsourcing ensures that the people remaining in the company are the real members of the community and have ‘signed up’ to the company philosophy. Shell, for example, has a statement of business principles that all employees must sign and it is very clear that Shell recruits people who are most likely to ‘belong’ and adhere to the company’s value system.

On the other hand, many companies are likely to have on their payroll people who were employed to perform a particular task or project required at a particular point in time. Such people will not necessary ‘belong.’ They are in situ for a particular skill and could be outsourced. Benetton, for example, employs only a very limited number of people who are ‘members’ of the company while up to 90% of functions are performed by outside contractors.

The predominant corporate legislation is based on the premise that the shareholders own the company. This concept derives from the past, when capital was the critical success factor. It attributes to the capital supplier very strong privileges. And thus we find a tension emerging in those startup companies as well as in “converted” companies like Goldman Sachs – between their imperative to develop and retain people, and the pressure they feel from their legally empowered shareowners.

One particular example I would cite is that of St. Luke’s, a remarkably successful media company in London. This company has deliberately set itself up as an entirely employee-owned ‘community of work’ with a unique organizational structure characterized by the absence of bosses and emphasis on the connection between co-ownership, creativity, collaboration and competitive advantage.

Where you choose to purse the concept of a work community, a living company, there are also need to be very clear rules within the company as to how to thwart any possible attempt to centralize power and control into the hands of a few people at the top. If you look at companies such as McKinsey, Booz Allen or St. Luke’s you will see that each company has built counterbalancing forces into its organizational structure.

I consider one of the most interesting companies currently to be Visa International which has a very different legal structure from that of most organizations. The best description would be to say that it consists of an agglomeration of ‘clubs’ united by common institution. As such, it rather resembles the modern nation state. Power flows from the members, from below, upwards. And therefore concentration of power is not possible. Banks can become members of one or several of these ‘clubs’ and ‘clubs’ can be both set up, and liquidated. But they are all integrated into Visa International and each has to sign a statement of purpose and principle – the ‘Constitution’.

Visa International is undoubtedly one of the most successful commercial organizations of the past 20 years and it is another good example of a very modern, and very successful, work community that does not follow the traditional capitalist shareholding model.

The companies should be looked at the same way we look at the nation states. In a nation state we do not allow outsiders, be they other countries to whom we export our goods (customers), or countries/institutions who invest money in our country, to tell our ‘national CEO’ what to do. In a nation state, power comes from inside. In a democratic society, power is distributed in a way that keeps checks and balances and avoids autocratic concentration of power. Admittedly, decision-taking is slow and frustrating, yet these countries are more enduring and flourishing than any dictatorship. I suspect this is the direction we should be going for company governance.

In Spain one of the most successful, if not the most successful, companies is a co-operative called Mondragon, which has a very democratic-like management structure. By being a co-op, power is internalized and it completely avoids the short-term pressure that comes from shareholders and financial analysts.

Also, a limited liability company is a license for the concentration of power and for the exercise of absolute power from the top down. That’s not the case in a partnership or co-op. Limited liability company is the typical product of the 19th century capital based economy.

The most critical resource that companies need to cultivate has shifted, since 1980s, from capital to people. Capital is becoming a commodity in the same way that wheat or iron ore are commodities. The capital market is now a buyer’s market, not a seller market. In fact, capital is a commodity; it is no longer a scarce production input. Capital is no longer dominant. Our world is simply awash with capital. So if you are choosing what business to create, why on earth would you structure it to maximize the return to the supplier of capital, the shareholders? That is very shortsighted.

The end of New Economy ebullience makes it clearer than ever that capital is becoming a commodity. Today, human talent is the scarce production factor. And if you would succeed you must have a management style that makes the most of that human talent. The primary corporate struggle is no longer to raise money, but to recruit, keep, and deploy good people. A company’s success no longer depends primarily on its ability to raise investment capital. Success depends on the ability of its people to learn together and produce new ideas.

The ability to continually rethink one’s purpose and methods was not just a valuable add on to corporate practice, but the single factor most responsible for competitive advantage. Company could have their assets devalued or their ideas stolen, but as long as they possessed the ability to innovate and to develop people, they would always remain one jump ahead of their competitors.

If we want to be successful in our lives, whether in our economic, social life or family life, we must learn constantly. We are all aware of the many theories in the cognitive sciences and in psychology about the role of learning in developing oneself and one’s life. And it’s the same with companies as they too move through a life.

How should a company train its management and other staffs? A good analogy here would be that of a football club. You get young players in and let them play but you also train them all the time. You do that because you want to increase their potential. The same goes for new company recruits. They are people in a particular phase of their development and with potential for development. It is essential that the company develops this potential because developing the potential of individual members creates the potential of the company.

In today’s companies the competitive success of the company is totally dependent on the developing the potential of its people, not simply its products, its office buildings or office equipment. And by training it’s not simply skills training but the development of each individual’s human potential.

I believe the most powerful means of achieving this is through on-the-job training. It is an experiential process by which you participate fully, with all your intellect and heart, not knowing what the final result will be, but knowing that you will be different when you come out the other end. This interrelationship with the environment actually makes you grow, survive, and develop your potential. Someone who undergoes a course of military training, for example, will no longer think or act the same way as before; the same is true for someone who goes through the rigors of in-depth professional school or corporations.

On-the-job training can be organized in a variety of ways including action learning, ad hoc working or project groups, communities of learning, etc. At St. Luke’s, for example personal development also comes through such means as role changing and development of multiple skills, experimentation, and performance evaluation.

People develop when they are under pressure, doing things, sharing things, but they need to do this together, in groups, in teams. In addition, people learn in a social context, through dialogue. Research by Xerox revealed the huge amount that was learned over a drink at the end of the day when maintenance workers shared their knowledge, their experiences, their stories about customers, … etc.

How important are the people within an organization and their relationships with one another? Relationships between people are absolutely crucial in a successful company. While the acronym HR is ‘shorthand’ for human resources, to me it will always denote human relations. Human relations are the essence and certainly one of the essential characteristics of the management of people, which is all about relationship.

The use of the word ‘resources’ dismisses the human element. You cannot run a business on a resource base or according to a mathematical formula. That is just not possible. Companies are by their nature communities of humans. More women at the top would help in many companies because women have particular skills in creating communities and establishing a unity of purpose. This is beginning to happen and I don’t think this is a coincidence.

All of the countries that do not invest in the potential of their human population will lose in this new world. They can get all the capital they want to set up a car assembly plant. But they will never have the talent to compete with Japan, or Europe, or United States on the design of the cars, on the design of the manufacturing methods, or on the ability to market them.

It’s difficult to see how countries in, say, the Middle East could catch up with Japan, United States, or Europe. Especially not if they leave, as so many Middle East countries do, all their women out of the system. Half the intelligence of the country is not available to them.

In conversations with some people in high tech companies, they say: “We’re finding out, that if somebody works for us for four or five years and begins to achieve a certain seniority in our organization, and then if we lose that person, it costs us an awful lot of money.”

What does those costs consist of? They include recruitment costs, the cost of training – of getting a new recruit up to the same speed – and of replacing the business contracts and professionalism of the person who left. The problem with people in company is retention. Continuity is thus, once again, becoming recognized as an essential business principle.

In the Fortune 500, the companies, which consistently rise, have relatively few assets. The difference between their high-capitalized share values and the low values of capital assets on their balance sheet represents a valuation of the intellectual capability of their human components. In the most successful companies, this valuation is comparatively high.

What actually produce good results? Is it the star performer or team performance? I’m inclined to look at the sport world. It is a fact that sport clubs which try to create a success by building their teams, tactics, and reputations around a few star performers are not necessarily the long-term, high success clubs. The clubs with more equality among the players produce consistently better results. In business that is almost certainly also the case.

I am basically a team player. I worked with a company with a very strong team ethic. I think that the power of a well-led team is superior to any organizational structure that arranges itself around one or two stars with a support staff. The continuous improvement of people’s capabilities for working together is clearly going to be the critical area of concern in companies that try to produce a superior intellectual output through teamwork.

But if you have been brainwashed at business school about efficiency and bottom-line return of investment capital, then you will struggle with this language about work communities. You will revert to your old business language, and since language creates reality, you will keep re-creating the reality, in your mind, of capital as the most valued commodity in business. You will have a hard time making the transition to a world where capital only has a secondary role to play in the success of the enterprise.

The cause of the lack of commitment was the excessively efficiency-oriented personnel policies. I believe deep in my soul that it was that efficiency orientation that ended the era of trust.

Now we live in a situation in which human talent has become the critical element of commercial success. It’s clear that it’s not the quality of the printing press or the computers that make a publication a success but rather the quality of human talent. Even in capital-asset-based industries like the oil industry or automobile industry, success is largely dependent on the human talent.

A beautiful example is that of the company to beat in the automobile industry is Toyota. Why is it Toyota? It’s because consistently over the decades Toyota has been at the forefront in the design of the cars, the design of the manufacturing processes and the design of the marketing. Basically, Toyota gets more out of the talent working for it than other automobile companies. Human talent works better in teams and these teams get better if they stay together over time. Organizations just like humans learn over time. There is an accumulation of experience and company knows more when they get older.

In this world where companies treat people just as a bundle of skills to be hired for a limited period of time we don’t create loyalty and we don’t create enduring teams. If human talent is a commodity you buy off the shelf then you run it as efficiently as possible until it wears out. Behind this sort of thinking is the use of the word ‘efficiency’ as if the essence of business is simply being efficient. This may have been the case when businesses relied mainly on capital. However, when business relies mainly on human talent the key word is not efficiency, but effectiveness. You have to run business in a way that gets the most out of the human talent that you have been able to attract into your business by creating infrastructure for learning
- that is, tolerance for mistakes, patience with the opinions of others, and room for innovation.

The new business reality is a human-centered one. The managers see that their critical competitive success factor is producing more talented output than their competitors; and they recognize that they can only accomplish this by getting people to learn and to work together better, rather than to simply work more efficiently as with machines.

Many of the problems we read about today stem from the fact that we still have present generation of managers who are trained in managing machines and the emphasis of the present management generation and the financial world is clearly all on the maximization of shareholder value and profit. Such priorities mean companies are just machines to make money and their managers are machinists. I find it more than coincident that so many of them ‘die’ and I find it remarkable that there is little debate about these issues.

To becoming successful in the long-term companies have to shift their managerial methods. They have to learn to optimize people, rather than capital. That means that they have to learn to make the maximum use of the talent they already have available. And they have to ensure access to the supply of talent, and retention of the talent they already have. This requires a completely different set of skills, in many ways far more difficult skills, than maintaining the machines and the access to the supply of capital.

Most corporations fails because managers are too narrowly focused on the economic activity of producing good and services, forgetting that their organization true nature is that of a living work community.

It is certainly easier to manage machines than it is to manage people. But if you look at the Financial Times Top 100 or the Fortune 500, the new winners are nearly always companies that have no or few capital assets but are completely dependent on people.

We must not make the mistake of thinking that the people who populate the management ranks in companies are stupid people, that is not at all the case. They are, either consciously or subconsciously, very aware of the shift from maximizing the use of capital assets to maximizing human capital.

I see HR as being the critical activity of top management in companies. That was in the past, and nowadays, when human talent is the critical success factor; it is clearly even more so. Remember that Jack Welch often mentioned that he spent 40 to 50 percent of his time on people matters. That’s a reflection of how good managers are at recognizing that the world is changing, and that success relies on people.

Business people recognize that human talent is a critical success factor and duty number one is to get access to that talent. We have seen more and more companies increasing their recruitment qualifications. They are not necessarily looking for higher educational levels, but they are much more critical towards, shall we say, the potential of the people they are hiring. Once you have the talent, the issue is how to develop it.

The only approach that seems to work well - developing human resources internally – takes a lot of thoughts and attention, from senior managers on down. It takes a recognition that attending to people’s growth and aspiration is the primary task that an executive has.

The companies that Collins and Porras investigated for Build to Last stand a much, much better change of being successful in this new world. They carry along from the past a value system that is harmonious with the new economic reality. They believe that success is dependent on community human talent and the continuous improvement of people’s capabilities for working together. The old winners stand a very good chance of being the new winners as well.

Life is path that you beat while you walk. This line embodies the most profound lessons on planning and strategy. When you look back, you see a clear path that brought you here. But you created the path yourself. Ahead, there is only uncharted wilderness. You do not navigate a company to a predefined destination. You take steps, one at a time, into an unknownable future. There are no paths, no road ahead of us. In the final analysis, it is the walking that beats the path.

This cycle of seeing, concluding, deciding, and acting is, of course the cycle of continuous learning. In this sense, strategy is simply the development of the organization’s ability to learn. Without an effective learning, a company cannot hope to evolve effectively in an unpredictable world. The organization’s ability to learn faster (and possibly better) than the competitors becomes its most sustainable competitive advantage.

But if you do your learning mostly based on past experiences, you are probably always ‘fighting the last war’. Companies must base their learning on the new signals coming in from the outside world. As a result, the company priority in learning is to develop a way to increase powers of perception; company must ‘hear’ more; and in order to do so they must be receptive to the outside world and be a part of it. The leaders have to be sensitive to the world around them and are outward looking people, so they will note changes in society and keep asking “what will this mean for the company?”

Managers of machines, meanwhile, are much more inclined to be navel-gazers and, if you constantly stare at your navel, you see very little of the outside world and can be rudely surprised. Learning depends on deliberately being part of, and open to, the outside world.

Scenario exercise is the best tool to increase power of perception of what is happening ‘out there’. The power of scenario development is that the management team then discusses what should be done if the scenarios identified were to come about. This enables companies to build up an important ‘memory’ of the future.

The scenarios identified are not predictions. They do not pretend to tell what will happen. They are time paths into an anticipated future. Your powers of perception increase dramatically. You get the information for which your mind is constantly scanning. We will not perceive a signal from the outside world unless it is relevant to an option for the future that we have already worked out in our imaginations. The more ‘memories of the future’ we develop, the more open and receptive we will be to signals from the outside world. The process acts as a filter while your mind scans the environment, selecting only what is pertinent or relevant. When this happens in a series of crucial events, it is called synchronicity. You meet the right person at a critical time and coincidence seems commonplace.

On a larger scale, preferred scenarios can become personal visions of your life and work. New Age proponents call this the ‘Theory of Abundance,’ and claim that the Universe gives you what you ask. Scientists, on the other hand, say that you create your own perception and reality. You create what you think about most of the time. Finding a sense of purpose or meaning in your life and work - your personal vision - programs your mind to scan for opportunities that otherwise you would have missed. Follow your bliss. Find work that you love, and you will never have to work another day in your life.