The approach is based on 1) establishing trust through transparency; 2) objectively determining the source of organizational value creation; 3) creating a transparent gainsharing plan; 4) embedding stakeholder voice into day-to-day management; and 5) conducting contract negotiations based on clear purpose, goals, objectives, and trust with the goal of working to share a growing pie rather than fighting over a shrinking one.
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By: Bruce Bolger
1. Establish Trust Through Transparency
2. Determine the Sources of Valuation Creation
3. Create a Transparent Gainsharing Plan
4. Embed Stakeholder Voice Into Day-to-Day Management
5. Conduct Contract Negotiations Based on Clear Purpose, Goals, Objectives, and Trust
Is This Scenario Fantasy Under Stakeholder Capitalism? Yes
The current automotive strike is estimated to carry at least a $1 billion cost to the three automakers in the first 10 days alone, not to mention the long-term impact on worker engagement and trust. In the meantime, the three automakers reported have approved $5 billion in stock buybacks in the last year alone, when for $1 billion set aside for the workforce would have provided each of the 146,000 autoworkers an average of $7,000. Was this a smart use of organizational profits?
If the major publicly held auto companies belong to the shareholders, the current strike certainly does not exemplify the best that shareholder capitalism has to offer. In fact, it is yet another example of the innate inefficiency of shareholder capitalism: the willingness to endure costly conflicts between the various stakeholders when it’s far better for the organization if the interests of all stakeholders are aligned toward a similar purpose, goals, and objectives.
Shareholder capitalism tends to play off the interests of different stakeholders to maximize short-term returns for investors. Stakeholder capitalism enhances returns for investors by creating value for customers, employees, supply chain and distribution partners, communities, and the environment, with the goal of increasing the pie from which all can share.
Here’s a quick overview of how effective labor management relationships can guide a better future for unionized organizations. In an ideal world, a union-management contract will yield a workforce more engaged than ever in helping the organization achieve its purpose, goals, and objectives, rather than leaving the exhausted workforce with a resentful “I’ll do just what I have to do” attitude.
This constructive framework is based on:
- The stakeholder management framework outlined in the Enterprise Engagement Alliance's two books, Enterprise Engagement for CEOs, and Enterprise Engagement: A Roadmap, based on decades of research and input from dozens of experts in all areas of engagement across the enterprise.
- Two recent EEA YouTube shows with experts on labor-management relationships: Stakeholder Capitalism Movement Creates Environment for Union and Management Reset and Negotiating Labor Agreements that Align with Stakeholder Capitalism
The best time to embrace a cooperative labor-management strategy is long before there is any labor strife so that there is an atmosphere of mutual respect and trust with all stakeholders when contract negotiations begin.
Organizations that wish to avoid strife during negotiations should clearly disclose to shareholders and stakeholders the purpose, goals, objectives, values of the organization, including transparent profit targets. Employees should not feel they are negotiating with someone behind a green curtain.
Without a clear north star, goals, objectives, and values, there is no way for labor to understand the tradeoffs management is making in its short- and long-term planning or on what basis it is asking labor to make tradeoffs. Even in a non-union environment, the more transparency the better in order to gain trust.
- Part of the purpose statement identifies how the organization enhances returns for its investors by creating value for all customers, employees, distribution partners, communities, and the environment upon which they depend for sustainable results. This gives labor a guidepost upon which to gauge management intentions and negotiating positions.
- The North Star can include a general commitment to a specific rate of return—generally higher than returns available through banks or government bonds—as well as funds to hold in reserve or to invest in the future—based on the priorities inherent in the organization’s stated purpose, goals, and objectives. Of course, management may need to adjust goals and objectives for a given year based on the organization’s purpose, unexpected challenges, or to survive economic or market headwinds, but those tradeoffs are easier to explain in negotiations when there is a clear purpose, goals, objectives, and values.
- Ideally, the purpose statement explains how the organization creates opportunities and risks for customers, employees, supply chain and distribution partners and communities, and how in turn these stakeholders create opportunities and risks to organizations—increasingly known as double-materiality—to help organizations set priorities when making tough decisions. This in turn helps labor understand the reasoning behind management’s negotiating stance, even if they choose to disagree.
- Stakeholder voice is critical—with consistent communication both down and up the organization and an active listening and action process that also includes customers, distribution and supply chain partners, and communities, organizations can anticipate how people will react and, when possible, act preemptively to gain buy-in. Labor needs to hear the voices of customers and other stakeholders as well, as all interests are interconnected.
Roles and responsibilities. Even most labor leaders would agree that the process of establishing the purpose, goals, and objectives of an organization starts with the founders or successors of those who raised the money from investors, and that includes boards and senior management. Investors and all stakeholders can benefit by knowing the purpose, profit goals and other objectives of management, as that helps set expectations. Ideally, the process of establishing a clear purpose, goals and objectives includes the active voice of all the stakeholders who can contribute to success—customers, employees, distribution and supply chain partners, and communities—without whose buy-in optimized success is unlikely. That said, these other stakeholders generally do not have the same legal standing as owners unless they too invest money. (There are exceptions in the case of public benefits corporations or others which might include articles bestowing specific rights related to a group of stakeholders or a cause.)
Without a clear purpose, goals, and objectives, or considering the needs of investors, customers, supply chain and distribution partners, and communities that might be affected by their actions and vice versa, management has no North Star by which to negotiate a contract with employees on how to share available resources for compensation, benefits, and gainsharing.
In the case of the three major US automakers, they face major challenges transitioning from costly legacy technologies to electric vehicles, mostly produced by non-union competitors. All stakeholders should be part of the discussion about how to address that challenge, and a contract that does not take this transition into account rests on shaky grounds when it is up again for negotiation.
Few businesses would make major decisions about allocating funds without an overall framework based on the cost and risk involved and the potential return on investment. What value will the endeavor create over time and what investments will yield the best results consistent with the organization’s purpose, goals, and objectives? For instance, what is the value of buying back stock from shareholders versus investing more in the workforce?
There is no way of objectively determining in which people or any resources to invest without at least some understanding of their contribution to value creation. Ideally, this means stepping back to evaluate the source of value creation for investors and other stakeholders to establish a sensible framework for the division of the overall pie that of course can grow if the organization enhances performance. During the pandemic, the term "essential" workers became prevalent, but that does not seem to have changed the overall distribution of resources, reflecting the common assumption that while essential, these people can be easily replaced without necessarily an examination of the true costs of turnover.
Management committed to aligning investments with actual returns can call in qualified experts to objectively weigh the value created by different classes of stakeholders. Obviously, there is no precise model, but in the absence of any such attempt, there is no way to establish a basis for effective resource allocation—a situation that would be intolerable in any other part of the business. This is a striking oversight because human resources and marketing costs often exceed 50% of organizational fixed costs.
Roles and responsibilities. Once again, this task falls upon the people responsible to those who have invested their money, who also are responsible for the fulfillment of the promises made to the stakeholders whose actions are necessary if there are to be any profits: customers, employees, supply chain and distribution partners, communities, and the environment. While it is advisable to gain input from stakeholders, this is not a negotiable process but rather the prerogative of owners in a free enterprise system.
Questions to ask:
- Which investments in people resources yield the greatest measurable impact on the organization’s value creation process? The answer usually starts with what attracts and retains profitable customers. That means objectively stepping back and assessing the true drivers of customer acquisition--what people costs, and that includes those for all management and employees, customers, distribution and supply chain partners, have the greatest impact on the attracting and keeping profitable customers. In addition to sales, profitability usually comes from product and service innovation; enhanced customer satisfaction, retention, referrals; employee productivity, quality, referrals; human capital return on investment and human capital value add; revenues, costs, and profits per employee and customer, etc.—metrics that have a direct impact on the bottom line. Which category of employees are in fact most responsible for these metrics?
- Drilling down further: what percentage of the company’s sales and profits are dependent upon specific classes of employees and other stakeholder expenses? To what extent does the production of automobiles have an immediate impact on the business versus leaving open a CEO position for six months, or halting Super Bowl advertising; delaying research and development activities; or holding back on senior management bonus packages. This analysis immediately highlights the interdependencies of stakeholder groups that logically should be reflected in the distribution of budget resources.
- To help establish the framework, also look at the factors that could increase the pie—such as new products, improved productivity and quality, retention and referrals, improved customer loyalty. This includes identifying who in the organization are most able to affect these metrics. What class of employee during a successful year helped create the extra value—was it a new product innovation, cost-cutting measures, marketing success, the enhanced executive pay package, or simply the pleasant tailwinds of positive market forces? What benefits to the organization would a stock buyback yield versus increased pay for workers or other investments, short-, mid- and long-term?
- This process is likely to yield uncomfortable results at many large companies. According to the Economic Policy Institute, in 2021 the ratio of CEO to typical worker compensation was 399-to-1 under the realized measure of CEO pay; that is up from 366-to-1 in 2020 and a big increase from 20-to-1 in 1965 and 59-to-1 in 1989. Yet, there is no comparable increase in corporate profits over that time. That said, even cutting the pay of top CEOs at major companies would not fund the level of pay raises desired by workers. Were the top three automakers to cut the annual pay of their CEOs by $60 million to $14 million combined per year, that would result in little more than $400 for each of the 146,000 UAW members for one year.
- What is possible over time, though, is to make sure that the overall allocation of financial resources focused on people at least to some extent reflects the value being created for shareholders, a concept that began to take hold during the pandemic, but which was quickly forgotten.
- Seen under this light, such broader policies related to executive pay, bonuses, corporate jets, and other perquisites unrelated to performance, and even some sales and marketing costs, might be seen in another light if independently weighed in terms of actual contribution to value creation. At public companies, another big question is the use of stock buybacks—are they better for shareholders if that money could have gone to such uses as paying workers more now to avoid costly strikes later.
- In addition, stock buybacks play a role when an organization chooses to reward shareholders at the risk of creating labor strife down the road by failing to address worker compensation issues. Would there be a strike right now if the automotive companies had used some of their stock buyback dollars to increase worker pay?
- What role should workers play in helping facilitate a successful transition to EV technology if that is where the market is inevitably going? Leaving that discussion out of any contract negotiations isn't good for any stakeholders, as it just kicks the bucket down the road.
The result of this process should be a pie chart displaying overall “sunk” costs allocated between stakeholders based on at least some explicable contribution to overall value. Within each group, the funds are allocated to individuals using as objective as possible criteria based on skills, experience, maturity, productivity, quality, etc. Yes, dividends and stock buybacks for shareholders should be considered part of that pie, because if excessive returns for shareholders result in undermining the viability of an organization, nobody benefits in the long run, including the shareholders who fail to bail out at the proper time.
Here is an approach for determining how to distribute the gains of enhanced performance over forecasted expectations to spur innovation and continuous improvement.
Roles and responsibilities. Once again, this task rests in the hands of the board and senior management who are legally accountable to the owners unless the corporate charter states otherwise. However, gainsharing can certainly be a discussion with the labor union as well.
Principles of gainsharing applied to all according to their contribution. Generally, the same framework for allocating the pie of fixed resources can also be used for allocating the rewards of exceeding goals in a process long established in total quality management known as gainsharing: the distribution of a portion of the proceeds of increased performance to the people who created it.
Once again, the expanded pie can be shared using the same general formula as the sharing of fixed costs. The gainsharing process will achieve the best results if the framework for determining people value creation is already in place, both at the macro and more micro level, based on who has contributed the most to value creation. The more the interests of all stakeholders are considered, the greater the chances of buy in, but obviously labor is not involved in how management rewards are distributed.
If the goal is to propel a transition to EV technology in the automotive business, the contract should consider how can workers be constructively involved in that process and rewarded for contributing to success.
Considering that no returns can be sustainably enhanced for investors without having engaged customers, employees, supply chain and distribution partners, communities, living in a healthy environment, any process that does not address stakeholder interests is doomed to sub-par performance at best. To avoid labor strife requires an ongoing cooperative labor-management dialog on how to fulfill the purpose, goals, and objectives of the organization. To succeed, this process also considers the needs of customers (who do not wish to pay too much for a product); supply chain and distribution partners (who have to make money as well) and affected communities, who may have to bear the unwanted costs of a company’s traffic congestion, an abandoned facility or polluted land, water, or air.
Actively involving unions in managing two-way employee communication helps build trust with all parties, but it’s important to keep both employees and unions in touch with the interests of customers, distribution and supply chain partners, and communities, whose engagement is also required to maximize results for the benefit of all. Recognizing the inter-connectedness of stakeholders creates a significant opportunity for value creation by streamlining and aligning activities.
How can arguing over the distribution of resources be the best way to determine their best use for the success of the organization? What will the state of employee engagement be at the automotive companies after the strike, even if the union claims victory?
When management provides a clear statement of purpose, goals, and objectives, including profit targets, and makes an objective attempt to assess the sources of people value creation as it would with any other investment exercise, negotiations with labor are based on a clear North Star: the organization’s stated purpose, goals, and objectives, and of course an evaluation of present circumstances. How is the organization doing in terms of achieving its goals and objectives in the context of its overall purpose? Has the pie grown, and if so, why and how? Was growth a result of external, beneficial economic forces or to specific management or other actions traceable to specific initiatives? In the case of the automotive companies, what needs to be done to prepare for the future of EV technology?
How aligned is the overall division of people investments in relation to their contribution to value creation? In other words, is there any justifiable basis for the percentage of monies flowing to senior management or to specific people initiatives outside of disclosed tradeoffs? Can management present reasons for deviating from the stated intended distribution of people costs based on the organization’s purpose, goals, and objectives, and current business conditions? Are there good reasons to pay executives far beyond what any human being needs to live in complete comfort without a financial care in the world for the rest of their lives? Is there a compelling reason to purchase back $5 billion in stock, when perhaps $1 billion could have been allocated to workers to avoid a strike that by some estimates could cost the three automakers $1 billion in the first 10 days alone.
I of course am not privy to answers to any of the above questions in the case of the automotive companies, and it’s difficult to understand how a labor contract for one company would apply to another, since each has its own circumstances and challenges. What we do know from the public discourse, of course, is that the general relationship is adversaria--perhaps less so at Ford--and that the strike will leave behind scars with uncounted costs in terms of diminished engagement that will go completely unaccounted for on the company’s balance sheet.
Neither side has presented a strategic and systematic presentation of their case to the public consistent with the organizations’ stated purpose, goals, objectives, and profit targets. The two sides appear to be battling over spoils with no discernable framework for dividing them that could be applied to future contracts, setting them up for a repeat of the same process upon the next contract renewal.
The negotiations seem more focused on a power struggle than on what is best for the investors who put up the money or for the customers, employees, distribution and supply chain partners, and communities upon whose commitment the automotive companies’ success depends.
Unions are major stakeholders too; their long-term success depends on the organization’s prosperity. Management will have greater success if it presents unions with a business case for their proposals; one that reflects a defensible and demonstrable recognition of the contribution of employees to value creation versus management, administration, and operations or other non-unionized employees; customers; supply chain and distribution partners, communities, and the environment, all of which need to be considered. Also in the equation are infrastructure, facilities, research, and development. It is in no one’s interest for worker pay to be determined in a vacuum against other necessary investments.
Management also should ask itself if stock buybacks provide the best long-term return for the organization and shareholders, if underpaying employees or other failures to invest in the company have long-term impact, such as the likely outcome of the current strike.
In the same vein, unions can make a case for how their members create value and what contract terms and initiatives could help enhance innovation, productivity, quality, or other benefits whose rewards can be shared through gainsharing or stock options.
Is This Approach a Fantasy Under Shareholder Capitalism? Yes
Because there is little trust by unions or workers that management shares their estimation of their contribution to value creation, and because management lacks a transparent system for better determining the source of true value creation of the different stakeholders consistent with the long-term financial interests of investors, we remain stuck in the sandbox with the parties fighting over the prize.
To those who say that it’s absurd to try to value the contribution of various groups of stakeholders to value creation, the answer is twofold. 1) The process of establishing the value of investments in any resource is a foundational principle of finance, so why not with people? And, 2) What is the basis for the current process of dividing the gains? Is it simply what management can get away with or is there a transparent explanation for why the ratio of CEO to base employee pay has skyrocketed without any compensatory reflection in actual profitability?
The sustainable solution to labor and management relations is having a clearly defined organizational purpose, goals, and objectives upon which everyone is clear; a strategic and systematic approach to aligning the interests of the stakeholders needed to fulfill that mission, and the transparency and mutual respect needed for both sides to make trade-offs when necessary for the benefit of the organization upon which they all depend.
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