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Opinion: US Labor Strife Signals Inefficiency of Shareholder, Top Management Focus

Nick ShepherdIt has always fascinated me that nations that pride themselves on the social foundation of a democratic system run their economic system like an autocracy. This is highlighted by the recent settlement of the five-month-old writers strike and United Auto Workers strike against the automotive companies. The enormous waste associated with these strikes highlights the profound failure of capitalism to reward the true source of value creation and the high price we pay for failure to address this obvious imbalance.
 
By Nick Shepherd

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The Great Shift of Resources to Management and Shareholders Comes at a Big Price
The Current Shareholder Approach Is Not Fiduciarily Responsible
 
Shepherd, a frequent guest contributor to ESM, is a former chief financial officer and principal of a management consulting firm, and now is an author and advisor on the connection between human capital and organizational success.
 
The Cost of Poor CultureWhat was the cost of the Hollywood writers’ strike and what toll will the automotive strike take on the financial results of the many companies, shareholders, and communities involved versus finding the same solution without labor action? The enormous waste involved in these strikes and the many more surely to come is a chilling reminder of the forces pushing toward a more sustainable form of democracy and value creation in business that gives voice to the people who are truly creating value.
 

The Great Shift of Resources to Management and Shareholders Comes at a Big Price

 
A 2019 article in the New York Times Magazine Review stated that the workings of the existing capitalist system have some of their roots in practices that have their roots in slavery. In the US, the richest 1% of Americans own 40% of the country’s wealth, while a larger share of working-age people (aged 18-65) live in poverty than in any other nation belonging to the Organization for Economic Cooperation and Development (O.E.C.D.) At the same time, according to the Wall Street Journal, US companies announced $1.27 trillion of share repurchases and completed $1.05 trillion in stock buybacks in 2022 alone, or almost $9,300 in commitments per full-time American employee, based on the latest estimate of 135 million in the US.  This does not include an investment in better customer service and product quality that many simply fail to include in their business plans. 
 
Likewise in mergers and acquisitions, workforce and other stakeholder issues are rarely addressed as part of the valuation, due diligence, and implementation process at enormous cost. Much has been written about the high failure rate of mergers and acquisitions, and it is increasingly recognized that issues such as a “clash of cultures” can significantly add to these problems. In 2016 the UK based Maturity Institute published a report using its OMINDEX rating system and concluded that the AT&T acquisition of Direct TV would result in a major culture problem. That is exactly what happened. The poor culture fit with other factors led to a major reduction in goodwill with a major loss to shareholders. This negatively affected the lives of thousands of employees – not just the shareholders.

The Current Shareholder Approach Is Not Fiduciarily Responsible

 
As a former chief financial officer, I can categorically state that I see no increase in corporate profitability or other forms of value creation over my long career that would justify such an enormous shift in resources toward shareholders and top management. Given that this is coming at the expense of the very stakeholders upon whose engagement we depend upon to achieve our organizational goals, purpose, goals, and objectives, financial and otherwise, these actions are no more fiduciarily responsible than was building in 10% defect rates into manufacturing systems in the last century.  What I do see a current system of financial reporting that almost completely buries the enormous waste of employee turnover, customer defections and poor word of mouth, product defects or dangers, and other costs into balance sheets unequipped to track them. As a result, these risks and costs get be kicked down the road for future shareholders to reckon with.
 
Times have changed. It is irresponsible to buy back shares and give big rewards to CEOs without addressing fundamental stakeholder engagement issues. The failure to address the enormous waste exemplified by the rise in labor-management tensions exemplifies the state of greenwashing today. While companies say that employee engagement and customer satisfaction are their No. 1 goals, and that people are their greatest asset, the low levels of employee engagement and customer satisfaction worldwide speak for themselves: many companies are investing a disproportionate amount of their cash flow to reward senior management and shareholders at the risk of the enormous waste just put on full display in these recent strikes—simply because financial reporting is ill-equipped to quantify the cost to shareholders.  
 
While employee motivation has always been an important as a driver of productivity and performance, the knowledge economy requires much more: engagement of both mind and body; a mutually beneficial contract that more rationally recognizes the value being contributed by customers, employees, supply chain and distribution partners, and communities, without whom there would be no shareholder value.
 
It takes a system. Organizations look at addressing sustainable value creation will recognize there is no silver bullet to enhance worker involvement and engagement. Is it meaning, pay, benefits?  Is it a lack of challenging work? Or is it poor leadership, combined with misaligned policies and procedures that stand in the way of talented people getting the job done? Too much bureaucracy? Do people experience oppression or bullying? Is there discrimination around opportunities for growth – or how people are treated? Are their cliques? Do all stakeholders have a true voice? Each organization will find the best path true to its purpose, goals, and objectives by addressing what is standing in their way.
 
While metrics are important, organizations need to ask about emotional engagement. Beyond having engaged customers, supply chain, and distribution partners, are people happy at work? Do they enjoy working with others? Is work something people want to do – are they valued, challenged, and fairly treated? Do they trust management to provide the resources they need to fulfill the organization’s purpose, goals, and objectives?
 
Understanding and obtaining employee engagement is not a fad. It is at the heart of the re-invention of capitalism. Without this the economic successes of past could fade into history as have so many great civilizations before us.
 
For More Information
Nick Shepherd
Eduvision.com
Nick@eduvision.ca

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