Dr. Klaus Schwab, founder of The World Economic Forum, made the provocative statement at the opening of the 2013 event in Davos: “Capital is being superseded by creativity and the ability to innovate – and therefore by human talents – as the most important factors of production. Just as capital replaced manual trades during the process of industrialization, capital is now giving way to human talent. Talentism is the new capitalism.” (WSJ CIO Journal) The ability to attract, develop and maintain talent will differentiate which companies thrive in the long run.
Is it time for investors to also start assessing talent as a key input to investment decisions? Sound fundamental analysis examines not only the company’s financial health and business strategy, but also its talent philosophy. The most successful companies that have left their undeniable mark on American business have had a deep sense of culture and values and are first and foremost talent organizations. Additionally, I would argue that talent indicators are a better predictor of future performance than is current financial performance. Financial results are typically lagging performance indicators because these are the outcomes that an organization has produced based on past actions. Conversely, the talent strategy of a firm provides leading performance indicators, such as employee engagement, retention rate, internal promotion rate and development, effective succession planning, and employee empowerment. Concerning warning signs of troubles to come include disengaged employees, high turnover rate, senior leadership departures, lack of strong middle-management layer ready to ascend the ranks, ability for other firms to poach top performers, frequent lay-offs or relentless firing of the bottom 20%.
Based on a talent analysis of leading indicators, Amazon’s management practices may be hurting its future stock price, and the reason could be the ruthless management style the company applies. In a recent blog by the Economist, Amazon’s culture is described as Digital Taylorism: “Frederick Taylor was the most influential management guru of the early 20th century. His “Principles of Scientific Management” was the first management blockbuster. His fans included Henry Ford, who applied many of his ideas in his giant River Rouge car plant, and Vladimir Lenin, who regarded scientific management as one of the building blocks of socialism. Taylor’s appeal lay in his promise that management could be made into a science, and workers into cogs in an industrial machine. The best way to boost productivity, he argued, was to embrace three rules: break complex jobs down into simple ones; measure everything that workers do; and link pay to performance, giving bonuses to high-achievers and sacking sluggards.”
The New York Times received over 5800 comments to an overview of Amazon’s management, describing the online retailer’s ruthless culture. One reader shared: “Midway through this article, after reading stories of how employees going through devastating personal losses were treated, I cancelled my Audible membership, deleted my Kindle app, and will no longer be shopping from Amazon. I cannot support a company that so purposefully creates a negative environment for its employees. It’s disgusting, it’s immoral, and I hope others feel the same after reading this article.” While this is just one comment, the sentiment is hardly an exception. The overwhelming response of readers sharing their own experiences at other companies demonstrates that Amazon is not an outlier and that scientific management is likely pervasive in corporate America.
Does scientific management accomplish what it promises to do? In the short term, yes. It is hard to argue with the success of Jeff Bezos: He built the world’s largest online retailer and is listed as the 15th wealthiest man on the Forbes list. On the surface, scientific management sounds compelling. The 15 “articles of faith” Bezos outlined to steer Amazon also make sense. In reality, however, there is a dark underbelly to the scientific management approach that in the long run can destroy the very company it helped build:
1) Scientific management kills collaboration: The fear of loosing one’s job or the constant competition with the very people one has to collaborate with in order to accomplish results leads to an erosion in the team dynamic. Organizations resemble orchestras or sports team that need to collaborate to accomplish outcomes far greater than any individual alone is capable of achieving. Scientific management aligns incentives inappropriately with too great of a focus on relative individual performance: “Employees are rewarded to tear apart one another in meetings and while the goal is to avoid politics the result often is a culture of cut-throat competition: “The internal phone directory instructs colleagues on how to send secret feedback to one another’s bosses. Employees say it is frequently used to sabotage others…Because team members are ranked, and those at the bottom eliminated every year, it is in everyone’s interest to outperform everyone else….Many workers called it a river of intrigue and scheming. They described making quiet pacts with colleagues to bury the same person at once, or to praise one another lavishly.” (New York Times)
2) Scientific management dehumanizes and demoralizes employees. Jeff Hunter, CEO of Talentism describes the level of disengagement in American business as an epidemic. He reports that in addition to Talentism’s own empirical analysis, “there are many alarming statistics:
- Gallup reports only 13% of workers worldwide feel emotionally invested in their work.
- Approximately one in five employees are highly engaged, according to Aon Hewitt.
- Deloitte reported that 79% of business and HR leaders see talent as a major obstacle to growth—they have a significant retention and engagement problem—but don’t know what to do about it.
- Conference Board reports 52.3% of American workers are actively unhappy with their work. Think about that! Tens of millions of Americans spend most of their waking hours disenchanted.”
The main reason for such dissatisfaction is rarely compensation or the nature of the work but the way people are mismanaged by the companies that employ them. It is unlikely that companies are getting the most of their employees if workers are disengaged. Jeff Hunter continues: “All of these dissatisfied, disinterested employees create an enormous waste of both human and economic potential costing billions of hours and trillions of dollars. It’s a big problem.” (The Disengagement Epidemic)
3) Scientific management is focused on near-sighted goals. At the 2015 Harvard Business School reunion, Clay Christensen, a professor of management, spoke about how “the church of finance” is culpable for stifling innovation in corporate America. Dr. Christensen described the relentless focus on efficiency and shortermism that has emerged as the unquestionable rule book of modern management practices. As a result, Dr Christensen argues, American corporations are not driving growth and investing in the future. Scientific management contributes to shortermism by aligning incentives for employees to hit the immediate quarter’s investor expectations, the current project IRR and today’s profit goals and shy away from long term incentives.
At Amazon most employees do not view a job with the company as a long term career. The demands are too high and burnout is prevalent. “Nearly every person I worked with, I saw cry at their desk.” says Bo Olson, who worked at books marketing at Amazon. Another employee, Liz Pearce shares: “I would see people practically combust.” (New York Times). When employees and especially managers do not believe that they will be with the company in the long run, perverse incentives flourish with the greatest focus on protecting oneself and short term results.
4) Scientific management destroys loyalty to the company: When employees are constantly worried about falling to the bottom 20% and/ or expect lay offs during the next economic downturn, loyalty towards the organization quickly dissipates. Instead, a rational employee, knowing that the company will not stand by them, will take as little risk as possible and work on their own resume and marketability. Acting like an owner and going beyond the call of duty, which is one of Bezos’s “inspirational” 15 principles, becomes highly unlikely. At Amazon, numerous examples were shared where employees experienced one sided loyalty – they were expected to give 200% but when they encountered challenges, the company did not reciprocate: “When you’re not able to give your absolute all, 80 hours a week, they see it as a major weakness …A woman who had thyroid cancer was given a low performance rating after she returned from treatment. She says her manager explained that while she was out, her peers were accomplishing a great deal. Another employee who miscarried twins left for a business trip the day after she had surgery. “I’m sorry, the work is still going to need to get done,” she said her boss told her. “From where you are in life, trying to start a family, I don’t know if this is the right place for you.” (New York Times). Employees that do not feel loyalty towards the company and know that the company will not stand by them rarely act in the best interest of the firm.
As early as the 1920s, Thomas J. Watson Sr. applied a contrarian approach to management which created one of the most innovative and enduring organizations of the time – International Business Machines (IBM). T. J. Watson had a radical philosophy of treating individuals with dignity, which resulted in job security and focus on developing from within. T. J. Watson’s management approach won over the commitment, engagement and life-long loyalty of his employees, who behaved towards the company like a family. During the Great Depression, IBM did not lay off its employees and invested in stockpiling inventory. While competitors considered T. J. Watson’s move risky, if not outright insane, IBM emerged at the end of the depression positioned for growth. When Congress passed the Social Security Act, IBM was ready and was selected to implement one of the largest technology programs of all time. Too many companies today take exactly the opposite approach. They cut their employee-base during recessions to preserve short term profits and scramble to rehire as the markets recover – not only is such a practice exorbitantly costly, but also hurts the employee’s trust and loyalty to the company. (“A Business and Its Beliefs: The Ideas that Helped Build IBM”)
5) Finally, scientific management hurts innovation. Productivity in the developing world has been continuously falling in the last decade. With interest rates close to 0%, many economists, business and government leaders are concerned about the risk of deflation. Simultaneously, the wealth gap in the United States is widening to an unprecedented level. Innovation is the secret ingredient that can ignite growth. Yet, according to Clay Christensen, American companies despite record profits are innovating less then ever. Does scientific management contributes to sluggish innovation? An environment where the incentives are to keep your head down, to only do the narrow job you are given, to focus on short term goals is unlikely to foster break-through ideas. Reportedly, Amazon employees are measured against hundreds of metrics on a daily basis. Employees inevitably focus on what is being measured. Over-analyzing specific performance creates a bureaucracy that erodes the very innovation a company desperately to improve and in some cases, to survive. For example, Amazon’s principles demand people to speak up, but in reality the hundreds of performance metrics stifle true openness.
The biggest problems occur when what is said by the leaders does not align with what actually transpires in the company: Scientific management inevitably creates destructive behavior. Socio-political books, from Aldous Huxley’s “Brave New World” (1932) to Dave Eggers’s “the Circle” (2013), warn against the dangers of the dissonance between well-intended principles and the actual reality. Jeff Hunter clarifies: “Taltentism is not “a workers unite” credo. It’s simply a recognition that meaningful work is done when one’s strengths and individuality are systematically supported by the design of the business. The root of long-term, progressive disengagement is not improper incentives or unclear expectations. Rather, it’s a misalignment between the culture (rewards and punishments) in which that work is performed and worker’s essential nature (what s/he is actually like).”
What insight does talentism provide for investors? There are different investment strategies and for many short-term focused investors, investing in companies that practice scientific management may turn out to be profitable. Amazon’s stock price rise has been phenomenal. Scientific management companies will likely meet quarterly financial expectations, implement stock repurchasing programs and deliver the dividends you expect this year and may be next…until they do not. Scientific management companies fail to truly invest first and foremost in talent and will likely miss the big picture: the trends that are defining the giants of the future. Such companies will likely address only the surface causes of problems: Management will implement lay-offs or will constantly fire and hire new blood to replenish the ranks. But because scientific management is unlikely to retain top talent in the long run, such companies will fail to reinvent themselves when their current business model is inevitably challenged.
Investors who seek to hold company stock for the long run need to look beyond financial analysis and into talent practices to identify the winners of tomorrow. When conducting due-diligence on talent practices, do not be fooled by the company’s official propaganda or even by management studies published in renowned journals. Dig deep to understand what employees are actually thinking, from the middle level manager to the receptionist, interview past employees and look at social network sources to find the true nature of a corporate culture worth investing in: In other words, it is not the 15 principles Bezos wrote that investors should worry about, but the actual application of these principles and the day to day reality captured by the hundreds of experiences of individual employees which lead to disengagement, burnout and ultimately inability to attract and empower top talent.
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