Corporations Compassion Culture. Keesa C. Schreane
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to worry about balancing the claims of employees, customers, the firm, and society. They could concentrate on making money for the shareholders. Adam Smith's “invisible hand” would make everything else come out right.14
Of course, Friedman's article wasn't the only reason for this shift toward putting profits before people. Other trends in the 1970s, such as slow economic growth, corporate leaders' friction with labor unions, and increased foreign competition, certainly contributed to this emerging mentality. But Friedman's article was used by many leaders to justify their brash pursuit of profitability and share price gains. It helped propel the shareholder value movement that took off in the 1980s and 1990s with eponymous cutthroat CEOs such as Sunbeam's Al Dunlap (nicknamed “Chainsaw” and “Rambo in Pinstripes”) and General Electric's “Neutron” Jack Welch.15
This movement led to a spate of corporate mergers and takeovers with profit-driven leaders viewing employees as dispensable, using mass layoffs and overall downsizing as a way to slash expenses and, in turn, rev up stock prices. GE, for example, laid off more than 100,000 workers during Welch's time as CEO. He promoted management practices such as ranking employees by performance and brazenly firing those deemed as underperformers. He unabashedly championed a non-equality philosophy when it came to managing employees—even decades after he left the helm. In 2017, Welch told the site Freakanomics:
Look, differentiation is part of my whole belief in management. And treating everybody the same is ludicrous. And I don't buy it. I don't buy what people write about it. It's not cruel and Darwinian and things like that, that people like to call it. A baseball team publishes every day the batting averages. And you don't see the .180 hitter getting all the money, or all the raises.
Welch's tough management style paid off handsomely for GE shareholders at the time, as GE's stock price grew 4,000% during his tenure.16
But the shareholder-first practices of Welch and many other like-minded corporate leaders had the ultimate effect of eroding employee trust. In the 1980s and 1990s, the “corporate social contract” was officially broken. For instance, many companies during this period suspended their employee retirement pensions—replacing them with a stock market–dependent plan called the 401(k). Many also slashed health benefits. Labor union membership plummeted from 25% to 15% between 1978 and 1988, in part because unionized jobs were often the target of layoffs.17
This fraying of the corporation-employee relationship created other problems. The purchasing power of most US workers' wages has stagnated since the 1970s and hasn't been buoyed even in times of historically low unemployment.18 This has widened the rift between top executives and typical workers. And because executives usually receive stock as a big part of their compensation, they are strongly motivated to drive up their company's share prices, often at the expense of the people working for them.
Here's the irony: for many companies, all this emphasis on maximizing shareholder value didn't even produce the sought-after outcome. Several studies have shown that mergers and layoffs in the 1980s and 1990s actually had minimal or even detrimental effects on the share prices of many of the companies that engaged in them. One just needs to crunch the long-term returns on the S&P 500 to see that the era of shareholder primacy did not create outsized returns for regular investors. In fact, it seems to have had little effect at all. The markets returned an average of 9.63% between 1956 and 1986 and 9.99% between 1986 and 2016. Both those periods lagged the 10.77% return seen between 1926 and 1956.19 What's more, the overall longevity of corporations seems to be on the decline. The life expectancy of companies in the S&P 500 declined from 61 years in 1958 to less than 18 years today.
The shift toward focusing on shareholder value wasn't just a US phenomenon. Similar to Friedman, many other economists and business leaders across the globe defended and championed similar “free-market” capitalist ideals over the past century—encouraging companies to focus on profits above all else. Austrian economist Friedrich von Hayek, another Nobel Prize winner, concluded that seeking social justice was a waste of time and that no outcome to market activity could be considered just or unjust.20
The 1980s and 1990s is considered a heyday in modern times for profit-only-driven cultures. Yet, this philosophy of putting profits ahead of people has been deeply ingrained in corporate culture since the early industrial days. Corporate language itself has always been brutal, leaving room for neither equality nor compassion. It's standard to talk about “annihilating” another company, “running competition out of business,” “dominating” a market, or “beating” individuals, and so on.
There is also a lingering notion that some people are divinely chosen to be leaders instead of others. This corresponds quite conveniently with the belief that some have been ordained by higher powers as more capable, intelligent, and privileged, just because of their sex or race. (These notions lay foundations for racial and gender inequities that will be discussed in later chapters.)
Difference between Externally Facing Philanthropy and Internally Facing Compassion
Clearly, corporate leadership is a complex construct. This is amplified when values and beliefs don't seem to align with bottom-line growth. The notion of “compassion” in business often gets reduced to the simple concept of corporate philanthropy. In the 21st century, progress in corporate philanthropy and benevolence kicked into high gear. Philanthropy benefits a firm's reputation and enhances sales prospects who appreciate the charitable work. But, although philanthropy may be lauded externally, inside corporations it's often perceived as a drain on profits and an unnecessary operating expense, especially in market downturns. Further, just because a company is philanthropic doesn't mean it treats employees well.
Philanthropy communicated through corporate websites and annual reports tout externally focused “corporate social responsibility” programs. There is nothing wrong with this: doling out resources and funding to communities and causes should continue to be highly regarded. But charity alone will not help corporate culture survive the coming decades. Valuing people, not just valuing profits, is the long-term solution. Investing in the people inside our enterprises—in their education, growth, and well-being—strengthens the communities and marketplaces where businesses operate. It's also the way to strengthen the employee-employer relationships needed to innovate and drive businesses forward.
True corporate compassion can't be a separate subsidiary or a spin-off of the primary enterprise. It's not something that can be tacked on as an afterthought. Compassion begins with leadership that integrates the values of courage, inclusion, purpose, and equality into business practices as foundational to the internal business culture.
Compassion: What's in It for Me?
A business culture with compassionate characteristics as the foundation is linked directly to improved employee performance, according to 2013 research by UC Berkeley's Greater Good Science Center:
Happy employees also make for a more congenial workplace and improved customer service. Employees in positive moods are more willing to help peers and to provide customer service on their own accord. What's more, compassionate, friendly, and supportive co-workers tend to build higher-quality relationships with others at work. In doing so, they boost coworkers' productivity levels and increase coworkers' feeling of social connection, as well as their commitment to the workplace and their levels of engagement with their job.21
Some researchers chide