A Management Question: If Employees Aren’t Assets, Then What Are They?

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Dec 22, 2010

By Thomas O. Davenport and Stephen D. Harding

It is dangerous to set up any single executive as a paradigm of enterprise-level leadership, given the frequency with which so many have been disgraced and replaced.

As with any complex human behavior, the performance of executives, including CEOs, tends to vary. Nevertheless, we can identify a set of attributes that consistently characterize successful leaders of large-scale organizations. They inspire goal-oriented action among followers by virtue of their focus on, and dedication to, organizational success, though not necessarily through personal charisma.

For example, former Colgate-Palmolive CEO Reuben Mark was known for his down-to-earth approach to leadership. He traveled coach class on overseas flights, disdained the common executive obsession with golf and avoided publicity. As one acquaintance said, he wanted the company, not himself, to be the superstar.

In searching for the best way to achieve organizational goals, the most effective top-level leaders tolerate, indeed encourage, healthy dissent. They don’t limit the information they receive to good news only.

Employees and customers first, then shareholder value

Roger Enrico instilled this kind of free information flow down the line at PepsiCo, observers say. They foster meritocracy within their organizations, in service of a commitment to organizational achievement. They are also aware of their own limitations and therefore ensure that others around them have compensating strengths. Cisco’s John Chambers is known for this sort of intellectual honesty.

Faced with obstacles, high-performing executive leaders bolster judgment with analysis and balance deliberation with action. They also learn from their mistakes, as Yum! Brands CEO David Novak did from a marketing debacle that occurred when he was marketing chief at PepsiCo. Pepsi introduced Crystal Pepsi, a drink that looked like rival 7UP but failed dramatically. Novak later said that he had learned to weigh the testimony of naysayers (the Pepsi bottlers who had told him the new drink tasted nothing like Pepsi) despite a natural inclination to ignore them.

We would add that the best executive leaders make shareholder value a derivative priority, one that follows a focus on employees and customers. Roger Martin, dean of the Rotman School of Management at the University of Toronto, says that concentrating primarily on creating shareholder wealth is ultimately a loser’s game.

The reason: the only sure way to increase shareholder value is to raise the markets expectations about the organization’s future results. “Unfortunately,” Martin says, “executives simply can’t do that indefinitely.… Talented executives can grow market share and sales, increase margins, and use capital more efficiently, but no matter how good they are, they can’t increase shareholder value if expectations get out of line with reality.”

We advocate that, instead of training her gaze directly on shareholder returns, a high performing executive leader should pay attention to the performance of employees and the linkage of employee performance with customer satisfaction and purchase behavior. Companies like Marriott, Southwest Airlines, and Starbucks all follow this creed.

Employees are more than a line item

“Take great care of your employees and they will take great care of your customers,” says Marriott executive vice president Mike Jannini. In the prologue to his book Pour Your Heart into It, Starbucks chairman and CEO Howard Schultz says, “A company that is managed only for the benefit of shareholders treats its employees as a line item, a cost to be contained. Executives who cut jobs aggressively are often rewarded with a temporary run-up in their stock price. But in the long run, they are not only undermining morale but sacrificing the innovation, the entrepreneurial spirit, and the heartfelt commitment of the very people who could elevate the company to greater heights.”

In describing how the company created its brand, Schultz says, “We built the Starbucks brand first with our people, not with consumers — the opposite approach from that of the crackers-and cereal companies. Because we believed the best way to meet and exceed the expectations of customers was to hire and train great people, we invested in employees who were zealous about good coffee.…That’s the secret of the power of the Starbucks brand: the personal attachment our partners feel and the connection they make with our customers.”

Leadership enacted on a smaller scale — in an individual unit or department — both resembles and differs from executive leadership. On the one hand, first-line leaders should display the same humility, tolerance for contradictory information, and focus on employee contribution displayed by competent executives. On the other hand, clearly, they perform their roles on a smaller stage.

In the words of management expert Marcus Buckingham, great senior executives (that is, leaders who do their jobs at the business or enterprise level) “discover what is universal and capitalize on it. Their job is to rally people toward a better future. Leaders can succeed in this only when they can … tap into those very few needs we all share.”

He contrasts this with the form of leadership exercised by someone who probably has the word “manager” in her title but who has a more circumscribed span of responsibility. This leader’s challenge, he says, is to “turn one person’s particular talent into performance. Managers will succeed only when they can identify and deploy the differences among people, challenging each employee to excel in his or her own way.”

Leadership is the same at all levels

In other words, leadership at the unit head level comprises the same components as leadership at the top of the corporation: envisioning a goal, plotting a path to achieve it, engendering motivation to get there, clearing obstacles, and providing boosts along the way. But unit-level leadership simply focuses on a few people, one person at a time, rather than on many people who share a few common aspirations.

A skilled leader who is also the head of accounts receivable will, for example, help each employee find a reason and a way to contribute to the department’s goal (reducing problem accounts, perhaps). For each person, the stimulus may be different. It’s the leader’s job to discover those individual motivations and activate them. Clear enough, but a gray area remains. It involves the human asset, something that is intangible and highly personalized. Assets are inert elements of the production equation, valuable only when someone manipulates (or manages) them.

Employees aren’t assets the way forklifts, land, and bond holdings are. Organizations do not own people (not legally, anyway), do not control them and do not directly reflect their value on the balance sheet.

Management professor Henry Mintzberg has strong opinions on the degradation implied by putting employees into the same classification as an organization’s tangible and financial resources: “Viewing them as resources is deadly. It turns them into robots. And you can’t possibly get them enthusiastic about their jobs when you’re treating them that way. It’s not coincidental that the rise of the term human resources coincided with a wave of downsizing” (italics in original).

Employees are owners of an asset

So if employees aren’t assets, what are they? Our answer: they are the owners of an asset, the asset that economists call human capital. Human capital comprises the knowledge, skills, talents, and behaviors of workers. It catalyzes all other assets.

A fundamental goal of managers, therefore, is to help employees build it and to evoke its investment, in support of a big-picture strategy or a specific tactic. A rational employee will make this investment only if it yields a payoff — in effect, a return on human capital investment. As capitalists of the true human asset, workers decide when they will invest, how they will invest and how much they will invest. The desired return on investment takes a variety of forms, both financial (pay, benefits, stock options) and nonfinancial (intrinsically fulfilling work, learning and advancement opportunities, recognition for contribution).

Organizations have many ways to generate ROI on human capital invested. The manager plays a critical part in the creation and delivery of many of those elements. A leader-cum manager must show each individual how his or her contribution of human capital will not only help to achieve an organizational goal but also produce a personal ROI.

Reprinted by permission of the publisher, John Wiley & Sons, Inc., from Manager Redefined: The Competitive Advantage in the Middle of Your Organization, by Thomas Davenport and Stephen Harding Copyright (c)  2010 by John Wiley & Sons, Inc. All rights reserved.

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