16 Apr. 2012 | Comments (0) Share Follow @Conferenceboard
Sometimes, the measures managers use to guide their decisions stop making sense. Take television ratings—the metric by which TV shows live or die in an advertising-supported industry. The New York Times reports that, given today's "time-shifted" viewing habits, the prevailing method of gauging audience size distorts the truth by counting only three days of viewing. Scripted shows like Modern Family, more likely to be recorded and watched later with full attention, come out looking less popular than reality shows which are almost wholly consumed on their air date. Nonetheless, "the overnights still set the tone and agenda," according to an ABC executive. Here's the upshot of that: because TV executives are encouraged to manage to that measure, they achieve better performance on paper but worse—wait for it—in reality.
It's a problem that's rampant right now in the practice of capitalism. Whether at the level of whole economies fixating on GDP or corporations trying to nail quarterly earnings targets, managers are being influenced by the wrong metrics and making decisions that actually leave us worse off. They're ignoring the fact that, given today's measurement capabilities, it is possible to gauge outcomes that matter more: well-being at the macro level; broader creation of value at the firm level.
This is why it was such big news when Paul Polman of Unilever announced that his company, by 2020, would help more than a billion people improve their hygiene habits, and halve the waste associated with the disposal of its products by their consumers. And when Walmart announced its intention to be supplied 100 percent by renewable energy. And when Apple, stung by recent scrutiny of its supplier base, pledged that its workers everywhere will work in safe and fair settings. For these firms to understand their baseline performance and know if they're making progress, their managers have to attend to new measures. Evidently not everyone is choosing to see their world in black and white financial terms. Some are seeing in color.
This is how capitalism changes. While it's helpful for Klaus Schwab to declare at Davos that capitalism "no longer fits the world around us," it really comes down to firms and individuals to try different things, some of which turn out to suit a changed environment better. Certainly there has been change in the environment of commerce. Many impacts that once defied measurement, and were therefore ignored by firms as externalities, are now knowable (like after-air-date TV show viewing).
A handful of multinationals—among the smart ones are Procter & Gamble, Coca-Cola, GE, and others—have begun to make these changes. These companies have the scope to easily gather data on their true impact (Coke's effect on the water table wherever it has a plant, for example) and the market dominance to act unilaterally. When such companies speak, their business partners listen, and often their competitors follow suit.
But mega firms don't have a monopoly on leadership. Any enterprise leader can aim to excel by new measures and reward progress toward them in their own ranks. This is the story of entrepreneurs from Ben & Jerry to Seventh Generation's Jeffrey Hollender to Whole Foods' John Mackey. In Brazil, Luiz Seabra founded Natura, which has grown into the cosmetics giant of Latin America, on the philosophy that the performance to be managed rigorously was not only financial but environmental and social. Consequently, the firm counts as part of its positive performance the 300,000 employees who leave Natura annually. That's because for many, selling cosmetics is their first paying job; their stint at Natura prepares them to achieve elsewhere. It's a positive externality management has decided to measure and make known. Perhaps most important about Natura is that its three categories of measures have equal impact on managers' performance ratings and bonuses. An executive who makes her numbers financially but not environmentally or socially does not succeed there. Really.
For a smaller company hoping to manage to new measures, it helps not to be a lone voice in the wilderness. We're seeing some leaders use a new tactic to create a chorus. Patagonia's Yvon Chouinard knew that his impact would be small as long as it was limited to his own managerial scope. So he approached the 800-pound gorilla of his industry, Walmart, with a vision of setting industrywide standards for measuring the impact of choices throughout the apparel value chain. The industry consortium they together assembled now has an A-list membership all agreeing to use the same yardstick in their efforts to make their business more sustainable. Fair Trade coffee and cocoa, or the Fair Labor Association that Apple has asked to audit its factories, are other examples. An industry-wide effort gains more attention with customers, and provides air cover for a small company.
Can even an individual manager start measuring and managing differently, and therefore be a driver of change in a complex system like capitalism? As we see it, managers have three choices. They can simply play by the rules—and game the measurement system to the extent possible. They can be critical of the rules, noticing where measures fall short and trying to do the right thing nevertheless, perhaps at their own expense. Or they can work to change the rules. They can emulate the small company, gathering support from like-minded people. But the new measurement capabilities afford them an additional toolbox. If better measures are possible, but the "tone and agenda" of a place still reinforces an old, narrow view of what metrics to live by, then a leader at any level can work to rally others around what really matters. Indeed, in an age of autonomous work and fast change, that might just be the definition of leadership.
Broader measurement of how businesses affect their societies is driving much of capitalism's evolution. The good news is that we're in the midst of a moment when the need for change is becoming apparent to more people, and the means are at hand.
This blog first appeared on Harvard Business Review on 3/29/2012.
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