A Cure for the Common Corporation

July 17, 2012

By Dov Seidman

HOW to Measure and Manage Performance in the 21st Century

“We now know that you do well by doing good,” says Warren Cormier, the President of the Boston Research Group and one of the founders of the RAND Behavioral Finance Forum. “It’s not a theory – it’s a fact.”

The fact that Cormier refers to is groundbreaking research that delivers compelling data on how our organizations really work. The results presented in The HOW Report are derived from a rigorous statistical analysis of roughly 2 million observations by 36,000-plus employees in 18 countries, from the C-Suite to the junior ranks. It was developed by my company LRN and independently conducted by the Boston Research Group, in collaboration with Research Data Technology and The Center for Effective Organizations at the University of Southern California.

The research examined how governance, culture and leadership influence behavior and impact performance. We’ve got good news and bad news to share. The good news is that, after having argued for two decades that principles and profits reinforce each other, the findings of The HOW Report prove this to be true: Companies truly built on purpose, guided by values and permeated with trust experience significant advantages over the competition.

These companies characterized as ‘self-governing’ scored the highest on every one of the 14 performance outcomes evaluated by the study:

93% of employees at high-trust and truly values-based businesses observe financial performance greater than their competitors vs. 48% of those at strict top-down organizations.
Employees functioning in a high trust organization are 22 times more likely to take a beneficial risk – which, in turn, enables 8 times the levels of innovation as compared to the competition.
When it comes to loyalty, 92% of employees of businesses based on values and trust plan to be working for their company in a year, compared to 46% of those in strict top-down organizations. 98% would recommend their values and trust-based company to a friend vs. just 33% at strict top-down organizations.
99% of high-trust and values-based companies observe highly satisfied customers vs. 42% of top-down organizations. Employees at high-trust, values-inspired companies are 92% more likely to observe high levels of innovation relative to the competition.
Further, in high-trust, values-inspired companies, only 24% of employees observed misconduct or unethical behaviors, compared to 47% in low-trust, non-values focused organizations.

The bad news from The HOW Report? Only 1 in 30 companies meet the standard of being based on values and trust. Just 11% of organizations foster high-values environments where employees are encouraged to take risks, make decisions, and innovate around products, services, and processes. Only 1 in 5 respondents strongly agree there is a high level of trust in their company.

Self-Governance Wins:

In business it is often said that you manage what you measure. I would add that what we measure is a window into what we value – and into our values. Since most leaders remain comfortable managing only what they can measure, in a more interdependent world it has become important to develop a new framework for analyzing, and an independently confirmable method for measuring, how organizations operate and relate to society, how their people behave and make decisions. This accounts for why we developed HOW Metrics.

The HOW Report found that all companies fit into one of three archetypal categories. Companies in the first group, called “blind obedience,” rely on coercion, formal authority, policing, and top-down command-and-control leadership. The second group, “informed acquiescence” organizations, have clear-cut rules and policies, well-established procedures, and performance-based rewards and punishments — the standards of high-quality 20th-century management. Both of these archetypes rely on a “top-down” authority and hierarchy. The third group, organizations with “self-governance,” consists of the most farsighted organizations, best positioned to thrive in an interdependent world. People at all levels of these companies are trusted to act on their own initiative and to collaboratively innovate; a shared purpose and common values guide employee and company behavior.

These are not static categories; they represent a theory of organizational evolution. The prevailing form of management in the industrial era has gradually matured over the past 150 years. It’s moved from blind obedience to informed acquiescence, and it’s just now moving to self-governance, but this study demonstrates it still has a long way to go to shed traditional authority hierarchies and gain access to significant competitive benefits.

Although these self-governing companies are still rare (at least for now), they experience the highest levels of resilience, employee loyalty, customer satisfaction and financial performance. Companies that excel at “doing good” are those whose decision-making throughout the company is animated by the highest levels of trust and values-driven cultures – the business outcomes that give them profound advantages in the marketplace.

The HOW Report’s findings succeed where a procession of surveys based on the opinions or perceptions of declining employee engagement, decreasing productivity, lagging customer satisfaction and declining customer loyalty have previously fallen short. We’ve known that employee engagement has been falling for years but we don’t know why or what qualities inside the organization generate higher engagement levels. We know that when employee productivity, customer satisfaction or employee engagement declines, it costs our companies billions of dollars in lost opportunities. But we did not know why. Until now.

What was Soft is Now Hard, and Quantifiable:

The vast majority of findings related to the business outcomes we business leaders hunger for – employee engagement, customer satisfaction, innovation – has been conducted via surveys based on opinions or perceptions. The HOW Report goes beyond a typical employee-engagement survey and statistically tests the link between values and performance. “This study should have a profound effect on business leaders for years to come,” Cormier explains.

Why? Because this new worldwide analysis of employee behaviors validates that companies built on values and purpose experience significant advantages in the marketplace.

For years, business leaders have wrestled with how to get the business outcomes they want without resorting to stop-gap measures. The findings in the HOW Report demonstrate that there exists a host of concrete, fact-based, effective and transformative actions leaders can take to engage employees, delight customers, increase average employee tenures, boost innovation and ultimately increase revenue while strengthening resiliency.

Despite this deciphering of the 21^st century organization’s DNA, our work has only just begun because transformative actions are absolutely necessary. Only 3 percent of global companies measure and manage the metrics that drive the business outcomes they seek. What’s more organizational cultures defined by strict, top-down management hierarchies remain present in 43 percent of global companies.

Universal Truth:

The adage “When in Rome…” has never been further from the truth in terms of how business truly works everywhere. High-trust, values-driven companies outperform other types of organizations across every important performance outcome in the U.S. and in Mexico; in the U.K., Australia, Germany and Turkey. Same in Brazil, Russia, China and India and every other country in the 18 where this research was conducted.

The truly global nature of these findings suggests that companies should not pursue a demarcated approach to how they conduct business. For example, if certain practices are prohibited by regulation in the U.S., many business leaders believe it is acceptable to conduct the same practices in emerging markets where the practices are not prohibited. The components of high-trust, values-driven cultures are universal. In other words, when in Rome…your company should behave the same way that it behaves in London, Mexico City, Beijing, Bangalore or Berlin.

Mitigating Measurement Anxiety:

I believe HOW metrics are crucial to ensuring the survival and success of 21^st Century organizations. We have scaled up the ability to measure ‘how much’ – how much market share, revenue, profit, debt, resource, web page views, friends and followers. While “how much” measures remain necessary, they are no longer sufficient because what was previously categorized as soft (values, behavior and culture) has become the hard currency of business. As a result, leaders should step back and ask what truly matters in business – and how can it be measured and managed?

What we need, a growing number of CEOs understand, is a new set of metrics for a new reality. Fortunately, culture and leadership as well as numerous HOW metrics (e.g., collaboration, values, inspiration and resiliency) can be measured. We have the research to prove it.

If you want more proof, ask the three percent of CEOs whose organizations have defied the odds by integrating HOW metrics into their management systems. Their companies are the most innovative, benefit, not suffer, from risk and consistently record the best financial performance. They’re not hard to find. They’re the ones winning, by every (HOW) measure.

Originally posted on Forbes