Stone Cutters, Saints & the New Captains of Industry

Inside of the Apostolic Palace, the official residence of the Pope in the Vatican, is the Sala Clementina or Clementine Hall, the largest and most important room in the palace. It is where presidents and princes are received. To see the room is to know why: it is covered in priceless 16th century Renaissance frescoes honoring the life and martyrdom of Clement I.

According to the church, St. Clement, a patron saint of mariners and stone cutters, began his papacy in 88 A.D. He is said to have known the Apostle Peter, a fisherman, whom Jesus, a carpenter, designated as the foundation stone of the church. Tradition also has it that the Apostle Paul, a tent maker, identified Clement in Phillipians 4:3 as a fellow laborer in Christ.

Connection between the patron saint of workers and today’s captains of industry?

There in Clementine Hall, 20 centuries after Clement, a connection was to be made between fisherman, sailors, stone cutters with today’s captains of industry. In that hall, CEOs employing almost 5 million people sat together in unity, including the leaders Barclays, Boston Consulting Group, Deloitte, Dow Chemical, IBM, McKinsey, Monsanto, Novartis, Royal Dutch Shell, Siemens and United Technologies. They were pledging to adopt a new perspective on business which shift the pursuit of profits  for profits sake and move their businesses to address broader social problems.

The Death of “Shareholder First”?

Alan Murray, the Editor-in-Chief at Fortune, joined the assemblage of leaders to present Pope Francis a report representing as a new “manifesto for business” labeled The 21st Century Challenge: Forging a New Social Compact.

In laying out a new “moral imperative for modern leadership” seven working groups produced recommendations for the following ills:

  1. Financial Inclusion: Market Access, Entrepreneurship, and Impact Investment
  2. Energy Innovation & Environmental Protection
  3. Jobs: Technology, Innovation and Inclusive Growth
  4. Global Health: Fighting Disease, Providing Access
  5. Jobs for All: Putting the Global Economy to Work for Everyone
  6. Food & Water: Ending Scarcity, Promoting Sustainability
  7. Education for All: Developing the Workforce of the Future

In receipt of the report, Pope Francis told the delegates, “Our world today is marked by great unrest. Inequality between peoples continues to rise, and many communities are impacted directly by war and poverty, or the migration and displacement which flow from them…. Your very presence here today is a sign of such hope, because it shows that you recognize the issues before us and the imperative to act decisively.”

Fortune’s headline for the event was The Humanity of Business and Alan Murray wrote, “The shareholder-first model that guided many companies in the post-World-War II era is dying, and a new model is struggling to emerge.” This new model will embrace “under-served markets, expand basic health services, and improve worker training as part of their core business activities.”

Manager of the (Last) Century…Renounced

Within the final report to Pope Francis, a frequent critic of capitalism and free markets, was a statement that, “Inequality within nations is on the rise, and dissatisfaction with a system that too often showers its riches on a privileged few is growing.” Part of a solution was the recommendation for the development of new business metrics to encourage long-term capitalism other than just profit or shareholder returns.

Fortune was signaling an important shift. Much of the 20th Century was guided by economist Milton Friedman’s philosophy when he once declared “the social responsibility of business is to increase its profits.”

Fortune must have recognized the irony at work. The very magazine that sponsored the papal visit for CEOs and presented a new business model for this century had named as its “Manager of the Century” for the 1900s former GE Chairman Jack Welch.

For many, Welch represents the penultimate executive commitment to building shareholder value. During Welch’s 20-plus year tenure, GE went from a market value of $14 billion — the 10th largest market cap in 1981 — to more than $410 billion at the time of his retirement — and for GE to hold the title of the most valuable company in the world.

Welch had called for and succeeded in creating a revolution at GE by first changing its mission from outpacing growth in GDP to a more ambitious goal: to be the world’s most valuable company. Welch fulfilled the mission in several ways.

First, by moving GE toward a more service-oriented business, he required each of his business units to be the industry leader, and if they weren’t the industry leader, they were to have a clear plan for achieving that role or they would exit that business. In his first two years, GE entered into more than 100 new businesses via acquisition or joint venture and sold more than 70 businesses.

He decentralized planning and told his managers to act like owners on behalf of their business units and departments.  He implemented town meetings in which employees from all levels of an operation would gather, along with their bosses, whom they would pepper with tough questions and recommendations. Significant pressure was put on superiors to respond with real action immediately. Welch also dispatched with the “GE way” that permeated the organization. People were encouraged to find and co-opt best practices from companies like Toyota and Wal-Mart.

With flattening the organization came cutbacks.  Welch made famous the so-called “rank and yank” meritocracy system whereby all employees at GE were graded annually on a 1-5 level scale.  Under this system, the bottom 10% had to move up or get moved out: a practice still popular today which also helped cement his moniker of “Neutron Jack”.

Near Welch’s retirement, Geoff Colvin wrote in Fortune regarding rank and yank the following:

Cruel? Far from it, says Welch. Falsely telling a manager he’s doing fine for 20 years, then firing him at age 53 when he’s got two kids in college–“that’s the definition of cruelty.” GE is just facing reality, says Welch, and of the many precepts he has made famous (“Control your destiny, or someone else will,” “Change before you have to,” “Be candid with everyone”), the most fundamental and important may be, “Face reality.”

At the time, “facing reality” might be said differently: acting in the shareholders’ best interest. Was this type of tough management philosophy precisely what was being challenged in Clementine Hall?

Which model stands as more benevolent? Welch’s total commitment to building value for his company, shareholders and executives who succeeded in this Darwinian system? Or, is the approach where an aging, underperforming manager might be treated more patiently and a new market is defined as the underserved who are given a hand up to participate in profitability.

Is is possible Welch himself has settled the issue? After Jack Welch’s retirement, he told the Financial Times that “on the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy. Your main constituencies are your employees, your customers, and your products.”

New Rules

Business leaders can hardly be blamed for adopting a kinder, gentler tone. It is a self-defense mechanism. Capitalism has always had its detractors, but the attacks from the public became and are today more pointed, personal — trained squarely on the CEO and senior leadership.

For two decades, trust in business has been deteriorating. A Gallup Poll taken after the Internet bubble burst found that 9 out 10 Americans felt those running corporations could not be trusted to look after the interests of their employees (95% of Britons felt the same of those in charge). If business leaders disregarded their employees, it must surely be because of their fixation on profits and shareholders. However, only 18% thought corporations looked after shareholders and more than double that — 43% — believed business leaders were only looking after their own interests.

Charles Handy’s  seminal Harvard Business Review piece in late 2002 asked provocatively, “What’s a Business For?” At the time, accounting scandals were increasing at big U.S. companies. Earnings announcements were under increased scrutiny after one analyst concluded that “the pro forma earnings announcements by the top 100 NASDAQ companies in the first nine months of 2001 overstated actual audited profits by $100 billion.”

Handy asked, “What has gone wrong? It is tempting to blame the people at the top.” However, he continued, “Personal greed, insufficient scrutiny of corporate affairs, an insensitivity or an indifference to public opinion: Those charges could be leveled against some business leaders, but few, thankfully, have been guilty of deliberate fraud or wickedness. All they’ve been doing is playing the game according to the new rules.”

The new rules included the increased prevalence the stock option. Handy pointed out that in 1980, only approximately 2% of executive pay in the United States was tied to stock options, by 2002, more than 60% was.  As a result, a fixation on share price causes an inevitable shortening of horizons (see chapter X) and executives, “…not unnaturally, want to realize their options as soon as they can, rather than relying on the actions of their successors.”

Other strategies and tactics to influence near-term share price, while legal, grew more in favor, including cutting or postponing expenditures geared to the future (chapter X) rather than the present.  (TK add more via ValueOpt ) Favoring acquisitions over organic growth, despite data that most mergers and acquisitions do not add value but they sure do grab headlines and move markets.

“The American disease is not just a matter of dubious personal ethics or of some rogue companies fudging the odd billion.  The country’s whole business culture may have become distorted.”

“Data then fPerhaps more surprising So much focus has been put on the person at the head of an organization.  The Celebrity CEO, Welch may have well been responding to the new era, one in which people

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Capitalism wasn’t always popular in America. Founding fathers were not supporters. (Quote from WSJ Piece)