Thomas D. Dee, Professor of Organizational Behavior at Stanford University’s Graduate School of Business, published a piece in the July-August 2009 edition of the Harvard Business Review entitled Shareholders First? Not So Fast…. In the article, Dee brought forward the argument that the recent economic hard times can be partially attributed to the dominance of CEO concern for the interests of the shareholder over other stakeholders: employees and customers. Professor Dee states:

It’s clear that the limits of shareholder capitalism are showing themselves like so many cracks in the ages-old foundation of a house.… In the 1950s and 1960s, the stakeholder was king. CEOs saw their role as one of balancing the interests of the various groups that touched their companies—customers, employees, suppliers, shareholders, and the community at large. This reflected the executives’ sophisticated understanding not only of their role as stewards of the valuable resources entrusted to them but also of their own enlightened self-interest…The idea that shareholders should be preeminent took hold in the 1970s, for many reasons. Among them was a widespread belief in the efficiency and intelligence of markets… (but) The idea that stock markets are invariably efficient and provide accurate estimates of value has been shot down time and time again: Witness the rise over the past few years in the number of earnings restatements filed and the number of companies that have gone from being most admired to most reviled almost overnight. “

The argument about shareholders vs. stakeholders isn’t new and it remains unresolved, at least in academic circles. The argument basically is this: what is the purpose of business? According to Milton Freidman, it is to maximize shareholder value. According to management theorist Peter Drucker, it is the creation and exchange of value (profit being an indicator that a company does this well). Lord John Browne, former BP executive and President of the Royal Academy of Engineering in the UK says that, “any successful business is part of society and exists to meet society’s needs. “

Wall Street of course is unambiguous: the purpose of corporations is to create wealth for the owners. Since 2008 we’ve all been living through the result of the unbridled pursuit of wealth at the expense of other considerations, and so it is beneficial to try to get back to basic principles now. But the discussion doesn’t have to be about social responsibility vs. profits. It was Peter Drucker who said in 2003, “every social and global issue of our day is a business opportunity, in disguise, just waiting for the entrepreneurship and innovation of business, the pragmatism, and the capabilities of good management. “

Spedan’s Partnership

In a marvelous new book, Spedan’s Partnership, author Peter Cox brings the academic argument down to earth. The purpose of business is explored in the context of the story of the John Lewis Partnership. The partnership owns and operates the John Lewis department and Waitrose grocery stores in the UK. Cox, who retired from the partnership in 2003 as director of IT for Waitrose, tells the story of the development of the John Lewis model of a co-owned business. The company’s statement of principles makes it absolutely clear which theory of business the partnership subscribes to:

The partnership’s ultimate purpose is the happiness of all its members, through their worthwhile and satisfying employment in a successful business. Because the Partnership is owned in trust for its members, they share the responsibilities of ownership as well as its rewards — profit, knowledge and power. “

Cox tells a spellbinding tale of the development of the John Lewis partnership by the son of the founder, Spedan Lewis. I was drawn into the story the way one can be drawn into a good serial drama on TV; even though the success of the partnership is well known, the question, “will they ever get out of this jam? “ draws the reader through time, right to the present day (not to spoil the story, but the answer is yes. Consider these facts: for the last 50 years, every partner has been paid an average bonus equal to 8 weeks’ pay; and in spite of the recent harsh economic times, the partnership reported year-over-year sales growth in 2010 of over 12% and 15% growth in operating profit.)

Would It Work Elsewhere?

Cox suggests in the prologue to the book that the applicability of John Lewis model is a current point of discussion in the UK. In a conversation with Peter last week, he explained further,

since the 2010 election in the UK, each political party has said that they have to learn something from the John Lewis model, but I’m not sure they know what they meant. But the National Health Service, which is really several regional health trusts, is talking. There are two aspects to the model; the first is the capital structure — the model is difficult to achieve unless the company started that way. The governance model is tricky. The other is ‘constant communication’ and eliciting feedback, and John Lewis has had that over the years — it was Spedan’s big idea to start the Gazette right from the beginning… if an employee sends a letter, it has to be published… and answered. “

As relates to the capital structure, the partnership truly is a partnership; the company is owned by its employees. Bonuses are tied to something tangible, and everyone participates. The effect of this ownership isn’t theoretical — it’s very real: “even on the shop floor, if someone is wasting time or money, he’s wasting his colleagues’ time and money, “ explains the author. “People will stop and say, ‘why are you doing that? It’s not yours — it’s ours!’ “ In an anecdote of how seriously people take the notion of shared ownership, the book mentions that Spedan always bought his own pens, so as not to borrow one from the shop.

What Can Be Learned

Regardless of the circumstances that led to the development and growth of the John Lewis Partnership, there are several lessons from the story that can be applied by any business, to help companies find a balance between social responsibility and profitability.

First of course, there has to be a value proposition that works. This seems so fundamental that we don’t often discuss it. John Lewis and his son were real retailers, and the senior Lewis “had a clear and unwavering policy. He would give excellent value. He would be entirely honest at a time when retailers frequently weren’t. He would keep in stock an extremely wide assortment. And…if you had a reputation for keeping in stock…you would gradually build in your customers an unconscious conviction that if you couldn’t get it at John Lewis you couldn’t get it anywhere. ” ^[1]

Secondly, leadership is more important than we tend to realize. Business is full of stories of great leaders (Bill Hewlett & David Packard, Sam Walton, Tom Watson). But lip service aside, RSR study participants frequently identify “lack of executive involvement “ as a top inhibitor to becoming a retail Winner. Spedan Lewis had a vision for his company, and the strength of character to relentlessly go after the vision (stories of how Spedan tried out, modified, and adopted his vision is in fact one of the most compelling aspects of the book — it’s the story of a real innovator).

Third, 360º communication (what U.S. politicians are fond of calling ‘transparency’) is critical. According to Peter, “when most people talk about ‘transparency’ they mean that what they want you to see can be seen. “ But at John Lewis, the regularly published Gazette includes every complaint and suggestion — and importantly, the management’s response. Spedan himself was suspected of posting ‘anonymous’ complaints about things that he heard employees grumbling about, in the early days (when of course, the employees suspected that their words might be used against them), and then answering those complaints at length. The idea definitely caught on. Today, there’s an online version of the Gazette available to the partners, but readership in the paper version remains at 50-60%. And to this day, there is still an anonymous letter column with the rule that so long as the letter is not clearly offensive or personally defamatory, it must be published.

Fourth, employees have to have a reason to put forward their best efforts, other than fear of getting fired. While it may not be possible for a public corporation to arbitrarily change the business from stockholder-owned to employee-owned, there are ways to accomplish some of the same magic, As Professor Dee pointed out in his HBR piece:

Even in an era focused on shareholder wealth, the outperforming companies have been those that have gone against the grain and embraced stakeholders. Look at Southwest Airlines, which had at one point a market capitalization equal to that of the rest of the U.S. airline industry combined. From the very beginning it has put employees first, customers second, and shareholders last. Even following the industry shutdown after the terrorist attacks on September 11, 2001, the company never had layoffs. Similarly, shareholder interests bring up the rear at Men’s Wearhouse, which now sells almost a quarter of all men’s suits in the United States. The company aids employees in financial distress and invests heavily in worker training. It competes not on price but on the quality shopping experiences it offers its customers. “[2]

The fifth lesson is the flipside of the fourth, that is, the owners must have more than a financial interest in the company. In the John Lewis partnership, there is a direct line between the actions of the employees and how the company fares for the long haul. But in the world of publicly traded companies, the focus has lurched away from long term viability and towards quarterly growth. A slavish obsession to stock price and quarterly earnings can (and often does) lead executives to make short term choices at the expense of long term ones. In the book Spedan’s Partnership, Spedan Lewis and his successors consistently kept the long haul in mind. In fact, when other retailers were pulling back, Spedan had a tendency to take risks, investing in the long-term vision.

Finally (to settle the academic argument), the John Lewis partnership demonstrates (as does Southwest Airlines) that if the company produces things of value to its customers, and the employees are happy, the owners will get plenty rich.

Ed. Note: Spedan’s Partnership can be purchased directly from the author at http://www.spedanspartnership.co.uk/, or by visiting the Amazon UK site at http://www.amazon.co.uk/Spedans-Partnership-Story-Lewis-Waitrose/dp/0955187729.

[1] Spedan’s Partnership, Peter Cox, 2010, p.5
[2] Shareholders First? Not So Fast…., Jeffrey Pfeffer, Harvard Business Review, July-August 2009