By Engr. Mohammad Iqbal Mirza, CEO, Green Leaves
In the eye of Rosabeth great companies do not only look after its financial interest. What they do is: Keep a balance between financial gains and institutional building, creating an alignment instead of subordinating to financial interests. There has been no utopian conditions in any sphere of life in this world, yet conditions can be produced where a sense of care and happiness can exist.
Rosabeth argues: “In order to carry out its activities and sustain the institution, firms require capital, but profit is not an end in itself but rather a means to further investment in continuing returns. This view of the firm is no more idealized than profit-maximizing views”.
The leading Companies Create Innovation, Profits, Growth, and Social Good, to derive propositions about the role of humanistic institutional logic. Institutional logic holds that firms are a vehicle for accomplishing societal purposes and providing meaning for those who work in them, which cannot be calculated only in terms of profits or paychecks. Their criteria is human values instead of extracting more profits. The organizational changes made are used as framework to reach decisions.
The theory-in-practice is that firms have a purpose, as institutions in society that contribute to meeting the needs of all stakeholders through the goods and services they produce, the jobs they create and the quality of work life, how their goods and services impact other aspects or society or are used to provide societal benefits, and their financial viability to provide returns to investors and capital for improvements and innovations.
“In South Korea, after the Asian financial crisis of the late 1990s, Shinhan Bank set out to acquire Chohung Bank, a much larger and older bank that had been bailed out by the government. Announcement of the acquisition was met by a dramatic protest: 3500 men from Chohung Bank, members of a union that extended into management, shaved their heads and piled the hair in front of Shinhan’s headquarters in downtown Seoul.
Customers are often lost in the turmoil of changes around mergers and acquisitions anyway; this widely-reported event was certain to do much more damage. Shinhan had to decide whether to go ahead with the acquisition, and then, if it did proceed, how to treat the protestors and what to do about Chohung employees – whether to retaliate against this hostile action. Shinhan, a relatively new bank, had been guided by humanistic values, and those prevailed. Shinhan negotiated an agreement with the Chohung union that involved deferring formal integration for three years, providing equal representation of both Shinhan and Chohung managers on a new holding company management committee and internal committees, and increasing the salary of Chohung employees to match the higher wages of Shinhan employees. (Shinhan also provided 3500 caps to cover the heads of the protestors.)
In short, Shinhan increased the cost of the acquisition and appeared to defer returns from it for several years. Moreover, Shinhan decided to invest the equivalent of tens of millions in U.S. dollars in a process the bank called “emotional integration” – a series of retreats and conferences that would not only spread strategic and operational information but would also be explicitly designed to produce social bonding and a feeling of being “one bank.” The first retreat involved taking 1500 top managers, the entire top layers, to a historic city where they climbed a mountain at a famous shrine together and
sang a company song. According to a financial logic, the new Shinhan Financial Group was wasting money and jeopardizing shareholder value. According to the institutional logic Shinhan used, these investments were considered the only course of action that would keep the two banks running with continuity from knowledgeable employees who had ongoing relationships with customers.
Within 18 months, Shinhan had retained and grown its customer base and neutralized the protesting union. Although no formal merger could occur, Shinhan and Chohung employees were working together on task forces discussing best practices, and ideas were spreading that began to make the branches more similar. Branches of one bank often displayed a sign for the other bank. Employees were, in essence, self-organizing. By the third year, when formal integration could occur, Shinhan was outperforming not only the banking industry in South Korea but the entire Korean stock market.
To carry out their activities, firms requires labor of a knowledgeable kind, who are trained, committed, and can understand what needs to be done when rules are vague or unspecified. Companies can pass up short-term cost-savings in order to motivate performance, retain and attract employees and managers. When part of a coherent strategy, this can produce superior financial results in the longer-term”.
The Benefits of Institutional Logic
In companies that adhere to an institutional logic, executives cultivate relationships with public officials neither as a quid pro quo nor to push through particular deals. Rather, they seek to understand and contribute to the public agenda even as they influence it. For example, PepsiCo’s chief global health officer, who came from the World Health Organization, is planning a cross-sector project to reduce childhood obesity.
IBM’s CEO, Samuel Palmisano, travels around the globe six or seven times a year to meet with national and regional officials, discussing how IBM can help their countries achieve their goals. This is not sales or marketing; it’s a high-level conversation to demonstrate the company’s commitment to furthering the development of the countries it operates in.
Institution building requires the efforts of many people. The top leaders are involved in external relations and involve others and for that reward them for building relationships with the nation and community. Although relatively few people might hold formal responsibility for these external interfaces, a great many might perform institutional work by volunteering, attending public meetings, and participating in community service. Community building is not a hard sell for people native to an area or for long-term residents,
Innovation
Articulating a purpose broader than making money can guide strategies and actions, open new sources for innovation, and help people express corporate and personal values in their everyday work.
Companies’ claims that they serve society become credible when leaders allocate time, talent, and resources to national or community projects without seeking immediate returns and when they encourage people from one country to serve another. IBM’s Corporate Service Corp, for instance, develops future leaders by sending diverse teams of the company’s best talent on month long projects around the world. The attention placed on social needs often generates ideas that lead to innovations.
For Cemex, operating by institutional logic and considering unmet societal needs produced innovations such as antibacterial concrete, which is particularly important for hospitals and farms; water-resistant concrete, useful in flood-prone areas; and road surface material derived from old tires, desirable in countries that are building roads rapidly. An idea from Egypt for saltwater-resistant concrete, helpful for harbor and marine applications, became a product launched in the Philippines.
Institution building helps connect partners across an ecosystem, producing business model innovation. Cemex started Construrama, a distribution program for small hardware stores, in 2001 as a response to competition from Home Depot and Lowe’s, which were then entering Latin America. Construrama offers the small stores training, support, a strong brand, and easy access to products.
In accordance with its values, Cemex sought dealers who were trusted in their communities, rejecting candidates whose business tactics didn’t meet the company’s ethics standards; Cemex handles itself the promotion of Construrama brand, but doesn’t charge distributors requiring stores to meet its service standards. Cemex participates in community-building philanthropic endeavors—expanding an orphanage or improving a school and by the mid-2000s, Construrama had opened enough stores to become a large retail chain in Latin America and expanding into other developing countries.
Self-Organization
Great companies assume they can trust people and can rely on relationships, not just rules and structures. They are more likely to treat employees as self-determining professionals who coordinate and integrate activities by self-organizing and generating new ideas.
Institutional logic holds that people are not paycheck-hungry shirkers who want to do the bare minimum, nor are they robots that can be ordered to produce high performance. Instead, employees make their own choices about which ideas to surface, how much effort to put into them, and where they might contribute beyond their day jobs. Resource allocation is thus determined not only by formal strategies and budgetary processes but also by the informal relationships, spontaneous actions, and preferences of people at all levels.
Fully understanding a company requires knowledge of its social structure and informal networks, and optimizing performance requires social investments. At Shinhan Bank, the two banks self-integrated through social bonds and relationships well in advance of the three-year mark when official integration was to take place. The new connections manifested in such actions as each bank’s voluntarily hanging the other’s banner in its headquarters.
At Procter & Gamble, managers in Brazil turned strategic and organizational traditions on their head to develop low-cost, high-quality alternatives to premium products. They undertook this risky initiative on their own and self-organized to ensure closer cross-functional teamwork and partnerships with customers. They felt that they had an obligation to improve the lives of consumers who could not afford premium products. Similar institutional logic led the P&G Himalaya team, a global cross-functional group, to find ways to make Gillette razors affordable and desirable to men often bloodied by barbers using rusty or worn-out blades.
Managers in great companies understand that formal structures can be too general or too rigid to accommodate multidirectional pathways for resource and idea flows. Rigidity stifles innovation. Informal, self-organizing, shape-changing, and temporary networks are more flexible and can make connections between people or connect bundles of resources more quickly.
Employees’ formal roles come to resemble the home base from which they are continuously mobile as they carry out daily tasks and projects, develop work relationships, and participate in team or group activities. Matrix organizations—in which individuals report to two or more bosses depending on the different dimensions of their tasks—become what I dub a matrix on steroids. People are accountable along many dimensions simultaneously, attending to multiple projects and using their networks to assemble resources for all those projects, often without going through a decision-making hierarchy.
Although there is a drudgery and confinement component to many jobs—on any given day about 40% of IBM employees in the U.S. do not go to an IBM office. They work at home or at customer sites, moving between locations and taking vacations at times of their choosing. IBM’s work-at-home programs, such as the one started in Japan in 2001, have caught the attention of governments interested in keeping women with technical degrees in the workforce. In some cases, IBM offers allowances to support infrastructure in the home, which has enabled a Harvard graduate working in India to combine project work with child-rearing, for instance, and a software manager from Egypt to move with her husband to Dubai.
Institutional logic assumes that people can be trusted to care about the fate of the whole enterprise—not just about their own jobs or promotions—and to catalyze improvements and innovations without waiting for instructions or sticking to the letter of a job description. Job descriptions nowadays document only part of what people do; performance reviews and salary bands capture only some of the activities through which people might add the most value for the company.
When people self-organize to create networks to share information, new initiatives or innovations are often the result. Organizations must encourage the creation of such networks, of course, and facilitate them through communication platforms or meeting spaces, but the networks usually flourish best if they spring from volunteers who do things that bosses might not have anticipated. What’s more, these self-organized networks often keep good ideas alive long after an organization would have abandoned them.
For example, three PepsiCo managers in Latin America had shared a dream for around a decade of developing new kinds of potatoes that were suitable for southern climates, less starchy, and environmentally sustainable. They felt that the initiative should be based in Peru, the potato’s birthplace. The troika remained in contact despite their moving to different locations, and even after years of ho-hum response, they presented their ideas wherever they could. They eventually received a boost when a new Peruvian potato chip whose creation they championed became a sensation. The chips, which used multicolored potatoes from small farmers in remote villages in the Andes, combined nutrition, tastiness, and social contribution. Proof of concept turned the dream into reality: In August 2010, CEO Indra Nooyi announced the establishment of a global potato development center in Peru, headed by one of the three champions.
Self-organizing communities can be a potent force for change, propelling companies in directions they might not have taken otherwise. People with no formal orders serve as explorers and entrepreneurs. For example, had it not been for self-forming networks, IBM might have lagged behind or even missed out on two big business ideas: virtualization and green computing. These emerged as among IBM’s top strategic priorities after an Innovation Jam in July 2006, a web chat spanning several days to which over 140,000 employees contributed ideas.
The virtualization initiative came together outside of formal structures and, initially, as a voluntary activity. Some 200 early adopters of virtual platforms—such as Linden Labs’ Second Life and similar platforms—found each other through the company’s chat rooms and created an ad hoc group of people who shared ideas in their free time through avatars and weekly phone calls, with conference lines sometimes open in the virtual world, too. After a year of informal self-organization, the network found an IBM executive sponsor. IBM then designated virtualization an emerging business opportunity and provided funding for it.
My argument has come full circle. A logic that justifies treating employees as self-determining volunteers—in essence, as true professionals who care about high performance because they believe in the company as institution—makes it important to have a motivating purpose and values to provide coherence and common identity. For great global companies, institution building is not the result of carrying out specific activities but a coherent, holistic pursuit in which elements reinforce one another, are inextricably intertwined, and reflect a logic and leadership style that permeate the corporation.
Firms presenting themselves as institutions and serving society often come under more scrutiny than others do, and they must withstand criticism about the gap between stated aspirations and performance, financially and socially. If these companies make money while doing good, they will be criticized for manipulation; if they do some good but not enough to solve complex problems, they will be criticized for lack of courage or commitment.
The great global enterprises are not waiting for grand new theories or perfect answers. Their leaders already use an institutional or social logic to supplement economic or financial logic in guiding and growing their enterprises. Institutional logic cannot be captured by cost-benefit equations or reduced to the language of economics, and yet it turns out to be a powerful driver of financial performance.
Leaders in the great companies can tell a different story about the basis for their decisions. In so doing, they are able to produce new models for action that can restore confidence in business and will change the world in which we live.
