How great companies think differently

By Engr. Mohammad Iqbal Mirza, CEO, Green Leaves

Rosabeth Moss Kanter is the Ernest L. Arbuckle professor of business at Harvard Business School. She is also director and chair of the Harvard University Advanced Leadership Initiative. She wrote an artice “How great Companies think differently”. Here is a condensed part of her article. I have always believed that – A koney wali dukan has all the potential to become a great company, but its proprietor has to do differently – with positive and negative choices at hand to make money, the basic to any business activity. You may find it interesting!

Anyone aspiring to enter into a business, of course is to earn a livelihood, aims at making the money and the more the better, is a common belief; he is supported by economists and financiers alike. Capitalism adores this narrow image and most of the big Corporations in their bid of maximizing short term profits for its shareholders practiced it wide and large.

Businesses, big or small shape the lives of the employees, partners, and consumers on whom they depend. You will notice, there lies a difference, the big companies operate and think their way to success. Great companies also work to make money, but they choose to do so by building institutions that last forever.

Their logic in building institutions is to invest in the future while being aware of the need to build people and society with a belief that business is an inherent part of the society. The logic is:

  • They consider both society and people of core value to their purpose that is not to be scrapped or discarded after use.
  • They believe that Companies are more than instruments for generating money.
  • They consider Companies are vehicles for accomplishing societal purposes and for providing meaningful livelihoods for those who work in them.
  • Enduring Institutional logic believes that the value a company created should be measured not just in terms of short-term profits or paychecks but also in terms of how it sustains the conditions that allow it to flourish over time. These corporate leaders deliver more than just financial returns; they also build enduring institutions.
  • Great Companies instead of viewing organizational processes as ways of extracting more economic value, create frameworks that use societal value and human values as decision-making criteria.
  • They believe that corporations have a purpose and meet stakeholders’ needs in many ways: by producing goods and services that improve the lives of users; by providing jobs and enhancing workers’ quality of life; by developing a strong network of suppliers and business partners; and by ensuring financial viability, which provides resources for improvements, innovations, and returns to investors.

Economist and Corporate leaders have a different view of the purpose and value of business. Corporate leaders undertake actions that produce societal value, whether or not the actions are tied to the core functions of producing goods, selling and providing services; whereas the financial logic is to maximize the returns on capital, be it shareholder or owner value.

The thrust of institutional logic is to balance public interest with financial returns. Institutional logic should be aligned with economic logic but it should not be subordinate to it. For example, all companies require capital to carry out business activities and sustain themselves. However, profit is not the sole end for great companies; rather, it is a way of ensuring that returns will continue.

The institutional view of the firm is not adored as much as the profit-maximizing view. Well-­established practices, such as R&D and marketing, cannot be tied to profits in the short or long runs, yet analysts applaud them. The companies intending to serve a purpose beyond their set of business investments have to do few things:

  • Employee empowerment,
  • Emotional engagement,
  • Values-based leadership,
  • And must contribute in society. Business history provides numerous examples of industrialists who developed enduring corporations that also created social institutions, for instance:
  1. The Houghton family established Corning Glass and the town of Corning, New York.
  2. The Tata family established one of India’s leading conglomerates and the steel city of Jamshedpur, Jharkhand.

That style of corporate responsibility for society fell out of fashion as economic logic and shareholder capitalism came to dominate assumptions about business and corporations became detached from particular places. In today’s global world, however, companies must think differently.

An intensely competitive global economy places a high premium on innovation, which depends on human imagination, motivation, and collaboration. Global mergers and acquisitions add further complexity, with their success resting on how effectively the organizations are integrated. Only if leaders think of themselves as builders of social institutions can they master today’s changes and challenges. I believe that institutional logic should take its place alongside economic or financial logic as a guiding principle in research, analysis, education, policy, and managerial decision making. In the following pages, I will describe six ways in which great companies use institutional logic, how it gives them an advantage, and how the perspective can radically change leadership and corporate behavior.

Great companies have a common purpose

Conceiving of the firm as a social institution serves as a buffer against uncertainty and change by providing corporations with a coherent identity.

As companies grow, acquire, and divest, the business mix changes frequently and job roles often vary across countries. The core of an organization’s coherent identity is its purpose and values and not the widgets produced. The sources of certainty permit people to take action in an uncertain world and guide people in their efforts to find new widgets that serve society. There are companies in the world employing hundreds of thousand employees across the world operating many industries – as diverse as automobile, finance and IT, with many more. The great companies invests in creating a culture based on a common purpose to provide coherence amidst diversity, proclaiming that it is “many companies united by a common purpose—to enable people to rise.”

Great companies identify something larger than transactions to provide purpose and meaning.

Globalization has detached organizations from one specific society, but at the same time it requires that companies incorporate the needs of many societies. It is a complex issue, yet can be resolved by establishing clear institutional values. PepsiCo, for instance, has made health a big part of its aspiration to achieve “Performance with Purpose”. Nutrition, environmental responsibility, and talent retention are pillars supporting the slogan. Performance with Purpose provides strategic direction and motivation for diverse lines of business in many countries.

Leaders can compensate for business uncertainty through institutional grounding. Great companies identify something larger than transactions or business portfolios to provide purpose and meaning. Meaning making is a central function of leaders, and purpose gives coherence to the organization. Institutional grounding involves efforts to build and reinforce organizational culture, but it is more than that. Culture is often a by-product of past actions, a passively generated outgrowth of history. Institutional grounding is an investment in activities and relationships that may not immediately create a direct road to business results but that reflect the values the institution stands for and how it will endure. Great Companies necessarily do followings:

  1. A Long-Term Focus

Thinking of the firm as a social institution generates a long-term perspective that can justify any short-term financial sacrifices required to achieve the corporate purpose and to endure over time.

The great companies sacrifice short-term financial opportunities if incompatible with their institutional values. These values guide matters central to the company’s identity and reputation such as product quality, the nature of the customers served, and by-products of the manufacturing process.

Banco Real, a Brazilian Bank, for instance, created a screening process to assess potential customers’ societal standards as well as their financial standing. The bank was willing to walk away from those that did not meet its tests of environmental and social responsibility. This short-term sacrifice was prudent risk management for the longer term. Companies using institutional logic are often willing to invest in the human side of the organization—investments that cannot be justified by immediate financial returns but that help create sustainable institutions.

  1. Emotional Engagement

The transmission of institutional values can evoke positive emotions, stimulate motivation, and propel self-regulation or peer regulation.

The reason of usefulness is not the only force governing corporate performance and behavior inside organizations; emotions play a major role, too. Moods are contagious, and they can affect such issues as absenteeism, health, and levels of effort and energy. People influence one another, and in doing so they either increase or decrease others’ performance levels.

Well-understood values and principles can be a source of emotional appeal, which can increase employee engagement. Having a statement of values has become common, so the issue is not whether a set of words called “values” exists somewhere in the company. Adhering to institutional logic makes the regular articulation of values core to the company’s work. The CEOs of great companies have allocated considerable resources and their own time to breathing new life into long-standing values statements, engaging managers at many levels in the institutional task of communicating values. The point was not the words themselves but the process of nurturing a dialogue that would keep social purpose at the forefront of everyone’s mind and ensure that employees use the organizational values as a guide for business decisions.

As a Procter & Gamble executive, Robert McDonald had long believed that the company’s Purpose, Values, and Principles was a cornerstone of its culture, evoking strong emotions in employees and giving meaning to the company’s brands. Within a month of becoming CEO in 2010, he elevated the purpose—improving the lives of the world’s consumers—into a business strategy: improving more lives in more places more completely.

In companies that think of themselves as social institutions, work is emotionally compelling and meaning resides in the organization as a whole rather than in a less sustainable cult of personality. Top leaders exemplify and communicate the company’s purpose and values, but everyone owns them, and the values become embedded in tasks, goals, and performance standards. Rather than depending on charismatic figures, great companies “routinize” charisma so that it spreads throughout the organization.

  1. Partnering with the Public

The need to cross borders and sectors to tap new business opportunities must be accompanied by concern for public issues beyond the boundaries of the firm, requiring the formation of public-private partnerships in which executives consider societal interests along with their business interests.

One paradox of globalization is that it can increase the need for local connections. To thrive in diverse geographies and political jurisdictions, companies must build a base of relationships in each country with government officials and public intermediaries as well as suppliers and customers. Only by doing so can companies ensure that agendas are aligned even as circumstances—and public officials—keep changing. Those external stakeholders are interested as much in the corporations’ contributions to the local community as they are in their transactional capabilities. At the same time, great companies want both an extended family of enduring relationships and a seat at the table on policy matters affecting their business.

To be continued