24th June, 2018

Bosses discover it pays dividends to put workers first

What is the right order to rank the various stakeholders in a business? Should shareholders, employees or customers come first?

Traditionally, company law enshrined the primacy of owners. The purpose of a business was clear: to maximise wealth for the shareholders, however the 2006 Companies Act, and various amendments since, require directors to meet responsibilities to other constituents, such as the workforce — and even suppliers, the community and the environment. The joy of the old model was that it was simple: directors focused on growing capital and income for the capital providers. Now they must promote success for the “members as a whole”. Measuring what that success looks like is much harder.

One philosophy is that staff should come first. This perspective is put forward persuasively in a new book called The Ethical Capitalist, written by entrepreneur Julian Richer. I was briefly in business with Julian and came to admire his talents. He has huge energy, sound instincts, and enormous loyalty to the staff in his retail firm Richer Sounds. Julian believes, as the title of his first chapter states, It’s All About the People: The Employee. He says that if staff are motivated, treated honestly and fairly, with decent rewards, they will reciprocate and the business will prosper. Of course, the opposite also applies.

Julian says that companies with the wrong approach suffer more fraud, theft, employee turnover and absenteeism. Unquestionably, Julian has impressive systems for recruitment, training, promotion, bonuses and staff treatment generally. He knows that contented staff encourage repeat business. He has even bequeathed Richer Sounds to his people on his death, since he has no children.

Archie Norman used his advice when he chaired Asda, and is making use of his skills again at Marks & Spencer. I hope it proves effective: like many, I have a soft spot for M&S.

I heard a speech at a recent Fast Track dinner from James Timpson along the same lines. He runs the eponymous shoe repair, dry cleaning and key-cutting chain. If anything, he is even more evangelical about the merits of trusting people who work for you. He has been a pioneer in hiring ex-offenders: a tenth of Timpson’s staff is recruited directly from prison. He emphasises the importance of kindness and trust towards one’s colleagues in building a great enterprise. Timpson delegates authority extensively within the firm, and he has only two rules: look the part; and put the money in the till.

I admire both Julian and James. However, I suspect their doctrine is more feasible in medium-sized, family businesses. If you run a large public company, or one owned by institutional private equity, then the ability to execute such policies effectively will be more challenging. This is not just Dunbar’s number in action. External owners and thousands of staff require more restrictive rules and, by their very nature, there will be greater distance between the owners and employees.

However, as a management style there is much to like about a staff-centric structure. A committed workforce delivers better service and works harder. Good people have plenty of choices about where they work — attracting and retaining the best pays dividends. In an era of low unemployment and rising wages, non-financial aspects of a job can work as a competitive advantage.

The contrast is General Electric, the US conglomerate that fell out of the Dow Jones Industrial Average last week for the very first time. In its 80s heyday, under hard-charging boss Jack Welch, it promoted a management academy that corporates everywhere copied. It was focused on de-layering, cost cutting, six-sigma quality and aggressive financial targets. Broadly, the initiatives delivered during his 20-year tenure but, in the past decade or so, the business has deteriorated badly: its return on capital has collapsed, its credit rating has slumped, and its market value has fallen by $100bn in the past year. It might even be broken up. It seems the old school of purely financially driven capitalism no longer works so well. Leaders who put their people first may well be the future.