Fair Business is Moral Business

Zero-sum (win-lose) outcomes, in which one party gains at the expense of another, are common in business, due in part to competitive pressures, time constraints, poor business school education, and poor leadership. The means by which to achieve non-zero-sum (win-win) outcomes is difficult to fathom, so nearly all senior managers ignore that choice and are satisfied with zero-sum outcomes in which they are the winner. In essence, they vigorously pursue shortcuts to get where they want to go, resulting in perceptions of unfairness. That is not the way things are done in REAL Lean management.

People have a basic expectation of fairness in their interactions with other people. This expectation also exists among people conducting business transactions because business is a socio-economic activity. The principle of fairness is accepted as a fundamental moral construct for human interaction. Therefore, outcomes in business that are unfair can be seen as immoral. However, that is usually not the case, as people can be very forgiving: an outcome is fair as long as it is not too unfair. But if unfairness goes beyond commonly accepted limits, or is seen as outrageous, then a judgment of immoral practices may be made. The following three examples illustrate unfairness going beyond commonly accepted limits, which makes people upset and causes them to disengage or look for ways to get even.

The first example is the use of online reverse auctions (ORA), in which a buyer pits new and incumbent suppliers against one another in real-time dynamic bidding to drive down purchase prices. While ORAs may have a broader purpose than to drive down prices, rapid price reduction is the main focus and principal desired outcome from the buyer’s perspective. The process is clearly zero-sum in its intent: suppliers’ financial losses are buyers’ financial gains. The use of ORAs has been so divisive that people have worked to soften the zero-sum outcomes for suppliers, such as introducing ORA codes of conduct – but to avail. ORAs are nothing more than technology-assisted zero-sum power-based bargaining. Suppliers soon realize there is nothing in it for them and refuse to participate. Importantly, the employees who run ORAs are caught between management’s mandate for cost reduction and the company’s ethics policies, which almost always cite fairness as a fundamental requirement for how business will be conducted. Thus, management has put purchasing people into a position where they are forced to deviate from ethics policies, yet will surely be held accountable on an individual basis for failure to comply with ethics policies. That too is unfair – to one’s own employees.

The second example is that of Fake Lean. Most organizations’ Lean efforts are nothing more than a large-scale zero-sum effort to reduce costs. The rapid introduction of zero-sum Fake Lean is due to a combination of short-term thinking, ignorance of what Lean management is, and ineptitude on the part senior managers and consultants. Nevertheless, the resulting zero-sum outcomes negatively impact one or more key stakeholders: employees, suppliers, customers, investors, and communities. The most common and most damaging outcome is to lay employees off as a result of process improvement. This quickly results in a tangible sense of unfairness that destroys employees’ desire to participate in continuous improvement. It also fundamentally contradicts the “Respect for People” principle. The cause-and-effect is obvious, yet managers choose to ignore this reality and continue to expect employees to participate in continuous improvement. Can this be seen as anything but unfair, and unreasonable? Note also that continuous improvement engineers are put in a position by management to cut costs by improving processes, which often means unemployment for their colleagues, yet also abide by the company’s code of ethics – which will usually cite fairness as a fundamental requirement for how business will be conducted. This too is unfair to one’s own employees. Fake Lean is unfair Lean.

The third and final example relates to corporate wealth; creating shareholder value, which is one of the responsibilities of senior management (not maximizing shareholder value). In the early 1970s, two U.S. business school professors wrote a paper in which they argued that granting stock options to top executives would compel them to think like owners and make decisions that better reflected owners’ interests. The professors and others continued to advocate for changes in executive compensation as a means of improving decision-making and to increase shareholder value. Within about 10 years, the idea had begun to take hold in corporate boardrooms, and annual executive compensation for American executives went from about 90 percent cash salary and 10 percent stock options, to about 10 percent cash salary and 90 percent stock options. As might be expected, what has happened in the U.S. since the early 1980s is a never-ending stream of new tactics designed to increase stock price, usually at someone else’s expense – most often employees.

The tactics are many and include: mergers, acquisitions (and usually overpay); lay people off; stock buybacks (usually at peak prices, which consume the greatest amount of cash); eliminate defined benefits pension plans; cut wages; limit wage increases to 3 percent or less; cut current employee benefits; cut retiree benefits; underfund pension and benefits plans; take out life insurance policies on employees to fund deferred executive pay; use pension funds to finance retiree healthcare benefits; hire contractors to do the work formerly done by employees (thereby reducing headcount, wages, and benefits expenses); rapidly grow the company (to be so large through acquisitions that it cannot be managed effectively) then split it into two or more independent pieces; conduct online reverse auctions to reduce the purchase prices of goods and services; outsource work; offshore work to lower wage countries; hire cheaper labor (women earn about 16 percent less than men; hire cheaper B.S. grads instead of M.B.A.s [that one is OK]); increase (or decrease) dividend payments to investors; and sell bonds to finance certain activities. Have I missed anything? Yeah, probably. How about creating shareholder value by improving the value proposition for end-use customers!

During the last 40 years, American workers’ productivity has increased nearly as much as in the period 1947-1975, yet median real wages have steadily declined and household income has declined more than 10 percent since 2000. Despite all the merger and acquisition activity over the last 30 years, which has greatly reduced the number of competitors in most industries and increased economies of scale, most companies have little pricing power because workers’ wages have decreased substantially. That, plus year-over-year increase in healthcare insurance premiums, forces companies to continue to cut costs via process improvement and outsourcing, both of which result in more layoffs. Thankfully, however, the stock price continues its upward march. (Note also that flat wages and layoffs cause tax receipts to decline, which, in turn, lays the groundwork for privatizing public assets. This is how citizens unfairly lose their public assets).

What has emerged among U.S. workers over the decades is a sense of unfairness that has gone from tolerable to intolerable, resulting in discontentment and conflict. The actions taken to increase stock price have left the workers who add value to goods and services, and other stakeholders, behind. Is this the outcome that executives, who were incentivized to think and act as owners, wanted? As a business owner, this is not an outcome that I would want.

REAL Lean business is moral business because it seeks to ensure that outcomes are fair – no perfectly so, but reasonably so. One party may not gain as much as it wants, but it does not lose as much as it could. Perhaps the moment for Lean management to take off has finally arrived, but for a reason far different than anyone of us could have imagined: as an antidote to long-term systemic unfairness in business.

REAL Lean business is fair business.

Tags: Lean Manufacturing

Category: Articles