Taking the High Road

Each day’s news reinforces what we already know: The old social contract surrounding employment is dead in the United States. Loyalty and good performance are no longer likely to be rewarded with long-term employment and retirement security. The signals are clear and seem never ending: large-scale permanent layoffs of white-collar as well as blue-collar workers, wage cuts, corporate bankruptcies that lead to terminations of pension plans; shifts from defined-benefit pensions to riskier and less generous defined-contribution pension and 401(k) savings plans; cuts in promised retiree health benefits; and the outsourcing or offshoring of jobs previously believed to be secure.

The impact of these actions will be felt in the United States for generations to come. Nearly 30 years of stagnant real wages for many employees mean that most young people entering the work-force will start at lower real wage levels than they would have a generation ago. Moreover, today’s young adults can expect their earnings to grow at a slower pace than their parents’ did. The United States is sitting on a ticking time bomb, which, if not defused, will explode when the new generation of employees realizes that the only way for them to achieve the American Dream is to work longer and longer hours, a cost that an increasing number of young people, including newly minted MBAs and other professionals, are beginning to question.

Too often, American business leaders ignore these societal issues or accept them as inevitable consequences of market forces. However, the reality is more complex. Many business executives today face an important but often little-discussed choice: whether they should build organizations that create higher-quality jobs through improved productivity and an engaged labor force or to create lower-paying jobs in companies that emphasize the control of labor costs. There is a quiet but critical debate over whether to compete by becoming a knowledge-based, high-trust organization — which requires training and empowering employees and harnessing their full motivation and talents to generate innovative solutions that drive productivity and service quality — or, on the other hand, to compete by focusing primarily on driving down and controlling costs. This debate gets at the heart of a larger question: What are businesses and the economy really designed to do? Are they to focus solely or primarily on maximizing shareholder value in the short run? Or are they expected to be accountable for balancing the long-term interests and needs of their shareholders, employees and other stakeholders? The outcome of this debate will have a huge effect on our society’s social fabric.

Taking the managerial high road is almost always possible, and it can be profitable. Indeed, over the last decade, research has demonstrated that those companies that invest in their human resources and become knowledge-based organizations can reap a return through higher levels of productivity, service quality and profitability than can those that carry over twentieth-century traditions of simply treating labor as a cost to minimize and control. For example, research we have done at MIT as part of a global airline industry project has shown that while cutting labor costs has been necessary for large, older U.S. airlines in recent years, no airline has been successful in turning around its performance without rebuilding its workforce’s trust and commitment and transforming its labor-management relations from adversarial to a partnership.

Continental Airlines Inc. learned this the hard way. In the early 1980s, Frank Lorenzo took over Continental and offered its workers a Faustian bargain: Come back to work tomorrow for half your pay, or don’t come back at all. What followed was a decade of labor turmoil that included two bouts of bankruptcy and the departure of Lorenzo from Continental. In 1994, a new management team took over with a different approach. By sharing information with employees, working with the company’s unions rather than fighting to get rid of them and negotiating union agreements that provided for sharing the gains resulting from rebuilding service quality and on-time performance, Continental, which is based in Houston, Texas, came out of bankruptcy and is now the most respected and financially sound of all the older major airlines in the United States.

As Jody Hoffer Gittell, author of The Southwest Airlines Way: Using the Power of Relationships to Achieve High Performance, has shown, Dallas-based Southwest Airlines and, more recently, New York–based JetBlue Airways adopted this knowledge-based, high-trust strategy from the start of their companies’ formation, the former as a highly unionized carrier and the latter nonunion-ized. The experiences of Continental, Southwest and JetBlue demonstrate that both old and new businesses, unionized or nonunionized, can adapt these management principles to fit their circumstances and compete successfully in an extremely tough industry by building trusting relationships with employees that enable the company to meet customer, shareholder and employee needs.

Similar examples exist in the automotive industry. Toyota Motor Corp. learned to apply its manufacturing system to manage American workers in this way in the 1980s, in its joint venture with General Motors Corp. at the New United Motor Manufacturing Inc. plant in Fremont, Cal-ifornia. Toyota then applied these lessons in the other U.S. plants it opened. Unfortunately, GM failed to internalize the same management lessons. Two decades later, GM finds itself in a situation similar to the older airline carriers, with higher wage, healthcare and pension costs than some of its competitors. The question for GM and other companies in these situations is whether they will use the current crisis not only to reduce their labor and benefit costs but also to fundamentally reshape their relationships with employees in ways that achieve and sustain high levels of productivity, quality and customer satisfaction.

Healthcare may be the next industry to face strong pressures to restructure and control costs while expanding access to high-quality care. Again, there are models for achieving this. My colleagues and I have been studying a decade-long labor-management partnership at Kaiser Permanente, a health management organization based in Oakland, California. Kaiser Permanente was on the brink of disaster in the mid-1990s, facing an increasingly frustrated and militant coalition of unions ready to go to war over persistent wage cuts, layoffs and staffing shortages. But the parties decided on a different approach and instead fashioned what has been the largest and most successful labor-management partnership ever created in the United States, a partnership involving 86,000 employees and 10 unions.

Kaiser Permanente has experienced a decade of labor peace, steadily improving and record profits and higher patient and employee satisfaction. Employees, managers and physicians are working together in joint projects to improve healthcare delivery.

Yet, for every example of an organization moving in such a direction, we have numerous examples of companies going in the opposite direction and hoping to become competitive primarily by reducing and controlling costs. Which model will win out? One challenge is that executives who want to invest in their employees may feel that they are isolated in their organizations and board-rooms, fighting an uphill battle against powerful forces on Wall Street that reward cost-cutting and downsizing initiatives. Here are three practical steps such executives can take.

Document the return on knowledge-based strategies.

Work with human resource professionals and independent researchers to document the productivity and service-quality gains from knowledge-based investments. New United Motor Manufacturing’s success became widely accepted only after researchers John Krafcik and John Paul MacDuffie showed with hard data that the reforms in manufacturing and labor relations generated world-class levels of productivity and quality. Moreover, the New York–based Alfred P. Sloan Foundation has funded 25 industry centers at various universities, each devoted to researching a particular industry, from motor vehicles to biotechnology.

Through the Sloan Foundation initiative, an entire generation of academic researchers in a range of industries has been trained to work collaboratively with industry and labor leaders to identify and document how to make knowledge-based strategies pay off for shareholders, customers and employees. So all of the knowledge and expertise that is needed to document the benefits of knowledge-based strategies is there for the asking.

Support a greater employee voice in corporate governance.

Build alliances with individuals and groups that are now arguing for a greater say in corporate governance for employees. After all, they invest their human capital in the company they work for, much as financial investors invest their money. Pension fund managers, unions and other shareholder activists are natural allies for making the case for building high-trust, knowledge-driven organizations.

Having an employee voice in corporate decision making avoids a knee-jerk reaction from management to cut jobs and labor costs as the first recourse to market or budgetary pressures. I have seen this change in action at Kaiser Permanente. Because Kaiser Permanente has a forum for top executives to meet periodically with top union leaders, the two groups have tackled budget crises together, finding cost savings and productivity improvements without layoffs in ways that management could never have achieved on its own.

Work with other leaders.

Some problems today cannot be tackled by any one company acting alone or by managers acting in isolation from other groups in society. Healthcare is a prime example. The United States’ employer-centered model of health insurance may have worked well in the past, when employees often stayed with a single firm for a long time and firms were more stable. Today, however, long-established U.S. firms often have high healthcare costs that put the companies at a financial disadvantage compared to new entrants and overseas competitors. Shifting to a more portable and uniform cost-sharing and coverage model for health insurance will only happen if business leaders work together with other societal groups to bring about change.

In Massachusetts, business leaders have shown what can be done when they engage others in this type of constructive dialogue. With the support of several business groups and over the opposition of another, a compromise healthcare plan for covering the uninsured was enacted into law in 2006. It is not a perfect or complete solution. But it is one step in the right direction and it is hoped will spur other states to follow suit with their own homegrown approaches. When business leaders become collectively engaged with other groups at the community, state and national levels, they are capable of effectively addressing problems and creating solutions that lie well beyond the reach of any individual company.

The question isn’t whether there is a high road to competing successfully that can meet the needs of shareholders, employees and communities. There are any number of examples that demonstrate that such an approach can work. The real question is: Are American executives ready to lead their organizations and the economy in this direction?