Tuesday, 12 August 2008

Who should come first? Shareholders? Are you sure…?

Herb Kelleher– the founder and former CEO of American icon Southwest Airlines – used to say: “We place our employees first”.

That’s a fairly extreme thing to say though, especially in corporate America, that you do not place your shareholders first.

Of course he would always be quite quick to continue: “Because if you have happy employees, you will get happy customers, and if you have lots of happy customers, shareholders will inevitably become quite happy to”. Now you could be inclined to say “ah, so it’s all the same; at the end of the day all parties’ interests are aligned”. In the long run that may be true, but in the short run such an “employee orientation” – the choice of who comes first – can lead to rather different decisions than a “shareholder value orientation”. And at Southwest they do put their money where their mouth is; they for instance provide perfect job security. Consider, for example, Southwest’s response to 9/11, which triggered a global airline crisis, prompting many companies to execute the hatchet on their employee head-count:

Southwest Airlines’ current President and COO (Colleen Barrett) said: “Southwest has not had a layoff in its thirty-year history and is not contemplating one now” (after which employees collectively organised an internal giveback effort, called “Pledge your Luv”, offering up to thirty-two hours of pay during the last quarter of 2001).

In contrast, US Airways paid $35 million in lump-sum retirement benefits to its former top three executives, while 12,000 employees were laid off and pilots agreed to $565 million in concession in their own retirement plans. Rakesh Gangwas, briefly chairman and CEO (who received $15 million of the 35 million) declared, a few days before resigning, that “the September 11 attacks had allowed the airline to restructure and downsize in ways that would have been impossible otherwise”.

Of course US Airways filed for bankruptcy in 2003, while Southwest recovered in less than a year.

Placing employees first may be suboptimal in the short run but in the long run it’s a different picture. You don’t become a better organisation by having “better shareholders” (whatever that may be). You can most definitely become a better organisation by having better employees. Truly prioritising the well-being of your employees just might pay off financially in the long run too. Loyalty, trust, extraordinary effort, etc. are reciprocal things; we give it to those from whom we receive it. And organisations and employees are no different.

1 comment:

Wally Bock said...

Congratulations! This post was selected as one of the five best business blog posts of the week in my Three Star Leadership Midweek Review of the Business Blogs.

http://blog.threestarleadership.com/2008/08/13/81308-a-midweek-look-at-the-business-blogs.aspx

Wally Bock