"Executive Suite," Redux

Haig R. Nalbantian, Workforce Sciences Institute

I recently stumbled on an old film, Executive Suite, starring one of my favorite actors, William Holden. I was very taken by the climactic boardroom scene where a philosophical battle plays out about the objectives and values of a corporation and which of them corporate leaders are duty bound to prioritize. It was striking to see this artistic enactment of a dynamic I routinely encounter in my work in the corporate sector and a battle that has figured prominently in my own career. If I may contemporize it, the film prefigures and dramatizes the tension between conventional “shareholder capitalism” and what today we call, “stakeholder capitalism.”

On one side are those whose biggest concerns are current revenues, margins and total shareholder return. They focus relentlessly on operational efficiency, rewarding managers who achieve it with significant payoffs and employees who actually deliver it with even more aggressive cost reduction and efficiency goals. They press for “scalability” of production processes and the “productization” of output as pathways to profitability, diminishing, often scornfully, the role and significance of people, expertise, long-term association, including employee tenure, in the creation of business value. Mega compensation packages for top executives are justified as “productive” while paying a living wage or offering a traditional employee pension are too costly and saddle the company with “excess” liabilities.

On the other side are those who insist that the quality and impact of what a company produces are paramount to making a great and enduring company. They believe that what assures the creation of sustainable value and, ultimately, survival, is the creativity and vision to anticipate what the future requires and aggressively pursue it even if at the expense of current earnings. Experimenting with big, but unproven ideas, taking risks on creative employees who offer and want to pursue those ideas is the lifeblood of a permanent entrepreneurial culture necessary for greatness. They recognize that employees’ pride and belief in the work they do are fundamental to company success. They appreciate that long service among employees – employee tenure – is not a manifestation of an “entitlement” culture but of the accumulation of a very special kind of human capital – what economists call “firm specific human capital” – that is often the prime source of human capital value in organizations. [1] Leadership and employees working “together,” as the Holden character emphasizes, are what permit a company to grow and prosper sustainably, to achieve greatness. All together should enjoy the fruits of their collaboration.

Watching this contest play out in the final Boardroom scene made me wonder: are the worlds of 1954 and 2023 - precisely my lifetime - all that different? Certainly, things have changed in some critical dimensions of corporate governance and management, with concerns over Environmental, Sustainability and Governance (ESG) no longer ignorable in the C-suite. But has the fundamental issue raised in this scene been resolved? Has the mindset of senior executives and the capital market institutions that ride herd over them adapted to reflect the broader humanistic values that are driving the ESG movement? Or does the focus on here-and-now financials, enforcing mundane, uninspiring financial targets that please the analyst community but often sap the vitality out of employees remain the reflexive default?

To me, the answers to these questions are yet unclear. There is positive movement for sure, but it seems to be a high-wire act. And how many executives are showing themselves to be Philippe Petit??

Research that I’ve been part of finds that, all else being equal, companies that rely heavily on short-term executive incentives such as the annual bonus end up with significantly lower investments in R&D. [2] Not surprisingly, incentives tied to current profits result in reduced focus on actions that can drive future gains, especially when the latter are uncertain. Normal risk aversion makes such behavior predictable. The prevalence of short-term incentives in executive compensation creates structural headwinds to the ability of executives to re-balance the weight they give to current versus prospective returns in their decisions about strategies and investments.

It is also unclear whether capital markets are able to evaluate these executive choices effectively when they continue to be deprived of vital information on factors directly linked to long term value creation - for instance, the efficacy of human capital management (HCM). Ask your typical company analyst or investment banker if and how they value a company’s human capital and the effectiveness with which it’s managed. Ask them how they assess the capabilities and motivation of a workforce to deliver on a company’s business plan. Chances are they’ll not have much to point to beyond some assessment of the company’s executive team, as if C-suite executives are the only human capital that matters when it comes to value creation. Increasingly, they may have some information on workforce demographics and diversity as well, perhaps even pay equity, but that’s a far cry from having a firm grasp of the substance and effectiveness of a company’s HCM.?

With respect to HCM, I am happy to say that more and more organizations do actually view their workforces as valuable assets to be nurtured, certainly more so than when I started working in this area more than thirty-five years ago. Some are even deploying advanced workforce analytics to bring a more disciplined, rigorous approach to the way they secure, manage and motivate their workforces. Evidence-based workforce strategy and management is gaining ground.

Still, far too many companies continue to see their workforces as costs of business to be minimized, some even to be "digitized" and farmed out to the gig economy. The rush to layoffs as the first response to any anticipated weakening of the economy demonstrates that the traditional cost view of HCM remains the default perspective of corporate leaders.? It drives home the reality that rarely does the protection and growth of human capital value receive the same level and kind of attention from corporate leaders as the here-and-now of financial value.

This conjures up for me the economic construct of "stranded assets." For example, a utility makes a good faith investment in a new plant, relying on full regulatory approval, but then the plant is rendered unusable due to a change in public policy. The asset becomes "stranded," its value lost. Corporate assets are usually stranded as a result of uncontrollable, external forces, such as technological or regulatory change. The stranding is not self-inflicted. Yet when it comes to human capital, corporate leaders routinely strand their own assets, depleting the value of their workforces in ways they cannot quickly redeem.

Lacking the requisite information, our capital markets aren’t yet positioned to force the uptake of an asset management view of HCM and the required evolution in corporate management. Will the burgeoning area of ESG reporting change this reality? Will it succeed in ushering in the broad embrace of stakeholder over shareholder capitalism?

Executive Suite ends with an upbeat outcome – the visionary leader wins the day and seizes the mantle of leadership from the finance-obsessed competitor deemed by all to be a shoo-in for the CEO job. He literally makes himself the CEO of the company by force of will, the compelling nature of his argument and the searing eloquence with which he delivers it. Could this scenario ever play out in today’s boardroom? Can leaders get to the top through vocal, principled dissent, by refusing to go along with the status quo of corporate values? Or are those who toe the line and do the bidding of Finance the ones who invariably ascend?

These are the questions whirling in my mind after seeing this film. These are the questions I’d hope every enlightened CEO would ask, especially these two:

1.?????? Would any on my executive team have the vision, the passion, the ability and the guts to take such a stand in my Boardroom?

?2.?????? If not, why not?

While I’m optimistic about where ESG can take us, I am less sanguine that corporate cultures can change sufficiently to make the William Holden character more the norm than the glaring exception, at least not anytime soon.

Building out and refining the information and measurement apparatus of ESG assessment and reporting, especially the HCM dimension, and its counterparts in “Responsible Investing” are critical to making this kind of corporate transformation happen. Investors demanding such information and directing their resources to companies that show they recognize the human capital sources of value by opening their books on HCM can be the prime agents of this transformation.

Perhaps the simple lessons from an old film can provide a little nudge to help inspire and accelerate executives’ and investors’ commitments to change.

Executive Suite Climax

https://www.youtube.com/watch?v=vcEOsGvT0qA

[1] For evidence of the value of tenure, see Richard A. Guzzo, Nalbantian, H.R. and Anderson, N. (2022). Age, Tenure and Business Performance: A Meta-Analysis. Work, Aging and Retirement, 8 (2), 208 – 223. https://academic.oup.com/workar/article/8/2/208/6574297?guestAccessKey=dc62f190-b8a7-4fe0-994c-b3476d22a72c

[2] Evans, D and H.R. Nalbantian, “The Effect of Firm Research Intensity on the Structure of Top Executive Compensation.” NERA white paper, July, 1994.