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EMPLOYEES

CSR Connection: This issue investigates the benefit a firm receives when it meets the needs of one of
its key stakeholders, its employees. A diverse organizational culture maximizes employee welfare,
while also maximizing productivity and decision quality for the firm.

Stakeholders: Employees.

Issue

Employees are an important stakeholder of the firm. To the extent that the

organization fosters a feeling of commitment and loyalty within its workforce, the

firm benefits. Employees are proud to work for organizations with an ethical

reputation, a sense that carries over into the quality of work that is produced:

Evidence from the Sunday Times’ “100 best companies to work for” list shows

that the share prices of the quoted companies on the list outperform the FTSE

All Share Index by between 10% and 15%, a result that is seen in every country

that produces a list.

This conclusion is reaffirmed by Gallup, which has been polling employees to

determine their degree of engagement with their work and organization for many

years:

It is likely that organizations with engaged employees experience positive

business performance, while workplaces with not engaged or actively

disengaged employees are more likely to experience lower productivity.

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The Benefits of Motivated Employees

There are many causal-related benefits for companies that ensure their employees remain happy
and healthy at work:

- Employee retention reduces costs associated with turnover— advertising, training, as well as lost
productivity as the staff gain experience in their new positions:

Workers are six times more likely to stay in their jobs when they believe their company acts with
integrity, according to Walker Information, a research company that measures employee satisfaction
and loyalty at the workplace. But when workers mistrust their bosses’ decisions and feel ashamed of
their firm’s behavior, four out of five workers feel trapped at work and say they are likely to leave
their jobs soon.

- Increased employee safety leads to reduced amounts of lost time and productivity due to injuries.
Intel’s approach to this issue makes both moral and business sense:

At Intel (No. 3), based in Santa Clara, Calif., good citizenship . . . includes careful attention to
employee safety—so much that CEO Craig Barrett insists he be sent an e-mail report within 24 hours
any time one of his firm’s 80,000 employees loses a single day of work to injury. . . . In 2000, Intel’s
worldwide injury rate was just .27 injuries per 100 employees, compared to an industry average of
6.7.

- Happy employees are productive and creative employees:

[At 3M, employees engage] in all sorts of frivolous activities, such as playing pinball and wandering
about the campus. These workers are actually pushed to take regular breaks, as time away from a
problem can help spark a moment of insight. . . . But this is just one reason for 3M’s creative
output. . . . The company also encourages its employees to take risks, not only by spending masses
on research (nearly 8% of gross revenue), but also by expecting workers to spend around 15% of
their time pursuing speculative ideas. Most of these efforts will fail, but some, such as masking tape,
an early 3M concept, will generate real profit for the company. The reason why this approach works
—and why it has been imitated by other crafty companies such as Google—is because many
breakthroughs come when people venture beyond their area of expertise.
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The opposite effect, of course, occurs when employees are disenchanted and

demotivated. To the extent that a firm treats its employees as a cost, something to be

managed and minimized wherever possible (as encouraged by modern accounting

convention), employees are likely to feel the organization deserves neither their

loyalty nor 100 percent of their effort. To the extent that employees are valued by

management and identified as the key to customer satisfaction (and, therefore, to

increasing shareholder value), however, employees are likely to be more engaged,

productive, and loyal. Unfortunately, it appears that modern corporations are better

at engendering the first reaction among their employees than the second one:

- The opposite effect, of course, occurs when employees are disenchanted and

demotivated. To the extent that a firm treats its employees as a cost, something to be

managed and minimized wherever possible (as encouraged by modern accounting

convention), employees are likely to feel the organization deserves neither their

loyalty nor 100 percent of their effort. To the extent that employees are valued by

management and identified as the key to customer satisfaction (and, therefore, to

increasing shareholder value), however, employees are likely to be more engaged,

productive, and loyal. Unfortunately, it appears that modern corporations are better

at engendering the first reaction among their employees than the second one:

According to a 2011 Careerbuilder.com report, 76% of full-time workers,

while not actively looking for a new job, would leave their current workplace

if the right opportunity came along. Other studies show that each year, the

average company loses anywhere from 20% to 50% of its employee base.

And, this is not a pattern that can be attributed solely to economic hardship and

the Financial Crisis. The danger is that corporations are undervaluing one of their

key resources—the employees who enact their strategy and interact with customers

on a day-to-day basis. Senior executives like to think of themselves as central to the

firm’s success, but the best strategy in the world is useless unless the firm has
engaged employees who use their creativity and imagination to implement the

strategy and conduct operations. A Gallup poll, first introduced in 2000 and

designed to measure such engagement is not promising:

The poll divided workers into three parts: “engaged” employees are those who

are “emotionally attached to their workplaces and motivated to be productive.”

“Not engaged” employees are those who are “emotionally detached and

unlikely to be self-motivated,” while “actively disengaged” employees are

those who “view their workplaces negatively and are liable to spread that

negativity to others.” In 2000, the poll indicated that 26% of employees were

engaged, 56% not engaged and 18% were actively disengaged. In 2008, those

figures came in at 29%, 51% and 20%; in 2010, at 28%, 53% and 19%; and in

2011, 29%, 52% and 19%

When companies ask for a ‘bottom-line’ benefit for implementing a

comprehensive CSR perspective, employees are one of the most rewarding places

to look. Creating a positive and inviting culture for employees takes some

innovation, but best-practice models exist, and the return on the investment is

tenfold. One example that is particularly effective in bolstering employee morale is

an employee volunteer program:

Today, more corporations are turning to hands-on volunteer projects to get their

people motivated and working as a team. In many cases, participants say such

activities help them forge bonds that remain even after they return to the

office.

In terms of employee loyalty and retention, employee volunteer programs

revitalize employees. Such programs expose employees to a new environment

away from their everyday position, allowing them to feel pride in their company

and its standing within the community while also leading to the development of new

skill sets.

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 Employee Volunteer Programs
Increasingly, firms are recognizing the benefits of employee volunteer

programs and are prepared to dedicate increasing amounts of resources to

ensure their success:

Accenture – Loans employees to non-profits at discount rates.

Cisco Systems – Places employees with education-related organizations

for a year, at full salary.

Bain & Co. – Supports employees who volunteer with local

organizations, and pays for their time on full-time consulting projects.

Pfizer – Pairs employees with health-related organizations to help with

research and training.

Wells Fargo – Pays employees to work with a school for as many as four

months.
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In addition, AstraZeneca, HSBC, and KPMG all have dedicated employee

volunteer programs in partnership with the UK’s Volunteer Service Overseas

(VSO) orga-nization, while IBM’s Service Corps “sends young executives to help

developing countries.” And, in response to the growing popularity of volunteer

programs in the UK, the British government (Home Office) designated 2005 as

the Year of the Volunteer.The bottom-line returns for firms from such programs

are dramatic:

Gallup estimates that actively disengaged employees cost more than $300

billion in lost productivity. Disengaged employees can hurt morale and erode

the organization’s bottom line. In contrast, engaged employees are more

profitable, more customer-focused and easier to retain.

One of the most celebrated employee volunteer programs is run by

Timberland, which reports the program’s results along with the quarterly financial

reports it releases in its annual Corporate Social Responsibility Performance

reports. The company’s CEO, Jeffrey Swartz, inspired the volunteer program,
which was launched in 1992. Swartz saw the power the company possessed to

evoke social change and also had the foresight to see the potential benefits this

activism would bring. He also saw Timberland’s employees as central to that

success. The firm’s Path of Service volunteer program was the result:

The program gives all Timberland employees 40 hours of paid leave each year for
community service during the workweek. Service sabbaticals, which provide up to six
months of paid time leave for employees to serve in capacity building roles in social
justice organizations is the latest evolution of the Path of Service program.

In response to a survey conducted by Timberland to learn more about the reception of the plan
among employees, “79 percent of employees agree with the statement: ‘Timberland’s commitment
to community is genuine and not a public relations vehicle.’” In addition, the survey “reveals that 89
percent of employees say community service is valuable to them, while 50 percent report that
Timberland’s volunteer programs influenced their decision to work for the company.” In general,
research indicates that volunteerism at the workplace is a key driver for positive worker attitudes.
One study finds that individuals who participate in employer-sponsored community activities are 30
percent more likely to want to continue working for that company and to help make it a success:

Accenture’s program quickly became a draw for some employees. Hundreds applied, and
those accepted now must wait weeks or months for an assignment. The program makes
Accenture “more attractive as an employer,” says Jill Smart, senior managing director of human
resources.

And, for Accenture, its program is not even one that will cost it any money. The firm is essentially
running a social enterprise start-up that is designed to “break even financially”:

The company contributes, the employees contribute (via a cut in pay when they are
doing it) and the client will pay a fee – although it is a fraction of the market cost.

In return, Accenture benefits from greater employee loyalty, additional employee training, and
improved relations with its community stakeholders.

Case Study: John Lewis Partnership

In addition to structuring an organizational culture that motivates employees, it is vital for firms to
protect worker rights by embedding them within the organization’s DNA. Doing so convinces
employees they are truly valued and central to the firm’s success.

Employee representation in the workforce has long been a cornerstone of a developed economy.
Since the industrial revolution, in sectors as diverse as

manufacturing, law enforcement, trucking, and education, labor unions have been the main source
of protection for employee rights and interests. In the U.S., private sector employees gained the
right to collective bargaining in 1935 with the passage of the National Labor Relationship (Wagner)
Act. This led to a rapid growth in union membership, to the point where, in the early 1940s, “one in
five American workers belonged to a union. Some 10 years later, organized labor was at the peak of
its power.” Since this time, labor union membership in the U.S. has been in steady decline:

The Bureau of Labor Statistics said the total number of union members fell by 400,000 [in
2012], to 14.3 million, even though the nation’s overall employment rose by 2.4 million. The
percentage of workers in unions fell to 11.3 percent, down from 11.8 percent in 2011, . . . its
lowest level since 1916, when it was 11.2 percent.

Within this bigger picture, however, union membership is a tale of two contrasting sectors—private
and public. As the economy in the U.S. has shifted from heavy industry and manufacturing to
services, “union membership has fallen from 24% of private-sector workers in 1973 to a mere 7% in
2011.” In contrast in the public sector, “union membership has risen from 23% in 1973 to 37% in
2011.” Private sector employees’ rights and status in the organizational hierarchy have suffered in
line with this decline in union membership:

Today, fewer than one in 14 private sector workers belongs to a union, half the portion of
15 years ago. Where unions matter most—fighting for workers’share of the spoils of economic
growth—they lost the battle long ago. Despite soaring worker productivity, the typical American
worker takes home today only 2 percent more than a quarter of a century ago, after adjusting
for inflation.

William Greider argues in his book, The Soul of Capitalism, that this imbalance will not be corrected
simply by reviving the union movement. Instead, a more fundamental change in organizational
structure is required to remove the injustice and inequality that capitalism can generate. In other
words, positively motivated employees are central to the goal of altering “the basic operating values
of American capitalism so that the priorities of society [over the narrow financial priorities of
stockholders] become dominant”:

Most Americans, in current life, go to work daily and submit to what is essentially a
master-servant relationship inherited from feudalism. . . . The solution is for workers to
own their work. The forms for doing so—employee owned firms, partnerships, cooperatives and
other hybrids—are alive and growing. To be effective, they must incorporate not only
employee ownership but collaborative decision making as well.

An effective employee share-ownership scheme ensures that the workers’, managers’, and owners’
interests are more closely aligned and that employees are likely to feel more committed to
generating positive outcomes for the company as a whole. In spite of the criticism leveled at stock
options—and their debatable impact on performance for top management—when awarded only to
an elite few, companies that distribute ownership throughout the organization see notable
improvements in job motivation and satisfaction:

Evidence suggests that smart use of options and other compensation do boost
performance. Companies that spread ownership throughout a large portion of their
workforce, through any form—options, Employee Stock Ownership Plans, or other
means—deliver total shareholder returns that are two percentage points higher than at
similar companies. . . . Better stock performance isn’t the only benefit. Companies with
significant employee ownership do better on a wide range of performance metrics, including
productivity, profit margins, and return on equity, according to the studies.

There are a number of arguments in favor and against employee-owned firms. A particularly well-
known example in the UK is John Lewis, a department store that was founded in the early 1900s, but
became employee-owned after the founder’s death in 1928:

Its ownership structure dates back to 1929, when John Spedan Lewis, son of the founder, set
up a profit-sharing scheme that became the John Lewis Partnership; a second settlement, made in
1950, transferred all his remaining shares into the partnership. John Lewis now has more than
[81,000] employees, who are known as partners, and the success of the company is widely
attributed to their loyalty and commitment.
Employee-ownership is presented as an alternative form of for-profit organization that re-prioritizes
the goals of the firm and generates much more of a social enterprise. Ownership can come in many
forms, such as “cooperatives, employee-owned firms, social enterprises, and community land
trusts,” with proponents arguing that these alternatives are a fundamental reform of capitalism (“a
permanent shift in the underlying architecture of economic power”). Equally importantly, they are
scalable to a level where meaningful change could be introduced:

Consider, for example, the John Lewis Partnership (JLP) in England. It’s the largest
department store chain in the country, with 35 department stores and 272 Waitrose
grocery stores. Revenues of this company are more than $11.5 billion. If placed into the
Fortune 500 list of the largest U.S. corporations, JLP would settle in around 212—a little higher
than Starbucks. It’s 100 percent owned by its employees.

In other words, employees feel invested in the company because they are the company. The firm’s
constitution, for example, states that “the purpose of the group is to ensure ‘the happiness of all its
members, through their worthwhile and satisfying employment in a successful business’”:

The John Lewis Partnership is built around the value of fairness. The founder, John
Spedan Lewis . . . believed that traditional ownership was unfair because dividends
paid to shareholders for doing nothing were obscene when workers barely earned
subsistence wages. . . . If the ultimate perquisite of being an owner is the right to
pocket some of the profit left after the bills are paid, then these employees are genuine
owners. Each year, after the firm sets aside a portion of profits for reinvestment in the
business, the remainder—generally between 40 and 60 percent of profit—is distributed to
employees. . . . Here we begin to see what is revolutionary about the John Lewis Partnership.
Employees in this firm are not a countervailing power. They’re not legally outside the firm,
negotiating with it. They are the firm.

The result is a firm that feels different, yet performs as well, if not better, than its competitors:

The mood in [John Lewis’] stores is markedly different from any other company. The
staff are more attentive and professional. They own the place and it shows. . . . John
Lewis was recently named Britain’s favourite retailer for the third year in succession . ..
It’s Christmas sales outstripped those of its rivals and Waitrose, its food arm, was the fastest-
growing retailer.

In spite of the many apparent advantages of this organizational structure, its long history (“Staff
share-ownership schemes emerged in America in the 1920s”), and its favored status as “a more
caring, cuddly capitalism,” it has not been widely adopted beyond a few firms. This is strange, given
that there are clear economic and competitive advantages to employee ownership:

Employee-owned companies are more productive and hardier in a recession, . . . [At

John Lewis] Staff turnover is low; the shop beat many competitors on Christmas sales. Firms
with similar structures concur: Arup, an engineering outfit, attributes its business range and ‘family
feel’ to being owned by its 10,000 employees.

In spite of higher productivity and a more dispersed ownership, however, there are barriers to
widespread application, including evidence that suggests employeeowned firms are no more socially
responsible than firms with other ownership structures:

It does not prevent bad decisions: having a quarter of shares in employees’ hands did
not save Lehman Brothers from bankruptcy.

Perhaps more importantly, minority employee ownership poses real risks to employees. While their
job security is often higher, financially, their heavy investments in their own firm can easily leave
them exposed to shifts in the firm’s share price:

It is rash to put a worker’s livelihood, savings and pension in one basket case; many
employees lost everything when Enron, an energy-trading company, collapsed in
2001.

Ultimately, the disadvantages of employee ownership on an organization-wide level may outweigh

the individual advantages that accompany increased involvement and commitment:

Companies that are wholly-owned by their staff may face barriers to growth. Many
firms need a flexible capital base to expand—one reason the partnership model in
 banking declined. Employee mobility promotes innovation. At base, it is unrealistic to
expect many bastions of capitalism to turn their shares over to their workforce.

Similar ownership forms have been explored in other countries, such as the U.S., and employee
protection has long been an important part of the economies of countries such as Germany and
Japan. The hybrid forms of employee ownership that are most prominent in these countries,
however, still face limitations in comparison for full employee-ownership:

In the US, many companies have Employee Share Ownership Plans (ESOPs) and in a
few cases the ESOP controls a majority of the shares, but these arrangements are rarely
linked to joint decision-making. . . . In Germany, codetermination gives extensive consultation
rights to employees through works councils and supervisory board membership, but does not
usually involve employee shareholdings.

In these systems, there remains the potential for a conflict of interests between employee interests
and shareholder interests because ownership is not invested fully in the employees. Nevertheless,
these hybrid models are still effective in flattening the organization’s hierarchy and reducing
inequality among employees. As owners’ and workers’ interests become better aligned, productivity
generally increases, “as long as it is linked to a coherent package of work practices that reduce the
level of supervision and give greater responsibility to employees.” 117 This idea of reduced
supervision—the elimination of layers of management—is beginning to take hold in a number of
innovative firms and generating interesting consequences.

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CSR Newsletters: Employees

An article in The Wall Street Journal profiles an innovative approach to allocating annual
performance bonuses among employees:

Coffee & Power, a San Francisco odd-jobs start-up, granted each of its 15 full- and
part-time employees 1,200 stock options this past January, to distribute among co-
workers in whatever way they chose. A worker can plunk all his options onto one
 colleague or split them among the group, so individual bonuses are tied to how co-
workers perceive each other’s work.

Personnel decisions taken within companies (e.g., decisions to hire, fire, reward, and promote
employees) are extremely subjective. We all are motivated by non-rational biases, prejudices, and
incomplete information. What this idea is doing is substituting individual self-interest for the
nonmeritocratic decisions of managers and executives. Of course, such ‘investment’ decisions by
employees will also be guided by the same biases and prejudices, but by democratizing or
‘crowdsourcing’ the process (by extending it to all employees), the opportunities for abuse are
diminished. The program’s rules reinforce this ethos:

Workers cannot reward themselves, nor can they give options to company founders,
who already have sizable shares. (The money or shares allocated to employees each
quarter varies depending on company performance.) Employees only know what bonuses they
receive, but don’t learn who allocated what. The company makes public a distribution curve
of all the bonus grants, with no names attached, so workers can see what the highest and
lowest bonuses were. . . . The biggest surprise: the thirdlargest allocation went to the ninth-
highest-paid person in the firm, a remote developer who handles small tasks and spends a lot
of time helping others.

It is an interesting thought-experiment to see what applications this concept might have in other
areas of the firm.

This idea of a flatter organization, with fewer bosses to closely control the workforce, has been
explored at length by Gary Hamel in an article in the Harvard Business Review. 119 In spite of the
value of managers, Hamel argues, the downside of what Alfred D. Chandler Jr. called the visible
hand, 120 “is that the visible hand is inefficient and often ham-fisted.” In response, Hamel promotes
a vision of the organization where:

+ No one has a boss.

+ Employees negotiate responsibilities with their peers.

+ Everyone can spend the company’s money.

+ Each individual is responsible for acquiring the tools need to do his or her work.

+ There are no titles and no promotions.

 + Compensations decisions are peer-based.

It is these characteristics that define Morning Star Company, the world’s largest tomato processor
and the best-practice model of an organizational structure that Hamel sees elsewhere (in firms like
W. L. Gore and Zappos), but argues should be much more widely adopted. One example is the tech
company, Valve Corp., a videogame maker in Washington state. Like many tech firms, Valve has a lot
of perks for its employees, “One thing it doesn’t have: bosses.” Reportedly, in the absence of
hierarchical oversight, employees are motivated by the innovative structure, which seems to
generate a culture that veers from anarchy to Communism:

At Valve, there are no promotions, only new projects. To help decide pay, employees
rank their peers—but not themselves—voting on who they think creates the most
value. . . . Firings, while relatively rare, work the same way: teams decide together if
someone isn’t working out. As for projects, someone typically emerges as the de
facto manager, says Greg Coomer, a 16-year veteran of Valve who works on product
design. When no one takes the lead, he adds, it’s usually a sign that the project isn’t
worth doing.

Proponents argue that the “boss-less” approach can also be applied to larger, more traditional
organizational structures, such as at GE, which “has run some aviation-manufacturing facilities with
no foremen or shop-floor bosses” for a number of years. W.L. Gore, however, provides perhaps the
best example of how this approach can be implemented in practice:

Since it was founded in 1958, W.L. Gore has operated under what it calls a “lattice”
management structure, which relies on teams in place of bosses and traditional chains of
command. . . . Gore’s 10,000 employees, who work mainly in engineering and manufacturing,
take on leadership roles based on their ability to “gain the respect of peers and to attract
followers,” says Ms. Kelly, the CEO. Those who choose not to take the lead also are valued, she
adds, noting that the company prides itself on staff “followership.”

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CSR Newsletters: W.L. Gore

An article in the Financial Times reports on an innovative management structure at W.L. Gore, the
successful maker of Gore-Tex, where ‘You would think it is a pretty tight ship. But no. ‘It’s a very
chaotic environment,’ declares Terri Kelly, the company’s chief executive officer.” The founders of
the 50-year old firm created a structure that minimizes layers of hierarchy:

The corporate hierarchy at Gore, such as it is, is almost completely flat. No one gets to
tell anybody else what to do. Decisions are reached by agreement, not diktat.

The result is a convoluted and sometimes unwieldy decision-making process. The firm’s executives
believe, however, that what they sacrifice in terms of speed, they make up for in terms of broad buy-
in to decisions that are made. As Gore’s CEO explains, “you have to sell your ideas, even if you’re the
CEO. You have to explain the rationale behind your decision and do a lot of internal selling.”
According to the article, the result is an environment that is more meritocratic, with only those ideas
that enjoy broad support progressing:

In Gary Hamel’s book, The Future of Management, he quotes a Gore associate, Rich
Buckingham, who sums up the company’s approach. “We vote with our feet. If you call
a meeting, and people show up, you’re a leader.”

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CEO Perspective

Herb Kelleher (Southwest Airlines)

If the employees come first, then they’re happy. . . . A motivated employee treats the customer well.
The customer is happy so they keep coming back, which pleases the shareholders. It’s not one of the
enduring green mysteries of all time, it is just the way it works.

The core of our success. That’s the most difficult thing for a competitor to imitate. They can buy all
the physical things. The things you can’t buy are dedication, devotion, loyalty—the feeling that you
are participating in a crusade.

Pro/Con Debate
Pro/Con Debate: Employee-ownership is the best way to minimize inequality and increase morale
among a firm’s employees.

Questions for Discussion and Review

1. What are some of the benefits to companies from increased employee morale and loyalty? Do
you agree that these benefits are likely to come from a volunteer program?

2. How can companies encourage employees to participate in volunteer programs and avoid the
suspicion that “by volunteering, they are potentially derailing their chances for a promotion because
of the time they’ll spend out of the office”?

3. Go to Timberland’s main website (http://www.timberland.com/) and also the company’s

responsibility website (http://responsibility.timberland.com/). Do you get the sense that Timberland
is genuine in its commitment to CSR? Does that create a good impression of the company or not
make much difference in your perception of it?

4. What is your impression of the John Lewis Partnership? Is it a good firm? Is it a successful firm?
Are those two things (good and successful) the same? Would you like to work there? Why?

5. Do we have a right to a job, or is it a privilege that has to be earned?

Online Resources

Accenture, Voluntary Service Overseas,

http://www.accenture.com/usen/company/citizenship/Pages/voluntary-services-overseas.aspx

Employee-owned Companies,

http://www.nceo.org/articles/employeeownership-100

Fair Labor Association,

http://www.fairlabor.org/

Fast Company Magazine, Employee Volunteer Programs,

http://www.fastcompany.com/tag/employee-volunteer-programs

John Lewis Partnership,

http://www.johnlewispartnership.co.uk/about.html

IBM Volunteer Program,

http://www.ibm.com/ibm/responsibility/initiatives/volunteers.shtml

Morning Star Company,

http://morningstarco.com/index.cgi

Salesforce.com,

http://www.salesforce.com/foundation

SERVEnet,

http://www.servenet.org/

The National Center for Employee Ownership,

http://www.esop.org/

Timberland’s Path of Service,

http://responsibility.timberland.com/service/

Volunteer Service Overseas (VSO),

http://www.vso.org.uk/

W.L. Gore & Associates,

http://www.gore.com/en_xx/aboutus/index.html

Work Foundation,

http://www.theworkfoundation.com/