Article

NextGen Know-How: What the Most Profitable Companies Do Differently

Group of happy employees at a successful company
Laurie Maddalena, MBA, CPCC, PHR Photo
Executive Coach/Consultant
Envision Excellence

4 minutes

Investing in all your primary stakeholders—including your employees—leads to superior value.

A couple of years ago, I read the book Firms of Endearment where the authors share how world-class companies profit from passion and purpose. We’ve all heard that having engaged employees is important if you want a high-performing organization. Yet in my experience, few organizations make engagement a priority. Many leaders think it’s difficult to measure engagement, so it isn’t made a strategic focus. And most leaders think that engagement is about having happy employees. Engagement is much deeper than just having happy employees—it’s about productive employees, and productivity impacts the bottom line.
In fact, a high performer can deliver 400 percent more productivity than an average performer!

What are “firms of endearment”?

  • They are companies that strive through their words and actions to endear themselves to all their primary stakeholders.
  • They build a business on love and care: They build superior value and have close relationships with all their stakeholders.
  • They profit from passion and purpose—beyond making money.

Firms of endearment subscribe to the philosophy that investing in all your primary stakeholders—including your employees—leads to superior value and profitability. The book’s examples of firms of endearment include Southwest Airlines, USAA, Starbucks, Patagonia, Trader Joe’s, Wegmans and Ikea. 

Below are the principles of the firms of endearment. Notice that they invest significantly more in engagement factors than most companies, including training, benefits and salaries.

  • They subscribe to a purpose that goes beyond making money.
  • Executive salaries are relatively modest.
  • Any level employee has access to the executive level leaders.
  • Their employee compensation and benefits are significantly greater than the standard for the company’s category.
  • They devote considerably more time than their competitors to employee training.
  • Their employee turnover is far lower than the industry average.
  • They make a conscious effort to hire people who are passionate about the company and its products. They hire for character, not just expertise.

Most executives would be hard to convince that focusing on engagement is worthwhile. They would see the above principles and zero in on the significant expense of employee training and paying higher salaries and benefits. But this is where the book gets really interesting.

The authors compare the cumulative performance of the firms of endearment to 11 Good to Great companies in Jim Collins’s popular book. At the five-year mark, the cumulative performance of the firms of endearment and good to great companies are on par with each other, with both outperforming the S&P 500. But at the 10-year mark, the U.S. firms of endearment deliver a cumulative performance of 410 percent compared to 176 percent of the good to great companies. And at the 15-year mark, the U.S firms of endearment deliver a cumulative performance of 1,681 percent compared to 263 percent of the good to great companies!

The authors of Firms of Endearment disagree with Jim Collins on what defines a company as “great.” Collins described companies going from “good” to “great” by virtue of their having delivered superior returns to investors over an extended period of time. (Each delivered cumulative returns at least three times greater than the market over a 15-year period.) The authors of Firms of Endearment believe a great company is one that spreads joy and fulfillment and makes the world a better place because it exists, not just because it outperforms the market over a certain period of time. And that distinction clearly makes a big difference in the profitability of the company. 

I find this research to be extraordinary. If creating cultures based on joy, fulfillment and engagement lead to significantly more profitable companies, then why aren’t more organizations investing in their cultures? Why do most executives still see salaries, benefits and training purely as expenses? Because most organizations are still operating in a traditional model of leadership that focuses on tangible organizational functions like finance, lending and marketing. These are functions that are easy to measure and therefore a strategic priority.

Of course, finance, lending and marketing are important. But if you want to build a long-term profitable business, you better start investing in your people. The people are your culture. And organizational culture is what separates merely good—and maybe even great—companies from exceptional organizations. 

Laurie Maddalena, MBA, CPCC, PHR, is a certified executive coach, leadership consultant and founder of Envision Excellence, LLC in the Washington, D.C., area. Her mission is to create exceptional cultures by teaching leaders how to be exceptional. Maddalena facilitates management and executive training programs and team-building sessions and speaks at leadership events. Prior to starting her business, she was an HR executive at a $450 million credit union. Contact her at 240.605.7940 or lmaddalena@envisionexcellence.net.

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Keywords

Leadership