Issue 90  March 17th 2023

As we are wont to do, we've messed with the formatting of this newsletter and today's issue features a longform jaunt through business world from Brian, followed by a collection of links with minimal commentary for your leisurely perusal.

Intro, outro, done. Enjoy!

Poor Michael H. just asking a simple question and gets hit back with this

Michael sent me an innocuous short text asking my opinion on some random aspect of corporate life and for whatever reason I had to write an essay back. This is probably why people never ask me simple questions... I've edited it and brought it in here so that more people could suffer through my insufferableness. Without further ado, my 30,000 foot (and probably 30,000 word) view on finding a successful, moral, and compassionate path through modern capitalism:

In a company or organization or whatever there are a lot of different dimensions of value that are competing. Management (the category I fall into these days) may ethically or unethically be trying to increase the rewards they reap. We are familiar when these things go wrong spectacularly (Madoff, 1MDB) but this pressure always exists and is well studied and given names like Moral Hazard and Agency Cost. Boards and comp committees and consultants spend an enormous amount of time trying to align compensation schema with company objectives in an effort to neuter moral hazard or at the very least turn its snaky head in a direction that benefits the company AND management.

The employees (labor) are simultaneously trying to capture greater rewards and / or pivot the organization towards things they care about more than the managers. Rewards here broadly referring to wages, benefits, schedules, the ability to work from home, or whatever.

The owners (aka capital) just want to maximize the cash returned to their pockets for their investment and if everyone would please quit with all the shouting that would be great...

And somewhere at the bottom of this sack of cats is the customer, who is finicky and demanding, and whose legal tender is ostensibly exchanged for goods and services they desire. I know a lot of people in inventory planning and customer service who think the company would be better off without customers but that's been tried by a lot of companies either purposely or un-purposely without any lasting success.

In a perfect world, management, labor and capital would collaborate to increase the value they provide to the customer and thus grow the total pie. Alas, that world is not our world....

Unions are one specific, formal tool to enhance labor's leverage inside the margin stack of the value stream but employees may use other formal or informal and individual or collective tools as well. That leverage is typically spent demanding higher wages but may also be used to try to shift the priorities of the company. For instance, Netflix employees walking out to try to get Dave Chappelle pulled from the service is an example of employees attempting to elevate a non-monetary value that isn't aligned with the pure fiduciary axis we traditionally associate with a company's purpose. In theory this destroys enterprise value and hurts the owners and management, but they realize not being able to operate due to staff revolt or not being able to attract talent would hurt more and seek to find a balance.

The owners of the company have a desire to see the value of the organization increase through a higher share price or more dividends or profitability. Different types of owners have different timeframes they are focused on which can help or hinder the broader health of the company. Private Equity famously is short term focused to try to juice certain metrics so they can flip the company over to another PE fund or take the company public. In the service of this they may sacrifice long term health and investment in important things in favor of short-term cash flow growth. The shadier firms may do things like cutting product quality to increase short term profits, knowing that it takes a while for a brand or market reputation to be impacted by the new, inferior product or service and in the meantime, profits are temporarily juiced.

All these things are competing constantly inside the firm. But all are overshadowed, in any sufficiently substantial timeframe, by the customer. And this blindingly obvious yet commonly ignored insight is where your edge to grow and climb and develop and be rewarded in your career starts.

As an employee, if you desire to grow inside the machine and reap the rewards that come with that growth (money, responsibility, power, whatever), one ethical approach is to become an expert on the customer. What does the customer value in what you provide? How does it help them make money in their business? How does it make their life more interesting or fulfilling or fun or safer or healthier or whateverier? And how can you specifically help drive and enhance the mission and capabilities of delivering that juicy value to them, toot sweet?

And customers, they have options. Competitors. Substitute and alternate products. Not buying and putting the cash back in their pockets. Customers are extremely sensitive to the value you provide and extremely cynical about their options. They can be loyal for years and be gone in an instant. Brands can go from world leaders to irrelevant in months. Think Blackberry and Myspace and 1980's American car manufacturers. But it happens slowly and unpredictably. It is mercurial and difficult to predict.

The customer's value of the product or service is the non-appealable, all-powerful veto. I've seen so much activity and time wasted inside organizations trying to talk around and work around the cold hard facts of what the customer values and is wiling to pay for. Falling for the sultry vision of how you want the world to be versus the way that the world actually is will sink the ship more surely than loose lips.

Over time, company profits will oscillate around a function that correlates with the value provided to the customer. Profits do not correlate to the other dimensions of value competing inside the organization. Customers do not pay you for anything except the value you provide them. Everything else is friction and a drag, though often important and essential, part of doing business. Non-essential, non-value added costs should be interrogated and extricated constantly. Only increasing the value to the customer and improving the ability of the company to provide that value will increase the money available to pay employees and managers and owners and do things like ESG and whatever. Nothing else will, over the long term, absent some sort of regulatory capture situation (public utilities or whatever). Losing sight of customer value and focusing on other competing things will kill the company. Slowly or quickly. But like Thanos, it is inevitable.

Thus, in my opinion, the ethical manager who cares about the long-term health of the company, about keeping employees employed and paying them more and improving their lives with better benefits needs to be laser focused on customer value. The ethical manager with a fiduciary responsibility to the owner of the company needs to be laser focused on customer value. The ethical manager who wants to be well compensated for their time and effort needs to be laser focused on customer value. Doing this IS how we take care of our employees and owners and ourselves and provide financial capacity to re-invest in our communities and make decisions that are better for the environment and do all the things we want to do as ethical and moral people.

There are unethical managers out there who block all those things. But I am me and I only control myself. I only have control of my actions and role in the process and I strive to be equitable and honest in this process. Unfortunately, the process isn't perfect.... reference the previously mentioned studies on moral hazard. Regardless, my responsibility as a manager is to make sure we stay competitive in the long term in providing customers what they value. This has a positive component in things like innovation and creation and creativity and collaboration and investment and building an organization that is customer focused and has a blast delighting customers.

But it also has a negative component of keeping under control costs and wastes that customers don't value and will not pay you for. This means managing the size of the work pool. Getting rid of employees who aren't providing value (along the customer's brutally defined dimensions) commensurate with the cost of that employee. It means closing factories that aren't competitive with the customer's other options. It means automating jobs done historically by a human. And all those things are brutally hard and impact individuals lives in ways that are unpleasant. But not doing them impacts the lives of every employee in unpleasant ways when the customers decide they don't want to pay us anymore and we go out of business.

That happens slowly and so the courageous and smart manager needs to be proactively managing this process. Often times we call this type of thing strategic planning. And it is a critical piece of the value a good manager provides. Knowing the trees intimately but also being aware of the forest and navigating in healthy directions through it, over the span of years and decades.

And in my career, I have tried to do all this with kindness and respect and empathy towards those impacted in the churn and froth of this process. Treating every individual with dignity and honesty. Honesty often includes withholding confidential information. But sharing as much as possible so people aren't surprised. Giving them as much control of decisions that impact them as possible. Doing everything to repurpose people and retrain them instead of losing them. Increasing the value they provide to customers through training and tools and creating strong, collaborative teams. Firing bullies. Firing unethical people and people who have given up and become lazy barnacles. Hiring smart brains who are fun to work with. Because when people create value for customers they get paid more and hopefully, sometimes, their work lives are fulfilling and satisfying.

When we do this, the organization is healthier and more resilient and able to weather the craziness in the world out there. It is able to survive and keep all of us feeding our families and equip and empower everyone who comes through the doors, for however long they are here, to thrive and grow as a unique and beautiful human, made in the image of God, created to work and create and labor and build.

The place that operates like that is the place where I want to work. And hopefully, every day, I am striving, however imperfectly, to build that place around me.

-Brian