Balance is widely accepted as an essential feature of human health. When we lack balance, we become fundamentally unhealthy: obese, workaholic, narcissistic, or obsessively thrill-seeking, for example. Paradoxically, the modern worlds of economics and business have adopted as their core rule the opposite of balance: the maximization of a singular objective. The implicit assumption, bizarrely, is that what is good for the individual is bad for the collective, and vice versa. But that assumption is making business and the economy fundamentally unhealthy. Because what is good for the individual is actually good for the collective, we need to reverse course before the sickness destroys us.
The maximization of shareholder value as the singular goal of the corporation is the most frequently debated manifestation of this core rule. I am on the record as agreeing that it is perhaps the dumbest idea in the world.
But it is merely a symptom. The problem is that the worlds of both economics and business have adopted the view that without a simplifying, unitary objective, an organization will be unable to make robust, consistent, and societally optimal decisions. Luminaries such as economics Nobel laureate Milton Friedman and superstar finance professor Michael Jensen have made the argument so convincingly that it has effectively become embedded doctrine: There should be a unitary objective whereby more is always better.
This is why the implicit rule in most incentive systems is that selling more is better—always. At Sears Auto Centers in the 1990s, more repairs per customer was better, with no upper bound. At Wells Fargo in the 2000s, more accounts opened was better, with no upper bound. With no balance consideration evident, employees followed the rule to such extremes that they created existential reputational threats for their organizations. Both companies apologized and agreed to settlements.
In energy, more proven and probable reserves is always better, so we get dangerous drilling and relatively unlimited hydraulic fracturing. In managing labor costs, greater “labor-cost efficiency” is always better, so there is limitless outsourcing of jobs to low-cost jurisdictions. In antitrust policy, more short-term efficiency is always better, so mergers are now enabled by the efficiency defense. As part of the Washington Consensus, more deregulation and fiscal austerity is always better, so countries engage in deregulation and austerity to comply. In the health-care system, more efficient use of working capital is always better, so minimizing buffer stocks of personal protective equipment made all sorts of sense—until a pandemic hit.
When scandal unfolds, we tend to be baffled at why the leaders involved didn’t show more of our natural inclination toward balance. We shouldn’t be. To show balance, leaders must personally violate the core rule under which they are asked to operate: More is always better. Thankfully, many do; they try to use their own personal instincts toward balance to guide their actions. But not enough leaders take that approach.
Unrestrained pursuit of labor-cost efficiency has left tens of millions of American workers earning less than a living wage while the top 1% achieve unprecedented wealth. Antitrust authorities worshipping at the altar of efficiency have facilitated the widespread consolidation of industries into fewer, more-powerful players. Judging company performance solely on the basis of short-term shareholder value increase has caused executives to give short shrift to long-term stewardship of their employees, communities, and the environment.
The only way to stop these practices is to recognize that while simplicity is handy for guiding action, it ceases to be effective if it is, in fact, simplistic. That means tearing down an entire infrastructure of simplistically extreme rules in business and economics and building a set of principles and practices that seek to achieve healthy balances. This must go far beyond making empty statements about balancing the interests of stakeholders, as with last year’s statement by the Business Roundtable. Change won’t happen as long as business, economics, and public-policy schools still teach the importance of a singular objective function, whether explicitly or, more often, implicitly. And it isn’t going to happen as long as reward systems are geared around achieving singular goals—like achieving this year’s budget, which is still the dominant goal in much of American public- and private-sector life.
The good news is that people are used to struggling with and making decisions that seek balance. If we stop putting them in artificial environments that attempt to negate that instinct for balance, they will thrive.
Roger L. Martin is professor emeritus at the Rotman School of Management at University of Toronto. He is the author of When More Is Not Better: Overcoming America’s Obsession with Economic Efficiency.
Email: [email protected]