A new business report shows that how business is conducted matters far more than who what, where, or why commerce takes place. And while it may sound intangible, "how" can be measured.
Dov Seidman, the chief executive of LRN, a business advisory firm, and author of the book How: Why How We Do Anything Means Everything, which has a foreword by Bill Clinton, says he figured out a way to forge data from things such as behavior. He dubs this "HOW metrics."
Financial advisors would be wise to include the HOW in their investment assessments. Financials, as we've seen, aren't enough in the due diligence process. HOW metrics may give intermediaries a leg up and keep them a step ahead of the rapidly changing business landscape, where financial ripple effects cast a wide net and take down seemingly strong companies, never mind entire countries.
"The 'New Normal' doesn't look like anything we've seen before, and the governance structures, organization models, corporate cultures, and leadership styles that proved successful in the past need to adapt to our changed circumstances. That being said, since most executives remain comfortable managing only what they can measure, it has become important to develop a new framework for analyzing an independently confirmable method for measuring how a company does business," Seidman says.
What's so telling about measuring "how" is that the financial performance of a company improves in companies "where there's less employee misconduct, greater innovation, higher levels of employee loyalty and superior customer satisfaction" as measured by the HOW metrics.
To measure intangibles across the board, LRN created nine indices: the Trust Index measures the extent to which an organization demonstrates and fosters trust throughout the company; the Horizon Index measures the extent to which a company stresses long-term, rather than only short-term goals; the Collaboration Index measures the extent to which a company fosters effective coordination between departments and groups; the Information Index measures the extent to which a company's leaders and employees share information authentically and truthfully; the Speaking Up index measures the extent to which employees feel invited to voice their opinions, or to report improper behavior; the Significance Index measures the extent to which employees aspire to and pursue making a positive impact on the world (versus only short-term success); the Inspiration Index measures the extent to which a company uses inspiration rather than reward and coercion as stimulus; the Values Index measures the extent to which a company uses values-based systems to guide behaviors and decisions versus rules-based systems; and the Sustainability Index measures the extent to which a company focuses on long-term sustainable practices versus only short-term opportunities.
To feed the data, LRN enlisted the Boston Research Group to study more than 5,000 U.S. employees. Three company archetypes were examined: "blind obedience" companies rely on rules and policing, are transactional and focus on short-term objectives-there is little focus on building enduring relationships in the workplace, the marketplace or society; "informed acquiescence" companies are where employees follow the rules, policies and procedures established by what they believe to be a skilled management team (managers rely on performance-based rewards and punishments to motivate people); and "self-governance" organizations, which are primarily values based. At these companies, people act on the basis of a set of core principles and values to inspire everyone to align around a company's mission, purpose and definition of significance.
Not surprisingly, companies operating on a system of self-governance win out: They deliver exponentially better levels of customer satisfaction, innovation and financial return.
Try these measures out on the companies you invest in.