In the capitalist corporate scheme, it is commonly assumed that for a business to succeed it must put profits ahead of the interests of its employees. This stems from an often misunderstood (some say flat out wrong) legal principle that corporations are required to prioritize maximizing shareholder profits over anything else, including its own employees. This model is called “shareholder wealth maximization” and it’s based on the idea that a company’s primary goal must be to raise its stock price. It’s not hard to imagine the negative consequences that shareholder wealth maximization can have on a business’s other stakeholders, including: consumers, the environment, and the company’s own long-term health.
Fortunately, corporate managers and directors are not actually required to think in a profit focused-vacuum. These days, most legal scholars and corporate lawyers agree that traditional for-profit corporations don’t have to maximize profit, but should instead balance varying stakeholder interests. More to the point: modern corporate law requires decision makers to act in the best interest of the organization; it does not require profits at the expense of everything else. Not only is it a misconception that corporations must make decisions based solely on profit, but it’s also a misconception that all corporations do make decisions this way.
The most successful companies see their employees as assets and want to do right by them. If a company wants to take additional measures to make clear to investors, stakeholders, and the public that they are committed to pursuing social good, they could incorporate as a public benefit corporation (PBC). Many states, including California and Delaware, have PBC statutes that require businesses organized under this structure to pursue one or more public benefit(s) along with profits. This type of corporate structure is gaining in popularity with the rise of values-driven companies and consumers.
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Successful corporations do consider employee interests
Companies are constantly faced with decisions that force them to weigh varying and sometimes competing stakeholder interests. A values-driven company that considers employees in addition to profits has the flexibility to fire a high performer because their actions don’t align with business values and bring down the morale of the rest of the team. These types of decisions can be critical to the long-term health of the business.
It’s easy to jump to cynicism when corporations promote socially responsible initiatives. Questions arise around authenticity; are they just doing this because corporate social responsibility is “popular”? This may be the case for some, but a growing number of companies are engaging in real, meaningful initiatives that add value to society while maintaining their profits. Slack’s Next Chapter Program is one of these and is aimed at transforming the tech sector to be fair, inclusive, and equitable by providing career pathways for people leaving incarceration.
Increasingly, businesses are thinking of their employees, not as a required cost, but as an investment. Viewing each member of your team as an individual investment—and treating them as such—is more likely to lead to a successful long term partnership.
Why does it matter?
Now that we’ve established that corporations may consider the good of their employees while making business decisions, here are three key reasons why they should:
- It’s the law (within certain parameters, of course).
- Employee satisfaction correlates with employee retention.
- To cultivate long term business success.
Employee interests are required by many federal, state, and local laws. While this might seem like common sense ethics, the law requires that employees be protected from certain harms. These protections range from physical workplace safety to having a workplace free from harassment, retaliation, and discrimination (and more). Employers cannot discriminate against their employees based on a protected characteristic such as gender, race, disability, or age. There are also extensive protections for the amount and manner in which employees must be paid under federal, state, and local wage and hour laws.
This means employers must consider the interests of their employees at times of hiring, promoting, changes to pay, discipline, and terminating their employment. And depending on the size of the employer, the law also requires that companies provide certain benefits to their employees, including unemployment insurance, workers’ compensation insurance, and protected leave job protections. It’s not just employment laws either. Corporations could face liability from tort lawsuits, agency audits, and associated penalties for getting this wrong. Just like any other legal risk that corporations weigh, deciding not to consider the interests of its employees could have very expensive, and ugly, consequences.
The law establishes the minimum requirements companies must meet with regards to the relationship with their employees. However, many companies consider employee interests beyond what the law asks of them. For example, some companies offer fully paid parental leave, even when it is not required. Over 80% of Americans are in favor of paid parental leave, making it more popular than chocolate. If as a society, we agree that additional job protections are something we want, corporations are in a unique position to be agents for this change. As more businesses adopt benefits to support and protect their employees, other organizations and policymakers will likely follow suit.
Employee satisfaction and retention
To align your company goals with your employee interests, you’ll have to know what your employee’s interests are. According to a Pew Research study, roughly half of Americans say having a job or career that they enjoy is essential to living a fulfilling life. Managers should get to know their employees to understand what drives and motivates them, then apply appropriate changes to the workplace that encourages employee growth and rewards good work.
Investing in your employees is not just about providing benefit packages. Employees want to engage in meaningful work, be valued, and feel invested in. To this end, there are important actions employers can take that have very little business cost. For example, employers should conduct regular check-ins with employees to facilitate open and meaningful lines of communication. After all, giving and getting feedback is an essential part of a successful employment relationship.
Creating a values-driven workplace with a culture of ownership is another powerful tool to assist in the alignment of interests between companies and their employees. This culture gives employees a seat at the decision making table, seeks out their contributions, and rewards them for it. Workplaces with ownership cultures encourage creativity from a well-informed and highly involved workforce.
When employees feel heard and appreciated for their contributions, they tend to perform well and stick around. According to a Gallup study, the cost of replacing an individual employee can range from one-half to two times the employee’s annual salary. Luckily, reducing employee turnover is a problem with a solution. Fifty-two percent of voluntarily exiting employees say their manager or organization could have done something to prevent them from leaving their job. It could be as simple as having an honest conversation about the needs of the business and the needs of the employee to keep everyone’s interests aligned.
Happy employees are good for business
Businesses do not have to choose between making a profit or supporting their people. Success of the two interests can and do exist in tandem. Employees who are satisfied at work have higher rates of productivity and creativity. Moreover, happy employees assist in creating a positive public perception for a company, are a powerful recruiting tool, and help companies establish better relationships with their customers. According to Gallup, employees who are satisfied and engaged are likely to improve customer service and can result in 20 percent increase in sales.
Costco is an example of a corporation that has realized an economic benefit while offering generous pay to its employees as well. Costco’s average employee wages are nearly double the national retail average and it sees some of the highest employee retention rates in the industry while still being the third most profitable retail chain in North America.
Companies are made up of people—and people have complex interests. While revenue is crucial for every company, business interests may also include employee well-being, the environment, the supply chain, and/or society as a whole—just to name a few. The bottom line is that strong, resilient, successful companies are driven not only by profits, but by people and their values.