What makes a company truly great

09.06.2013 04:56

Perhaps no business consultant
enjoys higher esteem in the
corporate world than Jim
Collins. Over three decades, he
has sold millions of copies of his
books describing the
characteristics of what he terms
“great” companies.
It is hard not to admire his
diligence. Along with a large
team of researchers, Mr. Collins
spends years gathering evidence
and analyzing companies. The
primary measure he uses for
greatness is how well a company
performs for its shareholders
over a given period of time. The
problem – as we have all been
warned – is that past financial
performance is no guarantee of
future results.
For “Good to Great,” his most
successful book, published in
2001, Mr. Collins selected 11
companies as truly elite
performers. They included
Circuit City (now bankrupt and
defunct); Fannie Mae (taken over
by the government in 2008 after
huge mortgage losses); Pitney
Bowes , whose stock has
progressively tanked over the last
decade; and Altria, the world’s
largest tobacco company, which
has actually performed well in
the marketplace, but earns its
revenues almost exclusively from
a product that causes five
million deaths a year.
In “Great by Choice,” published
in 2011, Mr. Collins and a co-
author, Morten T. Hansen, call
out seven companies for
“spectacular” results –
outperforming the overall stock
market and their industry
competitors by at least 10 times
over a 15-year period. They also
set up comparisons with
companies in the same industries
that performed markedly less
well.
The most striking comparison
involves Microsoft , which Mr.
Collins and Mr. Hansen identify
as a great performer, and Apple ,
which they cite as the
comparative laggard. Yes, you
read that right. Here’s why: the
15-year period the authors
happened to examine was 1987
to 2002.
How could so much research
miss the mark by so far?
An obvious explanation is that
huge changes in technology in
the last decade have redefined
what it takes to be successful –
elevating factors like the role of
disruptive innovation, quickness
to market and speed of
responsiveness to competitors.
What worked for Microsoft in
the era that Mr. Collins and Mr.
Hansen studied proved to be
wholly inadequate to compete
with Apple in the era that
immediately followed.
But the primary issue, I am
convinced, is the definition Mr.
Collins uses for greatness. For
this understanding, I owe a
considerable debt to John
Mackey , chief executive of Whole
Foods , and Rajendra Sisodia, co-
authors of the powerful new
book “Conscious Capitalism:
Liberating the Heroic Spirit of
Business.”
Maximizing returns for
shareholders over a given period
of time is narrow, one-
dimensional and woefully
insufficient. In an increasingly
complex and interdependent
world, a truly great company
requires a far richer mix of
qualities.
So how about this for a new
value proposition?
A company’s greatness is
grounded in doing the greatest
good for the greatest number of
people, and the least harm. It is
neither first nor foremost about
maximizing short-term return
for shareholders. Rather, it is
about investing in and valuing
all stakeholders – employees,
customers, suppliers, the
community and the planet – in
order to generate the greatest
value over the longest term for
all parties, including the
shareholders.
By that definition, a tobacco
company like Altria can never be
considered great, no matter how
much return it generates for
shareholders. The damage the
company causes to the world
vastly outweighs the value it
generates for a few. To be great,
a company must add some sort of
positive benefit in the world
with its products. Similarly, a
company that fails to pay its
employees a living wage, or to
treat them with care and respect,
can never be considered great.
Greatness also requires a
company to treat its customers
with the same care and respect,
in part through an unwavering
commitment to excellence in the
products it produces, and
fairness in the prices it charges
for them. A great company must
also take seriously its continuing
responsibility to the communities
in which it operates, and to the
planet, on whose resources it
depends. Above all else, great
companies must add more value
to the world than they extract.
This is admittedly a high bar, far
higher than the one Mr. Collins
sets in his books. After 15 years
of working with scores of large
companies, I have yet to come
across one that fully measures
up to this high standard. But
here is what I find heartening.
There are small numbers of
Fortune 500 companies making
an honest effort to value all
stakeholders in a conscious way,
and they are consistently and
widely outperforming their
peers.
In an earlier book, “Firms of
Endearment: How World-Class
Companies Profit from Passion
and Purpose,” Mr. Sisodia, a
business professor and
researcher, compiled a list of
companies that pay and treat
employees significantly above
average; provide high value and
service to customers; do not
squeeze suppliers for the lowest
possible prices; invest
significantly in their local
communities; minimize their
environmental impact; and do
not cite as a primary goal
“maximizing shareholder
returns.”
Over the 15 year period, 1996 to
2011, the “Firms of Endearment”
companies outperformed the
Standard & Poor’s 500-stock
index by 10.5 to 1. They returned
a cumulative 21 percent, while
Mr. Collins’s “Good to Great”
companies earned an annualized
return of just 7 percent during
the same period, barely
outpacing the broader market.
Here is the inescapable
conclusion: When a company
truly seeks to take care of all its
constituencies, it serves not just
the collective good, but also its
own long-term best interest.