Building the Healthy Corporation

"Language is a city to the building which every human being brought a stone." Mark Twain

August 2005 | by Daniel Burk

Growing numbers of organizations—including banks on both sides of the Atlantic, a global natural-resources group, and a leading UK retailer—are adding an important new "stone" to the 21st-century business lexicon. "Performance and health" is a metaphor that derives its power from a simple comparison with the human body. Just as people may seem reasonably well today but may not have the physical condition for the rigors of a long and active life, so too companies that are profitable in the short term may not have what it takes to perform well year after year.

What makes companies healthy?

Companies that attend to five different aspects of performance and health can build the resilience and the organizational capacity not only to deliver but also to sustain both.

Strategy

First, a company's strategy should be reflected in a portfolio of initiatives3that consciously embraces different time horizons. A typical large company does, of course, include business units with distinct strategies, but few of them could really help it adapt to events or capitalize on new opportunities. Some initiatives in the kind of portfolio that we recommend should bolster a company's short-term performance. Others should create options for the future—new products or services, new markets, and new processes or value chains. A key management challenge is to design and implement initiatives that balance the company's performance and underlying health on a risk-adjusted basis.

Metrics

A robust set of organizational metrics allows executives to monitor a company's performance and health. What's needed is a manageable number of metrics that strike a balance among different areas of the business and are linked directly to whatever drives its value. A vast assortment of metrics is self-defeating. Companies must avoid the erroneous thinking that too often juxtaposes "hard" metrics for performance with "soft" ones for health. They can and should attach hard numbers to health metrics, such as the motivation and capabilities of their employees. Similarly, they can and should track their current performance with softer metrics, such as the quality of their latest earnings or of their relationships with opinion formers.

Communication

The next step is for companies to change the nature of their dialogue with key stakeholders, particularly the capital markets and employees. For the capital markets, that means first identifying investors who will support a given strategy and then attracting them. Talking about corporate health to court hedge fund managers pursuing the next bid, for example, is pointless. Reaching out to employees is just as important. The complaint that "we don't know what's going on" often indicates that a company's leaders are communicating results rather than long-term intentions.

Leadership

One hallmark of great, enduring companies is a willingness to involve future generations of leaders in their own development. In addition, good leaders understand both the power and the attendant risks of what former Unilever chairman and CEO Niall FitzGerald called their "extraordinary amplification system." Those who casually or randomly articulate themes for action run a risk of making the organization schizophrenic. The combination of "initiative overload" and a reluctance on senior management's part to produce a simple and coherent agenda can be particularly damaging.

Governance

Companies must again learn how to meet next year's earnings expectations while at the same time implementing the platforms needed to deliver strong and sustainable earnings growth year after year. Achieving this dual focus involves thinking about strategy, communication, and leadership in new ways. And it calls for the creation of a carefully designed set of metrics—balanced across the business and linked to the creation of value over the short, medium, and long term—that can help management teams and boards monitor their ability to stay on course.

 

Executive Editor

 Ms Anna Sullivan

Ms Anna Sullivan