Unlock Creative Genius through Employee Ownership

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By Martin Staubus and Robert Porter Lynch

Even in our ever more difficult economic environment, some employee-owned companies are immensely successful, expanding their business and creating enormous value for their owners. Others flounder, with dismal results. Why the difference?

One of the most important reasons for the difference lies in how employee ownership is used to drive the creation of value.  The less stellar companies look at employee ownership as a “motivational tool,” hoping that by giving the workforce a piece of the action, they will try harder to make more profits for the company because it is in their best interest to do so.

These companies typically miss the mark because they don’t understand that people don’t simply work hard to make money. Decades of behavioral studies have shown that people want far more from a job than money. Security, recognition, personal respect and fellowship are critical needs, to name a few.

The Capital Myth

Even in the teeth of the global recession, the capital-access playing field has been effectively leveled.  With costs of labor and other production inputs working against them, the only competitive advantage left to American producers lies in their ability to systematically spur innovation, creativity and human productivity.  Businesses that don’t do this successfully will be overtaken by lower-cost producers around the globe.

Southwest Airlines didn’t beat United Airlines (both employee-owned) because it had more money – it didn’t. Foreign car makers didn’t bring Detroit to its knees because they had better access to financial capital. Nor did Walmart beat Kmart because it was better endowed with monetary resources. The power of the creative intellect of the entire workforce, top to bottom, made the difference. 

Collaborate to Innovate

The companies that succeed consistently display a keen understanding of the value of intellectual capital – the hidden passion for people to create, solve problems, learn from their environment, adapt to new situations – in other words: to innovate together. 1

At the employee-owned companies that thrive, leaders understand that employee ownership is not just a financial tactic to be used as an incentive to get people to work hard. Rather, they understand that engaging employee-owners in the ongoing challenge of creating better products and better ways to deliver them is a strategy – not just to survive, but to create an unassailable competitive advantage in the marketplace. 

By focusing on a strategy using employees’ imaginations to win in the competitive world, companies create economic value on the bottom line, revenues on the top line and personal value in the hearts and minds of the stakeholders.

The Employee Ownership Advantage

For employees, the pursuit of continuous innovation can be engaging and rewarding.  Some might even call it stimulating and fun.  But no one will describe it as easy.  It demands a higher level of engagement, of being alert and actively involved.  Frankly, it asks more of people than traditional workplaces have asked, where the standard has so often been to trudge through one’s routine and do no more than is necessary to avoid getting fired.  How do leaders get their people to embrace this more demanding strategy?

This is where employee ownership companies have a key advantage.  They are positioned to offer a convincing answer to employees who question why they should move to this higher, more demanding level of engagement in the mission of their organization.

One of the great figures who has shown the way in this area is Jack Stack, CEO of SRC Holdings.  Jack has developed a comprehensive, strategic operating system built around a never-ending process of continuous collaborative innovation.  As he so distinctively puts it, companies have a tendency “to use stock merely as a form of compensation – a carrot to get people to work harder. In a company with a strong ownership culture, stock is more than compensation. First and foremost, it’s a vehicle for change. The goal is not just to reward people for the work they do, or to maximize profits for their own sake, or to enhance shareholder value, improve cash flow, or whatever. Rather, equity is used to involve people in the process of making a difference in the world. Why? Because business … is a tool that allows us to accomplish the things that matter most to us, and those things must transcend business to have real meaning and value." 2

Caring about the success of the organization comes from finding a sense of meaning and purpose in both the organization’s mission and the manner in which employees’ creativity and teamwork is deployed to accomplish that mission.

No leader can force this from the outside; it’s got to come from the heart. According to Stack, “the Big Lie … is the notion that you can manage effectively by forcing people to do things they really don’t want to do. It is just not true. People only get beyond work when their motivation comes from the inside. That’s the higher law – you gotta wanna – says it all." 3

How to Create the Innovation Engine

Here are some simple ways to get started:

First, recognize that all innovation comes from differences in thinking. If two people in the same room think alike, one is unnecessary for innovation. Cherish the difference in how people view a situation. Encourage differences in points of view. To start the innovation engine, ask a diverse group of people a lot of insightful questions, honor their thoughts, and watch new ideas snap to attention like popcorn on a fire.

Second, encourage people to experiment, try out new approaches and pilot ideas on the work floor. And a word of caution: eliminate the word “failure” when an “experiment” doesn’t work. Substitute the word “learning.” Then share the learnings, and jump back in the ring with the next experiment.  

Third, beware of the confusion about the word “innovation.” Most people think innovation means conjuring up a new technology. But the vast majority of innovation is not technical – it’s unique solutions to problems, rearrangements of how we deliver products and services, improving the customer experience, making the flow of goods and services more efficient, reducing waste, getting rid of non-value-added effort or creating new business models.

Fourth, provide a continuous flow of business information to those whom you will rely on to innovate.  People can’t meet customer needs they don’t know about, improve cost structures they have no metrics for or streamline processes they don’t understand.  Organizations that limit information access to a chosen few are limiting the capacity of their employees to innovate.

Fifth, extend your relationships for innovation beyond your own company. Ask suppliers for innovation they might provide. Ask customers for problems they encounter. Form strategic alliances with suppliers, outsourcers and even other honorable competitors. Procter & Gamble formed alliances with their suppliers and a new stream of products like Crest White Strips, Mr. Clean Magic Eraser and the Swiffer emerged to create highly profitable revenue streams.  

Sixth, be sure ideas are shared throughout the organization and with suppliers and customers. According to Andrew Hargadon, “successful innovators are no smarter, no more courageous, nor tenacious, nor rebellious than the rest of us – they are simply better connected. 4 By sharing ideas, new evolutions of the idea build a momentum that ultimately creates competitive advantage, which in turn shows up as higher profitability.

Seventh, reward the entire organization for its innovation; don’t put financial rewards solely into the pockets of individuals. Otherwise you’ll reward people for sabotaging others and undermine the effort. Remember, innovation must be collaborative to be effective if value is to be created throughout the entire organization. Reward teamwork, sharing and helping others when they run aground.

One of the great things about the “innovation engine” is that it runs on fuel that’s free – ideas don’t cost anything.  Generating a continuous stream of ideas comes from asking employees to contribute their imaginations. 

Conclusion

Success in employee ownership means unleashing the creative energy in every human being, and focusing that energy on achieving a strategic vision for the company that creates competitive advantage and provides meaning and purpose for individuals.

Leading innovation is challenging, particularly for organizations that have not navigated this path before. It requires that senior management do far more than state superficial platitudes about innovation. It requires systematic, programmatic commitment and the active support of senior executives.  Ultimately, it is tremendously satisfying and rewarding.  There’s an old adage that “work is only work when you’d rather be doing something else.” When people engage in collaborative innovation, everyone wins.  Hidden within the employee ownership structure lies the enormous potential for creative breakthroughs, enjoyable work and the creation of wealth.

1 This concept is to be distinguished from intellectual property, the legal term used to refer to patents, copyrights and other ownership of intellectual products. In speaking of intellectual capital, we refer to the capacity to produce intellectual property, not the property itself.

2 Jack Stack, A Stake in the Outcome, p 5

3 Jack Stack, The Great Game of Business, p 36

4 Andrew Hargadon, How Breakthroughs Happen, The Surprising Truth About How Companies Innovate, p 11

Martin Staubus is a senior consultant at the Beyster Institute at UC San Diego's Rady School of Management. He can be reached at mstaubus@ucsd.edu.

Robert Porter Lynch is CEO of the Warren Company, a consulting firm specializing in collaborative innovation. He can be reached at RobertLynch@warrenco.com.