Leaderonomics

Every time I ask the question to directors, “What is your most important asset?”, they answer “people”. Yet, from my experience, boards spend less than ten percent of their time on people issues; at a time where advances in blockchain applications, robotics and AI make people with up to date skills perhaps the most important strategic issue boards have to face to stay competitive.

Wrong assumptions

Something has gone wrong in how ‘people’ are discussed at the board. If directors truly believe in the importance of ‘people’ as assets, they would put their ‘people’, summarised in payroll costs, on the balance sheet as well as in the profit & loss (P&L); as an asset to be invested in, upgraded and protected from obsolescence.

They would charge depreciation against the sum allocated, based on the rate at which skills and competencies became outdated. In other words, they would treat payroll in the same way as they treat plant, machinery, IP and goodwill; a financial lump sum not treated only as a cost. They might also regard people as a long-term resource rather than as variable costs to be disposed of, when no longer needed.

1. People are a cost

I suspect the accounting treatment creates unconscious psychological pressures on how boards look at people. They are expenses only in the P&L and not shown as an asset on the balance sheet. Therefore, there is subconscious and conscious pressure all the time to minimise these expenses in order to maximise shareholder returns.

This pressure can be taken to extremes, as exemplified by Amazon’s past treatment of some of its workers in the US, where despite benefitting from generous tax breaks to set up warehouses in communities, it also relied in part on food stamps provided by the supplemental nutrition assistance program (SNAP) to subsidise its part-time workers who did not get paid enough to buy their groceries.

If Jeff Bezos really believed the people who work for his company were its assets, would he treat them this way? Instead it seems as though they are costs to be minimised or externalised in whatever way the law permits.

That is a frame of mind encouraged by the way in which financial reporting is done. Perhaps this schizophrenic attitude to people, shown by so many boards – regarding them as assets to be treasured, but treating them as costs to be minimised or externalised – cannot be changed as long as financial statements reinforce the assumption people are only costs.

Some employers justify paying their employees less than market rates on the grounds and they provide ‘psychic income’ to compensate for the fact that they are paid less. This applies to all vocational careers, for example – nurses and carers, teachers and academics, soldiers, police and firemen and people who work for charities.

In Malaysia, ‘doing national service’ is another argument used to pay below market rates. A similar argument applies to the fashion industry where there are many people lower down the value chain who find it difficult to make ends meet because they do not get paid a salary, but in clothes vouchers instead. The justification for this treatment is that fashion is ‘exceptional’ as this quote referring to the fashion industry makes clear:

The message is, you don’t have to be paid because you are lucky to be there at all. Working in fashion is hyper socially validating, even if you’re unpaid. … Fashion presents itself as something exceptional, a world outside the ordinary…The dream that French fashion, especially, projects is that of a life of effortless luxury – mundane everyday facts of life such as working for a living, or indeed even money, are considered vulgar, taboo, even dirty subjects.

Marsh, S., “Chanel shoes, but no salary: how one woman exposed the scandal of the French fashion industry” – The Guardian, September 2, 2018.

The Internet and the gig economy have made matters worse; they make it much easier for even small companies to look for the cheapest skills in a global market. Platforms like Fiverr encourage employers of casual labour to race to the bottom:

While freelance websites may have raised wages and broadened the number of potential employers for some people, they’ve forced every new worker who signs up into entering a global marketplace with endless competition, low wages, and little stability. Decades ago, the only companies that outsourced work overseas were multinational corporations with the resources to set up manufacturing shops elsewhere. Now, independent businesses and individuals are using the power of the internet to find the cheapest services in the world too, and it’s not just manufacturing workers who are seeing the downsides to globalization.

Semuels, A., “The Online Gig Economy’s ‘Race to the Bottom’: when the whole world is fighting for the same jobs, what happens to the workers?”, The Atlantic, August 31, 2018

2. People are disposable

There are many arguments in favor of the ‘hire and fire’ culture typical of US and UK free market thinking. Flexible labour laws allow companies to employ people when times are good, making the economy better off as a whole because they are not worried about what happens when times are bad.

They allow firms to be more innovative because if the risk taken does not pay off, the firm is not burdened with unproductive employees. They allow the young to get a job, even if it is on zero-hours contracts, despite zero-hours contracts being bad for physical and mental health.

However, by allowing such flexibility, firms lose continuity – the continuity of engagement with employees that creates loyalty, thus making good economic sense for companies to invest in the skills of their employees long-term because they will stay.

3. Keeping wages low is the route to success

Companies choosing to come to countries, like Malaysia, where the primary focus of businesses has been to employ as low-cost labour as possible by importing foreign workers to keep costs low, reinforce the belief it is pointless to invest in skills-building, as they will only move to the next low-cost country when costs get too high.

This has happened in the garment, electronics and sports shoe industries, where Asian OEM and contract manufacturers from, for example, Korea and Taiwan have migrated from one country to another as their labour costs rose.

If so-called ‘middle income’ countries are to escape the ‘middle income’ trap, they must focus on maximising labour productivity, which requires a judicious blend of upskilling and increased automation – i.e. treating employees as assets to be invested in rather than as costs to be minimised.

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The resulting lack of continued demand for labour allows boards to regard employees as disposable costs, so continuity of engagement makes little sense to them; and they fail to invest in upskilling their workforces.

This creates a vicious cycle, as there is no reason for companies to remain in countries where the value added by now relatively unskilled and expensive labour is insufficient to justify staying.

To escape the ‘middle income’ trap, boards must stop treating people as costs to be minimised and regarding them as disposable. They must instead consider them as long-term assets, requiring continuous investment in upskilling.