Social Compact, Version 2.0

Are companies custodians of social values? For those of us raised somewhere between the invention of steam power and The Man in the Gray Flannel Suit, "corporate values" suggests a forlorn hope. But times, apparently, are not what they were. In February, Upside magazine featured an emblematic statement by Paul Saffo, the widely admired analyst of business technology based at Menlo Park's Institute for the Future, a Silicon Valley fixture: The high-tech industry, Saffo told an interviewer, has been "too immature, too young, to realize it had social obligations. But that's changed. There's a lot of social consciousness coming up, and a lot of sense of responsibility spreading out."

Responsibility for what? "Haves and have-nots is a big issue," Saffo continued. "Mitch Kapor [the founder of Lotus Development Corporation] frames it as 'knows' and 'know-nots.'" And how to distribute knowledge, including access to knowledge, so that everyone can be "enfranchised" members of society? Saffo is adamant: "In the end, being good and doing the right thing and being socially aware is an act of self-interest."

This message—that corporate values can repair the dislocations of an intensified corporate competition—is enjoying a certain political vogue. In May, President Clinton held a White House conference to explore, as the New York Times put it, how "profits and people go hand in hand." The conference, in familiar Clinton style, featured the President moderating presentations by corporate executives who have pursued worker-friendly growth strategies.

For liberal politicians short on public dollars, the equation of private profit with social purpose passes a social burden back to the private sector. For executives too casually accused of greed, "values" imply regard for the commonwealth. If treating workers well—cherishing their human capital, nurturing their morale, enhancing their authority—truly equals enlightened corporate self-interest, then postindustrial revolution needn't equal increased social turmoil. We can have the creation without the destruction. The only task is to persuade entrepreneurs to recognize their true self-interest.

Perhaps the most arresting declaration of this kind, certainly one of the most influential, came in an interview with Robert Haas, the CEO of Levi Strauss, published in the Harvard Business Review of September 1990. Haas declared:

A company's values—what it stands for, what people believe in—are crucial to its competitive success. Indeed, values drive the business. . . . If companies are going to react quickly to changes in the marketplace, they have to put more and more accountability, authority, and information into the hands of the people who are closest to the products and the customers. Values provide a common language for aligning a company's leadership and its people.

Haas even said that on occasion he had decided to keep factories open on extra-economic grounds, because of the "community impact."

The problem with this message is that it is misleading—misleading about the capacity of even values-driven companies to be faithful to employees, and awfully misleading about the kind of training companies can be expected to offer. Haas and others are quite right about how to build robust businesses and, arguably, more humane ones. Quality and innovation are rooted in intellectual capital, which means companies must indeed invest in many training hours—in sophisticated functional tasks, software development, soft-skill development. Yet the companies of the new economy cannot maintain anything like loyalty to employees, guaranteeing employment as long as there is profitability. Nor can they train the less-well-educated people of our society in a way that will make them fundamentally employable. Only the government can do that; yet ironically it is the claims of the good-guy advocates for values, like Haas and Saffo, that dilute support for government action while unloading unsustainable expectations onto the private sector.

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The corporate values movement, which traces its lineage to W. Edwards Deming and the total quality movement of the 1980s, is now pervasive in the knowledge companies of the new economy. The movement seems to stand for "good corporate citizenship," though it also stands for a kind of opposite. For acolytes do not just say that an individual company should do good for moral reasons. They say that all companies must do good for business reasons—where "good" means treating employees as human beings, not simply as hired hands, treating them with the "values" we might expect to find in a decent society. Prophets of the values movement speak especially of the importance to productivity of employee dignity and empowerment, of openness, informed choice, meritocracy—values that look vaguely like the values of democratic community, in fact.

Why is this good business? The world of "the traditional, hierarchical, command-and-control organization" is fading, as Haas put it. Companies increasingly depend on innovation and teamwork, so creative management structures and investments in training become critical competitive assets. Good companies accord employees the right to disagree and dissent, as in an experimental lab or a classroom, and they "invest in people"—training and retraining employees whose myriad competencies will engender new businesses, and whose inspired sense of purpose will become a key to victory.

Advocates of corporate values point to the undeniable achievements of the great companies of the new economy. Motorola, to take one leading example, spends about 2 percent of its wage bill on training, as much as $150 million a year. Intel spends about $120 million, $3,000 per employee. All in all, corporate America now spends as much as $30 billion on training—this, according to Louis Gerstner, the CEO of IBM, and the author, note well, of Reinventing Education. Motorola has also launched a program called "Individual Dignity and Empowerment," or IDE, which mandates regular reviews for all employees, in which individuals and their managers explore whether or not the company has defined a "meaningful" job for them.

Though the logic for this approach derives from a changing mode of production, not any ideology, the values underlying it resonate deeply with the residually social democratic notions one finds in German "Workers' Councils," and even with the neo-Shintoist notions one finds in Japanese management circles, namely, that managers are the stewards of their employees' welfare. It also appeals to American boomers who never really liked the idea of working just for money, as well as policymakers looking for an alternative to high-cost government training programs.

In its own way, talk of corporate success depending on "values" can seem powerfully reassuring to people hostile to (or just queasy about) tax increases. In the speech he gave just after being renominated to head the Federal Reserve in February 1996, Chairman Alan Greenspan urged that America should make a "renewed commitment to effective education and training, especially on-the-job training." A few weeks later Labor Secretary Robert Reich made a similar pitch, coupled with a warning, in a letter to the New York Times. "Of course, government can't do it all—especially a federal government trying to shrink the deficit while carrying a $4 trillion debt. That's where the private sector comes in. If corporate America doesn't step up to the plate, it will have to contend with far worse than a proposed tax incentive for upgrading employees' skills. . . . Try protection and nativism for starters."


Reich is certainly correct about the consequences of letting working America's problems fester. But no matter how hard they try, even enlightened corporate executives are not capable of providing the solution. Consider the pressures on employment at their most transparent. In every advancing company, blue-collar work competes with flexible machine tools and smart robotics; white-collar work competes with data processing software and information networks. A Motorola cellular phone plant that once employed 3,000 people and generated $1.5 billion in revenue now employs 500 people and generates $4 billion. In the past ten years, Chase's assets grew by 38 percent, while its workforce shrank by 28 percent. On average, reports the New York Times, companies have cut back to about two-thirds of their former size.

This has obvious implications for employment policies. A generation ago, the great multinationals—IBM, Eastman Kodak, General Motors—could offer something like the promise of lifetime employment because, let's face it, they had no real competition. The global economy has changed all of that. IBM has had to cut nearly 100,000 jobs in the last ten years. IBM no longer offers lifetime employment, but neither does its cultural nemesis, Apple. The Times reports that 75 percent of Americans think companies are less loyal than ten years ago, and 64 percent think workers are less loyal. Both are true.

Indeed, in the global economy, companies are less stable, more fragmented, and more cosmopolitan than companies ever were before. Even employees who are not replaceable by smart machines cannot expect to be treated like enfranchised citizens, and the chief reason for that, paradoxically, is that companies are increasingly built on shifting inventories of intellectual capital, the very creativity "values" are meant to elicit.

More and more, companies are built on process knowledge that controls production and product development systems, proprietary software, and ways of integrating and outsourcing complex pieces of a value chain—pieces that may reside anywhere. The game is customization; almost nobody makes money from "commoditized" products. So the skillful parts of companies pursue ever more rarefied and far-flung markets; they trade components and know-how with other parts of the corporation (and with their own customers and suppliers). Trade between business units of companies is now the largest part of international trade, producing some unexpected results. Robert Galvin, former Motorola CEO, tells of how Motorola-Israel supplied a water sprinkler monitor for his golf course near Chicago. He hadn't realized his company even made water sprinkler monitors.

Then again, the results are supposed to be unexpected. The great corporation is becoming an umbrella brand, a holding company, and an investment bank; corporate leadership qualifies and funds myriad enterprises, most of which hardly march in lockstep. The former head of Motorola's now-successful China operation explains that every time he made promises to the Chinese government in the early 1990s, he would then have to negotiate with 35 to 40 executives and business unit managers to deliver on his promises. "People complain of the Chinese bureaucracy," he smiled. "Ninety-five percent of my problem was in my own company." In this new economy, mass-production assets are far less important to profitability than innovative knowledge assets—research, software, systems integration processes. Boeing or AT&T are not so much manufacturers of airplanes or telecom equipment and services, as they are masters of proprietary knowledge about, say, avionics and load management. But knowledge assets are the least stable part of any business. They are most easily copied, or recruited away, or superseded by yet newer technologies. Indeed, the primacy of knowledge assets means that companies can get in and out of business much more quickly than ever before—and they must to survive.

All of which means that, although the terms of employment for any particular employee may be more appealing than ever before—more "dignified" and "empowered," to use the Motorola vernacular—it is nearly impossible for companies to be loyal to any home country, or worker pool as before, when mass production meant victory, and bigness shut out rivals. The vertically integrated "command-and-control" company may be on the way out, but the "love them and leave them" holding company is taking its place. Even back in 1991, Haas allowed that Levi Strauss employees had never stopped debating the contradiction between what the company promised its workers in the United States and what it promised people working indirectly for the company in, say, the Far East. [See Richard Rothstein, "The Starbucks Solution," page 36.] No global apparel company can resolve that contradiction.

And high-tech companies, despite their "knowledge" base, are subject to the same forces. In some places, a company is designing software; in others, it is contracting to manufacture circuit boards; in yet others, it is managing a relationship with a supplier of plastic housings. These strategies all change from year to year, entailing very different styles of work and, correspondingly, very different commitments to changing rosters of people. Even the smaller knowledge companies—software, consulting, and design companies—are made up of dozens of initiatives at any given time, initiatives that come and go, and that entail alliances with other companies that come and go. When the product or service comes to market, the job is often over. In Silicon Valley, the average tenure with a company is three or four years.

How can "workers" become and remain employable in spite of so much volatility? Can corporate training programs really close the gap between people who qualify for work and people who do not? Consider what one company actually tried to do. In 1985, Motorola set out to build a cellular telephone "factory of the future" in northeast suburban Illinois, planning to employ some 3,000 hourly workers. When it tested potential recruits—many of them experienced workers from Motorola's mobile-radio facilities in greater Chicago—it discovered that only 40 percent could be certified in basic arithmetic. (Questions included "Subtract 638 from 1135.") Further screening showed that, for better and worse, many who failed the test knew the math but had trouble reading the questions.

This hit management hard. All Motorola plants were expected to be at "six sigma" quality by 1992. Employees would have to log, monitor, and contribute to statistical quality information (using Pareto charts and so forth). To get appropriate flexibility out of production cells, employees would have to perform multiple tasks, read timing and build instructions, or enter data to update the master schedule. In short, manufacturing employees would have to get comfortable with computers, which were becoming ubiquitous in the company. How could they if they could not read at the appropriate level? On the other hand, would it not be an affront to everyone's dignity to fire loyal workers—many of whom had been productive for a generation—for "incompetence"?


Motorola made a courageous decision to define and teach basic skills. At a minimum, Motorola would require the equivalent of a high school foundation in English and math, and the ability to spell out production problems—on the whole, a much more rigorous standard than hourly production workers had ever needed before. By the end of 1988, about 1,500 Chicago-area Motorolans were in classroom courses, both at community colleges and on the company's Schaumburg campus, learning the 3 Rs, largely on company time and at company expense. The company now estimates having spent about $3 million a year on remedial education on the Schaumburg campus alone.

That was then. By 1995, software and better methods of organization had replaced three layers of middle management. Investing in incremental improvements in the skills of production workers means preparing people, as one senior manager put it, "to try climbing a ladder whose bottom rungs have all but disappeared." The point is, the company's notion of "basic skills" could no longer be governed by the quality routines and manufacturing cells of a 1980s factory. Production has become a matter of integrated process and product design, cyberspace information management, computer-integrated robotics, and computer monitoring of quality process data: Ten people can run a billion-dollar line.

In this new world of production, value is created by globally staffed problem-solving teams—interfunctional groups of 20 to 30 production engineers, sales people, marketing analysts, logistics managers. In these teams, Motorola people mine opportunities to reduce cycle time and costs, improve product designs, or increase responsiveness to customers. In 1988, Motorola instituted a "Total Customer Satisfaction" program (TCS), a part of which engendered a corporate-wide competition for teams to demonstrate the value of their work. More than 2,000 teams were formed by 1990, and more than 3,700 in 1992. Today, there are more than 5,000 teams in the TCS competition.

"People who cannot comport themselves in a team environment will ultimately not be employable," that senior manager argues. "The new basics are the soft skills that make a person effective with others." By this he means poise in handling time pressure, acceptance of innovation-driven change, the ability to move from job to job. People will not be able to manage the pressures of teamwork without also having a cultivated literacy: They will need to navigate current information technology (i.e., spreadsheets, word processing, the Web), make a succinct presentation, read critically and write persuasively, organize material and communicate their views about it.

Motorola is still committed to training. Nevertheless, says the senior executive, it is not within Motorola's power to make people "trainable." And that is a key distinction. A company should be thought of as a kind of graduate school, not a kind of high school. The skills it imparts should be focused on a particular business's culture and strategy, not the generalized skills that bring unemployable people to a point where they get into the game. Companies can certainly not do much for the perhaps 40 percent of the population who could once count on factory work. By the way, like Motorola, Lou Gerstner's IBM has ceased basic skills training altogether. Deutsche Bank researchers now say that even the vaunted German vocational system is out of date, preparing young people for manufacturing jobs that hardly exist.

What are we to conclude? How, if not through companies, will ordinary people achieve some measure of security? How will they—and their children—become "trainable"? Perhaps it is unfashionable to say so, but that is what governments are clearly for—not necessarily national governments, perhaps, but local governments, which are quickly becoming the most important ones we have. Take the question of worker insecurity. Obviously, a health care system tied to any particular place of employment is odd in a society in which people are constantly changing jobs, or where a great many people can expect to be unemployed for sustained, transitional periods. Pension funds that are tied to the survival of a job in a particular business are downright weird. The New York Times recently told the story of a man who worked for Eastman Kodak for more than 20 years and was fired a few months before his pension was vested. This is an outrage against common sense. What local governments should do and, with distributed information technologies now can do, is organize and manage common risk.

What about training? This is a more complicated story, but the bottom line is much the same. The first thing to be said is that the solution is not mainly a matter of making the technology cheaper. I do not know if Mr. Saffo would appreciate being associated with Newt Gingrich's offhand comment that we should buy our inner-city kids laptops and encourage them to be entrepreneurs; anyway, his solution is strongly reminiscent of it. We might as well cheapen the cost of pianos and tell inner-city kids to make their living playing Brahms.

In fact, educating people, making them trainable, is what governments are now really for. If we are to have a new social compact, it will not be between employers and employees, but between local governments that mentor our children and corporations that create the wealth and help set the standards for them. Our children will need excellent schools, competing with each other to innovate curricula. They will need many more small liberal arts colleges. They will need national service programs that teach them teamwork, diversity, and poise. Our inner-city children will also need thousands of preschool centers, thousands of wellness clinics, hundreds of small boarding schools and summer camps, thousands of Outward Bound-like programs. They will need police and civil guardsmen on virtually every corner. The cost of winning the Cold War will pale by comparison: Educational costs already run about a quarter of a trillion dollars in the United States, much more than the private sector can dream of sustaining.

When Motorola stopped teaching the basics, its leadership began to focus on working with local governments on reforming K-12 education, spending about $30 million over five years. This is a great deal of money, even for a growing global company. But even if the entire Fortune 1000 spent double what Motorola spends on K-12 counseling and school-to-work programs, that would amount to another $1.2 billion, or something like half of 1 percent of the national education budget. Granted, businesses can, and should, be a part of the solution. Many companies—McDonald's, GE Plastics, and others—are supporting school-to-work programs, inviting local high school students into after-school and summer jobs, and teaching them, say, the uses of computers and the basic discipline of work and competition. Businesses should help local governments understand what curricula are really going to be valuable to students.

Nor should we fail to acknowledge how new this positive connection between business and education is. Once, businesses had no interest in raising the common people's level of education beyond what repetitive motions in the factory required. Now—for the first time in industrial history, really—companies need virtually all potential employees to present themselves for work at a level of sophistication equal to that of someone with at least some college education. Indeed, most senior managers would tell you about the opportunities for growth they are missing because they can't find enough people to train, people who would allow the company to grow as quickly as opportunities grow. Fidelity Investments is now trying to hire 1,000 people a month to fill entry-level, customer relations positions—young people who would be paid about $27,000 a year to call up files and speak intelligently to customers. It cannot find nearly enough people to fill those jobs in Boston, of all places, the first home of public education.

But none of this means that it is in the interest of any particular company, or within its means, to qualify people for work. The justifiable pride of the "values" school notwithstanding, the boundaries between companies and communities have not disappeared. Rather, it is the boundaries between companies and companies, between countries and countries, that have been eroding, and the result is putting more stress on a manager's bottom line, not less. And even if this stress had not materialized, would companies really be the appropriate context in which to try to solve social problems? Individual companies are not meant to be engines of social good, after all; it is the competition among companies that is meant to be the engine of social good. Who wants their pension fund invested in companies whose managers aim for a fancier goal than competitive survival?


This is not the message the people of the new economy want to hear. A great many of us are putting in more hours than the man in the gray flannel suit ever did. We agree to have our voice mail and e-mail follow us home; we socialize at company retreats and work out on the company Nordic Track; we travel the world on the company's nickel. The global workplace is absorbing us as never before, respecting our peculiar genius as never before, flattering us as never before. Even as we look over the horizon to the next job, we are feeling more sovereign and rewarded in our companies than would have seemed possible ten years ago. It is pleasurable to think that our companies are communities, and that they run themselves by the values we expect to find in society at large.

But when you think about it, the values of a company can never really approximate what citizens mean by values, and perhaps we should not have been calling them values in the first place. Values are supposed to be ends in themselves, not means to competitive material ends—as Kant said, they are supposed to have a dignity, not a price. When Haas speaks of "permission to disagree," this may resemble freedom of speech, but it is actually subordinated to the hierarchies that are assumed to be necessary for the coordination and instruction required by competition. It is something like what Mr. Gorbachev once meant by glasnost. In civil society, "alignment" is meant to foster autonomy and diversity; in Haas's company, it is the other way around. As for integrity as a competitive advantage, Marx—Groucho, not Karl—may have had the last word a couple of generations ago. "Integrity is everything," he said. "If you can fake integrity, you've got it made."

But what in the restricted world of a company can ever really be sacred the way, for example, the nuanced ideals of liberty and equality are? Is giving service to customers really the same as helping other human beings? Is working late on a product the same as a love of ideas? When values become the means to winning at market competition, what solace do they give us? And, of all people, do not the people of the fierce new competition need solace?

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