In an interview on the CBC Radio program SPARK , Roger Martin, Professor Emeritus at the University of Toronto’s Rotman School of Management, contends that businesses’ obsession with efficiency over the past two centuries has gone too far. Although efficiency has been and will continue to be an important part of the success of businesses and the generation of wealth, the push for greater efficiencies has also created some unintended consequences, such as adding to the dramatically disproportionate wealth gap.
According to Martin, prior to the pandemic, hospitals were improving their efficiencies (i.e., producing more of the desired outputs with less inputs). They did so in large part by a reduction in both nursing staff and stockpiles of supplies. Of course, with the arrival of the pandemic and the waves of increased hospitalizations, nurses and personal protective equipment were both in tragically short supply. The lesson is that organizations need to balance efficiency with resilience.
In what first seems like an odd disconnect, Martin describes how a business sought to increase shareholder returns by cutting costs to improve efficiencies, but instead lost significant shareholder value. In contrast, he explains how Costco pays its employees a wage that is better than competing retails and, in spite of knowing precisely how many staff should be on the floor at any given time, Costco adds a few more than are needed. In doing so, Costco has a better employee retention rate which results in better informed staff and improved customer service. The results are better returns on investment.
If your board is using Policy Governance, there are three implications to consider from Martin’s insights.
1) Efficiency of Outcomes versus Outputs. One of the three components of Ends policies is the statement of what the intended results for intended recipients are worth. Worth is often interpreted either by the board or the CEO as a form of efficiency. Are the resources used worth the achievement of intended outcomes for intended recipients?
Ends policies refer to efficiency of achieving outcomes, not outputs. What’s the difference? Outcomes for students of a post-secondary college might be how many students have the skills for successful employment. Outputs could be how many courses the college held.
More importantly though, Martin’s Costco example illustrates an important lesson regarding which aspect of efficiency the board should focus on. CEOs have multiple levers to achieve Ends. Is it more important for the CEO to focus on simply keeping wages as low as possible or to achieve better overall efficiency (i.e., return on investment)? In other words, the board should focus on efficiencies within Ends versus efficiencies of operational components.
2) Resilience. Martin asserts the need to balance efficiency with resilience. For the board using Policy Governance, where would it place its expectations regarding resilience?
The Oxford Languages Dictionary defines resilience as: “the capacity to recover quickly from difficulties; toughness.” From an Ends perspective, an organization does not exist to be resilient (I.e., resilience is not a part of Ends).
However, it would certainly seem imprudent for the organization not to be resilient when under pressure, such as in a pandemic, an economic downturn, slashes in funding, etc.This issue is appropriate to address in Executive Limitations policies., where the board sets limits related to prudence and ethics.
Yes, resilience would likely reduce the level of efficiency in producing outcomes for recipients. But then again, so do insurance and other forms of protecting the organization’s abilities to be able to deliver Ends following unfortunate circumstances.
3) Unintended consequences of efficiency. As wise agents of the ownership, boards should make decisions informed by numerous perspectives. The classic case of an industry creating return on shareholder investment while polluting a community is such an example. I expect that boards using Policy Governance will normally consider the potential collateral damage when determining the intended outcomes for intended recipients in their Ends policies. I wonder, though, if boards are also considering the potential of unintended consequences by requiring more efficiency Often, I’ve observed boards that consider Executive Limitations to be purely for the benefit of the organization. For example, “if we don’t mistreat staff, we are less likely to end up in court or with a bad image.” But setting boundaries of what is unacceptable also includes those items that would be unethical. If the drive for efficient results has the potential to create unintended harm, shouldn’t the board put such damage off-limits in Executive Limitations policies, if only because it is the right thing to do?