Equity is a term that we have all heard of. To most people equity refers to an investment or shareholding in some company or business venture. The term equity can however be applied to anything that holds value. For the owners of a company the value of the shareholding would be the equity. If we consider the company to be a legal entity separate from the shareholders then we should also define what is the equity of the company. I think that “Relationship Equity” (RE) is the most important equity of a company. RE is what the company has invested in the relationship with its customers, employees, shareholders and other stakeholders. (In that order of importance). The customer is the most important stakeholder for a company followed by the employee and then come the shareholders and other stakeholders.
The problem with the traditional concept of the “Owner” leading and managing the company is that the shareholder’s equity (profit) is given first priority and since many a times there is a fundamental dichotomy between shareholder’s equity and company’s equity, the company loses out. Enterprise leaders with a long term vision understand that in order for the company to remain healthy it needs to have a strong RE and this in turn will also lead to long term profits for the shareholders. Every time the company’s leadership succumbs to the demands of the shareholders and gives priority to profits over the company’s RE the company’s interests are compromised.
The Chinese character “crisis” is made up of two characters. One representing danger and the other representing opportunity. The coronavirus pandemic is indeed a global crisis. It is a time of great danger for every company but it also offers opportunity. What better time than now to build up the company’s RE with its two most important stakeholders? The customer and the employee. I will talk about the RE with the customer another time. In this article I would like to focus on the company’s RE with the employee.
In these uncertain times every company is vulnerable. When this storm is over there will be a different landscape. Many companies would have gone into bankruptcy and many millions of people in the world will be unemployed. It is a stark reality that everyone is bracing themselves for. But post coronavirus will be a different battle. We will fight that battle when the time comes. Right now we are collectively fighting a battle for humanity and how we fight this battle will be our legacy for the future generations. The RE of a company is like a bank account. We can make deposits and we can make withdrawals from it. Every time we lose sight of a customer’s legitimate claim or fail to look after the welfare of our employee or refuse to pay the legitimate dues of a vendor or contractor who is also suffering, we make a withdrawal from the RE account. If we are not careful we can end up making too many withdrawals which will take the account into the red and just like a bank account further withdrawals will be refused. The corporate landscape of the world is strewn with failed and malfunctioning companies. A closer look at them will confirm that in many cases the cause of their malaise has been an overdrawn RE account.
By and large people have a good sense of judgement. Employees are no exception. In these difficult times any small gesture of generosity extended to them will be greatly appreciated by them and yield a bonus RE for the company. This healthy RE account will bring great success for the company and thus greater profits for the shareholders when things go back to normal after the coronavirus era. Adam Grant is a professor at Wharton Business School and his seminal book titled Give and Take dwells on the mystical philosophy that the more you give the universe conspires to give you back manifold in return. The book cites many living examples of such a phenomenon.
This battle against the coronavirus is the opportunity for every company to give. And who is more deserving than its lower level employees? Giving does not have to be irrational to the extent of jeopardizing the survival of the company. Small gestures like the human resource department of the company enquiring about the welfare of the employees and conveying a message that in case of any hardship or misfortune the employees should not hesitate to ask for help. The help needed could even be very simple like support to get admitted to a hospital or a small loan. Unfortunately the dichotomy of shareholder’s profit and the company’s RE may sabotage such a policy of the company.
I am firmly of the opinion that there is a difference in the role of the entrepreneur and the company’s leader. The two roles quite often have a conflict of interest. The entrepreneur’s role is to create new ventures; not to run the company in which he has a vested financial interest. It is vital that as soon as possible the company is left to be run by professional managers who give greater priority to the company’s RE than the shareholder’s equity. Every professional manager and organizational leader must remember that it is the company which employs him and pays his salary. Therefore in case of a conflict of interest between the company’s RE and the shareholder’s equity his loyalty must be to the company.