Tags Strategy, Know-how, Innovation

An old model for success

Why do some companies grow faster, make more profit and last longer than others? Arie de Geus, author of The Living Company, discusses the need for a return to long-term thinking.

There’s a memorable passage in The Living Company, by Arie de Geus: “When I entered my first place of work [in the fifties]... I felt a slight level of discomfort. The theories back at business school had mentioned labour, but there had been no talk of people. Yet the real world... seemed to be full of them. And because the workplace was full of people, it looked suspiciously as if companies were not always rational, calculable and controllable.”

Since that fateful day, it seems, De Geus has been very interested in where humans fit into the scheme of business. After 38 years with the Royal Dutch/Shell Group, followed by advisory work with the World Bank and various other high level appointments both in his homeland of The Netherlands and around the world, he distilled his thinking about people and commerce into his remarkable book. Its title alone – The Living Company – makes clear his views: successful, long-term businesses are not mere mechanical constructs, they are more like living entities. As he discovered back in the fifties, successful business is about people.

At the same time, the world has undergone remarkable changes, politically, economically, socially, and yet this hasn’t been reflected in the way businesses work.

“Why haven’t things changed?” asks De Geus. “With so many changes in the world and in the way that people view their lives and value systems – the very way they live their lives – why haven’t we seen that in business? Why haven’t we reacted to it and organised business in a way that fits these very fundamental changes and suits the way in which the people who constitute the business have changed?

“The way in which people work has changed considerably, but that’s not a recent phenomenon,” De Geus points out. “It stretches as far back as the early fifties and there is research that confirms the importance of flexibility, work/life balance and the emancipation of people in business. Yet, the managerial attitudes and values that brought success in the past are still valid today. They have not changed. Nor have the conditions needed to create success.”

Based on his experience and backed up by research conducted while at Shell, as well as the seminal study by James Collins and Jerry Porras of Stanford University, De Geus identifies four factors that are common between long-term successful businesses:

1. They are financially conservative: “They don’t engage in very clever deals – they’re usually old fashioned and quite conservative financially,” De Geus explains.

2. They are outward looking: “They know what’s going on in the world around them and try to think long-term what that means for their business.”

3. They are like a community: “People in a successful business know who they are and what they stand for.”

4. They train their people: “They all seek to increase the potential of their people, training them, giving them space for experimentation.”

According to the Collins and Porras research, these businesses outperform the market by 1,500 per cent (15 times over a 60-year period). This raises a basic question: why isn’t every business following this formula?

“The current, excessive emphasis on short-term thinking and immediate profits – where ‘immediate’ is defined as the next three to 12 months – contradicts these basic conditions for success,” De Geus points out. “The whole phenomenon of short-term thinking and pressure on short-term results is only possible because the law gives the shareholder that power. Company law in the US, UK and the rest of Europe puts the shareholder in the prime position of hiring and firing management, self remuneration, selling and buying.

The legal power being given to shareholders is being abused and possibly with dangerous results.

“However, if we can get a debate going about how dangerous the present situation is and start changing the power distribution within our companies, then we could have much healthier and more successful businesses.

“If we don’t, then there will be a large number of victims among today’s companies, while the businesses of tomorrow will start avoiding the limited liability shareholder-based model. And we’re beginning to see this already. Younger people are beginning to think in terms of partnerships, co-operatives are coming back in vogue, private shareholders are buying back shares from the market – these are structures that avoid the tension.”

Whether all businesses will change in the long run is not clear, but as far as De Geus is concerned, there aren’t many options: companies that do not change will either suffer or be surpassed by those that adapt to their emancipated employees. However, this change may involve a return to a more traditional, long-term approach to business, one where companies follow the same formula for success that has proven effective for so long.

“I should be too old for dreams, but if we can clear this up and get management to understand the value changes that have taken place, then maybe business will become a nicer place to spend eight or ten hours of your waking life,” he adds. “If a business is less concerned with the question of command and control, and treats employees as people rather than as a bundle of skills, or as part of a machine, it will be a much nicer place to spend time.”

Arie De Geus: In brief

Arie de Geus joined Royal Dutch Shell Group in 1951, eventually becoming Finance Director and then moving into general management before retiring in 1989. Since then, he has been head of an advisory group to the World Bank, adviser to the Office of the Auditor General of Canada and the Dutch Ministry of Transport and Communications. He is a Visiting Fellow at London Business School as well as a consultant to corporations in the US, The Netherlands, Sweden, Finland, Germany and South Africa. His book, The Living Company,was published by Harvard Business School Press (1997).

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