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Customers, Investors or Employees: Who Should You Put First?

Customers, Investors or Employees: Who Should You Put First?

May 10, 2018

This is a popular question in business schools. The go-to reaction is “customers” for many executives. After all, they’re the ones paying the bills, so if you make them happy, you make the other constituencies happy. That’s a very logical answer that also happens to be wrong. The smart answer? Employees.

If you don’t believe me, take in the wisdom of Herb Kelleher. Kelleher, now retired, was the founder and long-time CEO of Southwest Airlines, a company famous for spectacular business results – and for putting its employees first.

In a 2004 interview in strategy+business, Kelleher said, “My answer was very easy: You put your employees first. If you truly treat your employees that way, they will treat your customers well, your customers will come back, and that’s what makes your shareholders happy. So there is no constituency at war with any other constituency. Ultimately, it’s shareholder value that you’re producing.”

You can find loads of research on Kelleher’s management style, but if you’ve ever flown on Southwest Airlines, then you’ve likely been exposed to some happy employees. Once, on a Southwest flight I took that landed at LAX, the flight attendant announced, "Folks, I'm pleased to tell you that we have someone celebrating a very special day. He turned 90 years old today AND he's also taking his very first trip on an airplane. So please say 'Happy Birthday' to the captain as you go by the cockpit on the way out!" I walked off smiling along with nearly everyone else.

Southwest has achieved incredible business results since its inception. Management guru Jim Collins writes that Southwest Airlines’ stock performance over its first 30 years (1972 to 2002) delivered a return 63 times better than the overall stock market. Meanwhile, the rest of the airline industry has historically performed terribly. In 2007, Warren Buffet said, “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” Today, Buffet owns more than $3 billion of Southwest stock.

2017 was the 43rd year in a row that Southwest distributed profit-sharing to its employees (last year it averaged 13.2 percent of annual comp per person) and it has never laid off an employee or cut wages. And here’s an interesting fact: since Southwest generally pays more than its rivals, it has – by far – the highest employee costs as a percentage of flight operating costs. But it also has – by far – the lowest overall flight operating costs because its employees are – by far – more productive. If you haven’t seen a captain cleaning up trash in the seats after landing, you haven’t flown many Southwest flights.

So what does this have to do with distribution? Everything. These management principles are universal. If your employees passionately love their jobs and love working for your company, they’re going to provide fantastic service and your customers will buy more, more often. That will make your shareholders happy.

In 2014, Kevin Kruse wrote in Forbes, “I’ve tracked over 30 studies that show how engagement correlates to decreases in absenteeism, turnover, accidents, and defects, while it also correlates to increased customer service, productivity, sales, and profits.” I believe the data and if you research it, you will, too.

Lots of companies make statements like, “Our People Make the Difference.” This statement is so often corporate nonsense that it’s easy to be cynical when you hear it. And if it’s not authentic, employees will quickly figure it out; then you’re worse off than if you didn’t make the claim: you can’t fake sincerity. Ultimately you’ll be judged by your actions – you did see the part where I wrote that Southwest pays more than its competitors, right?

This is a hard balance to achieve. It’s okay to invest more in compensation if you get better productivity and results. But if you pay more and still have a lousy workplace, then you’re just increasing your costs. You have to treat your people like valuable resources because if you secretly believe that “HR” stands for “human racehorses,” then you don’t care if the troops are miserable. And I bet you are, too.

I’ve managed professionally for 30 years; I’m not inexperienced or naïve. I don’t believe in silly sayings like, “If you love what you do, you’ll never work a day in your life!” That’s nonsense; sometimes work is just work and you can’t wait to go home. But leaders who focus on making their employees happy, fulfilled and filled with passion and purpose will at least go home with more profits in their pockets.

And that’s the point. I’m not advocating for making employees happy as a humanitarian gesture. Business is a competition. I want to win and I assume you do as well. I’m advocating for putting employees first and making them happy because that’s how the most aggressive, ferocious and successful capitalists in the world make more money.

Treat people well, pay people well, challenge them to help you beat your competitors on every measure – including customer satisfaction, productivity and shareholder returns. If you want to experience huge success, then help your employees succeed, too.

© 2019 Gale Media, Inc.

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