Booktv continues on cspan2, television for serious readers. Good afternoon, good morning, welcome. I am judy judy samuelson, executive director of the Society Program. It is my pleasure today to welcome to thecreen with me two fellow travelers, longtime fries who share deep knowledge about the forces and ideas that influence business decisionmaking. The Society Program, a couple come to mind. Thpublic purpose. To shift the mindset of siness executives, what they believe to be true and wt they design businesses to aceve, both of these goals are in pursuit of beer businessutcomes. Roger martins just released today book, thank you, roger, for letting us be part of this journey, squarely in this domain, when more inot better overcoming americas obsession with economic efficiency. Both alan and roger and many of you, t former dean othe school of management at Th University of toronto, the animating force behind the prosperity ititute. He is the author of any number of books, a bio you can look a to learn more about roger and alan murray, thank you for joining us. The chief content officer of fortune. His ceo, daily column, starts my day every day and i would like to turn the conversation over to alan mury. We posted there biosn the chat and engage the audice and recent posts in a few boxes after we had the opportunity to learn more about roger martin and the recommendations for business. With that, lets turn it over to alan murray. Thank you for inviting me to do this and the good things you do at the business and Society Program and roger, thank you for letting me be your first interview. Im excited about that because i read the book and i have to say, based on everything i have read or studied or talked about is heresy. Guest a heretic. Host you are a heretic. I want to dive in with that issue. So many Business Leaders spent their lives learning how to increase the efficiency of their organizations. Think about the whole stigma of discipline, about increasing efficiency in your organization, interesting to see how much Business Schools do that is focused on that issue and you say that is the wrong goal. Tell us why. It is the wrong goal when it is an obsessive goal, theres a limit to how much more efficiency you should ring out of what you are doing. That is the fundamental era error Business Schools and businesses and world economists all said we should worry about efficiency. Make it more efficient by division of labor, David Ricardo said it, grow grapes, make wine, raise sheep and make will, trading with one another. The history of recognizing efficiency is a good thing but at a certain point and i think that certain point was around 40 or 50 years ago or half a century ago it headed into an excessive level, efficiency at all costs and a single unitary goal. Host how did that happen . How did we get there . What happened 40 or 50 years ago to set us on this track . Guest it was to an extent milton friedman, most people know his favorite New York Times magazine article, the business of business saying business must have a single unitary goal of increasing value to shareholders, serving shareholders and a great scholar double down on that and made a powerful argument in 1976 about how a corporation didnt have that singular goal it wouldnt know how to make decisions, would get confused and do all kinds of things that would make it ineffective for the shareholders. That happened in the 70s. That is the decade this notion of there should be a singular goal, it should be efficiency, that efficiency they believed would make the world a better place, more expensive products and more values for shareholders, they stopped thinking about the question of is it just that, or is it a more complicated picture, that went out the window. Host it is not logic, there is history behind that. We see so often so many compelling examples of a single, measurable goal, the effect it can have on people. Everybody get behind it. We measure it on a monthly basis and clock your results. It wears down pretty quickly. You can tell my stories about a given project, lets put a man on the moon, a single goal, but when you ask the question if you keep doing that and keep doing that and keep doing that and keep doing that, in due course you get to where ice i say in the book, more is not better. The pursuit of efficiency, did good things for america for the first 200 years in the existence of the country. 17761976, it was a nest politics. It is just when you keep doing that, the world has changed, and you start doing things that are excessive. Host give us some examples how efficiency has led business astray. Guest it led business astray in how much it has ground down wages of labor to the point where you have employees, as much as retail, sleepwalk through the stores in the Shopping Experience is a miserable one. Efficient staffing and Efficient Labor costs but what is the result . Costco took a look at that and said you know what . Heres what we are going to do, we are going to do something different. We are going to pay people way more than minimum wage, over 20 an hour, 23 average for folks, and figure out what efficient staffing looked like and then they say we will add some. What on earth . How can you run an organized store with that kind of attitude . It is one of the most beloved or successful, gigantic retailer in america by saying yes, we care about efficiency but we care about other things too, the shopper experience. Go to costco, lots of people go to costco and they love it. They love the way they are treated and empowered to make decisions, knowledgeable because they will stay there long time and what they are doing, do it with a certain joy. That is in contrast if we worry about efficiency in terms of labor costs, hourly wages, staffing levels, you are not going to produce that more robust good for the customers. Host your discussion which you write about compellingly in the book about efficiently, how does that tie into the conversation about stakeholder capitalists, moving away from shareholders and moving towards paying attention to multiple stakeholders . Guest there is a lot about that but i like. They move away from saying there is one single goal, as long as they do that, that was shareholder value. An interesting thing about shareholder maximization, ever since they got that there is a singular goal, shareholders have done that well. A clever guy that i like, the writings a estoppel a long time ago, 2400 years ago, said the purpose of life is to be happy, they are likely to be happy if they set out to live a good life by a life of servitude to their society and fellow man and woman, they are likely to end up often the pursuit of a given goal, singlemindedly doesnt get you that goal. Theres been a recognition of shareholder value is not entirely effective or right for society. The sacrifice we care about in society, i like the notion of moving away from that singular goal for the notion of stakeholders, there are more than one so they balance them. What i am not so keen on his lack of leadership being shown by the Business Roundtable in providing tools for doing that. This book is an attempt to do that. My experiences, when you dont have a tool, human beings dont have a tool they dont do the things they might want to do. Host i want to get to solutions in a little bit but understand the problems before we get there. Interesting since you paid the turning point of 40 or 50 years ago, you have the friedman article, what you also had was a rising ecosystem of corporate raiders, private equity, shareholder activists, all of whom felt the people who ran large companies, multiple goals and excuses, i didnt do great on shareholder return but im doing really good over here on this thing or that thing which is an understandable human dynamic which for them, forcing discipline around a single metric, in terms of accountability, the fear you wouldnt have accountability. Guest i agree and that is where there is value in the push for efficiency, your life could be made easier by a singular goal but i warn anybody to be aware what you wish for, you might just get it. That is what has happened. You might get things you did not think you would and one of the things we have gotten by accident, like doctor evil, plan a great massive income inequality with middle income and the top one doing better than others by far, nobody said we want that. It was an accidental outcome of taking one lever and pulling it superhard. We will take that efficiency lever, the corporate raiders thing and we will come get you, Delaware Court decision, make people think, through that shareholder value, legal legal requirements and so we started pulling it superhard. Host give us some examples where that went wrong. There are many examples of where it went right. Look at was toyota did for the productivity of the automobile industry, what sam walton did for the efficiency of the retail business. You talk about wages as one example where you feel this is been taken to an extreme. Give us a couple of examples. Guest i would never use toyota as an example. Host tell me why. Guest if there is any company on the face of the planet, it would be toyota, because they have a system that rigs the system, things that are wasteful, have no meritorious side but the way it treats its employees, all those things they have an understanding of an ecosystem and the right amount of flak. Something sam walton did as well. Will treated and beloved. After his passing got pushed to such an extent. Raised for 100,000 employees and that was a lot, they are turning it back in the right direction. Most, unfortunately, retail, hospitality have pursued efficiency to the point, turn very quickly, in the hotel business, annual turnover, if you are served by the average person, to a 16 month career in that company. It is a problem in the labor market. In other corporate markets as well. Guest we are pursuing efficiency in capital structures. That is where you get toys r quote us or other companies, perfectly Good Companies going bankrupt with all sorts of debt because that is efficient capital structure. Covid19, we had efficient amounts of ppe in the hospitals according to all the efficiency. How tightly nursing staffing, the biggest variable cost in the hospital for kept getting squeezed on and squeeze on and squeezed onto the perfectly efficient, the purchase of ppe, all of that was efficient but wasnt resilient at all. I dont think David Ricardo, nor did he ever mean you should open up every economy to everything, he just noted you should focus your resources on the things that you are better at. And pushed efficiency to an extent that does matter, economists used to think these workers find their way to other industry, they have shown defendant italy that there was a huge human total, it is not making for resilient economy. Host you have a significant portion of the book where you attack net promoter scores. The ceos of large companies, and the consumercentric, 90 of them so saw the mps score is the main tool for focusing on consumers. It has been adopted by businesses. They see it as a useful tool. What is so bad . Guest in some senses it is in the same category as edwards deming, he is a great guy, very smart. It just shows what happened when you take a goal, keeping your existing customers, having to get new ones that way. That gets translated into a measure, a model that says Customer Loyalty and the model says it is cheaper to keep customers we measure with net promoter. What happens over time. It was segregation. The score become seen in a persons mind the same as the goal. We had loyal customers and it is not true. It is just a measure of that. What you get keen on is great incentive programs around getting high in ps and two of the last three cars i bought, the salesperson at the end of the process told me, didnt know by name, and feel i never want to deal with that car company again and havent actually because it turns me off so much, pursuit of incentives for people, employees, to generate high mps had the opposite effect that the model intended and it is a greater danger when you have one cold, the wells fargo story, the one goal is close customer relations, gets translated into number of accounts per customer. Everybody says i know how to get number of accounts per customer, vote for accounts for customer, what is wrong with that . When you didnt ask them and they didnt want it and didnt know about it and that cost you billions and billions of dollars and shatters the reputation for 100 years or more to build. That is the mps story. It happened in the nonbusiness sector for students. All of them when you have that single goal. Life is not that way. One of the things i say to everybody is ask yourself is this how you operate . Host in your life you would never pick a single goal and exclude all other goals. Guest i dont think so. Not for anything longterm. The first tee of a golf run, the goal of getting 85 or 80 or whatever though you would realize if that was your only goal for that ground and it had nothing to do with having a good time with your playing partner or the doors, a couple of good shots that make you feel i can do this you will have a miserable time doing it. It is not the way life works and life is complex. A complex adaptive system, not a simple mechanistic system where you can say theres the lever i must pull that one lever and everything good will happen. Life doesnt work that way. Why do we think a company will work that way . Why do we think and economy will work that way . Host i wish someone like carl icahn were sitting here listening to you. I think what he might say is because Business People are not that smart. None of us are that smart. You cant get your mind around the complex ecosystem so simplification is essential for setting and achieving goals. Guest to a point he would be right. What happens and you go past that point. We have definitively clearly gone past that point. Where again the idea, if you take what you said about carl icahn, taking that is the truth, that unless you simplify, how would we know what is simplification, we whatever metric for simplification how to simplify how things are, having a small corporate office. That is simplification or list divisional structure, lets break it into pieces. All of these things can have value. When you take them to the extreme and thats the only thing youre thinking about and that is the only thing you are telling your employees that is what you will get. Host lets turn to solutions. What are you going to do about it . Guest political leaders, educators, citizens can all do. One of the things i say to Business Leaders is listen to deming, know what you think deming said, listen to him and say elimination of slack is not being efficient. There is a proper amount of slack in the system because they are not and it is simple and linear as you think they are so you can say having no access ppe is a good idea until the next pandemic comes along, eliminate slack, recognize a nonzero amount of slack is the right thing to achieve. Something i say is pick multiple goals, be like southwest airlines. Our goal is to be the lowest cost airline and the highest Customer Satisfaction and the most Profitable Airline in america and youve got to be kidding me except when you look at the 50 year track record of southwest being all those things simultaneously. What that will make you do is be more creative and if you are more creative there will be a strategy to charter and replicate, not a strategy that is dead easy to replicate but a higher achievement, everything or whatever. Anybody can do that. It is more complicated but that means embracing multiple measures and not getting into this cerro location surrogateion. To turn their back, it half a century trend towards reduction. We have marketing, we have operations, hr, etc. Break it down. Perfect each one. That is how all this is organized and each of these domains, the problem is, roger, there are no accounting problems or marketing problems or finance problems. There are only business problems which you have got to admit is right. However, they teach Business People to identify a marketing problem, the marketing toolbox treated as a marketing problem. That reductionism is creating companies that is efficient or narrowly shortterm efficient and probably longterm, grotesquely inefficient and ineffective. It is what it is. Dont believe seeking a monopoly position is a good thing to accomplish. They say that is what i want. That is exactly what i want is the problem when you look at the history of monopolies it doesnt end well. If you look at the steps that maintained a position for the longest time you will notice the ones that stay around have great competitiveness and are not monopolies. Why . Because everybody if youre going to be good at something, a practice and a trade. If you are going to be a pianist, go to competition, and basketball player, you need training for competitive action, if you are a monopoly. A difference in time frames, there are lots, fill your pocket in the short term and lots of ways or undercutting the longterm in lots of ways, the monopoly example being among them through the shortterm focus. A big piece of the puzzle, a mechanistic view, if you break time into tiny chunks, that will not necessarily optimize you for a number of those time. Gos. The same production, what is in the shortterm will end up when you add up a bunch of those kind of horrendous in the longer term. That is a piece of the puzzle, and little chunks they are all fine. We do not believe they will find when we bring them up. Host the other questions in a moment. How do you train a generation of Business People to get their heads around it . And tied into that how do you get the superstructure in place, the metrics to be successful in the way you are suggested . That is a challenge. To answer your first question, what we need to do to teach business students, give them practical tools for seeing, part of it is a finance problem, how to take those models and integrate them, Business Education punted on that. They teach general managers, absolutely do not. I asked for 15 years, my entire life, tried to get that and they have to train them with clashes between models rather than picking and calling it a marketing problem. And make that a finance problem. We are just going to build a new and better toolbox and i do think people are doing that. Something i think about in the book based on a great professor at sloan mit and how you think about how you train your workforce to create jobs that are good jobs, better for you to make more money, which says here is the different governance structure. What we have got to do and there are lots of environmental footprint measurement entities. What we need to do, this is a roundtable, they need to, they wont listen, they need to cobbled together a set of rules so that if you want to do what we said in our statement, heres a set of tools you can deploy to do that because they will continue to keep doing what they are doing because those are the tools they are and in Business School and how they learn to do it. If the first set of tools is a reasonable set of metrics theres interesting work for Accounting Firms working with the World Economic forum under the Business Council which put out a report last week, Brian Moynihan spent a lot of time on that. Is that a step in the right direction . Guest i have not looked at it but that kind of effort sounds tool based and i am one practical guy. Unless somebody has a tool for something they are not going to do it. People did not trade options until we had options, people did not advertise online until google created a tool to figure out how many clicks they got. When you develop a tool people start doing the thing and when you dont have a tool they are not going to do it. Host you want a full toolbox and not everybody sitting there with a hammer. Guest we have everybody sitting with a hammer wondering why they are lurching in one particular direction because that is what happens. Host let me turn to the questions, into the q and a, i dont have a name with it but what do you say to a ceo who says growth is their objective and their goal . The title of your book is when more is not better overcoming americas obsession with economic efficiency. s growth a bad objective . Guest yes. Growth with no concern about profitability will result in you being bankrupt pretty quickly. Host that was a separate issue. Guest most of them run out of cash and a gigantic survivor bias in our minds when it comes to Silicon Valley so growth as part of saying we would like to achieve this much growth and build more loyal customers with Production Capacity including our people that will enable us to maintain that over along period of time. That is a youthful goal whereas growth is not in my view. Host sharma has a couple questions around the notion of the role that finance has played in this, he asks what role has financial invasion of the economy had in making the problems of the last 50 years and also related to that, the Federal Reserve they played by reducing Interest Rates and creating bubbles. Guest on the second one, on the fed, the fed laborers under the delusional misconception of economists that they understand how the Machine Works and what lever to pull and how much to get the results they want. It is delusional. Absolutely and utterly delusional. They may be the smartest, the best economists but i think i do believe that the fed played a significant role, the financial crisis. To back off and realize you dont know and all you can do is make little tweaks and watch. Dont think you can do it all. In terms of the financial invasion, in my own view for much of the Twentieth Century, the part of the Twentieth Century america came absolutely to the 4, the worlds most powerful economic superpower, it had an advantage of the finest Capital Market in the world, most efficient, most trustworthy and that gave American Companies a huge advantage and that is why American Companies became multinationals that were able to do that. In the last 20 or 30 years the turned around our financial system, Capital Markets that American Companies have to overcome, the financial markets, Capital Markets, set up to serve the first, let them grow, so they participate on the issue words and afterthought, traders. The other two, who cares . As you know, we havent many Public Companies shrinking in numbers, private companies are growing, because of the Capital Markets making their life miserable. The financial is asian has slowly but surely made america less effective as an economy. Host do you think ceos make the right decisions to pursue the right set of goals when they are focused on the share price of a company . Basically they have to be insubordinate. There are insubordinate ceos. This is the thing people dont understand about these incentives. If you dont try to maximize your incentive you are being insubordinate. If your governance body, the board of directors, the number one incentive that outweighs all others is share price, you are insubordinate if you do not work in the next year to when you get judged on how you did to maximize your share price. Then the board asked the question why were you so obsessed with the shortterm share price, it is like louis in casablanca, im shocked, shocked the gambling is going on here. What are you people thinking . That is the problem. Incentives typically work too well. In this case, in this case, subordinate ceo says that is what they tell me to do and i do it and it turns out there are lots of ways to increase share price. The way to make it more profitable, and your stock at the right time, easier than building businesses that shape accounting practices. Why are we getting shady financial practices taking not taking shortterm investments. Cutting our r d. Why is the ceo doing that, you ask them to do it. That conversation is a bad idea. Ive written an entire book. It is a fundamentally bad idea. It is a bad idea. Host a question about supply chains. For people listening, while your topic is a particularly good one for the covid19 era when weve seen the important of resiliency and the limits of efficiency your book was put to bed before covid19 ever hit. You were pressing. Guest i also started the work in 2013 and in 2013, socialism did not poll at all well. Bernie sanders was not a National Political figure yet, and now both are. Host the fact that socialism polls well with young people and Bernie Sanders is a powerful force in the democratic party, what is the signal you are getting from those . Host the signal guest Democratic Capitalism is not considered the absolute standard. It is now considered a choice. Before that it was what we did. Host because it failed to deliver. Guest it is failing to deliver what it always delivered and what it needs to deliver which is a rising prosperity for most americans. The median family for me, i use that as a proxy. The median family is not moving ahead, then the swing voter isnt moving ahead smartly and for swing voter will say i dont know about this system. The system is delivering for me. They made a vote in 2016 on fat. Lots and lots of exit polls asking why did you vote for trump . Do you really think he would do this . No, no, no, no, i just wanted to blow him up. What was brexit . Brexit was a blow it up. When you get frustration there is more questioning of the fundamental system but in the Great Depression globally that happened and during the Great Depression there was a shift toward socialism and communism in western europe and asia and parts of asia. We tried to stick with Democratic Capitalism but if you look at the numbers that Median Income person is better, faster in the Great Depression than in 1976. We are getting what you would expect from that. Host is capitalism in crisis . Guest Democratic Capitalism, capitalism isnt at all, chinese capitalism is doing awesomely. Totalitarian capitalism is doing just fine. Host 30 years ago we didnt know that was a thing. Guest but it is. What i think of, maybe im being too awesome about this but the combination of democracy and capitalism is precious, having the majority of people decide in a democracy on how we are going to run the economy by ownership of productive assets, that combination, that combination is getting close to the crisis point. Host you have already referred to it but a double standard in pay setting, this applies to the logic of efficiency at the market while boards of directors insist there executives are paid above market because they are average. Guest boardrooms all around the course all around the coastline where everybody must be above average. It is a double standard and workers are responding in the way workers often respond, by checking out. All the engagement numbers that come out just show deadly low engagement. It is whitecollar and bluecollar. I am going to invest in other things, i will invest in my church activities. I will invest with my family as opposed to i will invest my all in my job. The adaptation of labor being treated miserably, blames them, walk into costco, it is an awesome customer experience. It is fun because they care about costco and you say why dont you have this stuff on your show . Next week when you come back they talk to their bosses and it is on the shelves and how does this happen . Because everybody listens to everybody. I think that double standard has a consequence and the consequence host globalization of supply chains in pursuit of efficiency. Was it a mistake . Guest to the extent that it was taken absolutely. One simple way is to take a job protected bibles and regulations democratically agreed upon for safety and work conditions and putting them in a jurisdiction where there are lower standards, often dramatically lower standards how does that make for a resilient initial economy. You think those rules and regulations good for the economy. You can opt out of those, it is beneficial in the shortterm. Do we believe in that set of that construct or not . We are getting what you would expect. The surprising thing, it is terrible, what exactly did you expect . What did you expect to that . It is not a lot of logic at work in it. Think something is a good idea, it is a different stream. Host thinking something is a good idea and taking it to its extreme, a question about amazon in the q and a, amazon is on its way to becoming a useful monopoly. What is the problem, what is the solution . Guest i think of amazon as they stopped and took stock and asked the question is what we are doing sustainable or not . Could be a useful monopoly for a long time. If instead they say get people to work at this price, we will do it and they have a 2tiered workforce where a lucky programmer makes zillions and the rank and file live hand to mouth below living wage, they will slowly but surely create the seeds of their own destruction. Theyve got choice, and i dont know how they will make it but i would say i think right now doug mcmillan, former ceo has got a huge huge task, unbelievably huge task of digging walmart out, 15 years, 20 years of abusing the systemic strength of walmart in the pursuit of a singleminded goal and it is an x essential fight. And of fulfilling time, they are shuffling around like zombies at 11 00 pm and worked at 6 am. Who cares about their life, and amazon has an opportunity not to put itself in a position to 15 years from now where nothing worked at amazon because it has been ignored entirely. That is the resilient sustainability i would be saying is there priority now and easier to do it on top rather than under siege. Host let me ask more probably what worldview these platforms play in this. There is a different economics at stake than i thought when i taught microeconomics. That is close to 0 marginal cost, clear benefits for people on the platform, how does that affect the dynamic . We have more creative outcomes, the tale of the long sort of what you see in the distance, the distribution and we have to enforce the way it was designed, the early Twentieth Century so it is a wellknown fact in Silicon Valley, tech giants have killed zones. I am sure, they have identifiable kill zones where they will kill anything in that zone near them, for fortune or gob of business. Or snapchat and that is predatory behavior of the sort, we had laws on the books not being enforced because there is the efficiency defense of monopolization. Host it doesnt matter, it shouldnt matter that google is more efficient or amazon is more efficient if they are making it impossible for others to compete with them you have to take action. And doing it in a predatory way. Unless you think sherman and clayton should be abolished they are still in existence and they were put there for a good reason because we want dynamic efficiency, not static efficiency. Tomorrow it may be more efficient if they bought instagram. They pulled it in and all of that. 20 years from now is there going to be as much innovation . Will there be as much innovation for instagram after it eases the rates snapchat . I doubt it. I have just never seen that. Monopolies exist to serve themselves. That is what your Cable Provider tells you. Host last question from heather wilson. What role should the board play in transforming companies away from efficiency to a broader set of goals . Guest they have a tough job, but i think a good board is one that gets rid of all compensation that doesnt for the person retired and think more longterm. This can be done, take my stockbased compensation, divide it into places, 3 or 4 or 5 or 10. And short stockbased compensation and what we say of the goals, theres enough variability, a dull boring strategy by somebody else. Those are hard jobs. That would be my advice for great stewardship. Host thank you, fascinating book, thanks for taking time to do this. Host heres a look at the books being published this week. Pope francis offers his thoughts on how we can build a better world. Find these titles this coming week wherever books are sold, and watch for many of the