How Business Pays for its View of Human Nature

The old notion of "economic man" still holds sway. A few companies embracing a less cynical model are profiting from it

In spite of the recent turmoil in the world's capital markets, I'm a big fan of capitalism, which deserves much of the credit for the recent progress in reducing global poverty. Still, there is a bad apple in the barrel of its foundational concepts. It's called "homo economicus," or "economic man." This 19th-century concept, embedded in classic economic theory and still embraced today, rests on two assumptions about human nature. The first is that individuals are only motivated by self-interest; the second is that we're all rational decision-makers.

Unfortunately these assumptions are both inaccurate and incomplete. Yet they're routinely taught in our business schools and embraced by Wall Street—and business suffers accordingly.

That's because erroneously believing that people are motivated only by self-interest and are totally rational leads to several unproductive management practices. Information is carefully guarded except on a need-to-know basis. Transparency is shunned. Expensive legions of "compliance police" continually monitor employee behavior, for fear these self-interested, untrustworthy people won't act in shareholders' best interests. And managers often view compassion for employees and other touchy-feely stuff as a waste of time, since everyone is supposed to be out for themselves.

The business world is filled with companies that hold to this line to some degree. As a result, employee engagement and commitment is low. People put in their hours only to quit when the first better opportunity comes along.

Contrast this to REI, the outdoor recreation goods retailer headquartered in Kent, Wash. They have a highly engaged and committed workforce both in their corporate headquarters and in their 106 retail stores. "Shrink" in the retail world is a euphemism for people stealing stuff—shoplifting by both customers and employees. REI's shrink rate is far below industry standards, and employees instead are allies in preventing customer theft. REI credits this to its culture, which is based on the view that most people can be trusted to act in the company's interests. Many companies say "people are our greatest asset" but don't behave that way. REI does, and it shows.

Another retailer that profits from a similar worldview is Costco Wholesale (COST). Employee retention is a constant challenge for retailers. Frequent turnover means high staffing costs, additional training, and dependence on people who do not have a long-term commitment to the company or the skill level to serve customers well. A 50% retention rate is considered good in retail. But Costco retains an astounding 93% of its employees after one year.

I recently chatted with a hot dog server at a Costco lunch counter. He said he'd held several jobs at Costco during the past five years—since leaving his job as a high school teacher. So I asked the obvious question: "Why do you stay here serving hot dogs?" "Because of the way I'm treated," he said. "I actually make a bit more than I did teaching. Plus, I know that sooner or later I'll be given a bigger job—perhaps one with some management responsibility, and that's exciting to me." I'm still looking to find the employee who isn't favorably disposed toward Costco.

Entrenched worldviews change slowly. It wasn't until 1995 that Daniel Goleman's groundbreaking book, Emotional Intelligence, finally brought legitimacy to the concept that emotional content is at the core of every business deal, no matter how "rational" the players believe they are being.

More recently, advances in brain science show that humans seem to be born with built-in neural wiring to be concerned about each other, much as we are wired to be verbal. Given a relatively safe and nurturing environment, children grow up to be moral beings. And research on decision-making has revealed that nearly 95% of daily decisions aren't made by a rational process but by patterns fueled by emotion.

Whether you lead 1,000 or 100,000, it's likely you wish for the same thing: a highly engaged workforce that is inspired by you and devotes all its energy to productive and innovative business practices. Viewing mankind as homo economicus won't get you there.

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