THE BLOG
06/25/2014 11:21 am ET Updated Aug 25, 2014

Relational Leadership: Where Relationships Lead and Capital Follows

Half of survey respondents identified lack of trust as a threat to their growth prospects - up sharply from 37 percent in 2013. 17th Annual PwC CEO Survey

Distrust and disengagement in business has gone viral, infecting our relationships like drug-resistant superbugs. It is what happens when a society grows resistant to its leadership. CEOs see the trend and feel the heat. Richard Edelman, reviewing Edelman Trust's latest trust survey, redefines today's leadership priority for CEOs as being "Chief Engagement Officer."

Leadership: Mass-Producing Costly Disengagement

Today's organizations are mass-producing unprecedented levels of distrust and its costly offspring - disengagement. Many in management are still trying to absorb Gallup's alarming report that 70 percent of employees are disengaged at work. Disengagement is costly: engaged workers average 57 percent more effort and are 87 percent less likely to resign. The Bureau of National Affairs estimates that employee turnover costs businesses $11 billion annually.

Employee disengagement begets customer disengagement. A Korn/Ferry survey cites customer engagement as the number one issue keeping Chief Marketing Officers up at night. Engaged customers average a 23 percent premium in value (wallet-share, profitability, sales growth) and disengaged customers a 13 percent discount.

Only one in five people trust business leaders to tell the truth regarding difficult issues and CEO turnover in 2014 is running the highest since 2008. Churn of public-company shareholders has risen from 21 percent in 1979 to 250 percent in recent years.

Netted out, we have transient customers, served by transient employees, working for transient leaders, owned by transient shareholders. Disengagement is overpowering today's leaders.

Masters of the Short-term Financial Fix: The Disengagement Economy

The priorities of today's business leaders (especially public companies) are evident: short-term profits, cost cutting -- especially payroll, cash-filled balance sheets, growth via acquisition, decent stock prices and well-paid CEOs. Bowing to unrelenting shareholder pressure, leaders have become masters of the short-term financial fix which comprise our short-term economy -- what I term the "Disengagement Economy." It is an economy so burdened with disengagement that it struggles to generate organic revenue (or job) growth, yet so addicted to the short-term, it cannot stop: It invests not in workers but in eliminating workers via technology, off-shoring and short-term temporary relationships. It invests in short-term transactions but not long-term customer relationships; in short-term returns but not long-term value. Harvest-mode starves growth and produces disengagement.

This Disengagement Economy increasingly runs on short-term incentives that serve more as bribes. "Hooking up" is not just relationship-less sex, it is empty transactions gone main-stream: billions to Wall Street for maneuvers with no constructive value, corporate payroll cuts that juice near-term rewards but mortgage future growth, increased funding to government lobbyists. Leadership becomes infected with "briber-ship" to narrow, entrenched interests undermining loyalty. Loyalty is what is left when the bribes are all gone.

Relational Structures That Produce Relational Poverty

This gets to the crux of the issue. Business is a relational structure most productive when engaged stakeholders create and spread value for the many. But when gain is concentrated short-term and narrowly for shareholders by leaders who self-serve rather than serve, the other stakeholders disengage and institutions atrophy. This produces relational poverty: the loss of social, emotional and economic energy needed to innovate, produce and deliver value. Thomas Piketty's controversial book Capital posits that capitalism's preferential treatment of shareholder capital has increased income inequality.

As a former CEO working with CEOs today, I believe this capital-centric relational poverty not only contributes to income inequality but also income destruction. It calls for a different form of leadership -- relational leadership focused on rebalancing and optimizing relationships to create increased value.

Relational Leadership: Where Productive Relationships Lead and Capital Follows

Relational leadership starts with a basic premise: productive relationships are the strategic source of value; profits are the result. Forging engaged, accountable, productive relationships with stakeholders is leadership's highest purpose. Strong products, profits, and rewards follow from these productive relationships. When gains are distributed productively it strengthens those relationships in a virtuous cycle. Three keys anchor relational leadership:

Treasure the goose: Relationships are the goose that lays the golden eggs. Yet our obsession with short-term financial results is killing the goose. By anointing capital the precious, scarce resource at the center of our universe, we encourage CEOs to act like CFOs and managers like accountants. Newsflash: capital is not scarce. As Christensen and van Bever conclude (Harvard Business Review), with over $1.6 trillion in cash on corporate balance sheets, financial assets that are10 times the value of global output and low interest rates, we have what Bain calls "capital superabundance." Relational leaders treasure productive relationships as their most strategic resource.

Prioritize relational purpose: In a world where "capital" is king, financial metrics rule. Return on capital becomes the divine signal guiding decisions and actions. Yet this capital focus has under-produced. Steve Denning at Forbes reports from 1978 to 2013, actual rates of return on assets and invested capital in US firms declined by 75 percent , while CEO compensation increased 937 percent, and typical worker's compensation grew just 10 percent. "Capital" signals can distort and distract from what is important or economically most productive. Christensen quotes Scott Cook, executive chairman at Intuit who describes how the "tyranny of financial metrics" too early in the innovation process can produce "a withering of ambition." Cook laments how every one of their strategic and costly new business failures had great-looking financial spreadsheets. Now, they focus early-stage on a more purposeful, human question, "where we can change lives profoundly." Relational leaders rivet organizational attention on "relational" purpose that stimulates innovation, energy and ultimately financial return.

Engage the disengaged: Finally when capital is king, contributors of capital (shareholders) can become oppressive dictators leaving stakeholders disengaged and rebellious - and kingdoms unstable and unproductive. Former CEO and shareholder value icon Jack Welch concedes this point: "On the face of it, shareholder value is the dumbest idea in the world...is a result, not a strategy...your main constituencies are your employees, your customers and your products." When shareholder value becomes oppressive, leaving discounted or bullied customers, employees and community - everyone loses. Relational leaders get it: grow the 23 percent value premium of engaged customers by cultivating the 57 percent effort premium of engaged workers.

We are all Chief Engagement Officer of our lives accountable for productive relationships built -- or not. No one gets a pass on that.