Future of the Firm
Future of the Firm

The “future of the firm” is a big deal. As jobs become more automated, and people more often work in teams, with work increasingly done on a contingent and contract basis, you have to ask: “What does a firm really do?” Yes, successful businesses are increasingly digital and technologically astute. But how do they attract and manage people in a world where two billion people work part-time? How do they develop their workforce when automation is advancing at light speed? And how do they attract customers and full-time employees when competition is high and trust is at an all-time low?

When thinking about the big-picture items affecting the future of the firm, we identified several topics that we discuss in detail in this report:

Trust, responsibility, credibility, honesty, and transparency.

Customers and employees now look for, and hold accountable, firms whose values reflect their own personal beliefs. We’re also seeing a “trust shakeout,” where brands that were formerly trusted lose trust, and new companies build their positions based on ethical behavior. And companies are facing entirely new “trust risks” in social media, hacking, and the design of artificial intelligence (AI) and machine learning (ML) algorithms.

The search for meaning.

Employees don’t just want money and security; they want satisfaction and meaning. They want to do something worthwhile with their lives.

New leadership models and generational change.

Firms of the 20th century were based on hierarchical command and control models. Those models no longer work. In successful firms, leaders rely on their influence and trustworthiness, not their position.

Big systemic thinking.

The firm of the future must be able to adapt to changing environments, changing interactions with its customers, and changing communications patterns within the organization. Every firm must understand their business is a complex system, and that it’s impossible to change one aspect of the organization without affecting everything else.

New kinds of partnerships between people and machines.

AI and ML are changing almost every job. This shift raises many questions: Who manages the machines, and how? What skills do those new managers need, and how are they acquired? What kinds of compensation are appropriate?

From hierarchies to networks.

Firms of the future are trending toward networked marketplaces where organizations build on their core competencies and outsource the rest to a network of contractors and free agents. Increasingly, these networks are managed by centralized algorithmic systems.

Free agency, personal brands, and the evolving employer/employee relationship.

Employees are free agents, which means hiring and retaining talent is difficult. Firms need to help employees meet their career goals, satisfy employees’ ethical concerns, and more.

Compensation beyond pay.

The nature of compensation is changing, with firms offering alternate work relationships, more flexible workplaces, training opportunities, additional perks and benefits, and more of a sense of “taking care” of workers.

Diversity, inclusion, and fairness at work.

It’s well known (but not well practiced) that diverse teams produce better results. But achieving diversity is more than a matter of filling the pipeline with new hires. Diversity requires solving compensation problems, creating a safe workplace, inclusion, and ensuring everyone knows their opinions will be respected.

Board governance and diversity.

Board independence and increased diversity can help improve board governance. Diverse boards provide broader perspectives and ask better questions, helping improve outcomes and adapting to rapidly changing business environments.

This is only a preliminary map of the territory, with some topics appearing across multiple regions. Our high-level view tries to distinguish the cities from the fields, mountains, rivers, and oceans that surround them.

Whatever the future of the firm, rest assured, it won’t be business as usual.

Setting the context

Before diving into the details, let’s look at the factors that have influenced our perspective on the future of the firm.

The economist Milton Friedman claimed that “there is one and only one social responsibility of business—to use its resources...to increase its profits.” This formula no longer works. Today, driven by technological, social, and political factors, success requires broad systemic thinking about all the players the organization affects—employees, customers, society, the environment, fairness, inequality, and purpose. The context, the milieu, the incentives, the scale, and the workforce expectations that organizations operate in have all changed in a world with increasingly sophisticated automation, with massive social connectivity, and with issues of inequality and climate change. More and more people are questioning whether the basic tenets of capitalism work best for everyone, whether automation will wipe out jobs, what millennial and younger employers want and demand from the companies they work for.

There’s a lot going on, a lot to digest, and a lot to process. For example, Seth Klarman, in a recent (and rare) interview with Evan Osnos at The New Yorker, explains how his focus on value investing helped him evolve his thinking—that a short-term profit focus is the wrong perspective for organizations, that they need to focus on customers, on employees. Recent reporting from the Davos World Economic Summit highlights the “clueless” response from billionaire attendees that “upskilling” for a digital age is all that’s needed, that wealth inequality is not the problem. And for citizens, the situation is worse: the latest research shows that only 20% believe “the system is working for me.”

These observations and many more help inform this compendium of topics. In the sections that follow, we address what business leaders, tech leaders, and decision-makers can expect; how they can prepare; and what they should learn to shape the future of their own firms. These are lessons that affect much more than the bottom line.

Trust, responsibility, credibility, honesty, and transparency

From our perspective, we see society undergoing a trust shakeout, with formerly trusted brands losing that trust and new trust intermediaries ascending to positions of trust and influence. Organizations can take advantage of the shakeout to focus on building trust and earning a trust premium that both customers and employees value.

As Laura Baldwin, President of O’Reilly Media, likes to say, “Your customer (your user) is your conscience.” Not only do your customers let you know when you’ve let them down, they let the world know. And increasingly, there are some with a much bigger megaphone than others. In particular, there are people who understand what Jeremy Heimans and Henry Timms call “New Power”. Donald Trump rode social media power all the way to the White House; Alexandria Ocasio-Cortez has become a congressional powerhouse even as a freshman because she too knows how to work the levers of internet visibility and vitality.

Concerns around trust and credibility swirl around many of the major social media companies—concerns that are amplified by the newness of the companies and the newness of online social media. For example, it is easy to blame tech companies like Facebook and Google for spreading fake news and hate speech, while giving traditional companies a pass on behavior that is at least as egregious. Facebook’s systems failed to stop fake news from spreading; too often, traditional media sources spread it intentionally. (See Yochai Benkler’s fascinating book on internet propaganda and the role that traditional media outlets have played in legitimizing and amplifying content that was once shut down by those with journalistic integrity.)

Even within tech, Facebook and Twitter get most of the attention while YouTube and Reddit, doing a far worse job of addressing misinformation, generally receive little scrutiny. Uber uses low-paid temporary workers with uncertain schedules and incomes—so do Walmart, McDonald's, and the Gap. Why do the tech firms get so much more heat while traditional companies often get a pass? Any attempt to come to grips with these problems needs an even-handed analysis of system-wide problems, not scapegoating of particular firms or industries.

But consider the fate of tech companies as a taste of things to come. The ability to shape or even to manipulate public opinion via social media is reaching a new level, not just in the hands of talented human practitioners but of those wielding new tools of algorithmic manipulation.

We can expect notions of trust to expand to include trust in machine learning and artificial intelligence algorithms far beyond social media. When these algorithms go bad—when results are biased, unfair, inexplicable—the results can shake a firm’s reputation and erode trust. Facebook and Google are in the crosshairs because AI and ML are at the heart of their businesses, but more and more companies will be swept up into scrutiny. And it can happen fast! Consider the failure of Microsoft’s chatbot experiment Tay, where trolls were able to game the application to create a PR disaster of offensive remarks on its very first day of operation.

Increasingly, organizations planning on public-facing or customer-affecting ML/AI services need to make fairness, accountability, and transparency primary design objectives, not things to be tacked on at the end of projects. (See fatconference.org and fatml.org for more information on research into fairness, accountability, and transparency [FAT] in ML.)

The search for meaning

The increased demand for trust and fairness covered in the previous section is part of a broader search for meaning—a topic of increasing interest and importance to organizations as they grapple with what motivates and inspires their employees, customers, and suppliers. The last few years of economic, political, organizational, technological, and social turmoil that helped fuel the trust shakeout have also intensified the search for meaning across the culture.

As the global economy has recovered from the 2008 meltdown, there has been a frightening increase in income inequality around the world. In 2017, eight men owned more wealth than the poorest half of the world, and in the US, wages after inflation have barely budged for 30 years. This trend, coupled with the need to deal with issues of global warming and migration and immigration in most developed economies, has created a crisis in trust.

New research by Edelman shows that in developed markets, only one-third of citizens believe their family will be better off in the next five years. Nationalism in the US, Brexit in the UK, and similar populist movements in France, Germany, and other countries show that the people are “rising up,” forcing political and business leaders to focus on making their lives better.

The impact on corporations has been enormous. Research by Gallup shows that more American millennials have a positive view of socialism (51%) than capitalism (45%), and a Shelton Group survey found that 64% of US consumers believe it is "extremely important" that companies take a stand on current social issues and adjust their purchasing behavior based on those commitments. There is also a growing backlash against plutocratic philanthropy: while people appreciate wealthy “winners” of the economy for their gifts, they now want government to step back in and fix problems like infrastructure, rampant growth in CEOs' profits, and misbehavior.

This has given rise to a search for meaning in the boardroom. Even Davos, the global meeting of business leaders, has lost its sense of purpose, as companies now sit around discussing the fourth industrial revolution but seem to have no consensus about how to regulate privacy, data security, ethics, and global warming among nations.

For CEOs, this has created a dilemma: while they feel beholden to stockholders who want steady increases in short-term profits, they now realize they must take a position on the value of their companies' products and services to society. And they are struggling to find their footing.

Companies like Unilever, Patagonia, and Johnson & Johnson have been mission-driven from their founding. They have always operated on the premise of “doing well by being good” and have a long track record of taking care of their employees, keeping their supply chains clean and sustainable, and making sure they practice ethical behavior in their product design, customer service, and operations. They are truly “conscious capitalists” at their core. But there is a new class of winners (Apple, Facebook, Google, Amazon, Alibaba) that are amassing enormous profits and market share in the digital economy, and are struggling to understand the consequences of their attention-driven business models.

And for all other firms, trust is now a way to differentiate themselves. Allbirds, a fast-growing shoe company that has the potential to threaten Nike or Adidas, builds its shoes entirely from sustainable products; it focuses on health and comfort for its young buyers, and its brand has skyrocketed in popularity because of its “good” way of doing business.

Consumer packaged goods companies like Unilever, P&G, Nestlé, and General Mills have been operating in this world for decades. They face constant criticism over water treatment practices, food quality, and other social issues, so they are vigilant and have mature ways of staying ethical as needs and problems change.

Others, like banks, insurance companies, and investment firms, are not sure what to do. Larry Fink, the CEO of BlackRock, the largest investment firm in the US, has told his investors two years in a row that if they and he don’t focus on responsibility in their strategy, the firm will cease to thrive. CEO after CEO is finding new language to sell purpose and mission, forcing managers and senior leaders to think the same way.

At the firm level, this is an existential issue with employees. Employees of all ages no longer want to work for companies that “do bad things.” Facebook’s Glassdoor ratings, for example, have dropped 30% in the last six months because of the ethical missteps and controversies that have been exposed, with its ranking in the list of "Best Places to Work" slipping from #1 to #7. Google employees stage protests for #MeToo, against defense department contracts and other corporate behavior. And it’s not just Facebook and Google: “The Tech Revolt” documents other manifestations of tech worker activism. While tech workers may have better facility with the tools for organizing, that knowledge can spread to others looking for employers that “do good to do well.” In this tight labor market, nearly every company should focus on its purpose to burnish its employment brand.

Apple, Microsoft, and IBM are now spending a lot of time talking about how to build technologies we can trust. Uber has changed its corporate advertising to talk about quality of life and self-fulfillment. This move toward becoming a “trusted player” in the world, acting like a global citizen, and truly defining one's business in the context of its value to society is an enormous new trend that CEOs, CTOs, and CHROs now face all around the world.

New leadership models and generational change

In a recent study by Deloitte[1], 81% of senior leaders said they need new models of leadership. The characteristics most cited are the ability to lead during ambiguity (82%), leading through influence instead of hierarchy (68%), managing a wide variation in work arrangements (51%), and understanding how to leverage technology and new jobs created by machines (46%).

The entire concept of leadership has come under question. Witness the company with the iconic leadership model of the late 20th century: GE. GE is the subject of many books discussing its leadership model, the strong persona of its former CEO Jack Welch, the drive to reduce bureaucracy and hold people accountable, and the objective to be number one or two in a market or get out of the business. Today GE is a fallen giant that failed to leverage digital business models and has now been taken off the Dow Jones Index. How did this happen?

There are a series of changes taking place.

First, leaders are everywhere. Even the youngest employees are leading initiatives, teams, and organizations. (Mark Zuckerberg was thrust into leadership in his 20s.) The idea that you must “wait your turn” and experience a wide variety of roles before you lead is no longer valid. Today, leaders learn to lead on the job, so they need to be coached all the time.

Second, leaders now lead through influence, not position. In the GE and older hierarchical models, the leader was the boss. You did what they said, and the boss wielded power over you. Today, the pyramid is inverted: technical and functional experts make decisions on behalf of the company; leaders are here to coach, align, and help people succeed. They gain followers because of their reputations, not their job titles or levels.

Third, we now lead in diverse, multigenerational organizations. More than 55% of college graduates are women; the fastest-growing segment of the workforce is now people over the age of 50. If you are not able to lead a team of men and women, people of many cultures, and people of many ages and demographic groups, you will not succeed. Deloitte’s research on highly inclusive teams shows that groups that feel “included” perform at about 1.8x the rate of those that feel “left out.” This is a model of leadership.

Fourth, we need leaders who can iterate, experiment, and learn to quickly solve problems. The days of 3- to 4-year product cycles, long development plans, and years of market study are over. Today’s high-performing companies develop products in an agile way, they show them to customers early, they fail fast and repair mistakes, and they iterate using data and experimentation. Today’s leaders must be hands-on and they must support this process of continuous, customer-driven improvement.

There are some significant challenges for leaders ahead. Can your leadership team adapt to gender equality, pay fairness, and a truly global culture? Can your leadership team attract and assemble smart, empowered people and keep them aligned and performing toward your goal? Can your leadership team reorganize and revitalize the business as it changes, without being tied to old models that have fallen out of date? And can your leadership team adopt a growth mindset, designed to help everyone in the organization learn?

Big systemic thinking

There is nothing simple about business. It’s easy to get trapped by simple business models—for example, optimizing by doing more of what you know. “We’re doing well selling widgets, so let’s make more” is a good decision only if you know that the market for widgets is growing, that you can maintain or increase your market share, and that there isn’t something you can do even better. While it may be necessary to simplify the components of a business to best understand and apply them, taking the time to do big systemic thinking could be the most important factor to an organization’s sustained existence and success.

Today, as products become services (every product now has a digital footprint, which itself provides service revenue), companies have to understand the ecosystems in which they live. Cummins, for example, one of the leading providers of diesel engines, has been studying its ecosystem for decades. Today, the company sells not only engines but online diagnostics, services to dealers and resellers, and continuous digital services to its users. In time, Cummins may become a “digital services” company with revenue streams as large as its machines.

How do you skate to where the puck is headed, rather than where it is? Firms have to understand and participate in their entire business ecosystem. Those that don’t do this often disappear in a flash. Digital Equipment Corporation's machines were absolutely central to the university and industry researchers who developed both the Unix operating system and the internet, but the company failed to realize that its own VAX/VMS operating system was a dead end. It was unwilling to sacrifice a popular but declining product for the future. If Digital had really understood the ecosystem in which it was engaged, the company might have seen this trend.

By way of contrast, consider Amazon, one of the best “systems thinking” companies in the world. As it built its retail business, the company realized that its many elements could be unbundled. Its massive internet infrastructure was a product in itself. Now Amazon Web Services (AWS), the unbundled services that power Amazon.com, is a leader in the cloud computing market, enabling even Amazon competitors. Not only that, but Amazon realized it could be more than one online retailer among many—it turned itself into a marketplace by unbundling its web catalog, its warehousing, and its delivery services and making them available to other merchants, reducing its own costs and taking a share of everyone else’s profits. And now, because of the scope of its marketplace offerings, it has built a large and fast-growing advertising business, taking away a meaningful fraction of what seemed to be Google’s unchallengeable share in one of the most profitable areas of search.

Sometimes, thinking holistically means deciding what not to do. For example, O’Reilly Media closed its online retail store not because the store was failing, but because the store got in the way of the company’s strategic decision to pivot from retail book sales to becoming a learning marketplace.

None of these are simple decisions you could arrive at just by doing more of what’s working. They also aren’t decisions you can arrive at by decomposing an organization into its component parts and analyzing them separately. They don’t come from simplistic and reductionist models of how the business works. Rather, they require a broad understanding and intuitive sense of the business and its environment: its customers, its competencies, its competitive situation, and how forces are constantly shaping and reshaping all of these. The decisions themselves, like “sell computing infrastructure as a service,” sound simple in retrospect. But getting through the complexity to those decisions isn’t simple.

There are no silver bullets; big systemic thinking can go just as wrong as any other thought process. Getting through the noise to communicate those decisions to employees, to customers, and to the board of directors isn’t simple, either. But without that kind of thinking, you can’t be right.

New kinds of partnerships between people and machines

At internet companies like Google, Facebook, and Amazon—and any other company delivering software-based services—we need an inversion of perspective. It’s easy to think that programmers are simply workers, assembling code like a previous generation assembled manufactured goods, but in fact, much of the actual work these companies do to serve their customers is done by software agents. At Amazon, one piece of software shows you your buying options. Another takes your order. Another queues it up for shipping. The software developers and “DevOps” staff are the managers of this new generation of workers. Every day, the managers are checking on their digital workers, A/B testing new approaches, and giving their workers feedback in the form of new code releases.

Meanwhile, the central job of massive, real-time coordination of people and resources—formerly done by human managers—is increasingly done by machine learning and artificial intelligence systems. The humans creating these systems are more like their teachers than their managers. They create them and train them, then turn them loose on the problem. When something goes wrong, those with a 20th-century perspective expect the company management to step in to fix the problem directly, but in a 21st-century company like Facebook, Google, or Amazon, the company’s programmer-managers must actually retrain the systems, or build new ones to compensate for their failings. The humans no longer run the operations directly. Managing the unintended side effects of poorly designed systems becomes the principal focus of human managers.

For a purely digital company like Google or Facebook, the analogy stops there. But at companies like Walmart, Amazon, or Uber, which provide physical-world services, the software bots are intermediaries between the managers and humans. When a customer requests a ride from Uber or Lyft, a software agent routes a driver to the pickup, and from there to the destination. But the driver isn’t the only one in the workflow. In what Microsoft researcher Mary Gray calls “Ghost Work”, a pieceworker in India may be performing a security check on the driver via Amazon’s Mechanical Turk service. Uber is a single vast machine made up of humans and software working in a complex dance.

Machines also upskill the drivers. It is no longer necessary for a driver to know their way around the city. The app knows that. This is one of the key enablers of a model in which anyone can drive for pay. This is also the new face of learning on demand: learning by doing, with the machine guiding you along the way. Autodesk, the engineering and construction management company, is exploring this same concept, building tools that increasingly help humans to do complex jobs not just by teaching them new skills but by partnering with them in new ways.

While we don’t know all the implications of automation and AI, we know people will still have important roles. Already, as AI enters roles like retail and customer service, companies like IBM and American Express are hiring people to monitor decisions made by software, improve social cues, and translate machine recommendations into more meaningful recommendations. Just as we “train” our computers to think through software and instructions, people will “train” their robots to be more successful through feedback.

From hierarchies to networks

Ever since Ronald Coase wrote “The Nature of the Firm” in 1937, the general understanding has been that the command and control systems within a single organization have lower transaction costs than the cost of finding, vetting, and contracting from among a marketplace of small independent businesses. That system peaked with the lifetime employment and generous benefits of the golden age of industrial concentration. But for the last 30 years, companies have been building two-tier organizations (with a highly compensated core of dedicated employees and a far larger base of fungible contractors) and outsourcing relationships, usually to large outsourcing companies that hide the churn of workers at the fringe.

The internet and big data added the last pieces of the puzzle, providing capabilities for companies to directly manage large networks of individuals (though intermediaries may also still play a role). A company such as Uber or Airbnb displays this pattern in its fullness: asset light, algorithm heavy. Human-scale marketplaces and management processes have been replaced by algorithmic, internet-scale marketplaces in industries such as advertising, where Google is only the largest of the algorithmic advertising networks that have threatened “Mad Men”–style agencies. Amazon only looks like a retailer; once you realize that it carries more than three billion SKUs worldwide (600 million in the US alone), many of them from third-party sellers who themselves carry all of the inventory risk, you understand that it, like Uber or Google, is an algorithmic matching marketplace, pairing up buyers and sellers in real time.

Systems like these preserve the appearance of free market economies, but in reality they are centrally planned economies, where the designers of the algorithms ultimately choose who gets what and why. As these platforms achieve near monopoly status, it vastly increases their power relative to their marketplace participants. We need a new theory of antitrust: one that measures the health of platform marketplace ecosystems, and the extent to which marketplaces compete with their suppliers, rather than simply looking at consumer benefit.

Building platforms that take better care of suppliers, not just their users, can create a critical strategic advantage. You can already see this, for example, in Apple’s position on privacy (treating its users as data suppliers to be valued, whereas Google and Facebook treat them as resources to be exploited).

Perhaps the biggest change taking place is the rapid evolution away from management hierarchies to networks of highly empowered teams. More than two decades ago, software engineers realized that large, hierarchical software teams were underperforming, so they developed the concept of small, multifunctional teams. (The book The Mythical Man-Month by Frederic P. Brooks, Jr., first pointed this out.)

Since then, the business concepts of “Agile,” “teams,” “Scrum,” and “iterative development” have exploded in all areas of business, shattering the corporate hierarchy. Yes, companies still have job levels, managers, and executives, but more and more companies now realize that people do not perform well when they are “told what to do.” What really makes companies thrive is letting people “solve problems,” “serve customers,” and “invent” in their own personal ways.

In a recent study published in the Harvard Business Review, 83% of R&D departments, 82% of operations, 79% of marketing, and 78% of sales, HR, and finance teams reported that they believed they were using some form of “Agile” in their business operations. While the true application of Agile principles in non-software operations is still emerging, the trend is clear and unstoppable. The firm of the future is a network, not a functional hierarchy.

This has implications in many areas of management. Should we promote people “up” or “across”? Should we pay people for individual performance or team results? Should we promote leaders who are good at direction and strategy or those who thrive at coaching and development? Should we develop goals from the top down or bottom up?

Every management principle can now be questioned, and as we see companies like GE fall behind in their growth and profitability, we can question decades of management philosophies based on the industrial organization of business. We believe the future of the firm is an empowered, bottom-up structure—and one that operates like a network, not a directed hierarchy.

Free agency, personal brands, and the evolving employer/employee relationship

As the bonds of loyalty fray between companies and their employees, there are two countervailing trends. First, relatively low-skilled employees, who might once have had secure jobs, have joined what Guy Standing calls “the Precariat”, living lives of continuous partial employment. In contrast, highly sought-after employees (such as AI professionals in Silicon Valley) have become the equivalent of movie or sports stars. The ability of such people to build reputations through open source software, blogging, and other forms of internet visibility gives them free agency. This leads to a tension in which some companies seek to hide their talent, while others let them display it freely. You can see this in the difficulty Amazon and Apple had in recruiting AI talent because of their cultures of secrecy, while Google and Facebook allowed employees to publish their research. Amazon was forced to open up, and Apple is starting to.

Skills and capability far outweigh seniority and tenure for determining free agent compensation. In highly stratified organizations, this can cause serious dislocations in pay and status. For example, in order to appropriately compensate cybersecurity professionals, the White House Office of Personnel Management had to create entirely new compensation guidance, authorized by an act of Congress! If this can happen in government, expect (for now) that salary parity rules at private companies will also be selectively tossed out—until the equity issues get thorny enough for a broad reassessment.

Top talent (executive or technical) commands superstar salaries, just as in movies and sports. Astonishingly high levels of compensation are funded not with dollars, but with stock options and grants, which pass at least some of the costs to investors and hide the true cost of employee compensation. Some companies correctly report stock grants as employee costs, but many continue to bury these costs in footnotes and report non-GAAP financials. This has led to a vast compensation imbalance between companies with sky-high stock valuations based on growth momentum and those that are living in the more mundane world of real cash flow and profits. This creates increasingly a winner-takes-all race for talent.

The Superstar Firms theory, put forth by David Autor and others, posits that eventually these higher wages will spread through the corporation and into the broader market, bringing up compensation levels for ordinary employees. This is something to be hoped for. In the meantime, companies without highly inflated stock must compensate employees in other ways. One such approach is through brand, mission, values, and purpose (we’ll come back to this in the next section). Macroeconomic factors may eventually also bring profitless growth stocks to a more reasonable level.

Even at lower levels, though, there is far more job mobility, again through online platforms. Temporary work through a platform like Upwork can even be a way of gaining new skills in an environment with less risk than at a person’s current employer. Data from O’Reilly’s online learning platform shows that employees often seek additional training before changing jobs, and after moving to a new internal job or receiving new responsibilities. Training is no longer something employees are sent to; it is something they seek out.

It is also worth noting there is a new labor movement building, but it’s not focused on the old labor issues. It’s more concerned with topics covered in not available. When Google employees walked out, it was about Google’s failures of social conscience, not about higher wages or working conditions. They were protesting Google’s involvement in providing AI for military purposes, and rewards to a top executive who, facing multiple charges of sexual harassment, had been forced out of his job but still received a massive severance stock payout. On a humbler level, when 30,000 Starbucks baristas used the coworker.org platform to raise issues with management, the first issue was not higher wages but the dress code, which required all employees to cover up any tattoos!

Compensation beyond pay

One of the fast-changing parts of organizations is the way people are paid. As increasing numbers of workers engage in contract, contingent, or gig work, organizations are rethinking their rewards. Economic data shows that US workers’ wages are not keeping up with inflation, leading an estimated 40% of American workers to take on “side hustles”. How does the firm of the future think about pay?

Research shows this is a re-engineering process taking place now. A 2018 study by Deloitte found that only 12% of companies strongly agreed that their pay practices were fully aligned with their business strategies. In most cases, companies compete for talent, so pay is driven by market wages. But when you dig deeper, the data shows something different.

In any given job family, there are employers who pay less (perhaps even “underpay”) but offer more career development opportunities, a more flexible workplace, and more benefits. Others, with more competitive cultures, may pay more—but they expect more. This new bifurcation of pay is letting firms think about all their people as independent agents, and they can now create the optimal mix of pay and benefits for their employees.

We’re seeing a shift in the composition of compensation toward perks, benefits, and non-cash rewards. In the US, benefits have grown from 28% of payroll in 1998 to 32% in 2018, increasing the burden employers are taking on. This increase is largely due to a rise in medical costs, leading employers to increase focus on well-being programs and other health benefits that reduce health care expenses. In fact, there is now an entire industry of corporate well-being programs in place, creating an escalating war for the best, most innovative, most modern types of well-being benefits. This goes beyond yoga classes and includes offerings such as programs for fertility, pet care, elder care, and free lunch; allowances for commuting; programs to help with student loans, financial fitness, and healthy diet; and mental health counseling. And that’s leaving out a huge extension in parental leave, exemplified by a CEO as central to his company as Mark Zuckerberg taking advantage of his company’s liberal parental leave policy to step away from his job for a full two months.

This shift in pay to a more customized, integrated set of holistic offerings is forcing companies to be more competitive and accommodate flexible working styles. The firm of the future is one that truly takes care of its workers, trying to entice employees to stay put, as more and more options become transparently available on the internet. If we see a recession, much of this may slow down, but we see this as being a permanent shift in the way companies pay their people.

Finally, in the new race for skills and continuous learning, companies are starting to realize that learning, development, and career opportunities are a huge surrogate for salary. Companies that invest in strategic learning and development (L&D) offerings, internships, and a culture of development can pay people less yet still attract the best and most motivated candidates because everyone is worried about falling out of date.

Diversity, inclusion, and fairness at work

Diversity, inclusion, and fairness are among the most critical issues facing business leaders today. The #MeToo movement set off a steady disclosure of gender bias and mistreatment in business. The passage of the CEO pay disclosure act set off a discussion about pay fairness. The Black Lives Matter movement sensitized non-white workers to their low levels of pay and relatively fewer roles in senior jobs. And now people are starting to wonder if AI and algorithmic decision systems are going to take all these decades of bias and institutionalize the problem in hiring, promotion, pay, and other talent-related decisions.

At the Davos conference in 2019, there were a series of sessions discussing the need for wealthy people to take responsibility for philanthropy and social equality. As we noted earlier, 51% of millennials have a favorable view of socialism, and the percentage of Generation Xers and Boomers who favor capitalism is declining. While many wealthy individuals have set up foundations and other philanthropies, there is a movement against this kind of giving. The book Winners Take All, by New York Times reporter Anand Giridharadas, argues quite persuasively that it is now time to put our trust back into government and political systems because no matter how hard we try, profit-making enterprises will never do what’s right for society.

We believe the future of the firm is a new form of responsible capitalism. It is not enough to have social responsibility programs and sustainability programs: companies must gladly pay taxes, they must support and give to political institutions, and they must support the infrastructure-based systems in their communities.

This is a tricky new space for CEOs and business leaders. More than 45% of executives recently surveyed by Deloitte believe their new "social purpose" products and services are revenue generating opportunities. That may be true, but it's the wrong reason to do it. Companies that don't truly act responsibly will be found out, and the social backlash can be tremendously damaging: when United Airlines mistreated an animal, when Volkswagen cheated on its emissions tests, when Equifax leaked sensitive data—these are brand-damaging events.

Right now, we have very uneven economic growth around the world. Developed economies are becoming unequal—the Gini index (a statistical measure of income distribution) is getting higher in major democracies than in autocratic countries. This means workers and buyers of products feel upset, frustrated, and angry at “wealthy firms.” While the firm is not a person, it represents a persona—and when the CEO and leaders do not take an active position on social and political topics they can risk long-term brand damage.

We know all companies must make money to survive. We know that profits fuel economic and business success. But despite the stock market’s short-term focus, we believe companies that do not specifically focus on trust, fairness, inclusion, social responsibility, and building a sense of internal community are going to suffer in the long run. If we experience a recession and buying slows, consumers will be even more sensitive—and Generation Zers and millennials are already very sensitive to company brand when they buy products.

Companies must inspect and audit fairness in all their new AI and algorithmic digital systems. If bias is discovered, it must be fixed promptly and openly; it’s not OK to find out later that a mortgage company was discriminating against black homeowners or a well-being company was overpricing products to low-income neighborhoods just because the AI recommended it. Every AI-based decision needs to be validated with a human lens—and this is a new burden and an expertise companies have to develop.

Issues of gender, race, and age diversity must be addressed. Yet, an employee survey shows most companies do not have programs that enable women and others to openly report on harassment or unfair treatment. This is woefully inadequate given the increase in the diversity of the workforce and the sensitivity of employees. With companies more service-dependent than ever, despite the growth of automation, diversity becomes a tool for increasing the pool of resources for these important roles. Fairness must be part of the blood of the firm, with constant, consistent attention to rooting out inequities.

Research also now shows that college degrees and GPAs are not predictive of career success. Companies must expand the aperture of their hiring, opening up the lens of talent acquisition to people of all ages and backgrounds. New AI-based assessments now make this easier than ever; however, as we've mentioned, these systems need vigilance and care to ensure fairness.

Another issue related to both fairness and compensation is the huge increase in CEO pay inequity. Despite new laws in the US and UK to force companies to disclose CEO pay ratios, the amount paid to CEOs keeps going up. In the US, the average salary for S&P 500 CEOs reached 373 times the average median income in 2014, with some companies paying CEOs 400–500 times the median employee salary. This inequality is having a negative effect on many employees, and we suspect it contributes to those 51% of millennials now preferring a socialist form of economy. We believe CEO pay has gone high enough, and companies have to realize that CEOs are not gods: they are replaceable, and many organizations have successors waiting in the wings.

For a more detailed look at issues related to equality and freedom, including the link between respect and policy to ensure freedom, see “The Philosopher Redefining Equality” by Nathan Heller.

Board governance and diversity

What is the board’s responsibility for the future of the firm, or the firm of the future? Boards are responsible for setting direction and overseeing the day-to-day managers. They’re responsible for ensuring the firm is managed responsibly. Yet, for too long, boards have been hired, bought, and paid for by management. The concept of an “independent director” is a convenient fiction. Given that directors are typically paid with generous stock grants, and that the shareholder value hypothesis posits that the directors’ primary fiduciary duty is to increase shareholder value, both pecuniary incentives and legal directives ensure there is little effective representation for workers, customers, or other stakeholders. This is an area ripe for reform.

Corporate boards are also lagging in digital sophistication. Areas like cybersecurity, social media marketing, AI, big data, and algorithmic management are all becoming table stakes for the modern company. A new kind of directors’ college is needed. When Tim O’Reilly attended Stanford Directors’ College a decade ago, most of the information provided was about how directors can avoid liability, rather than how to engage in a proper corporate governance role.

More broadly than digital sophistication, board members concerned about the future of the firm must think carefully about the big picture, about all the components of the firm’s success, not just the bottom line. That includes items affecting societal good, reputation, customers, employees, and even contractors. For example, a board with an elected employee representative only reflects employee concerns if all board members think employees are important. Board responsibilities like ethics, not just compliance liability, are often complex, with no “right answer”—which is precisely why the board needs to be involved.

Given the scope of a board’s responsibilities, one would expect organizations to constitute a board structured to give the best, most prescient advice. Yet, boards made up of “elder statesmen” from the business world notoriously lack independence and diversity—factors that affect board relevancy during this time of great organizational disruption.

At the O’Reilly Radar Conference in November 2018, Jeff Wong, Head of Innovation at EY, spoke about the lack of diversity on corporate boards—not just physical diversity (i.e., race and gender) but cognitive diversity—for tackling difficult issues like digital sophistication, employee welfare, ethics, and trust. Boards need to do a better, more confident job of asking the right questions—about change, digital transformation, cultural changes in the workforce, social media, artificial intelligence, and other (sometimes uncomfortable) topics that boards should address. Board members often miss these questions because they lack the diverse backgrounds that accurately reflect the state of the world.

As Wong noted, many organizations select board members based on what they've done over the last 30 years, which would be fantastic if the next 10 years were expected to look like the last 30. That’s not the situation most organizations face. To address a future of change, boards should hire people who look different, think different, have different tenures, earned their wealth in different ways, and have different academic and professional backgrounds, but who bring the right perspectives and right questions to the boardroom.

Another benefit of creating more diverse corporate boards is the finding from Scott E. Page that more diverse groups tend to make better decisions. This topic is well covered by Steven Johnson in his book Farsighted. For corporate board activities like evaluating risk and scenario planning, we consider Johnson’s advice for groups in general relevant: that “the most important element is the diversity of perspectives" assembled—an effect strong enough that “it appears to apply even when the diverse perspectives...have no relevant expertise.” Johnson goes into more detail as to why diversity helps: homogeneous groups “tend to come to decisions too quickly,” settling early on the most likely scenarios and not spending the energy to question assumptions.

Like the rest of the firm, the future of boards is likely evolving, rewarding firms that turn their boards into true assets that bring broad, diverse perspectives, independent thinking, and guidance to help navigate and anticipate a dynamic and disruptive future. Independent, diverse boards bring a healthy dose of real-world perspective and are good for the bottom line.

Conclusions

If there’s one idea to take away from this report, it’s this: if you think you can run the firm of the future the same way businesses ran in the past, you’re wrong, and perhaps fatally wrong. The next 10 years won’t be like the last 30 years, and won’t be remotely like the last 60. Technological fluency isn’t optional: it’s table stakes, all the way to the board level. Your employees will be changing, and they will value opportunities to learn and to make a difference. Integrating different ways of thinking and different kinds of experience is a must. Above all, businesses are complex systems, and simple, reductionist approaches are doomed to fail. There are plenty of opportunities for success, perhaps more than ever before; it’s the path toward those opportunities that has changed.

As we said at the start, whatever the future of the firm is, it won’t be business as usual.


Article image: Future of the Firm