Creating and Sustaining Positive Organizations

By Ryan W. Quinn

Last week I was reading The New York Times when an article caught my eye. In contrast with the all of the articles I typically read about health insurance industry executives battling Washington over the new legislation, this particular article was about Geisinger Health System, a network of hospitals and clinics in Pennsylvania, that has innovated a new business model instead of haggling with Washington. Geisinger’s health insurance plan covers around 250,000 people. They are profitable, in part, because they pay the doctors in their network to hire more nurses under the belief that they will save money in the long run by paying money now.

How it Works

Geisinger’s business model works because the cost of hiring a nurse to track and follow up with patients is ridiculously less expensive than the cost of paying for the hospitalization of patients with heart attacks, kidney dialysis, or other chronic health problems. If a nurse prevents just one diabetic patient who is missing check-ups from getting hospitalized, Geisinger saves between $500,000 and $1,000,000 of hospital costs. A single catch like that can pay the annual salary of many nurses.

Hiring nurses for doctors is just one of many practices Geisinger employs to save money, both for themselves and for their customers. These practices are supported by organizational capabilities that make them possible. For example, doctors and nurses need sophisticated electronic medical records in order to be able to track patients, contact them, and encourage them in appropriate, healthy behaviors. Building these capabilities and implementing these practices requires impressive foresight. Today, many organizations in the health industry are wrangling their hands over the difficulties of implementing electronic health records. Geisinger has been making use of a unique electronic medical record system for years, making the work of its doctors, nurses, and insurers easy by comparison.

Taking the Long View

Management scholars often tout the benefits of taking a long view to investment decisions (like Geisinger does), but many organizations (like much of the rest of the health insurance industry) take short-term, defensive approaches to making investment decisions much of the time. [1] Of course sometimes it is appropriate for companies to focus on the short-term. Focusing on the long term, though, seems to be harder for most executives than focusing on the short term.

How, then, can executives engage the investment process in ways that help them to make long-term, innovative decisions as often as it is appropriate to do so (like Geisinger), and make short-term, reactive, or defensive decisions only when necessary? I would like to explore two answers: incentives and stakeholders.

Incentives

The most common approach to answering a question like this is to look at the economic incentives that drive decision makers’ decisions. The typical argument is that organizations–particularly for-profit, publicly-traded firms–tend to focus too much on the short term because of the pressures to meet analysts’ demands for quarterly earnings. This is especially true when managers’ individual incentives are tied to short-term results. Research suggests, for example, that managers make investment decisions that are more focused on the short term when they have stock options that can be exercised right away and when their short term performance is poor. [2] The implication from this research is clear: design compensation packages for managers that incentivize at least as much long-term investment thinking as short-term thinking.

When Incentives Do Not Align

Incentives are a powerful way to influence behavior, the advice to design incentives for long-term behavior is only relevant to those who get to design others’ incentives. Our economy, and our society, need leaders who can take a long-term view, sometimes even when they are incented to focus on the short-term. And some leaders actually do this. [3] We need to understand this unusual behavior if we want our systems to change because systemic change begins with individual, counter-normative action.

To understand what we can do to help managers to take a long-term view even when they are incented to focus on the short term, let’s consider the Geisinger story again. An interesting question to ask is, “Who is benefiting from Geisinger’s business model?” The answer: just about everyone. Geisinger saves money, which raises profits. Patients get better health at a lower cost, physically and financially. Nurses have jobs. Doctors get help, and in some cases even get paid by the savings Geisinger creates. Geisinger employees find meaning in their work as well as having work to do. It is hard to find someone who is not benefiting. Is it at all surprising that the business model is profitable when every stakeholder benefits?

A Stakeholder View

A stakeholder view of organizations suggests that managers should commit themselves to find ways to create value for all of an organization’s stakeholders–investors, customers, employees, local communities, suppliers, and so forth. [4] Taking a stakeholder view is more than just a means of generating profit. It is also a way of creating innovations that balance the short-term and the long-term. It is a means to innovation because innovation is a process of recombining ideas across social domains. Stakeholders, by definition, occupy different social domains, so managers must innovate if they are to create value for each of them. [5] A stakeholder view is also a means for managers to balance short-term and long-term interests, because the interests of the stakeholders that they are trying to create value generally span different time horizons. It is no wonder, then, that employees around the world who have leaders that take a stakeholder view see those leaders as more visionary and exert more effort on behalf of those leaders. [6]

Action Implications

How, then, can managers adopt a stakeholder view when they make investment (and other) decisions? Here are a few suggestions:

1. Get out and talk to stakeholders–especially the ones that you do not normally interact with as part of your job–and talk to them about what you organization does, and can do that would be of benefit to them (see our review of Adam Grant’s work, for example).
2. Learn to communicate with stakeholders by using analogies, stories, or restatements to make sure you understand each other’s language and perspectives. [4]
3. Insist that a solution is not found until it adds value for everyone.
4. Develop stories with specific plots and engaging morals about how and why to act in ways that add value for everyone (see chapter 6 of Lift).
5. Invite your colleagues to engage others and participate in brainstorming with you.
6. Listen!

Beyond Health Insurance

The story of Geisinger is a wonderful illustration of how an effort to create value for multiple stakeholders can inspire long-term vision for a company with all of the strategic impact that implies. This kind of impact is not limited to health insurers, though. All organizations have stakeholders. All organizations can take a long-term approach to creating value with and for those stakeholders. By looking for opportunities to innovate in the needs of their stakeholders, Geisinger rose above the criticisms and battle lines of health insurance debates to create value. Managers in any organization can do the same by exerting the similar levels of interest, attention, and effort for their own stakeholders.

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References

[1] See, for example, Bower, J. L. (1970). Planning within the firm, American Economic Review, 60: 186-194; or Hayes, R. H. and Abernathy, W. J. (1980). Managing our way to economic decline. Harvard Business Review 58:67-77.

[2] Souder, D. and Shaver, J. Miles (forthcoming, 2010). Constraints and Incentives for Making Long Horizon Corporate Investments. Strategic Management Journal.

[3] The Centre for Financial Market Integrity and The Business Roundtable’s Institute for Corporate Ethics has issued a report on this phenomenon, cataloging for-profit, publicly-traded companies that are taking the lead on this by doing these link refusing to announce quarterly estimates to analysts. Examples of companies that are doing this include Berkshire Hathaway, Coca-Cola, and The Washington Post Company. Others have followed this lead, including General Electric.

[4] Pages 282-283 of Freeman, R. E. (2010). Stakeholder Theory: The State of the Art. Cambridge University Press: Cambridge. Note that making profits for investors is a critical part of this model. This is capitalism, but what people today often call “creative capitalism” or an enhanced view of capitalism (Michael Kinsley (2008). Creative Capitalism: A Conversation with Bill Gates, Warren Buffett, and Other Economic Leaders. Simon & Shuster.

[5] Hargadon, A. B. (2002). Brokering Knowledge: Linking Learning and Innovation. Research in Organizational Behavior. B. M. Staw and L. L. Cummings. Greenwich, CT, JAI Press. 24: 41-85.

[6] de Luque, M. S., N. T. Washburn, D. A. Waldman, and R. J. House (2008). Unrequited Profit: How Stakeholder and Economic Values Relate to Subordinates’ Perceptions of Leadership and Firm Performance. Administrative Science Quarterly, 53: 626-654.

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