What happened to the firm?

The workplace has an important role in the development of a person’s identity, thoughts, and behavior. When a person changes a job, almost everything in her life changes – appearance, habits, dress, judgment, opinions, behaviors, moods, and feelings. The workplace transforms her inner world thoroughly.​

However, this effect does not stop at the individual’s inner world, but spreads through a network of human relationships not only to colleagues and co-workers at the workplace, but also to suppliers and partners, and onward to customers and users of services. And when this individual comes home, this influence is inevitably spread through other communication systems – to members of the immediate and extended family, to neighbors, friends, acquaintances, and so on. So it makes sense to ask, what exactly are we spreading through our social network? What experiences are we bringing home from the workplace to our families, neighbors, and friends?

A culture of distrust and transactional costs

In most today’s organizations there is a “culture of distrust,” arising as a consequence of damaged relationships that are often due to firms’ leaders’ sole interest in profit, coupled with a complete disregard for the wellbeing of “common” workers (we will discuss this in more detail in one of the upcoming articles). This is in direct conflict with the original reason firms were created for – reducing transactional costs. So it’s not surprising that a considerable number of today’s firms either fail, or never manage to grow.

Let’s clarify what this means on the example of purchasing a car: The cost of buying a car is its price plus tax. Transactional costs are all the costs accompanying the purchase, but not directly linked to it – the cost of having a mechanic inspect the car before purchase (to account for the possibility the seller is selling a damaged or broken car), the cost of notary services (because I may want to cheat the government and pay a smaller amount of tax than the price requires), all expenses related to the bank loan to buy the car (because the bank wants to be sure I will pay back the loan), and so on, not counting the hours spent waiting in line, looking for guarantors, filling out forms… We encounter a similar situation when starting and managing a business, in the process of business transactions and making contracts, but also within the firm itself, where workers are often required to write countless reports, sometimes spending hours of precious time that could have been put to better use – both for the individual and the firm.

A firm is created when individuals realize that their long-term collaborative work, safeguarded by mutual loyalty and good faith, results in a reduction of transactional costs. Furthermore, it has been shown that groups of people become much more efficient when the transactional costs of their collaborative work are smaller. Businesses and organizations that survive and successfully grow in today’s market are led by a leadership that understands this principle and invests considerable resources in building and maintaining a positive organizational climate and relationships of trust among workers, as well as between workers and the organization’s leadership.

Although an “intuitive” first glance suggests differently – many of us have experienced first-hand that market competition and pursuit of profit do not go together with good relationships based on trust – research speaks to the contrary. Not only do firms that invest in employee relations thrive in almost every respect – from productivity to innovation, to fewer layoffs and shorter sick leaves – but they achieve a greater market value compared to firms focused solely on profit.

The above diagram shows a comparison of growth in value for firms recognized as “best workplaces” compared to firms who did not make that list. Although the value of their shares was equal in 1998, at 100 USD – in 2000 these values began to diverge and the difference keeps growing. In 2008, the average share value of firms that made the “best workplace” list was 266 USD, while the share value of firms not on the list was only 180 USD. This means that investing in a business that cares for its workers and builds a positive organizational climate and relationships of mutual trust, yields as much as 2.1 times more return on investment compared to investing in firms that do not.

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Doing business in a global world