The Nobel Prize was recently awarded to three economists who demonstrated the importance of societal institutions to a country’s prosperity. They found that freer, more open societies with “inclusive” institutions were more likely to prosper than societies with “extractive” institutions designed to benefit those few in power.
Their conclusion is not surprising, but it raises a deeper question. Why?
By considering this question, we’ll discover some universal principles that apply to the management of businesses, including financial advisory firms.
What Drives Behavior?
The research results by Daron Acemoglu, Simon Johnson and James Robinson were clear. Institutions created to exploit the masses are bad for long-run growth, while those establishing fundamental economic freedoms and the rule of law are good for it. What are the mechanisms at work here? Here are some possibilities:
- Incentives work. If you have a reasonable chance of making more money and building a comfortable life for yourself, you are more likely to bring your A-game to whatever you do. An entire society of motivated hard workers produces prosperity.
- Owners are more motivated to take care of their property than tenants. Citizens of societies with strong property rights have a stake in building and maintaining thriving neighborhoods and strong infrastructures. This translates into growth.
- Freedom is uplifting. If you feel empowered to take action, make decisions, and control your destiny, you become a more productive force. Alternatively, living under someone else’s thumb feels demoralizing and undermines productivity.
- Openness unleashes creativity. Encouraging and rewarding new perspectives leads to innovation and innovation leads to progress. Repressive environments stifle creativity, innovation, and, ultimately, progress and prosperity.
- Having a voice promotes engagement. People who have a say in shaping their futures become more personally involved in what’s happening. Getting the best thoughts from a diverse set of individuals benefits the collective group.
- Communication produces positive outcomes. Open societies have a free press and encourage open public debate. People know what’s going on and feel involved. This allows people to allocate their resources and efforts in the most productive way.
- Being a part of something bigger than yourself increases motivation and drives action. All prosperous societies are immersed in stories about their history, purpose and values. History shows people work hard and sacrifice for these ideals.
How This Applies to Advisory Firms
It doesn’t take much imagination to see how these principles might translate into pillars of success for businesses just as they do for societies. And in my experience, they do.
An incentive program can benefit a business in many ways. Of course, generous compensation can help you attract top talent. A program that includes an element of success-based compensation can encourage action designed to achieve success. But fairness is also important. The equitable distribution of monetary rewards motivates everyone.
Equity ownership is an incentive that deserves special attention. No matter how well the team members are paid, there is always a gulf between owners and non-owners. The upside belongs to the owners. This is not a theoretical matter for advisory firms—they are being bought and sold frequently these days.
There are two benefits to distributing equity widely among team members. Owners tend to work harder and view the business in a different light than non-owners. In addition, equity ownership tends to bind team members more closely to the organization.
There are types of equity ownership programs that don’t currently require team members to contribute cash to participate. Founders would be well advised to at least consider programs that give team members an ownership or quasi-ownership stake.
Giving team members the freedom to make decisions, experiment with new ideas, and exert control over their respective domains is energizing. This doesn’t mean you abandon tried and true processes and procedures. But it does mean respecting each person’s individuality to the extent possible and recognizing that there is often more than one way to accomplish a task. Experimentation can lead to breakthroughs or process improvements.
Establishing an environment that encourages brainstorming and exchanging new ideas can also lead to creative approaches to solving problems and discovering new opportunities. This should be done intentionally with a relatively open agenda. Bring people together who might not otherwise interact. Sit back and let the ideas fly.
Getting together the broadest possible group when making decisions has two benefits. First, it helps avoid problems that might not have been identified by a smaller group. Including frontline team members ensures a practical perspective that would otherwise be missing. Also, the feeling of being included uplifts those at all levels of the organization.
A regular communication program about what’s going on in the business can work magic. First, it makes people feel included and respected. Second, it gives everyone context for the decisions they make and the actions they take. This improves the quality of even small decisions and produces more coordinated actions by team members.
Simon Sinek’s book Start with Why discusses the importance of understanding and expressing why a business does what it does. Building a culture that emphasizes the common mission or purpose that drives an organization gives each team member something bigger than themselves to be a part of. If you haven't already, it is worth developing a “why statement” for your business. A sense of purpose can be highly motivating.
Common Behavioral Themes
The success of societies and businesses depends on people’s behavior. The three Nobel laureates named above identified some common themes that determine society’s prosperity. I believe those themes are very relevant to determining how to structure and run a successful advisory practice. They are certainly worth considering.
Scott MacKillop is a strategic advisor to GeoWealth and a 48-year veteran of the financial services industry. He also serves as an ambassador to the Institute for the Fiduciary Standard. He can be reached at [email protected].
