By Jack Cumming
We all live with an unconscious shaping of our values and thinking by the culture in which we live and function. That’s as true of businesspeople as it is of everyone living during a given era. Perhaps, it’s even more the case for those who cling to the promise of not-for-profit organizations than it is for those who unabashedly pursue profit as many private equity firms stereotypically do.
The Soul of Corporate America
A recent book puts this cultural emphasis into perspective. It’s a good read and a book that I recommend. I’m writing here of David Gelles’s The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America—and How to Undo His Legacy. You may know Jack Welch from his adaptation of the wise teaching of W. Edwards Deming, restructured as General Electric’s Six Sigma program. While Mr. Gelles focuses on Jack Welch, he really starts his insights with the academic theorizing of Milton Friedman in his 1970 New York Times article, The Social Responsibility of Business Is to Increase Its Profits.
Gelles argues that when Welch took the helm of GE in 1981, it was the first time that a major enterprise took the harsh Friedman morality to heart. That is when business began, led by GE according to Gelles, to turn inward, to become self-serving, to emphasize short-term earnings over long-term relationships, and to favor profit maximization over product innovation.
As you may know, General Electric has not fared well since the Jack Welch era. My own take is that an inward orientation can only achieve short-term results. The failure to innovate and grow eventually leads to decline. Of course, there are businesses that benefit from a takeover and turnaround, especially slow-moving not-for-profits, but vulture profit maximization ultimately results in customer alienation, a shrinking enterprise, and a withering away from greatness.
Are You a Reader or a Viewer?
If you’re reading this article, you’re likely part of a dwindling group of people who still read as their primary source for information. Many people now prefer video, and short videos at that. For the video group, Walter Isaacson, the well-known biographer, recently interviewed David Gelles about his book, and you can click here for that interview. If you still want to believe in General Electric, click here for an optimistic video assessment that its resurgence is just now beginning. Click here for a realistic view of the importance of the CEO choice and the risks of financial products as opposed to tangible goods and services.
What does this mean for senior living? For the past few years, we’ve seen CCRCs trying to move away from the inclusion in the continuum of care of licensed skilled nursing due to reimbursement and regulatory challenges. At the same time, CCRC customers have been entering with higher acuity initial frailty and/or cognition issues. Thus, the demand for high-acuity response has been accelerating, just as CCRCs are moving away from higher-acuity response capabilities.
Continuing Care?
Recently, the Health and Human Services Department of the Federal Government and the Centers for Medicare & Medicaid Services (CMS) issued an interim final rule rescinding a pending requirement that a registered nurse be on‑site in skilled nursing 24 hours a day, 7 days a week. This means that residents whose deteriorating or temporary condition requires services that only a licensed RN can provide must leave their “home for life” unless their provider maintains the needed staffing and equipment.
Though it is seldom discussed, residents have to leave their home CCRC if the facility does not provide care services that they may need. An example can be services that require an RN’s supervision. If there is no RN on duty at night or on weekends, they may have to leave or, worse, suffer. Imagine a person dying of cancer who can’t get pain relief over an entire weekend due to staffing in the onsite SNF.
This lack of a full continuum of care may be common among providers and likely reflects the Friedman/Welch doctrine. I haven’t been able to research how widespread this practice is among not-for-profit providers. It’s evident that meeting a high ability-to-care standard will be challenging in a small SNF, though imaginative leadership can help create a caring culture.
The absence of full care licensure and capability, though, illustrates how the inward-turning business culture has impacted even the not-for-profit sector. The industry would be wise to find a way to provide the full continuum of care needed to fulfill the vision of a care home for the rest of the resident’s life. In the face of regulatory and reimbursement challenges, it will take very imaginative leadership and effective regulatory changes curated by the providers’ advocacy organizations. That, too, can be difficult if the approach is one of defensive reaction rather than proactive envisioning.
What Are Our Values?
A question that future generations will control is whether American business will return to the values and principles that gave us the widespread use of mutual corporations in the mid-nineteenth century or the cooperative housing revolution in Manhattan in the 1980s. A corporate charter was seen as a privilege calling for public responsibility.
The senior living industry is one that particularly lends itself to cooperative or mutual organization. Residents might well choose to pay to have stronger care in skilled nursing and other settings for the time when they might need it.
Today’s Culture
For now, though, the United States has moved from a consumer-serving economy to one that enriches executives and shareholders. Not-for-profit executives have benefitted from the safe harbor regulation that mutes the force of IRC 4958, which appears intended to keep executive compensation reasonable. The safe harbor allows compensation escalation if justified by a survey of compensation for comparable organizations.
Since not-for-profits can lose executives to for-profit operators, the surveys include for-profit organizations. Moreover, the compensation advisory firms conducting the surveys are retained by boards and executives likely to benefit from increasing pay at the top. The result is an upward spiral in “acceptable” compensation as surveys justify pay increases, which then enter into renewed surveys, spiraling upward.
As Gelles notes, “Whereas CEOs made less than 50 times the annual worker salary when Welch took over, they were making 368 times as much by the end of his term.” Not-for-profit increases have been dampened, but a multi-facility CEO earning, say, $650,000 today is earning at least 13 times the wage of a minimum-wage worker in the state that mandates the highest worker wage in the country. Is the CEO’s value the same as 13 workers? That’s a philosophical question for our era.
Is Pursuit of Profit Socially Responsible?
For people like me, who were active in business before the Milton Friedman doctrine, his teaching can seem unfounded. After all, we were taught that corporations were chartered by the states to benefit humankind and that they were given limited liability in furtherance of that social good. Not-for-profits were further rewarded with tax exemption because they put mission first.
The shift to a more inwardly self-serving enterprise erodes the sense of trust that long characterized business ideals, e.g., a person’s word is as good as their bond. Now, we look more to the letter of the contract than to its substance. Loyalty has become mistrustful, and that breeds contention. In the end, though, in the consciences of those of goodwill, we are judged more by the substance of our accomplishments than by our self-aggrandizement.
