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  Trends and Challenges for Work in the 21st Century
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Rebuilding the Social Contract at Work:
Lessons from Leading Cases

Thomas A. Kochan
Institute for Work and Employment Research
Sloan School of Management, MIT

Task Force Working Paper #WP09

May 1, 1999

Draft in Circulation

Cross-Cutting Themes and Lessons

These case studies were discussed at a November 1997 meeting of the Working Group on the Social Contract and the American Corporation of the Task Force for Reconstructing America’s Labor Market Institutions. Eight cross-cutting themes emerged from that discussion and are summarized below. It should be noted that not all participants at the meeting necessarily share all of the views expressed below. Instead, this account represents my distillation of the discussion and what I believe we learned from these cases about the strengths and limits of how employment relations are structured and governed in these firms for the task of renegotiating a social contract that addresses the key concerns of shareholders and employees in today’s economy.

1. Define the terms of the contract clearly.

It is clear that the implicit social contract being offered by companies today is different than the implied expectations or obligations of the past. Kodak, for example, has been explicit in its statements, indicating that—while in the past it promised employment security—today employees should expect: (1) open information on the state of the business; (2) opportunities to learn new skills, develop, and remain competitive in the labor market; and (3) financial and labor market transition assistance, if downsizing occurs. This contract may be the most an individual company can offer, although some organizations, such as Saturn, continue to commit to a no lay-off policy. Saturn’s promise, however, is the rare exception. While the specifics of implied expectations and obligations will vary (probably closer to Kodak’s rather than Saturn’s terms), the Working Group agreed that, whatever the “terms” are, they need to be clearly defined and communicated for all types of employees. Such a step is essential at companies such as Lucent, Xerox, and United, where different groups of employees have access to different types of contracts and varying motivations for sustaining a given agreement. Thus, the first requirement in reconstructing a viable social contract at work today is to be open and explicit about what each party can expect from the employment relationship.

Should the terms of the contract itself be implicit or explicit? Is the concept of a social contract only viable when a union represents employees—or can a shared set of expectations or norms that are “enforceable” in some way exist when employees are not formally represented? This question sparked a vigorous discussion and some disagreement. Richard Locke from MIT’s Sloan School of Management noted, “The idea of constructing a contract is to record elements of a deal, because there is no trust that one or both parties will uphold that agreement. If a contract provision is there, things like benefits, voice, and security won’t be taken away.” Or, to continue Locke’s line of thinking, changes will at a minimum involve negotiations rather than unilateral decision-making and action. For example, although Kodak has maintained its paternalistic stance toward employees, the company’s non-unionized workforce has no recourse if the climate should change. In the case of Xerox, the vast majority of employees not included in the bargaining unit may have benefited from the labor-management partnership, but recent downsizing of clerical, middle management, and sales workers indicates how fragile those benefits actually are.

Dennis Rocheleau of General Electric offered a set of “constants” he believes should be incorporated into newly defined social contracts but suggested that few firms can turn these elements into explicit, binding agreements with employees. The first is to ensure that communication channels are clear and open. “The highest levels of honesty need to be upheld in the information being sent from the top down, and there needs to be open channels for input from the bottom of the organization to the top,” said Rocheleau. Second, employers and employees must share the successes—or failures—of an endeavor. Third, the model should include a shared responsibility on the part of employers and employees for expanding the base of employable skills within a job.

For Lynn Williams, formerly of the United Steelworkers, a key component to any new contract is power-sharing. “As people become involved and recognize how they do contribute, they want that contribution to be recognized and acted upon,” said Williams. In a democratic society, shouldn’t workers expect to have a voice in corporate decision-making? What part of a new social contract should include those elements? How can such an expectation be realized in a non-union setting?

While no consensus emerged over whether or not social contracts need to be explicit and binding, there was broad agreement that the expectations need to be clear and internalized by both employees and employers. Articulating these expectations generates trust. But, if they are broken, trust is difficult to rebuild. The key question is: How can organizations develop, communicate, and sustain these shared expectations and mutual obligations in the absence of formal representation on the part of employees? It is clear that existing institutional arrangements—union representation or employee involvement in non-union settings—are not adequate to this task. The former covers too small a portion of the workforce, and the latter seldom reaches high enough to influence the centers of decision-making power on these strategic issues. Some new institutional process must be invented and made available in settings where formal union representation with collective bargaining is either not desirable or feasible—but neither is no form of employee participation. There is not, however, likely to be consensus between labor and employer representatives over what such institutions or processes should be.

2. Change the whole, not just the parts.

Renegotiating the social contract involves changing a firm’s full system of employment practices and relationships, not just altering one piece of its system. A host of organizational practices and norms have been built around a different social contract—cultures, expectations, traditions, and business processes—that will cause the mere overlay of selected pieces of new model to be inefficient, impractical, or undermined. A large and growing body of empirical research on the effects of various human resource and workplace innovations on firm performance confirms this point. Taking erratic steps or rolling out add-ons will not be sufficient to generate the support needed to realize the new model’s goals. Several of the cases illustrated this misstep. While Lucent and Xerox are attempting to infuse entrepreneurial spirit into their large organizations with traditional cultures, GM has failed to integrate the innovations of Saturn into its other divisions. Clearly, without establishing a uniform culture or a consistent business philosophy, the gains realized by limited experiments will be short-lived.

In order to diffuse pilots and experiments across a large organization, mechanisms for changing the culture of the entire enterprise must be embedded in the design right from the start. Nancy Mills of the AFL-CIO noted how difficult this cultural transformation is. She knew of few successful cases in which a pilot project was diffused throughout a large organization, in part because participants in the pilots often self-select—employees interested in new modes of working are recruited, making the participation-performance equation work. Extending new models into other parts of the organization would require a long, committed effort to adapt the organization and rally the support of workers, middle managers, and union leaders. Drawing on the Saturn and Xerox models, William Hobgood of United Airlines concluded, “If you are ultimately trying to accomplish a complete change, you have to tackle the implementation at every level of an organization.” In a unionized setting, a cultural change involving a new social contract could only be adopted and sustained if it was addressed in every collective bargaining negotiation, in order to support a multi-year plan for implementation and ensure that the resources necessary to realize the change are committed.”

However, Rocheleau cautioned that a new model must also be adaptive to the reigning culture—or it will fail either to be implemented or to survive. “As an experiment, you’re more like a mutant organism that taxes the system. In order to avoid being removed, you have to be more compatible with the host,” he said. In a large organization, the adaptation process would need to be incremental, sustained, and consistent to have a large-scale effect. It would also have to be resilient enough to survive the normal fluctuations in business cycles, the inevitable conflicts and crises that will be encountered, and the expected resistance to cultural change by the people involved.

3. Design structures that have staying power.

The group agreed that—for a new social contract to be sustainable in the long-term and in the face of changes in business conditions, key supporters, or leadership—it would need to be adaptive and open for negotiation to adjust to ongoing changes; to contribute to key performance outcomes by demonstrating it is adding value and helping to meet key employee objectives and expectations; and to have built-in mechanisms for employees and managers to resolve differences or disputes that inevitably arise without undermining the process itself.

Productive negotiation is key to the success of any new model—whether these negotiations take on the formal features of collective bargaining or the more informal nature of day-to-day interaction in both union and nonunion settings. In either case, trust will only be gained when channels for debate are open. Saturn’s co-management system, which extends from the strategic to the front-line levels within the organization, is an innovative—but equally controversial—example of enduring mechanisms for employee involvement, voice, informal and formal negotiations, and dispute resolution.

But ultimately, to achieve permanence, a new model must also add value—a return to shareholders, an increase in productivity. “To what extent is a new social contract viable? Does it die with changes in the financial status of the firm? The success of a new contract will depend on its ability to meet financial and social obligations,” said Ralph Craviso from Lucent Technologies.

The Lucent case illustrates another point—the tradition of a fixed, long-term contract that developed through collective bargaining over the post-War period is no longer flexible enough to adjust quickly to today’s economic changes. Thus, the Walter Reuther’s concept of the contract as a “living document” needs to become the norm. This notion is what kept the Xerox partnership from deteriorating as new conditions (in some cases bad economic times and in other cases good ones) arose. The parties were able to adjust their agreements as needed to address these new conditions. Again, such flexibility can only be achieved if there is sufficient communication and transparency of the information for all stakeholders involved, as well as the trust required to support renegotiations when conditions change unexpectedly. Clearly, an institution-building task is once again required to accomplish this level of comfort; the Xerox case, as well perhaps as the Saturn example, offer a few ideas. In both cases, union and employer representatives interact on business issues in a relatively continuous, or at least periodic and timely, fashion.

4. Remember that leadership is important.

While a focus on structure is necessary for redefining a new social contract, alone it is not sufficient. The importance of leadership on the part of management is critical: every successful innovation hinges on a CEO or top-level official signing on and being willing to make a commitment. Without that leadership, the effort will not happen and might not become sufficiently institutionalized to survive a change in leadership at a later time.

One reason that the Xerox case stands out is that it has endured multiple CEO and union leader successions. In fact, leadership changes are about to challenged the union-management partnership once again; however, both parties are already taking steps to ensure the heir apparent CEO understands the history and achievements of the partnership, engages union leaders in open discussions of his vision and goals, and communicates his hopes for the partnership’s future. This rather unique attention to managing leadership transitions may account in part for the longevity of this partnership.

An equivalent level of commitment by union leaders and members is also needed. Some unions have supported these efforts and others have not, and it is this unclear vision or ambivalence within the labor movement that has hindered labor’s ability to build leadership capacity to promote and support these types of processes and partnerships. This is a critique of the labor movement. Until a generation of union leaders has internalized the importance of these models, has understood what it takes for a business to be run successfully in this environment, and has the political savvy to manage a democratic institution, the potential of these models is limited.

However, this limitation is being addressed. Building on considerable local union leadership experience in the field, the AFL-CIO has created a unit specifically charged with developing a clear vision and strategy for workplace democracy and strategic partnerships rooted in the values of the labor movement. The key questions for the future are: How can union officials develop the knowledge about industry and the leadership skills necessary to strike mutually beneficial bargains that would make a new social contract viable and sustainable? How can union members be convinced to trust and invest in that knowledge? (We will be exploring these critical questions at the next meeting of this Working Group.)

5. Strengthen and reposition the role of human resources.

American management has downplayed the strategic role that human resources (HR) could play in reconstructing mutually beneficial employment practices. As I mentioned in the meeting, “We can’t ignore HR’s professional value and power. HR can indicate when a company’s practice isn’t fair, legal, feasible, or sensible. HR can say: ‘You can’t do it that way, not just because a union or government regulation says you can’t, but also because it will destroy the trust we have worked hard to build with our employees.’”

I believe that there needs to be a deeper and more powerful voice within the management structure—one that is equivalent to the financial voice—expressing the notion that good management requires investment in the company’s workforce and community. There is still a critical role for HR and IR professionals within the corporation. These positions have lost power to finance and to line executives running individual business units, particularly as the roles of unions and government have receded, but we need to recreate that power in order to establish and sustain new social contracts that make sense. The key indicators of the relative power of these different management groups are who is involved and who makes the decisions about whether or not work is to be outsourced. The Xerox and Saturn cases demonstrated that HR or IR professionals and union leadership had a voice in these decisions. At Lucent, business unit leaders had greater discretion to act, resulting in considerable tension that is now the subject of active discussion.

6. Negotiate the boundaries of the firm and its community and labor market responsibilities.

In considering new or revised social contracts, it is important to determine which components should be inside or outside of a firm. As suggested above, in these cases, the biggest common threat to destroying prior social contracts and their concomitant trust is the current trend toward focusing on “core competencies” and outsourcing as much of the remaining work of the firm as possible. Thus, determining where the boundaries of firms are placed becomes an important part of the negotiation of new social contracts—one few employers wish to negotiate explicitly or share power over. Yet, if this issue represents the critical choice driving employment security and the level of wages and benefits that employees are paid, then it cannot be ignored or left off the table.

Negotiations over these issues could help to determine whether or not, for example, a company like Lucent could—or should—spin off its manufacturing functions. On the other hand, such questions could assist companies like Xerox, Kodak, Saturn, and Lucent—where internalized manufacturing processes help to feed research and development—understand how maintaining but reorganizing production could serve as a key competitive strategy.

Williams followed up these points with two questions: “Should new social contracts explicitly include the idea of community development? Is that commitment reasonable to suggest?” Taken together, the Xerox and Kodak cases highlight how individual firm decisions could have significant effects on the economic infrastructure of their communities. Located in the same town of Rochester, NY, if both companies resort to massive manufacturing layoffs, where will local workers find family-supporting employment? In the growing low-wage service sector? The combined effects of the social contracts at both of these companies could have potentially devastating effects on a local economy. The Working Group agreed that this issue will also be a priority for future discussions.

7. Look for potential solutions that lie outside of the organization.

While the cases focused on the social contract within individual firms, the working group recognized that there are limits to what can be achieved in any specific company, especially given the intense pressures for bottom-line results in today’s marketplace. The issue, then, boils down to the following question: What are the limits of individual company-employee social contracts and how do efforts to renegotiate and sustain a new social contract within individual firms relate to the broader set of community and labor market institutions? This concern is less relevant for firms that anticipate or can predict with reasonable certainty that their employment levels will either remain stable or change in an incremental fashion. United and other large companies with relatively stable employment levels, for example, will most likely continue on their current paths—though, no doubt, with significant modifications that depend on the success of both the firm and its industry. However, this level of predictability is less prevalent today than in the past—and, indeed, may be relatively rare. While it is important to examine individual firm practices, it is equally essential to examine how institutions external to the firm can complement existing social contracts or establish explicit relationships where they are non-existent.

As Locke mentioned, given the inherent instability of individual establishments, pinning a “social contract” on any one firm could be a limited notion. “To give multiple stakeholders rights and voice, there could be a more efficient institution outside of the firm. We really need to explore what we mean by that—could it be something sustained at the community level?” Both Xerox and Kodak have demonstrated a willingness to listen to and work with community representatives in the past—whether they are union or non-union groups. What lessons do these cases offer for other communities in similar predicaments?

In some cases, extra-firm solutions could help to recreate a social contract. As Mills asked, “Are there other forms of employment and economic security that can be devised as a result of multi-firm provisions or job creation and economic development efforts beyond one firm?” Is it possible to determine a way to balance internal labor market contracts and relationships outside the firm?

8. Include notions of social value in the calculation of value added.

When comparing companies such as Lucent and its younger but potent competitor, Cisco Systems, the group was struck by the enormous difference in each company’s number of employees, their use of integrated versus outsourced manufacturing systems, and the number of dollars spent on pensions and benefits. Margaret Blair of The Brookings Institution suggested that the “social value” maintained by a company like Lucent over its competitor Cisco should be incorporated into a different type of accounting that considers the benefits of an employer’s practices to its larger community. “If you take value to shareholders and add it to an expected stream of benefits to employees, there’s a different mechanism for how that value is taken into account,” said Blair. I agreed with Margaret, adding: “That’s a fundamentally different concept of the firm, similar to a stakeholder model—that different objectives are served by the corporation than simply maximizing shareholder value. If we don’t join this issue, we won’t be able to adequate explore new models for the social contract.”

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