Meritocracy in the corporate world can be defined as hiring and promoting employees into positions based solely on their competence without any favouritism – such as to relatives, known as nepotism, or to benefactors, known as cronyism.
Meritocracy is such a strongly held concept in terms of the successful execution of any endeavour that nations have embraced it as a central tenet of their civil services, where employment and placement are based on rigorous competitive exams. Singapore, arguably the poster child for successful emerging nations, has meritocracy as a basic national guiding principle. If nations are paying attention to meritocracy, should not businesses do the same?
A word of caution: meritocracy is not a concept that can be naively applied. There are national and moral issues that need to be addressed. At the national level, governments will always prioritise their citizens, and at the moral level, one has to consider that unfairly disadvantaged groups might need the playing field levelled. However, meritocracy is of such benefit that it is best to apply it then adjust it as necessary.
Some of the benefits of applying a policy of meritocracy to a business are clear. For example, recruiting and promoting the most competent employees leads to greater creation of shareholder value. Furthermore, as the culture of merit-based employment flourishes and is signalled in the market, the cost of employing competent people relative to other companies drops, giving the merit-based firm a strong cost advantage over its competitors, and in addition the cost of recruitment plummets.
Against these benefits are set several challenges. The first is that competent people will demand a higher salary than the market mean. Companies seem to believe that they can hire from the top quartile while paying market average salaries. Unfortunately they usually end up paying top quartile while hiring average talent.
The bigger challenge is nepotism, which excludes publicly recognised family partnerships. Even in a sole proprietorship where it might seem no harm is done, this ignores harm to employees who may be paid based on company performance, as well as stakeholders such as clients and lenders who depend on the performance of the company.
In cases where it is not a sole proprietorship or where the nepotism is not related to the shareholder, the situation is much worse. The reasons are not only the clear value destruction in not having the best person possible hired for this job, but also the disincentivisation of competent employees, thus destroying value in other areas.
Finally, there is cronyism which is invisible, or at the very least difficult to prove. This can be as simple as “you hire my son where you work and I will hire your son where I work” to much more complex schemes, whereby people are employed to ensure corporate behaviour that benefits the clique of cronies without regard to the welfare of the company or its stakeholders.
The latter behaviour, often called crony capitalism, is clearly exhibited in the continuing debacles in the global investment banking industry – from mis-selling complex debt instruments to assisting wealthy individuals in illegal tax evasion to manipulating interest rates, and now foreign exchange prices. The destruction by these cronies is in the tens of billions of dollars and counting.
The direct dangers of not supporting meritocracy and ensuring it flourishes are quite possibly dwarfed by the indirect dangers, with the worst being learnt helplessness.
In the 1960s, Martin Seligman, a noted psychiatrist, ran a series of experiments that showed that dogs would stop acting in their own best interest if they were first repeatedly exposed to situations that they could not control. Mr Seligman later ran experiments on humans, which confirmed the behaviour. The danger is that if the competent and able people in an economy are repeatedly shown that their competence is not relevant to their career success, then they will simply give up.
The competitiveness of a whole economy can be wiped out by a relatively small number of cronies who frustrate meritocracy.
This situation leads to a vicious downwards spiral, with the cronies beginning to look more relevant in the face of a competent workforce that they have circumvented, thus conferring to the cronies more implied influence to further suppress competent employees. This leads to a collective narcissism on the part of the cronies whereby their arrogance expands beyond any opportunity to reverse the situation without a confrontation.
At some point the drain of competence and the concentration of authority in the hands of the crony capitalists results in an implosion that destroys whole companies and occasionally national economies. Think about the financial crisis of 2008.
The only way to avoid this is to relentlessly push for meritocracy based on clear and transparent measures of competence and ability and to allow the natural state of a pluralism of competent voices and talent to drive the company.
Sabah Al Binali is an active investor and entrepreneurial leader, with a track record of financing, building and growing companies in the Mena region. You can read more of his thoughts at al-binali.com
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