This article originally appeared on LinkedIn.
We are about to head into proxy season, the time when CEOs publish their annual letters to shareholders. Warren Buffett’s letters are probably the most famous, but my favorite letter-writer is Jeff Bezos.
Bezos opened his 2016 letter to Amazon shareholders with a discussion of his management philosophy, which he boils down to a concept called “Day 1.” So important to Bezos that he named the building he works in after it, Day 1 argues for always focusing on outcomes. In a Day 2 company, by contrast, following corporate processes becomes more important than getting results. This, Bezos warns, leads to “stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death.”
To fend off Day 2, Bezos starts with customer obsession:
There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective of Day 1 vitality. Why? There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf.
Relying excessively on market research surveys as proxies for customer desires can lead in the wrong direction, he warns:
Good inventors and designers deeplyunderstand their customer. They spend tremendous energy developing that intuition. They study and understand many anecdotes rather than only the averages you’ll find on surveys. They live with the design. … A remarkable customer experience starts with heart, intuition, curiosity, play, guts, taste. You won’t find any of it in a survey.
Every year, Bezos follows his current letter with a copy of the very first one he wrote, in 1997. Twenty years ago, he understood that his business’s success would depend on turning customers into promoters, writing:
Word of mouth remains the most powerful customer acquisition tool we have, and we are grateful for the trust our customers have placed in us. Repeat purchases and word of mouth have combined to make Amazon.com the market leader in online bookselling.
In that 1997 letter, Bezos outlines nine aspects of Amazon’s management and decision-making approach. The first is relentlessly focusing on customers; the second, making investments based on long-term market leadership considerations, not short-term profitability or Wall Street reaction.
Recently, I heard an echo of Bezos’s argument in another CEO’s letter, that of Larry Fink, founder and chief executive of investment firm BlackRock, which controls more than $6 trillion in assets. Fink’s letter isn’t addressed to shareholders but to the CEOs of companies his firm invests in. In it, he argues that we have reached a moment when it is not enough for a company to deliver financial performance. It must also “show how it makes a positive contribution to society.”
Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?
Focusing on return on human capital, not just return on investor capital, is the way to build a business for the long term. Smart leaders understand the power of loyalty.