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October 16, 2008
October 15, 2008
We were sitting in a country residence in southern Germany, peer-bonding. It was a spring evening: warm, full of promise. (The Internet bubble had yet to burst.) The conversation turned, as if steered by an invisible hand, to company cars. Ah! The allure of the new. And yet not so new: we had been on our company’s training programme for baby strategists for more than a month, and the topic had yet to lose its lustre. Was a Mercedes better than a BMW? What were the merits of the BMW Series 3 over the Audi A4? (There followed a detailed excursus concerning the position of the armrest.)
Marissa, one of the other five women in our cohort of thirty-six, made eye contact with me. “I’m getting a Golf,” she said with an air of finality. We stood up, and left the table.
So often, companies adopt family-friendly programmes – flexitime, parental leave – in an effort to attract and retain talented women. And those programmes are important. But creating a women-friendly workplace is about much more than that.
Our blue-chip strategy firm, to give it credit, scratched its head over why women made up only 15% of its incoming class. But where it and its industry peers go wrong is in thinking that a good pregnancy policy is enough. It’s not. It’s not even half the battle. For starters, one commonly-cited statistic says that 40% of German women university graduates never have children. That’s two-fifths of the consulting workforce for whom a family policy is irrelevant.
We suffocate at restaurant tables where the air is thick with cigar smoke (according to Cigar Aficionado, women make up less than 5% of cigar smokers, but you’ll see a lot of cigars when consulting managers get together). We care about our Lufthansa Senator cards (hey, if you wanted the last place on the Thursday 19:35 flight to Frankfurt, you’d want those red leather luggage tags as well), but we don’t much mind about whose hood ornament adorns our cars. And a watch? It’s what you use to tell the time. Quite how men manage to get so much conversational mileage out of cars and watches is a mystery to us.
Most women (like most men) left my firm, but we left in greater proportion. As I watched us fly out through the gates of institutional memory, I decided that we were leaving because we had never felt we belonged. In this context, it was interesting to read a recent McKinsey Quarterly article that urged companies to “encourage mentoring and networking, to establish… targets for diversity, and to find ways of creating a better work-life balance”. The first two here are critical: mentoring, because it’s a way for a firm’s senior members to tell junior staff that they matter, and networking because it allows women executives to meet and talk – about anything, but not about topics they have little interest in.
In sum, attracting and retaining women isn’t just about letting them in the door and enabling them to have babies. It’s about creating a less alien environment. The sooner companies learn to do that, the slower the women they hire will be to become part of the past.
October 14, 2008
Schluss mit Lustig (loosely, “No more fun!”) demanded the German advertising executive and author Judith Mair von Eichborn six years ago in a book arguing that EQ, flexitime and a culture of trust and fun had no place in the modern workplace.
It was a clarion call in 2002, but it went unheeded even in Ms Mair’s own country: Prussian virtues notwithstanding, the internet boom had left enough of a mark on German culture to make even old-economy firms want to offer their employees an enjoyable working environment. And now, with market indices sliding down around our ears, who would want to deny that work should be fun? Certainly, überguru Tom Peters has been plugging the idea for more than a decade.
While the idea of an enjoyable workplace sounds worthy – praiseworthy, even – should employers pursue it? Does it make business sense, as well as emotional sense?
It turns out it does. Former Harvard Business School Professor David Maister studied 29 firms across more than 15 industries in 15 countries. He concluded that firms scoring in the top 20% of his sample for “commitment, enthusiasm and respect” financially outperformed the average of the other four-fifths by 63%. Firms in the top quintile for employee satisfaction outperformed the other quintiles by 42%; for empowerment, 32%. So getting the atmosphere right at work makes business sense: the soft stuff matters.
Google does not reveal the fate of Mair und Andere, the advertising agency which Ms Mair co-founded and where she worked (in a dark-blue uniform) at the time Schluss mit Lustig was released in 2002. But she published Fake for Real, a discussion about the social conflation of truth and fiction, in 2005. Two books in three years! Might Ms Mair’s diligent application of the pen imply that she is… enjoying herself?
October 13, 2008
The modern corporation is used to evaluating performance: employee performance, business unit performance, and, if the company is worth its salt, customer performance. But it’s rare for those in charge of the kit and caboodle to be evaluated themselves: at the turn of the century, only one listed US company in five regularly evaluated its board of directors.
Now, as noted earlier, directors enjoy wide protection from scrutiny – not just from others, but from themselves: a director’s chair comes with a brass nameplate, but rarely a silver mirror. Boards have been reluctant to evaluate themselves for many reasons – some lack the time, some find it more confrontational than clubby, and some simply don’t know how – but this needs to change. The NYSE’s Rule 303A(9) now requires boards to conduct a self-evaluation at least once a year. So how can a board best evaluate itself – and what should it look out for?
The key question the board must ask itself is, “How well did we perform our duty as a board?” That question points to the two kinds of inquiry it must make: into how well it performed – that is, into how well its own processes functioned – and into how effective it was in fulfilling its duties. The board should start with the second question, asking itself “What did we aim to do this year?” If the company’s governance is good, the answers to this question will be in the company charter, and will include developing long-range strategy, holding management to account for agreed performance goals, approving financial reporting, and so on. The next question must be, “Did we achieve each of our aims effectively?” This should be more than just a tick-and-cross exercise. If the board achieved a goal, it should ask, “Why? What worked well?” This will be useful data for compiling a list of best practices. If a goal was not achieved, or not achieved easily, the board must ask why not. Once it has gone through its performance by goal and collected a list of best practices and concerns, it should take one step back and look at its processes. Which worked well? Which need improvement? In a final step, the board should incorporate its findings into its governance process for the following financial year.
Evaluation should be tied into the board’s annual operating schedule, with annual objectives set at the beginning of the financial year, data collected during the third quarter (once it’s becoming clear whether the board’s expectations of management performance are aligned for the year) and a review session at the end of the year.
October 11, 2008
Do CEOs earn too much? Even in the 1960s, it must have been easy to say yes: in 1965, according to the Washington Economic Policy Institute, the typical CEO of a US listed company earned 24 times a worker’s average wage, working just two weeks to earn what Joe Schmo took home in a year of punching the clock.
Ah, those were the days. Today, those CEOs’ successors earn more than 260 times the wage of an average worker. Larry Ellison took home the better part of $193 million last year, once the IRS had snapped its jaws.
Many pixels have been pulled over why CEOs earn this much; undoubtedly, the reasons are varied – is it simply supply and demand? Do the risks of the CEO’s chair justify an enormous premium for taking it? – but scholarship has yet to serve us a satisfactory answer. Much more interesting, though, is this related question: never mind why CEOs earn so well – do they earn too much?
It’s a question that can turn up odd bedfellows. The claim that CEOs earn too much can rally the political left as a bloc and financially conservative investors individually. The reason is that there are really only two arguments that justify the claim that CEOs are overpaid: the argument from social justice, which says that it’s fundamentally unfair to pay one section of society so much more than another, and the argument, quite distinct in kind, that it is a poor use of shareholders’ money to lavishly pay a CEO who fails to deliver returns. Proponents of the former argument might object equally to the compensation received by Time Warner CEO Richard Parsons ($53 mio over the five years to May 2007) and that received by Ellison, above. But a shareholder advocate would probably only become enraged by Parsons. That’s because Time Warner underperformed the S&P over that period, its stock advancing 28 percentage points less than the index. Ellison’s Oracle, by contrast, beat the NASDAQ by more than 30% in the last half-decade.
So, next time someone tells you that CEOs earn too much, try to scry for their motives. Are they a socialist – or a shareholder?
October 8, 2008
Shrinking back from the legal liability taking up a directorship will involve? Relax. Courts in English-speaking countries have repeatedly refused to look at decisions taken by directors when exercising business judgment. The High Court of Australia put it nicely forty years ago in Harlowes Nominees Pty Ltd. v Woodside:
Directors … may be concerned with a wide range of practical considerations, their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts.
In other words, creditors and shareholders looking to recover from directors for losses resulting from poor business decisions will be disappointed to know that those decisions are not subject to review by the courts. It’s a massive exemption from liability, and it’s not one enjoyed by doctors, dentists or – until relatively recently, in most Commonwealth countries – even lawyers themselves. So why grant directors such freedom to mess up?
Delve deeply enough into the literature, and you’ll find as many justifications for the rule as you care to name. But there are three central reasons. First, scholars argue that people otherwise qualified to serve as directors won’t do so if their decisions are constantly second-guessed. This is well and good – no one likes to be constantly second-guessed, after all – but it’s not a reason to exempt a person from legal liability. Remember that we’re all responsible for reasonably foreseeable harm caused to others as we go about our daily business. Why should directors – who owe shareholders a fiduciary responsibility beyond what we owe each other in everyday social interaction – be held to a lesser standard than the rest of us?
Secondly, it’s said that courts are not equipped by nature to examine business decisions, and couldn’t act in real time even if they were. But, while it’s true that judges aren’t businesspeople, they’re not architects or forensic psychiatrists, either. That’s why courts call expert witnesses. There’s no reason experienced directors couldn’t be called on to testify about the wisdom of business decisions. And, true, the wheels of justice grind slowly – much more slowly than the wheels of commerce. But most allegations of director misconduct are made after the fact, in the context of an action for damages in the aftermath of bankruptcy, where time is no longer an issue. The courts have mechanisms for acting swiftly – injunctions are frequently granted under urgency – and there’s no reason they couldn’t deliver emergency interim relief in the same way.
The third and final reason given for the business judgment rule is that business requires risk-taking, sometimes even to the point of speculation, and that the directors are free to do just that. The argument here isn’t that, being in a position of responsibility, they should be held to a stricter standard than the rest of us; rather, it’s the reverse. Are the directors spending shareholders’ money irresponsibly on too risky ventures? Then, on this view, it’s up to the shareholders to fire them. Have the directors overcommitted themselves (without going as far as trading recklessly)? Caveat supplier – the firm’s trading partners should have done their due diligence before going into business with them.
Who watches the watchers? The business judgment rule says no one does, as long as the directors are using their powers for proper purposes to make good faith decisions. Why? Logically, the only reason is risk: it’s necessary for business, and someone – in this case, the directors – is allowed to take a lot of it.
September 17, 2008
It sounds like a hip Japanese accessory, and in truth it is a way to accessorise your mind. OODA, or the OODA Loop, is a concept developed by USAF Colonel John Boyd to describe a set of states fighter pilots cycle through during combat. OODA stands for Observe, Orient, Decide and Act: the pilot must observe the situation around him (and, back when the theory was devised, it was invariably him, not her), orient to it, decide what to do and act on that decision.
So far, so good: a nitty-gritty description of what most of us do unconsciously all day. So why is it worthwhile breaking an action down into its OODA components, and why should we schlep yet another military construct into the C-suite?
A company can gain competitive advantage through OODA in three ways: by speed of execution, by excellence in execution and by interfering with competitors’ own OODA cycles.
First, sheer speed of execution will create competitive advantage, as, for example, this decade’s literature on innovation to cash makes clear. Secondly, excellence in execution – perceiving the competitive landscape accurately, assimmilating and processing that information and implementing decisions well – will serve the company: this is the stuff of the well-run firm. But it is the third form of advantage, advantage by interference with a competitor’s OODA loop, that offers the strategist most room to manoeuvre.
No company operates in isolation. As a firm goes through its OODA loops, its competitors are executing theirs. It is difficult to influence another firm’s execution directly, but there are two other ways to interfere with competitors’ OODA loops: by influencing speed of execution and by shaping the perceptions which govern a competitor’s own OODA process.
First, a company can try to slow down others’ OODA cycling. Taking high (but calculated) risks will require competitors to hem and haw before they decide what to do, for example, and engaging in markets with high barriers to entry will slow the speed at which can competitor act.
Secondly, a company can interfere with a competitor’s perception of its options at any of the OODA nodes. Most firms focus on influencing competitor action, which is the final OODA step. But the first three phases, which allow a much more differentiated approach to the manipulation of competitor behaviour, bear closer examination.
Considering the first criterion, observation, we might think of Apple’s legendary secrecy, which makes it impossible for outsiders to observe anything at all. Or a company might dissimulate, luring its competitors into believing action – or a lack of action – is imminent. We need only look to any company’s internal decision-making for examples of interference with the orientation phase: it’s common for executives to snow their board with information, preventing directors from developing a reasoned stance on active issues and holding them hostage to the opinions executives provide. A company can lever the third OODA node by forcing its competitors to take decisions – bellwether pricing in commoditised industries is a cardinal example – and to re-visit those decisions, thus absorbing time and resources.
Take 320,000 people. Put them on a volcanically active island half-way between mainland Europe and North America. Denude the island of trees and dunk it in darkness for several months of the year. Allow its inhabitants to develop a rural and fishing economy. Then put your cap in hand and try to attract foreign direct investment (FDI).
Amazingly, Iceland scores fourth in the world in attracting foreign direct investment, even outpacing Singapore and Ireland, two economies often cited as inward FDI success stories. Singapore and Ireland were able to take advantage of geographical proximity to position themselves as stepping-stones to Asia and the EU respectively. From Iceland, you can step only to Greenland. So how has Iceland managed its success?
First, Iceland’s infrastructure is good. At 15%, Iceland’s corporate tax rate is second only to Ireland’s as the most competitive in the EU. In 2006, Transparency International ranked it as the second-least corrupt country in the world. (Finland won out.) The Heritage Foundation ranks Iceland fourteenth in the world for economic freedom, giving it a stunning 94.5% rating for business freedom. Energy is cheap – the country runs off its renewable geothermal resources – and Iceland boasts well-educated citizens who speak English in addition to their own impenetrable tongue. Finally, and in sharp contrast to Ireland or Singapore, land for greenfield investment is cheap, and readily available.
But setting an inviting scene is only half the story. Iceland’s investment promotion agency, Investment Iceland, has been especially successful in pushing Iceland abroad as a target for foreign direct investment. Three counter-intuitive examples show how successful Investment Iceland has been.
First, Iceland can point to success in bits and bytes. Here, Investment Iceland manages to make a virtue of Iceland’s isolation, pointing to the island’s “remote and secure location” as a plus for data centres, one of its six areas of strategic focus. In the information age, geographical distance may be more psychological than real. It’s a barrier Iceland is striving to overcome: the country is connected to the world by two fibre-optic cables, and a third is planned.
Secondly, Iceland can point to continued success in creative industries – an unusual feat, since these tend to be driven by one-off events and charismatic individuals. While it’s not unusual for isolated countries to lure filmmakers with dramatic landscapes – witness New Zealand’s success with Peter Jackson’s Lord of the Rings series –Iceland has been successful by any standards. Eleven major English-language film productions were made at least partly in Iceland in the five years from 2001, including the blockbuster Lara Croft: Tomb Raider starring Angelina Jolie.
Finally, Iceland has capitalized on its unique genetic heritage – it has a homogenous gene pool, and genealogies can be traced back for centuries – to attract life science investment. Iceland has a population with genetic, disease and genealogical data sets, and companies have used this data to screen for genes linked to disease.
It’s unlikely that any other country can replicate Iceland’s genetic treasures. But certainly Iceland’s example teaches that geography, size and climate are no barrier to wealth creation. If three hundred thousand Icelanders can achieve the tenth-highest per-capita GDP in the world, anyone ought to be able to follow.
September 16, 2008
He sounds an uncomfortable man to be, the T-shaped manager, arms flung out in the embrace of knowledge, crucified uncomfortably for the sake of his firm.
Coined by the British newspaper The Independent in 1991, the expression “T-shaped manager” refers to a man in a matrix, someone responsible both for a function – marketing, say, or operations – and for the dissemination of knowledge across functional boundaries. The key insight, as Bolko von Oetinger and Morten Hansen, two former BCG authors, make clear, is that knowledge diffuses, not through databases, but primarily through people.
The advantage of the T-shape is thus that it resolves one of the knottiest issues in knowledge management, the difficulty of making tacit knowledge explicit. By treating managers as live vectors for knowledge, the T-shape concept diverts energy from knowledge formalisation to knowledge transmission.
The T-shaped manager is an expert first and foremost: he or she has developed a body of knowledge and skills in a particular function. Functional expertise, the vertical line of the T, is developed first. Only then is it extended – the horizontal bar of the T – across functions in a process that both transmits knowledge from the function and receives information from the other functions with whose representatives the T-shaped manager interacts.
How does a firm that develops T-shaped managers differ from one which promotes other organisational best practices such as learning circles? The decision to pursue the T-shape should be deliberate. It requires investment both in functional expertise – for no manager can be effective if he or she has nothing to disseminate – and in the skills required for knowledge transmission. These will be twofold: first, the manager will need to understand the wider context of the business beyond his or her function, in order to filter accumulated expertise selectively; secondly, he or she will need sufficient social and didactic skills to work with others and to pass on knowledge. The firm will also need to support knowledge diffusion structurally.
September 15, 2008
The strategist is an etymological warrior, deriving his or her title from the Greek word for general, and indeed you can often tell a would-be strategist by the copy of Clausewitz or Sun-Tzu in a cubicle drawer. A decade ago this year, the consulting firm McKinsey sounded a different call to arms, heralding a “war for talent” that was to dominate business competition for the next two decades. A glance at the clock tells us we should be right in the thick of it.
“Attract good people. Keep them.” This is the nub of the war for talent, the battle for what a McKinsey director told Fast Company ten years ago, would be a more important source of competitive advantage than “capital, strategy, or R&D”. That’s a bold claim. Capital was more accessible in 1998 than it is a decade on. Strategy, McKinsey thought gamely, could just be copied. And the half-life of technology was said to be getting shorter all the time. What did this leave? Human resources.
(Note that strategy evidently can’t be copied all that easily. Fortune magazine estimates that McKinsey pulled in over $1 billion in revenues last year. And, as this blog’s last post notes, many biotech applications are still long-lived.)
So is today’s competitive landscape pitted by the war for talent? Sure, companies are looking for top people. Recruiting has been professionalised: assessment centres, whatever you may think of them, are used twice as often now as they were twenty years ago. But even before McKinsey’s placet, CEOs had been proclaiming for years that “our people are our greatest resource”. Whats new under the sun?
The genuine insight in the war for talent – and, as far as this author can tell, it belongs not to McKinsey but to McKinsey’s main competitor – is that top-tier talent isn’t just slightly better than the next tier down. It’s several times better, although no one seems prepared to quantify just how much. A first-class manager has many times the productivity of a merely competent one. And the Street believes this, as you’ll discover if you ask why celebrity CEOs earn hundreds of times the salary of their peons.
Ten years on, McKinsey looks like a Menshevik, a white-hat revolutionary chasing an illusion. This is no longer the roaring economy of the late 1990s. An economic downturn signals a war, not for talent, but for jobs: where talent is concerned, it’s a buyer’s market. As we coast into recession, talent will be hanging on by its fingernails.