Tuesday, May 31, 2005

$3.00? I'm Rich!

I want to express my deepest gratitude to America’s trial lawyers, especially those kings of torts who initiate class action suits to rescue injured parties like myself from any responsibilities for my lousy decisions. You see, during the big investment bubble of 1999-2000, when stock values went only one direction—up—I took a small position in two can’t-miss stars: WorldCom and Global Crossing. Well, guess what? Both stocks tanked, and the executives of both companies were charged with ethical malfeasance.

Enter the mass tort trial lawyers. They sniff out this stuff like hyenas sniff out carrion. Suddenly my mailbox was filled with big, official documents that invited me to participate in class actions. I remember telling my financial advisor with a laugh: “What the hell, let’s do it, just to see what happens. I’ll bet that the lawyers will wind up with millions and I’ll wind up with pennies, but I’m curious to test out that hypothesis”.

So here’s what happened: “I” won both cases! Hooray! In the case of World Com, I had lost $5600 of my original investment. But I no longer cared, because the plaintiffs (that’s me, folks!) won a $2.6 billion judgment. Wow!

What that means, I learned, is that I, as the person who has presumably suffered terrible wrongdoing, will receive a check for 40 whole dollars. Naturally, the attorneys will get $145 million. Am I upset at the discrepancy? On the contrary, I am relieved to learn that the lead counsels for the plaintiffs, who did such a fine job in representing me, can apply for additional payment for their out-of-pocket costs. Lest you think that’s extravagant given the $145 million they’ll receive for handling paperwork and avoiding a trial, let me reassure you that their expense claim cannot exceed $16 million. I feel terribly reassured to know that.

With Global Crossing, where I lost only $2500, my lawyers were stymied by a tough court bench. The final judgment was for a paltry $75 million, and the lawyers took home a trifling $13 million. I, however, as the injured party, made out like a bandit. I will receive a check for three dollars, and I’m already agonizing on how to spend it all.

It’s obvious that there’s no reason for tort reform in this country. Whether it’s about failed investments, asbestos, Vioxx, you name it, I think it’s wonderful that entrepreneurial attorneys in this country can band together to do a mass-market trolling campaign to attract people who say they were somehow injured, then fill out some legal documents, and ultimately reap millions of dollars even as the thousands of their nameless, faceless clients (some of whom are genuinely hurt) wind up with a few bucks each. Is this a great country or what?

Tuesday, May 24, 2005

Who's Most Important?

I got myself into trouble a couple days ago. Over drinks, I was chatting with a small group of managers, and I made the observation that investors and employees are not the most important stakeholders of a company. Customers are. By far. I didn’t think that my comment was particularly controversial. After all, management sage Peter Drucker has been saying for decades that the only reason for a company’s existence is to create and serve customers.
Nevertheless, the reaction to my comment was less than wildly enthusiastic, so I’d like to clarify my remark.

Let’s start with investors. Obviously, investors are important people, particularly for companies that desire a little capital! And these important people are, quite properly, very attentive to metrics like a company’s market capitalization and stock value. Sensibly, the company’s leaders should be too.

But good leaders—and, increasingly, smart investors-- also recognize that those metrics are scorecard consequences that are very strongly influenced by customers’ perceptions and responses. Simply put, where customers react to a company and its offerings with enthusiasm and excitement, investors follow. When customers leave in droves, investors follow.

When a company’s leaders view escalating shareholder value not as the consequence of a customer-alluring strategy, but as the raison d’etre of the business itself, that’s when the trouble begins. Managers become obsessed with short-term financials and “meeting their numbers” any way they can, customers be damned. Most of the innovation and entrepreneurship goes into “creative accounting” and financial sleight-of-hand, not towards products, services and experiences that delight customers. And of course, the heroes inside the company become those people who count things rather than those who make and sell things. Unless you're shorting or spinning stocks, is this the kind of company you’d want to invest in? Paradoxically, the more that leaders focus on investors as opposed to customers, the more likely that returns to investors will suffer.

Now what about employees? Well, once again I beg to challenge feel-good thinking. Organizations are not built for employees and managers. In fact, one of the best predictors of organizational decline is a bloated payroll of employees and managers who are content with the status quo and resist change, or whose skills and interests no longer fit the new realities faced by the firm. I was recently in a management meeting where the executive vice president said in exasperation: “We fall in love with our people regardless of their performance and regardless of their contribution. I’m tired of seeing happy people high-fiving each other when the results stink. I want to see high-fives only for results.” Hear, hear!

Sure, people like Hal Rosenbluth and Howard Schultz built the great Rosenbluth International (a $3 billion global travel agency) and the great Starbucks by having a catchy philosophy that “the customer comes second”, employees first. But come on. These guys never said they’re running charities. What they’ve said, quite correctly, is that companies need to concentrate on making sure that their employees have the best skills, technologies, power, compensation and morale. And why? Because that’s the best way to serve customers!!! Once again, those darn customers trump everyone else.

I suppose I would have been better off had I raised my drink and said "Here's to investors, employees, and customers; they're all important." But that would have been a vanilla cop-out. The reality, to paraphrase George Orwell's Animal Farm, is that all stakeholders are equal, but some stakeholders are more equal than others. As a leader, you’d be foolish to ignore the needs of your employees and the concerns of your shareholders, but if you seek sustainable competitive advantage, remember that the primary purpose of your job and your company is to help make customers very, very happy.

Friday, May 20, 2005

The Most Dishonorable Guys in the Room

It’s nearly midnight here in California. I just got back home from seeing the film “Enron: The Smartest Guys in the Room” and I’m still wired. Go see it. Even better, read the book “The Smartest Guys in the Room” by Bethany McLean and Peter Elkind. In some hazy way, I can comprehend the sleazy web of lies, deceit, cruelty, and fraud that both the book and film expose. What I can’t comprehend is the utter lack of honor among the ex-executives at Enron now that the house of cards they built has collapsed.

During the Enron heyday, the leaders of Enron were more than happy to enjoy the perks and privileges of their positions. CEO and former President Jeff Skilling liberated himself from his prior geek persona and posed for magazine covers as a three-day stubble stud. Chairman and former CEO Ken Lay was the toast of Houston society and the very public benefactor of many unctuous charities. Both men earned mucho millions of dollars. And yes indeed, all that time they bravely took responsibility for all the apparent success of Enron!

But after the crash, both men quickly slithered away from any sort of acknowledgement of responsibility. Skilling—well-known for his brilliant analytical mind and financial acumen—blithely says that right up until the end, he believed that Enron was in great shape, even as many employees and a growing number of outside analysts saw that the foundation of the company was rotten. While Skilling plays us for idiots, Ken Lay presents himself as an idiot. His defense—a la the “I’m a numbskull” strategy of WorldCom’s Bernie Ebbers during his trial—is that he didn’t understand what was going on, he was kept in the dark, others betrayed him, so it wasn’t his fault.

One of the most important things that attracts people to leadership positions is the chance to exercise power in order to influence others and to carve both a strategic direction and a corporate culture for the units they lead. Great leaders take both joy and responsibility for that kind of leadership. That is why they accept the rewards for their unit’s good performance, and they accept the consequences for their unit’s bad performance—because by definition: they led. Let me emphasize this once again. In my research, I have found that one of the most important components of great leadership is the willingness to not only accept, but also seek final responsibility for unit performance, fully and unequivocally. Great leaders truly operate by the old adage that “the buck stops here.”

As I look at the sad spectacle of too many ex-CEO’s like Richard Scrushy (HealthSouth), Dennis Kozlowski (Tyco), and of course “the smartest guys” at Enron—all under indictment, all pleading “see no evil” and pointing blame at everyone but themselves—I can only hope that in choosing CEO’s from now on, companies will tell their executive recruiters not to even consider anyone who doesn’t have a superb track record of honesty, character, and integrity.

Tuesday, May 17, 2005

Painful Pensions

Regardless of whether you’re a pro-labor or pro-management ideologue, the United Airlines pension story stinks. Last week, a federal Bankruptcy Court allowed United to terminate four employee pension programs. The responsibility for the programs will be transferred to the federal Pension Benefit Guaranty Corporation (PBGC). In no particular order, here’s why this deal will wind up with more losers than winners:

1. Once again the government is bailing out a failing corporation simply because it’s big. Hey, government people, what message are you sending to the airlines that are managed properly and making money? What message are you sending the losers in every industry? On top of that, the track record of protectionism tends to be awful: with few exceptions, poorly performing companies that are shielded from market realities remain weak.
2. If taxpayers are expected to pay for failed pension plans at United, why shouldn’t they pay for every failed plan in other companies? As of 2004 there are 31,000 pension plans covering 44.4 million employees in the U.S. Golly--as a taxpayer, I’d be tickled pink to pay extra every April 15 to buffer incompetent top managers from pension liabilities when their companies don’t perform, wouldn’t you?
3. Had United died, its assets (including many of its employees) would have been picked up by healthier rivals. That’s how weak companies get winnowed out, how good companies get stronger, and how new jobs get created. It’s Darwinian in the short run, healthy in the long run.
4. Having said all that, if we as a society insist that United must survive, we must recognize that the company has little choice but to dump its current pension liabilities. That means it has to violate its long-standing promises to its employees, who labored for years in good faith that those promises would be honored. Goodbye, integrity.
5. You know that however this turns out, United’s top managers will walk away with millions, while most of the employees and retirees will enjoy reduced and uncertain pension benefits. Hmm, what’s wrong with this picture?
6. Currently, the PBGC has $39 billion in assets. Sounds like a lot, but it’s not when you consider the scale of the payouts to United and other unsuccessful firms (192 in 2004 alone, including US Airways). A spokesperson for PBGC said: “We do have a long-term financial problem.” Nice understatement, especially since the PBGC estimates that corporate America’s total pension deficit is around $450 billion. Look for pork- loving members of Congress to pour more funds into PBGC so big failing companies in their districts can be kept on life-support indefinitely.

I hope you don't expect me to pull "le compleat solution" out of a hat! I wish I were that sort of magician. But perhaps I can make two modest self-evident comments that might help prevent this sort of fiasco in the future.

First, to labor-management negotiators: Think twice before agreeing to contracts that commit a firm to huge pension liabilities that may one day paralyze a firm, and may well be impossible to fulfill when the company’s fortunes sour. There are a number of alternatives (including the old battle- scarred 401k) that are superior to defined benefit plans like United’s.

Second, to individual investors: Don’t allow all your retirement dollars to be sunk into one company, regardless of whether you’re working for United, or Enron (remember what happened there?), or Google, or anywhere else. You’ll be much better off if you diversify your retirement portfolio big time.

Tuesday, May 10, 2005

20 70 10

I heard Jack Welch speak at the Commonwealth Club in San Francisco last week. He was better than I expected. Funny, bombastic, insightful. He talked about a lot of things, but the topic he approached with considerable passion was one that has landed him in some controversy, but really ought to be a no-brainer: Any good leader should lavishly reward high performers and get rid of chronic low performers.

In fact, Welch uses a little yardstick for this: his 20 70 10 rule. Locate the top 20%, tell them where they stand, and reward them profusely with significant compensation, lucrative career mobility, and lots of loving attention. The great gray "middle" 70% should also be told where they stand: and then rewarded with approval, job security, training and development, and the enthusiastic opportunities to get into the top 20%. The bottom 10% should also be told where they stand, given opportunities to improve, and if they don’t—they’re out. A failure to let people know where they stand, and act differentially, says Welch, is not only lousy leadership, it’s immoral.

Welch is no simpleton. He knows that performance is multi-faceted. He emphasizes that a leader has to insure that high performers are living by the corporate values and doing their work honestly and ethically. And I’m sure he would categorically oppose a system that becomes an Enron-type of “rank and yank” culture where performance reviews degenerate into power plays and backstabbing. But at the end of the day, a leader must differentiate between high and low performers, or the organization will decline.

And he’s right. I just came back from a visit to two of my clients. One set of discussions revolved around an acquisition. The other around marketing. In both cases, the executives I worked with agreed that neither the acquisition nor the marketing efforts would bear fruition unless their best and brightest people were unleashed to make it happen with innovation, competence, and passion. As Welch would say, it’s all about people, and it’s all about making sure that the best and brightest are the most developed and most rewarded—or else they won’t want to perform at peak for long—and there goes your carefully planned acquisition and marketing initiatives.

The 20 70 10 equation has a lot of implications. But let’s start with three simple questions.

• Do you have leaders, systems and processes that identify your top 20% and bottom 10%? (Nothing sacred about these numbers; make it the top 10% and bottom 5% if you wish).
• Do you clearly tell these people where they stand?
• Do you absolutely insure that your top 20% are significantly happier with their pay and career than those in the bottom 10%? (If not, I guarantee you that your top 20%, as your most marketable assets, will soon be polishing their resumes).

I don’t mean to be melodramatic, but if you can’t answer these three simple questions with an unequivocal yes, your organization is in trouble.