Restoring Confidence is the First Step

I just read a good article by David Smick on the role of confidence in restoring and maintaining a robust economy.

To add my own thoughts, confidence comes from predictability and trust. Job #1 for the government is to stop creating uncertainty and to implement systems that ensure fair playing fields for all, whether they be entrepreneurs or ordinary taxpayers.

Job #2 is to eliminate government waste and other spending that isn't absolutely vital to restoring the economy, thereby allowing government funds to be aimed at viable investments and a reduced tax burden (which also helps with Job #1).

Job #3 is for government to make the targeted, huge investments -- that only it can make due to its size and reach -- in education and infrastructure that will enhance industrial productivity and enable new business formation.

Job #4 is to provide incentives for people and companies to invest their new excess capital (from #2's tax savings) here in the U.S. Creating abundant capital and making it easier to achieve returns on that capital will reduce the cost of that capital to those he want to use it. Many investments that have been off the table for a generation now -- like building a blue collar factory -- would become viable again. Despite all the press about everyone needing to be a knowledge worker, we can definitely make use of well-trained people who can work with their hands, as they do in Germany.

It is well within our means to put people back to work and to set the stage for sustained prosperity. Some sacred cows will need to be slayed, "business as usual" (e.g., earmarks) in Washington will need to change, and we'll need to endure some upheaval as government workers are displaced and redeployed in industry, but the effort would be worth it. We just need to get on with it.

Follow-up on Obama and Change Management

As a follow-up to my last article on the importance of change management, below are a coupled of links to analyses of Obama's success or lack thereof in managing change. Both analyses reference the Harvard/Kotter change management model that I mentioned in my article.

"...Obama seemed to miss the opportunity to re-mobilize and engage the millions of supporters that had been energized by his campaign and to redirect them towards specific initiatives. Instead, he seemed to focus his efforts on traditional political forms of influence, with the unintended consequence of even greater polarization than there was at the beginning of his term."

Analysis from the Harvard Business Review blog: click here.

"President Barack Obama embarked on one of the most challenging change leadership initiatives imaginable -- with no previous large-scale change experience. Some have said that inexperience does not matter if the president surrounds himself with experienced people.

They were wrong."

Analysis from Human Resource Executive Online: click here.

Our Future Depends on Change Management

‎"We need to stop waiting for Superman and start building a superconsensus to do the superhard stuff we must do now."

This is an essential truth from Tom Friedman's brilliant October 2, 2010 article in the NYT (see article below).

To expand upon the importance of consensus building, in my opinion, we will never move forward as a nation until our political leaders understand the change management process, keys to which are establishing a legitimate sense of urgency about the problem(s), developing a unifying vision for a better post-change state, and building the consensus necessary to proceed into action.

No matter what any president's party affiliation, consensus of Democrats AND Republicans will be necessary to avoid gridlock. Impossible, you say? Well, that's what true leadership is all about. Building consensus is absolutely necessary, no matter how long it takes and no matter how painful the process may be. It will take an enormously patient, open-minded, courageous and determined president, but as we've seen with the divisiveness that results from the traditional approach -- which Obama fell into the trap of following -- attempts to shortcut the change management process simply don't work. I'm not saying Obama hasn't been well-intentioned (although I do disagree with his vision for our nation), but he either didn't know or didn't respect the process, and more harm has been done than good.

Click here to read more about the change management process, according to Harvard's John Kotter, who is arguably the foremost expert on the subject.

Third Party RisingBy THOMAS L. FRIEDMAN

A friend in the U.S. military sent me an e-mail last week with a quote from the historian Lewis Mumford’s book, “The Condition of Man,” about the development of civilization. Mumford was describing Rome’s decline: “Everyone aimed at security: no one accepted responsibility. What was plainly lacking, long before the barbarian invasions had done their work, long before economic dislocations became serious, was an inner go. Rome’s life was now an imitation of life: a mere holding on. Security was the watchword — as if life knew any other stability than through constant change, or any form of security except through a constant willingness to take risks.”

It was one of those history passages that echo so loudly in the present that it sends a shiver down my spine — way, way too close for comfort.

I’ve just spent a week in Silicon Valley, talking with technologists from Apple, Twitter, LinkedIn, Intel, Cisco and SRI and can definitively report that this region has not lost its “inner go.” But in talks here and elsewhere I continue to be astounded by the level of disgust with Washington, D.C., and our two-party system — so much so that I am ready to hazard a prediction: Barring a transformation of the Democratic and Republican Parties, there is going to be a serious third party candidate in 2012, with a serious political movement behind him or her — one definitely big enough to impact the election’s outcome.

There is a revolution brewing in the country, and it is not just on the right wing but in the radical center. I know of at least two serious groups, one on the East Coast and one on the West Coast, developing “third parties” to challenge our stagnating two-party duopoly that has been presiding over our nation’s steady incremental decline.

President Obama has not been a do-nothing failure. He has some real accomplishments. He passed a health care expansion, a financial regulation expansion, stabilized the economy, started a national education reform initiative and has conducted a smart and tough war on Al Qaeda.

But there is another angle on the last two years: a president who won a sweeping political mandate, propelled by an energized youth movement and with control of both the House and the Senate — about as much power as any president could ever hope to muster in peacetime — was only able to pass an expansion of health care that is a suboptimal amalgam of tortured compromises that no one is certain will work or that we can afford (and doesn’t deal with the cost or quality problems), a limited stimulus that has not relieved unemployment or fixed our infrastructure, and a financial regulation bill that still needs to be interpreted by regulators because no one could agree on crucial provisions. Plus, Obama had to abandon an energy-climate bill altogether, and if the G.O.P. takes back the House, we may not have an energy bill until 2013.

Obama probably did the best he could do, and that’s the point. The best our current two parties can produce today — in the wake of the worst existential crisis in our economy and environment in a century — is suboptimal, even when one party had a huge majority. Suboptimal is O.K. for ordinary times, but these are not ordinary times. We need to stop waiting for Superman and start building a superconsensus to do the superhard stuff we must do now. Pretty good is not even close to good enough today.

“We basically have two bankrupt parties bankrupting the country,” said the Stanford University political scientist Larry Diamond. Indeed, our two-party system is ossified; it lacks integrity and creativity and any sense of courage or high-aspiration in confronting our problems. We simply will not be able to do the things we need to do as a country to move forward “with all the vested interests that have accrued around these two parties,” added Diamond. “They cannot think about the overall public good and the longer term anymore because both parties are trapped in short-term, zero-sum calculations,” where each one’s gains are seen as the other’s losses.

We have to rip open this two-party duopoly and have it challenged by a serious third party that will talk about education reform, without worrying about offending unions; financial reform, without worrying about losing donations from Wall Street; corporate tax reductions to stimulate jobs, without worrying about offending the far left; energy and climate reform, without worrying about offending the far right and coal-state Democrats; and proper health care reform, without worrying about offending insurers and drug companies.

“If competition is good for our economy,” asks Diamond, “why isn’t it good for our politics?”

We need a third party on the stage of the next presidential debate to look Americans in the eye and say: “These two parties are lying to you. They can’t tell you the truth because they are each trapped in decades of special interests. I am not going to tell you what you want to hear. I am going to tell you what you need to hear if we want to be the world’s leaders, not the new Romans.”

The Problem with a Poorly Weighted Dow 30

I’ve always been annoyed by how the constituent members of the Dow 30 are weighted (i.e., based on the price of each company’s shares), but current weightings are really ridiculous in that only a handful of the 30 stocks have any meaningful influence on the value of the index.

Why is this a problem? Because the Dow is considered (although wrongly) to be a barometer of the health of the entire economy. If the Dow is doing poorly, it influences the psychology and behaviors of consumers and business leaders. With a poorly constituted index, as is the case now, false indications can more easily result, which is potentially harmful, as a negative trend in the Dow could trigger behaviors that could cause a recession.

Do we really want the price movement of three or four stocks to influence the psychology of the country, if not the globe? Some of the current heavy hitters in the index, like IBM and McDonalds, are doing fine now, but they had significant business issues within the past 20 years that dramatically deflated their stock values and which had nothing to do with the state of the economy as a whole. That could certainly happen again, and it's nothing trivial. Obviously, I'm dramatizing the risk somewhat to illustrate my point, but why unnecessarily create risks, especially after what we've been through over the past couple of years? The public is tired of having its fortunes dictated by Wall Street.

Given that price per share is simply a function of how many shares are outstanding, which has no relevance to anything, why not base the weighting on something more rational, like market cap, or why not even do an equal weighting?

Here’s a good explanation of what’s going on, in case this subject is new to you.




Click here for a link to the article that the video is from.

It's Time for Public Pension Reform

The photo above is of CalPERS' list of Top 10 pensioners. Between $200K-$500K a year for life? Good for them, but not for the taxpayer. (Click here for California Pension Reform's searchable database.)

Daniel Borenstein at the Contra Costa Times has been doing a bang-up job of reporting on how out of control our public pensions are in California (see link below). Not only is the system itself outdated and flawed, but the tactics used by some public employees -- with the support of their bosses -- to "spike" their pensions just prior to retirement border on criminal behavior, as far as I'm concerned.

Those of us in the private sector have to rely on our self-funded 401(k) plans for our retirements. Why are we providing full pay (or more) -- for life! -- to retirees who are in their early 50s? The outrageousness of this problem is exacerbated by recent surveys that show that public workers are also better paid and have dramatically better benefits than private sector workers in similar positions. In other words, they should be more capable of providing for their own retirements than the typical private sector employee. To add insult to injury, not only do many public workers have generous pensions, but they also have the equivalent of 401(k) plans (403(b) plans, etc.) with generous employer matching. How much is enough? Especially in light of the outrageous abuses that have been exposed in the Bell, California scandal, one has to wonder why no one is responsible for monitoring the fairness of these compensation schemes. It's time for serious public pension reform.

Click here for a good article by Borenstein.

The Importance of "Systems Thinking"

I came across a good article last night from the consulting firm, Booz & Company. It discusses what is known as systems thinking. The use of the word “systems” is a reference to a corporation as an organic whole, with many interconnected and interdependent functions. The article dovetails nicely into my own MBA research. I’ve been thinking a lot about this topic recently due to the BP oil spill, which one can very clearly identify as a breakdown in systems thinking, once you know what to look for.

What became very clear to me in my own research was that the bedrock of any successful, enduring corporate system consists of its leaders’ vision and values, which are expressed on a daily basis through the ethics and standards by which the company operates, through the delivery of its value proposition (i.e., the unique value it intends to deliver to its customers), and in how it operates internally in order to deliver that value proposition.

The vision of how a company will operate internally is communicated in the form of what I call an operating psychology, which consists of the organizational structures, methods, standards, processes, technologies, etc., that the organization will use to accomplish its work. The operating psychology needs to ensure that the leaders' values will be maintained through their employees' daily decisions and actions, and that such actions will produce the long-term vision the leaders have for the company.

A very basic issue to address, for example, when developing an operating psychology is to determine the level of quality the company wants to deliver as part of its value proposition, as quality has huge implications on the investments a company will make on plant and equipment, how much it will spend on training, the quality of people it will hire, whether it will use outsourcing, how much supervision it will provide to its staff, etc., etc.

Safety is another important issue. If a company's business activities are inherently risky, then the business needs to incorporate that degree of risk into its operating psychology. A company like BP, for example, would need to make sure that safety is prominently woven into the fabric of the company, and that safety would always take top priority over everything else. It must do so, as the consequences of doing otherwise can jeopardize the very existence of the company. To make safety the highest priority, the company would need to rigorously train its employees on good safety practices, and it would need to reward exhibitions of putting safety first, even when doing so results in short-term costs. Importantly, there can be no negative consequences on an employee who exercises appropriate caution -- no sideways glances, no withheld promotions, etc. Simply put, a commitment to safety must be a core value, and it must be continuously hammered into the psyche of the company.

Long story short, clearly communicating the operating psychology to the employees is every bit as important as disseminating the customer value proposition. This is where companies often fall down. After watching a 60 Minutes segment on the events leading to the BP disaster, it was obvious that there were both managerial failings on the rig and through every level in the company preceding those failings. It’s no coincidence that BP had the worst safety record in the industry even before this disaster. Clearly, a linkage between safety and the long-term sustainability of the corporation has not been firmly ingrained in BP's operating psychology. In other words, there are reasons why you get horribly short-sighted, costly and dangerous decisions from a mid-level manager on a rig in the middle of the Gulf. Those bad decisions result from breakdowns throughout the entire organization, all of which can be traced back to a failure in having a clear, enduring, and well communicated vision of how the company will operate and achieve success over the long haul.

The BP manager on the rig was worried about staying on schedule, as a slip in the schedule may have cost the company a few million dollars. Instead, by not keeping the long-term perspective in mind, he (and BP, through its bad management) created a disaster that may well bring down the entire company, and have costs on the people and ecosystems of this planet for decades to come. These same types of failings have brought down many corporations over the years, including many of the financial houses in the past couple of years. Hence, learning about these issues is really important, which is why I wanted to share these perspectives and the Booz article.

The article can be found here:

"Seeing Your Company as a System," from Booz's Strategy+Business online magazine.

Similarities between the Shuttle Challenger and BP Oil Spill Disasters

Most of the major accidents we're all familiar with could have been easily prevented. The more I learn about the BP oil spill, the more I see similarities with the Space Shuttle Challenger disaster: 1) speed and schedule were put before safety; 2) vital information provided by engineers in the field was ignored by management; 3) those same engineers allowed themselves to be bullied into continuing their work, rather than escalating the matter or seizing the power necessary to take control and avert disaster; 4) an overconfidence due to prior records of good safety led to complacency; 5) the failure of a relatively cheap and simple component (in both cases, a type of rubber seal) ultimately triggered the catastrophic failure.

If you've never studied the results of the Challenger investigation, I can recommend it as an excellent case study in poor communication and bad management.

60 Minutes ran a great investigative segment on the causes of the BP oil spill. The video can be seen here.

The results of the Challenger investigation can be seen here.