Friday, October 2, 2009

Forget GDP.

Forget GDP. That is the advice offered by several economists, including Nobel prize winner Joseph Stiglitz. Their position is that too much focus on GDP (Gross Domestic Product), at the expense of other more telling indicators, actually contributed to the economic crisis. GDP has long been an important indicator of economic growth made up of all goods and services. But there are some huge problems.

Like most accounting measures, GDP can be manipulated to say what you want it to say. At least in the short term. Take this example. In 2007, a boom year for the US economy, about 41 % of corporate profits came in the financial sector. Translation: profits were generated not through improving or selling goods and services, but through borrowing. Even more chilling, according to the economists, the profit write offs (translation - losses) in 2008 actually wiped out all GDP growth for the past five years. While the world celebrated GDP growth from 2002 through 2007, we were celebrating not real profits, but borrowed profits that we couldn't sustain.

Relying on a measure such as GDP in my estimation, is that it doesn't provide any early warning signs of problems. That should be one goal of a measure - what is the health (or vulnerability) of the system.

It seems that GDP may be a trope, just like shareholder value is often a trope. (see previous blog for more on this) "Our accounting framework affects how we see the world, and our accounting framework is flawed," said Stieglitz. This sounds like something an organizational behavior professor would say. Perhaps at least some economists may have been paying attention in class after all.

The economists did suggest an alternative measure, one that takes into account well-being, environmental impact, and other 'non-economic' indicators. See more at CFO online:

Wednesday, September 16, 2009

The trope of shareholder value

Once the crisis is over (yes, despite the fact that some have declared that the recession is over, there are signs the crisis remains) and the financial industry moves towards serious cultural adjustment, it will eventually have to consider the role of standards, compensation, and rewards. As Marshall Goldsmith recently argued in the Washington Post, financial incentives in the industry need to be more in line with desired practices (he even cites Steve Kerr's article about the folly of rewards). (see Goldsmith's article here

At many major firms now on the government doll, as well as organizations across industries, incentives remain exactly where leadership wants them -- in finding clever and resilient forms of executive compensation. The issue isn't that incentives aren't aligned with organizational goals, the problem is the goals themselves -- the goal is high executive compensation, not return to share holders – in many cases, little regard exists for long term consequences, risk or even in many cases the shareholders. It wasn't a problem of poor goal setting, it was the goals themselves, and they rewarded exactly the kind of behavior that was desired.

Another set of incentives that will need to be considered comes in the form of other people's money. CNBC reporter Charles Gasparino argues that what allowed investment banks to take on such huge risks (measured often in borrowing as much or more than 30 times equity), was the fact that these publicly traded companies were gambling with shareholder's money. (See him talk about it here

We can talk all we want about shareholder value, but until incentives are aligned with shareholder value, not simply short-term one time profits, often in the form of short term trading returns, - the whole discussion of shareholder value is simply a trope.

Wednesday, September 2, 2009

Financial crisis and leadership

The current financial crisis provides some incredible examples of leadership -- especially the challenges and unintended consequences of action. The situation faced by then Treasure Secretary Henry Paulson represents some of those challenges. A recent article in Vanity Fair (as well as other sources including PBS Frontline Series - Inside The Meltdown) paints him as a reluctant government interventionist. Here is a link to the Vanity Fair story that was provided to me by Mike Nothum a student in my MBA class:

Despite the still unknown consequences of these decisions, we can begin to see some of the short term consequences, as Erik Ballinger drew my attention to a story by David Cho in The Washington Post about who benefited and who has yet to benefit from the bailout cash -- suggesting that the too big to fail banks grown even bigger.

Not only are consequences unforeseen, our interpretation of the events is likely to continue to shift for some time.

Saturday, August 22, 2009

Forbes world's-most-powerful-women list

The recent Forbe's survey provides some insight into how things have changed for women in business in a short time. Carly Fiorina, former CEO of Hewlett-Packard, proves to be a real influence on today's list. She was unexpectedly (and unfairly I believe) ousted by HP's all male board. Then, as a very public advisor for Presidential candidate John McCain, made the unfortunate blunder stating that McCain was not qualified to run a company like HP. Despite some of the harsh treatment she has received from critics, she proves a trail blazer for inclusiveness in the executive suite.

To see how things have changed since Fiorina became the 1st female CEO of a Fortune 500 company, let's take a quick look at who holds the top spots on the list today compared to 5 years ago.

In 2009, of the top two spots, both are in government service, German Chancellor Angela Merkel and US FDIC Chair Sheila Bair. The next eight spots are held by Chief Executive Officers of major corporations. (Self interested insight: George Washington University (Law School) grad Mary Shapiro, Chair of the Securities and Exchange Commission, should be ranked higher, she came in only at 56).

In contrast to 2004, the first year Forbes began the ranking, Carly was ranked 10th, and the only Chief executive in the top 10, behind the likes of then first lady Laura Bush, Senator Hillary Rodham Clinton, and sitting in the top spot, then National Security Advisor Condoleezza Rice.

Did Carly help more women make it to the top, there seems to be an argument that she did, if for no other reason than by blazing the trail for women in the Executive suite.

Check out the 2009 list here:

And the 2004 list here:

Sunday, May 31, 2009

Pay and circumstance. Uproar over bonuses and other compensation for bailed out financial firms, including AIG and Merrill (Bank of America), have prompted a public debate -- exactly what should business folks be paid? More specifically the public discussion has focused on Edward Liddy, the former interim head of AIG. (disclaimer, I am a Liddy fan, and not only because he earned his MBA from George Washington University).

Since some Congress members have suggested executive pay should mirror that of the US President, interest in Presidential pay has also emerged, prompting the business news channel Bloomberg TV to ask, what does it mean to be "Paid like the President?"

I estimated for Bloomberg that the overall direct and indirect compensation for the US President was between US$17 and 24 million (see the entire clip here

I calculated our figure not based on US government figures, although the guided us in several cases, but based on what it would cost someone in the private sector. For example, the cost of hiring a private jet from DC to Chicago costs between $US24K and 60K, but the president travels with 18 people which means he needs two. In another case, we figured the current Real Estate costs in downtown DC was about $32 per square foot, we learned the White House is about 55,000 sq. ft, the Oval Office is 800 sq. ft. You get the idea of how we arrived at this range without me putting you to sleep with a line by line estimate. 

Back to Liddy who was grilled by Congress and made the straw man for the overpaid executive. In my view, this tag is completely off the mark. Liddy, a retired insurance executive, answered the call to public service when the government asked him to pick up the pieces for the failing insurance giant. 

Liddy's pay = US$1.

Your read that right 100 cents. Liddy answered the call, yet became the stomping ground for congressional (very public) outrage over executive bonuses when he approved the executive bonuses (Liddy did not receive any pay, let alone a bonus). With thanks like this, no doubt it will be difficult to find a replacement. Indeed, it may be that Liddy found his job more difficult than he imagined. AIG was more a mess than anyone knew and the complicated financial and organizational structure made things almost unmanagable in my estimation. 

The final analysis is not whether Liddy should be paid $17 million or whether Congressman should receive $1, both of these figures are probably the wrong ones to use. It does suggest however, that public service is different from private sector work, each entails a certain set of responsibilities and each has mechanisms for motivating differently. In my estimation, government imposed salary caps make about as much sense as government sponsored bailouts, but in times like these, sense is not always what gets us moving forward.

Wednesday, May 20, 2009

Leadership more important than $$

Leadership is more important than money, that is what a recent survey of Federal employees found. Not surprising, we have known for years, or at least argued for years, that money was a pretty lousy motivator. The study, conducted by the Office of Personnel Management, jives (that is the technical term) with what other studies showed, that people are likely to leave their job because of their boss, not the benjamin (that means $$, my aim is to educate). 

The notion that money doesn't serve as a primary motivator is not new, yet organizations continually use money (salary, stock options, other financial incentives) as a primary source of motivation. There may be a reason for this, some studies show that what is important is relative pay. In other words, perceived external equity the primary factors employees consider when looking for a new job or considering whether they want to move to another job. 

The debate seems to be more than just theoretical (or in this case survey hypothetical), as investment banking firm Morgan Stanley recently revamped its compensation methods in anticipation of new guidelines from the TARP monitors. (see Financial Times article at

So this takes us back to the original issue, yes money may play a part in motivating employees, but smack (eg$$) and pay are only relative considerations. What seems to be more important is leadership and how you compare to others. Once again, we see that basic psychology tends to trump economics in explaining human behavior!

Here is a link to the original article that appeared in the Washington Post

Thursday, May 14, 2009

Leadership, learning and organizations, that is the topic of this blog. I hope to begin a dialogue on important developments, theories, ideas, practices and events that relate to leadership, learning and organizations.

An interesting news item to get this thing rolling:

A recent headline noted that "Sergio Marchionne: Fiat chief with a can-do attitude"

Marchionne is an interesting figure in leadership. He turned around Fiat and is now seeking to create the 2nd largest auto company by buying Chrysler (US) and possibly Opel (a piece of GM's Europe business). The real question is whether he is an excellent manager or excellent at getting government financing to save companies (it may take both skills to turn Chrysler around).
Marchionne may be on to something. Under his leadership Fiat seems to be leading the way in Europe. His new thinking for the 'old world' put Fiat (up 4.7%), along with Hyundai(up 9.7%), as the only two car companies to see sales increase in April 2009 (source WSJ). Is he another Carlos Goshn, the turn around leader at Nissan? I just hope I can finally buy (an affordable) Alpha Romeo in the US, even if it has a Chrysler name plate. My preferences aside, while it's hard to guess American preferences for the likes of small cars by Fiat, it wasn't long ago that another Italian manufacturer took over a US name plate. No, I'm not talking about Illy coffee. The US military no longer carry Smith and Wesson side arms, they carry the (Southern Maryland made) Berretta!