Fluent Essays

Imagine yourself a leader and a steward in your dream career opportunity. Using Hamel’s five elements of Stewardship, carefully consider each of the following: Fealty: A propensity to view the talents and treasure at one’s command as a trust rather than as the means for personal gain. Charity: A willingness to put the interests of others ahead of one’s own. Prudence: A commitment to safeguard the future even as one takes advantage of the present. Accountability: A sense of responsibility for the systemic consequences of one’s actions. Equity: A desire to ensure that rewards are distributed in a way that corresponds to contribution rather than power. Task Description For each element, state your “bedrock belief” about each concept. It is not necessary to agree with Hamel. The purpose is to map the author’s concepts of stewardship to your values or beliefs. Next, for each stewardship concept describe how you envision incorporating the principle in your organization. Describe where and how might you apply the concept. What lengths would you go to be a steward? Identify any of Hamel’s concepts that you would omit and describe an alternative idea that should be added for stewardship. Delivery Summarize your answers and thoughts in a 2-4-page paper and at least cite 2 sources. Preface This is not a book about one thing. It’s not a 288-page dissertation on leadership, teams, or motivation. Instead, its a multi-faceted agenda for building organizations that can win in a world of relentless change, ferocious competition, and unstoppable innovation. This is not a book about doing better. It’s not a manual for people who want to tinker at the margins of their organization. Instead, it’s an impassioned plea to reinvent management as we know it—to rethink the fundamental assumptions we have about capitalism, institutions, and life at work. This is not a book that fetes today’s winners. It’s not a celebration of companies that have been doing great so far. Instead, it’s a blueprint for creating organizations that are fit for the future and fit for human beings. Obviously, there are lots of things that matter now, including social media, ‘‘big data,’’ emerging markets, virtual collaboration, risk management, open innovation, and sustainability. But in a world of fractured certainties and battered trust, some things matter more than others. While the challenges facing organizations are limitless, leadership bandwidth isn’t. That’s why you have to be clear about what really matters now. So ask yourself: what are the fundamental, make-or-break challenges that will determine whether your organization thrives or dives in the years ahead? For me, five issues are paramount: values, innovation, adaptability, passion, and ideology. Here’s my logic for putting these topics front and center ... · Values: In a free market economy, there will always be excesses, but in recent years, rapacious bankers and unprincipled CEOs have seemed hell-bent on setting new records for egocentric irresponsibility. In a just world, they would be sued for slandering capitalism. Not surprisingly, large corporations are now among society’s least trusted institutions. As trust has waned, the regulatory burden on business has grown. Reversing these trends will require nothing less than a moral renaissance in business. The interests of stakeholders are not always aligned, but on one point they seem unanimous: values matter now more than ever. · Innovation: In a densely connected global economy, successful products and strategies are quickly copied. Without relentless innovation, success is fleeting. Nevertheless, there’s not one company in a hundred that has made innovation everyone’s job, every day. In most organizations, innovation still happens ‘‘despite the system’’ rather than because of it. That’s a problem, because innovation is the only sustainable strategy for creating long-term value. After a decade of talking about innovation, it’s time to close the gap between rhetoric and reality. To do so, we’ll need to recalibrate priorities and retool mindsets. That won’t be easy, but we have no choice, since innovation matters now more than ever. · Adaptability: As change accelerates, so must the pace of strategic renewal. Problem is, deep change is almost always crisis-driven; it’s tardy, traumatic and expensive. In most organizations, there are too many things that perpetuate the past and too few that encourage proactive change. The ‘‘party of the past’’ is usually more powerful than the ‘‘party of the future.’’ That’s why incumbents typically lose out to upstarts who are unencumbered by the past. In a world where industry leaders can become laggards overnight, the only way to sustain success is to reinvent it. That’s why adaptability matters now more than ever. · Passion: Innovation and the will to change are the products of passion. They are the fruits of a righteous discontent with the status quo. Sadly, the average workplace is a buzz killer. Petty rules, pedestrian goals, and pyramidal structures drain the emotional vitality out of work. Maybe that didn’t matter in the knowledge economy, but it matters enormously in the creative economy. Customers today expect the exceptional, but few organizations deliver it. The problem is not a lack of competence, but a lack of ardor. In business as in life, the difference between ‘‘insipid’’ and ‘‘inspired’’ is passion. With returns to mediocrity rapidly declining, passion matters now more than ever. · Ideology: Why do our organizations seem less adaptable, less innovative, less spirited, and less noble than the people who work within them? What is it that makes them inhuman? The answer: a management ideology that deifies control. Whatever the rhetoric to the contrary, control is the principal preoccupation of most managers and management systems. While conformance (to budgets, performance targets, operating policies, and work rules) creates economic value, it creates less than it used to. What creates value today is the unexpectedly brilliant product, the wonderfully weird media campaign, and the entirely novel customer experience. Trouble is, in a regime where control reigns supreme, the unique gets hammered out. The choice is stark: we can resign ourselves to the fact that our organizations will never be more adaptable, innovative, or inspiring than they are right now, or we can search for an alternative to the creed of control. Better business processes and better business models are not enough—we need better business principles. That’s why ideology matters now more than ever. These are big, thorny issues. To tackle them, we have to venture beyond the familiar precincts of ‘‘management-as-usual.’’ These issues are also nuanced and variegated. So rather than reduce them to a few, trivial heuristics (‘‘get everyone in the boat rowing in the same direction’’), I’ve teed up a quintet of complementary perspectives on each of these crucial topics. If you’re following the math, that means twenty-five chapters. Don’t worry—they’re (mostly) short and modular. You don’t have to slog through all 288 pages. You can dip in and out as you like, depending on your interests. It’s not a seven-course banquet; it’s a tapas bar. Enjoy. Section 1: Values Matter Now 1.1: Putting First Things First If you are a leader at any level in any organization, you are a steward— of careers, capabilities, resources, the environment, and organizational values. Unfortunately, not every manager is a wise steward. Some behave like mercenaries—by mortgaging the future to inflate short-term earnings, by putting career ahead of company, by exploiting vulnerable employees, by preying on customer ignorance, or by manipulating the political system in ways that reduce competition. What matters now, more than ever, is that managers embrace the responsibilities of stewardship. To my mind, stewardship implies five things: 1. Fealty: A propensity to view the talents and treasure at one’s command as a trust rather than as the means for personal gain. 2. Charity: A willingness to put the interests of others ahead of one’s own. 3. Prudence: A commitment to safeguard the future even as one takes advantage of the present. 4. Accountability: A sense of responsibility for the systemic consequences of one’s actions. 5. Equity: A desire to ensure that rewards are distributed in a way that corresponds to contribution rather than power. These virtues seem to have been particularly scarce in recent years, as we’ve careened from Enron’s devious accounting to the financial chicanery at Parmalat, from Shell’s overstated reserves to BP’s derelict safety standards, from Bernie Madoff’s epic scam to Hewlett-Packard’s spying scandal, from the predatory loan practices at Countrywide Financial to the disastrous excesses at Lehman Brothers, and from India’s corruption- marred sale of wireless spectrum to the firestorm ignited by News Corp’s phone hacking. Despite these and other dirty deeds, I doubt that today’s tycoons are any less principled than their counterparts in earlier decades. The German word raubritter, or ‘‘robber baron,’’ dates back to the Middle Ages, and was first applied to grasping toll collectors along the Rhine River. In the nineteenth century, the term was revived as a fitting epithet for America’s buccaneering and occasionally rapacious industrialists. If twenty-first-century leaders seem especially amoral, it’s because a globally matrixed economy magnifies the effects of executive malfeasance. Consider the sovereign debt crisis that engulfed Europe in 2011. In a world of nationally constrained institutions, the credit problems of a country like Greece would be a small-scale catastrophe. Not so in an interconnected world where avaricious strategies are quickly aped and imprudent risks spread like a virus. It was these dynamics that led French and German banks to dump more than $900 billion into the barely solvent economies of the ‘‘PIGS’’—Portugal, Ireland, Greece, and Spain. Turns out American bankers aren’t the only ones who are susceptible to moral hazard. But it’s not just bankers we need to worry about. In a networked world, lax security standards can imperil the confidential information of a hundred million consumers or more. A failure to exercise due diligence over a vendor can result in a worldwide food contamination scare. And a decision that puts quality at risk can provoke a global recall. The critical point is this: because the decisions of global actors are uniquely consequential, their ethical standards must be uniquely exemplary. It’s easy to feel sorry for Mark Hurd, the former Hewlett- Packard CEO who was pushed from his perch over what seemed to be a relatively minor infraction of HP’s ethics rules. I don’t know whether justice was done in that particular case, but I do know it’s a good thing when influential leaders are held to high standards. If the global economy amplifies the impact of ethical choices, so, too, does the Web. Word-of-mouse can quickly turn a local misdemeanor into a global cause célèbre. Nike, Apple, and Dell are just a few of the companies that have been castigated for turning a blind eye to the subpar employment practices of their Asian suppliers. There are no dark corners on the Web—miscreants will be outed. The Web is also producing a new sort of global consciousness, a heightened sense of our interconnectedness. Increasingly we understand that we live on the same planet, breathe the same air, and share the same oceans. In civic and commercial life, we expect the same high standards of equity and fair play to apply everywhere, and are offended when they don’t. And thanks to the Web, that displeasure can quickly congeal into a global chorus of indignation. Around the world, ethical expectations, if not behaviors, are leveling up. The intermeshing of big business and big government is another force bringing values to the fore. As citizens and consumers, we’re smart enough to know that when lobbyists and legislators sit down to a lavish meal, our interests won’t be on the menu. Instinctively, we know that democracy and the economy do better when power isn’t concentrated, but since it often is, we must do whatever we can to ensure that those occupying positions of trust are, in fact, trustworthy. For all these reasons, we need a values revolution in business—and it can’t come soon enough. In a 2010 Gallup study, only 15\% of respondents rated the ethical standards of executives as ‘‘high’’ or ‘‘very high.’’ (Nurses came in first at 81\%, corporate lobbyists last at 7\%.)1 This lack of trust poses an existential threat to capitalism. Companies do not have inalienable rights granted to them by a Creator; their rights are socially constructed, and can be reconstructed any time society feels so inclined. (A fact made abundantly clear with the passage of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010—two U.S. statutes designed to dramatically curtail corporate prerogatives.) The good news is that the values revolution has already started. No one’s waiting for executives to have an epiphany. One telling statistic: Between 2005 and 2010, U.S. assets invested in ‘‘socially responsible’’ funds (as defined by the Social Investment Forum Foundation) grew by 34\%, whereas total assets under management grew by only 3\%. Today, of the more than $25 trillion under management in the United States, one dollar in eight is invested in socially oriented funds.2 And there are other harbingers. A decade ago, no car magazine would have noted a vehicle’s CO2 emissions, but now most do—at least in Europe. A decade ago, ‘‘Fair Trade’’ wouldn’t have been a marketing pitch, now it is. A decade ago, few would have paid attention to executive pay, now millions do. Given all that, the question for you and your organization is simple: Are you going to be a values leader or a values laggard? It’s easy to excoriate fraudster CEOs and greedy bankers, but what about you? (And what about me?) We can’t expect others to be good stewards if we’re not. Though some executives cast a bigger moral shadow than others, we must all shoulder the responsibility for protecting capitalism from ethical vandals. From Adam Smith to Ayn Rand, the defenders of capitalism have argued that the common good is maximized when every individual is free to pursue his or her own self-interest. I believe this to be true, with one essential caveat. Like nuclear fission, self-interest works only as long as there’s a containment vessel—a set of ethical principles that ensures enlightened self-interest doesn’t melt down into unbridled selfishness. Unfortunately, the groundwater of business is now heavily contaminated with the runoff from morally blinkered egomania. As parents, we expend enormous energy in socializing our children. While a rebellious teenage son might believe his interests are best served by dropping out of school and moving in with his girlfriend, his parents are likely to have a different view. That’s what parents do—they teach their children to become stewards of their own lives. Problem is, if you’re a manager or an executive, your stewardship obligations extend far beyond yourself and your family. Yet in recent years many business leaders have blithely dodged those responsibilities. That’s why executives languish near the bottom of the trust table. So before you go any further in this book, ask yourself, am I really a steward? 1. What about fealty? Like the executor of an estate, do I see myself as a fiduciary? 2. What about charity? Like a self-sacrificing parent, am I willing to put the needs of others first? 3. What about prudence? Like a committed conservationist, do I feel responsible for protecting and improving the legacy I have inherited? 4. What about accountability? Like the captain of a vessel, do I understand I am responsible for my wake—for the distant ripples created by my decisions? 5. What about equity? Like a conscientious mediator, am I truly committed to finding the most equitable outcome for all? If you’re struggling to think through what this means in practice, here’s something that might help. For years I taught a second-year MBA course at the London Business School. In the final session, I typically offered my students some parting advice. When you take your first post-MBA job, I’d tell them, assume that the following things are true: First, your widowed mother has invested her life’s savings in your company. She’s the only shareholder and that investment is her only asset. Obviously, you’ll do everything you can to make sure she has a secure and happy retirement. That’s why the idea of sacrificing the long-term for a quick payout will never occur to you. Second, your boss is an older sibling. You’ll always be respectful, but you won’t hesitate to offer frank advice when you think it’s warranted— and you’ll never suck up. Third, your employees are childhood chums. You’ll always give them the benefit of the doubt and will do whatever you can to smooth their path. When needed, though, you’ll remind them that friendship is a reciprocal responsibility. You’ll never treat them as human ‘‘resources.’’ Fourth, your children are the company’s primary customers. You want to please and delight them. That means you’ll go to the mat with anyone who suggests you should deceive or take advantage of them. You’ll never exploit a customer. Fifth, you’re independently wealthy. You work because you want to, not because you have to—so you will never sacrifice your integrity for a promotion or a glowing performance review. You’ll quit before you compromise. These assumptions, if acted upon, will help nourish the seeds of stewardship in your business life and, by example, in the lives of others. As we struggle with the uniquely complex challenges of the twenty- first century, it is good to remind ourselves that what matters most now is what’s always mattered: our bedrock values. 1.2: Learning From The Crucible Of Crisis As I write this, the U.S. economy is sputtering. Though the Great Recession technically ended two years ago, unemployment remains stubbornly high and economic growth is distressingly feeble. The percentage of the U.S. population working is at a 25-year low and with 125,000 new job seekers entering the workforce each month, it may take a decade for the United States to get back to prerecession employment levels. A number of European states are in similar straits: property prices have tumbled, unemployment has soared, and growth has stalled. What we are witnessing is the mother of all hangovers—the inevitable and entirely predictable outcome of an epically irresponsible borrowing binge. Unfortunately, in this case, the boozers weren’t hard-drinking college kids on a Fort Lauderdale beach. They were the captains of capitalism. Federal Reserve policymakers were the distillers, congressional legislators the rumrunners, and big bank CEOs the bartenders. Sure, a lot of ordinary folks bellied up to the bar of cheap debt, but they were egged on by the ‘‘adults.’’ If you’re looking for an analogy, picture a high school dance where parents and teachers are pouring shots at an open bar. It’s difficult to imagine grown-ups doing anything so reckless, but then, a decade ago, it would have been difficult to imagine the world’s smartest financiers and policymakers abetting financial idiocy on a global scale. The worst economic downturn since the 1930s wasn’t a banking crisis, a credit crisis, or a mortgage crisis—it was a moral crisis, willful negligence in extremis. Few of us are surprised when we witness base behaviors in lofty places (like a ‘‘sexting’’ congressman), but the implosion of America’s investment banking industry revealed Biblical scale transgressions. One is reminded of the Exodus account in which the entire Jewish nation abandons Yahweh to bow before a golden calf. Every institution rests on moral footings, and there is no force that can erode those foundations more rapidly than a cataract of self- interest. In The Radicalism of the American Revolution, Gordon Wood notes repeatedly that the country’s founders regarded ‘‘disinterest’’ as a noble virtue. As they set about inventing the United States of America, that first crop of patriots endeavored to detach themselves from selfish concerns over personal gain and loss. One would struggle in vain, I think, to find evidence of ‘‘disinterest’’ in the behavior of Lehman Brothers’ Dick Fuld, Merrill Lynch’s Stan O’Neal, or any of the other banking chieftains who pillaged the U.S. economy for personal gain. While much has been written about the antecedents of the banking debacle (much of it opaque and tedious), it is worth taking a few moments to perform a quick moral autopsy. This will necessitate a brief rehearsal of the facts. The goal here is not to heap more blame on the bankers (well, it’s not the only goal), but rather to understand what happens when self-interest slips the knot of its ethical moorings. It is easy to be contemptuous of the bankers and regulators who precipitated the crisis, but I am not so sure that you and I would have behaved much differently if we had been faced with the same temptations. By all means let’s hold the bankers responsible (Someone? Please?), but let’s also use their calamitous misadventure to do a little moral reflection of our own. So, what happened? Let’s focus first on the proximate causes of the disaster. EASY MONEY After the dotcom bust in 2000, the U.S. Federal Reserve, under the leadership of first Alan Greenspan and then Ben Bernanke, drove borrowing costs down to disastrously low levels. Dirt-cheap money encouraged U.S. consumers to gorge on debt, dramatically increasing the risk of widespread mortgage defaults. Asian savings also played a role. By pegging the yuan to the U.S. dollar, Chinese authorities kept exports high and internal consumption low, thus building up huge reserves. These had to be recycled, and a lot of that money went into buying mortgage-backed securities. SECURITIZATION By bundling mortgages into ‘‘collateralized debt obligations’’ and selling those CDOs to third parties, bankers were able to move dodgy loans off their books. Between 2005 and 2007, more than 85\% of all U.S. mortgages were securitized. Historically, lending had been tied to deposit taking. By taking the brakes off fund-raising, securitization led to an unprecedented boom in mortgage lending. The net result: a serious decline in lending standards. As banks competed their way to the bottom, they handed out loans to just about anyone with a pulse. As it turned out, securitization didn’t inoculate banks from the risks of subprime lending, since many banks built up large CDO holdings via off-balance sheet ‘‘Special Investment Vehicles.’’ Commercial banks also lent billions of dollars to the biggest buyers of CDOs, investment banks and hedge funds. INSURANCE Credit default swaps (CDS) made it possible for CDO investors to protect themselves from a housing collapse—in theory. As with all insurance products, underwriting prudence requires a rich seam of historical data, but given the unprecedented growth of the subprime market, and the concomitant decline in lending standards, past default rates had no predictive value. As a result, CDO insurers like AIG severely underpriced the risks of a default debacle. This error was multiplied when speculators dramatically upped the demand for CDS contracts. Amazingly, the world ended up with $62 trillion of credit default swaps and no organized trading exchange. COMPLEXITY The new financial instruments cooked up by the banks were mind- bendingly complex. Mortgages were packaged together, partitioned into tranches, and then sold. Many CDOs were bundles of other CDOs. These convolutions made it hard for investors and ratings agencies to decipher the real risks. It should be noted that all this complexity didn’t happen by accident. Bankers love complexity, as it creates the illusion of value-added and provides a veil behind which they can hide their porcine fees. It’s even better when a financial product isn’t publicly traded, as that makes it harder for a buyer to discern its real value. Unfortunately, as the world came to realize, complexity can also obscure risk. LEVERAGE In a bull market, the greater the leverage, the better the returns. That’s why the biggest buyers of mortgage-backed securities borrowed heavily to bulk up their portfolios. With leverage ratios of 30-to-1 and higher, most of the major investment banks made massive bets on a continued rise in U.S. home prices. While this unprecedented leverage amped their returns on the upside, it obscenely compounded risks on the downside. In their rush to profit from the subprime bonanza, many bankers seemed to forget that leverage is always a double-edged sword—sooner or later it cuts both ways. Unfortunately, much of that leverage came from loans made by commercial banks. When defaults began to accelerate, those banks started calling in their loans, forcing investment banks and hedge funds to deleverage in a down market. To do so, these institutions had to dump other assets, which sent the stock market tumbling. ILLIQUIDITY Because of their complexity and novelty, there was no real secondary market for many CDOs, so when things started to go south, it was hard for cash-strapped institutions to reduce their exposures. Without a well-functioning secondary market, buyers had no way of discovering the true value of the exotic instruments they held, nor was it easy for investors and regulators to gauge the real threat to bank balance sheets. In the absence of reliable pricing data, bankers had no choice but to take punishing write-downs on their mortgage-backed securities. Many senior bankers claimed that the subprime crisis could not have been anticipated—that it was, as the chairman of the Financial Crisis Inquiry Commission scathingly put it, an ‘‘immaculate calamity.’’1 I disagree. Anyone who was watching the unprecedented run up in U.S. house prices (see Figure 1.2.1) had to know that a crisis was looming. Indeed, in 2005 I bought a financial derivative from my broker that was, in effect, a bet against the housing market. The instrument was linked to a stock index that tracked the performance of America’s largest home builders. For every 1 percent decline in the value of the index, the value of my investment rose by 3 percent. The instrument expired in 2008 and paid off handsomely. My only regret is that I didn’t bet bigger. Figure 1.2.1: S&P/Case-Shiller Index of U.S. House Prices* As I watched the crisis unfold, my initial reaction was disbelief. How could so many super-smart people be so wrong? Once the poop hit the fan, pundits of every stripe came forward with their preferred remedy (turn the Fed into a super-regulator, create living wills for the biggest banks, dramatically raise capital reserves, limit banker bonuses, and so on). At the time, I wondered if the solution might not be simpler. What about tattooing a few carefully chosen lines onto the forehead of every banker who had received bailout money: Alchemy doesn’t work. What was true for Isaac Newton all those centuries ago is still true: you can’t turn dross (garbage loans) into gold (triple A–rated securities) no matter how clever you are. Things that can’t go on forever usually don’t. If an extrapolated trend produces ludicrous results (like million-dollar starter homes), it will soon reverse itself—so don’t bet it won’t. Risks and returns are always correlated. Maybe there’s someone out there who can produce a positive ‘‘alpha’’ year after year, but it probably isn’t you or anyone you know. Stupidity is contagious. Reflect on the mad obsession with leverage and complexity that consumed you and your banking buddies. Smart as you may be, you’re every bit as vulnerable to silly fads as Japanese schoolgirls. The tattoos would have to be inscribed in reverse, so that every time a self-admiring banker glanced at a mirror, a teaching moment would occur. Tats or no, bankers do understand these simple truths, so why did Wall Street’s finest fail to heed them? Or more pointedly, why did they so completely abandon their responsibilities as the guardians of capitalism’s most important citadels? As it unfolded, the subprime banking crisis revealed a Shakespearian catalog of moral turpitude. It was a perfect storm of human delinquency. Deceit, hubris, myopia, greed, and denial were all luridly displayed. DECEIT We now know that a good many mortgage bankers, the folks who made those subprime loans, conspired with first-time borrowers to overstate incomes and understate debts. In addition, deceptive sales tactics and a lack of disclosure encouraged many borrowers to take on loans they’d never be able to pay off. In 2009, the FBI investigated 2,794 cases of suspected mortgage fraud, up from 721 cases in 2005.2 The simple lesson: any financial instrument that is built atop lies and misrepresentations will be flimsy at its core. HUBRIS The Wall Street rocket scientists who were charged with packaging subprime offal into marketable securities dramatically overestimated their ability to parse and partition risk. They would learn to their sorrow …