Oren's blog

Zuckerberg and the Search for a Real vision. by Oren Harari. 1.17.10

Over the years I’ve learned a couple things about “the vision thing.” First, CEO’s are often enamored of “’visions; because they suggest that the leader possesses a mega dose of creativity and imagination, and is smart enough to shape a game-changing business model. Besides, visions are more fun to spend time on than a lot of the grubby details of actually running an organization. However, despite these noble sentiments, most existing corporate visions are in fact more sound then fury. Pretty safe, uncontroversial, bland, and uninspiring—not a surprising consequence of a vision-by-corporate-committee process (Keep that in mind next time a consultant offers you an “easy” step-by-step blueprint for a vision).
One of the ways that you know you’re in the presence of a real vision is when you can’t figure out what a company is doing, and why, because you’re operating from conventional wisdom and they’re not. For example, in the 1990’s, the Big Dawg of CRM (customer relations management) technology was multi billion dollar Siebel Systems. CRM allows companies to track and categorize their contacts with customers during sales and service interactions. Siebel vendors would install and maintain expensive software and IT structures on their customers’ facilities (switching costs were huge, of course, which was a boon to Siebel’s business model at least). Then in 1999, emerged a startup called SALESFORCE.COM with a startling vision: “the end of software.”
Customers of salesforce didn’t need to pay for anything physical (technology or reps); not even a CD. They just downloaded whatever applications they needed (usually in half an hour) and did all the work on the cyberspace “cloud.” Even today, salesforfce calls itself the #1 “enterprise cloud computing companies.” Well, Siebel Systems and its founder Tom Siebel could not fathom that this “end of software” represented a serious competitive threat. They should have. “End of software as industry conventional wisdom. Because of salesforce's first-mover advantaged in this new NO-SOFTWARE paradigm, the company came up with attractive innovations in service and technology and cost efficiencies; accordingly, even today salesforce.com continues its forward growth progress while Oracle and Siebel are forced to concentrate more on volume and mass marketing to maintain flattening-to-dwindlingmarket share.

Remember, I said earlier, that one of the ways you know your competitors know they’re in the presence of a real vision is when they can’t figure out what you’re doing because you’re playing a different game. This happened frequently when observers tried to figure out exactly what Mark Zuckerberg was doing with Facebook. For example, I confess that I was initially puzzled why a 21 year old kid (Zuckerberg) would turn down a cool $800 million from Microsoft’s acquisition machine. Now I get it. Once the $800 million orgasm would have petered out, Facebook would have been just another business unit of the Microsoft Empire, which means Zuckerberg’s vision for his company, and for the Web, would have been co-opted or slowly smothered.

You see, the conventional perspective of the Web is that it is a composite of a myriad wealth of information. The optimal goal, presumably, is to be able to access the myriad wealth of data, information, communication, and such. Those are the building blocks of the web. Both Microsoft and Google work to give us the tools to access all that “building block” stuff.” Facebook starts with a different assumption altogether: The information is far more valuable when coming from trusted sources in one’s social community. Put another way, Zuckerberg vision is that the real power of the Web is in the virtual relationships themselves and that any data and informationare secondary—in fact, data and information are is are only useful and powerful and useful when and useful they are tracked and shared by people who know and trust each other. Given that we are now in an Age of Celebrity, where peoples’ desire for 15 minutes of fame (thank you Andy Warhol, Us, E!and People) is paramount, Zuckerberg’s perspective seems quite valid. Market-wise, the numbers support Zuckerberg and Facebook: 350 million loyal users forming the world’s largest social network. That’s the power of real visions.



To test this conclusion further, I thought it would be a good idea to do some additional empirical research with my two teenage sons, both of whom have the Web wired into their DNA. They represent today’s customers and more importantly, tomorrow’s customers.
Unfortunately, as I caught up to them before they were heading for bed, neither of them was thrilled to participate in this groundbreaking interview research as to the value differences between Google and Facebook. My 14 year old politely (I’m being diplomatic here) declined, preferring to turn off the light, and then wrap his body and his electric guitar in a blanket before sharingsome serious snoring. My pre-teen was more cooperative, but still not very helpful when I asked him the practical difference between Google and Facebook, for him.

‘Dad!” he laughed (he really laughed at my ignorance)” You can’t compare them! They’re two separate things, completely.” There you go. Totally different concepts and visions. He knew. Maye he'd enlighten me.
Anyway, despite the fact that according to him, I “can’t compare them”,
I pressed on gamely: okay, I said, which one do you use more, and why?

“Facebook!” He responded. OK, I said, why?

“I use Google for research or if I need to look up something for class,” he explained. So far, so good. “But if I want to know something really interesting, I go to Facebook.” For example, he went right to the Facebook site of one of my wife’s friends, where he immediately picked up some information he wanted on karate (my wife’s friend is a black belt and provided links he took seriously) and confirmed a rumor of an unfortunate impending divorce and how her son (his friend) was coping with it, along with photos. In this short interchange, he earned something important about karate and how intimate relationships can fail. He was happy. So was I. I couldn't have convinced him to comb the Web for this information using Yahoo or Google.


Vision isn’t enough for competitive advantage, of course; but it’s an important element. A dull conventional vision will inevitably yield a dull conventional strategic plan. When you and your colleagues are excited and a bit scared (because you’re truly venturing into the unknown), and when your competitors are bewildered and irritated at you (because they can’t figure you out), you know you’re probably doing “the vision thing” right. try it. And Don’t accept anything less if you want to break from the pack in today's global economy.
Editorial and research support by Jordan Harari

What Cancer Survivors Can Teach Entrepreneurs. by Oren Harari. December 17, 2009.

Oncologists deal with cancer, and cancer is grim. So oncologists, one would think, would be pretty immune to anything. Generally they are. But if you want to see an oncologist’s eyebrows (and possibly blood pressure) rise, ask them to start talking about Glioblastoma multiforme (GBM). GBM is the most common and aggressive type of primary brain tumor in humans, involving glial cells and accounting for 52% of all parenchymal brain tumor cases and 20% of all intracranial tumors. Make no mistake, GBM is a virulent killer. The statistics are pretty horrific. Only 10% of people who get diagnosed with it even survive until the second year, and only 1% survive 5 years.
Even the acknowledged guru on this topic, Dr. Henry Friedman of Duke University Medical Center, has stated that the vast majority of those diagnosed with GBM will die.

How’s that for a little preliminary to cheer you up?

And yet….And yet…. There is still cheer for this holiday season. There are lots of individuals with GBM who not only survive, but they go on to lead long, healthy, happy productive lives. What’s their secret? And how does that secret help an entrepreneur or leader of a start-up business?

Well, I did a little bit of investigation on this subject and came up with an interesting conclusion that may surprise you. It did me.
What the GBM survivors do is seemingly ignore the devastating aggregate data on the disease that’ is available throughout the Web. They're not ignorant of the disease they have: of course,they research it. They know what they are up against, but they concentrate daily only on the specific data they need to succeed in their own unique personal journey.

It’s pretty straightforward. If you suffer from GBM, and do a web search and focus on the general GBM stats and prognosis, you’ll most likely give up, logically concluding that you will be dead yesterday regardless of what you do today. But if you’re like the people who tend to get beyond the disease, you’ll concentrate on what you need to do to get healthy, regardless of the odds, and and regardless of what the established “experts” (who often represent conventional wisdom in medicine or business or any other field) advocate.

The protectors of conventional wisdom often defend their approach as research-based, which should be applauded. Yet ironically, the survivors' strategies often seem to diverge from the research findings. Here's how we can make sense of this apparent anomaly. In fact, the the survivors' approach makes sense statistically and experimentally, not just psychologically. First of all, there are some noteworthy problems with the published research studies themselves: One, many are dated (i.e., they represent old data gathered prior to the peer review process and eventual publication -- even while new approaches and products are currently being tested), Two, many are based on very small samples. They are essentially anecdotal descriptions of individual case studies. This is not as robust an experimental paradigm as one that allows the researcher to perform a statistical analyses based on comparing members of a wide sample on a number of variables, and coming up with hard metrics that allow the researcher to confidentially assert within a .01 or .05 probability that one subsample of trial volunteers with a particular diagnosis, drug or protocol definitely does better than the other--with no placebo possibility. Three, many of the studies are contaminated by “outliers”. An outlier is a data point or observation that appears to deviate markedly from other members of the sample—which suggests that either a measurement error is occurring or the subject (that’s the human being on trial, me or you) is actually part of a different population than the one that is supposedly being measured. For example, Senator Ted Kennedy died of GBM, as expected by the “data”. Suppose an Olympic athlete was in Kennedy’s clinical trial and survived? The Outlier principle would suggest that any conclusions about the test trial would need to be postponed because Kennedy and the Olympic star—the “outlier”-- were probably not drawn from the same bell-shaped “population” (of fitness, healthy, vigor, lifestyle, demographics), etc. and therefore the Olympian’s results cannot be generalized to Kennedy’s, or to yours, or mine, and vice versa.

But the statistical analysis was not the major issue that I gleaned from my interviews with doctors. It turns out that much of an individual’s prognosis with GBM is, no pun intended, “in the head”. A Chinese doctor in San Francisco exclaimed to me vigorously: “If (a person with GBM) has a good attitude, he will live. If he has a bad attitude, he will not live.” Even Western MD’s, who usually have little patience with these sorts of psychological variables, told me that the mindset and attitude of the patient have a huge effect on the ultimate outcome of treatment.

But what is a “good" attitude? It’s not simply optimism. Given the grim data on GBM, how does a physician realistically tell a patient to be optimistic ?Optimism in this case could easily turn into a goofy "What Me Worry?" Alfred E. Neuman flight from reality. And on top of that, Good leaders do inspire optimism, to be sure (as Colin Powell says, “Optimism is a force multiplier.”) But in this case, good attitude means disciplined selective attention: Ignore the aggregate “relative” data; don't be seduced by thinking and action that is comfortable and conventional, selectively choose what might make sense for you and your particular unique condition Once again, patients who focused on the existing aggregate data on the disease as a whole tended to think negative, depressing thoughts (which makes sense intellectually, but it diminishes spirit and health) ); patients who literally ignored the existing general data were, literally and again unsurprisingly, more ignorant about the disease “field” but tended to think more systematically, and optimistically of their own case, and that ultimately made a difference.

Okay, so back to the title of this blog—what does all this have to do with entrepreneurialism?

Quite a bit, actually.

My research over the past couple decades has demonstrated that many successful entrepreneurs would never have launched their businesses in the first place (nor worked at a frenetic daily 24/7 pace) if they had dwelled on the overwhelming challenges facing them in the marketplace, or even within their own organizations.. That isone reason that entrepreneurs are slightly insane to begin with. After all, back in the early 1980’s, mighty IBM owned the computer world, from personal to mainframe. Would you have bet a plugged nickel that two penniless geeks in a garage (metaphoric MBG carriers) could create a truly “personal” and cool computer and a thriving company called Apple that changed the rules of the game and ultimately forced IBM to sell off its entire personal computer division to the Chinese firm Lesotho? Or in the early 1960’s, when GM not only owned the car world but was one of the most powerful corporations on earth (with annual sales that exceeded most countries' Gross Domestic Products), would you have bet a plugged nickel that six innocent mid-level Honda engineers who naively came to the U.S. to in the hope of learning what Americans wanted in cars, rented a few Los Angeles apartments (while sleeping on the floor at night) -- would one day bring the American car colossus to its knees?

No way. As I said, this isn’t about mindless optimism. Optimism on its own can be catastrophic: witness the irrational rise and inevitable blow-ups of the Internet and housing bubbles over the past decade. No, what I am talking about is more than optimism. It is unyielding focus, concentration, determination, a vision of clear goals, and plain unyielding persistence, , one day at a time, regardless of the external views that you are a damn fool for venturing into the shark-infested waters in the first place. Optimism is the consequence of this process, not the instigator.

Just to muddy the waters further, I am not suggesting that successful leaders should deliberately turn away external data. In fact, I have, in several publications, shown that one of the reasons why some very high-priced acquisitions in the Merger & Acquisition world fail abysmally is due to crappy diligence before the deal is closed. It is remarkable how often deals are consummated despite glaring gaps in knowledge—like a multi-billion dollar class action suit pending, or a major quality and customer problem, or a significant (and possible illegal) problem with the balance sheet. All the optimism in the world won’t compensate for that sort of ignorance, stupidity and malfeasance.

In fact, the most successful entrepreneurs, from Apple’s Steve Jobs to Whole Foods Markets’ John Mackey, have combined a healthy due diligence research of “the data” that’s relevant to their industry (what sort of resources do we need; what’s out there that’s a particularly dangerous threat to me, and what must I do in response right away)—while disregarding the data that point to uphill industry battles that, from a probability perspective, are lost causes.

Here are some comments I made a couple years ago in http://www.harari.com/blog/index.php?/archives/164-The-Real-Essence-of-Strategy.html which outlined the kinds of data that John Mackey focused on.

....When John Mackey launched Whole Foods Market, he certainly had to be knowledgeable about the business practices of competitors—from giant grocery retailers like Albertsons and Kroger to small corner shops like 7-11 and Harry’s Deli. He certainly had to understand competitor-driven forces like capital requirements, customer switching costs, potential retaliation from entrenched players, supplier power, pricing impact, and such. And he certainly had to (still has to) continually monitor the moves of other food retailers.

But at the end of the day, Mackey’s strategic purpose was not to understand his competitors, cope with them, or even to “beat” them. His purpose was to provide customers a radically new and desirable alternative in the form of natural, organic foods. His purpose was to create an exciting and lucrative market. That, in turn, is why Whole Foods busted the competitive landscape and transcended its competitors while becoming the fastest growing, highest-margin food retailer in the industry.

Without a doubt, understanding and coping with competitors is a vital part of competitive strategy. But never forget that the soul of a winning strategy revolves around the pathbreaking value that your organization can create, regardless of what competitors are doing. That’s what excites customers, turns on employees, and brings investors rushing in.

So once again, not to be too Mary-Poppinsish about it—it’s not about the challenges and odds as much as it is the obsessive focus, persistence, and commitment to a set of extraordinary goals—whether you’re trying to “beat” GM or GBM.

One last example. If you had the chance back in the 1990’s, How many of you would have bet your life savings on the prognosis of two young starving Stanford Ph.D students named Larry Page and Sergey Bin, who — armed only with a small, intangible proprietary algorithm that could be used for Internet searches — planned to go head to head against mighty Microsoft. Remember, Microsoft was run by fierce competitor Goliath executives themselves Bill Gates and Steve Ballmer. The company had a legal monopoly on the foundation of most computer use: The Windows operating system and the Office product suite. Microsoft’s annual R & D budget ($6 billion) exceeded the yearly revenues of most of its competitors. Its brand name was world famous. On top of that, the company was sitting on a fat hoard of $40 billion in cash. What could two unknown students do against that? If they had acted in accordance with the brilliant commentators and analysts who reviewed the market “data”, they would have gone home to die. Or, if lucky enough to be alive today, they’d be holding down middle management jobs in an insurance company and living with their parents at night.

Instead, today the market capitalization (MC) of Google is nearly $200 billion (even though the company’s actual revenues are “only” $23 billion) and Page and Brin themselves, just over 30 years of age, are themselves billionaires. A company’s MC represents, from the investor community’s perspective, the actual worth of Google: MC, technically, is Google’s true value? But as big as it is, it’s misleading, and conservative. Market capitalization, MC, or the real “market value” of Google, the total value of all the shares of stock the company has issued multiplied by the price per share. So, for example, regardless of this year’s annual revenues, take the number of Google shares outstanding and multiply it by the price per share and you get the market cap. That number—which vastly exceeds the annual revenues-- represents investors’ confidence in future profits and cash flows of the firm—and at this point investors are pretty confident that it will be far greater than the financials today, Microsoft and Facebook and IBM notwithstanding.

Google’s “Enterprise Value”, or EV, is even more impressive., even though it is “only” about one-half billion dollars. That’s because Enterprise Value=Market Capitalization + Total Debt – Cash. In other words, EV is the true value of the firm once you remove all its warts, blemishes and liabilities from its market cap. . Once you remove those last three factors, you’ve inherited a company that has its problems (debts, weak assets, marketable securities that must be quickly liquidated), as well as its upside in people, technologies, brand equity and marketing muscle.

MC and EV are important because they provide good clues to the future prospects of the firm, not just a report of its current sales and market share. And in this case, Google is doing tremendously well like an MGB survivor who is now winning triathlons. It s happening, in medicine and in health and in business. The one common denominator: don t get hung up on all depressing challenges and blatant failures that now exist in the general space of the disease or product line; concentrate instead on what you can focus on obsessively every day to transcend conventional wisdom and beat the lousy odds, one day at a time, and make sure you ignite these feelings in your team. I can t guarantee you billionaire status if you follow these rules, but I think I can make you feel more secure that your start-up will more likely prosper rather than die.

Nobody should get cancer. It's a gruesome evil disease. But even gruesome evil diseases can sometimes offer clues to competitive market success. In hindsight, don t you wish you would have put down your bet on those GBM-like students at Stanford (metaphorically speaking, of course) rather than the conventional analysis which could only conclude the little Google venture would be a hopeless disaster and you should park your money with "safe" tech firms like Motorola (where you would have lost most all your investment)? Don t feel bad. Outliers are often dismissed, but because of them, research progresses and new products and technologies emerge. So if you're called "nutty", wear the badge proudly. Forget normal. I'd rather be crazy and prosperous than normal and dead.


Here's a testable hypothesis: I propose that true entrepreneurs start up as Outliers, or end up as ones. By definition entrepreneurs are separated from the traits and behaviors that proliferate among those in the “normal” population. Let’s remember: Deviant monomania in goals and in executions is what drives significant improvements in medicine, business and national economies.

Suggestion: put a cancer survivor on your board of directors.


Posted by Oren Harari at 11:45

Obscene Profits? by Oren Harari. 11.19.09
DR. Fredrik Vedel Jensen, a Danish surgeon with an impressive resume of international and infectious diseases experience, just came back from living 5 weeks on a huge oil drilling rig in the Gulf of Mexico, where he served as the “ship's doctor". He showed me photos of this rig. It’s enormous. From above, it Looks like a 7 story futuristic hospital or hotel positioned on a giant pod in the middle of an ocean. Last year, British Petroleum found a lucrative oil patch 6 miles below the surface of the Gulf waters, and this year, the joint venture of Norway’s Stat Oil company and the Danish giant Maersk, a privately held shipping and container firm are joining forces under the name AP Moller to try to replicate BP’s fortune. Given that worldwide demand for oil remains at 60-80 million barrels a day, you won’t be surprised that AP Moeller’s finances are pretty healthy. How healthy? Well, let’s skip revenue figures; too many zeros. The net income of Maersk Limited is $150 billion and the operating income is close to $130 billion. Substantial numbers.

So substantial, in fact, that the knee-jerk Pavlovian response of some readers and many ideologues (including politicians) is that those numbers are “wicked”, “obscene” and “unfair.” These people do not pump soy milk into their Priuses when they drive to meetings to denounce the “evil” oil executives, but you can see where this line of reasoning is heading.

I brought this up to Dr. Jensen and though he is not an accountant or engineer, his take on the matter was enlightening. Repeatedly, he reminded me that “it costs AP Moller $1 billion a day to do its work, and there is no guarantee that they’ll find anything.” So the profit numbers are colossall, but so is the investment and risk. We often forget that part, all we know is that we must satisfy our addiction to oil and we don’t want it from our enemies in the Mideast if we can help it. So the Gulf might be a safety valve, though drillling though 6 miles of ocean, even assuming no hurricanes or sabotage, is a tall order requiring substantial investment and incentives.

But why a billion a day? I don’t know what sort of picture you get of this rig, but for me it’s almost like a San Quentin prison: 200 big tough “roughneck” men (no women allowed), dragging their knuckles on the ground as they walk. What’s expensive about that?

Not so fast, says Dr. Jensen. This is an amazingly high-tech operation. Jam packed with state-of-the-art architecture for employees, bulky electronic gear, large expensive computer hardware, sophisticated i.t. systems, and university-like lab spaces for scientific precision to insure that the drilling stays absolutely and delicately constant as the surrounding waters continually heave, ebb and flow. True, Jensen saw a lot of tattooes on arms that were as thick as his thighs, but basically, he was impressed with the knowledge and sophistication within the property--and good people cost money too.

So think about it next time you are motivated to call a company’s profits obscene. Sure, sometimes I’m staggered and irritated by the numbers I read from huge inept corporations and myopic private equity firms, especially when I work with entrepreneurs who would give their eye teeth for a measly $500,000. On the other hand, let’s be fair. How much demand is there for an oil company’s products? Quite a bit, right? How much capital investment and risk is necessary to bring those products to market for us to enjoy? As I said a couple times above: Sometimes all those numbers are huge and if so, we shouldn’t begrudge a company, even an oil company for goodness sakes, for enjloying profits on that scale if it succeeds in its expensive research, planning, marketing, and execution. Incidentally, if you want obscene prices, go fill up a tank in a European country. (Oh, by the way, 35% of those oil profits go to taxes; and even ideologue politicians can warm up to that!)

take it a step further. Are Google's profits obscene? How about Apples'? Who's to judge? It appears that Google's users rely upon the company for, well, just about everything, and the Appl iPhone is a cult product with very loyal customers. So it seems that impersonal markets have set the bar for what's reasonable and what's not. Nw, for anti-market ideologues, such thinking is anathema. But what's the alternative? A lobby-laden Congressional committee making those decisions? [Did you notice that Senator Mary Landreau (D-Louisiana) just demanded $300 million for her state in exchange for a "yea" vote on Obamacare? In England, politicla committees are already determining executive pay]Or worse, would you prefer an omnipotent one-person political hack with a job title of "Profit
Czar?" While those who still revere the central planning processes of the old Soviet empire might get excited by these possibilities, I'm not at all sanguine about them.

Even in today’s knowledge edconomy, commodities are rising in value; gold is now over $1000 an ounce. Oil is a non-negotiable necessity. Basic laws of supply and demand coupled with basic laws of behavioral psychology mean that large companies with deep pockets and patient capitalo will be the ones we will most likely continue to rely on to discover, extract, refine, and package these commodity goods so we can suck some value out of them in our private lives. If these companies actually do their job efficiently, ethically and legally (unfortunately, not an automatic assumption in today]s world it seems)), then why begrudge them the incentives and the profits that on the surface seem ridiculously large? Do we naively expect them to become charities and do all this for nonprofit love, as in “Exxon.org”? Dr. Jensen doesn’t think so. He charged AP MOller a pretty penny (or a pretty kroner) for his labor.

"Leadership Lesssons from Michael Moore?" by Oren Harari

Now that President Obama has won the Nobel Peace Prize, I suppose it was inevitable that his critics on the right and the left would trash him for not deserving it. Michael Moorse, in his MichaelMoore.com website, was characteristically blunt:



33 Comments Print
Share

October 9th, 2009 2:14 PM
Congratulations President Obama on the Nobel Peace Prize -- Now Please Earn it!
Dear President Obama,
How outstanding that you've been recognized today as a man of peace. Your swift, early pronouncements -- you will close Guantanamo, you will bring the troops home from Iraq, you want a nuclear weapon-free world, you admitted to the Iranians that we overthrew their democratically-elected president in 1953, you made that great speech to the Islamic world in Cairo, you've eliminated that useless term "The War on Terror," you've put an end to torture -- these have all made us and the rest of the world feel a bit more safe considering the disaster of the past eight years. In eight months you have done an about face and taken this country in a much more sane direction.
But...
The irony that you have been awarded this prize on the 2nd day of the ninth year of what is quickly becoming your War in Afghanistan is not lost on anyone. You are truly at a crossroads now. You can listen to the generals and expand the war (only to result in a far-too-predictable defeat) or you can declare Bush's Wars over, and bring all the troops home. Now. That's what a true man of peace would do.
There is nothing wrong with you doing what the last guy failed to do -- capture the man or men responsible for the mass murder of 3,000 people on 9/11. BUT YOU CANNOT DO THAT WITH TANKS AND TROOPS. You are pursuing a criminal, not an army. You do not use a stick of dynamite to get rid of a mouse.
The Taliban is another matter. That is a problem for the people of Afghanistan to resolve -- just as we did in 1776, the French did in 1789, the Cubans did in 1959, the Nicaraguans did in 1979 and the people of East Berlin did in 1989. One thing is certain through all revolutions by people who wish to be free -- they ultimately have to bring about that freedom themselves. Others can be supportive, but freedom can not be delivered from the front seat of someone else's Humvee.
You have to end our involvement in Afghanistan now. If you don't, you'll have no choice but to return the prize to Oslo.
Yours,
Michael Moore
MMFlint@aol.com
MichaelMoore.com


Following this unequivocal rant was a series of 30-some comments by readers. Readers of my blog know that my commitment is to improve corporate strategy and leadership, not weigh in on partisan politics. But one reader comment, by “Realist” below, deserved a reaction from me. What do you think of it? Here’s what Realist wrote:

Realist
Posted today
There is generally a silver lining that goes along with all bad news. In the case of Obama the socialist being elected, and his ruining this great country, it comes down to this. When all capitalism is eliminated, all women are subjected to becoming second class citizens like in Arab countries and free speech is eliminated, we won't have to listen to the drivel that this guy is constantly spewing. Michael Moore is a snake oil salesman. Although he preaches anti-capitalism, there is nobody in the worls who practices capitalism than this clown. He makes more money than 99.9% of Americans by beating up what he actually practices. Oh well, we are a land of idiots or this guy would not exist.

My knee-jerk rresponse was as follows:

Deep inside, I basically agree with much of Reaalist’s thoughts even though I recognize that his own opinions seem are pretty extreme. Herre’s what I mean: I work with many small capitalsts—i.e., entrepreneurs, people who invest their money and time (and often risk everything) into projects they love and think might ultimately be financially viable, and so on. These people are “capitalists”, but they are not evil or stupid or exploitative people (we’ve got to get over this ancient stereotype of a “capitalist” as a fat, top-hatted man in mustache who exists primarily to ruin peoples’ lives and environment in order to pocket $$$$$$ regardless of cost. Instead, think about the guy or gal who takes a second on his or her mortgage to start a company, often for a green or progressive cause, then works with employees 80 hours a week to achieve a dream, and eventually hires an attorney to charter the tiny organization as a “corporation” in order to keep vulture civil litigators at bay. Small capitalists They are folks who have kept this economy humming for over 200 years. Pardon my own bluntness, but Moore’s rants are both delusional and hypocritical. He’s as creative as Steven Spielberg, Oliver Stone, and Anna Wintour and he does the same thing with projects and new enterprises, though perhaps on a smaller scale. Of coursse he’s a capitalist and of course he’s fully deserving to be a multimillionaire (and paying appropriate taxes and providing appropriate jobs) precisely because he’s operating successfully in a capitalist environment. He should be proud of himself, as are Spielberg, and Winotour, and Tarantino, and Steve Jobs, and as many of Moore’s ownhis fans/customers are. But to so flagrantly bite the hand that feeds you, like in his latest film Capitalism, A Love Story? I’m not a shrink, but that question deserves a deepeer analysis What do you think? Frankly, I wish we had more Michael Moores in other industries. Leaders by definition create controversy, even chaos, and they constantly challenge routine and conventional wisdom. They make people uncomfortable, especially people who are comfortable with tradition and how things have always been done. What good leadersthey don’t do, however, is deliberately alienate those who might disagree (on the contrary, they try to engage and inspire them). Nor do they deliberately blow up the theatre that allows them to create and enjoy the fruits of their creation. That’s when things get somewhat pathological. Oren Harari. Regardless of your political take on Michael Moore, what do you think of his views—speaking as a leader?

"Regulation, Shmegulation" by Oren Harari. August 9, 2009

In my July 25 blog (“Ethics, Shmethics”, see www.harari.com/blog) I proposed that if you need ethics counselors and university courses to tell you what’s right and wrong, you’re unlikely to ever “get it.” I’ll make the same assertion about government regulators. I understand that many of the bad boys currently in prison—like Enron’s Jeff Skilling and Tyco’s Dennis Kozlowski—still deny personal responsibility for serious malfeasance. Their moral compass never changed; they just got caught and convicted. (I’ll make an appointment with Bernie Madoff 150 years from now to see if his moral bearings have changed).

Nevertheless, some of you might still hold on to the fantasy that more government oversight and regulation will solve the ethics crisis that has reduced the public’s trust in business, and that almost bankrupted the world.

Let me rid you of that fantasy. In my last blog I described the corruption at Beazer Homes USA. What I didn’t tell you was that the Beazer crime wave continued right under the noses of the SEC, Justice Department, and the Department of Housing and Urban Development, right up until the Charlotte Observer broke the story on numerous frauds.

And even after the story hit the spotlight, here’s what the oversight of the Feds generated:
1. A measly $15 million fine (if you want to be outraged, reread my last blog for the gory details of what Beazer did).
2. The CEO, COO, and board of directors still have their jobs.
3. A self-serving puff statement from a HUD official who said “This action shows that the administration is serious about….(blah blah blah)….”

How’s that for inspiring fear into potential crooks at the top? So much for oversight and regulation.

Then there’s the Harry Markopolos story. Back in 2000, Markopolos figured out Madoff’s entire Ponzi scheme and over the next nine years tried repeatedly to interest the SEC in his calculations. Markopolos was not some flake. He was a respected investment officer with Rampart Investment, and nine years ago he prepared what has been called a “devastatingly persuasive 17 page letter” to the SEC. Yet the agency showed no interest in pursuing the case. Markopolos tried to connect with the SEC several times thereafter to present his analysis, but as he testified at the House financial subcommittee hearings, the agency ignored his warnings or brushed them aside right up until the entire scandal blew up. So much for oversight and regulation.

Ask Warren Buffett. At a recent speech, he pointed out several that the Feds assigned 60 “full time” professionals to do only one thing and one thing only: monitor the activities of Fannie Mae and Freddie Mac. That’s it. One job. Sixty people. Through either incompetence or neglect, they failed at the one miserable responsibility they had. Right up until those two institutions’ meltdown, the word from these experts was that everything was groovy and gravy. So much for oversight and regulation.

Then there’s Allen Stanford, a big bawdy Texan who launched his own mini-Madoff-style multi-billion dollar Ponzi scheme and relocated to Antigua to avoid close surveillance. As investigative reporter Bryan Burroughs reported in the July issue of Vanity Fair, “It took the S.E.C. years to charge Stanford despite a steady stream of tips and lawsuits by former employees of Stanford Financial (my emphasis)”. Even so, Stanford kept his business going, until a single independent financial analyst, Alex Dalmady, working alone in South Florida, figured out what it took the government agencies over a decade to discover. Burroughs quotes Dalmady as follows:

“It became obvious. No one was looking at stuff like this. The S.E.C. had its head up its butt. So I dug deeper and put some numbers on a spreadsheet—took me about 30 minutes. It just got worse. Where was the portfolio? What were they invested in? [Twenty percent plus] returns on their hedge funds? No way. Outperforming the S&P in stocks? No way. With 30 percent deposit growth? No way.”

Burroughs concludes as follows: “It took Alex Dalmady maybe two hours on the Internet to glean the amazing truth. It’s not clear anyone in Washington every seriously tried.” So much for oversight and regulation.

So the next time you hear someone pontificate about how the government will solve these kinds of problems, do two things:

1. Open up the daily paper and point to the latest case of a legislator or regulator being embroiled in some sort of deceit or corruption, and ask: “Is this the fox you want guarding the chicken coop”.
2. Show them this blog.

At the end of the day, the TV shrink Dr. Phil is right. Our sense of self is what we believe about ourselves “when nobody else is looking.” If you need the SEC or the U.S. Congress to tell you who your self is, then I think you’re going to find it very difficult to do what ought to be simple: the right thing.

"Ethics, Shmethics" by Oren Harari. July 25, 2009

While on business trip a couple weeks ago, my eye fell upon a little teaser in the lower right hand corner of the July 10 New York Times. The headline, in small font, was “Golf on the Honor System.” Here’s what followed:

“Strathtay Golf Club in Scotland is a charming, out-of-the-way course with a number of unusual features—including a box where golfers drop off their greens fees…..’It’s strictly a practical business decision’, one longtime member said.”

Well, I quickly turned to the “B” section of the Times in anticipation of a warm fuzzy story. I remembered a few years ago, while driving in rural areas of Denmark, I was pleasantly surprised to find tiny grocery stands set up by local farmers on the shoulder of the roads. Each stand had only a shelf or two of fruits, nuts and vegetables, and adjacent prices. But no people. Just make your selection and drop your money into the little boxes. I felt a lovely glow about the future of humanity.

Sure enough, the little Scottish Golf Club of Strathtay (200 members) can’t afford a full-time staff, so patrons are asked to drop their greens fees into a box. And by and large, they do. Honesty and integrity seem to be transferring quite well from the arena of sport to the arena of commerce. The fact that the honor system is in full play contrasts nicely with the dishonor, deceit, and greed that drove many firms’ financial decisions, which in turn generated the deep recession we find ourselves in.

But wait, it’s not so simple. As I turned to the inside pages of the “B” section to read about golf and truth, I noted a much bigger lead story on page “B1”. It was about Beazer Homes USA, which, apparently:

“…defrauded buyers, particularly poor people being sold homes they could not afford. It defrauded the federal government by getting government guaranteed mortgages for those buyers….and while it was at it, Beazer lied to shareholders about how much money it was making. First, it lied by claiming it was making less than it was. Then it lied by hiding losses when the housing bubble began to burst. To keep the lies going, the government says, the company prepared fraudulent documents to mislead its auditors.”

Now, of course, the company is on the verge of bankruptcy and is enmeshed in a sea of litigation.

Well, now, that kind of puts the Strathtay Golf story in perspective, doesn’t it? I threw up my hands in frustration (figuratively, since I was reading the Times on an airplane). How does one explain those events, or the Beazer leaders whose decisions led to those events? How does one decipher the executives of Peanut Corp of America, who camouflaged severe food safety violations in its plants until a national salmonella outbreak (and nine deaths) pushed the company into bankruptcy? How does one figure out Ramalinga Raju, the founder and chairman of the Satyam Corporation in India (“satyam” meaning “truth” in Sanskrit), who confessed to falsifying the company’s accounts for years to the annual tune of $1 billion of additional cash balances and revenues that simply did not exist?

I teach at a business school MBA program, and I’ve heard from academics and business pundits that we need to emphasize “business ethics” more in national conversations, and we need to make sure that MBA students take stronger “business ethics” courses.

To that I retort, “Ethics, Shmethics.” I’ll bet most of those dishonorable leaders running the above companies have an MBA degree and have taken at least one ethics course while pursuing their degree. I’ll bet that each one of them has a business ethics book in his library. I’ll bet again that each one of them has probably pontificated about ethical behavior in speeches to deferential audiences.

If you need to take a business ethics course to tell you what the right thing to do is, you’re simply lost—commercially, existentially-- and no book or training seminar will help you find your way. If you need an ethics course to convince you that honesty and integrity are good for the bottom line, then obtaining multiple MBA’s won’t propel you to business success. One can’t train an inauthentic person to be authentic.

I am fortunate to serve as board member and consultant to a variety of successful entrepreneurs and small-business owners who don’t need to enroll in an MBA-level ethics course. They simply work their butts off, tell the truth, worry about the integrity of their technologies and products, and obsess about “doing right” by their customers. I’ve also had the privilege of working with CEO’s of larger companies who live by the same perspective. Like John White, who heads Public Financial Management, a financial advisory that issues bonds and manages assets for public sector groups. For White, honesty, integrity, client care and “business citizenship” are not intellectual concepts divorced from practical matters. They are unequivocally, non-negotiably built into the company’s cultural and financial DNA. And then there’s Scott MacLellan, who heads Morrison Management, a division of the Compass Group. Morrison provides food services for hospitals and elder care facilities. Scott grows almost spiritual when talking about the privilege of creating healthy, genuinely organic foods and a warm, caring service environment for the vulnerable members of our society. At Morrison, compassion is not PR pap; it’s an integral part of the business fabric, impacting how people are hired and how capital is allocated.

Oh, by the way, while the AIG’s and CIT’s implode, PFM has maintained a steady double-digit annual growth rate over the past decade, and has been rated by Bond Trader as the #1 financial advisory company in the U.S.

And while outsourced food service providers find themselves slashing prices to compete in a commodity environment, $2 billion Morrison Management company continues to grow margins, brand equity and customer loyalty by offering an innovative “ethical” value proposition without the need of “ethics” consultants.

Do you really need ethics consultants and professors to tell you that what Beazer Homes, Peanut Corporation, and Satyam did was, like, “wrong”—and maybe a crappy way to do business?

Do the right thing. You know what it is, if you just listen quietly and deeply to yourself, and rev up your courage at the same time. Don’t rely on books, professors, and trainers to give you a sterile, analytically detached response set. Just do the right thing, for goodness sakes!

One last thing, and I’ll talk about it in my next blog: If you think the answer to ethics violations lies in spiking up government regulation and oversight, you’re really living in fantasyland. Stay tuned.

"Are Today's Leaders Naked?" by Oren Harari. June 25, 2009

So it’s mid year 2009. Let’s do a quick reality check on the recession. Most analysts ask questions like: Have we bottomed out? Are we on the financial upswing? Is the last segment of the “U” investment model finally emerging?

These are all valid questions, but my interest today is a little different: As managers and leaders, have we learned something from this debacle? What is the likelihood that we’re going to repeat our errors?

Let’s review. On some level, we’ve learned that financial business models built on continually ramping up risk, leverage, complexity, and pay-for-short-term-results are simply not sustainable. At least I hope we’ve learned. Have we?

Have we also learned that arrogance and complacency are deadly? The hubris of the “Masters of the Universe” in the financial sector has been well documented. Back in September 2008, Fortune magazine’s Shawn Tully described the economic collapse as “… the failure of an antiquated, risky strategy that depended on macroeconomic luck and that grossly overcompensated employees for being in the right place at the right time.” That kind of environment easily breeds megalomania, and we saw plenty of that during the go-go boom years leading up to the inevitable popping of the bubble.

But arrogance and complacency can easily contaminate any industry. Last year, in a series of lectures sponsored by the Australian Broadcast Corporation, Rupert Murdoch made the following comments about the woes of the newspaper industry:

"The complacency stems from having enjoyed a monopoly--and now finding they have to compete for an audience they once took for granted….. It used to be that a handful of editors could decide what was news and what was not. They acted as sort of demigods. If they ran a story, it became news. If they ignored an event, it never happened. Today editors are losing this power. The Internet, for example, provides access to thousands of new sources that cover things an editor might ignore. And if you aren't satisfied with that, you can start up your own blog and cover and comment on the news yourself….”

So once again, have we learned our lessons? Warren Buffet once said that “it’s only when the tide goes out that you see who’s swimming naked.” Well, the financial tide has been going out for a year. Excesses are being de-leveraged. Inflated asset prices have fallen. Free-flowing credit has shrunk. Consumer demand has cooled.

On the surface, it seems that leaders are responding to the outgoing tide by wearing the robes of fiscal prudence, personal responsibility, and corporate citizenship. But is it real? Or are leaders really naked? Once the tide returns (you know, macroeconomic stability, rising demand, easy credit), will leaders go right back to the distorted values and premises that got them—and us—into this mess? See, unless governments screw up the system, I know the markets will eventually correct. But the issue of leader nakedness (metaphorically speaking, of course) is the question that worries me for the long term.

"No More Mission Statements!" by Oren Harari. June 12, 2009

Repeatedly in my career, I’ve found myself reading singularly unimpressive corporate mission statements. Most of them are overgeneralized pieces of bland prose. They hang meekly and unobtrusively on walls, influencing few, inspiring fewer. Sometimes I think there’s a factory out there stamping out commodity, “me-too” mission statements that basically say that “we will be the best provider of widgets (or widget solutions) in the world, and we will delight our customers, and we will be the best place for employees who are our most important assets, blah blah blah.”

So I was particularly pleased to hear two individuals whom I respect lay out the same message I’ve been preaching to clients for several years. At the Milken Conference in April, high-profile pollster Frank Luntz called for an end to mission statements. Mission statements will not create, nor sustain, a compelling and differentiated brand, he noted. Luntz said the key for corporate success begins with the answer to two questions: One, what are you (and your firm) passionate about? Two, what will you (and your firm) do to drive a movement?

In early June, Colin Powell addressed the International Dairy Deli Bakery Association and argued that mission statements inspire neither soldiers nor businesspeople to take the bold actions that will yield extraordinary results. “Mission” per se is important, but all too often, it becomes synonymous with an oh-so-carefully-crafted “mission statement”. Powell suggested that the word purpose replace “mission” because the former is better able to reflect something that is deeper, more compelling, and more likely to inspire passion. Ah, there’s that word again—“passion”.

Well, it just so happens that for years I’ve been independently arguing that a collective “passion for purpose” is a key driver of competitive success. Companies as diverse as Whole Foods Market (we will change the way America eats), IKEA (we will help lower- income people feel wealthy), Google (we will harness all the information of the world for everyone), ING Direct (we will help build wealth through savings), and Harley Davidson (we will help ordinary people excite their lives) have a distinct underlying purpose that their leaders and employees are genuinely passionate about. That passion for purpose is what drives these companies’ strategic priorities, operational decisions, financial investments, performance metrics, and cultures of innovation. Maybe these companies have formal mission statements too, but those statements are less important than the deeper purposes that are continually articulated and provide a collective sense of “who we are”, “what we’re trying to do together”, “how we’re trying to change conventional wisdom”, and why.

In my book Break From the Pack, I cited the above companies, among many others, to argue that an authentic purpose represents a “higher cause” that can be a first step to drive profitable growth. Here’s what I wrote:

A higher cause defines a noble and honorable purpose. A higher cause aims to leave a positive mark. It aims to change an entire market; in fact, it aims to change the world for the better. It’s about somehow bettering the lot of human beings.

(In contrast to typical mission statements which focus on the organization and its products) higher causes focus on customers: how they benefit and how their life or business will be elevated, all in a way that’s fresh, unique, and perhaps most important—uplifting and virtuous. The most powerful higher causes lead people to see how the world will be a better place, and how humanity will benefit anew.

Lest you think that I (or Luntz or Powell) are urging you to hold hands and sing “Kumbaya”--think of the opportunities that higher-cause purposes open up for inspired teamwork, turned-on customers, and intrigued investors. Think about the opportunities for unique branding, for strategies that drive a profitable difference, and for high-margin customer loyalty

As Microsoft CEO Steve Ballmer once said: “What makes morale good or bad is the sense of the future. Are we working on something important? Are we changing the world? Is that an opportunity to benefit financially? Those are the kinds of things that make a difference to people.”

Yes indeed. Instead of plunging right away into formulating strategic plans and mission statements, leaders would be well advised to first consider questions like:

• What could we do profitably that would make a world of difference to our customers—including potential and future customers?
• What mark-on-the-market can we leave that sets us apart from everyone else?
• How can we significantly improve peoples’ lives, and change the world for the better?
• What is our legacy that we will be able to point to with pride?
• How will we all commit to, execute, and monetize our answers?

Yes, it’s about purpose, movement, higher cause, passion. Let those elements form the lifeblood and soul of your organization. Begin by burning your current mission statement.

"The New ‘WWW’ is Wild West Web 2.0" by Oren Harari

Okay, we’ve reached the tipping point on this social networking/Web 2.0 stuff. There’s the feeling of aged anachronism if one doesn’t have a Facebook account. There is the accelerating volume of cover stories in business magazines. There are the umpteen presentations about it in professional conferences. There is the fact that social networks and blogs today rank as the fourth most popular Web activity—with Twitter usage up 3000% since 2008. And in my case—yours too, I’m sure--there is a growing wave of new e-mails every day from people I don’t know asking me to join them in holy digital matrimony.

As I say, the momentum is upon us. With over 200 million Facebook users, the concept is no longer theoretical. Problem is—nobody is quite sure what it all means for business. Facebook’s $10 billion market cap has little to do with its $500 million revenue, a pittance. It has to do with the expectation (hope?) that one day, somebody will figure out how to really monetize it.

So I was particularly eager to join an informal discussion last week with two experts who might offer us some clues as to where all this is heading in business. MB Deans, the CEO of Douglas Partners, a career transition consultancy, is particularly interested in the possibilities of work-related social community sites like LinkedIn and Plaxo. Sherry Prescott-Willis, a high-tech marketing consultant and author of Market This, is interested in how marketers can best capitalize on the practical synergies among multiple sites like LinkedIn, Twitter, Facebook, hi5 and such.

Our initial conversation generated the following points:

• Networking technologies like Wiki have been around since the early 1990’s, but now the technologies are so ubiquitous, diverse and user friendly that your grandma could leap in without too much difficulty. (The fastest growing demographic in Facebook is the 40’s and 50’s age brackets)..
• The economic recession has accelerated usage. Job seekers need quick, cheap, scalable access to tips, referrals, and support. Companies need quick, cheap scalable access to available talent, sources of capital, employees’ ideas and customers’ attitudes.
• In contrast to impersonal blasts of information on the Web, social media offer people the possibilities of specialized, customized, trusted conversations and information exchange. In today’s financial crisis, that sort of intimacy is particularly appealing.
• As external partnerships and outsourcing arrangements mushroom, firms are using social media to track and improve progress in ventures around the world.
• Marketers, product-development and R & D folks are using social media to track beta users’ reactions to prototype products and projects.
• Marketers and advertisers are exploring how members of virtual communities do, and potentially can, influence each others’ purchasing decisions.
• Managers in all functions are using social networking tools to turbo-charge the unfiltered flow of communication and information within organizations.

Intel CIO Diane Bryant says that Web 2.0 is now the “wild wild west of corporate life.” Now that the tipping point has been reached, I’ll take her metaphor a step further and remind you of newspaper publisher Horace Greeley’s advice to ambitious readers in 1865: “Go west, young man (author’s note: and woman),” he said. It was good advice then. It’s good advice today.

"Pay for Public Sector and Union Leaders: Just as Dirty" by Oren Harari. May 28, 2009

In my May 14 blog called “A Cure for a Dirty Word” (see www.harari.com/blog ), I wrote about a Milken Conference panel I was on that was entitled “CEO: How Will It Stop Being a Dirty Word?” I argued that if CEO’s want their brand to suggest something other than—quoting the panel promo now—“greedy, incompetent, careless, uncaring…”, the first and foremost step is to fix top executive pay. In many companies, it’s obscenely large and obscenely uncorrelated with performance—a double whammy.

But I’m an equal opportunity offender. CEO’s of public sector and nonprofits are often guilty of the same sins. So are union leaders.

Let me cite one vivid example, courtesy of Phil Matier and Andrew Ross, two well-known investigative journalists in the San Francisco Bay Area. It concerns the Bay Area Rapid Transit, or BART. BART is a heavy-rail public transit system that connects downtown San Francisco with a variety of cities in the suburbs.

Like many public sector organizations, BART is unionized, so Mattier and Ross began their May 6 column with a catchy query:

“How many BART workers does it take to fix a broken train seat?

“Two—and that’s no joke.

“One to replace the bottom of the seat, and another to replace the back.”

They weren’t kidding. And if that’s not salacious enough, how about this?

“It also takes two types of janitors, at $28 an hour apiece, to clean one of the open-air BART stations.

“One sweeps up indoors, and another works outdoors—the boundary between the two defined by the ‘drip line’ where rainwater falls from the station’s roof.”

The top dogs of the five unions representing BART employees are enjoying very comfortable executive salaries—rewards, no doubt, for negotiating such lovely terms for their members. Unsurprisingly, within the transit industry, BART workers have some of the most enviable pay and work conditions in the country.

The fact that the union bosses are contributing to extraordinary inefficiencies, to growing customer dissatisfactions (ask riders), and to a looming $250 million shortfall is irrelevant. They met their narrowly-focused, short-term objectives, and accordingly, they are emulating many of their private sector CEO counterparts quite nicely.

But let’s not just pick on the unions. While the system rots and customers get steamed, 18 BART executives (who among other things agreed to the union status quo in the first place, don’t forget) took home $3.4 million last year. This, according to Maiter and Ross, makes them “the best paid transit system bosses in the country.”

Is this a great country, or what?

There’s one final example that puts it all together for both “management” and “labor”: mutual greed, stupidity, self-aggrandizement, lousy stewardship, customer contempt, and overall incompetence. Read it and weep:

Apparently, the work rules allow train operators a 15 minute break at the end of every run. When BART finally began running a much-needed five minute shuttle between the airport and Millbrae (a community near the airport), the drivers still took a 15 minute break—after each five minute run!

Well, this was too egregious even for BART management. By George, they had to do something to earn their salaries! So pooling their vast MBA credentials and their many years of valuable transit experience, they came up with a brilliant solution: They eliminated the shuttle.

Ratchet up this myopia and dysfunctionality to the state level, from the public sector unions to the state Assembly to the Governor, and you can begin to understand why the great state of California is now on brink of bankruptcy. With this track record, are you surprised that the $116,208.00 salary afforded each California legislator is the highest in the country?

Anyway, to address the current state financial crisis, the legislators desperately got together with the Governor and together they cobbled five quick-fix, unsustainable, cover-their-butts proposals for the recent May 19 special election.

California voters summarily rejected every one of them. We ain’t as dumb as we look to the rest of the country.

But there was a sixth initiative that somehow got on the ballot, and that one was passed with an overwhelming 74% majority. That’s the one that would prevent legislators and state elected officials from receiving pay raises when the state is running a deficit.

"A Cure for a Dirty Word" by Oren Harari. May 14, 2009

A couple weeks ago I was privileged to be a member of a panel discussion at the annual Milken Institute Global Conference. The title of the panel was “CEO: How Will It Stop Being a Dirty Word?” Titillating, eh? The title certainly attracted a hefty audience, as did the first sentence of the panel description: “’CEO’ has become a dirty word these days. Top corporate executives have been vilified as greedy, incompetent, careless, uncaring….” .

My colleague panelists, including author Sir Ken Robinson, executive coach Marshall Goldsmith, and Rafael Pastor, CEO of Vistage International, are all distinguished experts. They provided valuable insights on a number of ways to address the issue, including the need to formulate new perspectives on values, ethics, corporate culture, national policies, and even capitalism itself.

My contribution was less ethereal, I’m afraid. I argued that the best way to stop “CEO” from being a dirty word is to make significant and concrete changes in CEO pay. Period.

CEO pay is highly symbolic, and its value has been corrupted in many large, publicly traded companies, and particularly in many of the high-profile influential corporate cases that regularly appear in news flashes.

The corruption takes on two forms. The first is the sheer size of the CEO’s pay package relative to that of “underlings.”

Nobody begrudges an entrepreneurial founder of a business—say, Fred Smith at FedEx, Mark Zuckerberg at Facebook or John Mackey at Whole Foods Market-- becoming filthy rich due to the appreciating value of stock he or she owns. But when “professional managers” who become agents for owners in large, mature companies negotiate complex annual pay packages for themselves that are valued at 300-400 times that of their lowest paid employee (that number is now more the average than the exception), the symbolic implication of that yawning pay gap overwhelms any philosophical discussions about teamwork, collaborative cultures, vision, values, and the like.

It is interesting that John Mackey’s annual salary is no more than 40 times that of the front-line clerk at a Whole Foods facility. It is also interesting that hedge fund manager and venture capitalist Peter Thiel says that one of the most important factors he examines before deciding whether to invest in a startup is how much the CEO’s annual salary is. His conclusion is simple: The lower the CEO salary, the higher the probability of success. Here’s what Thiel said at a recent TechCrunch50 Conference:

“The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money….But (beyond that), it goes to whether the mission of the company is to build something new or just collect paychecks.”

Why shouldn’t this standard be held for every organization-- large or small, privately held or publicly traded, for-profit or not-for-profit?

The second reason for the corruption of CEO pay is that as obscenely large as it often is, it also has little to do with merit or performance. Every year prominent business publications like BusinessWeek and Fortune feature cover stories that detail the gargantuan bonuses and recalibrated stock options given to certain CEO’s whose firms have suffered every conceivable financial and market loss—and major losses at that. It doesn’t matter whether employees have been laid off, brands have been decimated, market shares have dwindled, earnings have shriveled, and market caps have plummeted—the total compensation package of these CEO’s isn’t appreciably impacted. Sometimes it actually seems to increase. Indeed, in some cases, the payout for a CEO who has left his or her company in shambles after having finally been “let go” is greater than if he or she had stayed on.

There are high-performing companies, like FedEx and Nucor, where executive salaries grow fat during the good years (nothing wrong with that), but during lean years are slashed by a greater percentage than the pay packages of lower-level employees. I have worked with a variety of CEO’s whose pay reflects Colin Powell’s principle of good leadership: “When the troops are cold, you’re cold.” So, I suppose, there’s reason for optimism.

But ultimately, who’s going to make the necessary changes to CEO pay across the board? Well, speaking of board--A few years ago I heard Jack Welch commenting on Robert Nardelli’s inexplicably huge pay package at Home Depot—one that, by the way, royally expanded to a $210 million severance after he was ousted for alienating a perfect trifecta of investors, customers and employees. Verbally shrugging, Welch said that it is Boards of Directors that will have to change. The fault lay not with Nardelli but the Home Depot board who offered Nardelli stratospheric sums of money in the first place (as if Nardelli and his attorneys didn’t come in with steroid demands in the very beginning).

Even so, if Welch is right, then two discouraging conclusions can be inferred. One, he’s implying that CEO’s are simply out for themselves, so don’t count on them to initiate any appreciable sense of integrity or fair play when it comes to their own pay. Two, he’s implying that boards, which have been remarkably docile and sheeplike when it comes to CEO pay, will suddenly grow spines and aggressively correct the corruptions that I’ve discussed.

Frankly, I question both implications: I’ve personally seen exceptions to the first one (which means that there are individual CEO’s who do embrace responsible, high-integrity pay) and I’ve seen insufficient evidence for the second (which means that the Corporate Library's regular rogue's list of very highly compensated CEO's at very poorly performing companies has not yet shrunk).

Bottom line: if we want to clean up the dirt on the “CEO” brand, we’d best start focusing on the thing sets the foundation and the stage for everything that follows. It’s called pay.

"Do Not Do What I Do" by Oren Harari. April 28, 2009

The year is nearly half over (hard to believe!) and I just read the best statement on leadership thus far in 2009. Mark Taylor, the chairman of the religion department at Columbia University, contributed an Op-Ed piece to the New York Times on April 26. The column was about the need to radically transform the way universities are structured (as someone who has worked in several universities, I say, dream on, Mark!), but a small sentence in his last paragraph held the gem. Here’s what he said:

For many years, I have told students, “Do not do what I do; rather, take whatever I have to offer and do with it what I could never imagine doing and then come back and tell me about it.”

Lovely. That short quote is packed with wisdom and practical advice for anyone in a leadership position. If leaders took Professor Taylor’s message to heart, here is what they would say, piece by piece:

1. Do not do what I do. I may be your “boss”, but I don’t want you to do what I’ve always done, or what everyone in your job has always done, or even what I would do if I were in your position. I’ve given you some broad parameters of your job, but I want you to use your brains and initiative to figure out alternative and better means of getting the job done. If I can get everyone on my staff to do the same, we’ll have a unit marked by continuous improvement and continuous innovation.

2. Take whatever I have to offer…..This presumes that I have something to offer you other than directives. And indeed I do. I want to offer you my philosophy of the business, my perspectives of where we need to go and why. I want to engage you in honest dialog about the future, including our vision and goals. I want to be as transparent as possible, opening your access to whatever data (financial, marketing, etc.) that you need to succeed. I want to provide you with whatever tools, technology, and training you need in order to “not do what I do” (see #1 above). And throughout, I want to offer you mentoring, coaching, and whatever wisdom I’ve accumulated over the years.

3. ….and do with it what I could never imagine doing…. Now we’re getting to the heart and soul of the matter. Ultimately, I hired you to help me create additional value for this organization. Stretch the meaning of your job. I want you to use your talent, initiative, imagination and collaborative skills to help take us in new directions. I want you (and whoever else you can enlist) to figure out uncharted paths—be they in operations, marketing, administration, product development, customer care, supply chain management—that I wouldn’t have. By doing so, you’ll not only help the organization (and me!), but you’ll also help your own compensation and career mobility.

4. ....and then come back and tell me about it. When we meet for your performance review, I want you to tell me not only how well you did your job, but how much you’ve changed it. In fact, don’t even wait until performance review. Keep telling me whenever you’ve accomplished something special. Not because I want to micromanage you or play “gotcha”. But because I want to stay engaged and support you. I want to applaud your successes. I want to offer you guidance and advice during the rough patches. I want to run interference for you. I want you to trust me enough so that when I point out warnings, or if I ever disagree, you’ll appreciate my input. But believe me, I want to celebrate your progress and let others know so they can learn something new. And most of all, I want to learn new things myself.

Throw away your leadership books. All you need is Mark Taylor’s sentence.

"Getting Back to Basics?" by Oren Harari. April 16, 2009

Over the past month, during a couple post-speech Q & A sessions, I received an intriguing question from the audience. It went something like this: Now that we’re in a recession, do you believe that leaders are de-emphasizing innovation by going “back to basics”? (A variant of this question is: Do you believe that too little risk is being taken in organizations now because leaders are going back to basics? Another variant of this question is: Should leaders go back to basics?)

It’s a very interesting question. There is no one single cause to the current financial crisis, but I think it’s safe to say that one of the major contributors was the fact that business leaders in the financial sector took on reckless and irresponsible levels of risk with incredibly complex, ridiculously leveraged derivatives, securitized loans, collateralized debt obligations, credit default swaps, and such. “Innovations” assembled around these exotic financial products built a house of cards that inevitably collapsed. Reckless innovations are deadly.

With that in mind, here is the answer that I’ve been giving to those who have posed this question.

Are leaders currently de-emphasizing innovation in favor of cautious “back to basics?” Yes and no. To the extent that leaders define “back to basics” as removing any toxic, bloated, confusing or overly complex assets in their own organizations, they’re doing the right thing. To the extent that leaders get rid of peripheral distractions and refocus on a few key growth priorities, they’re doing the right thing. Companies that simplify their plans and de-clutter their organizations are positioning themselves for more speed, agility, cost-effectiveness, and strong innovation. Leaders that clean up, streamline (and whenever possible, divest) whatever structures, processes, assets, systems, departments, functions, customers, businesses and ventures that consume management time and monies with little payback are doing themselves a huge favor. They are liberating precious resources that can be funneled into the kinds of innovations that will yield sustainable success-- even in a recession.

On the other hand, if going “back to basics” means going back to the old comfortable ways—often inefficient and uninspired—and old familiar business models—often commoditized, undifferentiated, and mature—then leaders are myopically de-emphasizing healthy risk and healthy innovation. If leaders take the perspective of “let’s hunker down and protect what we now have until this storm blows by”, they will wake up in a new world with new conditions (capital constraints, frugal customers, disruptive technologies, lean-and-mean competitors) that will simply overwhelm them. Hyper-caution and risk-aversion are no solutions in an environment that demands that an organization generate unique value in order to achieve competitive success.

One last thing that I repeat ad-nauseum to clients: Innovation is not recklessness. It’s about execution, sustainability, profitability and accountability. One cannot separate short- and long-term discipline from innovation. Entrepreneurs understand this, mainly because they have no money to waste. Over the past decade, the “smartest guys in the room” who defined innovation in terms of financial sleight-of-hand didn’t understand this, and didn’t care, because their concern was making a quick buck off an easy-credit, artificially growing “bubble” economy.

If getting back to basics means creating a leaner, more transparent, more focused climate where innovation occurs relentlessly and responsibly, I’m all for it. But if getting back to basics means going back to old worn-out practices and comfort zones, then it’s merely an excuse for wistful thinking.

"Nine Reasons Why Not Much Will Change In Healthcare--and What We Can Do About It" by Oren Harari. April 9, 2009

In the April 6 issue of the Washington Post, E.J. Dionne wrote: “Yes, this is the year Congress will finally give every American access to health insurance. Getting there won't be pretty. But for the first time since the passage of Medicare in the 1960s, the forces favoring action on health care reform are stronger than the forces of cynicism and obstruction.”

I understand Dionne’s reasoning. The millions of Americans who remain uninsured are an embarrassment to this country, and even the business sector is tired of being saddled with exorbitant health care costs that seem to have no end and no ceiling.

Yet other pundits, like Jennifer Rubin, disagree with Dionne. Writing on the same April 6 date, but in Pyjamas Media, Rubin suggests that the multi-trillion dollar Obama spending spree may yield “…a gigantic increase in domestic spending and debt, but no substantial progress on the president’s two main policy initiatives, global warming and health care. It is one thing to ‘get something’ for all that spending, it is quite another to run up the debt and wind up with, well, a lot of debt. “

Who’s right? I think Rubin might be, but for nine other reasons which were recently summarized by Debbie Comerford and me last week in Colorado. More on Debbie shortly, but first, here are nine reasons why any changes in health care in the near future are more likely be marginal than paradigm busting:

1. The political power of trial lawyers. Simple fact of life: the fear of litigation not only runs up malpractice insurance dramatically, but also causes doctors to be overly risk-averse while defensively running every conceivable test to cover their backsides from potential lawsuits. Yes, bad clinicians and terrible decisions should be prosecuted. But the failure to institute meaningful tort reform has a sizable impact on costs, MD retention, and clinical innovation.

2. The moral power of the first and last year of life. Check it out: Around 50% of health care dollars are funneled into severely afflicted youngsters in their first year and dying (often terminal) adults in their last year. Believe me, I’m not heartless: I’m not about to tell any parent that their baby doesn’t deserve million-dollar care for a 10% chance of survival. Nor am I about to tell grieving adults that their terminally ill mother doesn’t need million dollar care for the last three months of her life. This is a moral issue, and I’d feel the same pain that anyone else would. But as long as our moral perceptions remain the way they are, it'll be tough to make significant dents in health care costs.

3. The second class citizenship of preventative health. Here’s a little 2-question quiz. What’s significantly more cost- and health-effective? Question 1: Quarantining and screening out immigrants with contagious diseases like tuberculosis, or Letting many of them in under the guise of political compassion and treating the inevitable consequences afterwards? Question 2: Insisting that our kids and spouses—and we ourselves-- exercise daily and eat right always (no sugars, transfats, gluttony, etc.), or Seeking medications and surgeries for the inevitable complications afterwards? Enough said. Public health and personal responsibility often get trumped by post-hoc magic bullet medical treatment fantasies. The national costs are enormous. Follow the money.

4. The use of U.S. as a cash-motherlode market for drug companies. Why do drugs cost more in the U.S. than abroad? The reason is that Americans will pay more, thus subsidizing drug companies’ research and development costs and generating the bulk of their earnings. Somebody’s gotta pay for this stuff. Pharmaceutical companies charge more for their products in the U.S. , everyone knows it, and the entire American health care infrastructure, including government payers like Medicare, plays along. Until American payers and users exercise common-sense group purchasing muscle, the cost structure of health care will remain inflated.

5. The power of paper. Digitalizing management processes in hospitals will radically reduce health care costs. I mean radically. In most organizations, digitalizing the flow and resolution of a paper invoice or purchase order can reduce the internal costs of these processes by more than 50%. A Rand research study indicated that digitalizing medical records alone in the U.S. will reduce health care costs by $140 billion annually. Several studies indicate that digitalizing drug prescriptions will have a major impact on reducing costs, rework, and errors. But liquidating the paper pipelines and their supportive management infrastructure in health care organizations will take genuine leadership. Bold leadership. Courageous leadership. Long-view leadership. Until we see a lot of that leadership, the bloat of paper will rule.

6. The power of pass-offs. Among clinicians, pass-offs mean that one doctor doesn’t know (and sometimes doesn’t care) what other doctors know, have done, or have prescribed for a particular patient. The adverse aggregate cost and health consequences of this episodic, non-wholistic medical care is significant. In administration, pass-offs mean turfism and its resultant frictions and bureaucracy. Check out the empirical literature. Organizations with transparent, interdisciplinary management structures outperform their opaque, turfist counterparts by double digit percentages. Once again, until we see a lot of leadership among managers and clinicians, the bloat of pass-offs will rule.

7. The absurdity of many reimbursements. Those of you who are not in health care may not understand this, but as many health care managers will attest, boosting health and reducing costs will, under certain circumstances, actually generate less income because the way third party (insurance, government) reimbursement is set up. This is too big a task to explain in one little blog, but figure it this way: If patients get better more quickly with less care, and stay healthier longer, then hospitals and doctors charge less and receive less reimbursement. Blame loony laws and loonier legacies - like the classic "fee for service" revenue model. When external incentives are changed to consistently reward innovations in cost reduction and health quality, you’ll see a lot more of them.

8. The opaqueness of prices. I’ve spoken to and consulted with many health care groups, and I never cease to be amazed that unlike other industries, health care doesn’t seem to operate under normal rules of microeconomics. For example, in other markets, customers tend to know the prices of goods and services, and make purchasing decisions among competing vendors accordingly—based on price and other visible factors. Not in health care. Other than their minimal co-pays and deductibles, patients usually don’t know (and often don’t care) what things cost, and sometimes, doctors don’t either. (That’s why green visor payer intermediaries like insurers, who necessarily impose some level of hard nosed fiscal discipline into this weird system, are reviled by doctors and patients). Without price transparency, don’t anticipate the kinds of efficiencies and rational decision making that would lead to meaningful changes.

9. The power of entitlement. Can you imagine going to a Ritz Carlton hotel and saying “I’d like a deluxe suite and your top-of-the-line room service. I can’t pay for any of it, but since I’m an American, I deserve it.” The customer-friendly Ritz will throw your friendly customer butt out the door. Health care providers don’t have that option. Health care is considered a “right”. You want knee surgery? You want daily AIDS cocktails for the rest of your life? You want to give birth to a baby? You want your gunshot wound fixed? You want a new heart? But you can’t pay for most of the care, or any of it? No problem. You deserve the best care right away, costs and price be damned. Sorry to be so blunt, but that’s the way we Americans often feel, and many politicians find it expedient to fan those flames. I'm not arguing that it's wrong to see health care as a right. But let’s admit that as long as we do, and as long as our population grows and ages, we’re in for an uphill battle on costs, and an even more uphill battle on meaningful change.

These are nine reasons why despite all the sound and fury emanating from politicians and pundits, in reality we’re likely to see only marginal reform of health care in the foreseeable future—which means only marginal improvements in costs, quality and coverage. I remain an optimist for the long haul, however. Hopefully, the above nine barriers to change will eventually be overcome by authentic leaders in government and the provider base. That’s my mission, anyway, whenever I work with leaders in the health care environment.

One last thing. I told you that Debbie Comerford and I generated these nine issues, and you may wonder who Debbie Comerford is. Well, let me tell you.

She’s a chauffer with CME Premier car services, a limo company which transports travelers to and from Denver International and surrounding ski resorts. I was on my way to address a corporate audience at the Keystone resort, and Debbie was assigned to be my driver. My lucky break. Debbie is smart, well-read, and has had the benefit of transporting—and conversing with-- guests far more prominent than me. I’m talking Novel laureates, elite corporate chieftains, and high-profile government figures.

Well, Debbie and I got stuck in mountain traffic during a surprise spring snowstorm and over the span of three hours, we probed the complexities of health care. At the end, our conclusion jibed with Pyjama Media’s Jennifer Rubin, who opined:

“Democrats and media pundits are now hinting that….health care reform may simply amount to some ‘incremental’ changes but not the far-flung redesign once envisioned by the victorious Democrats.”

"Four Questions for Entrepreneurs" by Oren Harari. March 31, 2009

I had dinner last week with a serial entrepreneur—you know, the kind of restless, creative individual who lives to start businesses, has less interest in “managing” them, and typically moves on after bringing a new venture to speed. These are the people who drive our economy and carve avenues for real wealth creation, so I’m always interested in talking to them.

He told me about his latest vision for a new start-up and asked for my comments. He also asked me to be part of it. Well, I serve on a couple boards of startups and the demands on one’s time can be significant, so I usually turn down these kinds of requests. The reason is, as I told him, is because when all is said and done, visions and great ideas usually don’t translate into viable businesses. In evaluating the prognosis for any start-up, I ask if it meets four criteria. By the way, these criteria are good ones for any new venture in an already-existing firm, but they’re essential for startups:

1. Is the technology or business model really new? Is it disruptive? Is it a qualitative breakthrough from current practices and conventional wisdom? If it’s just an incremental improvement to the status quo, existing players will quickly imitate it, build it to scale, and market the hell out of it. A successful entrepreneurial venture has got to be really different, really forward-looking in a fresh compelling way, and it’s got to appeal to—even better, excite—customers and investors in a way they’re not excited currently. Bottom line: Is there a “wow!” factor?

2. How and when will this idea make money? I mean profit and cash flow as well as sales and market share. The days of racking in big venture capitalist or angel dollars based on non-financial factors like “eyeballs”, “stickiness”, “coolness” and such are long gone. Potential investors will ask questions like: Have you done a thorough due diligence? Have you vetted everyone and everything of importance? Is there really a market of real paying customers for this idea? Is it a growth market? Where will sales come from? Who will buy? Why would they buy? At what price? What’s the cost to make all this happen? What sorts of financials can be expected in what sort of timeframe? Is there an exit strategy or longer-term growth strategy that will yield a defensible return for investors, and what might that return (roughly) be? Unless one can actually monetize a great idea, the idea is simply a concept that sounds very cool over drinks at your local bar.

3. Assuming that uniqueness, specialness and the “wow!” factors exist, are they sustainable? Likewise, is the monetization of the idea sustainable? Obviously, having patents and proprietary intellectual property is very helpful. But even so, the main strategic question is: Once we launch, what do we have in place—like processes for next-generation product; talent and systems for new initiatives in product features and market penetration; or cutting-edge partnerships for collaboration of people and resources (etc.)—that will steer us clear of others’ duplication efforts, accelerate our forward momentum, and keep us ahead of the pack? One doesn’t need to get bogged down in too many of these details at the outset, but the outright failure to prepare for them has sunk many a startup that had one (and only one) great hurrah.

4. Is there a management team and organizational structure that can be counted on to perform with excellence and make #1, 2, and 3 really happen? This is a major concern of potential investors, and it ought to be. At the end of the day, they want to know who will be running the show and why would anyone feel a sense of confidence and inspiration knowing that. What is the execution plan, and what (and who) is the management structure to insure excellence in execution? Lots of questions will emerge: How will this company get product to market? How will it deliver services? How will it build sales? How will it build a "gotta-have-it" brand? How will it maintain rigorous financial oversight? And how will the company do all this with limited capital, budgets and manpower? Potential investors will be especially interested in questions about operational efficiencies, cost structures, supply chains, sales and distribution channels, and financial oversight. Unless the founders have some reasonable answers to these questions, they are unlikely to get funding, and for the good reason that without reasonable answers to these questions, they’re unlikely to succeed.

So these are the four questions that drive successful entrepreneurs—and, for that matter, successful “intrepreneurs” who work in established companies. They understand that innovation is not simply a neat idea, nor is it an excuse for recklessness. The guy who invited me to dinner understands that, which is one reason I’ll probably throw my hat in with him—as will many others, I’m sure.