Marina Gorbis's Blog, page 1348

Leadership in Liminal Times

Leaders have always shown their mettle in times of liminality. The term comes from Arnold van Gennep, the Belgian anthropologist who first outlined the common patterns in how cultures mark transitions from one human state to another (for example, from adolescence to adulthood). In his 1909 book The Rites of Passage he described three stages of separation from one world and entry into another. The liminal (or threshold) stage is central. Commenting later on van Gennep’s work, anthropologist Victor Turner explained it as “a moment when those being moved in accordance with a cultural script were liberated from normative demands, when they were, indeed, betwixt and between successive lodgments in jural political systems. In this gap between ordered worlds almost anything may happen.”

Organizations must also periodically go through such wrenching times of transition, and it is during such liminal times that leaders have their greatest impact. They must manage to both craft the new world with smart strategy, often in the wake of disruption, and cause the organization to embrace the required change. Lou Gerstner’s arrival at IBM in 1993 is a classic example of leadership through a liminal period. Parachuted in to salvage a beleaguered organization, he pushed the company toward a new way of thinking, ultimately growing IBM’s value and revenues by more than 40 percent.

Procter & Gamble provides another example. It was the summer of 2000 and the company had quickly lost $85 billion in market capitalization. Newly minted CEO A.G. Lafley was thrust into the spotlight. Employees were disengaged. External analysts, stakeholders, and shareholders were questioning everything. It had become a time of liminality for P&G, and it was Lafley’s turn to try to make things work. As he stated in a 2009 Harvard Business Review article, “the CEO’s [role] is to interpret the organization’s values in light of change and competition and to define its standards. This was a top priority in my first year as P&G’s chief executive, after setting goals but ahead of strategy.” By 2010, P&G exceeded $80 billion in revenue, its market value had increased by over $100 billion dollars and the number of billion-dollar brands – such as Gillette, Pampers, and Tide – increased from 10 to 24, suggesting that Lafley’s leadership through P&G’s liminality was a success.

Times of liminality are disconcertingly chaotic; therefore, a leader’s job is to provide some firm footing for people, with assurances of what will not keep changing. Gerstner did this with his clear and consistent view of where IBM needed to go, and Lafley did it with his reassertion of bedrock values. Great leaders also act as mentors, providing counsel and coaching to the people in the organization during various stages of transition. And perhaps the ultimate work of leaders in times of organizational change is to ensure high engagement levels. Lawrence A. Bossidy, former CEO at AlliedSignal, once said, “We need people who are better at persuading than at barking orders, who know how to coach and build consensus. Today, managers add value by brokering with people, not by presiding over empires.”

This suggests that many leaders themselves will need to experience liminality. If they are truly interested in seeing their organizations accomplish great things, many will have to make a transition from an immature mode of invoking hierarchy, territorial ownership, and formal positional power, to a more mature phase of gathering and channeling group energies with influence, engagement, and other elements of what I call  “open leadership.”

In my role at the Canadian telecoms company TELUS, I’ve witnessed first-hand the progress that can be made during a liminal time, both for the enterprise and its leaders. Fourteen years ago, Darren Entwistle arrived as a young CEO (he is now Executive Chair) and immediately began transforming the regional telecommunications player into a global entity. Between 2000 and 2014, the TELUS brand grew in value from a few hundred million dollars to $4.3 billion, and its revenues increased from $6.4 billion to $11.7 billion. But Darren never saw the change required as only a matter of capitalizing on new technologies and developing new products. He insisted on the need for “behavioral innovation” – that is, shifting leaders’ mindsets throughout the organization to the importance of innovation and the values of courage, passion for growth, enthusiasm for change, and belief in spirited teamwork.

What has been most amazing to me is that, in a time of such rapid change, employee engagement at TELUS also rose dramatically (from 53 percent to 83 percent) – clearly bucking the generally negative trend. The causal relationship between a highly engaged organization and marked improvements with customer satisfaction, stock price and revenues is irrefutable, famously outlined at Harvard Business Review back in 1998 with “The Employee-Customer-Profit Chain at Sears”. For Darren, the implication for leaders is clear. They must “make team members feel like they have equity in what they are doing.” Engagement comes, he believes, with “the business ownership mentality.”

As imperatives to change come more and more frequently to companies, leaders’ ability to manage through times of transition will be tested like never before. In a previous HBR post entitled “The Renaissance We Need in Business Education,” Johan Roos calls for a more humanistic curriculum in business schools to prepare our future enterprise leaders. As part of that, perhaps writings on liminality should be required reading.

This post is part of a series leading up to the annual Global Drucker Forum, taking place November 13-14 2014 in Vienna, Austria. Read the rest of the series here.

Making Sense of Owned Media

Marketers often distinguish between paid, earned, and owned media. While the strategies are different, the goal is the same — to generate awareness and engagement. Paid and earned get most of the attention, but the new battleground is going to be owned media. If you want to get ahead, and stay ahead, you need to rethink your owned media strategy.

At the risk of oversimplifying, paid media is advertising and sponsorships, while earned media is public relations and word-of-mouth. Companies either pay to deliver content to an audience or try to earn coverage and exposure from reporters and influencers. In contrast, owned media is anything under companies’ direct control such as websites, newsletters, catalogs, and blogs.

Social media is usually treated as owned and earned. The rationale is that brands own their own social channels and audiences, then try to earn sharing and word-of-mouth. But don’t be fooled. Social media is not owned media.

If social media were truly owned, brands would have control over the experience, access to their fans, and full use of the data. But the reality is quite different. Public social networks like LinkedIn and Twitter don’t enable brands to access their own data. And Facebook now charges brands to reach their own fans and followers.

Most social media is rented, not owned. Facebook, Twitter, and LinkedIn are your landlords and you just lease the space. It’s true that you own your accounts and profiles. That’s like having your name on the mailbox. But as your landlord, they can enter your apartment at will,  renovate the building whenever they like — and keep the profits resulting from improvements you make to the property.

There are many advantages to leasing a property. But don’t confuse the rights of a renter with the freedom of an owner. Third-party social media platforms are a combination of paid and earned, not owned. Social media is an owned media strategy for the social networks themselves, but not for you.

So what are the elements of an owned media strategy? Think content, community, and context.

Content: The foundations of an owned media strategy are your content channels — the vehicles through which you deliver content to audiences directly, unmediated by a third party. The most common channels are your website, catalogs, and newsletters. You should also consider your stores and mobile apps. The key to a successful content channel is that you have engaging content that is relevant and valuable, and that you are using all available data to personalize the experience for the user.
Community: While content channels focus on the connection between you and your customer, community emphasizes the connections your customers have with each other. These can be online, such as virtual communities or private social networks, or offline, such as in-person gatherings or events. They can be direct, as in discussion forums, or indirect, through peer benchmarking. It’s more work to create your own community than to rent someone else’s, but the rewards can ultimately be much greater.
Context: The biggest limitation of paid and earned media is having a purely transactional relationship with your fans, followers and customers. You need some mechanism for turning isolated interactions into a connected experience. This requires an ability to capture data and turn that data into value for the customer by combining big and little data. Loyalty and reward programs provide this type of context for B2C companies, while strategic account and relationship management programs do the same for B2B companies.

We can see how content, community, and context come together in the owned media strategies of today’s most innovative marketers. These brands create engagement platforms that do more than push out messages. They create a gravitational field that pulls prospects and customers into orbit around their brands.

Sephora has created its own channels for delivering content, its own communities for building connections, and created a context for capturing data and creating value. The building blocks are Sephora’s Loyalty program, mobile app, BeautyTalk community, and ColorIQ service. Customers can use the ColorIQ service to find the best shade of makeup for their skin, access preferences in their profile, see recommended products in the mobile app, and discuss tips and techniques with experts and peers through the online community.

Vail Resorts has created an owned media platform called EpicMix to engage skiers for its resorts. EpicMix is a cross between a social network and an adventure game. RFID technology in the lift tickets track the locations of skiers and their friends on the mountain, and their times on the various runs. They earn badges, post photos, send messages, and compare times through the EpicMix mobile app. In large part due to EpicMix, Vail Resorts grew revenue, profitability and market share through the recent recession while others fell behind.

Owned media strategies are particularly compelling for manufacturers who want to create direct relationships with customers. In the sporting goods industry, Nike has created the Nike+ running community while UnderArmour is developing an owned media strategy around its recent acquisition of MapMyFitness.  In the food and grocery segment, McCormick has created its FlavorPrint taste profiler while Kraft Foods has created an entire community around recipes as a social currency.

Owned media can be used in B2B as well. Jive Software (one of my clients) recently launched a marketing strategy around the idea of workstyle — the equivalent of lifestyle for the workplace. In addition to the usual paid, earned, and social strategies, Jive’s owned media strategy incorporates content, community, and context to help people work better together.

Each of these owned media strategies share some fundamental characteristics. First, they create value for people beyond the products being sold. Second, they use data not just as a way to target a message, but as a way to create a useful service. Third, they treat people not as a passive consumers but active co-creators. Whereas most media strategies are about push, these owned strategies are about pull.

These owned strategies also leverage paid, earned and social strategies in important ways. Paid media is used to build awareness and generate initial engagement with the platform. Insight from the data and collaboration with the community generates compelling content to garner additional exposure on traditional channels (earned) or for sharing by community members to their networks (social).

There is no doubt that these owned media strategies are complex and require a real commitment of time, energy, and resources. It is much easier to create an ad campaign, make a media buy, refresh your web site, or execute a PR program. But the future of engagement is about regaining control over your data, disintermediating the current channel owners, and creating ongoing relationships with customers beyond individual transactions.

It will take courage and vision, but the alternative is a lack of differentiation and authentic engagement. If sneakers, spices, and skiing are fertile ground to building engagement platforms, then every industry is fair game.

Paid and earned aren’t going away. But if you want to truly be disruptive, it’s time to rethink owned media and make it a more strategic part of your marketing mix.

Ending Gender Discrimination Requires More than a Training Program

This week, approximately 9,000 current and former female employees of KPMG were invited to join a class-action lawsuit against the firm alleging they were paid less than their male counterparts, in violation of the U.S. Equal Pay Act. Such gender discrimination appears to persist in many workplaces. Women remain underrepresented in most high-level positions: They account for less than 5% of Fortune 500 CEOs, less than 15% of executive officers, and less than 20% of full professors in the natural sciences. And, as reported in a recent New York Times article, women make up just 17% of Google’s engineering employees and 21% of its managers.

One possible explanation for such drastic gender disparities is that they are caused by unconscious biases. These biases, which social scientists have found to be prevalent in our society, are rooted in our tendency to rely on cognitive shortcuts — in essence, stereotypes — to process incoming information.

As hidden, reflexive preferences, our biases shape our worldview. Most of them, like preferring to eat food instead of bricks, are helpful. But others can lead to rash decisions and discrimination when we’re not aware of them and apply them inappropriately. Bias against another person originates at the first moment of contact, such as a first meeting, and continues with each interaction. In the workplace, biases can profoundly affect how welcoming an organization is to different people and ideas.

Some organizations actively attempt to raise awareness of potentially harmful gender biases through training programs and policies that favor gender equality in the workplace. Google, for example, has been has been trying to reduce bias and improve its diversity for years through programs aimed at increasing the representation of women and minorities in technology jobs and carefully examining the way it hires people.

But do these programs actually work? Evidence suggests that, on their own, they may not be sufficient.

Diversity training may be a good first step in raising awareness of gender and other biases. This awareness, my research suggests, can help people reflect on how to redesign processes so they more effectively counter biases. But others’ research shows that diversity training alone is ineffective in countering biases that taint decisions in organizations.

In one study, Alexandra Kalev (of the University of California at Berkeley) and her colleagues examined the efficacy of approaches that organizations commonly use to promote diversity. Using federal data on the workforces of 708 private-sector establishments from 1971 to 2002 and survey data on organizational employment practices, they found that efforts to reduce managerial bias through diversity training and diversity evaluations were the least effective methods of increasing the proportion of women in management.

In particular, their work shows that programs that target managerial stereotyping through education and feedback (i.e., diversity training and diversity evaluations) were not followed by increases in diversity. The paper also demonstrated that mentoring and networking programs (which are usually aimed at addressing social isolation) did not help much to increase diversity. By contrast, efforts that established responsibility for diversity (such as diversity committees and diversity staff positions) were more effective and were followed by increases in diversity.

Related research on affirmative action seems to suggest that even formal diversity-training programs may fall well short of their goals. Why? Some minority students who are admitted to top schools with the help of affirmative action might be better served by attending a less elite institution that gives them less of a boost or no boost at all. According to this so-called “mismatch” theory, affirmative action can harm some of those it’s supposed to help by placing them in schools where their abilities fall below the norm, a practice that sets them up for failure at school and in their careers. (To be clear, mismatch theory does not suggest that minority students should not attend elite universities. Rather, it suggests that all students — both majority and minority — benefit from attending a school where their academic qualifications are aligned with those of their classmates.)

Recent work gives some insights into changes to organizational practices that might improve gender equality. Iris Bohnet, Alexandra van Geen, and Max H. Bazerman studied the effects of a lab intervention aimed at avoiding biased assessments. Under their “evaluation nudge,” organizations assess employees’ likely future performance jointly rather than separately. While joint evaluation used in most hiring decisions (candidates are compared to one another), especially at the lower levels, it is rarely used when job assignments and promotions are being considered. Their work demonstrates that joint evaluation helps employers focus more on employees’ past performance and less on gender and implicit stereotypes. While it is not always feasible to bundle promotion decisions and explicitly compare candidates, the research suggests that, whenever possible, joint evaluation would increase both efficiency and equality.

In addition, when systematic errors due to stereotypes are plain obvious, simply being made aware of our bias may be an important first step in addressing problems such as unconscious bias. In one study by Devin G. Pope of the University of Chicago, Joseph Price of Brigham Young University, and Justin Wolfers of the University of Michigan, professional basketball referees made less racially biased calls after media coverage of a study finding bias in their profession made headlines. It seems the negative attention made the referees aware of the problem and motivated them to do better.

The moral of the story? Diversity-training programs alone will not overcome conscious and unconscious biases. But they can raise awareness and trigger reflection on what may be more effective ways to change processes and organizational structures that lead to bias.

How to Get Your Employees to Speak Up

Getting candid opinions from your direct reports can be difficult. After all, no one wants to upset the boss. But hearing messages from down the ranks — including input from your company’s customers, feedback on your performance, and information from other departments or units — is critical to your organization’s success. How can you encourage your team members to have honest conversations with you — and to speak up when it’s important?

What the Experts Say

Cultivating an open environment is tough because people are wired to be conservative, according to James Detert, a professor at Cornell’s Johnson Graduate School of Management who specializes in transparent communication in the workplace. “We have a deep set of defense mechanisms that make us careful around people in authority positions,” he says. “That is why the information you’re getting from people multiple levels below you in the organization is likely to be filtered.” But you need those people to be straight with you. “They are better in touch with customers and stakeholders and they understand problems and possibilities, what works and what doesn’t better than you,” he says.

Getting an early handle on minor issues before they become big problems is the key, according to Joseph Grenny, the coauthor of Crucial Conversations and the cofounder of VitalSmarts, a corporate training company. “You can approximate the effectiveness of the team — or even an entire organization — by measuring the average lag time between when problems are identified and when problems are brought out in the open,” he says. Here’s how to minimize the gap.

Zero in on the source of the silence

“Silence usually means people are holding back,” says Grenny. Whether people are clamming up in meetings or avoiding questions behind closed doors, it’s up to you to understand why. Are they worried that if they speak up about a problem, they will lose out on a bonus? Or do they think it’s futile since other suggestions haven’t been implemented? To encourage openness in a group setting or in a one-on-one conversation, Grenny suggests “coming up with a code word that jars people into knowing they can be candid with you.” In his corporate training work, Grenny advises managers to use the phrase: “crucial conversation.” The phrase helps “frame the issue so that your team knows they have permission to be honest and open,” he explains.

Give people options

You may want everyone on your team to feel free to discuss issues publicly but speaking up about problems in a group setting is uncomfortable for many people. Some might feel put on the spot; others worry they’ll say something unpopular. Initiate more one-on-one, casual conversations so that your people have more ways to express their views. An open door policy is important, says Detert, but “stop waiting for people to come to you — go out and ask them yourself.” Begin with your team’s opinion leaders, advises Grenny. “Every smart manager knows who the opinion leaders are,” he says. “Take them out to lunch individually and ask for feedback,” he says. Pay close attention to the gaps between the issues they raise with you in a “safe, informal environment” versus the “issues that are discussed in team meetings,” Grenny says. “Those are things that really may be bothering your team.”

Model candor

In every organization, there are things you just don’t do — disagree with the big boss in public, for instance, or criticize a certain manager’s pet project. But cultivating a climate of candor requires a “willingness to kill the sacred cows,” says Grenny. Are there certain topics that you don’t dare broach with your own manager? If so, you need to speak up — and make sure your team knows you have done so. “You lose moral credibility with your team if you’re not taking risks with your boss,” he adds. Your willingness to run issues up the food chain will make employees more apt to come to you in the first place. “People will realize that if they’re willing to stick their neck out and tell you what’s bothering them, you will try to get something done,” says Detert.

Create an ownership culture

When it comes to speaking up, some employees think: “Why bother? It’s not as though my perspective matters.” This line of thinking, according to Detert, is dangerous “and is exactly why you need to create an ownership mentality in everybody on your team.” Colleagues need to feel they have a stake in the success (or lack thereof) in the organization and that speaking up, admitting mistakes, “and addressing concerns is a collective responsibility.” This goes for you, the manager, as well. To embed this notion, Detert suggests offering regular updates on the financial picture of the organization to deepen their understanding of what’s working and what’s not — including examples of your own errors in judgement. “You want to make sure everyone’s motivation to improve the place is sufficiently high.”

Make it routine

You can get people in the habit of speaking up. In one-on-one meetings, set aside a few minutes at the end to ask if there are any issues you should be aware of. Dedicate part of the agenda in your regular team meetings to air out problems. Before each meeting, appoint someone whose job it is “to bring up any issues and concerns” and then “rotate that messenger role throughout the team” over the course of time, says Detert. “It’s a good way to show that this process of putting things on the table is everybody’s job. And everybody does it without consequence,” he adds. “It creates a safe zone.” Another approach is to schedule certain meetings with the express purpose of bringing up problems. “Tell your team you want to hear everything that’s wrong with Project X,” says Grenny. “Then build consensus around those to help you figure out: How do we deal with these challenges together?”

Do

Try to get to the source of your colleagues’ concerns about speaking up: what precisely are they afraid of?
Initiate one-on-one, informal conversations, which will help team members feel safer about broaching uncomfortable topics
Create a culture where colleagues feel they have a stake in the future of the company and that speaking up about issues is everyone’s job

Don’t

Allow your organization’s cultural norms of “what not to say” get the best of you — be willing to speak the unspeakable
Be a hypocrite. If you’re not bringing up tough topics with your manager, you can’t expect the same of your team
Let your team get out of the habit of speaking up; before each group meeting, appoint someone whose job it is to bring up issues and concerns

Case study #1 Build trust by communicating with colleagues one-on-one

About two years ago, Josh Green, the co-founder and CEO of Panjiva — which helps companies source manufacturers around the world — sensed turmoil on his team. “Things clearly weren’t working and morale was low,” he says. “Low morale is, in my experience, usually a precursor to bigger problems.”

Josh suspected that people were upset because of a decision he had made some months earlier to restructure the team. But during team meetings, colleagues were reticent. “I wasn’t getting the whole story,” he says. “I needed to talk with people one-on-one.”

He sought out three colleagues — people he’d worked with in the past and whose judgments he trusted, and met with them individually for a drink after work. He chose a site away from the office so they would feel more relaxed. “I said: ‘Put yourself in my shoes and describe what you would do if you were me,’” he recalls. “It was a challenge getting them to be candid because they weren’t sure I wanted to hear what they had to say.”

Once his colleagues felt confident that he was “genuinely looking for an honest assessment,” they were more forthcoming. His hunch was right: his team was unhappy with the restructuring. They presumed he wasn’t interested in their opinions because he had brushed off complaints and defended the decision for months.

“One-on-one conversations are vitally important,” Josh concluded. Based on the input from his team, he decided to reverse his decision. Morale improved immediately as did performance.

 Case study #2: Be vulnerable with your team and colleagues will follow your lead

Megha Desai — founder and CEO of MSD, the New York City-based branding strategy firm focused on social entrepreneurism — wants to cultivate an office environment in which “every person is—and feels — responsible” for the success of the business.

Megha shares all of the company’s financial information with her team, and provides them with weekly status updates on client revenue. Letting employees in on this level of detail has a positive effect on their willingness to be honest and upfront with her when issues arise. “I empower them so that they realize the need to step up and speak up,” she says.

But occasionally, there are bumps in the road. Earlier this year, for instance, she commissioned one of her team members to develop an internal website. “About halfway through the project, I could see that my colleague had reservations about the person (?) she had brought on board to design it. I chose not to say anything and it ended up being a teachable moment for me.”

By July, the site was woefully behind schedule and the design was awful. Megha asked her colleague: Why didn’t you speak up sooner about this problem? “She told me she was nervous to admit she had made a mistake. She said: ‘I thought it would look bad if I showed you self-doubt.’”

The lesson for Megha was that she needed to be more honest and open with her team about her own mistakes. “The notion that founders and leaders are infallible is false,” she says. “I make mistakes all the time — and when I do, now I share them with my team.”

Shared Pain Turns into Social Glue

In a series of experiments, people who underwent painful experiences such as plunging their hands into ice water felt more bonded to their fellow participants than did those who hadn’t experienced pain (3.71 versus 3.14 on a 5-point solidarity scale); moreover, shared pain promoted cooperative behavior among the participants, says a team led by Brock Bastian of the University of New South Wales in Australia. The findings may explain why painful experiences such as burning and mutilation are part of social rituals in many cultures, the researchers say.

Our Misguided Obsession with the Tax Code

Over the past two months, three prominent columnists at The New York Times (Andrew Ross Sorkin, Joe Nocera, and Floyd Norris, in case you’re keeping score) have given prominent play to University of Southern California law professor Edward D. Kleinbard’s finding that U.S. corporations really don’t suffer much from this country’s comparatively high corporate tax rates and taxation of worldwide income. “[W]hether one measures effective marginal or overall tax rates,” Kleinbard writes in a recent paper, “sophisticated U.S. multinational firms are burdened by tax rates that are the envy of their international peers.”

So it’s a little surprising to crack open the chapter on tax reform in Kleinbard’s new book, We Are Better Than This: How Government Should Spend Our Money, and discover that he thinks “the federal corporate tax rate — nominally, 35 percent — is much too high relative to world norms” and that the U.S. would be better off with a “territorial with teeth” tax system in which income earned overseas isn’t taxed here. (He’d also be happy with keeping the worldwide system but no longer exempting from it, as the tax code does now, earnings that are retained overseas.)

Kleinbard, it turns out, is a centrist — maybe even center-right — wonk when it comes to tax policy. As a partner for more than two decades at the New York-based law firm Cleary, Gottlieb, Steen & Hamilton, he became a regular at NYU law professor (and blogger) Dan Shaviro’s tax colloquium. He adopted the late Princeton professor David Bradford, something of an icon to center-right would-be tax reformers, as his mentor in the economics of taxation. In practice that means he favors the lowest possible tax rates, the broadest possible tax base, not too much tax progressivity, and lower rates on capital income than earned income.

But now, after two years in Washington (where he was chief of staff to the Joint Committee on Taxation) and five at USC, Kleinbard has concluded that tax policy just isn’t the most important thing. It’s how government spends the money that really defines who we are as a nation — and to some extent how our economy performs. Taxes are simply a means of raising that money, if all goes well as unobtrusively as possible.

This of course goes against the grain of much public and academic discussion since the 1970s in the U.S., with claims and counterclaims about the benefits of tax cuts often crowding out any talk of the merits of government spending on infrastructure, education, R&D, and social insurance.

Kleinbard’s book is an epic attempt to rectify this, with most of its 509 densely packed pages devoted to making the case for spending a bit more than the U.S. does now in order to invest in the future and provide adequate insurance against bad luck. The “fundamental premise of this book,” Kleinbard writes at one point, is “that material outcomes are determined by an undifferentiated porridge of personal efforts and brute luck.”

A secondary premise is that to pay for increased investment and insurance and shrink the deficit to a reasonable size, the U.S. will need moderately higher taxes. Because he’s a centrist tax wonk, Kleinbard’s plans for increasing revenue mostly avoid raising income tax rates, as he calls instead for curbing itemized deductions, increasing gas taxes, and removing the cap on taxable wages for Social Security purposes, among other things. But he also argues that going back to the higher income tax rates that prevailed before 2001 wouldn’t be a bad thing at all. It would dramatically improve the deficit picture, and there’s no convincing evidence that it would be a drag on growth. In fact, of course, the 1990s saw much stronger economic growth than the lower-tax 2000s.

“History suggests that we all get on with the business of living, and doing business, under very different tax structures,” Kleinbard writes. “That is not to say that we should be recklessly indifferent to tax system design, but only that we should not assume that lower tax rates, always, are unequivocably necessary and sufficient conditions to economic growth.”

This seems like an important message not just for politicians and voters but for the CEOs who frequently argue that our nutty corporate tax code is a (or the) major obstacle to economic growth and job creation in the U.S. Yes, we have a nutty corporate tax code, and we should fix it. But the corporate tax code most likely isn’t the main reason why U.S. median incomes have stagnated or job growth has been anemic. Other things matter more.

Focus More on Value Capture

Stefan Michel, professor at IMD, says your business should rethink how it captures value, not just how it creates it. For more, read his article, Capture More Value.

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3 Big Economic Ideas in Waiting

In what has now become an iconic statement about American politics, and maybe politics everywhere, former White House Chief of Staff Rahm Emanuel (now Chicago Mayor) declared that “a crisis is a terrible thing to waste.” He was making the point that it is always hard to summon the will to enact big, new policy ideas, even when they appear perfectly logical. Until some dramatic development galvanizes people to act, they sit on the shelf. And what a pity it is if that dramatic moment passes, and there they still sit, perhaps never to be put into law or regulation.

Thinking about that phenomenon, you’d be wise to wonder: what transformative ideas are sitting on the shelf right now? Three of the biggest, I would argue, come from the work of economists. They address very specific problems in very smart ways. But they might only be adopted when concern about the federal government’s deficit is again at a fever pitch.

Congestion pricing

Multiple studies have shown what all Americans can see: in many places of the country, especially on too many of our nation’s bridges, our infrastructure is either crumbling or excessively crowded. By some accounts, the bills for just public facilities (excluding additional privately funded broadband investments) could run into trillions of dollars. In principle, even with huge federal budget deficits, such investments could be funded through a special “capital budget” as they are at the state level. But past proposals for a capital budget have gone nowhere, so the only politically realistic way of funding them instead is through some kind of public infrastructure bank, which at this writing has some bipartisan support, but still not enough to get the bank created and adequately funded.

Even if this should happen, however, many economists have argued for years that before much construction of additional roads in particular is undertaken, existing roads, which are less than full during off-peak hours, could be more rationally used, reducing somewhat the need for potentially hundreds of billions of dollars in new roads. That rational way is by charging drivers more during congested periods when their presence on the road generates “negative externalities” for other drivers.

However much congestion pricing may make sense to an economist, the politics make it all but a non-starter: people accustomed to driving on public roads for free are not likely to embrace these charges, even if they are told it will mean less taxes required for building new roads. The regressive nature of the charges only complicates the politics.

A very different result may be possible, however, as more states and localities authorize the construction of roads that are privately owned and financed, or even sell off existing roads and other infrastructure in order to relieve their own budgetary pressures. Private owners are likely to have greater freedom in how they set tolls than is the case for governments. Private ownership of roads and infrastructure raises a host of other issues — such as whether certain roads are deemed to be so essential that their rates are regulated to prevent monopoly exploitation — but in our “new normal” age of austerity, taxpayer funding of roads seems less and less likely, leaving private financing and ownership as the principal way to rebuild and expand a good portion of America’s aging physical infrastructure.

Medicare vouchers

Another idea waiting for implementation at some point that will have major implications for the entire health care industry is vouchers (euphemistically and for political reasons probably called “premium support”) for Medicare, and possibly Medicaid, as a replacement, or at least an option, for those over 55, in lieu of the current fee-for-service reimbursement system. Under such a system, beneficiaries would purchase health care insurance on their own (without regard to preexisting conditions, of course), with insurers receiving a support payment.

In some versions of this idea, initially proposed in the 1990s by Brookings Institution scholars Henry Aaron and Robert Reischauer, the supports would be geographically based, and in all versions would increase with the growth of the economy, and perhaps with the cost of medical care itself. Clearly, the lower the escalation factor for the voucher, the greater would be the incentives of premium support for medical care cost control, but also the greater risk that beneficiaries would have to pay more for care out of pocket (which for many seniors would translate into receiving less care).

Another long-time Brookings Senior Fellow (and public policy servant extraordinaire) Alice Rivlin briefly agreed on a premium support plan several years ago with Rep. Paul Ryan, the current chairman of the House Budget Committee, but the two later parted ways over the magnitude of the escalation factor. Even though medical cost inflation has slowed in recent years, economists have not agreed on how much of the slowdown is cyclical and how much is likely to be permanent.

Whatever the facts, the continued aging of the population means that Medicare spending will continue to rise, and it is because of this fact that federal policymakers eventually may be driven to adopt some kind of premium support plan. When then happens, look for even more pressure for medical cost control than exists now including downward pressure on provider earnings. Also look for more cost-effective medical delivery models, such as Minute-clinics in pharmacies, and also innovation and entrepreneurship aimed at cutting the growth of health care spending.

Tax on carbon

A third policy idea that has been on the shelf for some time and which has many intellectual “fathers” and “mothers” is a carbon tax, which has two rationales. One is to correct an “externality,” namely the contribution of carbon dioxide emissions to climate change (though the magnitude of that contribution continues to be hotly disputed, pun partially intended). A second benefit of a carbon tax is that its revenues could make a significant contribution toward long-term deficit reduction. For example, a tax of $20/ton on carbon, would raise roughly $1 trillion over a decade, though the net increase in revenue would be somewhat smaller to the extent that some of this amount would (as it should) be rebated to lower income households because of the tax’s regressive nature. A potentially more politically palatable way of introducing a carbon tax is to trade it for a reduction in the social security tax and thus keep the whole package revenue neutral, but at least tax a “bad” (pollution) while encouraging a “good” (the supply of and possibly the demand for more labor).

Any one of these ideas, if implemented, would change the economic environment for firms and compel them to respond strategically. The thinkers behind them would join the pantheon of the trillion dollar economists whose ideas have transformed business. For now, they’re on the shelf, still in waiting for their crisis.

When Start-ups Should (and Shouldn’t) Partner with Industry Leaders

The hard work and dedication you’ve devoted to your startup has finally paid off; your industry’s largest incumbent has invited you to join it as a partner and key supplier. Should you accept?

On the surface, the decision may seem straightforward, but before you sign on and cash in, there are risks to consider. A high-profile test case is unfolding before us in the space race between Jeff Bezos’ Blue Origin and Elon Musk’s SpaceX. Their opposing tacks present an opportunity to evaluate the trade-offs for start-ups in partnering with an incumbent.

First, some background: On September 17th, NASA announced the winners of the $6.8bn “space taxi” contract which will fund the development and launch of new platforms to ferry astronauts to and from the International Space Station. As expected, the incumbent, United Launch Alliance (a joint venture between Boeing and Lockheed Martin), won the lion’s share of the contract; notably, SpaceX was awarded a portion of the contract to promote price competition. Most pundits, however, jumped over the details of the contact to point out that United Launch Alliance (ULA) will use engines made by Bezos’ Blue Origin.

It’s not hard to see why a partnership between a strong, but staid incumbent and an innovative startup appears attractive. Blue Origin gains instant credibility and access to ULA’s capital, regulator relationships, and deep well of experience. ULA benefits from access to Blue Origin’s innovative designs and lean operations. However, to effectively understand any partnership, you have to analyze each firm’s Resources, Processes and Priorities. In the case of a startup and an incumbent, it’s even more important because of the significant power asymmetry between the companies.

If Blue Origin were merely providing a resource — like intellectual property — that ULA would plug into its own processes, the partnership would likely perform well for both parties because resources are fairly easy to transfer. However, when combining processes and priorities is necessary, stress fractures are likely to emerge. Processes and Priorities create problems because they are shaped by shared experiences and are resistant to change. Processes develop as an organization repeatedly overcomes similar problems and develops an institutional understanding of the techniques that succeed when facing those kinds of problems. Processes aren’t designed to change. Priorities are even more deeply rooted in an organization. Priorities develop to reflect a company’s business model and over time become enshrined in the company’s culture.

At first glance, it appears that Blue Origin is merely supplying a resource, its innovative BE4 engine, to ULA. In reality, it will be nearly impossible for Blue Origin and ULA to maintain separate processes and priorities because the final product, ULA’s rockets, is built on an interdependent platform.

Interdependency refers to product architectures where the parts cannot be developed independently. Interdependent products have custom interfaces, like a house whose rooms have to be designed so that the doors to each room meet at the same point on the wall. Modular architectures form the other extreme. Modular products have internal components that connect in standardized, highly defined ways. For example, a USB port is a modular interface because every component with that standardized plug will work regardless of its design outside the plug.

Modular products are flexible and easier to design but in exchange they typically compromise on performance. Interdependent products are just the opposite; expensive and complex but extremely high performing. Rockets clearly fit in that category.

As the supplier of a critical component in an interdependent product, Blue Origin will need to work closely with ULA on all future innovations to make sure that the parts fit and the combined system achieves its goal. This is where the process and priority conflicts begin creating stress fractures for both organizations. Innovations developed in tandem will need to progress through a shared process and designs will need to balance each company’s priorities.

Because ULA is the “customer” and sits between Blue Origin and NASA, it’s likely that their processes and priorities will dominate the relationship. Ultimately, ULA is responsible to NASA for “Perfect Product Delivery” and is unlikely to allow a supplier to compromise that with a sub-optimal design or less-thorough, but streamlined, process. This will likely create tension and frustration as both sides of the innovation team grapple with a lack of consensus that accomplishes neither company’s objective.

For entrepreneurs this provides a valuable lesson. Before agreeing to join a strong incumbent, consider how your organization will contribute to the end product. Is your relationship modular or interdependent? If it’s modular, you will likely lose little in the way of autonomy; however, a competitor with a similar product could easily replace you. If your relationship is interdependent, your organization will be difficult to replace, but your autonomy will likely decrease as you are forced to adhere to the incumbent’s processes and adopt their priorities.

So where does this leave SpaceX and Blue Origin? It’s apparent that Blue Origin has jumped into the “Big Leagues” of the industry and leap-frogged SpaceX in terms of immediate impact. But theory would predict that over time, through its partnership, Blue Origin will evolve to resemble ULA. Designs that would have compromised performance to reduce cost will likely evolve into high-performance, high-cost products built with established, low-risk processes. SpaceX, without the help of a strong partner, may gain industry acceptance more slowly. But because it’s unencumbered by a partner’s processes and priorities, it’s more likely to develop radically different rockets, disrupting the industry and eventually producing similar results at lower prices.

Stop Trying to Control How Ex-Employees Use Their Knowledge

The free flow of workers between companies is central to economic growth and innovation. Yet employers are increasingly taking legal action to prevent former employees from using knowledge and skills learned on the job.

More and more frequently, firms are asking new hires to sign post-employment agreements, which prevent former employees from working at rival firms or starting up their own companies in the industry. And U.S. state policymakers have aided and abetted these efforts by changing the law to enable employer control over workers’ knowledge. States that continue to side with controlling firms over skilled employees are hampering their economic prospects and inviting brain drain to more enlightened locales.

While noncompete and non-disclosure clauses were once standard only in the employment contracts of key executives and technical personnel, many firms now require a wide range of employees to sign them including, in some cases, even yoga instructors, designers and camp counselors.

Some of these restrictions are drafted as non-solicitation or non-dealing clauses precluding the employee from dealing with the former employer’s customers and others are drafted as restrictions on using any information learned on the job. And more firms are going to court to prevent former employees from working at rivals, charging that allowing them to do so would inevitably reveal proprietary trade secrets. The number of lawsuits filed over noncompete agreements and trade secrets has increased dramatically since 2000.

This trend has been fueled not only by the contemporary talent wars and the much debated skills gap, but also by changes in the law that have expanded employers’ control over employees’ knowledge. Although it might seem that greater control and stronger enforcement are beneficial—it is important for firms to protect key trade secrets, after all—the evidence shows that these changes critically undermine employee incentives to learn and innovate.

The law governing trade secrets and noncompete agreements is largely state law and it varies significantly from state to state. In California, for example, employee noncompete agreements are generally not enforced and trade secret enforcement is relatively narrow. Economics research shows that these policies are a key reason why Silicon Valley startup firms succeed relative to tech companies in many other states. Despite differences from state to state, however, the last two decades have seen a significant expansion of trade secret law.

First, many states have adopted a broader notion of the range of employee knowledge that the employer can seek to protect. In the past, trade secret law only protected well-defined knowledge such as the formula for Coca Cola or the code of software programs; now, in many states, the law also extends to cover less well defined knowledge, such as employee know-how, customer relations, basic skills, and knowledge that is not used commercially. For example, in many states, trade secrets now include lists of actual or potential customers and suppliers, as well as pricing lists and marketing strategies, making it virtually impossible for a former employee to compete over clients.

Second, in some states, such as Illinois and Florida, a firm can take legal action against a former employee who has not actually misappropriated secret knowledge; all that is necessary is a “substantial threat” of misappropriation or a claim that the former employee will “inevitably disclose” secret information. For example, IBM got a court to enjoin a former IBM executive from taking a job at Apple; the executive had managed semiconductor and server engineering at IBM and IBM argued that he would inevitably disclose trade secrets in his new job managing iPod and iPhone engineering. In this way, firms can prevent former employees from taking jobs in the same industry, even when employees have not signed a noncompete agreement or when noncompete agreements are not enforceable.

Third, some firms have gotten federal authorities to initiate criminal proceedings against former employees under the Economic Espionage Act. For instance, last year a former Goldman Sachs computer programmer was sentenced to eight years in prison for saving some of the files he worked on to his own computer account. Currently, Congress is considering a further expansion by allowing civil lawsuits and injunctions in federal courts.

The law has given employers new powers over employee knowledge and firms are increasingly using these powers. However, economic researchers have firmly established that these changes are shortsighted both as a matter of public policy and firm strategy. Indeed, empirical evidence shows that overall these changes have not been good for firms or for society. Why? Because firms need to strike a delicate balance between protecting secrets and encouraging employees to learn new skills and knowledge. Employees’ incentives to learn on the job are weaker if they cannot use that knowledge later in their careers. They invest less in acquiring knowledge, reducing their skills and innovativeness.

Evidence shows aggressive enforcement leads to less learning, a loss of talented people, and less innovation in the long run. Stronger enforcement of noncompete agreements and trade secret law also result in lower pay and reduced employee mobility. That might seem like a benefit to employers, but that too is a double-edged sword: it also means lower incentives to learn on the job and greater difficulty hiring talented workers. Indeed, researchers studying state-to-state differences find that states with stronger enforcement of noncompete agreements have a “brain drain” effect: inventors tend to migrate to states with weaker enforcement, and that trend is especially strong among the most productive inventors. Not surprisingly, stronger enforcement is also associated with less investment in capital and R&D.

Instead of relying on the threat of litigation, today’s most innovative companies are finding creative ways to positively incentivize and motivate their employees, such as Zappos’ peer-to-peer reward program, Qualcomm’s patent reward system, or Starbucks’ employee tuition reimbursement plan. Companies are also increasingly identifying the ways in which their former employees, similar to university alums, can strengthen the firm’s ties and collaborations as well as aid new recruitment.

These findings and developments provide a stark message to managers: the law provides an increasingly powerful tool to control the use of knowledge that former employees have learned on the job, but it is a tool that should only be used sparingly. Managers need to protect real trade secrets, but overly aggressive enforcement undermines employee motivation, makes hiring talent more difficult, and undercuts firm innovativeness. Excessive use of post-employment restrictions or overly aggressive trade secret litigation against former employees amounts to giving the legal department too much control over human resources policy. The result may be less innovation and a depletion of human capital.