Jeffrey Pfeffer's Blog, page 2

Trump’s Next Painful Leadership Lesson? Being a Winner Excuses Abhorrent Behavior

The Trump phenomenon affords many (often uncomfortable) leadership lessons; for instance, that a brand is not an organization, so Trump would have trouble in caucus states where having a ground game matters, and that what people say they want in leaders is often the opposite of what they select. Now, Trump is demonstrating one of the most important lessons in power and leadership: that winning excuses almost everything as people rush to associate with powerful winners.

Yes, the stop Trump movement lives on—for the moment—with various conservative organizations and personalities taking the lead. Meanwhile, former rivals like New Jersey Governor Chris Christie and neurosurgeon Ben Carsonhave endorsed Trump, as have Florida Governor Rick Scott and former GOP Vice Presidential candidate Sarah Palin. More endorsements will follow, and when Trump passes the 1,237 delegates necessary to win the nomination, it’s likely that most Republican politicians will fall into line behind him. Here’s why.

People are seemingly hard-wired to associate with and embrace success. This behavior may have an evolutionary basis. For a person’s genes to survive into posterity, it’s better for that individual (or creature) to be able to identify and then be part of the tribe or group that was going to triumph in struggles for survival. That is why people tend to automatically respond positively to displays of strength. And our preference for strength may also help explain why people tend to select male over female leaders and to prefer taller men and women for leadership positions.

The classic basking-in-reflected-glory research showed that university students were more likely to wear clothing items with their school logos following a football victory than following a defeat—even though the people themselves had no direct responsibility for the games’ outcomes. The explanation: To feel better about themselves—to self-enhance—people sought to symbolically identify with success by adorning themselves with successful school’s insignias.

Of course, politicians not only share this desire to be on the winning side and to be close to success and status, they also seek jobs and career advancement. Those who hold powerful positions provide others the possibility of access to jobs, information, public events, and other resources. That is why even rivals and ideological opponents often fall into line behind adversaries once those adversaries triumph.

Moreover, people change their positions on politicians and products all the time. Marketing research provides evidence of two psychological mechanisms that make supporting even unethical or immoral political figures—let alone just divisive or unattractive individuals—possible. Moral rationalization gives people the freedom to say that transgressions aren’t that bad. So, for instance, if Trump exaggerates his capabilities and demonizes minority groups, one rationalization would be that politicians do such things all the time and that Trump’s behavior isn’t that far outside the norm. Moral decoupling allows people to maintain that some inappropriate behavior is not relevant when making judgments about someone’s competence in another domain. For example, the thinking goes, Trump’s aggressive language may not be relevant to his ability to get things done. In fact, his demeanor could signal that he may be more competent in negotiating better deals with trade partners and political adversaries. Moral decoupling and moral rationalization permit people to support politicians who do bad things; the desire to be close to winners provides the motivation to engage in such reasoning.

None of this is suggesting that such tendencies are ideal or recommended. But such behavior is common. So don’t be surprised when seemingly intractable opponents flock to Trump and even seek to curry his favor once he has locked up the GOP nomination. This behavior is common in politics and in business—for some potent psychological reasons.

(This post was originally published on Fortune on March 18, 2016)

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Why the VC’s Are Alright—And Always Will Be

William Cohan’s recent cover story in Fortune argued that “a reckoning is coming in the tech world.” That prediction may or may not come true, as research shows that even expert forecasts are often wrong. But whether or not Cohan’s prediction is correct, high enterprise valuations and IPO problems won’t affect the VC or private equity industries very much.

That’s because investment managers long ago mastered an important skill—the ability to gather assets under a compensation structure that makes them money almost regardless of how their investments perform. Here’s how it works.

As everyone knows, VCs and private equity funds—the two are often lumped together in both industry reporting and academic research—collect 2% on all assets under management, and 20% of the gains the funds earn.

For many reasons, including low interest rates on fixed income investments, inconsistent stock market returns over the past decade, and effective marketing of their products, the alternative investment industry has been on a tear. According to Prequin, which publishes research on the industry, private equity and venture capital assets soared from some $1.2 trillion in December 2008, to $2.6 trillion in June 2014, an increase of more than 100% in just six years.

Two percent of the $2.6 trillion asset base is $50 billion in fees collected each year. No wonder that managers of alternative asset funds are among the most highly compensated people on the planet.

VC and private equity also seem firmly planted on a path to expansion, notwithstanding California’s pensions system’s decision to reduce its exposure to alternative investment products. Prequin’s report notes that “investor appetite for the asset class remains robust and many LPs (limited partners) are below their target allocations.” And in 2014, 994 funds raised more $495 billion—that’s half a trillion dollars—in just one year.

Moreover, research suggests that VC compensation is not highly related to fund performance. For instance, a study of 419 venture capital partnerships formed between 1978 and 1992, co-authored by Harvard professor Josh Lerner, reported that the mean level of “base” compensation—management fees—averaged around 18%, while the sensitivity of compensation to performance—the amount total compensation grew if the asset growth rate went from 20% to 21%—was only about 4.5%. The study concluded that there was “no relation between incentive compensation and performance,” and noted that base fees—the fees for overseeing assets not tied to performance—“are a significant fraction of venture capitalist’s compensation.”

But does performance affect the ability of funds to attract (and retain) assets?

Although research coauthored by University of Chicago professor Steven Kaplan shows that “better performing partnerships are more likely to raise follow-on funds and larger funds,” it is nonetheless the case that there are diminishing returns to performance, “so top performing partnerships grow proportionally less than average performers.” In other words, many funds are able to raise capital effectively almost regardless of their relative performance.

Cohan’s analysis in Fortune focused on the poor performance of companies such as Twitter, Zynga, Groupon, and others whose stock prices have tanked after going public. But this share price decline is a problem only for those who bought at the public offering or invested shortly before the companies went public. Typically, VC investments are made early in companies’ development and at much lower valuations. Therefore, VC—and for that matter, early employee—returns are stunningly wonderful whether the equilibrium enterprise value turns out to be $10 billion or “only” $2 billion. When I recently asked a former Stanford student now running his own small private VC fund how he could afford a house in one of the most expensive areas of San Francisco, his reply was that he had a job running the Indian operation for Zynga for a while. His options earned him a lot of money, notwithstanding Zynga’s subsequent struggles.

And lest you think that liquidity concerns constrain the ability of private investors to get their money out of alternative investments, there are markets to trade both unregistered securities and interests in VC portfolios.

Because of the soaring value of assets under management and a compensation structure that bases rewards on the amount of those assets and not just performance, partners in the VC and private equity world enjoy enormous pay packages, with little sign of trouble on the horizon. Commentators need to not confuse what happens to VC’s and their counterparts with what happens to those who buy investments as the VC’s are exiting.

(This post was originally published on Fortune on March 2, 2016)

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In 2015, Old Power Triumphed Over New Power, Again and Again

In 2015, “old power” people and tactics triumphed in politics and business around the world. Sometimes, good people behaving nicely did well and received deserved plaudits, but not often enough.

This year, there was lots of talk about transparency, holacracy, the power of social networks to constrain selfish or dishonest behavior, and so forth. Meanwhile, the facts of leadership and power remained anchored in a social dynamic that Machiavelli would easily recognize.

The concept of new power was named by CNN as one of the top ideas for 2015. Unlike old power, which is concentrated, hoarded, and leader-driven, “new power is open, participatory, and more transparent.” It’s a nice narrative that presumably reflects the new, purpose-centered ethos of the millennial generation, the reality of more rapid communication, and the ubiquity of social networks and the rapid transmission of information. But I don’t see much evidence of new power in the world.

At the national level, the Arab spring has been replaced by Abdel Fattah el-Sisi in Egypt, while Bashar al-Assad perilously hangs on in Syria. Eastern Europe seems to be embracing authoritarian leaders. In Hungary, there is Viktor Orban, who has significantly increased the government’s power in society, while in Poland, Andrzej Duda and his political party are trying to eliminate any judicial checks on their authority. In Turkey, fundamentalist strongman Recep Tayyip Erdogan won reelection. Marine Le Pen of France, president of the right-wing National Party, with its anti-immigrant platform (not much openness there), garners substantial support in public opinion polls and in the voting booth. And then there is Vladimir Putin of Russia, who, notwithstanding the falling energy prices that have devastated Russia’s economy and weakened its currency, nonetheless expanded his sphere of influence in Ukraine and annexed Crimea by force, an old power tactic if there ever was one, even as he exerts power in the Middle East and confronts a Europe divided on maintaining economic sanctions.

Well, this is politics, so what can we expect?

How about transparency, another new power principle? The most transparent companies are those that are publicly traded, because they face numerous mandatory disclosures of financial and governance information and growing pressure to publicly report on their social and environmental impacts.

But as Michigan business professor Gerald F. Davis points out in his forthcoming book, The Vanishing American Corporation, the number of public U.S. corporations decreased by 55% between 1997 and 2012. There were fewer initial public offerings in total over the six years between 2009 and 2014 than there were in the single year of 1996. Moreover, many companies including Zynga, Facebook, Groupon, and Google, when they did go public, provided their CEOs with disproportionate voting rights, guaranteeing their control of the companies. Not much shareholder democracy there. And as widely noted, some valuable companies such as Uber, Lyft, Zenefits, controversy-plagued Theranos, and Airbnb are not public and are therefore not required to—and do not—disclose much if anything about sales, profits, margins, or anything else. So much for transparency.

As for the devolution of power from the C-suite to front-line employees, there have been more articles written about holacracy than there are companies that actually adhere to the management principle, which promotes the decentralization of authority. The late Stanford business school professor Harold Leavitt perceptively noted that although almost no one has anything good to say about hierarchy, and its demise has been predicted for decades, hierarchical structures nonetheless survive and indeed may be both desirable and necessary for organizing large, complex organizations.

So when you read or hear about the demise of old power arrangements, you should ask to see the evidence. After all, Time’s 2015 person of the year was the always strategic, frequently underestimated, but undeniably tough German Chancellor Angela Merkel, with its No. 2 being none other than the leader of ISIS and No. 3 Donald Trump.

Rhetoric v. Reality

2015 demonstrated yet again that many of the widely advocated leadership traits and behaviors aren’t always necessary or even useful for achieving individual career success.

For instance, in our socially networked world, an individual’s reputation and being generous and cooperative with peers presumably counts for a lot. Tell that to first-term Texas Senator Ted Cruz, who is currently in the top three among Republican presidential candidates. As voluminously reported, “Mr. Cruz stands out for his widely held reputation for putting Ted first” and is singularly unpopular among his Senate colleagues.

The Internet and modern media have supposedly made it impossible to get away with being untruthful. In 2007, the Tampa Bay Times founded PolitiFact to fact check candidates’ statements. But presidential frontrunner Donald Trump’s “record on truth is astonishingly poor,” and he is followed closely by Ben Carson, who up until recently was running neck-and-neck with Trump in the polls. Among the more truthful of the candidates in the Republican race are Jeb Bush and Chris Christie, who happen to currently be far down in public opinion polling. Although the sample is small, examining the chart in an article written by Angie Drobnic Holan, the current editor of PolitiFact, suggests there may be a negative relationship between truthfulness and political success, at least as measured by public opinion.

Modesty, while widely advocated, is mostly absent in the presidential race, with few negative consequences for the immodest. Trump puts his name on everything. Carly Fiorina touts her business record, despite her questionable success. The number of companies who claim they are the leaders in their particular business is enormous—how often do you read annual reports or see advertisements where the business says, “we are at (or below) the median in our industry?” Of course, by definition, there are companies (and leaders) that are below average. And the market for CEO-written books touting the executive’s wisdom and amazing achievements has never been bigger.

Even the Exceptions Proved the Rule

Old power ideas are so potent that kindness and generosity sometimes produce opprobrium rather than approbation. Take the case of Dan Price, whose credit-card transaction processing company, Gravity, decided to pay all of its employees at least $70,000 a year. Price agreed to reduce his own pay so the company could afford the approximately $1.8 million in extra expenses. The reaction? Fox News and commentator Rush Limbaugh called Price a socialist and some of Gravity’s employees and customers complained. Bloomberg published an article claiming that Price’s move came in response to a suit by his co-founder brother alleging Price had paid himself excessively.

Gravity seems to have profited from Price’s generosity, regardless of its cause, as the resulting publicity has been a marketing bonanza that helped produce rapidly expanding sales. And, not surprisingly, employee productivity has soared so that Gravity’s costs have not increased significantly. I say this isn’t a surprise because 30 years ago, Nobel prize-winning economist George Akerloff, in his description of efficiency-wage theory, noted that employers who paid above-market wages would obtain more effort from grateful employees as a result. Furthermore, higher wages also attract more talented people.

This year, Pope Francis continued to speak about environmental degradation and on behalf of the poor. Even after the Paris attacks, the Pope reiterated that “refugees are more than statistics: they are children of God.” He exhibited humility by traveling around Kenya’s capital, Nairobi, in a “little gray Honda” rather than a Mercedes or four-by-four. His message: “Remember the poor. Respect the youth.” These positions have earned Francis criticism from conservative religious leaders in both Catholic and Protestant churches, politicians such as Rick Santorum and Chris Christie, and from businesspeople such as Ken Langone, a founder of Home Depot.

It seems as if self-interest and selfishness still abound, and that no act or statement of compassion or caring is immune to politics and negativity.

Change Comes From Power

The narrative that millennial values and social media transparency will root out bad actors and promote generous behavior leads people to a very false sense of the world. If social forces will effortlessly produce better leaders and more benign behavior, people don’t have to do anything. Improvement arises automatically.

But I am convinced that the best, maybe the only, way to create a better world populated with kinder, more generous, and selfless leaders is to both recognize the current realities and accumulate the power skills to get into a position to change things. Liberal democracy, human rights, freedom of the press, and a more equal distribution of economic and physical well-being don’t just emerge. Those with power or those who seek power for their own interests are not going to be swept away in some new-economy, new power paradise.

Everyone needs to build their understanding of and willingness to use power, even in its old, “hard” forms. Otherwise, as The Who once proclaimed, we will repeatedly “meet the new boss, same as the old boss.”

(This post was originally published on Fortune on December 23, 2015)

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This is Why Donald Trump Will Lead the Polls Far Longer Than You Expect

Many pundits such as David Brooks expect the Trump bubble to burst and his support to fade as voters get more serious about the election and give Trump and his rhetoric and policy positions a closer look. But supposedly knowledgeable observers have been predicting Trump’s fade for months. Meanwhile, recent polls show him leading the field with more support among Republicans than ever. Here are some social psychological principles that make sense of the “Trump phenomenon.”

Let’s ignore for the moment the fact that Trump embodies many behaviors people claim to not like in leaders—self-promotion, unbridled self-confidence, and the disregard of many social conventions such as being polite, for example—even as many workplaces and people select and promote leaders for precisely those things. There is yet another important psychological process working to help Trump: people with money and other trappings of success receive more favorable evaluations from others, regardless of how the success was achieved. This is because success creates positive attributions about the successful individual.

Begin with the fact that people prefer congruent cognitions—a psychological principle that forms the foundation of the late social psychologist Leon Festinger’s theory of cognitive dissonance. For example, if people can be induced to do a task for minimal to no financial reward—the insufficient justification condition—they will come to believe they like the task as a way of making sense of their behavior. That is because it is inconsistent to do something you don’t like for no reward. Therefore, you must have enjoyed the experience.

It is incongruent to believe that Trump is, on the one hand, rich and successful, and on the other hand, unintelligent, incompetent, ineffective, and not a good leader. To maintain cognitive consistency, people are motivated to infer intelligence and many other positive traits from the mere fact of success. This phenomenon was demonstrated 40 years ago in the context of group performance by U.C. Berkeley professor Barry Staw. Staw found that when individuals were told a group had done well, they attributed all sorts of positive attributes to that group. In part, that’s because people carry around in their heads lay theories of the causes of good performance and use those theories to ascribe characteristics to high performing groups—or individuals. And that’s partially because it would be psychologically inconsistent to believe that high performing groups do not have attributes logically associated with high performance.

A subsequent study asked whether people’s actual experience in groups might overcome this bias. After all, personal experience should provide concrete evidence that should counter such assumptions. But much to the study authors’ surprise, they replicated Staw’s effect exactly, noting that, “group history did not rival performance feedback as a cue for individual perceptions.”

This effect applies to individuals as well. To take one prosaic example, a colleague who teaches at the business school at Duke happened to be behind two students walking out of a CEO’s speech at the school. Even though the speech contained meaningless platitudes, logical inconsistencies, and statements at odds with many facts, the talk was warmly received. My friend overheard one student say to the other something to the effect of, “Well, he’s incredibly rich, so he must be smart.” Thus, the talk was viewed as brilliant, regardless of the errors.

For people to believe that individuals (or organizations) are economically successful but incompetent or not virtuous would also violate people’s strong desire to believe that the world is a just and fair place. As described by social psychologist Melvin Lerner decades ago, the “just world hypothesis” guides people’s judgments. For instance, in one classic paradigm, when bad (or good) things randomlyhappen to people—and even when the observers know the events are random—these observers change their judgments and attributions to make the bad or good fortune explainable and deserved.

Because Trump’s reputation rests largely on his wealth and success, as Forbes has noted, no one has been more interested in the magazines’ rankings and assessments of his wealth than Trump. And Trump is always quick to challenge the idea that his current net worth is not significantly different than his inheritance compounded at a typical stock market return over time. Early in his campaign, he included statements about his wealth in his speeches (“I’m really rich”), with the implicit suggestion that the wealth was a signal of his acumen and other leadership attributes. Recently, The Economist reported on a Trump rally in Sarasota, Florida. The reporter noted, “Many interviewees offered the thought that ‘He’s a rich businessman, so he knows what he’s doing.’”

And if you’re thinking, “surely there are other candidates—and people—who would be subject to this same effect,” you are right. The problem for Carly Fiorina is that she was fired from Hewlett-Packard and therefore her business record is endlessly contested. The problem for Meg Whitman in her race a few years ago for governor of California was that she was running as a Republican in a very Democratic state—and there are obviously limits to the strength of the effects I am describing.

But notice the conversations and events around you. Every day, you can see people’s statements being accorded undue status and weight because they are wealthy and successful, even in domains irrelevant to their presumed expertise. After all, people pay attention to Jenny McCarthy, the successful actress and model, on the subject of vaccines even though she has no professionally relevant medical or scientific credentials.

Success causes people to be perceived as competent and smart, almost regardless of what they say or do, because of people’s desire to believe in a just world. To maintain logically consistent perceptions of the world, people attribute intelligence and skill to those who are successful.

Trump’s polling success rests at least in part on the perception that “he is a rich businessman” who therefore must be smart and a great leader. And that perception is not going away unless and until people attack his business record, not his incendiary language and ever-changing political positions.

(This post was originally published on Fortune on December 10, 2015)

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This Is What’s Wrong With Ben Carson’s Life Story

Was he admitted to West Point? Was his childhood adversity and temperament precisely as he described them? Did he really try to stab someone in high school?

The recent flap over Republican presidential candidate Ben Carson’s life story and its accuracy offers a lesson that applies to anyone who’s ever recounted an autobiographical tale, including many other political candidates whose personal narratives include factual errors. That is, self-reported personal anecdotes are seldom entirely accurate and truthful, because they almost can’t be.

Here’s why.

When people talk about themselves and their pasts, they are motivated to both selectively remember and selectively disclose positive personal information.

As the authors of a recent social psychological study from the University of Illinois at Urbana-Champaign note, “Self-serving judgments, in which the self is viewed more favorably than other people, are ubiquitous.”

Conversely, people want to—and do—both forget about and fail to disclose negative personal information.

That’s not new with the case of Ben Carson: The effect of the favorability of information about the self on its likelihood of being recalled and shared publicly has literally been studied for decades. Sociologist Erving Goffman first published his classic book on people’s efforts to construct positive images and reputations, The Presentation of Self in Everyday Life, in 1959.

Second, we know from extensive research on eyewitness accounts of accidents and crimes that even when people have no incentive to be anything but accurate in their recollections, memory is invariably fallible.

As psychologists George Rahaim and Stanley Brodsky noted in a witness study, there exists “an impressive body of empirical data…arguing that eyewitness identifications and subsequent testimony are often unreliable.” And psychologists Deborah Davis and Elizabeth Loftus showed that memory becomes even more unreliable in the presence of media accounts and widely-disseminated rumors that further bias recall.

Third, as author Ben Dolnick perceptively noted, if someone retells a story often enough, the account becomes etched in the person’s memory. Therefore, the individual becomes incapable of distinguishing embellishments he or she may have consciously added in the beginning (to make a tale more interesting) from the true facts. Dolnick nicely described in his own life “how the things you write [or talk about] begin to blend with, and then replace, the things you experienced.”

Fourth, an article in Behavioral and Brain Sciences by a psychologist and an anthropologist demonstrates that self-deception is an adaptive trait. Self-deception is helpful in part because it permits people to display more confidence, and confidence attracts others. Self-deception also makes people more effective in deceiving others—your lying cannot behaviorally “leak” into inadvertent physical cues when you believe what you’re saying!

As an added bonus, when people believe the tales they tell, they have an easier time remembering the story. That permits them to tell the same thing consistently and also do so with more cognitive ease.

For these reasons, leaders’ stories about themselves are inherently and inevitably unreliable.

In the cases of Carson and the other candidates running for president, political aspirants for high office are often caught in their fabrications because they confront lots of fact-checking and public scrutiny by journalists and opponents.

Business leaders’ stories, on the other hand, typically face much less vetting. Consequently, business figures can claim positive relationships with family members and business associates even if the opposite is true. And they can (and do) embellish depictions of career successes with little fear that anyone will do much due diligence to ascertain the accuracy of the self-portrayals. In fact, because observers love heroic stories and want to believe in a just world, we are often complicit with the yarn-spinners in accepting the most positive portrayal of things.

There’s a big problem that comes from this myth-making: it leads to leadership case studies and biographies that are more myth than reality. But people seeking to learn how to be more successful in their own careers need accurate information in order to form accurate judgments. Moreover, because of the pervasive and almost inevitable inaccuracies in many leadership stories, these examples provide an exceedingly poor foundation on which to base a science of leadership.

As a social scientist and, more importantly, as someone trying to educate students in principles that explain human behavior, I believe that people can handle the truth and need facts and evidence to guide their decision making. Therefore, we need two big changes in the writing and speaking about leadership: We need much more due diligence on the stories proffered, not just by political candidates but by all leaders; and we need much less seeking of myths and inspiration.

When people stop buying into untrue—albeit uplifting—stories, they will be more likely to get the facts and insights that can form a better foundation for understanding and action.

(This post was originally published on Fortune on November 12, 2015)

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Corporate apologies: Beware the pitfalls of saying sorry

Apologies are in the air these days. This month, outgoing Procter & Gamble CEO A.G. Lafley took responsibility for the consumer product giant’s weak performance at the company’s annual meeting and promised improvements. United’s new (and currently sidelined) CEO Oscar Munoz apologized to the company’s employees and passengers for its poor treatment of them. Pope Francis apologized—again—for the scandals bedeviling the Catholic church. Volkswagen apologized for selling cars with software designed to defeat pollution control regulations. And more than a year ago, Mary Barra, CEO of General Motors, “gave a full-throated apology for the defect-and-recall disaster” arising from flawed ignition switches.

Virtually every company and person is, at some point, going to screw up. So the question becomes, if, and how, you should apologize. As for the first issue, to apologize or not, conventional wisdom in public relations says to apologize whenever a company or person makes a mistake. But holding aside the fact that apologies sometimes seem like admissions of blame, leading lawyers to counsel against apologizing to reduce potential liability, there are other considerations that also make the choice less straightforward.

Why apologize?

The archetypical example of admitting blame and moving on is Tylenol. In 1982, Johnson & Johnson recalled 31 million bottles of Tylenol from stores after seven people died from taking cyanide-laced capsules. Although the recall cost the company $100 million, Johnson & Johnson’s stock price—and Tylenol’s market share—soon recovered. In drawing lessons from this story, people sometimes overlook a few important and unique facts. First, the company was not responsible for the product tampering, which could not have been reasonably anticipated. Second, the solution to the problem—creating tamper-evident packaging—was clear. So J & J was able to get the problem behind it and do so in a way that did not embarrass the company or its employees.

Apologies do seem to make recovering from errors easier and less expensive. For instance, research shows that physician apologies for medical errors reduce the likelihood of litigation and decreases the average payout by $32,000

Kennedy School lecturer Barbara Kellerman, in discussing when to apologize, makes two important points. First, when someone is wronged, even unintentionally, they expect an apology as a way of obtaining a least some measure of justice. Unfortunately, in today’s world, everyone apologizes all the time. Therefore, they may not be as effective because talk is cheap and people expect actions, not just words, to ensure that the behavior doesn’t happen again.

But second, when companies and their leaders apologize, they are speaking not just to wronged or potentially harmed people, but also to other constituencies, including their employees, shareholders, and their boards of directors. That makes apologizing much trickier. In saying sorry, a leader is potentially undercutting employees’ feelings of pride in the institution and their attachment to the company and its work.

The case for not apologizing

In the aftermath of the financial crisis, Goldman Sachs was accused of betting against—or shorting—securities it had sold its clients. In 2010, the bank faced a Senate committee headed by Carl Levin of Michigan and eventually settled accusations against it for hundreds of millions of dollars. Also in 2010, BP confronted House of Representatives’ committee hearings on the oil spill in the Gulf of Mexico. I use excerpts from the testimony of the two CEOs—Lloyd Blankfein of Goldman Sachs and Tony Hayward of BP—to illustrate to my business school students how to deal with objectively tough situations.

Blankfein never apologizes, never admits that Goldman did anything wrong, and mostly looks puzzled as he explains to his interrogators how financial markets work—for every buyer there is a seller, and vice versa. He notes Goldman’s age, venerable history, size, success, and the talent of the firm’s staff. He refuses to accept the characterizations that others make of the firm and its behavior. And he ceaselessly reiterates the importance of the firm’s clients and their trust—and that the firm only did what was requested of it. At one point he notes, “People wanted an exposure to the housing market, and that’s what they got.”

By contrast, Hayward in his testimony never puts BP and its activities in context—why was the company drilling in the Gulf of Mexico in the first place, with pressures of thousands of pounds per square inch? He apologizes but then seemingly ducks responsibility, noting that he had nothing to do with the drilling of that well, and, in his testimony, he is relying on the reports and recommendations of others.

Most viewers like Hayward’s contrition and are repelled by Blankfein’s arrogance. But Blankfein still has his job (and some large bonuses) and Hayward is long gone. In part, that reflects an uncomfortable but important psychological truth, nicely described by Stanford social psychologist Larissa Tiedens: people accord more status to those who express anger than to those who express sadness or remorse. Both anger and sadness are negative emotions, likely to be expressed when things have gone wrong. But one emotion connotes power, and the other does not.

When in crisis, or maybe all the time, people look to leaders to assess whether they believe the leader can guide the organization through its problems. They seek expressions of confidence and assurance that the leader is in control. Companies should apologize when it’s appropriate, but they should also provide reassurance and confidence that everything is going to be fine.

One other strand of research is relevant to apologies. People are notoriously bad at predicting how they will feel in the future—a phenomenon called forecasting errors. A recent study shows that people overestimated how much they would value an apology, rating an expression of contrition more highly when they imagined receiving it than when they actually did, and predicting that they would trust the individual delivering the apology more than they did when they received one.

So life is complicated. On the one hand, companies need to make amends to those that have been harmed. On the other hand, companies need to retain their people—the talent that makes them successful. We think we want apologies from those who have harmed us. Yet we instinctively respect strength, confidence, and assurance. And throughout, our ability to forecast our true reactions to situations is imperfect.

Steve Jobs’ “Antennagate” apology

For guidance on how to “apologize,” watch any one of the 33-minute YouTube versions of Steve Jobs apologizing for what came to be known as “Antennagate.” When Apple introduced its iPhone 4, there were reports that the phone’s built-in antenna did not work well and there were front-page articles on the device’s reception issues and dropped calls. The brouhaha came to be called “Antennagate.” After a few weeks of media frenzy, Jobs decided to hold a press conference in a big auditorium—recorded, of course, for future watching and distribution. He did his usual masterful job.

After admitting that “we’re not perfect” and offering a free iPhone case (to help mitigate the problem of people touching the phone in the wrong place and accidentally interfering with the built-in antennas), Jobs went on to compare the iPhone’s performance (favorably, of course) to that of its competitors, note how many iPhones had already been sold (3 million), how few customers had complained (just 0.55% of buyers), and that fewer than 2% of people had returned their iPhone 4. In short, Jobs used the occasion of a presumed apology to do what he always did—sell the company and its products. He did this by articulating a narrative that placed the situation in the most favorable light for Apple, Jobs, and the company’s employees who created and sold its products.

The lessons from watching Steve Jobs apologize for a product problem seem both clear and generalizable:

Most importantly, control the narrative—tell your story. And as in the case of Apple’s iPhone, put the problem in context, in comparison to competitors or to the challenges the company is addressing.
Don’t appear—or be—defensive or weak. As a leader, people are invariably asking if they should be led by you. That is an assessment of whether you have the savvy and strength to ensure their success and the company’s future success. Jobs admits, early on, that “we’re not perfect”—but of course no one is (something else he notes)—and that is pretty much all there is in the way of an apology. His strong defense of Apple, its people, processes, and products makes the case that the company is in very strong and capable hands.
And most importantly, explain why (if that’s possible) the company and you did what you did. Lloyd Blankfein, in his testimony and his many statements about Goldman’s behavior during the financial crisis, consistently noted that the company was old, filled with smart people, and, most importantly, was just doing what its clients wanted—serving as the other side of what its clients wanted.

Although people often think they want apologies, they also are attracted to strength and confidence and often overestimate how much they will value an apology. This is why apologizing, and doing so in a way that maintains confidence, is trickier than it might look.

(This post was originally published on Fortune on October 26, 2015)

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What Starbucks can learn from Pope Francis

The juxtaposition seemed striking: on the one hand, Pope Francis in the U.S. with his message of taking care of the poor and the forgotten—a Pope who had published an encyclical speaking to the challenges of inequality and reminding us that “human beings too are creatures of this world”—and on that same day, an article describing the inconsistent way in which Starbucks was implementing its proposed policy to give its hourly store workers more notice about their ever-shifting schedules and total hours of work.

To be clear, Starbucks is a company that offers benefits to part-timers and provides tuition assistance to its employees, and it is often accurately held up as one of the more people-centric corporations in retail. But even in the midst of this economy recovery, we are treated to almost daily articles on more layoff announcements and wage stagnation that has left many lower-paid employees struggling to make ends meet even if they work full-time.

Although many companies display almost-obligatory boilerplate language thanking their workers in their annual reports, and numerous organizations proclaim a version of “people are our most important asset,” few businesses consistently put these noble sentiments into practice and manage based on their espoused corporate values. Maybe more should.

Here’s the issue: “economic realities” frequently intrude on companies’ value statements and good intentions. For instance, during the recent recession, Starbucks, although still profitable (albeit at a reduced rate), laid off about 6,000 people in an effort to maintain its margins and profits. Starbucks senior executive and board member Howard Behar resigned his position on the board of directors because he thought the interests of employees should have higher priority in the company’s decision making. And although CEO Howard Schultz said at the time that there would be no more layoffs at Starbucks, in 2015 the company was laying off an undisclosed number of employees at its Seattle headquarters.

But there is no (or at least there shouldn’t) be conflict between taking care of people and being competitive and profitable. In a long review of the evidence published in Newsweek in 2010, I showed that layoffs did not increase stock price, improve productivity, increase innovation, or enhance profitability, and often layoffs didn’t even reduce costs. That’s because companies did not invariably lose the right people and were prone to hiring back laid off employees as contractors.

Recently, Tom Rath and Jim Harter, affiliated with Gallup, published a report on “The Economics of Wellbeing.” After describing the five dimensions of wellbeing—financial, physical, community, social, and career—the report presented data showing that, “compared with employees who are struggling, thriving employees have 41% lower health-related costs to the employer.” Struggling employees were also more than twice as likely to say they would look for another job if the market improved. The Gallup data showed that only 12% of employees strongly agreed with the statement that they have substantially greater wellbeing because of their employer. Rath and Harter concluded: “The research on this topic is quite clear: Your workforce’s wellbeing directly affects your organization’s bottom line.”

Companies can take care of people during tough economic times and even benefit from doing so. Jim Goodnight—co-founder and CEO of the large, privately owned software company SAS Institute—told me a couple of years ago that during the recent severe recession, people at SAS were concerned for their jobs, even though the company had never laid anyone off. After he put out a notice assuring people there would be no layoffs—but in return asking for their assistance in holding down costs—he was delighted at employees’ responses. Staffers cooperated in managing costs and they could work more effectively because they were not distracted by the stress of worrying about their job and their financial security.

The Pope’s message reminds us that we are responsible not just for the physical environment, although that is obviously important, but also for the human beings we are contact with and whose livelihoods are entrusted to us. And that includes the people who work inside companies.

That message is completely consistent with the views of Robert Chapman, who took over his father’s struggling bottle-washing business and turned it into a highly successful manufacturing company, Barry-Wehmiller, that now employs some 8,000 team members in more than 100 locations worldwide. Chapman has come to define the success of his company this way: “At Barry-Wehmiller, we measure success by the way we touch the lives of people.” Chapman told me that his company has enjoyed 16% compounded growth since the early 2000s when he adopted this management approach, and that the culture and philosophy of the company has helped integrate its more than 70 acquisitions.

As the case of Starbucks illustrates, even well-intentioned workplaces struggle to live up to their values. The Pope reminds us of our important responsibility to care about and for other human beings, even in the face of economic exigencies. And Jim Goodnight, Bob Chapman, and the Gallup data illustrate the principle that caring for people is compatible with being successful in competitive business environments.

(This post was originally published on Fortune on September 28, 2015)

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Carly Fiorina: Why you shouldn’t underestimate her

While pundits endlessly debate Carly Fiorina’s record at Hewlett-Packard — how much of the stock price decline during her tenure was her fault; was the Compaq merger, about to be undone in the impending split of the company, smart or dumb; how much did H-P really increase its sales and inventiveness during her reign, and so forth — there’s one thing no one should question: Fiorina has mastered some important lessons in leadership, lessons relevant for anyone.

Here are four things that anyone, running for president or not, can and should do:

Number one, tell your story. If you won’t, no one else will. By telling your story repeatedly, you can construct your own narrative. When Fiorina was fired and left H-P, The New York Times reported that her exit brought her $42 million. That figure soon became widely reported in the media as a $42 million severance. Fiorina vigorously rebutted the amount, noting that it included restricted stock she had earned, pension benefits and stock options, compensation that would not normally be considered “severance.”

Moreover, even before the current campaign, Fiorina wrote an autobiography to provide her account of her many successes as a business executive. Of course, she cherry-picked data to present her track record in the most favorable light. But that is something everyone can and should do: Highlight those parts of job performance where you shine, and ignore or downplay weak results.

Second, Fiorina has and is building a brand — a public presence. Recognizable brands have real economic value. Sarah Palin went from being mayor of a small town in Alaska to being governor to taking in a reported $12 million by becoming a well-known public figure. Running for president, even if unsuccessful, transforms people into public figures often widely sought on the speaking circuit, so in many ways, they win even if they lose. Everyone can and should build a public brand because no one is going to get picked for a job, promoted, or be accorded other opportunities if others don’t know them. So build your own visibility — by blogging, publishing articles, giving talks, becoming active in civic organizations. Visibility doesn’t correlate perfectly with earnings capacity or being hired for a great job, but it helps.

Third, don’t worry about being liked — Fiorina doesn’t. In an oft-told story of being subjected to sexist comments — including being called a token bimbo — Fiorina decided she would not tolerate being disrespected, regardless of the consequences. Much like Condoleezza Rice, who told one protégé, “people may oppose you, but when they realize you can hurt them, they’ll join your side,” Fiorina is more concerned with being feared and respected. In that choice, Fiorina is following the wisdom of Machiavelli, who noted that while it was wonderful to be feared and loved, if you had to choose one, being feared was safer than being loved.

The fourth lesson taken from watching Fiorina may be the most important. As we struggle with understanding what makes leaders “successful,” people frequently overlook the fact that success depends very much on how that term gets defined and measured. In business and in politics, the interests of leaders and their organizations don’t perfectly coincide.

At Hewlett-Packard, Fiorina was well-known for not tolerating dissent or disagreement, particularly on important strategic issues. As someone quite senior in H-P’s strategy group told me, disagreeing with Fiorina in a meeting was a reasonably sure path out the door. By not brooking dissent, Fiorina ensured that few opponents would be around to challenge her power. But disagreement often surfaces different perspectives that result in better decisions. The famous business leader Alfred P. Sloan noted that if everyone was in agreement, the discussion should be postponed until people could ascertain the weaknesses in the proposed choice.

Self-promotion, brand-building, worrying more about being respected or even feared, and taking care of oneself seem inconsistent with the typical leadership prescriptions — and they are.

As I note in “Leadership BS,” discussions of leadership often focus more on aspirations than realities, on what we would like to believe rather than what is, and on inspiration rather than social science. No wonder so many people suffer career derailments. Fiorina has a pragmatic view of what it takes to be successful. And that’s one reason she should not be underestimated, regardless of the opinions about her career at H-P.

(This post was originally published on CNN on September 18, 2015)

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How the Trump bubble might burst

At breakfast, Steve Westly, employee No. 22 at eBay, former California state controller, and a candidate for governor in the 2018 race, explained that his political campaign was like growing a startup from scratch to $30 million in about 18 months, with all the scaling up and operational issues such growth entailed. The challenge would be many orders of magnitude larger in a national presidential campaign.

Campaign organizations matter because they affect election outcomes. A scientific study published in Public Opinion Quarterly examined why President Obama’s 2008 presidential campaign was successful. The conclusion: the enormous financial resources available to the campaign organization permitted it to establish more than 700 field offices. Examining the county-level vote in 11 battleground states, the study concluded that the counties where there was a field office saw a disproportionate increase in the Democratic vote. “This field office-induced vote increase was large enough to flip three battleground states from Republican to Democratic.” The bottom line: to wage a successful campaign, you must be able to micro-target voters and get your supporters to the polls—or to caucuses, in the case of states like Iowa.

This raises the following question: can the Trump campaign build the organization necessary to be successful? Maybe not. Trump is a consummate marketer, brand builder, dealmaker, and a master at public relations. Organization building and operations call for a different set of skills.

Trump’s campaign organization, even at this early stage, is suffering from internal conflict. “It turns out that, inside a campaign that’s been built on attacking seemingly anyone and everyone, the staff has now turned to attacking each other,” reported New York magazine. There’s been turnover. Roger Stone, the campaign’s primary political strategist, quit (or was fired, according to Trump) after Trump’s verbal attack on Fox News’ Megyn Kelly.

Trump’s casinos, some of which went into bankruptcy, faced operational and guest service issues. When Caesar’s former CEO and current chairman Gary Loveman was still a Harvard Business School professor providing advice to Harrah’s, the company he would enter in 1998 as COO, he stayed at a Trump facility in Atlantic City. As he described to my class, while he waited some 45 minutes in line to check in, he was panhandled by a homeless person who was “working” the check-in line. As Loveman contemplated the opportunity to gain a competitive advantage in the casino industry by providing a better service experience, he reflected, “This wasn’t the Four Seasons. It shouldn’t be too hard to do better than this.”

Trump’s situation as an entrepreneur who is better at creating and marketing something than operating it isn’t all that unusual. After all, many founders are thrown out of their startups because of their inability to scale operations, delegate, and turn a product vision into a sustainable, successful business. In an article in Inc, Noam Wasserman, a Harvard Business School professor who studies founder succession, noted, “the percentage of founders that stay on with the company for extended periods of time as the CEO are very low.” An article from Entrepreneur noted that in addition to Steve Jobs, other founders pushed out of their companies included Noah Glass of Twitter, Jerry Yang of Yahoo, Martin Eberhard of Tesla, Eduardo Saverin, the Facebook co-founder, and the two founders of Research in Motion, the company behind the BlackBerry. Some VCs will privately admit that about 80% of founders will be gone from their companies within the first few rounds of fundraising, and those that remain for years are the exception rather than the rule.

In VC-backed companies, and certainly in publicly traded ones, there is at least some pressure to build a bench of strong operating executives and an infrastructure that can support growth and operations. And some founders get the message.

Consider the case of Steve Jobs. As Ed Catmull, co-founder of Pixar and a co-leader of Disney’s animation division since Pixar was acquired, noted in an interview with Fortune, there is a public perception of “bad boy Steve,” a person noted for being hard on others. Catmull commented, “About 15 years ago he [Jobs] figured out things and we saw the change in the person. He became very empathic and changed the way he worked with people. And after that point everybody that was with Steve stayed with him for the rest of his life. It was the changed Steve that made Apple great, not that guy.” Jobs brought in then-Yale business school dean Joel Podolny to build Apple University to develop the Apple culture and way of managing, and he hired Tim Cook to be his partner in running operations and eventually to take over the company.

Few organizations that succeed over long periods of time and surmount the challenges of scaling infrastructure and talent are one-person shows. Mark Zuckerberg of Facebook brought in Sheryl Sandberg, and Larry Ellison, after forcing out talented executives such as Ray Lane, now has Mark Hurd and Safra Catz overseeing the day-to-day business. The Obama campaign had a wealth of organizational and analytical talent, which is one reason, beyond the candidate, that Obama won the election.

I cannot predict when the organizational deficiencies of Trump’s one-person show and difficult personality will catch up with his campaign. But considering the requirements of mounting a successful presidential effort, I am sure, unless Trump changes a lot, issues of personnel and campaign operations will eventually do him in.

(This post was originally published on Fortune on September 1, 2015)

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3 lessons from the Amazon takedown

The recent New York Times profile of Amazon.com describing its relentless, high-pressure, measurement-obsessed culture is scarcely the first to depict what it is like to work there, either in its warehouses or its offices. While CEO Jeff Bezos has denied (no surprise) the accuracy of the reporting, a quick Web search reveals numerous articles painting a picture remarkably consistent with this most recent portrayal: Amazon is a tough place to work, Bezos is famous for his temper and put-downs of employees, and many people who cannot stand the stress and pressure leave.

There are numerous lessons to be gained from considering Amazon, its culture, and its success—lessons that pertain to many other workplaces. Here are three:

The leaders we admire aren’t always that admirable

In 2014, Jeff Bezos was ranked as the Best-Performing CEO in the World by the Harvard Business Review. In 2015, Amazon ranked No. 4 on Fortune’s list of the World’s Most Admired Companies, and in 2014 it was No. 2. In 2013, Bezos topped Vanity Fair’s list of leading innovators. Amazon and its founder are widely admired, yet the place seems like a hellhole. What gives?

Simply put, dimensions of leader and company performance are poorly correlated. For instance, Fortune’s list of most admired companies, which reflects the size, financial performance, and stock appreciation of the enterprises, has only four entries in common with its 100 Best Companies to Work For list. And only one of Fortune’s most admired companies also appears on the 2014 Hay Group’s Best Companies for Leadership list. (Hay also works with Fortune to create the Most Admired Companies list.)

As I note in a forthcoming book, decades of leadership writing, blogging, TED talks, and a multitude of leadership development speeches and workshops have clearly failed to improve job satisfaction or employee engagement, or the success and job tenure of leaders. One reason for that failure: The prescriptions for what leaders should do frequently depart from what many high-profile, venerated, successful leaders—people like Jeff Bezos—actually do. This leaves observers cynical from the hypocrisy of advice based neither on reality nor social science, and confused about whether to follow what they’ve been told or what they see around them as being effective.

In one sense these discrepancies shouldn’t be surprising. There are multiple paths to success, and what makes a company a great place to work is not necessarily what is going to produce the most visible, outsized financial gains. On the other hand, the fact that some of the most admired companies are well-known as harsh workplaces says something about the fact that taking care of people is not much of a priority in today’s world. Which leads to the second lesson.

Economic performance and costs trump employee well-being

Stress induced by long work hours, the insecurity that derives from having one’s job continually at risk, and work-family conflict such as that detailed in the Times account, induces unhealthy behaviors and produces negative health consequences. A recent study estimated that there were approximately 120,000 excess deaths and $190 billion in additional health care costs annually in the U.S. due to work-related stress.

But in today’s business world, there seems to be precious little concern about employees’ well-being. Companies have steadfastly cut health insurance benefits, pensions, and jobs—systematically transferring risks and costs to their workforces, even as they increase the use of contractors who receive no benefits at all.

This current workplace situation implies the need for a broad movement in our communities and society to make human well-being important. As near as I can determine from talking to people in industries ranging from mining to high technology, employees’ lives matter little in the unrelenting drive for large market capitalizations and competitive dominance. Everyone is dispensable, and their well-being a luxury, except for those at the very top.

People participate in and rationalize their own subjugation

And then there’s the third lesson. For Amazon and similar organizations to survive, they need employees—a lot of employees—to fuel growth and refresh high turnover. But given that Amazon’s workplace culture is scarcely a secret, how is it successful in attracting and even retaining so many people?

Part of the answer is simple economic necessity. As noted in The Guardian, Amazon intentionally locates warehouses in economically depressed areas where people will a) work for less money and b) be less fussy about their working conditions, in part because they have few options.

But there are some important psychological principles at play. Commitment begins with choice, and even stronger commitment comes from the choice being irrevocable. Having chosen to join Amazon, employees have two alternatives if confronted with a demanding, unpleasant environment: rationalize their working conditions as not being that bad or even desirable, or admit to having made a mistake. Some of the oldest experiments in cognitive dissonance demonstrate that they’ll settle on the former: When people face unpleasant circumstances they’ve chosen for insufficient reward, they adjust their attitudes and perceptions to be consistent with their choices and behaviors.

Now combine commitment and consistency ideas with being part of some elite. After all, not everyone is chosen to work at Amazon and not everyone can tolerate the environment. Therefore, if someone survives or even thrives, that individual must be “special.” Survival at Amazon validates those who believe they are part of an elite workforce. That enhancement of the self provides incentives to join and remain, regardless of other aspects of the work environment.

And then there are the Amazon stock options. They incentivize employees to stay because they vest over time. Moreover, as the Times notes, if Amazon employees leave too soon, they have to repay relocation allowances and other perquisites. So there are a number financial reasons to stay—particularly if the stock price is rising. Shares of Amazon have climbed from about $38 in 2008 to more than $530 today.

Finally there is the addictive nature of the hard work and pressure so nicely described by the Times. Yes, “work addiction is a real mental health condition” that often “stems from a compulsive need to achieve status and success”—something that almost all people can be susceptible to.

In the end, “Amazonians” are not that different from other people in their psychological dynamics. Their company is just a more extreme case of what many other organizations regularly do. And most importantly, let’s locate the problem, if there is one, and its solution where it most appropriately belongs—not with a CEO who is greatly admired (and wealthy beyond measure) running a highly admired company, but with a society where money trumps human well-being and where any price, maybe even lives, is paid for status and success.

(This post was originally published on Fortune on August 18, 2015)

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