Jeffrey Pfeffer's Blog, page 5

Underpaying Employees Can Hurt a Company’s Bottom Line

There’s little evidence to indicate that raising wages will lead to job losses, and studies show that high-wage companies fare better than lower-wage ones.

Just this week, Seattle workers won a significant battle when the city raised its minimum wage to $15 an hour. Richmond, Calif, recently voted to hike theirs to $13 by 2018, while polls indicate San Francisco voters favor a $15 minimum. Even the CEO of McDonalds is somewhere between neutral and positive on raising the minimum wage.

People continue to argue that increasing the price of labor will reduce the number of jobs. However, the oft-cited study in the fast-food industry by economists David Card and Alan Krueger show small to no negative employment effects. And a comprehensive study of minimum wages in European countries concludes that there is “no general evidence that minimum wages reduced employment.” But even if higher minimum wages do cost jobs, should U.S. policymakers care? Maybe not.

Contrary to what you may think, the U.S. is actually a comparatively low-wage country. According to data from the Organisation for Economic Co-operation and Development, in 2013 the U.S. ranked 23rd out of 28 industrialized countries in terms of hourly earnings. These data suggest that the U.S. can easily afford to pay more and not jeopardize its competitive standing.

Moreover–and this is important–there is essentially no relationship between average hourly earnings and that country’s competitiveness as measured, for instance, by balance of trade statistics. In 2012, countries with high wages—such as Germany, the Netherlands, Sweden and Denmark, to take a few examples—ran a large balance of trade surpluses, while low-wage countries such as Portugal, Iceland and the U.S. ran a balance of trade deficits.

Nor, for that matter, do high-wage companies invariably suffer, as University of Colorado Denver management professor Wayne Cascio’s comparison of higher-wage (and benefits) Costco with lower-wage (and benefits) Sam’s Club so nicely illustrated. The issue is not what people cost, but what they can do, their innovativeness, and their productivity. Poorly paid people are more likely to quit, and turnover is costly. Underpaid people are unlikely to be engaged with their work or to exert discretionary effort. There is simply little reason to believe that raising wage rates will unduly harm country or company competitiveness.

But most fundamentally, policymakers need to ask what sort of economy they want to create: a) an economy with low-wage jobs—and maybe one with few environmental or safety protections as well—such as Bangladesh, or b) an economy with high-wage employment and working conditions that do not sicken and kill people—think Denmark or Singapore.

Some years ago I had the privilege of working with the Ministry of Manpower in Singapore. Although Singapore has no national minimum wage, the government has consistently pursued policies to raise not just the education and training levels of the workforce, but also income. Early in Singapore’s history, it was a hub for low-cost manufacturing. When low-wage manufacturers complained they would be forced to move their operations out of Singapore as wage levels rose, the government’s response was: learn to be more efficient and productive, or go. Why would the government want to encourage the preservation of low-wage work—a policy that would also retard the growth in national median income?

Missing from the minimum wage discussion are the effects of wages and other job conditions on people’s physical, psychological and economic well being. And what about the “social pollution” caused by companies who pay people so little that their food and health care must then be subsidized by the public? Many advanced industrialized economies have chosen a “high road” policy path that has produced higher incomes and, not coincidentally, much better health outcomes such as longer life expectancy and lower rates of infant mortality. Economics teaches us that trade-offs are inevitable. Trading off job quality for job quantity might be a poor choice.

(This post was originally published on TIME.com on June 6, 2014)

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Win at Workplace Conflict

No matter how sound or well-intentioned your ideas, there will always be people inside — and outside — your organization who are going to oppose you. Getting things done often means that you’re going to go head to head with people who have competing agendas. In my career studying organizational behavior, I’ve had the privilege of witnessing some incredibly effective conflict management techniques. I’ve distilled a few of them into some rules for dealing with organizational conflict:

1. Stay focused on the most essential objectives.

It’s easy to become aggravated by other people’s actions and forget what you were trying to achieve in the first place. Here we can learn a lesson from Rudy Crew, a former leader in the New York City and Miami-Dade County schools.

When Crew was verbally attacked by Representative Rafael Arza, a Florida legislator, who used one of the nastiest racial slurs to describe Crew, an African-American, Crew filed a complaint with the legislature but then essentially went on with his work. As he told me at the time, a significant fraction of the Miami schoolchildren were not reading at grade level. Responding to every nasty comment could become a full time job but, more importantly, would do nothing to improve the school district’s performance. Arza was eventually expelled from the legislature. Crew’s takeway? Figure out: “what does winning look like?” If the conflict were over and you found that you had won, what would that look like? Which leads to the second rule…

2. Don’t fight over things that don’t matter.

For a while, Dr. Laura Esserman, a breast cancer surgeon at the University of California, San Francisco (UCSF), and a leader of fundamental change in breast cancer treatment and research, was sponsoring a digital mammography van to serve poor women in San Francisco. The sponsorship was taking a lot of time and effort — she’d had trouble raising money for the service after the Komen Foundation had reneged on a pledge of support. Her department chair was worried about the department’s budget and why a department of surgery was running a radiology service. The hospital CFO was not interested in funding a mammography service that would generate unreimbursed care while the university was raising debt to build a new campus. And Esserman herself did not (and does not) believe that mammography was the way forward for improving breast cancer outcomes. After figuring out that sponsoring the mamo-van was absorbing disproportionate effort and creating unnecessary conflict with important people inside UCSF, Esserman offloaded the van. It smoothed the relationship with her boss and allowed her to focus on higher-leverage activities.

3. Build an empathetic understanding of others’ points of view.

As the previous example illustrates, sometimes people fight over personalities, but often they have a reason for being in conflict. It helps to understand what others’ objectives and measures are, which requires looking at the world through their eyes. Don’t presume evil or malevolent intent. For example, an ongoing struggle in the software industry has centered around when to release a product. Engineers often want to delay a product release in the pursuit of perfection, because the final product speaks to the quality of their work. Sales executives, on the other hand, are rewarded for generating revenue. It’s therefore in their best interest to sell first and fix second. Each is pursuing reasonable interests consistent with their rewards and professional training — not intentionally trying to be difficult.

4. Adhere to the old adage: keep your friends close, and your enemies closer.

The late President Lyndon Johnson had a difficult relationship with the always-dangerous (because he had secret files on everybody) FBI director, J. Edgar Hoover. When asked why he spent time talking to Hoover and massaging his ego, Johnson was quoted as saying: “It’s probably better to have him inside the tent pissing out, than outside the tent pissing in.” This is tough advice to follow, because people naturally like pleasant interactions and seek to avoid discomfort. Consequently, we tend to shun those with whom we’re having disagreements. Bad idea. You cannot know what others are thinking or doing if you don’t engage with them.

5. Use humor to defuse difficult situations.

When Ronald Reagan ran for president of the United States, he was (at the time) the oldest person to have ever been a candidate for that office. During the October 21, 1984 Kansas City debate with the democratic candidate, Walter Mondale, one of the questioners asked Reagan if he thought age would be an issue in the upcoming election. His reply? “I am not going to exploit, for political purposes, my opponent’s youth and inexperience.”

Let’s face it: you’re going to have conflict in the workplace. It’s unavoidable. But if you keep these simple — albeit difficult to act on – rules in mind, you’ll learn to navigate conflict more productively.

(This post was originally published on the HBR Blog Network on May 29, 2014)

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The Latest Executive Dustups Prove Relationships, Not Skills, Determine Success

The media firestorm over Jill Ambramson’s firing from the New York Times mostly ignores a simple but crucial lesson for people at any organizational level: Critical relationships have to work.

You have to make them work, not only to get things done in the web of interdependencies that characterize most jobs, but also to keep your position. Leaders need support—from their subordinates, customers, and most importantly, their bosses. When that support vanishes, so do their careers. This lesson holds true regardless of your job performance and track record.

And everyone, even chief executives and executive editors, has a boss. Insufficient attention to managing relationships with bosses, such as boards of directors, has cost many otherwise talented and successful people their jobs—witness, as one example, last summer’s ousting of Men’s Wearhouse founder and emblematic spokesperson, George Zimmer, from his role as chairman of the board.

Businesses—indeed, all organizations—are first and foremost about relationships. Gary Loveman arrived as chief operating officer at what was then Harrah’s Entertainment in 1998, having been hired by CEO Phil Satre. Loveman, who had come from Harvard Business School, not only had little credibility—as he has noted, being called “professor” in Las Vegas is seldom a compliment—but he also had people in senior roles in the organization who thought they should have the position he now occupied.

There are many natural human responses to such circumstances. One is to ignore your rivals and enemies. Another is to try to show everyone around you how smart you are and how much you deserve the job, in the hope that outstanding job performance will win them over. A third is to try to hire your own team and replace your enemies, a strategy that often can’t be implemented and has its own risks as you bring in other, inexperienced (albeit loyal) people to help you run a complex operation.

And then there is what Loveman did—identify the most critical relationships, those individuals crucial to both your success and the success of the business, and nurture those relationships. This entails asking people’s opinions, even if you don’t think their views are likely to be helpful. It means telling people what you are doing and why—sharing information with them so they never feel left out. Serving relationships means going to visit people in their offices, not yours, and in countless other ways showing others that you value them, their experience, and their expertise.

Making critical relationships work mostly entails two things that executives, particularly senior executives, seem to be particularly bad at doing. First, suppressing your ego sufficiently to bolster the self-esteem of others, and second, putting aside personal likes and dislikes—the relationship has to succeed regardless of what you think of the person.

There are clearly many dimensions to the Abramson story—a particular management style that may not be as well tolerated in a woman, lower pay compared with her male predecessor, internal rivalries, disagreements about hiring and strategy—but in the end, career disasters or survival mostly revolve around ensuring that critical relationships work and that you have the support of those around you, particularly, and most importantly, your boss (or bosses).

Working on relationships with people you may not like or even respect is difficult work, which is precisely why executive tenure is often so short. After a while, people forget how tenuous everyone’s hold on power is and get tired of the important but often mundane tasks of serving critical relationships.

The lesson: Each day figure out who is crucial for the success of you and your initiatives. Ascertain the agendas and personal predilections of the most important people in your part of the business. Then work tirelessly on those relationships. You and your projects will have a much greater chance of success.

(This post was originally published in Bloomberg/Businessweek on May 22, 2014)

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Do it, Japan Inc.: go against the most fundamental of human tendencies

The Wikipedia entry for Elon Musk, CEO of the $26 billion electric car company Tesla Motors, says it all: “Elon R. Musk is a South African-born Canadian-American business magnate, inventor and investor.” Musk, like Sergey Brin, co-founder of Google; Andrew Grove, co-founder and retired CEO of Intel; Winston Chen, who built Solectron into a large contract manufacturer before its acquisition by Flextronics; and scores of others illustrate precisely what is required to succeed in an increasingly globalized world: an eagerness to embrace talent regardless of its origins or accents, or, for that matter, gender, as the career of Sheryl Sandberg, chief operating officer of Facebook demonstrates.

Japanese society and Japanese companies have typically not comfortably assimilated foreigners, something that bodes ill for the future. That is because the ability to attract talent from all over the world, as Toronto professor Richard Florida argues in his book, “The Flight of the Creative Class,” is critical to competing successfully in a modern economy in which creative work is increasingly important. For instance, a study of all engineering and technology companies established in the United States between 1995 and 2005 found that there was at least one key immigrant on the founding team for more than one-quarter of these start-ups, which by 2005 had generated some 450,000 jobs and more than $52 billion in revenue. The secret to America’s innovation and the critical component of the success of companies all over the world has been to win the war for talent by attracting people with ideas and skills from wherever they can be found. Studies of creativity and decision-making reinforce what the data on entrepreneurship demonstrate: People who are different in their social backgrounds, education, and perspectives collectively make better decisions and also are more innovative. That is because combining different perspectives and discrepant information leads to more nuanced and sophisticated judgments.

Embracing diversity is psychologically difficult. Human beings are hard-wired to prefer those who are similar to us. Social psychological studies show that people are more willing to offer assistance to others with whom they share even incidental, trivial similarities such as birth dates or initials. Other research shows that one of the more effective ways to influence another is to mimic that individual’s speech patterns and body language, because we like those who remind us of ourselves. And yet other data suggest that we value more highly anything that we own simply because it is ours — a phenomenon called the endowment effect. So asking companies to hire and promote diverse others goes against some of the most fundamental human tendencies. Moreover, favoring those who are similar may have a basis in evolution, in that helping those more like us tends to ensure our own genetic material is more likely to survive.

But business is simply too competitive today for successful companies to foreclose using any source of talent or ideas. So when Hyundai, the Korean carmaker, decided to make a significant push to expand both its sales and its brand equity in the American automotive market, the company hired an American, John Krafcik, in 2008 to be CEO of Hyundai Motor America. In 2013, Krafcik was named Automotive Executive of the Year from DNV Business Assurance for his leadership in growing Hyundai’s business.

Similarly, it was an Argentinian, Sergio Nacach, who grew Kimberly-Clark’s business in the Andean region in South America (five countries that do not include Argentina), doubling sales and tripling profits in only four years. Now Nacach is in charge of the American company’s Latin American operations, a $4 billion paper products business whose biggest market is Brazil, where he is in the process of replicating success on an even larger scale.

Global companies require global workforces. The best way to ensure that hiring and promotion decisions do not unduly reflect the bias toward similarity is to make such decisions as objective and quantitative as possible. Newly emerging techniques relying on data analytics to evaluate people’s skills and personalities render this suggestion increasingly feasible.

Another recommendation would be to evaluate and reward senior leaders on their ability to attract, retain, and develop talent on a global basis — set goals for globalizing the talent pool just as a company would for any other important business objective.

And third, companies need to be welcoming to people from diverse backgrounds. That entails ensuring communications occur in a language that many people can write and speak. Many multinationals based in numerous countries are wrestling with establishing a common basis for communication, but this is a task worth undertaking regardless of apparent difficulty.

Globalization continues apace, as companies of all sizes and ages increasingly source and sell all over the world.  Succeeding in global markets requires a global workforce. The sooner Japanese companies embrace this vision, the better off they will be.

(This post was originally published in the Nikkei Asian Review on May 15, 2014)

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Lessons in Power from the Chris Christie Kerfuffle

There are numerous lessons from the Chris Christie “bridgegate” scandal for people in high-profile leadership roles. Here are a few.

First, power comes with a) visibility and b) envy. If you are working at a minimum wage job, few people are going to want to trade places with you and few will question your qualifications and performance. As you move up the hierarchy, both things will change. As Patricia Seamann, an executive coach in Switzerland, told me, by the time you get to be CEO (or governor of New Jersey), there will be many people who think they can do the job better than you and there will be many others who will feel free to criticize what you are doing. Some of those who think they can do your job better will be willing to wait, some won’t. Which leads to the related point: with great power comes great attention. So mistakes you can make in low-level roles become magnified once in positions of great power and prominence. The difference between bridgegate and the political paybacks being delivered every day all over the world in both the public and private sector is mostly the attention Christie has because of his status as a viable, maybe even leading, contender for the Republican presidential nomination in 2016.

The next lesson seems obvious but, given the media discussion, maybe it’s not. It is a lesson in two parts. First, basic learning theory suggests that behavior is a function of its consequences. That means leaders who don’t want mutiny and an absence of discipline make sure that people who misbehave are punished. My colleague Charles O’Reilly has written about the positive consequences of ritual firings in which people who don’t adhere to company values get dismissed. “Misbehavior” as defined by many, many leaders is manifest in how loyal their subordinates are. Payback is common, as a partner at a large human resources consulting firm when it was still a partnership learned. Having backed the wrong person in the election for head of the firm, the new head told him he had to go. There are stories that under the first Mayor Daley in Chicago, city services such as snow plowing were allocated by the loyalty of the neighborhood’s alderman. Allocating rewards to friend and punishing enemies is common in all domains and in most countries. This observation leads to the second point: just because people are piling on the bandwagon of criticism, don’t expect to not find instances of precisely the same behavior in their past—or maybe even their present and future. Hypocrisy is plentiful, and many of the people criticizing Chris Christie are guilty of similar acts of revenge, albeit possibly not ones that were so photogenic.

Which leads to the third and maybe the most important lesson: since those in power are going to be subjected to public scrutiny and the envy of others who seek power, since people will inevitably make mistakes (or have staff that do), and since then there will be piling-on by people who should read the gospels about not being too quick to judge others, the issue becomes how does the leader respond. We want apologies, because that brings the powerful down to earth. But the research suggests that apologies seldom work, mostly because that behavior signals weakness. Embarrassment is not a strong emotion. One account of Christie’s state of the state speech used terms such as “diminished” and noted a “lack of confidence.” A state senator called his performance “not as bold as usual.”

When leaders are embarrassed, lack confidence, and don’t seem bold—when they appear diminished—we would like to believe that this display of vulnerability will bring sympathy and assistance. But it won’t. People want to associate with winners—to bask in reflected glory. The minute Chris Christie appears “diminished” he will have fewer friends than before and his rivals will be emboldened.

All of which leads to a simple recommendation: people respond more positively to strength than to weakness, and the sooner Chris Christie goes back to being and doing what he was and has done, the sooner people will get beyond bridgegate and get behind him. It is, after all, somewhat appropriate on the 500th anniversary of the appearance of The Prince to recall Machiavelli’s advice on the advantages of being feared over loved if you can’t manage to do both at the same time.

(This post was originally published on the Harvard Business Review Blog Network on January 21, 2014)

Sorry, Kids, Corporate Power Hasn’t Changed

Today’s work world is increasingly populated by millennials with values presumably different from more-senior employees—more egalitarian, less competitive, more meritocratic, less accepting of hierarchy, and more tolerant of all forms of diversity. And if that’s true, surely companies are changing, which means we need new theories about power and influence to reflect these new cultural realities. Strategically expressing anger, building a power base, or eliminating rivals are considered outmoded ways of getting ahead. Certainly, the reasoning goes, in a world where reputations get created and transmitted quickly and anonymously through ubiquitous social networks, people who resort to such bad behavior will suffer swift retribution.

The typical Silicon Valley recruitment pitch, or something to this effect, reinforces this view: “We’re not political here. We’re young, cool, socially networked, hip, high-technology people focused on building and selling great products. We’re family-friendly, have fewer management levels and less hierarchy, and make decisions collegially.”

Unfortunately there’s not much evidence of change but plenty of testimony to the contrary: the power struggles that beset the founding of Twitter, the turnover among CEOs at Hewlett-Packard, and the experiences of former Stanford MBA students working in the supposedly egalitarian world of high tech who have lost their jobs or been thrown out of companies they founded notwithstanding their intelligence and good job performance. Meanwhile, relationships with bosses still go a long way to predict people’s career success; organizational gossip lives on; and career derailment still awaits those who fail to master political dynamics.

In sum, the rules of power endure. First, hierarchy remains. Note that many companies such as Facebook and Google have gone public with dual classes of stock that allow the founders to retain the lion’s share of control, that shared CEO responsibilities are as rare as hens’ teeth, and that most bosses still demand loyalty and—more important—agreement from their subordinates.

Yes, I hear the stories about how companies want diverse opinions and diverse workforces, but the data belie this. Recent research shows that, despite the younger generation’s supposed egalitarian values and ready acceptance of workplace diversity, women from leading MBA programs continue to be offered lower salaries and to progress less rapidly in their careers than their male colleagues.

When status hierarchies exist, people naturally prefer to be at the top rather than the bottom. Rewards accrue disproportionately to those at the top—witness the recent pay kerfuffle over Larry Ellison’s package at Oracle. Control over one’s job also rises with hierarchical rank, and as British epidemiologist Sir Michael Marmot has found, job control is positively related to health and longevity. So there’s inevitably competition for promotions.

People like to think well of themselves and also want to be sure they triumph in contests for organizational survival. They tend to believe they are above average and seek to associate themselves as closely as possible with success—basking in the reflected glory of prosperous organizations and leaders. Therefore, what matters most in attracting allies and support is winning, or appearing to win and to be successful. Ends trump means. Witness among many other examples the veneration of Steve Jobs, even though the latter was well known for not being the nicest of bosses. And as for his truthfulness, just consider the phrase “reality distortion field,” as well as the FBI report released after his death that detailed his penchant for not telling the truth.

Unfortunately there is little evidence that self-enhancement is on the wane among the younger generations. If anything, their upbringing and the abundance of narcissism unearthed in a number of studies would suggest self-enhancement motivations exceeding those of their forbears. Illusions of superiority and control seem destined, then, to persist, contributing to the persistence of hierarchical organizational practices.

People are hard-wired to prefer others who are like themselves. Individuals offer jobs and provide help disproportionately to others with whom they share some form of social identity, such as school ties or shared work experiences. Thus, similarity remains a fundamental basis of interpersonal attraction, whether similarity in background, behaviors, or even seemingly irrelevant characteristics such as initials or birthdays. This preference for others similar to us helps produce the social sameness pervasive in the Silicon Valley and elsewhere, and shapes the contour of political networks and alliances.

Competition for status and advancement exists not only over time and across countries but also in virtually all species. In short, whether we like it or not, the rules of power abide largely unchanged. People who ignore these principles do so at their peril.

Note: A version of this article first appeared in the November issue of the Academy of Management Perspectives.

(This post was originally published in Bloomberg/Businessweek on November 15, 2013)

When Did Business School Become All About the Parties?

The discussions of the role of social class at Harvard Business School apply to all the leading business schools where, like the rest of the world, inequality in wealth has grown tremendously. But these discussions mostly miss the underlying cause of the problem: Students from all social backgrounds who gain admission to top schools all have the intellectual horsepower to effectively compete with their classmates in academics. Not all students have equal ability to compete when it comes to participating in and throwing lavish parties. Unfortunately, as the New York Times makes clear with its revelations about the ultra-wealthy members of the mysterious “Section X” at HBS, business school has become way more about the parties than about the course work, which has left poorer students at a social—and professional—disadvantage.

At Stanford, I think it began with FOAM (Friends of Arjay Miller, a former Ford Motor senior executive and dean of the school). Students in the top 10 percent of the class are called Arjay Miller Scholars. As sort of a joke, a group that originally called itself the 11 Percenters and then became known as FOAM began with a Tuesday-night bar scene—since there are no classes on Wednesday. Some students thought it would be cool to go to Las Vegas on a Wednesday during the winter quarter—hence, Vegas FOAM—with a Tuesday-night departure, and some people dressed in costumes. Then people began going to the Sundance Film Festival—a majority of the student body now make that trek. And, of course, there are the ski houses and ski weekends, the rental houses in tony Atherton and Woodside that some second-years live in, the various charity fundraising balls, and the numerous other events and trips that I can’t even keep track of.

Some years ago we had Scott McNealy, a Stanford B-school grad and co-founder and former chief executive officer of Sun Microsystems, telling the students at a View From The Top speaker event that business school was all about the networks you should and would build while in school. McNealy was just more explicit about what many students (and visitors to the school) have come to believe: Business school is about relationship-building and networking, which makes sociability and the financial wherewithal to throw—or at least attend—the omnipresent parties and trips critical.

Missing from the current discussion of the “class divide” at B-schools is: Why haven’t the problems of social class beset law schools, medical schools, and schools of engineering—professional schools that also have students from vastly different socioeconomic backgrounds who arrive at leading universities with unequal financial resources—particularly for extracurricular activities? As one former student told me when I suggested doing a study in which one would take head shots of students from various professional schools and see if random outsiders could do better than chance in picking out the B-school students: “Of course, you could sort them. The business school students are better looking, taller, and leverage their social skills more in their careers.”

Whether students should pay $50,000-plus annually in tuition for networking opportunities is, of course, an interesting economic calculation. Part of the reason the investments get made is the understanding that there are important, wealthy, and well-connected people in the leading schools. I believe the phrase is: “It’s a target-rich environment.”

To me, the more fundamental issue confronting business schools, which deans privately talk about, but—ever since Businessweek (and other publications) began ranking B-schools, making students “customers” with their ratings affecting business school prestige—few will actually do anything about, is what happened to the classes, to academic performance, to learning something?

If and when business schools become more like many of their professional school brethren—where status comes primarily from academic/professional accomplishment, not from who can hold the most liquor or put on the best show—not only will less wealthy students no longer be disadvantaged, but the culture will change for the better—from booze, cars, and houses to ideas.

That would be good for everyone involved in the business school enterprise.

(This post was originally published in Bloomberg/Businessweek on September 10, 2013)

Why Your Employees Need to Sign Their Work

Nothing keeps a person accountable like a signature. That John Hancock still carries the same weight it did back in 1776.

When the collapse of a Bangladesh garment factory killed over 1,100 workers last month—and eight more perished in a fire at another clothing factory soon after—astonishingly, the clothing retailers tied to these tragedies claimed to know nothing at all about where their merchandise is made or under what conditions. Of course, such ignorance (along with cost savings) is one of the virtues of contracting out: You can always deny knowing anything about what your contractors or subcontractors are doing.

These hideous stories reminded me of the venerable concept of “plausible deniability”—a term coined during the Kennedy administration by the CIA to describe the act of withholding information from senior officials so, when questioned or confronted about some action, the officials could credibly deny knowing anything because they had arranged to be intentionally kept in the dark. If this sounds like Children’s Place, Walmart, and the other manufacturers who act to ensure they don’t know what they would be embarrassed by knowing, it should. It’s also a term that describes the many bankers a few years ago who claimed ignorance about the conditions of their balance sheets or untoward risk-taking going on in their trading operations.

Legally Sound, Ethically Corrupt

The memorable lyric from the Fleetwood Mac song, “Tell me lies, tell me sweet little lies,” describes an ethical conundrum confronted by leaders of organizations of all sizes. The legal concept is simple: What you don’t know can’t be held against you. But what may be good for legal formalities is toxic for ethics. As an employer, you are morally (if not legally) accountable for what you pay–even if your employees are ostensibly on a contractor’s payroll. You are also morally responsible for the resources used and the waste produced by your operations—even if others shield you from directly seeing what you are causing.

Sign It

Some years ago when I wrote about plagiarism, a colleague in journalism told me that bylines helped combat fraud in his industry. I didn’t say it “completely prevented fraud” because, after all, nothing is foolproof, but it certainly helped. Similarly, when I had lunch with a senior banking executive in charge of risk management, she told me that when she made a presentation to the board of directors based on her employees’ work, she insisted that they sign their names to the work.

Sort of like bylines on articles or employee-signed presentations, the Dodd-Frank mandate that CEOs attest to financial statements, the requirement that politicians “approve this message” when they buy advertising, the very act of signing something creates a stronger psychological link between an individual’s identity and their work. This connection will make them take the work and its integrity much more seriously. As Soichiro Honda once said during a presentation, one of the reasons his cars were of higher quality was that when they broke down, people were cursing him and his name.

Lessons From Small Business

Family-owned businesses often have better reputations and higher quality because of this effect—what you put your name on, you will take more responsibility for. Perhaps if clothing executives had to attest that they knew and had approved the conditions of where their clothes were made, there would be fewer factory deaths. Every business can profit from this fundamental behavioral insight—have employees put their names on their work. Not only will they get credit for what they do, they certainly become more responsible for their actions.

(This post was originally published in Inc. on June 10, 2013)

What’s Wrong With Big Banks? Too Many Lost Customers

As the soap opera about whether Jamie Dimon will or will not continue to hold the chairman’s role at JPMorgan Chase continues, and while there is ongoing discussion of whether banks are too big to fail, what’s missing from the conversation is much sense of the real problem at big banks—a problem that partly drives the bizarre risk-taking in the first place. That problem is losing too many high-value customers. I was reminded of this when a friend who currently does business and personal banking with Comerica asked for a recommendation because he intends to move his accounts.

Alone at a Christmas party given by First Republic Bank for its clients a couple of years ago (my wife hates such events), I decided to do an informal, unscientific study of who was there and their banking experience. Total number of invited guests (about 1,000) included pretty much what you would expect for the Silicon Valley—lawyers, entrepreneurs, VCs, some doctors, scientists. I asked everyone I met that night three questions. First, how long they had been with First Republic? For the most part the answer was not very long, many just some months, and few more than two years. Second, where had they previously banked? Invariably the answer was Wells Fargo or Bank of America. And third, why had they left? Mostly it was small, irritating junk fees (for example, charging for an incoming wire) and the bank not having any branch phone numbers so clients could talk to people who knew them and their circumstances.

Doing a back-of-the-envelope calculation and conservatively assuming an average individual net worth of $10 million (this is low given that many people were on their second or third going-public startup), $10 billion in net worth was in the room that night. They were people who need investment advice, financial services for themselves and their businesses, trust services, and so forth—enough to start a decent and profitable bank just with this clientele. To make matters worse, not one person told me that, as they closed their accounts at their previous bank, anyone had contacted them to try to keep their business.

As the large, poorly run banks lose retail and business customers by the boatload—profitable customers at that—they need to do all sorts of weird and risky things to figure out how to make the money they used to make by providing straightforward banking services.

Not First Republic. After being bought by Merrill Lynch and then owned by the Bank of America following the financial meltdown, First Republic is back out on its own and publicly traded. Named No. 4 on the ABA Banking Journal’s list of top performing big banks in 2012 and No. 5 on Forbes’s 2013 listing of the best banks in America, First Republic has a truly tiny number of nonperforming loans and enviable returns on assets and equity. The bank provides a phone number for each branch and business cards for every branch employee (many of whom are long-tenured), so customers have people to call for help, free use of any ATM in the world (it rebates fees charged by others for accounts with a fairly small minimum balance), and few to none of the aggravating fees others charge. In other words, First Republic actually acts as if it cares about its customers and their experience.

This story illustrates a simple, but oft-forgotten message: If you take care of your customers, you won’t lose them, and you can therefore be profitable without any sort of financial or strategic gymnastics. This is a lesson delivered long ago by Bain’s Frederick F. Reichheld in his book, The Loyalty Effect. Sadly, it is a lesson lost on the many big banks that have forgotten the essence of banking.

(This post was originally published in BloombergBusinessweek on May 17, 2013)

Why Does Apple Care About Its Share Price?

Beset by critics and bedeviled by a declining stock price, Tim Cook, the company’s beleaguered chief executive, announced a big stock buyback and a substantial dividend increase. The market did not, however, respond by pushing up Apple’s stock price. But these actions do raise the question why Apple, which has too much cash on its books and is trying desperately to return cash to its shareholders, a company unlikely ever again to need to raise money in the public markets, should worry so much about its share price anyway?

And it’s not just Apple. CEOs are obsessed with their companies’ stock price. So companies faced with falling shares frequently announce share buybacks, even though research shows (pdf) that many such buybacks are not completely consummated. Other data suggest (pdf) that companies’ market timing is often quite off, with the businesses buying their shares at high prices and issuing them at low prices, a buy high, sell low strategy that benefits no one. Meanwhile, CEOs spend lots of time doing analyst presentations, conference calls, and the increasingly ubiquitous industry investor conferences where they sell—not their products or services to real customers, but their investment attractiveness to kibbutzers.

Although many people believe that total shareholder return (TSR), which consists of changes in stock price and dividend payouts, actually reflects something about the quality of the company’s management, I am far from convinced. Justin Fox, editorial director of the Harvard Business Review group, wrote a book, The Myth of the Rational Market, that pretty thoroughly debunked the idea that stock prices efficiently incorporate all available information instantaneously to provide accurate signals about a company’s (and by implication, its management’s) performance.

So Apple, with trailing 12-month sales of $164 billion in sales, $42 billion in profits, and $57 billion in operating cash flow, according to Yahoo!, dwarfs its high-tech competitors, not just the inept Hewlett-Packard and dying Dell, but Microsoft and Google, as well. Think about those numbers—Apple turns approximately a third of its sales into cash flow, a ratio that would be the envy not just of retailers but the of pharmaceutical industry, even as many bemoan the company’s performance.

As research (pdf) by Stanford accounting professors Ron Kasznik and Maureen McNichols has shown, stock price returns are related to whether companies either beat or fall short of expectations, and earnings surprises can be a more important determinant of a stock’s price than actual operating performance. Holding aside the perversity of this empirically demonstrated fact, as Toronto business school dean Roger Martin perceptively noted a while back, the current regime of “TSR above all else” seems to reward senior executives for, to use a sports analogy, “beating the spread.” Although few baseball managers or football coaches would hold their jobs long if they had horrible won-loss records but managed to exceed gruesomely low expectations, that is precisely what goes on in industry all the time. Moreover, because of the enormous and perverse incentives to game the system, virtually all professional sports have banned players and managers from participating in the expectations market, and when such bans fail, there are often prominent scandals. Meanwhile, in business, executives are encouraged or even compelled to play in an expectations market, with people being surprised when the leaders game the system.

Don’t get me wrong. I’m all for underpromising and overdelivering in jobs at all levels—it’s a nice way to build your managerial reputation. But we ought not to confuse image management with substantive performance. Some of the best-managed companies have share prices that don’t move much because their superior management and results are already reflected in their stock price. (Southwest Airlines is one example.) That fact does not negate their outstanding results in the least.

Put simply, executives should spend more time on product development and customers and less time worrying about something (their stock price) that is more outside their control. And in thinking about Apple or any other company, observers should focus more on profitability and cash flows. After all, that’s what Warren Buffet does.

(This post was originally published in BloombergBusinessweek on April 25, 2013)