Big Ideas Simply Explained - The Business Book

["LIGHTING THE FIRE 99 are rarely brave enough, or Challenging the status quo con\ufb01dent and committed enough in their ideas, to stake their careers African-American businessman African-American history, and reputations on risky game- John H. Johnson had the acumen literature, arts, and culture. changing innovations. The heroic to recognize the untapped It was a rapid success, reaching leader\u2019s strength lies not just in potential for publications aimed a circulation of 50,000 in only six their vision, but also in their at the African-American market. months. A second magazine, willingness to stand in the Excelling at high school despite Ebony, was founded in 1945, and spotlight when things go wrong. an impoverished upbringing, at its height reached a circulation Johnson won a scholarship to of more than 2 million. Thanks Corporate history is littered the University of Chicago and to his willingness to challenge with examples of failed products. supported himself with an of\ufb01ce the status quo, Johnson built Most businesses are therefore, by job at an insurance company. It a publishing empire that nature, risk averse. Even Apple has was while at work that he came included radio, television, and made mistakes\u2014and, again, its up with the idea for Negro Digest books. He was named in the example is instructive. Jobs may be (later renamed Black World), a Forbes 400 list of wealthy best remembered for transforming magazine that would feature Americans in 1982. the music, computer, and phone industries, but he\u2019ll also be world; Walt Disney\u2019s Laugh-O-Gram encourages long-term thinking. remembered as the poster boy for studio went bankrupt in 1923; Adopting such a strategy means embracing failure, and bouncing and Henry Ford had three failed that shareholders must be tolerant back from it. He has reigned over businesses before \ufb01nding success. of risk and uncertainty, and patient a long list of failures. The Pippen Game changers such as Albert with regard to returns; payback games console, for example, was Einstein (labeled \u201cslow\u201d by his periods may be long, and rewards unable to compete with the likes teachers) and billionaire Oprah dif\ufb01cult to measure. But if allowed of Sony\u2019s Playstation, and was Winfrey (told she was not \u201c\ufb01t to to \ufb02ourish, this longer-term approach quickly dropped. The Apple III be on screen\u201d) seem to defy the enables a business to build a computer suffered major design future mapped out for them. stronger brand, invest in research faults, and the\u00a0Lisa\u2014a computer and development, create better that would eventually provide the Long-term thinking business processes, and avoid basis for the iMac\u2014had poor sales. It is the ability to recover from taking (possibly damaging) actions The Apple Newton, a forerunner of failure, and maintain the courage to boost short-term pro\ufb01ts. today\u2019s smartphones, was a \ufb02op. and conviction to keep changing the game, that sets great leaders As Christensen\u2019s The These failures led to Jobs being apart from the rest. From a Innovator\u2019s Dilemma suggests, \ufb01red in 1985. In a speech to students strategic point of view, a focus game-changing leaders are not graduating from Stanford University on game-changing innovation bound by incremental change and in 2005, Jobs stated that the \u201cme-too\u201d thinking: they rewrite the dismissal triggered him to change You have to be willing terms of competition by embracing his own game: \u201cThe heaviness of to be misunderstood. unique ideas, and recognize that being successful was replaced by in a corporate world characterized the lightness of being a beginner Jeff Bezos by the mantra \u201cchange or die,\u201d again, less sure about everything. disrupting the status quo in your It freed me to enter one of the most US entrepreneur (1964\u2013) own favor puts you not just one creative periods of my life.\u201d step, but several steps ahead of the competition. In today\u2019s History is \ufb01lled with examples hypercompetitive markets, game- of trailblazers who stumbled before changing leaders do not simply \ufb01nding success. KFC chicken, outthink, outsmart, and invented by Harland David Sanders, outcompete their rivals\u2014they was rejected by more than 1,000 move the goalposts and rede\ufb01ne restaurants; R. C. Macy opened and the rules of the game. \u25a0 closed many stores before founding the largest department store in the","100 IN CONTEXT THE WORST FOCUS DISEASE THAT Success and failure AFFLICTS EXECUTIVES KEY DATES IS EGOTISM c.500 BCE The ancient Greeks coin the term \u201chubris\u201d to HUBRIS AND NEMESIS describe a form of pride that loses touch with reality and leads to \u201cnemesis\u201d\u2014a fatal retribution or downfall. 2001 Kenneth Lay, CEO of Enron, sends employees an email saying \u201cour performance has never been stronger.\u201d Four months later, Enron \ufb01les for bankruptcy. 2002 US activist Herbert London claims that hubris is as great a danger in the 21st century as in ancient Greece. 2009 Jim Collins identi\ufb01es \ufb01ve stages of corporate decline in How the Mighty Fall. E ven iconic companies can falter, fail, and become irrelevant. History repeatedly shows that successful corporate goliaths\u2014such as Swissair, Enron, and Lehman Brothers\u2014can fall from greatness. The list of possible causes is long and includes management complacency, poor marketing, poor products, strategic blindness, a weak economic environment, or simply bad luck. However, in many cases, paradoxically, success is the catalyst for failure. This is because success can lead to an overcon\ufb01dence that blinds business owners and managers to the real state of affairs. Meanwhile, they also start to","LIGHTING THE FIRE 101 See also: Reinventing and adapting 52\u201357 \u25a0 Beware the yes-men 74\u201375 \u25a0 Good and bad strategy 184\u201385 \u25a0 Avoiding complacency 194\u2013201 Success breeds Great success can lead to con\ufb01dence. overcon\ufb01dence. Greedy for more success, This can make managers Jim Collins managers force the blind to changes that begin to affect the Business consultant, author, company to overreach. company. and self-titled \u201cstudent of great companies\u201d Jim Collins Problems and pitfalls By the time management was born in the US in 1958. are swept aside as realizes there is a major Collins holds degrees in irrelevant or mere blips. problem... business administration and mathematical sciences from The worst ...it may be too late Stanford University, and disease that to save the company. several honorary doctoral af\ufb02icts executives degrees. He has worked is egotism. alongside senior executives and CEOs at corporations of believe their own hype. Internal company\u2019s directors and staff start all types\u2014from health care, warning signs may be present long to become overcon\ufb01dent. In highly education, and the arts, to before management\u2014buoyed by successful companies there is a religious organizations and seemingly unstoppable success\u2014 risk that staff members will government. His interest lies notices or chooses to do anything become arrogant, and will begin in the difference between about them. Hubris, a kind of blind to regard their success as a right good and great: how do pride, can shield people from or entitlement. Managers lose sight companies attain such seeing that a company is already on of the underlying factors that superior performance? the path to corporate catastrophe. created success in the \ufb01rst place, overestimating their own strengths In 1995 he founded a Five stages of decline and those of the business. management laboratory in Jim Collins identi\ufb01ed \ufb01ve stages Boulder, Colorado, to do of corporate decline. In stage 1, the If stage 1 is a feeling that \u201cwe\u2019re further research into business business is doing well, perhaps so great, we can do anything!\u201d excellence. His books have exceptionally well. Press coverage stage 2 is characterized by the sold more than 10 million is positive, \ufb01nances are good, and feeling that \u201cwe should do more!\u201d copies globally and have been morale is high. However, as a result Collins calls this stage the translated into 35 languages. of such success, during stage 1 the \u201cundisciplined pursuit of more\u201d: \ufb01rst warning sign appears\u2014the more sales, more stores, more Key works growth, more of everything. \u276f\u276f 1994\u00a0Built to Last\u00a0 2001\u00a0Good to Great: Why Some Companies Make the Leap \u2026 And Others Don\u2019t\u00a0 2009\u00a0How the Mighty Fall: And Why Some Companies Never Give In\u00a0","102 HUBRIS AND NEMESIS Continued management arrogance markets pick up, their business The best leaders never breeds indiscipline; decisions are brilliance will ensure that the presume they\u2019ve reached made out of greed and warning company regains market leadership. ultimate understanding signs are ignored. Companies at stage 2 make indisciplined leaps Now or never of all the factors that into areas where they have little Stage 3 represents the turning point. brought them success. competitive advantage; diversify Many companies reach this stage into areas in which they have no but manage to avert collapse. If Jim Collins expertise; or undertake ill-conceived management listens to the views of mergers and takeovers. The its staff (especially from the front bank and journalists asked complacency of stage 1 turns into lines, such as sales staff), heeds questions about its future, Fuld the overreaching of stage 2. shareholder concerns, and changes was reluctant to countenance any strategy in line with the changing capital infusion. Selling parts of the By stage 3, problems begin to reality, it is likely to recover. Andy bank was not an option he felt he mount, staff begins to question Grove famously pulled Intel back into could consider. Although Fuld management decisions, and pro\ufb01tability by pursuing this strategy. eventually revoked this decision, it disturbing data suggest things However, the same cannot be said was too late: the bank declared might not be all that they seem. for Lehman Brothers. In 2007, with bankruptcy on September 15, 2008. However, as Collins points out, it is its stock price at a record high, the possible to be in stage 3 of decline US investment bank ignored the The way in which management and not yet realize that it is early warning signs of collapse. Even responds to a crisis brought about happening. Anomalies in as cracks in the US housing market by success and accompanying performance at this stage tend to be became apparent, with subprime hubris is critical. Inevitably, \u201cband- explained away; any problems are mortgage defaults rising to a seven- aid\u201d solutions that do not address blamed on \u201cdif\ufb01cult trading year high, Lehman continued to the underlying problems rarely conditions.\u201d Management holds \ufb01rm expose itself to mortgage-backed succeed. Quick \ufb01xes based on the in the view that the company is \ufb01nancial products. Management, same overcon\ufb01dence that brought strong and nothing is fundamentally particularly the chief executive, crisis in the \ufb01rst place\u2014such as a wrong. They believe that once the Richard Fuld, were blinded by hubris bold but risky strategy, a hoped for and deep in denial. They pressed on blockbuster product, or a \u201cmarket- \u201cRogue trader\u201d J\u00e9r\u00f4me Kerviel with ill-conceived strategies and changing\u201d acquisition\u2014usually claimed his company, Soci\u00e9t\u00e9 G\u00e9n\u00e9rale quickly found themselves in stage 4. result in the company moving bank, was aware of his dangerously to stage 5: capitulation to large trades, but turned a blind eye Dealing with disaster irrelevance, or death. because they were focused on pro\ufb01ts. By stage 4 a company\u2019s dif\ufb01culties become undeniable\u2014even the Capitulating to irrelevance most headstrong and arrogant In stage 5, reality \ufb01nally hits home. manager has to acknowledge that Expensive failed strategies erode there are problems. The question \ufb01nancial strength and accumulated now is how to respond. Unfortunately, setbacks damage the individual as the Lehman example shows, spirits trying to repair the damage. acknowledgment does not always Key managers generally leave the result in appropriate action. company at this stage, and the few customers that remain migrate to As the global credit crisis erupted in August 2007, Lehman\u2019s stock fell sharply. Having grown Lehman to become the fourth biggest bank on Wall Street, Fuld could not accept that it was time to adopt a new strategy. When uncertainty started to grip the","LIGHTING THE FIRE 103 US homeowners were prey to companies such as Lehman, which made big pro\ufb01ts in mortgage-backed securities in the 2000s. Lehman\u2019s managers ignored warnings of unrepayable mortgages. other brands. The once-mighty company has \ufb01nally fallen. A management buy out, merger, or takeover may save the business and protect some jobs, but the company is unlikely to ever recapture its former glory. Most, having slipped this far, survive (if they survive at all) as niche brands trading on past history. Return to glory Group. By 1997, Apple was months simpli\ufb01ed product line, sold through Decline is, of course, not inevitable from bankruptcy, as the business a limited number of outlets. He for all successful companies. Those continued to spiral out of control. stabilized Apple and allowed a that reach the later stages of A new board assembled and called return to its core values\u2014a focus corporate decline do so because for the return of one of the on innovation and quality\u2014that managers failed to heed the early cofounders\u2014Steve Jobs\u2014as CEO. later brought iconic products such warning signs of change or were Many expected him to respond as the iMac, iPod, iPhone, and iPad. irrationally sure of their ability to with a slew of new products, but \u201cbeat the odds.\u201d However, it is he did the opposite. He shrank the The pursuit of less possible to reach stage 4 and company to a size that re\ufb02ected Hubris is not the single cause of recover. According to Collins, its niche position, and cut back the business failure. Even the most this involves taking a calm, clear- desktop computer models from skilled management may fail when headed approach and reaching not 15 to one. He ended production of faced with turbulent markets, the for savior strategies, but for the printers, cut software development, collapse of a key supplier, or other basic core values and disciplines and moved production abroad. He factors beyond their control (the that made the organization great redesigned the company around a 2008 credit crunch, for example, in the \ufb01rst place. was the \ufb01nal blow for an already Success comprises in struggling Woolworths). Hubris Steve Jobs did just that at itself the seeds of its may occasionally be a factor in Apple. In the late 1980s and early corporate decline, but failure may 1990s, the company\u2019s management own decline. also result from poor business perceived Apple as vastly superior, Pierre de Coubertin practice or simply from bad luck. ignored increasing competition from PC manufacturers, and French educator (1863\u20131937) However, if overcon\ufb01dence expected customers to dismiss leads to an \u201cundisciplined pursuit quality and compatibility issues as of more,\u201d the remedy seems to be \u201cquirks.\u201d After the 1995 release of the disciplined pursuit of less\u2014a Microsoft\u2019s Windows 95 operating return to a company\u2019s strategic system, Apple fell into decline. roots. Ego, though, is a powerful Sales, pro\ufb01ts, and Apple\u2019s image thing, and humility is too rarely tumbled. BusinessWeek called it the tool managers reach for when \u201cthe fall of an American icon.\u201d The \ufb01ghting for survival. \u25a0 CEO, Gil Amelio, cut costs, reorganized the company, and added a new Internet Services","CULTURE IS THE WAY IN WHICH A GROUP OF PEOPLE SOLVES PROBLEMS ORGANIZATIONAL CULTURE","","106 ORGANIZATIONAL CULTURE IN CONTEXT Culture is \u201cthe way we do things around here.\u201d FOCUS Organizational structure Organizations Culture is Culture is are collections exempli\ufb01ed by a subject to KEY DATES variation. 1980 Geert Hofstede draws of different company\u2019s attention to the importance of cultures. language, organizational culture in his routines, book Culture\u2019s Consequences. and rituals. 1982 US business consultants Culture impacts every aspect Terrence Deal and Allan of business behavior. Kennedy argue that culture is the single most important Culture is a signi\ufb01cant determinant factor in determining success. of organizational success or failure. 1992 Harvard professor John Kotter claims that in an 11-year period, organizations with rich cultures see net income growth of 756 per cent, compared to one per cent in those with less-de\ufb01ned cultures. 2002 Watson Wyatt develops the Human Capital Index, demonstrating the economic value of business cultures that maintain good practice in human resources. O rganizations build a 1940s, human relations experts overlaps with societal culture. He sense of identity through began to consider organizations from identi\ufb01ed \ufb01ve dimensions of culture tradition, history, and a cultural point of view, drawing that in\ufb02uence business behavior: structure. This identity is kept alive inspiration from earlier sociological power distance, individualism vs. through the organization\u2019s culture: and anthropological work associated collectivism, uncertainty avoidance, its rituals, beliefs, legends, values, with groups and societies. However, masculinity vs. femininity, and long- meanings, norms, and language. the term \u201corganizational culture\u201d vs. short-term orientation. Corporate culture determines how only became part of the business \u201cthings are done around here.\u201d lexicon in the early 1980s, following Five cultural dimensions the publication of Culture\u2019s The \ufb01rst of Hofstede\u2019s dimensions\u2014 Culture provides a shared view Consequences by the Dutch cultural power distance\u2014refers to the of what an organization is (the psychologist and management distance in authority between intangibles) and what it has (the expert Geert Hofstede. manager and subordinates. Business tangibles). It is the \u201cstory\u201d of the cultures that have a high power organization: a narrative reinforced Looking closely at organizational distance tend to be rule-driven and through idiosyncratic languages and structure for the \ufb01rst time, Hofstede hierarchical (everyone \u201cknows their business-speci\ufb01c symbols. In the observed that it is shaped by and","LIGHTING THE FIRE 107 See also: Creativity and invention 72\u201373 \u25a0 Gods of management 76\u201377 \u25a0 Hubris and nemesis 100\u2013103 \u25a0 Avoid groupthink 114 \u25a0 Balancing long- versus short-termism 190\u201391 \u25a0 The learning organization 202\u201307 \u25a0 Creating an ethical culture 224\u201325 Hofstede\u2019s \ufb01ve cultural traits can be measured 120 across companies in different countries. Hofstede\u2019s research 100 allocated a score between 1 and 120 for each trait. For example, companies 80 in China received the highest score\u2014118\u2014for long-term orientation, 60 while companies in the USA had a much shorter-term focus, 40 receiving a score of 25 (in Russia, data for this trait was unavailable). 20 Brazil China 0 Russia USA Power Individualism Masculinity vs. Uncertainty Long-term vs. distance vs. collectivism femininity avoidance short-term orientation place\u201d). In Russia, for example, Masculinity and femininity, more uncertain and ambiguous employees have little access to Hofstede\u2019s third cultural dimension, situations. British organizations, for executives (power distance is high). are viewed differently from one example, are considered fairly at Conversely, in low power-distance organization to another. Some place ease with unstructured and cultures, such as many companies great emphasis on masculine traits unpredictable situations. in Australia, decision making is (such as status, assertiveness, and distributed more evenly throughout advancement), while others accord Hofstede\u2019s \ufb01fth dimension, long- the organization. feminine traits (such as humanism, vs. short-term orientation, is the cooperation, collegiality, and extent to which organizations Anthropologists have long nurturance) greater value. Italian privilege the short-term (pro\ufb01t) over theorized that collectivist cultures organizations, for example, tend to the long-term (value generation). \u276f\u276f control members through external have assertive, competitive cultures. societal pressure (shame), whereas The thing I have learned individualistic cultures control their The fourth of Hofstede\u2019s at IBM is that culture members more through internal dimensions is known as is everything. pressure (guilt). In his second uncertainty avoidance. This is the Louis V Gerstner Jr dimension, Hofstede proposed that extent to which workers feel this tendency toward collectivism threatened by ambiguous US businessman (1942\u2013) or individualism can be most situations. The more uncomfortable clearly seen in the difference people are with \u201cnot knowing\u201d how between Asian and US companies. to react in a certain scenario, the When problem-solving, US more rules and policies the businesses tend to look to the company will need to introduce to individual for a solution, whereas reduce that uncertainty. Companies Asian companies prefer to pose with a low degree of uncertainty the problem to a group. avoidance are likely to thrive in","108 ORGANIZATIONAL CULTURE Japanese businesses, for example, maintaining uni\ufb01ed business decisions, big and small, then they think very much in the long-term: cultures, whether operating across start to feel unloved and removed Toyota Motor Corporation has a multiple national or international from the business and its success.\u201d 100-year business plan. cultures. The challenge is to balance the promotion of \u201cone culture\u201d within Cultural bene\ufb01ts Why culture matters an organization against the Strong cultures give staff a sense Every organization\u2019s culture has in\ufb02uences of local cultures in of belonging, which in turn brings varying degrees of these different the external world. bene\ufb01ts, such as job satisfaction and dimensions. The best leaders know staff retention. At Nike, staff are which cultures operate within Companies with strong considered rookies if they have been different parts of their organization cultures, such as Nike and India\u2019s at the company for less than a (and within different parts of the Tata Motors, are intensely aware of decade. Moreover, culture de\ufb01nes world), and adjust their leadership their history and image. At Nike it \u201cthe rules of the game,\u201d simplifying style to suit\u2014valuing collective is not unusual for employees to priorities. Decision making is faster approaches, for example, when have the company\u2019s \u201cswoosh\u201d logo and easier if everyone understands dealing with Asian subsidiaries. tattooed on their body. At these company values, beliefs, and vision. businesses, culture encompasses Deeply embedded cultures also Today, organizational culture is an internalized sense of \u201cwho we improve the customer experience; if more important than ever before. are\u201d and \u201cwhat we stand for\u201d to staff believes in the product, they Increasingly competitive markets, such an extent that many of the will transfer this belief to customers. globalization, the prevalence of staff are able to recite corporate mergers, acquisitions, and alliances, maxims from memory. Similarly, Culture also protects an and new modes of working (such as the UK smoothie company Innocent organization from the whims of teleworking) require coordination has worked hard to create a charismatic leadership and the across vast numbers of staff and corporate culture based on \ufb01ckleness of fashion. A leader may huge geographic distances. communication. Dan Germain, the in\ufb02uence corporate culture, but a Hofstede\u2019s observations highlight brand\u2019s Head of Creative, explains: successful culture should endure the dif\ufb01culties that leaders face in \u201cif people aren\u2019t involved in all even when management changes. Visible aspects of culture, such as Features of culture an organization\u2019s rituals, stories and Strong organizational cultures can symbols, are only the tip of the iceberg. suffer from problems of groupthink Its beliefs, values, attitudes, and basic (everyone is too like-minded), assumptions are hidden but de\ufb01nitive. insularity (too narrow a vision), and arrogance (a belief that everything Symbols the company does is right). Culture can become a source of power and Ceremonies resistance; necessary change may Stories be resisted simply because \u201cthat\u2019s not the way we do things.\u201d Behaviors Terrence Deal and Allan Values Kennedy\u2019s 1982 publication Corporate Cultures outlined a range Assumptions of cultural phenomena. The authors suggested that culture is composed Attitudes of a framework of six interlocking elements: a company\u2019s history; its Beliefs values and beliefs; its rituals and ceremonies; its stories; the heroic Feelings \ufb01gures whose words and actions embody corporate values; and the cultural network.","secret sauce that made this place LIGHTING THE FIRE 109 great and allowed us to earn our clients\u2019 trust for 143 years ... I look Geert Hofstede around today and see virtually no trace of [that] culture.\u201d The letter Born in 1928 in Haarlem, the made headlines, and the company\u2019s Netherlands, Geert Hofstede shares fell by 3.4 percent. went to technical college then gained an MSc in mechanical The cultural network, devised by Culture in practice engineering from Delft Deal and Kennedy, refers to the informal The desire by leaders for some sort Technical University. He channels in a company\u2014storytellers, of standardized culture\u2014one that spent two years in military gossipers, and whisperers\u2014through is \ufb01xed, visible, and stable\u2014is service with the Dutch army, which culture is formed and passed on. understandable, but it likely to before going into industrial operate only in the imaginations of management and beginning Deal and Kennedy also de\ufb01ned four leaders than in the experiences of a PhD. In 1965, while studying types of organizational culture, employees. Companies rarely have part-time, he joined IBM and which emerge from the interplay one culture; they are usually a founded a personnel research between a company\u2019s attitude to combination of many, which department. His years at IBM risk, and the speed of feedback and overlap across departments, were to prove formative; the reward. In the tough-guy, \u201cmacho\u201d countries, and business units. The data and insight gleaned there culture, rapid feedback and reward task for leaders is to ensure that formed his research base and are combined with a high tolerance these cultures do not diverge too his \u201cbottom-up\u201d view of of risk, as in the advertising industry. far from core organizational values. organizations. Hofstede In the work-hard, play-hard culture became a professor of \u2014such as a sales company\u2014risk is Organizational culture is not management in 1973, and was less prevalent, but rapid feedback static. Every type of culture is named one of the world\u2019s most and reward produce a high-pressure dynamic and shifts, incrementally in\ufb02uential thinkers by the Wall environment. In the \u201cbet-your- and constantly, in response to Street Journal in 2008. The company,\u201d high-stakes culture, the internal and external pressure. ideas in his 1980 book Culture\u2019s risk attached to decisions is high, Managing culture, especially Consequences continue to but feedback on success or failure is through periods of deliberate inform global debates on slow. The oil industry is typical of the change, is one of the most dif\ufb01cult organizational culture. high-stakes culture. In a process business tasks a leader can face. culture, such as an insurance Key works company or government agency, The advice for leaders seeking feedback is slow and risks are low. to change culture is start small. 1980 Culture\u2019s Consequences Culture is slippery, and trying to 2010 Cultures and Leadership and culture are change everything at once often Organizations: Software interwoven and interdependent. If a results in failure. Bold new mission of the Mind leader does not protect or rede\ufb01ne statements, big of\ufb01ce redesigns, or the core values that made a exhortations that \u201cworking here is Culture eats strategy company successful, culture can fun\u201d rarely have the desired impact. for breakfast. erode. In 2012, a Goldman Sachs Cultural change requires long-term employee bemoaned the investment investment in employees, not in Peter Drucker bank\u2019s \u201ctoxic culture\u201d in an open buildings and branding. This is letter to The New York Times, because culture may be led from US management consultant claiming: \u201cthe culture was the the top, but it grows from the (1909\u20132005) bottom; it requires patient nurturing over time. Leaders must understand the dynamic of an organization\u2019s culture so that they can usefully draw on its strengths, rather than be overcome by its constraints. \u25a0","110 EMOTIONAL INTELLIGENCE IS THE INTERSECTION OF HEART AND HEAD DEVELOP EMOTIONAL INTELLIGENCE IN CONTEXT E motional intelligence your emotions; motivating yourself; (commonly abbreviated recognizing and understanding FOCUS as \u201cEQ\u201d, for emotional other people\u2019s emotions; and Emotional intelligence quotient) is the ability to perceive, managing relationships. control, and evaluate emotions, KEY DATES both in oneself and in others. The Goleman pinpoints high EQ as c.400 BCE The philosopher concept emerged from research a common trait among effective Plato says that all learning into social intelligence in the 1930s, business leaders. Without emotional has an emotional base. and from work in the 1970s on intelligence, he argues, a leader can different forms of intelligence. In have limitless energy and ideas, a 1930s US psychologist the 1990s, US psychologist Daniel perceptive and logical mind, and Edward Thorndike describes Goleman published the highly impressive quali\ufb01cations, but still be the concept of \u201csocial in\ufb02uential Emotional Intelligence: ineffective and uninspiring. intelligence\u201d\u2014the ability to Why it Can Matter More Than IQ. get along with other people. In the book he identi\ufb01ed the \ufb01ve Goleman cites Bob Mulholland, \u201cdomains\u201d of emotional intelligence: head of client relations at Merrill 1983 US psychologist Howard knowing your emotions; managing Lynch during the 9\/11 attacks, as a Gardner suggests that people leader with high EQ. After his staff have multiple intelligences, The most effective saw a plane hit the twin building including interpersonal, leaders are alike in one opposite their own, they began to musical, spatial-visual, panic\u2014some ran from window to and linguistic. crucial way: they all window, and others were paralyzed have a high degree of with fear. His \ufb01rst response was to 1990 US psychologists Peter emotional intelligence. \u201cunfreeze\u201d their panic by addressing Salovey and John Mayer Daniel Goleman each of their concerns individually. publish the \ufb01rst formal theory He then calmly told them that they of emotional intelligence. were all going to leave the building, via the stairs, and that they all had 1995 Daniel Goleman time to get out. He remained calm publishes Emotional and decisive, but did not minimize Intelligence: Why It Can people\u2019s emotional responses. All Matter More Than IQ, which his staff escaped without injury. becomes a global best seller. This was a rare and unusual context, but Mulholland\u2019s approach shows the value of EQ in managing staff in any form of volatile situation.","LIGHTING THE FIRE 111 See also: From entrepreneur to leader 46\u201347 \u25a0 Effective leadership 78\u201379 \u25a0 Organizing teams and talent 80\u201385 \u25a0 Avoiding complacency 194\u2013201 \u25a0 The learning organization 202\u201307 \u25a0 Kaizen 302\u201309 Emotional intelligence has \ufb01ve components: Self-awareness Self-regulation Motivation Empathy Social skills (the ability to (the ability (a desire to (the ability to (an ability to recognize and to control pursue goals understand \ufb01nd common understand with energy) other people\u2019s ground and emotions) impulses and build rapport) emotions) emotions) Goleman suggests that high EQ that the answer is both: inherent trigger points might be. This facilitates other essential leadership personality traits are important in procedure seeks to increase traits. For example, the ability to leadership, but EQ\u2014which grows emotional maturity. A 1999 study recognize accurately what another with age, experience, and self- showed that partners in a person is feeling (empathy) enables re\ufb02ectiveness\u2014is just as important. multinational consulting company one to manage that feeling and any who scored highly on EQ delivered behaviors that arise from it. Today, the development of EQ $1.2 million more pro\ufb01t than other lies at the heart of leadership partners. Other studies have shown What makes a good leader? coaching. New and aspiring leaders similar correlations between EQ One persistent debate within the are mentored by experienced ones; and effectiveness. Emotional business world is whether leaders together, they discuss past and balance, it seems, is a key factor are born or made. Goleman suggests future scenarios, various possible in commercial success. \u25a0 responses, and what the emotional Daniel Goleman Psychologist Daniel Goleman was his PhD, he traveled widely in born in 1946 in California, US. India and Sri Lanka, studying His parents were both college meditation and mindfulness. professors, and Goleman was He taught brie\ufb02y as a visiting president of his high school before lecturer at Harvard University receiving a scholarship to study before becoming a journalist at Amherst College, MA. During and author. His bestselling the course, he transferred to the book, Emotional Intelligence, University of California, Berkeley, has sold more than 5 million for a year, where he studied the copies in 40 languages. rituals of social interaction under sociologist Erving Goffman. Key works Goleman then took a doctorate 1995 Emotional Intelligence at Harvard University, where he 1998 What Makes a Leader? studied under David McClelland, 2011 Leadership: The Power best known for his theories on the of Emotional Intelligence drive to achieve. After completing","112 MANAGEMENT IS A PRACTICE WHERE ART, SCIENCE, AND CRAFT MEET MINTZBERG\u2019S MANAGEMENT ROLES IN CONTEXT Managers perform a multitude of roles, which can be divided into three categories... FOCUS Management roles ...Informational: ...Interpersonal: ...Decisional: Monitor Figurehead Entrepreneur KEY DATES Leader Disturbance 1949 French engineer and Disseminator Liaison business theorist Henri Fayol Spokesperson handler develops what becomes Resource allocator known as \u201cthe classical theory of management.\u201d This claims Negotiator that managers have \ufb01ve key functions: planning, Management is a blend of these often con\ufb02icting organizing, coordinating, roles, where art, science, and craft meet. commanding, and controlling. T he question \u201cWhat do discontinuity.\u201d He \ufb01nds them to 1930s Australian psychologist managers do?\u201d has vexed be strongly oriented to action, Elton Mayo publishes the experts, and many front- and disliking of re\ufb02ection. Hawthorne Studies, which of\ufb01ce staffs, since organizations ushers in an era of people- came into existence. In his 1975 Mintzberg suggests that there oriented management, rather paper \u201cThe Manager\u2019s Job,\u201d business are ten basic management roles, than managing according to guru Henry Mintzberg argues that which fall into three categories: business objectives alone. managers are not the re\ufb02ective, informational roles (managing systematic planners that people through the use of information); 1973 In The Nature of assume; instead, \u201ctheir activities are interpersonal (the management of Managerial Work, Henry characterized by brevity, variety, and people); and decisional (managing Mintzberg dismisses Fayol\u2019s decisions and action). claims about the management process as \u201cfolklore.\u201d","LIGHTING THE FIRE 113 See also: From entrepreneur to leader 46\u201347 \u25a0 Leading well 68\u201369 \u25a0 Gods of management 76\u201377 \u25a0 Learning from failure 164\u201365 \u25a0 Crisis management 188\u201389 \u25a0 Simplify processes 296\u201399 \u25a0 Kaizen 302\u201309 The informational role is possible personnel resources and decision Organizational effectiveness because, although managers do making (be a \u201cresource allocator\u201d), does not lie in that narrow- not know everything, they tend to encourage innovation (act as an know more than their subordinates. entrepreneur); and seek conciliation minded concept called \u201cScanning the environment\u201d and or paci\ufb01cation when the company rationality. It lies in the blend processing information is a key part is unexpectedly upset or of the manager\u2019s job. In this sense, transformed (be a \u201cnegotiator\u201d of clearheaded logic and Mintzberg claims, they are \u201cthe and \u201cdisturbance handler\u201d). powerful intuition. nerve center of the organizational Henry Mintzberg unit.\u201d They monitor what is going None of these roles is exclusive on, disseminate it to others in or privileged. Mintzberg claims that Mintzberg argues that the answer the companies, and act as a effective managers shift seamlessly to the question \u201cwhat do managers spokesperson for the business between these different functions do?\u201d is not simple. He concludes in the world at large. and know when each role is most that management is complex and appropriate for the given context. contradictory in its demands, Information is easily available relying as much on intuition, to the manager because the role Fact and \ufb01ction judgment, and intellectual agility connects him or her to many The traditional view held that as on technical skill, planning, people. In this sense, the manager management was a science, where and scienti\ufb01c logic. All these come plays an interpersonal role, which managers controlled a company\u2019s into play, he says, since a manager also involves acting as a \ufb01gurehead constituent parts\u2014people and designs, monitors, and develops the for the companies, providing machinery\u2014both of which acted ways in which things are done. \u25a0 leadership, and acting as a liaison in predictable and scienti\ufb01cally point between a large group of controllable ways. Mintzberg people. The group may include argues, however, that management subordinates, clients, business is a practice in which art, science, associates, suppliers and peers and craft meet. It involves sorting (managers of similar organizations). and processing of information, organization of systems and, The third role of management, most importantly, highly subjective, is decision making. Managers must nonscienti\ufb01c management of people. oversee \ufb01nancial, material, and Henry Mintzberg Mintzberg is the author or co- Although he has been teaching author of 15 books and more than since 1968, Mintzberg\u2019s interest Born on September 2, 1939 in 150 articles, and is best known for in organizations and managers Montreal, Canada, Henry his work on management and emerged during his \ufb01rst degree, Mintzberg\u2019s background was in managers. His Harvard Business when he spent time at the mechanical engineering. After Review\u00a0paper \u201cThe Manager\u2019s Canadian National Railway. graduating in 1968 from the Job: Folklore and Fact\u201d won\u00a0a His memoirs describe the Massachusetts Institute of McKinsey award in 1975. In 1997 catastrophic result of two Technology (MIT), US, he moved he was made an Of\ufb01cer of the boxcars colliding as an excellent to McGill University in Montreal, Order of Canada and of l\u2019Ordre metaphor for corporate mergers. where he joined the faculty of national du Quebec; and in 2000 management. He later took a he was awarded Distinguished Key works joint appointment as professor of Scholar of the Year by the strategy and management at Academy of Management. In 2013, 1973 The Nature of Managerial both McGill in Montreal and he was awarded the \ufb01rst honorary Work INSEAD, in Singapore and degree ever given by the Institut 1975 \u201cThe Manager\u2019s Job\u201d Fontainebleu, France. Mines-T\u00e9l\u00e9com in France. 2004 Managers not MBAs","114 A CAMEL IS A HORSE DESIGNED BY COMMITTEE AVOID GROUPTHINK IN CONTEXT T he desire to belong is a of assumptions, and ignores powerful human emotion. warnings. It begins to assume FOCUS We want to be accepted a position of moral superiority, Group dynamics and to be part of a group, which and fails to consider the ethical explains why individuals may set consequences of its actions. KEY DATES aside their opinions, remain silent 1948 US advertising guru in meetings, and nod in agreement The challenge for managers is Alex Osborn promotes the even when they disagree. This to recognize groupthink and take practice of \u201cbrainstorming\u201d\u2014 deterioration of individual \u201cmental action to prevent it. Encouraging generating ideas in groups, ef\ufb01ciency, reality testing, and moral dissent, assembling groups with without criticism. judgment\u201d\u00a0was outlined by US diverse demographics, and listening psychologist Irving Janis in 1972, to others\u2019 opinions before airing 1972 US research psychologist and is known as \u201cgroupthink.\u201d their views are means of doing so. \u25a0 Irving Janis publishes Victims of Groupthink. Groupthink is the idea that Swissair went into liquidation in 2001. concurring with others is the sole Once labeled \u201cthe \ufb02ying bank\u201d due to 2003 An investigation into overriding priority. It can become its pro\ufb01tability, the airline\u2019s executive the Columbia space-shuttle so strong that it precludes realistic structure displayed groupthink traits, explosion cites a culture where assessment and analysis. Insulated such as a sense of invulnerability. it was \u201cdif\ufb01cult for dissenting from contrary perspectives, groups opinions to percolate up.\u201d displaying groupthink self-justify their own conclusions. Irrational 2005 Robert Baron publishes decisions may be made based on the academic paper \u201cSo Right false or incomplete information. it\u2019s Wrong,\u201d claiming that groupthink tendencies may Irving noted that groups be con\ufb01ned to the early stages displayed a series of characteristics of the formation of a group. when groupthink gains hold. The group begins to feel invulnerable, 2006 Steve Wozniak, the which encourages extreme risk inventor of the \ufb01rst Apple taking. It collectively rationalizes computer, advises creative decisions, fails to check the reality thinkers: \u201cWork alone. Not on a committee. Not on a team.\u201d See also: The value of teams 70\u201371 \u25a0 Beware the yes-men 74\u201375 \u25a0 Hubris and nemesis 100\u201303 \u25a0 Organizational culture 104\u201309","LIGHTING THE FIRE 115 THE ART OF THINKING INDEPENDENTLY, TOGETHER THE VALUE OF DIVERSITY IN CONTEXT A s with most clich\u00e9s, Diversity management it is also a truism that isn\u2019t merely nice to have, FOCUS managers often tend Work-force diversity to recruit in their own image\u2014 it\u2019s a business must. males, for example, have a tendency KEY DATES to employ males. If left unchallenged, Daimler company statement 2005 Car maker Daimler such behavior can lead to companies (2005) targets 20 percent of staffed with homogenous clones\u2014 management roles be \ufb01lled by people from the same backgrounds can sti\ufb02e innovation and growth. women by 2020. It sets similar and with the same view of how In diverse teams, opinions are less targets for other diversity the business should be run. likely to go unchallenged. measures, such as age mix, socio-demographic mix, and In contrast, when organizations Diversity is not con\ufb01ned to nationality mix. actively pursue diversity\u2014by employee demographics. It might employing people from different simply involve creating cross- 2009 A survey analyzing cultures and socio-economic functional teams that incorporate the value of female backgrounds, and of different the views of people from across representation on corporate genders and ages\u2014the more a company\u2014the marketing team, boards ranks companies dynamic and stimulating they for example, might bene\ufb01t from the with more females higher are as places to work. insight of operations or \ufb01nance. But than male-dominated rivals. whatever the context, monochrome The case for diversity recruitment can lead to stasis\u2014 2012 A Harvard Business Greater diversity means greater diversity \ufb01ghts against it. \u25a0 Review article by business scope for creativity\u2014the more consultants Jack Zenger and varied are the sources of an Joseph Folkman \ufb01nds that organization\u2019s views, the more women are rated higher in 12 likely that out-of-the-box thinking of the 16 competencies that and problem solving will occur. de\ufb01ne outstanding leadership. Studies have shown that diversity can also combat groupthink, a 2013 New Italian law requires malaise in group dynamics that a third of a company\u2019s board members be women by 2015. See also: The value of teams 70\u201371 \u25a0 Beware the yes-men 74\u201375 \u25a0 Thinking outside the box 88\u201389 \u25a0 Organizational culture 104\u201309","MAKING WORK MANAGING FINANCES","MONEY","118 INTRODUCTION F inance has always been \ufb01nance, in other words, when business owners, particularly when seen as having two distinct they do not report loss-making the failing institution has been a functions: recording investments on the company\u2019s bank. Some \ufb01nancial commentators what has happened (\ufb01nancial balance sheet, thereby appearing wonder whether the balance has accounting) and helping businesses to boost pro\ufb01ts. This leads to an swung too far away from tradition. to make decisions about the future important question in relation to (management accounting). Today, modern business: who bears the Director involvement it has a third function: \ufb01nancial risk? Traditionally it was assumed When times are tough, directors strategy. This incorporates that the risk taker was the have to make dif\ufb01cult decisions judgments about risk, which some shareholder, because it is the about investment and dividends. companies (especially banks) shareholders who collectively own Usually the directors will have an have realized must play a larger the business. However, in Europe agreed policy in place\u2014perhaps part in \ufb01nancial decision-making. and the US especially, the desire that half the after-tax pro\ufb01t will be to encourage entrepreneurship has paid as dividends to shareholders, Understanding risk led to generous rules that reduce the while the other half will be retained Fundamental to an understanding extent to which losses are borne by to invest in future growth. But of \ufb01nancial strategy are the business owners. Since 2008, many during recessions it is wise to keep concepts of leverage and excess business collapses have proved more cash within the business, so risk. \u201cLeverage\u201d is a measurement expensive for customers, staff, directors may decide that dividends of the extent to which a business and suppliers, but less so for the should be cut. If the business also is dependent upon borrowings. cuts its investment plans, it can The higher the leverage, the greater The bonus mania which keep more cash in its current the level of risk. In good times, caused the recession could account, providing the liquidity to directors come under pressure to never have happened without survive dif\ufb01cult trading conditions. produce impressive pro\ufb01t growth, corrupted accounting rules. and one easy way to achieve it So who is responsible when is to borrow money and invest Nicholas Jones things go wrong? This depends on in the most pro\ufb01table parts of the the systems of accountability and business. However, if the economy UK \ufb01lm maker, ex-accountant governance within each company. turns downward, toward recession, Ideally, the directors of the business heavy borrowings turn into should be suf\ufb01ciently involved to an overwhelming burden. know when things start to go wrong, Leverage becomes toxic. and call for discussion of a change in strategy. If the directors are too The risk level generated hands-off, they may feel unable by leverage is worsened when to hold the CEO fully accountable businesses use off-balance-sheet when things do go wrong. Alert,","MAKING MONEY WORK 119 hands-on directors should also understanding the huge potential For \ufb01nancial accountants, the spot when rewards for staff are of the mass market. When looking traditional stance has long been so out-of-control as to threaten the at China today, the most exciting \u201cplaying by the rules.\u201d Integrity and pro\ufb01ts being made for shareholders opportunities are for products that adhering to accounting principles and for the future \ufb01nancial health would appeal to the hundreds of such as prudence and consistency of the business. \u201cPro\ufb01t before millions of potential consumers were seen as most important. More perks\u201d should be the mindset. who are workers, not managers. recently, career opportunities have arisen for accountants who are Important to good governance Using money wisely willing to be more creative. This is a willingness to ignore the herd. In management accounting, two way of thinking stems from the For example, if every US bank began factors are of particular importance: scope for \u201cmaking money from to expand into South America, a cash and costs. A management money,\u201d by lending the company\u2019s smart South Korean bank would accountant works hard to provide cash deposits to other companies at refuse to copy. However, in practice, accurate data on production costs, high rates of interest, or speculating this proves hard to do. Directors so that managers can make on future trends in exchange rates meet each other in the same clubs informed decisions about pricing, or commodity markets. In a world and conferences, and like to be part on outsourcing, and on which where a quicker, bigger buck can of the same pack. Nevertheless, products to back with marketing be made from money than from US investment guru Warren Buffett spending. Activity-based costing, manufacturing, playing by the has become one of the world\u2019s which provides the most complete rules may seem a poor choice. \u25a0 wealthiest men by ignoring the data on costs per unit, is the best herd instinct among investors. way to do this. When trading I am incredibly nervous that is poor, however, management we will implode in a wave The mass market accountants place their tightest Some modern boards of directors focus not on costs but on cash of accounting scandals. accept that if there is wisdom \ufb02ow, following the maxim that Sherron Watkins among crowds, there may be \u201ccash is king.\u201d This arises because even greater wisdom among staff. the worse the trading conditions, US executive, former vice president Henry Ford was one of the \ufb01rst the more that companies try to hold of Enron (1959\u2013) to realize that your workers are onto the cash they have\u2014making your customers, but it has taken it much harder to get paid if they a century for others to see the are your customers. The \ufb02ow of potential in this phrase. Not only cash dries up, so an early focus on is there value in drawing ideas from cash \ufb02ow makes sense: start your staff who care about the products own cash hoard before others they both produce and use, but begin trying to create their own. there is also strategic value in","120 IN CONTEXT DO NOT LET FOCUS YOURSELF BE Governance and ethics INVOLVED IN A FRAUDULENT KEY DATES BUSINESS 1978 US scholars Ross Watts and Jerold Zimmerman PLAY BY THE RULES write Towards a Positive Theory of the Determination of Accounting Standards. 1995 French professor Bernard Colasse claims that \u201cthere isn\u2019t any true result, but a result arranged using creative accounting techniques.\u201d 2001\u201302 Telecoms giant WorldCom overstates earnings by more than $3.8 billion. 2009 UK professor David Myddelton publishes Margins of Error in Accounting. 2012 Directors of US discount website Groupon identify a \u201cweakness\u201d in \ufb01nancial reporting, \ufb01ve months after becoming a public company. B usiness accountants have two roles: to record pro\ufb01ts and cash \ufb02ow and to provide tightly estimated data about costs to help make strategic decisions. The accountant\u2019s instinct is to be cautious and prudent\u2014costs and cash-out\ufb02ow \ufb01gures generally err on the high side, while revenues and cash in\ufb02ows tend to be on the low side. Any surprises should be positive. For example, in January 2009, Honda Motor Company warned that dramatic falls in sales worldwide\u2014due to the global downturn and the strong Yen\u2014 would force the company into a $3.7 billion loss in the fourth quarter of its \ufb01nancial year. However, the loss","MAKING MONEY WORK 121 See also: Hubris and nemesis 100\u201303 \u25a0 Pro\ufb01t before perks 124\u201325 \u25a0 Making money from money 128\u201329 \u25a0 Accountability and governance 130\u201331 \u25a0 Morality in business 222 \u25a0 Creating an ethical culture 224\u201327 \u25a0 The appeal of ethics 270 The rules set out ...but some rules The alternative to minimum standards... ignore morality\u2014 rules is a principled \u201cplaying by the rules\u201d approach based on a may not be enough. \u201ctrue and fair view\u201d of a company\u2019s accounts. Good companies and But without statutory accountants consider protection, individuals can rules plus morality. ignore principles and pro\ufb01t from immoral actions. turned out to be $3.3 billion, up with different \ufb01gures, even UK\u2019s newly formed Accounting demonstrating that the company though the underlying data that Standards Board, which in turn had erred on the side of caution. they are analyzing is the same. developed new accounting rules in an attempt to minimize the Accounting for pro\ufb01t In 1992, British banking analyst scope for \u201ccreative accounting.\u201d An accountant who follows safe Terry Smith published a book practices sleeps well, but may called Accounting for Growth. Today, most countries around the struggle to climb the corporate This publication set out the world follow the rules laid down by ladder. When the stock market is remarkable array of opportunities the International Financial Reporting full of optimism (a \u201cbull market\u201d), for publicly traded companies to Standards (IFRS). As a consequence, there are intense pressures within provide an arti\ufb01cial boost to their the income statements and balance companies to push the stated pro\ufb01t stated pro\ufb01t levels. The book had a sheets of companies in most level to the highest feasible point. huge impact, and in\ufb02uenced the countries follow the same format. \u276f\u276f This could be considered an odd statement, since pro\ufb01t might seem to be a simple matter of fact. However, the calculation of pro\ufb01t (which is effectively an estimation) is underpinned by a series of assumptions, and a company\u2019s stated pro\ufb01t is effectively a moveable \ufb01gure. Different accounting teams may come Accountants must decide how cautious they are going to be when reporting a company\u2019s \ufb01nancial status, since they may be under pressure to boost the stated level of pro\ufb01ts.","122 PLAY BY THE RULES Mark-to-market accounting is a risky method of valuation, since it of rules in accounting. He believes values a company\u2019s assets according to current market value. Historic in traditional accounting principles, cost valuation is a more reliable, and cautious, measure of value. because these supply the required \ufb02exibility for accountancy across During a stock-market If the stock market many different types of companies. boom, valuing a company\u2019s falls, the value of the He claims that the idea that there balance sheet will is a \u201csingle correct answer\u201d when assets and investments preparing a company\u2019s accounts is according to their shrink, leaving the nonsense. Nevertheless, this idea company in a lies behind the call for increased current market value vulnerable regulation. \u201cPeople want it to seem can lead to an position. as if we\u2019re doing something about overin\ufb02ated scandals,\u201d he says; they think that balance sheet. greater regulation will make a difference, \u201cbut it never does.\u201d Although the time frame for suggested that a more prudent Myddelton also believes that implementation is unclear, a widely approach would be to increase the directors should gain a \u201ctrue and supported plan is in place to merge level of provision\u201d against bad debts. fair view\u201d of their accounts, instead the IFRSwith the US\u2019s Generally Ultimately, the directors of HBOS of being forced to rely on a picture Accepted Accounting Principles had decided to take an optimistic produced by someone else\u2019s idea (GAAP) to provide globally view of the bank\u2019s lending. They of the accountancy rules. recognized accounting rules. chose to play beyond the rules. Some \u201ccreative accountancy\u201d Although the rules are becoming Cautious accounting practices stretch the \ufb02exibility clearer, important areas for debate Professor David Myddelton, a within the rules so far that they remain. These might be raised UK management scholar, argues can produce potentially misleading internally, in arguments between strongly against the expansion accounts. \u201cMark to market\u201d company accountants and directors; accounting, for example, values or the debate might be between Moral duty assets at their current market value. independent auditors and the This means that when the stock organization. When UK bank Halifax Julian Dunkerton is the founder market is booming, any investment Bank of Scotland (HBOS) collapsed and major shareholder in the (such as shares in another business) in 2008, the UK government bailed fashion business SuperGroup will also be booming. This boosts it with $32 (\u00a320) billion, before the plc, whose leading brand is the value of the company\u2019s balance bank was acquired by Lloyds Bank. the popular street-wear label In 2008 the gap between the bank\u2019s Superdry. Based in Britain, pro\ufb01t to the tax authorities. Not loans and its deposits was $341 but with business and outlets that Dunkerton wants to claim (\u00a3213) billion. The bank\u2019s auditor, worldwide, SuperGroup could the moral high ground\u2014in its KPMG, was heavily criticized over easily follow the lead set annual report, SuperGroup plc the HBOS collapse, although KPMG by other organizations and explains that \u201cWe recognize the had consistently raised warnings manipulate accounts to commercial value, as well as over the risks involved. When the minimize its tax liabilities. the moral duty, of consistently UK\u2019s regulator, the Financial operating with integrity, Services Authority, published a Instead, the business plays honesty, and a commitment to report on HBOS in 2012 it noted by the spirit of the tax rules, responsible and ethical business that KPMG had \u201cconsistently paying about 30 percent of its practices.\u201d Dunkerton has the wisdom to appreciate that acting responsibly can yield \ufb01nancial bene\ufb01ts, particularly in the long term.","MAKING MONEY WORK 123 Major accounting misconduct was unearthed by US company Caterpillar Inc. in a Chinese business it purchased in 2012. Irregularities included overstated pro\ufb01ts and falsi\ufb01ed stocks. sheet and may encourage it to 2013 Caterpillar said it was writing countries in which it operates have expand beyond its means. All it off $580 million from the value of no legislated cap on interest rates, takes is a fall in the stock market for ERA, thereby virtually admitting so the directors are playing by the this valuable shareholding to that the purchase was a complete rules. However, a report by the UK become worth considerably less. waste of money. Caterpillar then Citizens\u2019 Advice Bureau in 2013 Myddelton suggests that it is better accused the previous management stated that three out of four \u201cpayday to use \u201chistoric cost\u201d accounting at Siwei of deliberately creating loan\u201d customers struggle to repay. than \u201cmark to market,\u201d since this misleading accounts, but let the In contrast to the UK, countries provides a more stable set of \ufb01gures; matter drop in May 2013 when a such as France and the US have it values assets at their cost at time \ufb01nancial settlement was reached. rules that set maximum interest of purchase, minus any depreciation levels for consumer credit loans. that has taken place, rather than at In other circumstances, directors their current market value. can \ufb01nd solace in the rules. Ultimately, no set of rules can Operating in South Africa, Canada, substitute for ethical behavior The argument of rigid rules and Europe, short-term money- nor safeguard the system from a vs. looser-based principles will be lender Wonga.com sets its annual determined attempt to manipulate heard repeatedly when the merger percentage rate (APR) on \u201cpayday accounting \ufb01gures in a misleading talks between the US\u2019s rules-based loans\u201d as high as 5,800 percent. way. In the hands of principled GAAP system and the IFRS This is perfectly legal because the accountants, \ufb02exibility within the become serious. Even though the rules is useful; but if someone seeks IFRS is far more rule-based than Mark-to-market accounting to gain huge \ufb01nancial advantage its predecessors, it retains a greater is like crack. Don\u2019t do it. no matter what, that \ufb02exibility will reliance on principles than the Andrew Fastow enable him or her to do so, even US\u2019s GAAP system. if this entails acting immorally. US former Enron executive (1961\u2013) Ethical conduct Rules help to ensure that Whether rules based or rooted in companies operate at an acceptable principles, no accounting methods minimum standard. The argument can prevent a deliberate attempt revolves around where this standard by directors to mislead. In June lies, balanced as it is between useful 2012, for example, US construction- standards and costly overregulation. equipment giant Caterpillar Inc. Rules also encourage those with completed a $650-million purchase ethical principles to go further of Chinese company ERA Mining than the minimum. \u25a0 Machinery Ltd. and its wholly owned subsidiary Zhengzhou Siwei Mechanical and Electrical Equipment Manufacturing Co. This was part of Caterpillar\u2019s long-standing strategy of growth in China. Unfortunately, a series of black holes in Siwei\u2019s accounts soon emerged, including the discovery in November 2012 that the company did not hold the stock levels it had claimed. In January","124 EXECUTIVE OFFICERS MUST BE FREE FROM AVARICE PROFIT BEFORE PERKS IN CONTEXT In a public company, Multiple shareholders the shareholders cannot run a company, FOCUS are the owners of so they must employ Equity and performance executive of\ufb01cers to do the company. KEY DATES this for them. 1776 Adam Smith says that managers will not watch over ... so it is essential that It is not possible a business with the same managers can be trusted to oversee, in detail, vigilance as partners in a to act in the interests of everything that these private company would watch over their own. the company, not managers do\u2026 themselves. 1932 US professor Adolf Berle and US economist Executive of\ufb01cers must be free from avarice. Gardiner Means coin the phrase \u201cthe separation of I n an ideal business, directors Yet there is a risk that bosses can ownership and control.\u201d pursue the company\u2019s be dazzled by the wealth generated objectives without undue around them, and work toward 1967 Canadian-American consideration for personal gain. boosting personal gain instead economist J. K. Galbraith says Upon election to the board, they of the pro\ufb01ts due to shareholders. that shareholders no longer negotiate their salary and standard control the organizations perks, and from then on, their focus This situation, known as \u201cthe they legally own. is on the success of the business. divorce of ownership and control,\u201d \ufb01rst arose in the late 19th century, 2012 Larry Ellison of US computing corporation Oracle Inc. becomes the world\u2019s highest-remunerated CEO, when he receives $96.5 million in pay, shares, and perks.","MAKING MONEY WORK 125 See also: Beware the yes-men 74\u201375 \u25a0 Is money the motivator? 90\u201391 \u25a0 Organizational culture 104\u2013109 \u25a0 Avoid groupthink 114 \u25a0 Play by the rules 120\u201323 \u25a0 Accountability and governance 130\u201331 question corporate governance Leadership is a privilege mechanisms and executive pay. The to better the lives of others. shareholders of Barclays Bank, for It is not an opportunity to example, were stirred into taking action just before the bank\u2019s 2012 satisfy personal greed. AGM. They had discovered that in Mwai Kibaki the previous year, pro\ufb01ts had fallen by 3 percent, shares had dropped by Former President of Kenya (1931\u2013) 26 percent, but chief executive Bob Diamond was due to receive a bonus of $4.2 (\u00a32.7) million and total pay in excess of $10 (\u00a36.3) million. German mittelstand companies\u2014 Restricted ownership of family-owned and publicly owned such as Faber-Castell, a world-leading In private limited companies, the companies in Spain found that producer of pencils\u2014are usually family- situation is simpler. Since share family-owned companies performed owned. Directors of such \ufb01rms are more ownership is restricted (often within better, in terms of \ufb01nancial equity, likely to focus on long-term performance. a single family), the directors and than nonfamily companies of the the shareholders are usually the same size in the same industry. with the creation of large, public same people. In any case, it is Countries such as the UK and US, limited companies (plcs) that unusual for people to take advantage however, have a larger proportion allowed senior management more \ufb01nancially of those within their of plcs than many other countries. freedom to operate beyond effective own circle of family and friends. For After decades of noninterference, shareholder scrutiny. As long as the example, the problem of perks before shareholders are once again company pro\ufb01ts were satisfactory, pro\ufb01ts is rarely an issue in Germany, becoming interested in corporate directors were free to conduct their where the mittelstand (medium- governance and gain. \u25a0 business functions as they saw \ufb01t. sized) companies\u2014which are However, if a business enterprise mainly family companies\u2014are the comes to re\ufb02ect the aims of its dominant business model. A recent managers, will the business be study of the different performances focused on pro\ufb01t maximization (for its owners, the shareholders) or Fewer perks, more pro\ufb01ts on increasing the status, \ufb01nancial rewards, and power of its managers? Several companies have taken were told that the choice was positive steps to eliminate perks between a reduction in travel Personal interests as part of a cost-cutting strategy. expenses, or a cut in their Some directors act opportunistically; At the German company annual bonuses. they seem to be more interested T-systems International, an ICT in personal gain than in the subsidiary of Deutsche Telekom Since the 2008 \ufb01nancial company\u2019s \ufb01nancial well-being. AG, all workers must now \ufb02y in downturn, there has been an The banking crisis of 2008 led the coach class, regardless of the increase in the trend of shareholders of many companies to traveler\u2019s position within the organizations tightening their company, or the distance and purse strings. Even the mighty duration of their journey. The entertainment company Walt change from business- to Disney is phasing out executive economy-class travel is thought car allowances. Cost cutting and to have saved T-systems $1.5 eliminating perks puts greater million annually. Executives pressure on managers to boost their company\u2019s pro\ufb01tability.","126 IF WEALTH IS PLACED WHERE IT BEARS INTEREST, IT COMES BACK TO YOU REDOUBLED INVESTMENT AND DIVIDENDS IN CONTEXT A fter calculating the year\u2019s to shareholders that most businesses pro\ufb01t, a company\u2019s manage each year. It might amount FOCUS directors can choose to a 3 percent return on the sum Financial strategy whether to pay a dividend to invested, which would make it shareholders or reinvest the sum. comparable to the interest a saver KEY DATES A dividend is the annual payment might receive from a bank deposit. 1288 The \ufb01rst recorded share certi\ufb01cate is issued to the How much a company pays in dividends or Bishop of Vasteras in Sweden reinvests in the business is decided\u2026 by Stora Enso, a pulp and paper company. \u2026according to growth prospects and the health of the balance sheet. 17th century The Dutch East India Company issues shares, When growth is high, or the When the balance sheet is heralding the emergence of balance sheet is weak, strong, or growth is slowing, organized share trading. companies should retain cash companies should pay 1940 Peter Drucker writes on for reinvestment. dividends the need for businesses to balance short-term dividends to shareholders. and long-term reinvestment. 1961 Modigliani and Miller claim that paying or retaining dividends does not affect a business\u2019s long-term performance. Their seminal work is later disputed, with several studies showing that dividend increases boost a company\u2019s share price. Directors must balance the need for reinvestment in the business with shareholder returns.","MAKING MONEY WORK 127 See also: Accountability and governance 130\u201331 \u25a0 Who bears the risk? 138\u201345 John Kay \u25a0 Ignoring the herd 146\u201349 \u25a0 Pro\ufb01t versus cash \ufb02ow 152\u201353 Professor John Kay is a British The Dutch East India Company the company for reinvestment? The economist born in 1948. Best was the \ufb01rst public company to offer higher the company\u2019s growth known for his sceptical support shares. Investors put up money for prospects, the greater the incentive for free-market business voyages in return for a share of the to keep money within the business. behavior, he is a visiting pro\ufb01ts made from successful trips. Slow-growing companies should professor at the London School therefore pay out a high proportion of Economics and regular In 2012, for example, Honda Motor of pro\ufb01ts in dividends, whereas contributor to the Financial Company of Japan paid out just booming organizations are more Times. In 2012 he presented under half its $2.7 million pro\ufb01t in likely to keep the cash within the a detailed report to the UK dividends, leaving just over half to business. There is no safer source government on the stock reinvest in the company. of capital than retained pro\ufb01t: it does market, which emphasized not need to be repaid, nor does it that the normal purpose The \ufb01rst dividend payments require the payment of interest. of stock markets is not were made in the 17th century by Another factor to consider is the speculation, but to provide the Dutch East India Company, health of the company\u2019s \ufb01nances. companies with access to which was the world\u2019s \ufb01rst company If they are weak, pro\ufb01ts should be capital and to provide savers to issue shares in exchange for retained; only if the balance sheet with an opportunity to share capital. To encourage investors to is strong should generous dividends in economic growth. He also buy shares, a promise of an annual be paid to the shareholders. highlighted concern about payment (called a dividend) was excess dividend payouts. made. Between 1600 and 1800 the Dividend payouts must be Dutch East India Company paid considered carefully. In 2006, the Key works annual dividends worth around 18 Royal Bank of Scotland (RBS) percent of the value of the shares. declared a 25\u00a0percent increase in 1996 The Business of dividends to shareholders. Market Economics Invest or pay out? commentators praised the move, 2003 The Truth About Dividend payouts are entirely the gift with one team of analysts issuing Markets of the directors. Their decision is the note: \u201cThanks Fred [Goodwin, 2006 The Hare and the simple: what proportion of after-tax CEO of RBS], we love you.\u201d The Tortoise pro\ufb01t should be paid in dividends, dividend increase put money directly and what should be retained inside into the hands of the shareholders. Just two years later RBS was forced to ask shareholders to buy shares at 200p ($3.13) each, in order to raise \u00a312 ($18) billion. Six months later, those shares were worth only 65p ($1.03); three months after that, just 11p (\u00a217). The company\u2019s generosity in 2006 cost its shareholders dearly. In contrast, Apple did not pay dividends from its formation in 1977 until 2013. The directors, led by Steve Jobs, argued that shareholders would bene\ufb01t in the long term by allowing Apple to reinvest pro\ufb01ts. Only in 2013, with its growth rate beginning to fall, did the company announce dividend payouts, which it projected would average $30 billion a year until 2015. \u25a0","128 BORROW SHORT, LEND LONG MAKING MONEY FROM MONEY IN CONTEXT Companies with a good cash \ufb02ow and liquidity can make money from money, by\u2026 FOCUS Financial products \u2026investing in \ufb01nancial \u2026borrowing short- products such as term and lending to KEY DATES derivatives and customers long-term, c.1650 A rice market in futures contracts. Osaka, Japan issues the \ufb01rst like a bank. standardized futures contract, agreeing to prices for goods But this can prove to be a not yet delivered. money-losing exercise if there is a crash in markets or the economy. 1970s and 80s Deregulation gives banks and companies Making money from money is a risky, more ways to use money to short-term strategy. make money. S ome companies opt to they can gain access to a new 1973 US economists Fischer \u201cmake money from money.\u201d source of pro\ufb01t. The two terms that Black and Myron Scholes This means they use their exemplify the idea of making devise a mathematical formula cash assets not only to further the money from money are \u201ctreasury that appears to take the risk development of their products, but function\u201d and \u201dshadow banks.\u201d out of futures contracts. also to generate money through the \ufb01nancial markets. Some Hedge betting 1980s Large corporations companies believe that by making \u201cTreasury function\u201d is a term that begin to use derivatives to hedges (bets) on the \ufb02uctuations of emerged in the late 1970s in the make money from money. the currency markets, for example, wake of economic challenges, such 2007\u201308 Financial markets collapse around the world, threatening the continued existence of banks and banking-type ventures.","MAKING MONEY WORK 129 See also: Managing risk 40\u201341 \u25a0 Hubris and nemesis 100\u201303 \u25a0 Investment and Treasury in focus dividends 126\u201327 \u25a0 Who bears the risk? 138\u201345 \u25a0 Leverage and excess risk 150\u201351 For the decade prior to the to rise, but in fact it underwent a \ufb01nancial crisis of 2007\u201308, sharp devaluation and the company many companies began to use ended up losing $2.5 billion. short-term \ufb01nancing to fund As a result, some companies now long-term capital expenditure. spell out their opposition to making However, the \ufb01nancial crisis of money from money. Mining 2007\u201308 changed conditions multinational Rio Tinto, for example, dramatically, as banks stated in its 2013 annual report that collapsed or came close to its treasury \u201coperates as a service doing so. CEOs demanded to to the businesses of the Rio Tinto know where their company\u2019s group and not as a pro\ufb01t center.\u201d cash was, and the real-time cash position. Not all Many manufacturing companies, Shadow banks treasurers were able to such as Brazilian paper company Aracruz Other companies, however, have provide immediate answers, (known as Fibria since 2009), used the extended the treasury function to since some of their treasury function to make money, not just become a major, or even majority, investments were in local, manage it, from the 1980s onward. pro\ufb01t center for the business. manually operated, less-than- Companies such as US transparent systems. as quadrupled oil prices and conglomerate General Electric (GE) \u201cstag\ufb02ation\u201d (where in\ufb02ation and have developed this function into As a result, the treasury unemployment are both high at the an effective \u201cshadow bank.\u201d In function has moved to the same time). The idea emerged that 2007, GE\u2019s treasury function GE forefront for many companies, the goal of a company\u2019s treasury Capital held over $550 billon of with an increased need for function (the department responsible assets, making it larger than some transparency and up-to-the- for stewarding its \ufb01nances) should of America\u2019s top ten banks. It minute accountability. Boards be to achieve the optimum balance contributed 55 percent of GE\u2019s expect treasurers to be between liquidity and income from pro\ufb01ts, mainly by borrowing money prepared for the unexpected\u2014 the company\u2019s cash \ufb02ows. short-term to lend to customers such as by increasing cash over the long-term (\u201cborrowing reserves to reduce liquidity During the decades leading up short and lending long\u201d). GE was risk. However, this brings up a to the 2007\u201308 \ufb01nancial crisis, able to \ufb02ourish as a member of the new problem for the treasury large companies steadily added shadow banking system without function: if more cash is kept in greater responsibilities to the having to bear the regulatory reserve, how can this surplus treasury function. Often, these burdens of banks. By 2008, liquidity be used most began as ways to minimize risk, however, it was forced to ask to effectively to fund growth? but the opportunities for pro\ufb01table participate in the US government\u2019s trading became very tempting\u2014to banking sector bail-out program. The line separating the point that some companies took investment and speculation out contracts on \ufb01nancial hedges Making money from money that were worth more than all their carries serious risks, whether the is never bright and clear. export earnings. For example, in bets go wrong or not. This is Warren Buffett 2008, the Brazilian paper and pulp because the more pro\ufb01ts a company Aracruz used cash assets company\u2019s treasury generates, the US investor (1930\u2013) to make bets on currency futures less willing the board may be to (the value of currencies at a future invest in research and development date). Speci\ufb01cally, it bet that the for the future growth of the company. Brazilian currency would continue This way of making money from money is strongly correlated with short-termism in business. \u25a0","130 THE INTERESTS OF THE SHAREHOLDERS ARE OUR OWN ACCOUNTABILITY AND GOVERNANCE IN CONTEXT Good governance relies on... FOCUS ...proactive, ethical, ...clear, traceable ...alert board Executive control well-informed lines of members. directors. KEY DATES responsibility. 1981 Australian-born US management consultant Peter A ccountability is the Following a series of business Drucker suggests that chief obligation of an individual disasters (from Enron through to executives \u201chave not yet faced or organization to accept Lehman Brothers and numerous up to the fact that they responsibility (be accountable) banks), corporate governance has represent power\u2014and power for their actions. In business, become a major issue worldwide. has to be accountable.\u201d it is often used to trace chains To achieve effective accountability, of responsibility: staff may be directors need to make sure that 1991 The Cadbury Committee held to account for their actions roles and lines of authority are clear. is established in the UK to by those above them in the This makes it possible to trace the investigate scams, failures, organization\u2019s hierarchy; or higher cause of a mistake to its source\u2014 and accountability in corporate tiers of management may be held and attribute responsibility to governance. Its in\ufb02uential accountable for those below them. the right person or group. For report, Financial Aspects of Ultimately, the way the company is governance to work well, board Corporate Governance, is governed is the responsibility of the members must be well-informed, published a year later. directors; their governance should fully independent, and should work therefore be proactive and ethical. together for the long-term interests 2002 The US government\u2019s Sarbanes-Oxley Act sets out much stricter guidelines to govern accounting practices and the publication of previously con\ufb01dential data (such as operational business risks).","MAKING MONEY WORK 131 See also: Pro\ufb01t before perks 124\u201325 \u25a0 Who bears the risk? 138\u201345 \u25a0 Pro\ufb01t versus Jamsetji Tata cash \ufb02ow 152\u201353 \u25a0 Balancing long- versus short-termism 190\u201391 Born on March 3, 1839 in Companies that bury their heads limited or no understanding of the South Gujarat, India, Jamsetji in the sand\u2014like the proverbial ostrich\u2014 risks their company faced. This Tata might have appeared an may be reluctant to be held accountable suggested a \ufb02aw in the ability of the unlikely candidate to be the for actions and decisions, with damaging board to hold executives to account. founder of a business that consequences for business ethics. would grow to be one of the Most of the time, in most largest conglomerates in the of the business and its owners\u2014 companies, executives make sound world. Tata followed his the shareholders. Nonexecutive decisions that require minimum father\u2014who had broken the directors have an important role scrutiny. However, good governance family tradition of being a to play in corporate governance: ensures that the board is always Brahmin priest\u2014into business they are not company employees alert\u2014so it will be fully aware of at 14 and soon showed and should be able to quiz what is happening when a mistake potential, graduating from executives with impunity. is made. Such a mistake might be Elphinstone College in related to strategy (an overpriced Mumbai in 1858. After Board-level scrutiny takeover bid, for example), or to working for his father, Tata In 2011, consultants McKinsey & the ethics of a particular situation. took on his \ufb01rst enterprise\u2014a Company published \ufb01ndings from Independently minded nonexecutive cotton mill\u2014in 1868. One of a survey of 1,597 board directors, directors should be in a prime his dreams was to found a providing fascinating insights into position to question, for example, steelworks, and although this the proceedings of board meetings. whether the company is right to business aim would not be The survey showed that in Asia, be using very low-cost suppliers, achieved in his lifetime, Tata no more than a third of a board\u2019s or whether a contract has been Iron and Steel Company was meeting time was spent scrutinizing won using questionable means. set up in 1907 by his son management actions and decisions; Dorabji. The steel industry far longer was spent on strategic When things go wrong went on to be the foundation planning. Although this sounded The importance of good governance for Tata Group\u2019s global success. sensible, it suggested that was made clear in the case of accountability and governance Japan\u2019s mighty Olympus camera One of Jamsetji Tata\u2019s received less time. By contrast, in business in 2011. Newly appointed overriding principles was North America nearly two-thirds of Chief Executive Michael Woodford fairness, which permeated board time was spent on scrutiny. found that a $1.7 billion cover-up his entire business approach. of losses had been made when In terms of accountability, his More surprisingly, the same acquiring other companies. The vision was simple: \u201cWe started sample showed a lack of satisfaction Olympus directors had hidden on sound and straightforward with fellow board members. these losses from the published business principles, considering Directors thought that more than accounts and therefore from public the interests of the 30 percent of their peers had scrutiny. The board responded shareholders as our own.\u201d by \ufb01ring Woodford. Only after a successful campaign by Woodford Accountability breeds did the Japanese authorities charge response-ability. key Olympus directors with fraud. Eventually the whole board Stephen R. Covey resigned. The case demonstrated how ineffective Olympus\u2019s US management consultant (1932\u20132012) nonexecutive directors had been in holding the board to account, and how important good governance and accountability are to the well-being of every company. \u25a0","MAKE THE BEST QUALITY OF GOODS AT THE LOWEST COST PAYING THE HIGHEST WAGES POSSIBLE YOUR WORKERS ARE YOUR CUSTOMERS","","134 YOUR WORKERS ARE YOUR CUSTOMERS IN CONTEXT M ost economic models The Ford Motor Company quickly state that during the realized that its production line was FOCUS early stages of economic ef\ufb01cient but made workers unhappy. Market expansion development, low-wage workers By giving them a large pay rise, Ford \ufb01nd themselves making products created a market of staff-customers. KEY DATES that are bought by middle- and 1914 Henry Ford doubles his upper-class consumers. The Model\u00a0T automobile was priced at employees\u2019 wages to $5 a day. workers tend to eat simple food, $825 in 1908, at a time when Ford such as potatoes, rice, or corn, workers earned less than $2 a day. 1947 US psychologist Alfred J. and travel on foot or\u2014if they are In 1913, Ford introduced a system Marrow \ufb01nds that productivity lucky\u2014use a bicycle as a means of conveyor-belt mass production, increases when employees are of transportation. Meanwhile, their reducing the time taken to make involved in decision making, employers eat expensive meat- a Model\u00a0T from 750 to 93 minutes. and introduces the concept based meals, and travel in With this improvement in ef\ufb01ciency, of participative management. luxurious transportation\u2014from the company could afford to cut the the \ufb01ne horse carriages of the 17th price of one of its vehicles to $550. 1957 Douglas McGregor century to the sleek, \u201cdream publishes The Human Side machine\u201d automobiles of today. One problem remained, however. of Enterprise, claiming that The repetitive jobs required to run organizations thrive best by However, economic growth the Model\u00a0T production line made trusting staff to apply their takes a huge step forward when creativity and ingenuity to the workers are able to buy the products enterprise in which they work. that they make; when they, too, can afford to eat meat and purchase 1993 Ricardo Semler of Brazil\u2019s household and leisure goods. This Semco writes Maverick!. is now starting to happen rapidly in China, where the the sales of staple 2011 Google is revealed products\u2014such as toilet paper and to have the highest job refrigerators\u2014are growing quickly. satisfaction in the US high- tech sector; young \u201cGooglers\u201d Building a market are both employees and Workers were recognized as customers of the company. potential customers by US car- making pioneer Henry Ford. Ford\u2019s Companies should focus on They should also reward This enables employees providing consumers with their employees with the to buy the company\u2019s highest wages possible. products or services. good products and services at low prices. If your workers become They can then provide your customers, your management with business will thrive. valuable insights and ideas, as well as boosting sales.","MAKING MONEY WORK 135 See also: Changing the game 92\u201399 \u25a0 Organizational culture 104\u201309 \u25a0 Understanding the market 234\u201341 \u25a0 Focus on the future market 244\u201349 \u25a0 Make your customers love you 264\u201367 \u25a0 Maximize customer bene\ufb01ts 288\u201389 workers dissatis\ufb01ed, and pushed 60$ (US) PER CAPITA, 2011 Household spending labor turnover to higher than 370 data from 2011 shows percent\u2014the average employee 50 that US spending on stayed for only three months before luxury goods (such as quitting. To counter this, Ford 40 chocolate) outstripped announced that wages at the spending on essentials company\u2019s factories would be more 30 (like toilet paper). The than doubled, to $5 a day. His data from China shows actions made headlines around 20 that as an economy the world, and in the factory, labor develops, spending turnover fell to 16 percent annually, 10 on essential items helping the output per worker (a rises the most. measure of overall productivity) 0 to rise by around 40\u00a0percent. Toilet paper Chocolate USA By 1914, it took a Ford worker stumble upon an important fact: China just three months to save enough when your workers earn enough money to purchase a Model\u00a0T. By to afford to be your customers, India 1924, the price of a Model\u00a0T fell there can be huge bene\ufb01ts for the again to $260, making it possible business. Along with increases Fragrances to buy a brand new car with a in staff pride and commitment, month\u2019s pay. By 1924, the Ford managers are likely to be given in helping to generate the 400,000 Motor Company sold more than valuable insights into the company\u2019s work force suggestions per year 50 percent of the world\u2019s cars. products and processes. on how the company might improve production ef\ufb01ciency and quality. Learning from employees In Toyota City, Japan, more than Although Henry Ford generated half the work force owns a Toyota Emerging markets excellent publicity by making his vehicle. This is a signi\ufb01cant factor In 1924, the US government policy of paying high wages sound published a report titled Cost of like altruism, his practical need to Living in the USA. It showed that lower the labor turnover helped him the average family spent 38\u00a0percent of its $1,430 annual expenditure on food. This is interesting because, in the past \ufb01ve years, India\u2019s family spending pattern has slipped below this level, to 36\u00a0percent, indicating that the average wealth of Indian families is increasing. When China\u2019s proportion of spending on food fell toward 30\u00a0percent of income, households could afford to increase their wider spending on nonfood items, such as consumer goods. In the US today, just 7 percent of household income is spent on \u276f\u276f Farm wages in India increased by 17.5 percent annually from 2007 to 2012. Since farm labor is at the bottom of the economic pyramid in India, this signi\ufb01es a very fast overall rise in wages.","136 YOUR WORKERS ARE YOUR CUSTOMERS CAR OWNERSHIP (%) 90 18 ANNUAL SALES (MILLION CARS) Car sales in China 80 16 and India grew steadily 70 14 from 2005 to 2012. The 60 12 potential for sales is 50 10 huge\u2014percentage 40 8 ownership in both 30 6 countries is tiny 20 4 compared to the US, 10 2 where ownership 0 is high and sales 0 remained static. 2005 2006 2007 2008 2009 2010 2011 2012 China Car ownership Annual sales India Car ownership Annual sales USA Car ownership Annual sales food, leaving the average family \ufb01ve years, boosts its spending on disguise, to \ufb01nd out what the with a huge surplus with which toilet paper to China\u2019s per-capita business looks like from that to buy nonessential items that spending, the market growth in perspective. The show clearly quickly become \u201cnecessities,\u201d such India will be $8.4 billion ($6.72 x illustrates how those in charge of as cosmetics and gym membership. 1.25 billion population). For China a business are often unaware of the India is perhaps about to embark to catch up with the US would opinions, insights, and feelings of on this stage of economic imply market growth of $24.3 billion their customers and staff. Despite development. If so, this will have ($17.98 x 1.35 billion population). a world of online praise and blame, an impact on the sales of a huge And that\u2019s just the increase in some companies are able to remain range of everyday items. market size\u2014not the total market. in a bubble of self-delusion. The signi\ufb01cance of this trend Exactly the same logic applies However, this is unlikely to be lies in the numbers of people across the market for ordinary true of an organization in which the involved. If India, over the next household goods throughout the worker is also the customer. These developing world. Already, China is employees care about the product I will build a car for the world\u2019s biggest market for luxury or service because they experience the great multitude \u2026 items, such as Swiss watches, it themselves and realize that their [that] will be so low in jewelry, and cars. Over the coming job security relies on customer price that no man making decades, China is also likely to satisfaction and the company\u2019s a good salary will be dominate sales of ordinary items commercial success. If a customer (such as toothpaste), and services waiting room becomes messy and unable to own one. (such as insurance). The potential dirty, for example, staff-customers Henry Ford sales volumes involved are huge. will quickly draw attention to it. Today, China is the world\u2019s largest US industrialist (1863\u20131947) car market, even though fewer than In Europe, fashion retailer 10 percent of households own a car. Primark enjoys huge success in the mainstream market. The In touch with reality company turns runway fashion The television show Undercover speedily into low-priced garments Boss sends senior executives with a target market of 15\u201335-year- into low-level jobs in their own olds. However, its growth was companies, under alias and instigated by an unusually elderly senior management team. By","MAKING MONEY WORK 137 Clothing retailer Primark has built a reputation for low-cost fashion in the European ready-to-wear market. Its success is due in no small part to the opinions of its workers. the time Primark had reached its beyond empowerment toward his engineers to start a special new strongest phase of growth in the worker ful\ufb01lment, even delight. business division. This became the 2000s, its senior executives were Born in 1959, Semler took over the nucleus of a new Semco, developing in their 60s and 70s. It was critical, business from his father at the age new ideas that soon generated 66 therefore, for directors to listen to of 21. Between 1982 and 2003, he percent of the company\u2019s business. the young work force, who could drove Semco\u2019s sales turnover from give insights into customer views. $4 million to $200 million. On his Semler\u2019s leadership approach \ufb01rst day in the of\ufb01ce, he \ufb01red nearly is to encourage his work force to Democratic management two-thirds of the senior management manage themselves in terms of Ricardo Semler, head of Brazil\u2019s team, who he believed were too time-keeping, work-scheduling, Semco Group, is perhaps the rooted in his father\u2019s autocratic and career development. By doing world\u2019s most radical employer. He management style. In the late 1980s, so, he believes that workers will believes that bosses need to move he backed a proposal by three of truly care about what they do; this means that they will inevitably be taking care of not just the business, but its customers too. Semler describes his methods in his book Maverick! (1993) and outlines how much companies can bene\ufb01t from the staff engagement that results. This approach has become known as participative management. It holds that people are naturally capable of self-direction if they are committed to corporate goals. And when your workers are your customers, the two sets of goals become perfectly aligned. \u25a0 Work should be a pleasure, Arthur Ryan the name to Primark for the not an obligation \u2026 business model that he was to Born in Ireland in 1935, Arthur use in the UK, the Netherlands, We believed that people Ryan is the founder of Primark. and Spain. From 1973 until his working with pleasure could After leaving school, Ryan retirement in 2009, Ryan built worked at a department store up the business to change it be much more productive. and then a fashion wholesaler from being a \u201cbargain\u201d store to Cl\u00f3vis da Silva Bojikian in London before returning to an inexpensive, on-trend fashion Dublin, where he worked for retailer. In 2013, Primark Brazilian former HR of\ufb01cer of Semco retailer Dunnes Stores. In 1969, employed more than 43,000 staff Gar\ufb01eld Weston, CEO of in stores in Ireland, Spain, the (1934\u2013) Associated British Foods (ABF), UK, Austria, Belgium, Portugal, hired Ryan to set up a discount Germany, and the Netherlands. clothing chain with a seed fund ABF is still its parent company. of $80,000 (\u00a350,000). The \ufb01rst In the recessionary year of 2009, store, Penneys, opened later that Primark\u2019s like-for-like sales grew year in Dublin, but Ryan changed by more than 7 percent.","UTILIZE OPM OTHER PEOPLE\u2019S MONEY WHO BEARS THE RISK?","","140 WHO BEARS THE RISK? IN CONTEXT When a business is ...a small investment \ufb01nanced with debt, in shares can yield FOCUS or with other people\u2019s control of the company. Financial risk money... This increases KEY DATES the chances of huge 1950s US economist Harry ...while the costs of Markowitz advocates failure are largely borne pro\ufb01ts for the gathering a portfolio of business owners... investments to protect against by the work force... losses due to \ufb01nancial risk. Heads I win; ...and the company\u2019s tails you lose. 1990s Research on types of middle managers, who \ufb01nancial risk identi\ufb01es ways of measuring and managing take the blame for different kinds of risk, including poor performance. market risk (changes in the value of equity, interest rates, currency, and commodities) and credit risk (the risk of nonpayment of debts). 1999 UK conglomerate General Electric Company (GEC) is renamed Marconi plc, and its traditional businesses are sold off. The directors\u2019 gamble on this change in strategy fails\u2014the business collapses in 2001 and shares are suspended. Nearly 25 percent of staff is laid off. T he degree of \ufb01nancial risk Greek shipping magnate Aristotle shareholders\u2019 capital \ufb01nances the borne by a company has Onassis built a business empire business start-up, and remains at profound implications for that stretched across the world and risk until it is repaid in full. If the the long-term viability and success incorporated dozens of industries, business liquidates, the holder of of the business, its employees, and was underpinned by complex \u201cordinary\u201d shares (as opposed to and its shareholders. A business \ufb01nancial arrangements. Onassis \u201cpreferred\u201d shares, which are higher structured in a traditional manner recommended utilizing \u201cother in ranking and yield dividends would put the most risk on the people\u2019s money,\u201d and while this before ordinary shares) is the last shareholders, since they stand approach might yield \ufb01nancial in the line to be paid. The ordinary to lose their investment if the success, it may end with others shareholder is therefore the least venture fails. But the proliferation bearing the costs of failure. likely to recover his or her of increasingly complex \ufb01nancial investment. Because of the risks mechanisms and means of Traditional risk they take, entrepreneurs are held in accounting have, to a degree, In theory, the risk takers in a market high esteem. So are early-stage, insulated a business\u2019s owners from economy are the shareholders, who venture-capital investors, who invest the worst effects of failure. effectively \u201cown\u201d the business. The in start-ups in return for equity.","MAKING MONEY WORK 141 See also: Managing risk 40\u201341 \u25a0 Play by the rules 120\u201323 \u25a0 Accountability and governance 130\u201331 \u25a0 Leverage and excess risk 150\u201351 \u25a0 Off-balance-sheet risk 154 \u25a0 Balancing long- versus short-termism 190\u201391 \u25a0 Morality in business 222 The burden of risk associated with a business is spread wider as its \ufb01nancial affairs grow more complex. Executives and staff stand to lose \ufb01nancially and perhaps even punitively\u2014with prison sentences possible\u2014if the company fails. Creditors and shareholders can lose \ufb01nancially, while in the worst-case scenario taxpayers may bear the heaviest burden of all\u2014in the form of high taxation and low economic growth\u2014if their government chooses to rescue the business. Shareholders Creditors Venture capitalists, such as Indian- Business born Vinod Khosla of Sun Microsystems, invest in companies at an early stage and risk bearing the brunt of failure. But returns can be high with success. Executives Staff The association of risk with the Taxpayers shareholder is bene\ufb01cial in many respects. A risk-bearing shareholder Risk of \ufb01nancial in a large, multinational bank would loss be inclined to discourage senior management from taking large risks Risk of criminal with the bank\u2019s capital or reputation. prosecution Calculated risks may be considered, but not risks that threaten the code gives a struggling business business\u2019s assets are sold after it existence of the business. The substantial protection from those to has entered bankruptcy. The assets shareholder can play a signi\ufb01cant whom it owes money (its creditors, and operating model are sold to part in the business process, acting such as suppliers of raw materials, new owners, leaving the original as a natural check on the company\u2019s ingredients, or subsidiary services). business entity behind. Suppliers propensity to take risks. This view This protection is intended to allow and other creditors may receive no of business has been held since the a company to rethink its business more than a token payment, such foundations of modern capitalism plan and perhaps \ufb01nd a more as 10 percent of the value of their in the 18th century. pro\ufb01table business model. claims on the business. The new shareholders then have a debt-free Suppliers and creditors In the UK, a struggling company business with all the assets of the The traditional view may be can choose to enter a phase of \u201cpre- old company, but with none of the \u276f\u276f threatened due to effects of new pack administration,\u201d in which the rules and practices. In an attempt to encourage entrepreneurship, Chapter 11 of the US bankruptcy","142 WHO BEARS THE RISK? Suppliers are among the last to receive compensation for their goods or services if a business goes bankrupt. If, in the UK, it enters \u201cpre-pack administration,\u201d suppliers might receive nothing at all. liabilities. This method can be protection, the creditors can \ufb01nd personal pension funds in Enron especially controversial, since it themselves in a riskier position shares. When the business was can allow the owners of the original than the shareholders. liquidated, employees not only lost business to sell the \u201cpre-packaged\u201d their jobs, but also their pensions. new entity and still be involved in Employees at risk When the collapse of the business the business. In August 2008 the Staff employed by a business is was becoming clear, Enron froze London-based restaurant business also at risk when a company fails. its pension fund, preventing of Michelin-starred chef Tom When US energy company Enron employees switching their pension Aikens went into administration. collapsed in 2001, an extraordinary holdings out of Enron shares. It was bought by TA Holdco Ltd., feature of the unfolding story was of which Aikens was appointed the plight of many employees. Employees can also be partner and shareholder. Around Unlike the senior executives, rank- vulnerable due to the predations of 160 suppliers were left nursing and-\ufb01le staff had been part inspired the investment market. If a company losses that would never be and part browbeaten into \u201cshowing is bought through private equity, recovered. However, by early 2010 faith in Enron\u201d by investing employees can \ufb01nd themselves Tom Aikens\u2019 business achieved a worse off if the business fails. A \ufb01nancial turnaround, and opened \u201cTails you lose\u201d\u2014in bad private-equity purchase is when a three new ventures in London. times, the owner is protected publicly traded company is bought from losses, but the business by a \u201cprivate-equity group,\u201d often When pre-pack administration and its employees suffer. through a leveraged buy out, where is utilized, suppliers are revealed the assets of the purchased to be in a much more vulnerable Private-equity ownership company are used as security to position than might otherwise be is typically structured in an borrow funds with which to \ufb01nance expected. The \ufb01nancial losses asymmetric way. If things go the purchase. In so doing, the burden incurred by Aikens\u2019s restaurants well the private-equity owner of risk is on the business (and its were effectively absorbed by gains, and if things go badly employees), not on the owners. suppliers, not shareholders. In a the subsidiary business loses. world of pre-pack administration The UK franchise of Canadian and Chapter 11 bankruptcy underwear business La Senza collapsed in 2012, with 1,100 \u201cHeads I win\u201d\u2014in good employees losing jobs. In cases like times, the business this, the staff has little to gain when owner stands to gain, things go well, but everything to whereas the position of lose when they go wrong. Suppliers employees changes little.","MAKING MONEY WORK 143 are in the same position. Only the They were investigated over a ten- There is a simple way of private-equity shareholders are year period\u2014the six years leading avoiding excess risk taking protected\u2014by limited liability. up to the buy out, and the four years after it. The researchers found by the managers of our When publicly traded soccer that in the year following the buy \ufb01nancial institutions. It is team Manchester United was out, 59 percent of the private-equity purchased by US businessman owned businesses cut their staf\ufb01ng to make it a crime. Malcolm Glazer and his family in levels, compared with 32 percent in Paul Collier 2005, the transaction was the control group. In the following effectively a private-equity deal. years, private-equity ownership UK economist (1949\u2013) The Glazers followed standard was associated with falling average practice, buying the publicly-listed wage levels among staff. In the company Blackstone Group earns company for $ 1.3 billion, then put short term employees appear to $130 million a year. He is closely the debts onto the balance sheet of lose out\u2014and in the medium to followed by the bosses of Carlyle the new Manchester United Ltd. long term their chances of losing Group, Apollo Global, and KKR\u2014 Private-equity owners suggest that their jobs are higher due to the who each earn in excess of $100 debt is an effective means of forcing greater level of debt of the million a year. Remarkably, all these employees to work ef\ufb01ciently to companies they work for. bosses enjoy favorable tax treatment make a pro\ufb01t and meet interest in both the US and the UK. This payments. More plausibly, though, Private-equity iniquity became an important issue in the it is a way of transferring risk from Not everyone loses out under 2012 US presidential election, when the private-equity owner to a limited private equity. In 2003 the British Republican candidate Mitt Romney liability subsidiary. If Manchester retailer Debenhams was purchased (a former private-equity boss) had United Ltd. were to enter \ufb01nancial by three private-equity companies. to admit that his income tax rate, at trouble, the liability of the Glazers The businesses paid themselves 14 percent, was lower than that of would be minimal due to the a dividend of $1.9 (\u00a31.2) billion average, working Americans. protection of \u201climited liability,\u201d before \ufb02oating the publicly traded which limits the owners\u2019 liability to Debenhams onto the stock market Executives on the hot seat the value of their investment, not in 2006\u2014laden with debt. Years In the world of public limited the total debts of the business. later, in its 2012 annual accounts, companies and corporations, the the \ufb01nancial strain still showed. CEO might be in the riskiest Research published in 2013 The degree of \u201cgearing\u201d (debt as a position of all. They may have the compared the performance of 105 percentage of capital employed in most to gain from their business\u2019s companies purchased through the business) at Debenhams was a success, but also the most to lose private equity and 105 \u201ccontrol\u201d high 51.5 percent, and its liquidity from its failure. These risks may be companies in the same industries. (as measured by the \u201cacid test partly \ufb01nancial, but even more they ratio,\u201d which determines whether a are reputational. Richard Fuld, chief We have corporate company has enough short-term executive of Lehman Brothers at CEOs who raise their pay assets to cover its immediate the time of its 2008 bankruptcy, 20 percent or more in years liabilities) was a very weak 0.175. went from being an award-winning when they lay off thousands Yet for the private-equity owners, CEO to a nominee for a range of the deal was highly pro\ufb01table\u2014 \u201cworst ever...\u201d awards. From being a of people. It\u2019s obscene. they made $1.9 (\u00a31.2) billion very director of the Federal Reserve Bank Charles Handy quickly and still retained shares in of New York, he became a pariah. \u276f\u276f Debenhams (a stake that was sold UK management expert (1932\u2013) in the years that followed). Their overall pro\ufb01ts exceeded 200 percent. For the bosses of private-equity companies, the rewards can also be impressive. Bernard Schwarzman of US private-equity investment","144 WHO BEARS THE RISK? Italian food giant Parmalat\u2019s 2004 $1.6-billion accounting cover-up was primarily due to fraud. The effects were sharply felt by shareholders and the many employees who lost their jobs. In the UK, a similar fate awaited should, on this basis, lead to the term \u201ctoo big to fail\u201d illustrates that \ufb01gures such as Fred Goodwin (CEO death of the business. Austrian- business risks have been transferred of Royal Bank of Scotland when it American economist Joseph to the taxpayer. Faced with the collapsed in 2008) and James Crosby Schumpeter, in his classic 1942 bankruptcy of General Motors and (CEO of Halifax Bank of Scotland book Capitalism, Socialism, and Chrysler in 2009, the US government until 2006). Both were blamed for Democracy, made the famous \u2014in other words, US taxpayers\u2014 the dramatic collapses of their statement: \u201cThe process of Creative took on billions of dollars\u2019 of debt to banks in 2008, and for their part in Destruction is the essential fact give the companies a fresh start. the subsequent economic turmoil. about capitalism.\u201d Schumpeter, like In the UK and Europe, bank many others, viewed recessions as bailouts in 2008 and 2009 saved Is it fair that a company\u2019s a cleansing mechanism, allowing the private sector from huge losses. bosses should have to take the the weak to fall back and new, In Europe, what was put forward as blame for failure so personally? stronger companies to emerge. a Eurozone government problem After all, it is inconceivable that the was in fact a private-sector problem, CEO is the only one to blame for the Yet modern governments seem as banks faced nonrepayment of failure of a business. Objectively, to see things differently, certainly loans to businesses within Greece, the answer is clear, because in relation to large businesses. The Portugal, or Italy. The bailouts business failure is certainly the were arranged and \ufb01nanced by responsibility of more than just the Risk comes from governments, meaning that CEO. Yet high-pro\ufb01le executives not knowing what taxpayers turned out to be the risk often strive to associate themselves takers, even though nobody asked so closely with the company\u2014 you are doing. their opinion. American economist making it seem as though they Warren Buffett Nouriel Roubini summed this up personally are the business\u2014and by saying: \u201cThis is again a case are so eager to back this up with US investor (1930\u2013) of privatizing the gains and massive remuneration packages, socializing the losses; a bailout that it can be no surprise when the and socialism for the rich, the public and the media turn on them. well-connected, and Wall Street.\u201d Taxpayers to the rescue This issue has stretched far In mature, developed economies, wider than the US and Europe, businesses are supposed to take in\ufb02uencing the economic situation risks in pursuit of reward. Failure in both Japan and China in recent decades. From the start of its 20-year depression in 1990, land prices in Japan fell by more than 80 percent, and today remain far below the levels reached in 1988 before the recession began. In effect, almost every bank in Japan was insolvent as a result of vast portfolios of nonperforming loans\u2014loans that were made to companies that could neither repay the debt, nor pay the interest on that debt. Only the support of the Japanese central","MAKING MONEY WORK 145 bank kept these commercial banks by only 37 percent. Government Richard Fuld alive. The taxpayer took on the bailouts for big business effectively risks that are supposed to be taken mean that taxpayers are providing Richard \u201cDick\u201d Fuld was born by the private sector. Many support for those who bene\ufb01t most in 1946 in New York City, NY. analysts suggest that the same is from today\u2019s economic system. In He graduated from the true in China at present, although the long run, businesses may enjoy University of Colorado in 1969, the opacity of the Chinese banking substantial pro\ufb01ts, and accept the and received an MBA from the system makes this hard to verify. rewards as recompense for the risks Stern School of Business in they take. But if the risks (and losses) 1973. He was CEO of Lehman Who bears the risk? are borne by the taxpayer, it is fair Brothers investment bank Roubini\u2019s statement that losses to question why only shareholders from 1994 to the day of its are \u201csocialized\u201d (borne by the public) gain the pro\ufb01ts in the good times. collapse in 2008, and during while pro\ufb01ts remain in the private that time, he received more sector appears to be true. Income Often, employees and suppliers than $500 million. Known as inequality has widened considerably bear higher levels of risk than the \u201cGorilla of Wall Street,\u201d around the world in recent decades, seems fair\u2014shareholders, who Fuld was the domineering in countries including the US, enjoy the rewards of success, should boss who pushed the company UK, China, and India. For instance, bear the primary risk of failure. into the subprime mortgage between 1979 and 2007 in the US, Even trade-union protection for business. For many critics, the the income of the top 1 percent of workers has been eroded in recent decision that illustrated his earners rose by 266 percent, while decades\u2014in the US and many hubris was his refusal of that of the bottom 20 percent rose countries around the world, unions bailout funds from investor account for no more than 10 percent Warren Buffett and the Korea Greek citizens protest in Athens of private-sector employees, which Development Bank, even against austerity measures in 2011. leaves workers unprotected when though Lehman Brothers was Rescue loans from the European Union things go wrong. Although labor in the throes of being toppled to Greek banks mean that the country \ufb02exibility has its merits, imbalance by the 2008 credit crunch. His faces years of economic hardship. between \u201cmy risk\u201d and \u201cyour reasoning was that the offers reward\u201d has perhaps gone too far. \u25a0 of cash did not match his own valuation of Lehman Brothers. Following the company\u2019s bankruptcy in September 2008, Time Magazine named Fuld as one of the \u201c25 People to Blame for the Financial Crisis,\u201d and Cond\u00e9 Nast Portfolio magazine ranked him number one on its list of \u201cWorst American CEOs of All Time.\u201d","146 IN CONTEXT SWIM UPSTREAM. FOCUS GO THE OTHER WAY. Business behavior IGNORE THE CONVENTIONAL KEY DATES WISDOM 1841 Scottish journalist Charles MacKay documents IGNORING THE HERD herd behavior in his book, Extraordinary Popular Delusions and the Madness of Crowds. 1992 Indian economist Abhijit V. Banerjee publishes A Simple Model of Herd Behaviour. 1995 In \u201cHerd Behaviour, Bubbles and Crashes,\u201d German professor Thomas Lux claims prices and sentiment affect one another, so feelings of the herd affect prices (for example, faith in the housing market pushes up prices). 2001\u201306 The housing bubble in the US and parts of Europe gathers pace before collapsing in the 2007\u201308 \ufb01nancial crisis. T he herd instinct is clear in nature and just as clear in business. Most people feel more comfortable following what others are doing than standing out as a \u201cloner\u201d or maverick. Ignoring the herd takes great psychological strength. When stock markets rise steeply, new\u2014perhaps \ufb01rst-time\u2014 investors get sucked in by the apparently easy pickings. These latecomers to a booming \u201cbull market\u201d cause share prices to propel upward for a last time before they slump back toward their previous value. By following the herd in this way, most \ufb01rst timers invest when share prices are near the top and usually sell when they \ufb01nd that their","MAKING MONEY WORK 147 See also: Stand out in the market 28\u201331 \u25a0 Gaining an edge 32\u201339 \u25a0 Beware the yes-men 74\u201375 \u25a0 Thinking outside the box 88\u201389 \u25a0 Avoid groupthink 114 \u25a0 Protect the core business 170\u201371 \u25a0 Forecasting 278\u201379 Companies follow herd instincts when they\u2026 \u2026stampede to buy \u2026buy other businesses \u2026develop \u201cme too\u201d shares in high-trend because of a current products rather than businesses, or buy them follow logical strategy. market trend in completely. diversi\ufb01cation. These actions are unlikely to be \ufb01nancially bene\ufb01cial. Swim upstream. Go the other way. Ignore the conventional wisdom. assets have dropped in value. They An example of the risks of following shares. And by February 2001, the often suffer serious losses. A the herd came with the dot-com share price had fallen to 9 cents. contrarian investor\u2014or a savvy bubble, between 1998 and 1999. A little later the business was company that holds a portfolio of Among numerous examples of declared bankrupt. \u276f\u276f investments\u2014does the opposite. extraordinary share-price gains When share prices rise and new followed by equally huge losses, The herd instinct among investors are attracted into the was the business eToys.com, forecasters makes sheep look market, they sell, and if the market which was opened in 1997. In May slumps, they buy. However, few 1999 it was launched onto the New like independent thinkers. investors show the foresight required York Stock Exchange at $20 per Edgar R. Fielder to know when a boom is turning to share, raising $166 million. Buyers bust. Warren Buffet, a legendary piled in, pushing the price up to US economist (1930\u20132003) investor, says: \u201cWe simply attempt $76 by the end of the \ufb01rst day. By to be fearful when others are greedy fall 1999, the share price was $84, and to be greedy only when others giving the business a higher are fearful.\u201d Between 1965 and 2013, market value than the retail giant Buffet\u2019s investment company gave Toys R Us. As the market turned investors a capital gain of more downward, the experts started to than 900,000 percent. sell, leaving the herd with the","148 IGNORING THE HERD Global market shares of smartphones in 2009\u201313 varied Nokia military spending. A worried BAe greatly: Apple stayed relatively stable; Nokia and RIM, who Samsung then approached the owner of had responded with herd instincts to the iPhone\u2019s success, Apple Airbus, suggesting a merger and saw huge losses; Samsung\u2019s shares soared, re\ufb02ecting its RIM implying that a mix of civilian development of products that would stand the test of time. and military businesses was a preferable focus. Could things 40% really have changed that much between 2006 and 2013, or was 35% BAe responding to the trend for diversi\ufb01cation? Strong business 30% leaders look to the long-term and ignore fads and fashions among 25% stock-market analysts and management consultants. 20% 15% 2010 2011 2012 2013 Following the leader The third herd behavior to avoid 10% is \u201cfollowership.\u201d This occurs when companies develop \u201cme-too\u201d 5% products to imitate market innovators. Of course, if a business 0% already has a genuinely 2009 differentiated offering, it is wise to follow a new trend. Often, though, It makes sense for the share-buying but little mention of long-standing businesses rush out copycat public not to follow mass trends, research, which suggests that 60 products to demonstrate that they but is the same true for business to 66 percent of all takeovers are staying competitive in a sector. leaders? In 2008, US mass-media destroy shareholder value for the When the iPhone was launched in corporation AOL, noticing the winning company. In other words, 2007, Nokia could boast more than growth in social network sites, most takeover bids prove to be 40 percent of the global smartphone bought the social-networking site a disappointment. market. Despite a series of new Bebo for $850 million. It joined the product launches by the company, herd and lost out badly. In 2013, it The second herd behavior to sold the same business back to its ignore is the strategic clash between Those entrapped by the founders for $1 million. focus and diversi\ufb01cation, and the herd instinct are drowned way the market tends to concentrate in the deluges of history. Following trends on one of these two at any one time. But there are always the Business leaders, then, must be When \u201cfocus\u201d is the market mantra, few who observe, reason, as cautious as anyone else about share prices rise in companies that treading the same path as the sell off peripheral assets or divisions and take precautions, majority. There are three main of the business. This is what and thus escape the \ufb02ood. types of herd to ignore. The \ufb01rst, happened to British Aerospace as mentioned, is the occasional (BAe) when it sold its 20 percent Anthony C. Sutton stampede to make takeover bids. stake in the Airbus aircraft business In this case, business leaders worry in 2006. At the time, the stock UK economist (1925\u20132002) that if they do not buy a rival, market liked its $2.99 (\u00a31.87) billion someone else will and perhaps sale of the largely civilian aircraft create a bigger, more dif\ufb01cult maker, since it focused BAe on the competitor. At such times, there is defense and military sector. By 2013, much talk of synergies (the sum this view looked absurd, as Airbus being worth more than the parts) powered ahead but governments\u2014 especially the US\u2014cut back on"]