Of Banks and Crisis

Reading about Obama and his socialist cronies baying for blood of the banks got me thinking once again about the recent financial crisis.

Government tells banks to lend to people who are not credit-worthy. Banks are not sure, so Government decides to guarantee such loans. After all the American dream means at a least an owned house for every individual. No matter if he is a worthless bum. By virtue of being a human being and an American citizen he deserves the loan. Nevertheless, the risky loans demand high interest rates. If Government wants to gamble the money that it has earned so painstakingly from tax-payers, who are banks to interfere? Besides, getting interest rate reserved for junk bond while holding Government backed AAA+ investment was too good to let go I guess. However, like the proverbial mosquito who drinks so much blood that it is unable to fly, reality caught up with the banks and the Government. Of course the Government cannot be wrong, especially as it thinks about people. Didn't it help its citizens to go on a debt-fuelled consumer frenzy by keeping interest rates artificially low? My, it really cares for its people. Especially the tax-payers and savers. So, banks were the devils who created this spectre of mortgage based securities that threatened to swallow the world. But were they the only ones to blame? I guess not.

My question is simple: why should banks lend money to any worthless idiot because the Government wishes it so? And if they are forced to, why cry foul if they manage to take advantage of it? That is what you get when two looters play chess with each other. Might is right, so the Governments escape blame in name of helping people. But let no one delude themselves into thinking that banks could have pulled this one off all alone. I don't think that banks should suffer the price of socialist dreams because I do not believe in socialism. People who expected banks to self-immolate to satisfy their mediocre vote-banks got a well-deserved shock. And, by all means, the people who allowed and accepted such a system in name of social justice have only themselves to blame. It is a world governed by the laws of cause and effect, and everything we do or don't do has consequences. The banks simply turned a cannibalistic system against itself, but they did not invent it.

Built to Last: Underestimating Leadership

I have started reading 'Built to Last: Successful Habits of Visionary Companies' by Jim Collins and Jerry Porras. As the title suggests, the book aims to analyse the habits of visionary companies for the benefit of entrepreneurs, managers, CEOs and other business building professionals. In this, its research methodology is pretty similar to "In Search of Excellence". It differs, however, by the fact that it tries to bring out the successful habits by comparing the visionary companies with good but not visionary companies in the similar sector. I think the book may have some useful insights just because it uses some practical examples and data to assert its beliefs. Nevertheless, I would take what it says with a big pinch of salt.

One of the first assertions that I have read in this book is that one does not need a leader to make a sustainable great company as great companies last much beyond their leadership. Instead, a company that is value-based, can clearly articulate its purpose of existence, find a profitable denominator and implement its philosophy consistently across the board will succeed. Moreover, the author believes that anybody can become a leader.

I find the entire assertion true and childish in equal measure. What the author says is true theoretically, without a doubt. It is akin to a preacher telling us that we all are potentially divine and there is a saint within all of us. It may be a good management policy (or the politically right thing to increase book sales figures) to tell everybody how good and equal they are. But lets face it: human beings are neither same nor equal. Our physical strength, knowledge, capabilities, experience, motivations, morals, beliefs, wisdom and ambition differ. Our faces, finger prints and bodies differ too. Potentially and theoretically everybody can be equal. And theoretically Communism can be the most humane system of governance. We, however, do not live in an ideal world. Hence, the concept of equality is absurd as one can compare only apples with apples. You could, for example, say that one lawyer is better than the other lawyer in the field of intellectual property rights, but to assert that a top lawyer is better, equal or worse than a top athlete is simply stupid unless we can define a common, intelligent and universally acceptable denominator for comparison. Human beings due to their essentially uniqueness are difficult to compare in absolute terms. So, calling them equal is an easy and the wrong way out. In practical terms, everybody is not equal and everybody cannot be a good leader.

Moreover, good leadership is the result of wisdom gained over years and cannot be possibly taught in a three-day workshop. Practical corporate experience or an MBA can possibly help to develop it, but even that is not guaranteed. To cultivate leadership one needs courage, maturity, experience, strong beliefs, patience and the ability to rally people. There is no short-cut to leadership or to grow a company without a leader. He is always the starting point, whose mind and strength will ultimately shape the organization and its future.

I may also add that even Jim Collins was forced to recognize the need for a Level-5 leadership in his other book, Good to Great. The truth remains that only such a leader can create leaders and engineer a self-sustaining process that can carry a company far. A Level-5 leader is indispensable for building a visionary company, as is evident from all the examples given in both the books. Such leaders, like true Level-5 leaders, may shun publicity and die unknown. Nevertheless it does not eliminate the need or importance of such leaders because only such leaders are capable of building a visionary company and can also turn-around a normal company into a great one. Moreover, to assert that anybody can become such a leader is no different from saying that anybody can be Mr. Universe. The hard work, mental discipline and perseverance necessary for it are not laid out clearly enough, to the extent that the need of good leadership has been significantly played down. Without a gardener who sows the seeds properly and takes care of the sapling, chances of having a giant, fruit-bearing tree are downright difficult, if not impossible.

In Search of Excellence: Conclusion

Just finished reading the book "In Search of Excellence". I would like to summarize my observations and learning.

I feel that this book is not an attempt to revolutionize but to synthesize, i.e. it does not look to come up with a radically different management theory but tries to consolidate on the existing ones. However, it is not done with a view of academic research. Instead, the synthesis has been achieved by retro-fitting the elements of old management theories with all that seems to work for excellent companies. In this, the book is very practical and hands-on in its approach. There is a lot to take away from this wonderful book. All the same, I feel it does not sufficiently highlight the role of the leader. It does mention how a leader's personality shapes the company and determines its future. But it also tends to make the reader believe that it is possible to reach that stage in a series of calculated steps. I am not sure about this. I agree that learning from experience of excellent companies can help the managers to avoid fundamental mistakes. However, I am more convinced than ever that without an able leader you are not going anywhere. No matter what you do. It is good to talk about building leaders, but only a leader can build a leader. You cannot always manufacture one in any factory, university or consultancy. Finally the company will become the embodiment of the ideals and beliefs of its top leadership. Period.

All the same, the basic principles espoused by the book can make any work place better. It can help all people with any trace of level 5 leadership to recognize what they can achieve (and for them "Built to Last" and "Good to Great" may prove to be good as well). It can also seriously burn your fingers (and more) if you seriously have no idea where you are going. Overall, I think that the basic principles advocated may be an important step in the growth of a leader or forming of an excellent company. This book is also a valuable resource for any management student who wishes to quickly re-cap the main management theories in Business History.

Easy Answers Can Be Misleading

Business executives, especially those of large corporations, do bear a responsibility to the society. Nevertheless, I find the recent attack on "executive greed" by GE chief Mr. Jeffrey Immelt in somewhat bad taste. I guess with recession in full force it is becoming increasingly fashionable to air socialist views as panacea of all evil. Why, I think Hugo Chavez would be delighted. It is true that inequality has increased in the US and the corporations have played their part in it. However, to link the current problems directly (and only) to executive greed is both absurd and far-fetched. I think it is a demagogic effort to find an easy answer to a very difficult question. If US wants to find answers to its problems, it will have to do better than trying to throttle its bankers and executives.

The American dream is about the ability to make it big, no matter who you are, by sheer force of your brain. There in lies the magic of US. America's entrepreneurial spirit defines US and ensures its dominance. All the same, US does face a multitude of problems (to name a few: a hyper-active judicial system that can really sound funny, a broken medical care system, an increasingly bureaucratic structure of governance that may stifle creativity, lack of interest in education in youngsters, the weakening family structure, tense race & religion relations, increasing number of homeless, under-privileged & unemployed). People are living much beyond their means, consuming wastefully and getting into debt. The American dream is not about being irresponsible/lazy and not all its ills result from corporate negligence. Accountability is not the domain of bankers and executives only. Unless each citizen learns to take responsibility about their finances, the size of their family, their personal life and their education, it is useless to irresponsibly point fingers. As someone has rightly said, US needs a "Statue of Responsibility" to balance the "Statue of Liberty". Bashing bankers and executives is not going to solve America's problems. But perhaps they would make convenient targets for politicians so as the Government can hide its own failures and escape the public ire. Considering a career in politics, Mr. Immelt?

Excellence: Creativity is not Innovation

As I move along this book, I see that Peter Drucker's principle of employing the "whole" person is pretty central to this book. In fact, the book actively champions the principle and supports it with umpteen anecdotes, stories and examples. It mixes it pretty nicely with having a strong focus on the end-user. In this whole mix, something that struck me as pretty important was the place of creativity and innovation in this whole equation. The writers are pretty clear: creative and new ideas come dime by dozen. What is rare is the ability to see a practical use for these ideas, the will to implement a vision and the willingness to learn by experimentation. This is termed as innovation and dubbed as one of the most critical factors behind the success of excellent companies.

I think this should serve as a stark warning for new entrepreneurs and inventors alike: if you do not get the business basics right but have a good product, ultimately you will be displaced by somebody who can take your ideas to the end customer in a better way. Or, as the book says, an innovator can be an idea-thief (not always). Patents may not always help as there can be many ways to achieve the same thing. Once anybody has proved that a market exists, everybody would want a piece of it. Fewer problems and good communication would help to retain customers. Hence, it may be worth it to go a few months late into the market if it means lesser problems with the product. Moreover, the second-mover can potentially learn from the mistakes of the first mover and cash on it. As I read somewhere, the early bird gets the worm but the second mouse gets the cheese! The vice-versa is also true: to start an enterprise one does not need a multi-million dollar research team: an innovative idea and customer focus will suffice.

One-off big bets with strong patent possibilities (as in pharma, computer chips, chemicals and biotech) may come to the mind as exception to this rule. The book points that the culture of innovation and openness fosters new products (as in 3M) and there is no substitute for innovation. Confusing it with creativity can take one down the wrong road.

Excellence: About Culture and Action Bias of Excellent Companies

Moving further "In Search of Excellence", I find that in the beginning it more or less advocates the basic principles of sound management laid down by Peter Drucker in his "Concept of Corporation" and "Principles of Management". The points about a need in people to feel like winners/achievers and the need that the top-line leader/CEO should cultivate a sense of pride and ownership for work/manage culture are fundamentally nicely repackaged Drucker principles. "In Search for Excellence" builds on it by squarely grabbing the user's attention when it matters and giving a number of solid examples to demonstrate its point. This makes it easier to understand and enjoyable. There are two major concepts that I have just read - the importance of culture and the inherent action-bias in excellent companies. What do I think about it?

Drucker advocate a definable, unified task in which a worker can take pride. He also urges the manager to have a vision for the company and the people, that people should not be perpetually tied down to roles form where they can never progress no matter how hard they try. He attributes a lot of labour problems and job dissatisfaction to these two factors. Jim Collins' books demonstrate how (particularly the case of Nucor Steel), if successfully implemented, this can lead to "a culture of discipline" and play a critical role in the rise of the company. I agree with it. "In Search of Excellence" re-brands this mix of strong work-ethic shaped by an able leader as culture by bringing in elements of internal marketing to the mix. It also rightly points out that internal marketing tactics can degenerate into "control games" if not implemented correctly. I am convinced about the usefulness of internal marketing as a potent supplement for a framework of strong work-ethic and able leadership. But leadership is as much about inspiring greatness, so this would also need a careful hiring. As Drucker and Jim Collins both point, hiring the right people is absolutely critical; with hire for attitude and can train for skill (within reasonable limits) being the mantra of good hiring in the long-term. Internal hiring and employee development is essential as well. No wonder a lot of excellent companies tend to hire graduates and then hone them over time; a.k.a. P&G, Goldman Sachs.

Action-bias revolves around the willingness of a company to experiment and innovate. To just do something, anything except standing still. Run around, look busy? I am absolutely sold-out on the idea of experimentation, testing and marketing trials. It makes a lot of sense. This principle when juxtaposed with Jim Collin's "hedge-hog" principle makes a potent mix of sound company strategy: experimenting but keeping your ears to the ground. Too long and expensive "experiments" and one-shot untested projects,as the writers point, are a no-no.

Finally, I feel that only a company that has a clear, hopeful vision based on brutal facts for itself and its people can excel, create value for its employees and enrich the society in which it operates. For me, this book captures certain critical aspects of this belief brilliantly. Let us see what else we learn from this book in days to come.

Excellence

I have just started reading "In Search Of Excellence: Lessons from America's Best-Run Companies" by Robert H Waterman Jr, Tom Peters. Just down the first few pages, already I have got some interesting insights about some questions that had been bothering me about the sustainability of a profitable corporation over time. The Mckinsey's 7S framework, as the writers point out, presents a good way to diagnose the possible factors holding back a company from achieving excellence but it does not present a solution to actually address those problems. The writers further define eight signs of excellence. However, in the same breath they go on to assert that an excellent company may NOT have all the presented signs but will have at least some of the features. They further acknowledge the role of a "strong" leader in setting the tempo and talk about a CEO as manager of that culture, a person who makes sure that the values set by the leader are carried on. The book sounds promising and there sure will be some good things to learn. Nevertheless, the initial pitch has got me thinking about whatever I have learned about companies by reading from other sources and my own observation.

Excellence consists of delivering quality customer service, quality returns on investment and being able to sustain both of them over a long period of time. I agree that only if everybody in the company is passionate about the product can we have a great company. In this respect, Jim Collin's research in "Good to Great" offers very powerful insights about good-to-great turn arounds. Not surprisingly, the role of a good leader (what Jim Collins defines as a level 5 leader) was a major finding that resonates well with what what this books talks about leadership. Essentially, it boils down to getting the right people, keeping them and having an effective succession. The basic problem is that human beings are not perfect and it is possible to abuse any policy. For this, I did suggest having a "living will" for a policy, that is trying to anticipate when and how the policy should be abandoned. Thinking over, I realize that it may make things more complicated. I am also reminded of Jim Collin's assertion that rules are made for people who are not committed, but they end up stifling the creativity of those who are. And it turns out to be a major factor in the death of the entrepreneurial spirit, so to say. Careful hiring and small teams come to mind as a logical solution. Still, it seems clear from the start that having enough good managers is going to be the final hurdle in growth of a company and sustainability of excellence.

I think a transparent, meritocratic succession system can help provided you have a level 5 leader at the helm and give him sufficient freedom. A good way to get get a level 5 leader may be to identify a level 5 company and try to poach its top people, as Bank of America did to some extent with Wells Fargo. That may not help much,as in this case, if the leader does not have enough freedom to restructure. I completely agree with Jim Collins that getting the right people on the bus, getting the wrong people off the bus and shifting people to places where they can perform best is absolutely critical before starting. The "who" is absolutely more important than "what". Another element to it would be effective internal communication and internal marketing so as the employees identify with the company, trust it and take pride in it. Sustaining it is not possible if it is just lip service. Having in mind a growth plan for your employee and willingness to let him go if you cannot offer him growth is part of the deal.

About sustainability, it is worth remembering that fastest growth does not necessarily mean sustainable growth. Many times a company sacrifices speed and profit for sustainability. Not surprisingly, the best example that comes to my mind is of McKinsey. Christopher McKenna in his book about Management Consultancy attributes the resilience of McKinsey to its simple yet effective organization and strong culture. Due to this, many times even though McKinsey has not been either the number one or the most profitable of all consultancies, it has grown incrementally and has never been in remotely any kind of financial trouble. Its survival ultimately helped it to dominate.

One also needs to remember that success is never final. In fact, sometimes it is easier to achieve success than staying consistently successful. A too successful company can also fall victim to its refusal to change with time, Government greed and unreasonable union demands. In fact, refusal to address the problems right away inflates the problem over time. There is no substitute for constant vigilance.

Finally, there is no magic pill to excellence. Frameworks can help to structure the thinking but they can never replace thinking. Leaders are perishable goods and don't come dime by dozen, so it is quite natural to seek for a way to grow without them. I feel it is like trying to get to heaven without dying. I feel that frameworks cannot replace disciplined thinking and "cultural mangers" cannot substitute for a level 5 leader. The answer lies in nurturing leaders, if we can really understand the alchemy of leadership, or by finding such leaders and promoting them.