U.S. Financial System in a Death Spiral

Tweet

Our financial system along with our stock markets are collapsing. There also is currently no plan to get us past this crisis. Why, then do I feel better than I have in years about our future? After years of disappointment about the lack of the Government’s unaccountability to the American people, the failure of the $700 billion bailout actually gave me hope that we can force our representatives to vote against a bill that is not in OUR best interest – even with the pressure from the administration to pass it.

Instead of writing about the details of the $700+ billion bailout, I thought I would just list the 2007 compensation of the executives associated with the companies involved in the collapse. As you look at the table, keep in mind that these people took home millions of dollars while the rest of us are left to clean up the messes they left behind.

COMPANY	TOP EXECUTIVE	2007 COMPENSATION
FNMA (Fannie Mae)	Daniel Mudd	$ 12.2 million
FHLMC (Freddie Mac)	Richard Syron	$ 19.8 million
Lehman Bros	Richard Fuld	$ 22.1 million
Morgan Stanley	John Mack	$ 41.7 million
AIG	Martin Sullivan	$ 13.9 million
Goldman Sachs	Lloyd Blankfein	$ 68.5 million
Merrill Lynch	John Thain	$ 83.1 million
Merrill Lynch	Stanley O’Neal	$161 million
Washington Mutual	Kerry Killinger	$ 14.4 million

I think it’s important that these guys (along with the Board members of the institutions they destroyed) go down in history as the group that led to the collapse of the United States financial system (along with the economy, in general). We may never recover from the effects of their greed and self-centered actions. But, as is typical in these types of situations, they will attempt to retire rich and comfortably while millions of Americans struggle to keep or find jobs, make mortgage payments, and watch their investments continue to shrink.

Another Failure of Leadership

The executives listed above failed in their absolute number one priority of leadership: to improve the long-term health of the organizations they lead. I understand that this is not necessarily in line with the traditional American system of management, but it is absolutely necessary for the survival of our businesses and way of life. The greed that has developed in the board rooms and executive offices in U.S. companies has got to be stopped or the economic decline that began 30 years ago – and has grown to become a full-fledged crisis in recent months – will continue to send us into a death spiral. Although I’m actually happy that the people are forcing Congress and the President to develop a plan that will result in a true fix to the financial system – instead of another band-aid on an arterial wound – I am afraid about the fall-out in terms of jobs over the next several weeks. When American companies need to shed large costs quickly, they fire people. I can only hope that we don’t get that that stage in this crisis.

Leaders in U.S. companies need to start paying attention to their fundamental responsibility to the organization and the people they lead. There are top executives who do not display the level of greed exemplified by the gang that destroyed the country. Executives at companies like Toyota, Honda, Nucor Steel, and Hillerich & Bradsby (makers of the Louisville Slugger baseball bats) have shown over the years that a focus on the long-term health of the organization instead of their own bank accounts leads to sustained positive results and financial success for everybody.

Rewarding Greed

I recently got into a discussion with the Chairman of the Board of a $400 million U.S. company on the subject of executive bonuses. He was adamant that executives need to be rewarded on results and nothing else because it removes subjectivity in bonus calculations. Well, this looks like a sensible concept on paper, but as current events have shown, it is not in the best interest of the organization.

I have been saying for years how destructive traditional executive compensation plans are to business and the investment firms involved in the crisis have proved me correct. Rewarding executives on “results” turns them into short-term, greedy tyrants. I have personally witnessed personalities of managers change when they are given targets that are tied to monetary rewards. Remember Maslow, Kohn and Hertzberg? These guys have hundreds of articles and papers that discuss the link between intrinsic and extrinsic rewards and the type of behavior associated with each (possibly a future blog entry, but not enough time to get into it here).

First of all, rewards need to be given based on areas that strengthen the long-term health of the organization. Things like lowering employee turnover, training hours, quality levels, customer satisfaction, and even supplier satisfaction will lead to behavior that strengthens the organization. Secondly, executive bonuses need to be capped – an executive must never receive grossly high compensation while others in the organization are not rewarded (or rewarded at token levels). Bonuses should also not drain the organization of capital that can be used for future downturns or improvements like employee development, new products, new technologies, etc.

The most important thing to remember, though, is to appoint, hire, or promote people who have the proper values and understand that the job of a leader is to serve those he or she leads. This is critical to strengthening the organization and making it able to withstand downturns.

So as we go forward (and I’m assuming we will move forward), I appeal to the U.S. Government to take whatever time is necessary to truly fix the problems that exist today. Do not worry about re-election and today’s stock market and PLEASE do not let Sarbanes or Oxley get involved.

A 360° Savior?

Tweet

It can help, but if you're expecting 360° feedback to drive improvement, your wait may be long and frustrating

Those who have read W. Edwards Deming’s books [1,2] or experienced one of his 4-day seminars undoubtedly learned about the destructive effects that performance review systems have on people and organizations. Despite the warnings from Deming and others about the detrimental effects of the practice, however, many managers continue to cling to the process because they don’t know of anything with which to replace it (which, it should be noted, is no excuse to continue a practice that, at best, has no value to the organization). Now that we have 360° feedback systems our problems are solved, right? Probably. . . not.

A 360° feedback system is a process that enables an individual to receive feedback from his or her supervisor, subordinates and co-workers (hence the name, 360°). The process has gained considerable attention in recent years as a way to overcome the problems associated with a traditional performance review system. Although in theory the process makes sense, when implemented in an improper culture it can be just as destructive as traditional reviews. Just like many other performance improvement tools, 360° feedback is only effective when implemented in an improvement-focused environment where the leaders understand and support the theory behind the concept.

WHAT IT DOESN'T DO
As with other organizational improvement tools used over the years, 360° feedback has been over-hyped and promised to deliver much more than it actually can. Because of this, expectations are high when an organization embarks on a mission to implement the system. Unfortunately, this often leads to frustration, disappointment and further distrust of improvement initiatives, which is something that we have too much of in organizations already.

To align expectations and make sure the company’s culture is advanced enough to benefit from a 360° review system, it is important to understand what the system can and cannot do. By itself, a 360° review will do nothing. It will not improve performance, teamwork or communication, and without total confidentiality of results, it also will not lead to employee development.

What the system can do, however, is provide valuable input to a personal development plan. The development plan pulls together the 360° feedback along with other information, including the person’s career objectives, and new skills related to corporate directives (e.g., new safety initiatives, organization-wide training programs, etc.). The plan becomes a commitment to, as well as a roadmap for improvement. It also becomes a basis for dialogue between an employee and his or her supervisor.

If the system does not include some type of personal development plan and relies solely on the person receiving the feedback to act on the results, very little will change. Personal development is unfortunately a low priority in today’s business world because
people are too busy and many lack the knowledge necessary to improve themselves. When emphasized and regularly reviewed, however, the development plan adds credibility to the process and validates the importance of personal growth to the organization.

The 360° review is obviously a key input to the development plan because the
feedback comes from a person’s internal customers and suppliers. Organizations are becoming increasingly complex and success is heavily dependent on the quality of the interactions between people. As these interactions improve, an organization’s performance improves. By receiving and acting on the feedback from those with whom a
person interacts throughout the course of business, the interactions, and hence the
operation can improve.

THE NECESSARY ELEMENTS
There are several elements that are necessary to help create an environment in which a 360° system can succeed. Unless these elements are present, the process has little chance of aiding the improvement effort.

Confidentiality of Results The first requirement is to keep the results of the feedback completely confidential. This means that, unless a person decides to share the feedback with others, nobody has access to the information; not even the person’s supervisor. This is a difficult concept for many managers to accept because of a loss of perceived control. Some managers have become so accustomed to judging the people who work for them that they feel entitled to this type of information. Without complete confidentiality, however, the 360° process will experience many of the same problems as a traditional performance evaluation system. People will become defensive about the results and those providing the feedback will be less open and honest if they believe the exercise will result in negative consequences for the person receiving the information.

As with any activity, people will be more likely to willingly participate if the process results in positive action, but shy away from it if it leads to negative consequences. Basically, without complete confidentiality of results, a lot of energy will get directed toward things other than improvement.

A common concern about keeping feedback confidential relates to a lack of documentation for protection against dismissal-related lawsuits. The objective of a 360° system, however, is improvement. It is not a tool to fire people. Documenting a problem with an employee needs to happen when the problem occurs rather than waiting until the next review, which may not occur for several months later. This, along with the high level of subjectivity involved in performance evaluations, and the fact that people often
use evaluations to document general issues rather than specific instances of problems, makes them virtually useless in defending the company against lawsuits anyway. In a survey of labor attorneys reported by Tom Coens and Mary Jenkins[3], it was found that 7 out of 10 attorneys did not find performance appraisals beneficial in defending companies against wrongful discharge suits. It should also be noted that “problem” employees generally result from ineffective hiring practices, poor leadership, or both.

Customer Focus A second element of an effective 360° process is a customer focus throughout the organization. This means that everyone understands their role in serving customers, both inside and outside of the organization. Without a customer focus, people will direct their efforts toward satisfying the needs of the boss rather than those of the customer. This will cause the feedback received from internal customers to be ignored (or reduced in importance), resulting in frustration and an overall lack of interest in the 360° process, and a lack of improvement activity.

Maturity & Teamwork Another vital element of an effective 360° system is a high level of maturity and teamwork throughout the organization. If there is internal competition and frequent conflict between people and teams, the feedback will tend to be more negative and personal than constructive. To be useful for improvement, the feedback needs to be actionable by the person. The more negative and personal the information, the less the person will be able to identify specific steps to be taken to improve.

Careful Selection of Respondents To prevent 360° overload within the organization, the respondent group needs to include a sampling of the subject’s internal customers, rather than everyone with whom the person interacts.

There are many organizations that utilize the process by having the entire management team provide feedback to each other. This practice becomes extremely burdensome for people who are already overloaded and turns people off of the process.

To keep the time drain on people to a minimum, nobody should be selected to provide feedback to more than three other people during a given period of time. The only exception, of course, is a manager who is required to provide feedback to everyone on his or her team, regardless of the number of people involved (the feedback exercises need to be staggered, if necessary, to keep the process from overloading the manager).

Depending on the size of the organization, the HR department may need to get involved to keep anyone from being selected for more than three assessments. If managers are not willing to take the time necessary to plan the selection activity, it is better not to embark on the 360° process at all.

Coaching and Guidance The final element necessary for success in the process is the ability to understand the feedback and provide guidance to people in the development of an improvement plan. Although it sounds basic, there are many companies that focus so heavily on implementing the surveys that they don’t know what to do to help people act on the results. When this happens, the unfortunate result is a lot of money and time spent on a tool that provides no value to the organization.

Taking the time to assess the organization’s readiness for a 360° system before attempting implementation can save the company a lot of time, money and frustration. It
is also important to understand that, like many of the tools used in an organizational development process, a 360° process cannot by itself drive improvement. When
implemented correctly in an environment where improvement is part of the culture and driven by the organization’s leaders, however, the process can help people better understand who their internal customers are, what they want, and what they need to do to better contribute to the organization’s success.

REFERENCES
[1] Deming, W. Edwards, The New Economics, Massachusetts Institute of Technology—Center for Advanced Engineering Study, Cambridge, MA, 1993.
[2] Deming, W. Edwards, Out of the Crisis, Massachusetts Institute of Technology – Center for Advanced Engineering Study, Cambridge, MA, 1982.
[3] Coens, Tom and Jenkins, Mary, Say Goodbye to the Performance Review: Why Dr. Deming Was Right All Along, The Human Element, Human Development and Leadership Division of the American Society for Quality, Fall 2001.
Stocker, Gregg, Avoiding the Corporate Death Spiral: Recognizing & Eliminating the Signs of Decline, Quality Press, Milwaukee, WI, 2006.

Practices Leading to a Death Spiral

Tweet

Keeping up with business news today can be depressing. Layoffs, plant closings, and job moves continue to occur and have become so commonplace that they don’t warrant much more than a mention in the news. It’s also interesting that, not too many years ago, many of the companies in trouble today seemed pretty much invincible. They were large, strong, and very profitable. So what happened?

Many of the reasons blamed for the downfall of companies are somewhat sensible: poor economic conditions, rising energy costs, natural disasters, terrorism, etc. There is no doubt that these external issues affect company performance. If these are the causes of a company’s troubles, why do competitors in the same industry serving the same customers perform much better?

It comes down to the job of managing – which is to continually build the health of an organization. Just like the human body, an organization has an immune system. As long there are no severe external stressors, an organization with a weak immune system can appear successful (just as a person with a weakened immune system can appear healthy). As soon as something external – and completely out of the control of the business – occurs, the weakened immune system becomes evident and performance drops off severely.

By the time external events occur and a company’s profits and/or market share shrink it is too late. Company decline has begun and executives do not feel they have the time to work on issues that don’t have immediate impact. The company enters crisis-mode and begins to make drastic cutbacks – including plant closings, layoffs, and severe budget cuts – in order to return the company to profitability. Although these items are often well-intentioned, these actions cause damage that often cannot be repaired and the company sinks further into the death spiral.

Companies that continually work on improving their health still have problems. In fact, they recognize that the job of improvement is never done. Toyota is a very strong company, but still runs into problems now and then that affect its performance.

Improving Organizational Health

There are six common practices in organizations that gradually break down its immune system and set it up for failure. Even if the organization appears to be successful, the existence of any of these practices is a sign that troubles are ahead. Stopping these practices begins the process of building the company’s health, thereby reducing the effect of external events on its future.

Practice 1: Losing Purpose

The first practice is forgetting the purpose of the organization and focusing on purely financial results. Companies need profits to survive, but they are not the reason for their existence. An organization is created to serve a need in society. It is vital to remember that need in order for the company to stay focused and successful. The more it strays from its fundamental purpose, the more teamwork breaks down as people define purpose within their own area of specialization (e.g., salespeople define it in terms of sales; accountants define it in terms of cost control and financial results; etc.).

Profits result from sticking to the purpose and doing it well.

Practice 2: Number-Obsession

Number-obsession occurs when managers attempt to run the organization from a spreadsheet instead of through people, processes, and purpose. It is not uncommon today for a manager or executive who spends more time with a spreadsheet than his or her team members.

Meetings that consistently start with review of numbers and financial results is a sign that number-obsession exists. Unfortunately this practice, which was initiated during the 1950s has become pervasive throughout American industry to the point that, a person who is not good with numbers little chance of rising to the executive ranks.

Practice 3: Squeezing Suppliers

Supplier squeezing refers to basing the relationship with suppliers on the basis of price and payment terms. Suppliers are a part of a company’s system and it is important to understand that, when a supplier suffers, its customers also suffer. Squeezing suppliers results in lower quality products and services, longer leadtimes, and a breakdown of trust with your suppliers.

To measure suppliers accurately, it is important to include the costs of extra inventory due to quality and delivery problems, longer processing time due to variation in incoming materials, cost of incoming inspection, rejections by the customer, and nonmeasurable costs like design support and expertise that a supplier can provide.

Practice 4: Undervaluing Employees

Balance sheet aside, companies that treat employees as an expense do not value their contributions. On the employee side, there is little pride of association with the company. Employee turnover is high, layoffs are common, and employee morale is low.

On the other hand, companies that treat employees as assets invest heavily in training and development. Employee turnover is low and morale is high. The management team is made up of people who have risen through the ranks and have a great deal of experience with the company’s products, processes, culture, and customers.

Practice 5: Dirt, Clutter and Damage

Workplaces that are dirty, unorganized, and equipment is worn and broken. Productivity and quality is usually low, while accidents rates and costs are high. Companies that do not respect their assets – do not respect their people.

There is an unfortunate preventive maintenance paradox characteristic of American companies: When business is good, there is no time for preventive maintenance – When business is bad, there is no money for preventive maintenance.

Practice 6: Operational Fragmentation

Operational fragmentation occurs when the organization is managed by breaking it down into individual departments and setting separate objectives for each component. All to common, objectives are set for individuals and departments that conflict with each other. People meet their objectives – especially when tied to compensation – which does damage to the organization as-a-whole.

Organizations need to be led as a system – not as individual components. Objectives should be organization-wide so everyone can work together for the good of the company.

More detail about the practices, including how to identify their existence and eliminate them, is available in my book, Avoiding the Corporate Death Spiral: Recognizing & Eliminating the Signs of Decline (Quality Press, 2006).