Archive for the ‘Current Events’ Category

The Power of Leader Charisma in Employee Engagement

Saturday, April 10th, 2010

The last couple years have been tough on organizations on many fronts.  One area organizations are now struggling with in particular is employee engagement.  Through this trying time much has been written about what it takes for leaders to create and develop engaged workers at all levels of the company.  This entry pulls together some of those conceptual threads to suggest ways of using your personal charisma as a leader to help energize your employees.

Let’s start with a quick look at leader charisma.  First, what does charisma mean?  Wikipedia defines charisma as a personality trait that features personal charm and magnetism, along with powerful interpersonal abilities.  But what makes leaders personally charming or magnetic?  It might be helpful to think about what charismatic leaders do and what they do not do, what they embrace as behaviors and what they avoid or totally eliminate. 

One way to think about it is in terms of the interpersonal signals leaders emit to others around them.  This includes their non-verbal behaviors, like eye contact, facial and hand gestures, energy and enthusiasm, or how close they stand to people.  Signals also include verbal behaviors like word choice, vocal tone, and clarity of articulation. 

Successful, charismatic leaders.  The most charismatic leaders are those who exhibit an energized, enthusiastic presence.  They are verbal and talkative, but also spend a good portion of their time asking questions of others and deeply listening to the responses.  They recognize and appropriately respond to people’s interpersonal cues.  They draw people out with their gentle queries and encourage others to speak up and participate in conversations or discussions.  Optimistic and upbeat, they motivate others and help create a collaborative environment and culture. 

Charismatic leaders often set high standards for their teams, and they hold themselves to the same metrics.  They make their expectations clear, cast a motivating vision, and help remove obstacles so their team members can feel good about the progress they make.  Though serious in their focus on achieving objectives at the highest levels of quality, they also exhibit an inclusive sense of humor.  And they make it a priority to help their direct reports develop in their careers.

Sounds too perfect, doesn’t it?  The good news is that leaders do not need to be perfectly charismatic in order to have a very positive effect on their direct reports and others.  Even if they simply avoid the opposites from those attributes and approaches outlined here, most people will view them positively as leaders.  For example, just by avoiding things like accepting mediocre work, being closed to new ideas suggested by others, displaying a lackluster level of energy, and projecting a muddled vision, most leaders will exhibit a level of charisma.  You do not need to be perfect to be charismatic.

Engaged, resourceful followers.  You can also positively affect your team members by emphasizing the importance of facilitating “followership” as you lead.  This graphic outlines the various types of followers you may currently have on your team:

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In the lower left corner are those followers who are relatively disengaged from their jobs and the rest of the team, and, at the same time, likely to avoid decisions or actions that seem risky to them.  Your goal as a leader is to help team members move from this quadrant to the resourceful and engaged part of the graph.  Followers here display a good level of energy related to their tasks and responsibilities, and they are capable of coming up with new ideas for improving their approach.  One way to dial up your charisma and encourage development on your team is to identify which of your direct reports would best be described as:

  • Risk-averse and disengaged
  • Risk-averse, but engaged
  • Resourceful, but disengaged
  • Resourceful and engaged

Each category, above, requires a different charismatic strategy to generate enthusiasm and optimism on the part of your team members.  Of course, for the resourceful and engaged team members, the strategy is simple—keep doing what you are doing and try to stay out of their way!  But, what about the other three categories?

For the resourceful, but disengaged, the key is to figure out what is causing the disengagement.  Perhaps you have not sufficiently reinforced them for their resourceful ideas and actions, and, consequently, they have become discouraged.  Maybe something outside of work related to their personal situation is causing them to disengage from work.  They might even be depressed on some level and not cognizant of their level of disengagement.  Whatever the cause, your role is to point out examples of the disengagement and express your desire to help them re-energize and become engaged again.  Reinforce any behaviors you observe that seem energetic and positively engaged.

In the case of the risk-averse, but engaged, the primary need is to help them experience success in taking risks.  Start by giving them small stretches that might not seem risky to you, but may seem like major hurdles to them.  Give the degree of support they need as they work on the task, and encourage every resourceful step you observe.  Continue to give them assignments that stretch their comfort with risk, and make sure you positively reinforce every resourceful step you observe them take.

The most entrenched and difficult to move are the risk-averse and disengaged team members.  They need a consistent combination of reinforcement for small steps they take to optimistically solve problems or take a risk, as well as any expressions you observe that suggest energy and engagement.  You might consider pairing them on projects with someone who is both resourceful and engaged, to see if the enthusiasm of the one rubs off on the other.  As a last resort, you should consider replacing the person in the position.  Disengaged, risk-averse workers are not happy in their work, and might blossom in a very different role.  Sometimes, the most compassionate step you can take as a leader is to help someone exit their role or the organization.

The bottom line.  To function as a charismatic leader, you must exhibit energy, engage others in communication in which you both listen and convey your thoughts and feelings, and use humor to disarm stressful situations.  Make certain your expectations are clear, set high, but attainable goals, and ensure that the team makes good progress.  Prioritize the development of your team members so that they become more engaged and resourceful in their work.  The result will be one in which you, your direct reports, and the organization all win.

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Under-reacting: Lessons from Ft. Hood

Wednesday, March 10th, 2010

The massacre at Ft. Hood, in which an Army major killed 13 and wounded 42 military and civilian personnel, raises important questions about a little-examined behavioral problem: under-reaction.  The media seems mostly focused on the question of whether this was a terrorist act or another example of someone “going postal” due to psychological problems.  We will not address that question in this paper.

The more compelling question for those of us who coach and train organizational leaders is why so many people suspected issues with this individual, but neither reported them nor took them seriously enough.  The question we explore in this paper is what “under-reaction” is and why it exists in the repertoire of human behaviors.

We know that people around Maj. Nidal Hasan noticed or documented these issues, but did not take decisive action:

  • A former med school classmate described him as a very outspoken opponent of the war in Iraq
  • In 2007, his supervisor at Walter Reed wrote a memo claiming that Hasan showed a pattern of poor judgment and lack of professionalism
  • Also in 2007, Hasan gave a slide presentation to fellow medical staff at Walter Reed Hospital, in which he stated Muslim soldiers should not serve if they are in a position to injure or kill fellow believers
  • In 2008, the FBI Joint Terrorism Task Force looked at his email exchanges with a US-born, radical Muslim cleric living in Yemen, but dropped their investigation
  • Earlier this year, he came to the attention of law enforcement officials for reasons that are unreported so far
  • He recently posted radical Internet statements regarding suicide bombings

There may be excellent reasons why no one connected the various “dots’ of issues with Maj. Hasan and concluded that he could be a danger to himself and others.  The issues involved unconnected agencies and individuals, occurred over several years, and could have been dismissed simply as cultural insensitivity on the part of the observers.  Yet, we cannot help but ask, “what if someone had stepped forward and acted decisively?”

The broader question that becomes a lesson from this tragedy is why people, in general, observe situations and fail to respond appropriately to them.  More specifically, why do organizational leaders at multiple levels under-react?

Under-reaction is fear-based.  When people fail to respond appropriately in a situation, sometimes it is the result of lack of knowledge or skill to do so.  Most often, however, failing to respond is the result of irrational fears and faulty beliefs that undermine a reasonable response.  Bruce Roselle describes this phenomenon in his book, Fearless Leadership (2006).  For organizational leaders, under-reacting to situations that present themselves is as dangerous, and perhaps more dangerous, than over-reacting.  The goal for any leader in any set of circumstances is to respond appropriately, with the right level of timeliness, force, and insight.

What dynamics create the “perfect storm” to make a leader under-react?  The graphic, below, illustrates that the two primary factors are level of logical analysis and degree of fear of consequences:

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From the graph, we can see that as fear of consequences for taking action increases, the likelihood of an appropriate response occurring significantly decreases.  Most often, an appropriate response comes as the result of a moderate degree of logical analysis and a low fear of consequences.  When leaders over-react, it is usually the result of a knee-jerk reaction based on high fear of consequences and little forethought.  Under-reaction, on the other hand, results from high fear of consequences and too much thought.  Unlike over-reacting when a person or situation pushes your buttons, under-reacting stems from analyzing too much.

In responding appropriately, leaders typically demonstrate these kinds of behaviors:

  • Trust gut intuition
  • Spend a reasonable time in analysis before taking action
  • Discuss the situation with trusted others for additional perspective
  • Use common sense (if it walks like a duck and quacks like a duck…)
  • Take personal responsibility to act, even if others are also likely to take action

By contrast, leaders who tend to over-react to situations often exhibit these types of behaviors:

  • Become defensive, angry, and resistant
  • Blame others for the situation, find fault outside themselves
  • Engage in cultural profiling, projecting their fears onto others
  • Sound and look irrational to observers
  • React with either passive avoidance or aggressive attack

The behaviors of leaders who under-react typically include these:

  • Worry about being politically correct
  • Afraid to take risks, make mistakes, or be seen as incompetent by others
  • Analyze situations to the point of paralysis, unable to take action
  • Believe that others who are more competent, confident will take action, step in to risk the consequences
  • Do not trust their intuition or common sense to be correct

Minimizing under-reaction in your leaders.  What can organizations do to apply lessons from the Ft. Hood tragedy in order to minimize the negative consequences of under-reaction?  Perhaps the most important lesson is to make certain that your organizational culture genuinely encourages leaders to reward risk-taking.  This does not mean kudos only for those who try and succeed, but also for those who try and fail, and learn valuable perspective in the process.

A second critical lesson is to promote openness and honesty, even when it means, “blowing the whistle” on a situation or coworker that could be dangerous or problematic.  While you want to fall far short of creating a vigilante environment, it is possible to develop a team-based culture in which people talk straight to each other about behaviors they observe, and, if that fails, talk to their supervisors about potential problems.

It is also important to encourage taking action, even if it may occasionally come off as a ready-fire-aim result.  Since a key factor in under-reacting is to analyze a situation too much, encourage leaders to move forward into action and know that they can adjust their direction as new facts become available.  Emphasize the importance of taking personal responsibility for taking action to address safety, quality, and other issues.  If five people shine a light on a potential problem, that should be viewed as preferable to only one person bringing it to someone’s attention.

To paraphrase the observation of Sen. Joe Lieberman regarding the under-reaction at Ft. Hood, “When people become aware of someone behaving in a way that seems extreme, they must reach out to do something before real harm occurs.”  How can you reach out and do something?  Start with self-examination of the ways in which you might be guilty of under-reacting as a leader in your organization.  Then, begin to do what you can to reward risk-taking, promote openness and honesty, and encourage others to take action.

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What are you doing to protect your organization’s future in these troubled times?

Tuesday, November 3rd, 2009

In a shaky economy, many organizations take dramatic steps to freeze expenses related to new hires and promotions, downsize, and suspend or limit expenses.  This is the conventional response and it makes good economic sense.  In fact, these moves, plus a focus on protecting the existing business revenue, are often critical in the short-term to insure that organizations remain viable. 

For the most part, senior executives have little illusion about the severity of the current economic crisis, or the chance of emerging from it soon.  Most corporate leaders are taking deliberate, intentional actions to manage through the challenges, and part of that is to lower costs and increase efficiency by reducing headcount and restructuring jobs.

The conventional response.  Laying off a percentage of the workforce is one option companies choose, but often is not the best way to reduce expenses.  A 2001 study by Bain & Company, for example, found that it took companies six to 18 months to realize savings from job cuts after the 9/11 attacks.  The actual time to realize savings is probably longer, since these numbers do not reflect the additional costs of recruiting, hiring, and training new people when the economy turned back around.  Other options to decrease cost, and often better ones, include cutting salaries, reducing benefits and perks, mandating a standard number of unpaid vacation days for everyone, or offering financial incentives for voluntary separation.

For example, in a March 2009 study by Roselle Leadership Strategies, Minneapolis, that included 30 companies ranging in size from below $50M to more than $10B, 67% are making targeted cuts in workers and managers in what they deem the least critical areas, and 70% are working with vendors to reduce cost and/or inventory.  Nearly 100 percent indicate they are taking some steps to reduce costs.  The specific steps they identify include:  institute pay cuts, increase virtual meetings, freeze or limit new hires, close marginal business lines, reduce travel and other discretionary expenses, require all employees to take unpaid vacation time, delay the filling of vacant positions, make changes to existing health plans or 401K matching contributions, and put off various consulting expenses. 

Not all cost reductions are equally helpful.  The key to effective cost reduction is to keep your organization’s core competencies intact.  Leaders need to have clear understanding of, and commitment to, the capabilities that differentiate them from the competition.  Organizations cannot succeed long-term by making short-term decisions that undermine this strategic differentiation.

The challenge for leaders in trying times like these is to be courageous and strategic, and at the same time, practical and realistic.  This is the paradox at the core of an unconventional response to an economic  downturn.

The unconventional strategy involves four facets:

  • tapping into the creative ideas of the entire organization
  • creating a distinct process for strategic expenditures
  • investing in leadership development for the stars
  • attending to the personal lives of employees.

Tap all creative ideas.  While leaders seek areas in which to make financial cuts, it is important to tap into the creativity of the entire organization for future-oriented ideas.  In difficult situations, leaders too often hunker down and try to make all the brilliant decisions themselves to save the organization.  A better strategy is to tap into others at multiple levels to harvest their thoughts and energy.

Many corporate leaders recognize the importance of developing innovative approaches to address business challenges.  One way to foster creativity is to cultivate an open and collaborative culture.  The key is to develop a corporate mindset that stimulates people to think and do things differently, and then stays out of their way enough to let ideas percolate.  Workforce diversity helps fuel this process.

Success often depends on leadership’s ability to use open-ended questions to nurture inventive problem solving, encourage information exchange and scenario analysis, and challenge the status quo with a motivated vision.  Leaders must identify the innovators in the organization, the ones that can focus on the most important kernels without getting lost in the peripheral chaff.  Successful innovators can look at business challenges from multiple perspectives and identify those approaches most likely to fly in the organization’s culture. 

In our study, we found that fully 70% were making deliberate attempts to tap into creative ideas across the organization.  How are they doing this?  By asking questions and listening (57%), encouraging information exchange at multiple levels (53%), developing various future scenarios (60%), and sharing a motivating vision of the future (60%).

Create a process for strategic expenditures.  Recognizing that this economic downturn will not last forever in its current condition, and that the marketplace may not return to its former condition, organizations must develop new strategic initiatives, and set aside money to fund them.  These might include new products, reconfigured services, expanded marketplaces, new business models, and improved talent base.

The key here is to develop some likely strategies and allocate sufficient resources to test them.  History tells us that in the lean times, future orientation rules the day.  For example, from early 1973 to late 1974, the U.S. stock market experienced a 45% drop in market value.  Spikes in oil and gas prices, easy credit, and a murky military endeavor (Vietnam) preceded this dramatic drop.  Sound familiar?  Despite these challenges, companies like FedEx, Southwest Airlines, Microsoft, Apple, Genentech, Oracle and others were born during this difficult economic time.  

This next generation’s growth companies will be the ones that exploit technology and innovation and learn to thrive during periods of deflation, inflation, and delusion.  Even in this economic downturn, such companies will invest in new products and services, nurture innovation, leverage technology, and expand into new markets.  They will expand segments of their workforce in potential growth areas, at the same time they decrease headcount in other areas.   

The new growth companies will search their high potential talent pool to find innovative people and give them future-oriented projects with few parameters to limit their thinking.  Since innovators need access to resources and networks of people against whom they can bounce ideas, leaders will also remove obstacles, and encourage mentoring and peer feedback. 

Some companies will look for opportunities to increase the level of their talent by intentionally seeking innovative and self-motivated individuals from other companies who are frustrated at the reduced career options with their current employer.  In a 2009 Deloitte study conducted by Forbes Insights, nearly half of the 300+ senior business leader respondents indicated they would focus on product development and innovation this year.  Fully 40% indicated their organizations would recruit more for critical talent. 

These recruitment efforts might include deliberate steps to build a marketplace brand that identifies them as a highly desirable employer.  From our work with Target, for example, we know that their brand image, built on a combination of business success, appealing products, and corporate philanthropy, is a major attraction to potential employees. 

In our study, 83% of responding companies indicate they are intentionally setting aside funds and creating distinct processes for developing future-oriented products or services.  Most (70%) indicate a focus on expanding or re-defining existing marketplaces, while 43% indicate they are budgeting for new or re-configured products or services.  About a third indicate they are creating pilots of new business models, and another third that they are exploring new product test markets.

Invest in leadership development.  One type of expenditure that many organizations consider a strategic priority is to retain and develop the critical talent they currently employ, while they attract similar talent for their future needs.  Downturns present the perfect opportunity to enhance and deepen workforce skills and capabilities.  It is smart business to use this time to help high performing managers and high potential stars expand and deepen their leadership skills in areas like collaboration, team play, and big picture strategy. 

Talented people are difficult to recruit and retain, and even more difficult to replace if they choose to leave.  Retention of key talent is a major concern across many organizations this year.  In the Deloitte study, nearly half of the senior business leaders who responded indicated their intention to invest in building new workforce skills despite the economic climate.  The companies in this survey came from across the globe, and ranged in size from $500M to more than $20B. 

Market leading companies recognize that leadership development is not just nice to have; it is essential to maintain and build competitive advantage, especially in tough economic times.  For example, Toyota pulls people offline in these times and provides training.  They utilize this strategy because the costs involved in providing leadership preparation and coaching are relatively small when compared to the potential future ROI.  Growing leaders from within an organization by using strategic work assignments, internal mentors, external coaches, performance feedback, and structured succession planning is a strategy increasingly employed by successful organizations. 

72% of those polled in the Deloitte study indicated the intention to direct limited human resource dollars to the development of leaders and high-potential individuals.  The same group of business leaders indicated that 48% intended to invest in building new skills in their workforce.

We determined in our study that 100% plan to invest in their key leaders during this downturn.  With more specific responses, they indicate their intention to take steps to maintain high motivation and productivity (80%), enhance skills and develop leadership capability (70%), and work to increase the likelihood of success once the economy turns around (50%). 

Pay attention to the personal lives of employees.  It seems obvious that creating personal relationships will help leaders get the most out of their employees, but most managers believe they are better at this than they actually are.  Times of dramatic change create predictable stress and fear in your workplace.  In the Deloitte study, an average of 44 percent of surveyed leaders indicated a decline in the morale of their employees, and almost 30 percent reported a decrease in trust/confidence in leadership. 

Greater attention paid to employees’ lives outside of work, and the personal toll on them caused by the changes, usually results in greater productivity, morale, and trust.  Acknowledging the pressure and affirming people for their efforts creates greater loyalty and effort.

Among the methods utilized by the organizations in our study, 93% indicate they are taking steps to acknowledge and show concern for the toll taken on those who remain after layoffs.  More specifically, 77% point out that they are affirming employees for their efforts and 67% indicate they are showing compassion for the emotional toll and the strain on their families.  Only 30%, however, say they are providing individual or workshop-based counseling for those who remain.

Peter Drucker describes the essence of leadership as the balance between managing what you have, and creating future capacity.  The dilemma in this economy is how to make the best choices in the dynamic tension between surviving now and thriving in the future.  The key to the courageous response is to be adaptive, imaginative, and practical.  Tomorrow’s industry-leaders will be those that position themselves to move quickly and effectively when the economy inevitably comes back around.  They will do this by cutting the fat, nurturing creativity, encouraging new strategic initiatives, and developing the talent that remains.

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When the economic outlook seems grounded, invest in the stars!

Thursday, September 10th, 2009

When storms keep fishermen at port, they spend the time mending nets, repairing their boats, and discussing strategy so that they will be more productive
once the storm clears.

The conventional response. In a shaky economy, many organizations choose to freeze expenses related to new hires and promotions, to downsize, and to suspend or dramatically limit expenses for things like travel and capital expenditure. These moves, plus a focus on generating new revenue, are often necessary in the short term to insure that organizations remain viable for the long term. However, it is critical to offset the increases in workload and frustration on remaining employees caused by such measures. Even the most talented and motivated workers will respond with fear and sub-optimal performance in response to such changes in the work environment.

The courageous response. A great way to offset the negative impact of cost-cutting measures is to invest in high potential and high producing leaders throughout the organization during the slow economic times. Relative to the savings netted by freezing new hires or downsizing overall head count, the cost of leadership development is small. However, to engage in such initiatives during an economic downturn, even a major one, sends a strong and reassuring signal to the star performers who remain. This is the courageous response, and it leads to stronger companies long-term.

Though it may run counter to conventional thinking, it is even more important in the midst of an uncertain business environment to invest in your star performers.  Although the tendency may be to put leadership development in the “nice to have” category, smart organizations invest in their retained talent.  They maximize the productivity of their people now, even with limited resources, to prepare for a quick and competitive start when the general business climate improves.

Some companies actually increase their market strength during tough times.  Toyota, for example, pulls people offline in the slow times and provides classroom training for them (based on an article in the December 2008 Training + Development Journal, American Society for Training and Development).  They do this to better position themselves for the inevitable upswing. 

Why develop your leaders?  It is helpful to remind ourselves why successful organizations invest in leadership development initiatives in the good times.  Our research with clients over the last decade indicates these primary reasons for investment in their leaders:

  • Increase productivity:  From a quality/continuous improvement point of view, people—like products and processes—need to become more effective; greater effectiveness yields greater productivity.
  • Retain top performers:  The relationship between manager/executive and his/her subordinates is the key factor in retention; when leaders are ineffective at building and maintaining relationships, when top performers are not developed to their full potential, retention suffers.
  • Plan for Succession:  Senior managers and managers must look at how to leverage strengths and manage their development edges every year to be ready for greater responsibility.  The leadership pipeline needs to be robust for the future, and stars need to see opportunities on the horizon.
  • Foster a Motivated Environment:  The effective role model of leaders who are motivated to become better, themselves significantly impacts the drive to continuously develop and improve.  Leaders set the tone, especially in economically shaky times.
  • Form More Effective Teams:  When leaders at multiple levels identify obstacles to the effectiveness of their team and exhibit a commitment to work through these, the team becomes more effective.  Often, their own leadership style and capacity is one of the obstacles.

The compelling three reasons.  If these five outcomes are important in the good times, how much more critical must they be during business downturns?  Here are three reasons your organization should plant leadership development seeds in its stars now (based on the results of several recent leadership surveys described in the Training + Development journal of the American Society for Training and Development), in order to harvest their increased capacity when business turns around later in 2009:

  • Increase motivation, productivity.  Though 75 percent of senior leaders identified leveraging leadership talent as a top priority, 60 percent of leaders at lower levels were not satisfied with their leadership development options.  This leads to reduced satisfaction and a less motivated and productive environment.
  • Maintain competitive edge.  Star performers want on-the-job opportunities for skill development, and this is even more important when their options for promotion or increased responsibility decrease in a sluggish economic climate.  With many organizations already lowering salary increases or freezing them in 2008, providing development opportunities is a way to offset the lack of financial reinforcement.
  • Retain top talent.  Close to 50 percent of high performers leave their jobs due to ineffective leadership above them and/or a poor relationship with their immediate manager.  Though these employees might not have the opportunity to leave your organization in slow economic times, up to 30 percent will likely jump ship quickly when opportunities open up in the marketplace. 

The bottom line.  Leadership development is not just nice to have; it is an essential competitive advantage in propelling your organization into the future.  Tomorrow’s industry-leading companies will be the ones that leverage the current economic climate by cutting the fat and elevating the talent that remains.  In so doing, these leading organizations position themselves to move quickly and effectively when the economy inevitably comes back around.  The cost of providing leadership training and coaching is relatively small compared with the potential ROI in the next year.

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My Vote on November 4th will be for Entrepreneurship

Wednesday, October 1st, 2008

These days, the presidential race hangs like a 45 pound weight around the neck of the collective American psyche.  Whether you’re a ‘bleeding heart’ liberal, a ‘staunch’ conservative or somewhere in between, there are likely a handful of issues that are legitimately salient to you.  There may be another 20 or so issues that you either don’t completely understand, or that you understand but do not feel strongly one way or the other.  This is the essence of our two party system—millions of citizens voting either A or B (in our case, McC(A)in or O(B)ama) on a test question that involves 25 subscales, each of which offers multiple subjective solutions. 

The reality is that few, if any, of the many and profound domestic challenges confronting our next president are fully resolvable by a single term in office.  The issues of ensuring greater access to and affordability of healthcare, addressing our looming entitlements crisis, making significant headway against poverty, and restraining man-made climate change will take much more than four or eight years under one president.

Above these important issues, improving the economy is of utmost importance and the policies our future presidents champion will have a dramatic impact on how rapidly our economy grows.  Continued growth in per capita incomes, generated through ongoing improvements in productivity, is what will drive improvements in living standards.  This faster growth is what will give us the requisite, sustainable resources to address each of our major domestic and foreign policy challenges.

Of course, government does not directly generate growth.  However, the private sector’s success, and thus the pace at which the economy advances, depends heavily on the rules, incentives, and basic infrastructure that government sets and provides.  None of our long-term challenges, or the opportunities afforded by faster growth, will be achieved in the future without continued innovation—new products, services, technologies, and ways of doing things.

American history reveals that many of the most important radical innovations—the telegraph, telephone, radio, television, automobiles, airplanes, computers and the software that operates them, and many of our current Internet-based successes (Google, Amazon, eBay)—have been introduced and commercialized first by entrepreneurs.  What we all should demand, regardless of our political affiliation, in our next president and governmental officials, therefore, is their deep understanding and promotion of policies that will best foster the entrepreneurial spirit that drives radical innovation.

For two decades from 1973-1993 the economy grew at only 2.5 percent.  However, from 1994 to 2000, annual growth jumped to about 4 percent.  Even after the 2000–2001 ‘recession’, and until the downturn this year, the economy still grew at roughly a 3 percent annual rate.  So what happened?

The conventional wisdom is that, beginning in the mid-1990s, growth surged because of the information technology (IT) revolution.  This revolution featured new technology, as well as the freedom for and support of entrepreneurs to take that technology to market.  Think for a moment about which firms made all this IT so easy to use.  The answers that immediately come to mind are companies like Microsoft, Apple, Sun Microsystems, Intel, Oracle, and Google.  The success of these entrepreneurial enterprises made it possible for the rest of us to change the way we live and for the firms we work for, or run, to churn out more products and services with ever fewer resources.  The days of large, established firms (Big Steel, Big 3 automakers, the old AT&T, etc.) driving the economy are over.

Looking ahead, rapid growth could not be more important.  30 years from now, per capita income will be roughly 35 percent higher if we can grow at the 4 percent annual rate we achieved in the last half of the 1990s, rather than the 3 percent annual rate that many now project for the future.  Further, over the next century the economy would be three times larger if it grew by 4 percent annually instead of 3 percent.

What can be done to maximize our chances of growing at the more rapid clip?  A few answers are apparent to me: improve education to build a more skilled workforce, reduce poverty through incentives, address our energy dependence, welcome high-skilled legal immigrants, and continue to open global markets.

The clear lesson from our recent past is that the central task for U.S. policymakers is to ensure that our entrepreneurial revolution continues, and that we do not slip back into anything like the Big Firm economy we once had.  Without entrepreneurs, economic growth stagnates.  Without economic growth, most of our country’s social problems will worsen.  Growth is life; stagnation is death.  In November when I walk into the voting booth and carefully choose between candidates A or B, above all else, my vote will be for entrepreneurship. 

The entrepreneur in us sees opportunities everywhere we look, but many people see only problems everywhere they look. The entrepreneur in us is more concerned with discriminating between opportunities than he or she is with failing to see the opportunities.
-Michael Gerber

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Reason for Optimism

Monday, May 5th, 2008

If you have picked up a newspaper or watched any sort of news or financial coverage in the last 6 months or so you are assuredly aware of the fact that the U.S. is headed uncontrollably into the worst financial times since the ‘mild recession’ of 1990.  My question is, when did speculation start creating reality?  Only about half of Wall Street investors can even use speculation to pick a bundle of securities that will beat a basic market index like the S & P.  To avoid creating an economic self-fulfilling prophecy Americans need to focus their attention on the positive.  A few reasons for optimism are that unemployment is low, interest rates are low, and the dollar is poised for a world market correction.  As a provider of high-level services to mid and large cap companies, RLSI’s survival is dependent on the survival of the U.S. economy as a whole.  Inspired by Rich Karlgaard, the publisher of Forbes Magazine, I believe that the grim outlook for the economy is oversold at this point, and that there are four main reasons for the unjust pessimism: The president is unpopular, it is an election year, the business press is scared and ineffectual, and the subprime mortgage mess is overstated.

At the moment, George W. Bush’s approval rating is hovering around 30%.  In other words, 70% of Americans disapprove of the job the president is doing currently.  Not surprisingly, this is the exact same percentage of Americans that report that our country is on the wrong economic track.  I wonder if these percentages could be related in some way…  On the other hand, half of Americans report that they feel positive about the future, and 84% say that they are satisfied with their lives.  This is an example of how confusing statistics can be, and why we have to be very careful not to jump blindly behind the results of the latest empirical study.  So, who do you believe?  Do you believe the 70% that say that the whole country is on the wrong track, or the 50% who are rosy about their own economic futures and the 84% who are completely satisfied with their lives?  My opinion is that the 70% who say that we are on the wrong track are merely expressing their Bush fatigue, not their pessimism about our economic future.

Related, we are wholly engulfed in an extremely compelling election year.  One thing that can be guaranteed about all elections is that the out party – this year the Democrats – will always say that the economy is in bad shape.  For example, in 1992 Bill Clinton’s slogan was: it’s the economy stupid.  In 1980 Ronald Reagan asked Americans if they were better off than they had been four years earlier – These men were on different sides of the aisle, but used the same message to get elected because it works.  In our current case, the Democratic primary season has been by far the more dramatic of the two races.  Understandably, both Democratic candidates are justifying their positions on the basis of a weak economy.  Since the democratic race offers incredible daily drama, it is justifiably getting much more attention in the press, and thus, the negative economic platforms of the candidates are getting lots of air time.

Exacerbating this issue is the fact that, according to Karlgaard (not me), most business journalists are not necessarily the best people in the world to have analyzing complex economic and business topics; most of them are, after all, just failed sports writers.  Think about what it takes to be a first-rate business journalist: facile with numbers and financial statements, confidence talking with top executives, board members, etc., deep knowledge of the industry, coherent global economic views and exceptional storytelling ability.  Karlgaard argues that the people who actually have these credentials and abilities become Wall Street analysts, Booz Allen consultants, or go into business on their own; they do not become journalists.  Another issue with business journalists is that they are in a fearful mood in general due to the fact that journalism itself faces threats of disruption from the Internet.  This thin talent pool, combined with the fearful moods of the writers and the fact that the majority of journalists are hostile to business anyway, often is interjected into their stories.

Lastly, as is commonplace in the media, numbers get stated as astronomical, but are not put into proper context.  For example, one of biggest issues with the economy today is the subprime mortgage mess.  It strikes fear in the hearts and minds of Americans to hear that banks have had to write off $150 billion in bad loans; how could our economy possibly survive this?  To put it into perspective, $150 billion is less than 1% of the market capitalization of U.S. stocks, and in a typical trading day U.S. stocks gain and lose $150 billion every hour.  The nearest historical comparison we have to our current mortgage situation is the savings-and-loan crisis of 1986-1995. Back then, the S&L crisis saw $700 billion in bad loans – nearly 5 times our current level – and during this period the U.S. economy grew and stocks went up.

All of this to say, maybe we shouldn’t be so doom and gloom about the future of our country.  Are the current economic conditions ideal?  No, not by any stretch of the imagination; but the economy was due for a correction for the prosperity of the last 10 years.  As was the case in the mid-90s, it will be business innovation and consumer confidence that decides our economic fate for the next decade.  It is up to us as business owners, executives, strategists, teachers, leaders, professionals and consultants to lead the economy away from the impending downturn and create our own reality – let us not just sit back and allow political speculation and economic pessimism to shape our futures.

‘…by the best cultivation of the physical world, beneath and around us; and the intellectual and moral world within us, we shall secure an individual, social, and political prosperity and happiness, whose course shall be onward and upward, and which, while the earth endures, shall not pass away.’                  
–Abraham Lincoln (1859)

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