Are There More Enron’s Out There?

Ken and Jeff’s not-so excellent adventure is entering a new phase. Both are headed to a jumpsuit jamboree courtesy of the U.S. Federal Government. It took nearly four years but the ex-heads of Enron – Ken Lay and Jeff Skilling - were found guilty as charged last week by a thoroughly non-gullible jury of their fellow Houstonians. The duo will soon be sentenced before heading off to prison to serve time for their crimes.

When Creative Becomes Criminal

It is easy to get caught up in the flawed personalities and ethical shortcomings of Skilling, Lay and Fastow - the main players in this American business tragedy. But the company they led was once highly regarded by academic researchers and the business media for its “out of the box” thinking, deal-making acumen, game changing strategies, intense internal competition, and a performance culture that gave outsized rewards for over-the-top performance. Enron may now be kaput, but these principles and practices are not only still prevalent but remain at the ideological and emotional core of American business. Proponents argue they fuel the innovation and growth that keeps the US economy on top. Critics point to Enron and dozens of other scandals as well as to over-the-top CEO pay as evidence that these principles and practices are leading to the wrong kinds of outcomes.

What changed Enron from a company of full of innovators to a cell-block’s worth of inmates? Did its demise result solely from the moral and ethical failures of its leaders? Or was its collapse also caused by a defect in the corporate American business system which causes some organizations to push the ethos of individual achievement and financial self-interest too far?

What Path to Profit?

A significant body of sociological research shows that groups and communities that are long lasting actively enforce rules against selfish behavior in their members. These studies show that punishment is a key to a group’s ability to profit - groups of people engaged in cooperative endeavors fail and go out of existence unless they have clear methods of punishing people who become selfish or exploitive.

In one of these studies, researchers at the University of Erfurt enrolled 84 students in an investment game. Each were given 20 tokens (redeemable in real money) to start. The object of the game was to maximize profit. This could be done either by pooling and investing the group’s tokens collectively which would yield everyone a guaranteed level of profit or by opting out of the group pool and acting alone to maximize one’s individual profit. Players were free to switch groups after each round of play. In the beginning, many players joined groups where individualistic strategies could be pursued without punishment. But by the fifth round, half of the players switched to groups in which players were penalized for not participating in the collective investment strategy. By the 20^th round the vast majority of players were in these groups. In the end, the groups in which members acted cooperatively instead of individualistically made the most profit.

Enron illustrates what happens when selfish individualistic behavior is not properly sanctioned and controlled within organizations. Its demise was spectacularly tragic, but everyday smaller implosions and meltdowns occur in businesses caused by many of the same forces that spiraled out of control at Enron.

Is Your Organization a Little Enron?

Here’s a test to help you gauge whether your organization is heading down the wrong path. How many of these seven Enron-like characteristics reflect your culture and environment?

Gonzo for Growth – Growth is a vital piece of any business equation – but constantly pushing for unsustainable levels of growth is a recipe for disaster over the long run. Ambition and stretch are good – obsession and overstretch eventually destroy empires whether national or commercial.

Deal Makers are Deified - The ‘bigger is better’ mentality rules in your organization and the rock stars are people who bring in the most revenue or sign the biggest deals. Your organization is fixated on size and gets easily caught up in large numbers and ‘big deals’.

Rationalizing Reigns – There is no room for straight talk – problems and deficiencies are never openly acknowledged or discussed. Questioning leadership only provokes censure or dismissal. Reality is what the top executives say it is. Certain questions and ideas are not talked about publicly. Dissenters are vilified and driven out. Leavers are devalued.

Only the Numbers Matter – Compensation and careers hinge in huge proportions on “making the numbers”, be they stock price, cost or sales targets. “Gaming the system” and accounting chicanery are common.

Inequity Abounds - The spin from the top is meritocracy but the on-the-ground reality is a caste system. Those who “perform” best are seen as deserving of preferential treatment and the lion’s share of rewards. After all they “add the most value”.

Intramural Warfare Rages - Competition among internal groups and individuals is often more fierce than with competitors - whether it’s Marketing and Engineering going at it; Sales thumbing their noses at Finance; one business unit competing against another for the same customer; or executives jockeying for positions of power and status.

Ethics Taught By the Book Not by Example – Ethics are something that employees need to have instilled in them through training and courses rather than the real deeply held values and natural behaviors of the organization.

How does your organization rate? Even if it strongly exhibits only a few of these traits, it could be headed for some trouble.

So, are there more Enron’s out there? My guess is that there are – and hopefully laws such as Sarbanes-Oxley and the regulators enforcing them will expose anymore of the Enrons in our midst before they do the kind of damage done by Mssrs. Lay, Skilling, Fastow and company.

Even Some CEOs are Criticizing CEO Pay

CEO's in the U.S. have been taking a public relations pounding over their excessive levels of compensation. While many have spoken out against this situation - not surprisingly few critical voices have been heard from mahagony row. Until now.

Ed Woolard, former CEO of chemical giant DuPont, gives a wonderfully folksy and straight-to-the-point critique (see the video) of excess CEO pay and what should be done about it.

His key idea is to institute what he calls "internal pay equity". This practice links the amount of CEO compensation to what the other key executives are paid, not to what CEOs in other companies get.

Other companies like Whole Foods Markets limit CEO pay to fixed percentage of average pay within the company.

By the way, many thanks to reader Broc Romanek for telling me about the Woolard video.

How France and Sweden Are Coping With the Changing Workplace

How should countries cope with the effects of the globalization of business and labor?

Two articles relevant to this question appeared in consecutive issues of the New York Times this week. They highlight some of the workplace policies and practices of Sweden and France respectively.

"4 Hours a Day, 3 Days a Week" examines the growth of temporary workers in France. It presents a different perspective on the French workplace than what we've seen lately as students and unions forced the government to back down from implementing a new law making it easier to fire entry-level workers.

Apparently temporary working is growing at a rapid clip in France. Some of this trend is driven by the fact that it is so hard to fire people so company's are extremely reluctant to hire anyone on a permanent basis. Instead, many rely on temporary workers. But in some industries this is not such a bad thing. The article describes one temporary worker who has turned down offers of full time work because she'd rather work for multiple "clients" than a single employer. "You lose your edge."

"An Economy With Safety Features, Sort of Like a Volvo" discusses how Sweden deals with the social impacts of downsizing and corporate restructuring.

Both articles highlight aspects of each of these countries that go against each countries national stereotypes. Sweden is viewed as a crade-to-grave welfare state with high taxes on business, but it turns out to be one of the more dynamic and resilient economies in Europe. According to the article, the Swedish economy is set to grow by 3.7 percent this year — almost twice the rate forecast even for Germany, the only one of the big Continental European economies showing signs of confidence.

Sweden's official unemployment rate of is only 4.8 percent, but many economists say, is distorted by the omission of people in government-financed retraining programs. This may actually be a good thing, especially if they are being trained to take on tomorrow's high value, good paying jobs. After all what wrong with making investments in developing a country's human capital?

Behind its economic prosperity is Sweden's collective toward dealing with disrupiton and change.

Says a labor union leader, "Our job is to create a society where people are protected and suffer as little as possible and get new chances in society with education and training. There's a social charter, a social contract. There's a general peace contract in Sweden. There's a general culture of problem-solving instead of fighting."

Why such a cooperative attitude about dealing with problems instead of shifting them to the other guy?

Joakim Palme, a leading expert on Nordic welfare systems is quoted in the article as saying, "I think the fundamental aspect of the Scandinavian model is trust.....the Scandinavian experience has been to be positive to this change, because it is producing more wealth in the end."

This is obviously a contrast from the "every man (and woman) for themselves" mentality that's prevalent in the States.

Sweden and France - two countries grappling with the downside of competing in a world of global business. Sweden seems to be coping better it's not nearly as difficult to fire people there than in France, but employers and the government work in partnership to provide generous benefits and training to displaced workers. France is struggling more with this problem, but temporary work seems to be a default, albeit imperfect solution.

The situations each of these countries is facing highlights the need to rework the employer-employee 'deal' or contract to one that apportions risk more fairly and allows people to be more agile in dealing with changes in industries and the demand for skills.

According to Raymond Torres, a top labor economist at the O.E.C.D., "The best way would be to reform the permanent labor contract...The more rigid the requirements are for a permanent contract, the more employers tend to recruit temporary workers....It's not just a social issue, it's a waste of human capital, a waste of productivity, and it divides the labor market."

I agree with Mr. Torres that change is needed, but perhaps moving to a system that allows individuals employers to negotiate contracts on relatively level playing field based on individual needs and the tradeoffs each side is willing to make would be better than any one-size-fits-all laws or regulations. It won't be easy to do this, but we'll certainly never get there unless we try.

Learning to Swim in the Global Talent Pool

Global trade has been around since the days of Marco Polo, if not well before. It started with goods - at first raw materials and then progressed to finished products. Next came financial capital. In more recent times, trade in services and increasingly labor and knowledge work have gone global. What’s different today from the past is the immense scale, scope and dynamism of global business. The perceived opportunities are vast but there are downsides as well, in particular the fear of many knowledge workers of losing their jobs to lower-paid counterparts in other countries.

Factory workers have faced this dilemma for many years, and now it’s the turn of knowledge workers. Advances in technology and dynamic business practices ensure that the movement of capital, goods, services and now knowledge work will only intensify in the years to come. The key issue is not whether to stop these forces, but how to best adjust to them to reap their advantages and minimize the downsides.

How’s the Water?

There is no doubt that some are prospering in the global labor pool but others are struggling. A key attribute of the global market for knowledge workers is mobility – whether its workers moving to where the jobs are or the jobs migrating to where the workers are located. There are three key drivers of this phenomenon:

Commodization – Standardized components and processes have been well-established in the computer industry and many other manufacturing businesses. As standards and common components and processes spread it enabled manufacturing to move quickly and cheaply around the world. The same thing has been happening with all manner of services and knowledge work from the back-office to call centers and now technical and scientific work.

Componentization - Whether its products or services, many businesses are increasingly organized around well-defined sets of activities that can be pulled apart and reconfigured. This has helped to accelerate the movement of work around the world via outsourcing and captive operations. In theory, componentization means work will move to those parts of the world where talent is located that can do the job best at the most competitive cost.

Connection - With processes and activities spread around the world, connecting the dots becomes a critical activity. Much knowledge work is electronically enabled. Global communications are increasingly ubiquitous and cheap. Air travel makes it easier for workers and managers to physically move across national boundaries and time zones. These developments make it easier than ever to hire people in other countries, outsource work, and import workers. It also means having the ability to connect all these groups together and coordinate their activities on a global scale.

How To Stay Afloat

For better or worse, globalization of business and knowledge work is here to stay. A key challenge for many is how to avoid being stranded without a life preserver in the deep end of the global talent pool. I certainly don’t have the complete answer to this question, but in my view there are at least three things on which individual knowledge workers (and governments and companies as well) need to focus to survive and thrive in the world of global business.

Customers - Know Those You Serve

Everyone talks about this – so much so that it’s a cliché. But the hard truth is that anyone can be supplanted if they don’t develop and maintain deep knowledge about their customers and strong relationships with them. In the dynamic global market, customer knowledge becomes a key asset for standing out from the rest of the pack. This ‘customer intimacy’ requires making a commitment to continuous learning, relentless experimentation, unflinching risk taking, and rock- solid focus on the values, goals and interests of customers. None of this will be built easily or quickly. But for those who can develop in-depth understanding of their customers, the pay-off will come in the ability to always stay ahead of the competition in anticipating and responding to opportunities.

Competence – Know What You Can Do Best

What can I really be good at? Sounds like a simple question but companies and knowledge workers often find it difficult to answer in a pragmatic way. It must however be addressed and understood in order to effectively compete in the global talent marketplace. The right mix of skills and the ability to deliver higher quality results is the only sure way to stay viable. This requires investment in learning and the development of skills and knowledge. Building experience and developing expertise and acumen is no mean feat. None of this is quick, easy or inexpensive. Companies, government, and individuals must work together to ensure that learning is not only a priority, but a reality, whether in our schools or in our workplaces. Governments and companies have a responsibility to provide ample learning opportunities, however individuals must be accountable for their own learning.

Collaboration – Know How to Work Well With Others

To be effective, knowledge workers must be open not closed to new ideas, new influences, and new people. Not exactly an easy thing to do when individuals, organizations and indeed entire countries feel overrun by outside forces. But success hinges on being able to work across geographies, cultures, businesses and organizations. Interestingly, many companies have cultures and management practices that inhibit collaboration both among internal staff and with outside parties. This must change. In the future, collaborative networks will become the norm of how companies operate. Knowledge workers with deep collaborative skills will have an edge whether as employees or service providers.

Staying in the Swim

Customer intimacy, deep competence, and collaborative capability are key assets in competitive global markets. Individuals should strive to develop all three capabilities. If globalization delivers the growth that economists predict then it’s in the interests of governments and even companies to help them as much as possible. Because they are going to need all the talent they can get.