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Why Current Profitability Model is Unsustainable By Dr. Bill DeMarco
Profitability is the gaining of advantageous returns on investments. When I began my career decades ago, there was some discussion about the role of service to customers, service to employees, and service to the community as a major if not primary purpose for a business’s existence. That was still the era of mutual insurance companies, multi‐generational company employers, and company dominated towns.
“Defined benefit” (DB) programs were real and highly valued. The past few decades have seen a shift to fundamentally profit‐driven corporate models. Even mutual insurance companies, originally founded to perform some noble purpose for widows, orphans, and the general public, have almost all migrated to for‐profit models. “Defined benefit” programs have given way to “defined‐contribution”(DC) programs, which derive the funds for “benefits” mostly from stock investments. In Ontario over the past twenty years, pensioners rarely receive pension checks from funded company plans, because companies mostly failed to fund their pensions by taking “contribution holidays” If in surplus; or in the case of solvency deficiency, they were allowed to amortize unfunded liability for up to fifteen years. (Ontario Pension Benefits Act, 1990), Ontario pension law was not significantly different from other North American jurisdictions. Companies that took this course of action hoped to achieve higher market evaluations, stock splits, and other market‐related activities which would generate “money” over time, putting a happy face on quarterly and year‐end numbers. To illustrate this, I once had a major Fortune 500 company client which had a fantastic year‐end in Europe, driven in no small part by the strength of the American dollar vis‐à‐vis the German Deutschmark. Their European executives received large bonuses. In all these cases, irrespective of whether it was pension‐related or not, we have examples of a “fools gold” model of what good performance looks like. Like a drug addiction, these companies over time failed to see what was happening until it was too late. The Fortune 500 company I mentioned, like so many others, was eventually sold off in parts. They all failed to recognize what really counted was truly growing the business through innovative new products, superior customer service, increased sales, constant happy returning customers and more effective operations; for companies with underfunded pension liabilities, this is particularly more important than the risky roll of the dice they too frequently engage in.
Governments in both the U.S. and Canada, responsible for overseeing the funding of contractually agreed to pension plans, allowed this, frequently charging an administrative fee for deferring funding company pensions, placing those fees into government operating funds. All of this has led to a domino effect, not unlike families today relying on borrowed money (credit cards, lines of credit, home equity loans, etc.)…it looks good in the beginning until it comes time to pay the bills, or the income line slows down.
In the early to mid 1990’s, it seemed to work well for everyone. These diverted pension funds initially bolstered quarterly company and government numbers. Many pension funds even ran surpluses, while quarterly company profits looked rosy. As time went by, these under funded pension liabilities reached minor (1999) and major (2008) tipping points as stock values deteriorated. Coupling these events with the ever‐increasing number of retirees, companies frequently faced a perfect storm. The beat went on so relentlessly that by the end of 2011, 93 percent of federally regulated DB plans were under‐funded according to the Office of the Superintendent of Financial Institutions of Canada. The situation has gotten even more dire since then. For example, an August 2012 study by the credit rating agency Dominion Bond Rating Service Limited (DBRS) looked at 451 major corporate DB plans in the United States and Canada, including 65 north of the border. It found funding deficits of US$389 billion. DBRS noted more than two‐thirds of the plans were “underfunded by a significant margin” and heading into a “danger zone,” the point at which reversing the deficit becomes very difficult.
I am not attempting to be critical of stock holders or pensioners here, for they are on the receiving end of a profitability model which common sense would dictate is not sustainable for the long haul. Unfortunately, there end up being multiple victims in this scenario … including stock holders/pensioners who rely on recurring profits for sustenance and lifestyle choice.
There are fundamentally two ways of achieving profitability: (1) grow the business through the judicious design and distribution of market‐desired goods and services; (2) cut costs. The latter has become the dominant, and uninspired business/government means of obtaining more desirable numbers, because for all its heartlessness, it is easy to achieve and does not require much real business imagination. Of course companies need to be judicious with how they manage their businesses. However, there is an increasing obsession today with beating the analysts’ predictions, getting “bigger” at all costs, being the biggest in the industry at all costs, beating last year’s numbers no matter what, etc. etc. Company and government decision‐makers have become too often addicted to the opiate of what I call “cut‐cut, chop‐chop leadership”, as if there is an endless supply of physical and human resources to be cut, or suppliers willing to provide goods and services for almost nothing. In this scenario, the temptation to cut salaries/benefits is great since human resource expenses account for over 50% of overall company expenses, and the saving can go to the bottom line almost immediately.
Key business and government decision makers, including boards of directors, need to be weaned off of this addiction to “chop‐chop cut‐ cut leadership”, partly because of their fiduciary responsibility to sustain the enterprise. This management addiction is absolutely not sustainable for the long haul. In 1957, the average life expectancy of a company in the S&P 500 index was 75 years. Today, it’s just 15 years. There absolutely is a better way. It requires inspiration, courage, and real leadership where the enterprise is given a real purpose, recognition in high places that making money is a result not a purpose, and stakeholders at all levels give their willing effort to support that purpose. This is not a call to go back to a bygone era of any form of utopianism (welfare/ social / Nordic/ Rhine capitalism). Rather, it is a call for a common sense which recognizes that current profitability models are unsustainable, and that senior executives need to both think and behave for the long haul, rather than leaving this untenable situation for their successors to handle!
Let me offer an example. About twenty years ago, I was a senior executive at a major consulting firm. A client of our firm for many years was a global aerospace company, known for its decades of engineering creativity and performance. In recent years, they were having difficulty growing the business, mostly due to a risk-‐averse culture and leadership. The firm’s CEO and the board really needed positive year‐end numbers to beat the buzz on the street about the company’s financial underperformance. Since I was responsible for our Organizational Effectiveness Practice, our consultant responsible for the account asked me to come in to help the special ad hoc committee put together by the CEO to come up with some way to quickly improve the bottom line numbers. The reality was that the CEO had a white knight willing to “invest” several billion dollars for new research, subject to agreeable year‐end numbers. The committee chair was an executive vice‐president. He and his staff had come up with one recommendation, which they wanted me to put our firm’s reputation behind when he presented it to the CEO. The suggestion was to implement an early out program for all employees over 52 years of age. The amount saved in salary and benefits would marginally surpass the targeted amount sought. I asked one question: “Does an aerospace engineer with thirty‐plus years experience have more to offer the enterprise than an engineer with ten plus years experience? Why get rid of all that knowledge and capability? “ His response was they had that covered. They would hire back senior engineers as consultants as needed. If I was a stockholder, I would have been appalled…simultaneously paying out retirement benefits, generous exit packages and high consulting fees, while losing the resident capability that made the company great. I and my firm refused to support the idea. To no one’s surprise, the company went ahead with the plan any way. The company beat the street’s year‐end expectations… executives got hefty bonuses. Most importantly, the company was bought up by a competitor in a fire sale less than two years later. Truly a long‐term victim of risk‐aversion and “chop‐chop, cut‐cut” leadership!
So what is a better way? Is it possible to be profitable now and for the long haul? What does a sustainable profitability culture look like? It starts off with leadership which gives purpose to organizational effort while inspiring willing effort to support that purpose! Part Two will cover the specifics.
Simon Sinek: Why good leaders make you feel safe
What makes a great leader? Management theorist Simon Sinek suggests, it’s someone who makes their employees feel secure, who draws staffers into a circle of trust. But creating trust and safety — especially in an uneven economy — means taking on big responsibility.
Leaders on Leadership: An Intimate Conversation
Institute Chairman Mike Milken joins three icons in their fields for a discussion about long-term thinking in industry, markets, government, education–and life. When Howard Marks issues one of his legendary client memos, the rest of the investment world pays attention. Janet Napolitano has served as an attorney general, a governor and a Cabinet secretary, and she now leads one of the world’s great institutions of higher learning–the University of California system. And one only needs to have visited Las Vegas in the past several decades to get an idea of the influence of Steve Wynn’s boundless vision and relentless focus on customers. This intimate discussion will explore the qualities that have propelled each of these leaders to their positions of prominence.
The Art of Leadership | Bill Strickland, CEO, Manchester Bidwell
Bill Strickland, President and CEO of Manchester Bidwell Corporation, spoke at the Harvard School of Public Health as part of the Decision-making: Voices from the Field webcast leadership series on March 4, 2014. Watch the entire series at hsph.me/voices.
Topics discussed include how to effectively communicate with diverse groups, the necessity of a leader to provide vision, and the impact of creating a positive physical environment.
The Decision-making: Voices from the Field webcast leadership discussion series at Harvard School of Public Health invites leaders to speak about their experiences making decisions that affect global health. Highly interactive and candid, the series is produced in The Leadership Studio for a student audience. The high-definition webcast is streamed live and posted for future viewing. Students learn from experienced leaders about decisions that were effective, decisions that failed, and which decisions, if any, could have been made differently.
Bill Strickland, President and CEO of Manchester Bidwell Corporations, Manchester Craftsmen’s Guild, and the Bidwell Training Center in Pittsburgh, is nationally recognized as a visionary community leader with marked success in community adaptation and revitalization. Manchester Bidwell Corporation — developed by Mr. Strickland over several decades — is a nonprofit organization in Pittsburgh that provides job training for adults, and arts education and mentoring to young people. Under his leadership, Manchester Bidwell has become a successful business model for social change, whose organizational culture fosters innovation, creativity, responsibility and integrity. President Obama selected Mr. Strickland to be one of the founding members of the White House Council for Community Solutions.
Roselinde Torres: What it takes to be a great leader
There are many leadership programs available today, from 1-day workshops to corporate training programs. But chances are, these won’t really help. In this clear, candid talk, Roselinde Torres describes 25 years observing truly great leaders at work, and shares the three simple but crucial questions would-be company chiefs need to ask to thrive in the future.
BCG’s Roselinde Torres studies what makes great leaders tick — and figures out how to teach others the same skills.
WHY YOU SHOULD LISTEN TO HER?
Roselinde Torres is a senior partner and managing director at the consulting firm, BCG. A senior leader in the firm’s “people and organization” practice area, she is also the company’s resident expert on leadership, a topic she has studied her entire career.
Questions she likes to ask include, “what innovative methods can help prepare the next generation of leaders?” and “how do we enable leaders to unlearn past modes and habits of success?”
Prior to joining BCG in 2006, Roselinde was a senior partner at Mercer Delta Consulting, while she has also led internal consulting teams at Johnson & Johnson and Connecticut Mutual Life. She speaks frequently about organizational transformation and leadership; her work and thinking have been featured in publications such as BusinessWeek and The Economist.
“The best leadership development doesn’t happen by just going off to a course or a seminar … The best leadership development happens when people are learning in the context of their own strategic, economic agenda, with the actual people that they are going to influence and lead.” Roselinde Torres
Are leaders born or made? I have the answer! Baron A Rohbock
Baron graduated with honors in Business Administration and Leadership. With a passion for training and working with teams, he entered the Learning and Development field as Director of Training for Taylor Hartman, author of The People Code (previously published as The Color Code).
With a wide breadth of knowledge in leadership, Baron returned to the training industry to combine first hand management and executive leadership experience with a passion for working with people to shape results while revealing individual and collective talent. In 2011 he started Core MotivAction, an innovative brilliant training company dedicated to people and team development.
What if… We knew the difference between leadership and management?
Presenter: Tony Mortensen, Director of the Executive Development Programmes
· What is strategic leadership?
· What is effective management?
· Do organisations know the difference?
· What is best for achieving sustainable growth?
The last decade has seen an exponential increase in the number of courses offered in the area of organisational leadership, with almost every major business school worldwide now offering specialised training in this area. Do organisations truly understand the key difference between leadership and management? Do they understand what is needed in their organisation to achieve efficiency, profitability and sustainable growth? If we employ skilled people to undertake the different tasks in an organisation do we really need to manage those people or are we better off allowing them to do what we employed them to do. The flip side of this is that if we do not manage these people effectively then the organisation runs the risk of becoming less efficient and effective at providing society with the desired outcomes.
At odds with both these ideas is the fact that New Zealand is now seen as one of the hardest working countries in the OECD, yet our productivity continues to fall. Therefore, are organisations getting the best from their human resource or are we as a society destined to be out-performed?
Tony has over 18 years’ experience in accounting, management and education and is now responsible for executive training through the Master of Business Administration (MBA), Postgraduate Certificate in Strategic Leadership, Master of Business Management (MBM), Master of Professional Accounting (MPA) and Executive Education (short courses).
Dick Ruhe | Leadership Speaker
Dr. Dick Ruhe is a cherished motivational speaker, as well as a celebrated corporate consultant and trainer. Throughout his highly spirited presentations on productivity improvement, change, and customer loyalty, Dick insightfully connects with attendees’
core issues and inspires a deep desire for success. Based on his extensive management and supervisory experience in the private and public sectors, Dick shares a myriad of amusing stories that absorb audiences and create an unforgettable experience.
As a senior consulting partner for The Ken Blanchard Companies®, Dick Ruhe is the author of the training program Total Quality Leadership. He has also worked with Tom Peters, Gordon Lippit, and Paul Hersey. Dick has served as a regular columnist for Sales and Marketing magazine and has been published in Training and Development, Western Business Systems Journal, Proceedings of the Academy of Management, and Executive Excellence.
A past chapter president of Sales and Marketing Executives, Dick Ruhe is a member of the International Customer Service Association, the National Speakers Association, the International Platform Association, the American Society for Training and Development, and the American Society of Quality Control.
Dick Ruhe received his MBA from the University of New Haven and his doctorate in human resource development from George Washington University. He is the author of Getting Major Results, a field book for change and leadership.
Lessons In Leadership – Episode 2 – Family Businesses
When it comes to family-run businesses, there’s a common saying that the first generation creates a business, the second builds it and the third squanders it away.
Is there any truth to that? Bloomberg TV India’s Mini Menon discusses how best family run businesses survive generations as she speaks to Professor John Davis, Senior Lecturer of Business Administration, Harvard Business School on Lessons In Leadership.
Seth Godin on the Difference Between Leadership and Management
Bestselling author Seth Godin says that “Management and leadership are totally different things. You think you are being a leader, but you are probably being a manager.”
He goes on to say, “Managers figure out what they want done and get people to do it. Managers try to get people to do what they did yesterday, but a little faster and a little cheaper with a few less defects.” But this is not leadership.