Wayne Wilson on Companies in Transition

The Governance Committee: Driving Board Excellence

Wayne will be a panelist for the National Association of Corporate Directors - New England Chapter (NACD-NE)'s director education seminar on the Governance Committee's role in driving board performance. This half-day seminar will be held at The Conference Center at Waltham Woods, 860 Winter Street, Waltham, Massachusetts beginning at 7:30 am on October 30, 2008.

Click here for more information or to register for the seminar.

Nothing Lasts Forever

One of the things that never ceases to amaze me is how smart, well-educated people get caught up in waves of prosperity and consciously or unconsciously assume that the good times will roll on forever. Nothing lasts forever. Even the sun will eventually burn out and the earth will become a darkened ice ball.

The head of A.I.G.’s Financial Products Group [1] was once quoted as saying:

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.” [2]

That was before the government’s $85 billion bailout.

I am a firm believer in Andy Grove’s famous maxim that “only the paranoid survive.” As soon as you think you are completely safe, some peril is about to overtake you. And while no one can anticipate every danger, thinking about what might happen should enable you to be better prepared than if you did nothing.

Ken Fisher’s [3] advice for minimizing the risks of bad investment decisions should be taken to heart by all owner/CEOs and senior managers:

Shun pride and accumulate regret. [4]

Pride goeth before the fall [5] – pride causes us to think that our success is due solely to our own efforts rather than the efforts of many others, that we are smarter than we really are. Avoid pride at all costs.

Our regrets should be many – while I am not one for looking back and crying about the past, I do greatly value the exercise of thinking about what went wrong – why various things did not work out as I had expected.

Our lives and businesses are littered with mistakes – that’s how we learn. If we fail to learn from our mistakes and those of others, we do so at our own peril.

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[1] The unit which originated the credit default swaps on mortgage securities that have now crippled the insurance giant.
[2] Behind Insurer’s Crisis, Blind Eye to a Web of Risk, NY Times, 9/27/08
[3] CEO of Fisher Investments, a $30 billion money management firm
[4] The Only Three Questions That Count: Investing by Knowing What Others Don’t
[5] Proverbs 16:18 - Pride goes before destruction, and a haughty spirit before a fall.

Jack Welch – Advice for companies in difficult times

Owner/CEOs and senior managers of companies large and small are now starting to worry about the likely spill over to Main Street businesses of the financial gridlock currently afflicting Wall Street banks and other financial institutions.

And while the collective effect of individual businesses tightening their belts may result in a self-fulfilling prophecy (a recession), no owner/CEO wants his company to be a victim of the stampede.

In a recent speech, [1] Jack Welch [2] offered some timeless advice for business leaders during difficult economic times. Here are my thoughts on Jack’s key points:

• Focus on your cost structure – every organization spends money on activities that are neither essential today nor contributing to tomorrow’s success. It’s time to trim the sails.
• Reduce debt – businesses, consumers and the economy in general are all over-leveraged. As that leverage inevitably unwinds, you want to be in front of the curve, not behind it.
• Take care of your best people – even in product-based businesses, the knowledge, skills and experience of key employees are usually a company’s biggest assets. Make sure they are properly tucked in.
• Continually communicate your vision – if you are not continually reminding everyone of where your organization is headed and why, they will fill the void with rumors and other false information.
• Take advantage of investment opportunities as they arise – volatility creates opportunity. But such opportunities come in unpredictable shapes and sizes, and you must be ready to seize them quickly from the platform of a tightly run company.

The strong will get stronger and the weak will disappear.

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[1] Jack Welch says U.S. faces “deep downturn”
[2] Former Chairman and CEO of General Electric

Deep in the Rabbit Hole

“We’re deep into Alice in Wonderland’s [1] rabbit hole.” – Alan Blinder [2]

Financial crises come in all shapes and sizes – some foreseeable and some not. Some crises are amenable to resolution by taking specific actions and others are like hurricanes – there is nothing you can do but ride out the storm and then clean up the resulting mess.

The current mortgage-related financial crisis is a hurricane composed of two interrelated but separate phenomenon:

1. A relatively short-term financial panic caused by fear and a loss of confidence in the safe and smooth functioning of financial markets, and
2. The painful longer-term unwinding of excessive leverage in housing and financial markets

Some response similar to the plan proposed by the Treasury to buy up banks’ bad debts is essential to quell the current financial panic and get the markets moving again.

But the larger challenge of de-leveraging housing, Wall Street and the economy will take much longer and will be much more painful than most people are prepared to acknowledge.

Owner/CEOs need to think about:

• The growing probability of a recession in the real economy
• Tightening credit restrictions for some time to come
• Greater angst and less appetite for risk-taking among investors and business partners

If you have not already done so, it’s time to batten down the hatches while focusing on core long-term business objectives. Peripheral activities and spending need to be pitched overboard.

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[1] Alice’s Adventures in Wonderland
[2] Princeton economist and a former vice chairman of the board of governors at the Federal Reserve quoted in the New York Times, “A $700 Billion Rescue Plan for Wall St., but Will It Work?” 9/20/08

Black Boxes Sometimes Cast Long Shadows

In an earlier post, we discussed the profit potential of black box pricing. The opportunity for profit to the seller derives from two mutually reinforcing factors:

1. The product or service offered appears to provide large value to the buyer at reasonable cost but
2. The lack of transparency prevents buyers from analyzing and understanding how the seller makes money and therefore whether the deal is fair or makes sense.

For any business relationship or investment, it’s critical to understand how the other side makes money – what do they do, how do they get paid, what generates their profit.

AIG’s credit-default swaps (cds) are a good example. Investors sought insurance against loss for purchases of complex financial instruments, and AIG was happy to oblige. As long as the financial instruments performed well, AIG made large profits because there were few losses. When the debt markets seized up, AIG faced a problem akin to Galveston in the face of Hurricane Ike - a massive storm surge and no where to go.

And because the cds marketplace is also a black box without regulation or even a central clearinghouse, nobody knows where the risk is concentrated or how to lay it off. Investors bought products they did not understand and then covered their first bet by buying insurance they did not fully understand either.

The old maxim still holds – if it sounds too good to be true, it probably isn’t.

Capitalism, Science and the African Savannah

A conversation this week with the chief scientific officer of a young pharmaceutical company and an editorial in the Wall Street Journal [1] brought home to me the common dual essence of capitalism, science and nature:

1. the competition for resources and
2. the survival of the fittest ideas and organisms.

On the African savannah, the hyenas feed on the weakest wildebeest allowing the strong animals to flee and survive. For scientists the competition to secure research funding and achieve novel discoveries animate their days and ultimately drive overall scientific progress. For businesses, capital is both scarce and essential.

What can owner/CEOs of companies in transition learn here?

• Neither success or survival are guaranteed despite Herculean effort

• Progress will be messy and erratic even for the successful survivors

• The survival and success of the few will be built on the failures of the many

In business, science and nature, only the strong survive.

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[1] Lehman’s Fate, WSJ, 9/12/08, p. A16

Preparing for success – do you really believe in it?

Belief is a complicated, even messy, concept about which there are many theories yet little agreement. [1] Belief has been described as everything from:

 

• a state of mind to
• a wrong-headed but useful strategy to
• a psychological disturbance (a delusion). [2]

And yet belief is central to everything we do including our ability to accomplish anything of value. Belief motivates and empowers action. People do not exert great effort to accomplish some goal unless they first believe that:

1. the goal is worthwhile and that
2. the goal can be achieved if only they keep trying.

Beliefs drive behavior. To be effective as a motivator and platform for action, your beliefs must be intensely examined, analyzed, and tested in the crucible of your mind and your experience. Assumed or inherited beliefs do not motivate until you take personal and complete ownership of them.

Eli Manning and the New York Giants could not have defeated the Patriots in last year’s Super Bowl unless they had first believed that it was possible to defeat the New England juggernaut. That belief powered their preparation, their risk-taking, their ACTION.

“Fake it ‘til you make it!” is a time-honored maxim of professional sales. Before you can be successful in sales, you must look like and act like a successful sales person. Customers only want to do business with successful people and adopting the persona of success helps instills that belief in you and your customer and creates the expectations essential to closing the sale.

The mind can achieve only what it first believes. [3]

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[1] This is the second article in a series illustrating the 5 principles of Preparing for Success.
[2] See Belief at http://en.wikipedia.org/wiki/Belief
[3] Napoleon Hill, Think and Grow Rich.

Keeping Innovation Alive

Most business executives would agree that innovation is very important to the health and success of their organizations. But how do you keep innovation alive, well and producing tangible benefits?

Here are some tips from Philip Newbold, a hospital CEO in his 21^st year at the helm: [1]

• Visit inventive companies on a regular basis – learn from others; success comes from the cumulative effects of aggregated knowledge.

• Conduct stand-up brainstorming sessions – standing creates a sense of urgency as well as helping associates learn to think on their feet.

• Make innovation fun – games and contests create excitement and alleviate pressure.

• Give prizes for “good tries” – generating ideas is one of the areas where effort should be rewarded in addition to results because you never know where the next great idea will come from.

• Put an innovation line item in the budget – a budget line item says this innovation stuff is for real. It also causes you to think about and decide on a specific level of investment that seems appropriate for your organization.

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[1] Joann Lublin, A CEO’s Recipe for Fresh Ideas, WSJ, 9/2/08, p. D4.