Sensitivity Training Gone Terribly Wrong

Many of you may know that I've lead a multi-division Affirmative Action and diversity initiative (why I have that white streak in my hair). "Sensitivity training" for the most part, left people scared of each other and tiptoeing around on eggshells.

So imagine how I giggled when I saw this.


Sensitivity Training - The best video clips are here

Boards, Stockholders and Execs Gone Wild

The cascading systems failures in the mortgage, insurance, credit, automotive (stopping now...getting tired) industries has led us to a series of running postmortems to try to understand what went wrong--hopefully so we don't, well, do it again. In an article in today's New York Times, Roger Lowenstein has taken on an aspect of the economic debacle that has been largely overlooked: the role of stockholders. Here's a piece:

Let’s say you own a small business, maybe the local car dealership, assuming it is still extant. One day, you are feeling pinched and sell some shares of the business to a few folks in town. To keep things on the up and up, you create a board.

Every year you and the other shareholders get a report from the fellow you hired to manage the dealership. The business runs so smoothly you barely even think about it. Until one day, sales crash and profits, too. You would like to sell your stock, but it is in the tank. So you ring up the manager to see what happened. “Simple,” he says. “I quadrupled my bonus and I forgot to order a line of fuel-efficient cars. My bad.” Then he hangs up.

Feeling a little irritated, you try to contact some of the directors, but they are out driving gas-guzzlers that the manager supplied them and don’t seem inclined to return your calls. Now you are very irritated. As the biggest shareholder, you request that your name be included on the proxy ballot for the next election to the board. This the corporation refuses to do. Only the management (or its handpicked board) chooses nominees, and it is an iron rule of American corporations that ballots should not contain more nominees than seats. In the former U.S.S.R., this style of democracy endured for only 72 years. In American business it is timeless. Until last month, anyway, when the Securities and Exchange Commission proposed that shareholders who own at least 1 percent of the stock be able to nominate candidates to run in opposition to — and on the same ballot as — the slate offered by management. (Read the rest here)

The Compensation Gap Yawns
We've been having a pretty good time mocking executives with their huge salaries and giant bonuses. Truth is: as soon as we've moved on and the economy turns around, we'll probably go right back to the compensation structure we've known. We can't keep pretending that executives are solely to blame for bad business decisions and hefty rewards for failure. Truth is: HR wonks like me have been concerned about the canyon-like gap between executive compensation the salary/wages of the average worker. Just about 20 years ago, that ratio was 14:1. Now, amazingly, in the U.S., it's over 400:1. That might make some sense if corporate performance had increased by 28%; however, it hasn't.

"What did happen?" Now, there's a complex question. 
A piece of the answer is connected to the friction between the rank and file stockholders and executives selected to run companies. The long-held assumption was that stockholders would only think in terms of short-term returns while executives would plan for long-term gain. With the recent trend towards CFO as the feeder pool for CEO's and the anayst-driven mandates towards frequent restructurings, one wonders how much sense this has made--companies seem to be planning by looking in the rear-view mirror for the past quarter's (or worse, the past month's) results.

Stockholders are provided elaborate reports that provided them with enough information...to keep investing. With the moves towards simplification in credit and mortgage documents, I can only hope that this trend will extend to the quarterly and annual reports, so that they can be easily read and understood by people who didn't get their degrees in accounting and finance. And those nominating slates for board members? Well, there's no democracy there. Stockholders are only supplied enough names to fill those empty seats and not a single name more. The SEC is now considering a policy change that will allow stockholders with 1% or more to add names to the board ballots. Good luck with that.

Another element is the composition of the Executive Compensation committees on most boards of directors. Committee members, who design the system of salary and perks that are supposed to spur a leader's best thinking and keep him or her interested in staying are, well, other leaders and corporate board members. In a sense, what has happened is that they've been voting to incrementally and inexorably raise all boats.

The Business Roundtable, a powerful lobby of corporate CEO's has shifted from their 1970's mandate to serve the interests of customers, employees, stockholders and the communities in which they operate to a single focus: making money for the stockholders, with an eye to ruthlessly reducing expense (read: employees). This shift had lead many thinkers in the areas of leadership and compensation to wonder whether it's infected our corporate goal-setting process with a "profits or perish" mentality. For example, in the 60s, then-Ford CEO, Lee Ioacocca gave marching orders that would prove both incomplete...and deadly:

Faced for the first time with competition from low-cost, high-mileage foreign imports, Iacocca set a specific target: Ford would design a new automobile that weighed less than 2,000 pounds and sold for under $2,000, and it would be on the showroom floor in time for the 1971 model year. What resulted was a mad dash to create the Ford Pinto.

The rush to roll out the Pinto had lethal consequences. Common-sense safety checks took a backseat to meeting Iacocca's deadline. In particular, engineers failed to examine the decision to place the Pinto's fuel tank only 10 inches behind the rear axle. When the Pinto was rear-ended, it often went up in flames. Fiery rear-end crashes caused 53 deaths, numerous injuries and a string of costly lawsuits. (Read the rest here)

Overly ambitious goals and overly generous compensation: A heady mix.

Now, maximizing stockholder wealth means something quite different when considered against the enormous stock offerings made to corporate execs...and the shift in comp and benefits mix in the last 30 years (from Big-C cash plus stocks to little-c cash plus Bis-S stocks to Big-...um, everything). I get how challenging this is...vesting of stocks is a dicey thing: execs are taxed on the value of the stock when issued--not when vested and received. And stock values have been known to crater to zero in just weeks, leaving execs to jockey for more up-front money as a hedge against stock volatility.

Noted economist, Milton Freidman, in the '70s opined that stockholders would keep companies moving in the right direction. Milty didn't however, anticipate profit-sharing and stock ownership plans for managers on down to key employees or even ESOPs (employee stock ownership plans).

What a hot mess.

GM, Gone as We Knew It

Reading Michael Moore's account of the GM bankruptcy announcement from "GM town," Flint, Michigan (with over 40% of its workers employed by GM), I'm reminded of what it was like to work for R.R. Donnelley &; Sons in Crawfordsville, Indiana, when they announced a 70% reduction in force. Donnelley was the major employer and when it shed over 3.300 jobs in a town of 13,000 it landed with the force of a tsunami. Moore writes:

It is with sad irony that the company which invented "planned obsolescence" -- the decision to build cars that would fall apart after a few years so that the customer would then have to buy a new one -- has now made itself obsolete. It refused to build automobiles that the public wanted, cars that got great gas mileage, were as safe as they could be, and were exceedingly comfortable to drive. Oh -- and that wouldn't start falling apart after two years. GM stubbornly fought environmental and safety regulations. Its executives arrogantly ignored the "inferior" Japanese and German cars, cars which would become the gold standard for automobile buyers. And it was hell-bent on punishing its unionized workforce, lopping off thousands of workers for no good reason other than to "improve" the short-term bottom line of the corporation. Beginning in the 1980s, when GM was posting record profits, it moved countless jobs to Mexico and elsewhere, thus destroying the lives of tens of thousands of hard-working Americans. The glaring stupidity of this policy was that, when they eliminated the income of so many middle class families, who did they think was going to be able to afford to buy their cars? History will record this blunder in the same way it now writes about the French building the Maginot Line or how the Romans cluelessly poisoned their own water system with lethal lead in its pipes.

Moore insists, like others, that GM refused to build fuel efficient cars American drivers wanted to buy. I don't agree. Following Moore's train of thought, the roads would have been filled with SmartCars and Priuses (Prii?). Instead, we kept buying cars with gas mileage ratings that were nothing to boast about even in the 1980's. Like that chestnut from Richard Pryor (scrubbed for sensitive readers): we ordered poo, so we had no choice but to eat poo (not the same punch as Pryor).

The UAW, management and shareholders were locked in a zero-sum game of Money-Money-Money, with the workers wanting higher wages even when the company, feeling the strain of competing with foreign-based manufacturers making cars in the US making for a fraction of the comp/benefits costs; top management demanding enormous compensation packages despite company results; and shareholders, in the age of Googlized (inflated like Octo-Mom's lips) profits, revolt-ready if profits fell.


There are several things I'd love to see GM take with it to the dustbin as it regroups. GM had one of the most byzantine HR systems to be found anywhere. Now, sweeping and immediate changes are in the offing, regardless of the direction their Chapter 11 filing:

Some retiree benefit obligations to be reduced by roughly two-thirds; hourly staff will hit 38,000 by 2011; salaried workforce to be trimmed to 23,000; and the number of dealers will drop to 3,600.  

Um, wow!

Human Resources at GM seemed skilled at figuring out how to line up employees in a orderly dance, even when profits fell below their historic highs. Called "Generous Motors," GM was known for high wages and lucrative comp deals for execs. However, in promising the moon in terms of retiree health and pensions in order to help keep salaries lower (yipes!), even when moving jobs offshore, it set itself a Sisyphean task. This from the Washing Post (H/T FiveThirtyEight.com):

GM began its slide down the slippery slope in 1950, when it began picking up costs for medical insurance, pensions and retiree benefits. There was huge risk to GM in taking on these obligations -- but that didn't show up as a cost or balance-sheet liability. By 1973, the UAW says, GM was paying the entire health insurance bill for its employees, survivors and retirees, and had agreed to "30 and out" early retirement that granted workers full pensions after 30 years on the job, regardless of age.

These problems began to surface about 15 years ago because regulators changed the accounting rules. In 1992, GM says, it took a $20 billion non-cash charge to recognize pension obligations. Evolving rules then put OPEB on the balance sheet. Now, these obligations -- call it a combined $170 billion for U.S. operations -- are fully visible. And out-of-pocket costs for health care are eating GM alive.

Retirement plans have historically been based on an actuarial formula that "works" for employers when retirees die within 2-5 years of retirement. Having retirees leave the company at as young as 48 (in their "30 and out" system), they stood to pay retirees and their mates for decades beyond the usually and customary (and grisly) benefits and comp formula. This report from Boeing shows a bit of what I mean:



Early retirement, as Boeing found, proved to be too costly, though there is some suggestion in the literature that early retirements have a greater illness and injury relationship. If that is actually the case, the new GM should focus more on wellness care and job design that takes a dramatic swipe at the possibility of injury.


We'll see.

We Just Don't Have the Words...

I'm an HR wonk. I admit it. I love looking at the systems and strategies that have people be successful at their work. So, I admit that been concerned for quite some time that we no longer have the words to describe what we're doing.

"Layoff," a term that historically referred to hourly workers for whom there was not enough work and who had to be furloughed until worked picked up, no longer means what it used to. Now, due to administrative/legal alchemy, we use "layoff" to describe workers who continue to receive continued benefits and "salary" from a different budget "pot" that takes them off the books as a active employee, then "voluntarily" accedes to be separated from the company should there be no job for them to return to.

Of course, at no time is the employer looking for a new job for a RIFed worker.

Biz Failure and The "Rashomon Effect": Bring Out the Pies!

My "little" brother (6'2" and 225 lbs) is a constable on patrol (actually, now a Sargent responsible for training and development) in our home town. Talking with him one day about how people process information, he remarked that sometimes the most challenging thing an officer could encounter is an crime scene with several witnesses, each with their own point of view on what "really happened."

I think about that long-ago conversation, sometimes, when speaking with management and leadership teams. Their take on what went wrong and what caused it can, at first, sound quite a bit like the wind-up for a Three Stooges pie fight...only without the pies.



Like the "Rashomon Effect" Perry and I were talking about (based on the amazing Kurosawa movie--think CSI: Feudal Japan in which people posit plausible, but differing accounts of events), blame-shifting and the regrettable inability to parse "what's so" based on the limits of perspective can surely hamstring a team looking to make a quick shift.

See how nicely I said that?

Even more troubling is the tendency of people to cling to their account of events...all the way to the bitter, hopeless (pieless) end.

• It was those people HR hired!
• If accounting could have given us better numbers...
• The IT people can't program worth a damn!
• I blame Bush, the economy, the Chinese, global warming.
  
• (in sotto voce: it was the CEO's fault!)
  

What's powerful is the realization that no one "owns" The Truth (said with gravitas)--not even the CEO, who only knows what he or she sees...and little of that with absolute certainty. Even more powerful is the ability to put together a "workable truth" with enough facts with which to make decisions and enough flexibility to quickly shift as more information becomes available.