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Archive for June, 2016

Margaret_Thatcher_croppedIn 2002, Margaret Thatcher wrote prophetically about the future of the European Union.  She said in her book Statecraft, “…that such an unnecessary and irrational project as building a European superstate was ever embarked upon will seem in future years to be perhaps the greatest folly of the modern era.”  Fourteen years later the British electorate seems to agree.

In the midst of the post-Brexit cacophony–both apocalyptically gloomy and euphorically joyful–I do not see how the decision of Britain to depart the EU can be anything but positive for our moribund European entrepreneurial brethren.  The one foundational essential for healthy entrepreneurship is freedom.  This is what Britain is attempting to reclaim through Brexit.

Britain has chosen to reject the sclerotic rigidity of the arrogant bureaucrats in Brussels.  It is saying “No” to the suffocating pillow of micromanagement that has mandated rules and one-size-fits-all standards for all European products and services–from teapots to toasters to the fat content of cheese.  It marks the end of power, at least in the UK, to the tyranny of over 40,000 overpaid, unaccountable oligarchs and four unelected “Presidents” over all aspects of British business life.  It is a full-scale rebellion against the creeping, faceless totalitarianism of what the Hunger Games movies call “The Capitol.”  It gives European entrepreneurship hope.

There has been a cost to the expanding regulatory burden and governmental micro-management of small business in Europe.  And that cost continues playing out.  Entrepreneurship is virtually dead in many EU countries.

This week my eye was caught by a short pre-Brexit article in a file I had printed out from Bloomberg.com.  It was about a small Italian company called Firem.  Firem has sales of $4 million per year and a work force of 40, but hasn’t posted a profit since 2008.  Here’s what happened.

map-1019896_960_720“Early in August, Fabrizio Pedroni wished his employees a happy summer holiday and told them to return to work in three weeks.  That night he began dismantling his electrical component factory in northern Italy and packing its machinery off to greener pastures.  “Had I told them earlier about any plans to shift the production abroad, they would have occupied my factory and seized all my stuff,’ says Pedroni, owner of his family company Firem.  “The plain truth is that I wanted my business to survive, and there weren’t the right conditions for me to operate in Italy any longer.”

Leaving Italy was the last thing Pedroni wanted to do.  But he could no longer survive under the rigid EU strictures in Italy.  He was forced to make a clandestined escape in lieu of the freedom to run a nimble, creative small business in his own country.

Carlo Alberto Carnevale Maffe, professor of business strategy at Milan’s Bocconi Uiversity says, “Pedroni, like many entrepreneurs before him…abandoned the ship called Italy because it was the only way to survive.  In Italy most businesses like Firem have been posting losses for at least five years.”  From 2001 to 2011, about 27,000 Italian companies, each with annual sales more than $3 million, moved abroad, with a concomitant accompanying loss of revenue and employment for Italy.  (Much bigger firms, like Fiat, are also abandoning Italy.)

Italy is not alone in Europe with it’s failing anti-entrepreneurial economy.  Spain, France, Portugal, and Greece face very similar issues.  In none of these countries can you easily adjust to the rapidly evolving world economy.  You can’t move, you can’t downsize, you cannot fire or reduce workforce, you cannot change–finally resulting in a vertiginous economic descent for these countries of old Europe.

italy-880116_960_720Furthermore, the countries that have embraced America’s traditional capitalist freedoms and processes (like Poland, Singapore, Vietnam, and India) are beginning to eat even America’s lunch as well as old Europe’s, beating us at our own game by nurturing rather than repressing entrepreneurial animal spirits.  American historian Markham Shaw Pyle says,  “If the power to tax is the power to destroy, the power to regulate is no less so.”

Brexit may well be the canary in the coal mine for the triumphalist, over regulated, oligarchic state and a plangent death knell for the EU.  Brexit is saying that hubristic, statist government overreach just doesn’t work to create a salubrious business climate.

So Britain has made the first move to reject the regulatory snake oil and closet totalitarianism of Brussels.  Can Frexit, Spexit, Grexit, et. al. be far behind?  I, for one, hope not.

Lawrence Lessig, in Free Culture: The Nature and Future of Creativity says, “Free culture depends upon vibrant competition.  Yet the effect of the law today is to stifle just this kind of competition.  The effect is to produce an over-regulated culture, just as the effect of too much control in the market is to produce an over-regulated-regulated market.”  Thank you, Lawrence.

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Management savant Peter Drucker supposedly said, “If you can’t measure it, you can’t manage it.”  The only problem with this frequently cited quote is that Drucker never said it.  In fact, he actually said things quite the opposite.  Like “Culture eats strategy for breakfast.”

photoLast week I attended a fascinating all-day seminar at NYU’s Stern School of Business titled “Ethics by Design:  How to Use Nudges, Norms and Laws to Improve Business Ethics,” sponsored by Ethical Systems.org, the Behavioral Science & Policy Association and CEO Trust.  There were over 150 attendees, mostly top-drawer academics with a sprinkling of executives and entrepreneurs.  I found it thought-provoking, useful, and even startling.

The day covered many topics, but the general trope was cautionary concerning our ubiquitous business emphasis on quantification, measurement, and goals.  While acknowledging that goals can encourage persistence and performance, almost all seminar participants emphasized the caveat that rigid goals will have deleterious effects on corporate culture and long-term corporate health.  While historic studies point to the positive impact of goals on increasing business performance, more recent research, including by many of the attendees and presenters, pointed to the the fact that overemphasis  on goals encourages unethical behavior.  The symptoms of this include increased moral disengagement, decreased individual self-regulation, and hazardous risk-taking.

Put another way, setting and pursuing ambitious corporate goals appears to incentivize employees to cheat, lie, and flimflam.  It encourages short-term thinking.  It undermines healthy process and culture.  It puts too much emphasis on the trees rather than on the forest.

The case against the over reliance on metrics was summed up neatly by Lisa Ordonez, Vice Dean at the Eller College of Management at the University of Arizona and by Marc Hodak, professor at the NYU Stern School.  Their presentation was titled “Walking the Tightrope:  Balancing the Incentives to Perform vs. Incentives to Cheat.”

363px-Drucker5789Dr. Ordonez wrote an influential article for the Harvard Business Review in 2009 (with colleagues Maurice Schweitzer [Wharton], Adam Galinsky [Northwestern-Kellogg School], and Max Bozeman [HBS]) titled “Goals Gone Wild.”  Her talk last week was premised on two basic conclusions of her research:

  • Goals cannot create self-sustaining motivation.
  • Goals cannot be the entire focus of management.

Specific organizational effects Ordonez warns of include systemic problems from narrowed focus, unethical behavior, risk taking, decreased cooperation, and decreased intrinsic motivation.  “Goal setting is management by numbers,” states Ordonez, and institutional incentives need to be assigned very carefully and in the context of principles.

She cites several episodes of goal-setting culminating in corporate disasters.  For example, she points to this year’s compliance calamity at Volkswagen.  Volkswagen had set two demanding goals for itself:  to comply with and effectuate mandated environmental standards and to become the biggest car company in the world.

It did not work out well.  As employees and managers at Volkswagen started work on the aggressive company goals, they quickly realized they could not easily meet the strict American (EPA) and European standards.  Rather than admit that, they decided to cheat.  And cheat massively and systemically.  They consciously decided to engineer their cars to fool the national testers and examiners instead of honestly fulfilling environmental and legal requirements.  The result is massive fines, loss of reputation and good will, lawsuits as far as the eye can see, and a significantly diminished stock valuation.

Both the recent scandals at the Department of Veteran’s Affairs and BP speak to the results of corner-cutting and dishonesty to achieve stretch goals.

Professor Marc Hodak was even more blunt than Dr. Ordonez.  Hodak said simply,  “Incentive to perform is indistinguishable from incentive to cheat.”  He points to the incentives for corporate executives to lie, exaggerate, and hide financial truths even from their boards of directors through techniques like channel stuffing sales results.

Hodak offers three solutions to ethics/compliance conundrums:

  1. Approach your goals holistically and put your incentives in the context of a culture of honesty.
  2. Look beyond “performance.”  Bad behavior hides behind good performance.
  3. Remember why your are in business.  Be true to your culture.  Always remember who you are.

urlEthics and corporate rectitude are not impractical, esoteric matters in the age of compliance.  Ethics is increasingly a practical necessity related to profit and ROI.  In many cases goals do more harm than good and rigid adherence to specific outcomes can be disastrous.

The solution?  I don’t know.  But the answer is surely somewhere near the corner of ethics, culture, and human meaning.

Ethics is not just a matter of doing good or being righteous.  It’s actually a selfish thing.  As Danny Meyer of Shake Shack puts it, “It is in our self-interest to be good.”

Dr. Priyavrat Thereja puts it this way:  “If ethics is not the engine of success, in the train of growth, it sure is a guard, with a flag, which may be green, or red.”

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