Corporate governance, value and performance of firms: new empirical results on convergence from a large international database

This article aims to revisit the link between corporate governance, value, and firm performance by focusing on convergence, understood as the way that non-US firms are adopting US best practice in terms of corporate governance, and the implications of this adoption. We examine theoretical questions related to conventional models (agency theory, transaction cost economics, and new property rights theory), which tend to suggest rational adoption of best practice, and contributions that alternatively consider country- and firm-level differences as possible barriers to convergence. We contribute to the empirical literature by using a large international database to show how non-US firms’ adoption of US best practice is having an impact on performance.

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How Decisions Can Be Organized – and Why It Matters

Recent theoretical advances allow organizational designers and managers to better understand how decision processes can be improved. These advances allow managers to address a number of critical questions about the structure and process of decision making, issues that are relevant for any kind of organization be it social, political, or economic. Can we add another employee somewhere in the decision process to increase economic performance? Can we add or eliminate a channel of communication to raise the quality of decisions? What level of skill is worth paying for when we hire a decision maker? Is it a good idea to push decision makers beyond their current capacity if doing so increases their error rate by five percent? Where does the injection of inexperienced decision makers hurt the least? We describe an organizational design approach that provides answers to such questions, and we offer specific guidelines that managers can use to improve decision making in their organizations.

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The Role of Top-Down Management in Enterprise Innovation

Running a successful enterprise innovation management program can be a challenging mission. Multiple factors have to be considered,each of which affect potential outcomes. One key aspect is the level of support an innovation program receives from an organization’s management. Connecting the needs of top-down management with the strategy and architecture of an innovation program will always lead to greater levels of success.
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Basecamp’s Strategy Offers a Useful Reminder: Less Is More

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Unless you follow tech companies, you might have missed the startling announcement by collaboration and communications software maker 37signals that it has decided to refocus the entire company on a single core product.

“Refocusing” might be an understatement.  37signals has developed a dozen different products and services since its founding in 1999. They will now be a “one product company” focused on Basecamp, its popular project management software.  To emphasize the point, the company is also changing its name to Basecamp.  So instead of following the conventional wisdom about growth through diversification, CEO and founder Jason Fried is doubling down on one successful area and putting all of his resources in one basket.

Basecamp is a small company. Even with more than 15 million users, it still has less than 50 people on its payroll.  So it’s somewhat audacious strategy might not be a model for everyone.  But regardless of your company’s size, there’s a lot to be said for the power of pruning and the importance of maintaining focus.  For many companies, in fact, the strategy of “less is more” has been a powerful driver of success.  For example, one of the secrets to Trader Joe’s profitability (which is one of the highest in its industry) is that they only carry 4,000 stock keeping units (SKU’s) per store vs. the typical 50,000 at other grocery chains.  They also open a limited number of stores each year, trading off rapid growth for insuring the quality of their brand.  Similarly, Apple has maintained the dominance of the iPhone partly by resisting the urge to create multiple product variations with different functions and features, in stark contrast to their competitors.

Keeping a business focused on a limited number of products, customers, or capabilities is not a new idea.  In the 1950’s, Peter Drucker emphasized that business strategy needs to include “purposeful abandonment,” i.e. deciding what not to do. Similarly, Peters and Waterman’s 1982 classic, In Search of Excellence, reported that successful companies were those that could “stick to their knitting” and not get sidetracked.

Despite all of this advice, the kind of radical focus exhibited by 37signals (now Basecamp) is difficult for managers who often act like kids in a candy store. Instead of focusing on doing a few things well, they try to go after too many customer segments, too many adjacencies, and too many new technologies.  Witness the struggles of financial services firms that become too big to control effectively; or large pharmaceutical companies that place bets on so many therapeutic areas that they don’t end up winning in any of them.

It’s a natural human tendency to want to do more.  Most of us have trouble walking away from tempting opportunities, whether it’s at the dinner table, or at work.  So we end up with indigestion at home and overload at work.  That’s why it takes a great deal of discipline, and even courage, to slim down, both physically and strategically.

A case in point is Google’s recent sale of Motorola Mobility to Lenovo.  The original purchase was probably a tempting opportunity that was viewed as too good to miss; but when it became clear that the telecommunications hardware business was not in their sweet spot, Google’s senior executives made the tough decision to sell, despite the financial consequences.  And in the long run, avoiding distraction and dilution of focus will probably be worth the cost.

Most of us of course are not in the position to buy and sell companies or even rationalize our product lines.  As managers however, we can make sure that our teams stay focused on the few critical strategies and projects that will make the most difference.  We also can ask Drucker’s question about what we should stop doing; and we can push back on others when we’re asked to do things that might be distractions from the core mission of our group.  None of this is easy in the midst of day-to-day pressures.  But in the long run, it’s very likely that we’ll reap higher rewards by doing less.


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Health Care Opens Up

An article in the Huffington Post website noted that open innovation is not new, but it is relatively new to health care, igniting a broad cross-section of challenges, hackathons, and competitions that seek to identify breakthrough solutions to solve for our health and our health care. By applying the best practices of the leading tech accelerators, these programs accelerate the speed at which new solutions are developed, companies are formed, and jobs are created.

Click here to read the full article.

Image via Flickr.

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Will Your Bad Boss Make You a Bad Boss, Too?

One of the best predictors of whether a person will become an abusive parent is if he or she was abused as a child. On the face of it, this is puzzling. Certainly, as children, these people did not say to themselves, “This is how I want to treat my kids.” To the contrary, our guess is that they said to themselves, “I am definitely not going to treat my children the way I have been treated.”   And yet they did; they did not escape the influence of that terrible role model.

This got us to wondering whether there might be a leadership analogy to this sad phenomenon. That is, we wondered, “Do people who work for terrible leaders turn out to be terrible leaders themselves?”

In our research we’ve demonstrated that a great leader can have powerfully positive effects on an organization: decreasing turnover of team members and greatly increasing customer satisfaction, profitability, employee engagement, sales revenue, and even workplace safety—virtually every business outcome that’s measureable.  In those studies, we’ve looked primarily at the relationship between individual leaders and their groups of direct reports. Recently, we’ve become fascinated by the question, “How much impact does a great or poor leader have at the next level down—on those who work for those direct reports?”

When we ask individuals about how their bosses influence their own leadership styles, they often respond that they are their own persons. Whether working for a great boss or a nightmare one, they feel that they are in control of themselves and the situation. If there’s a bad boss above, they serve as a buffer.

When we look at three levels of our 360 evaluations of the leadership effectiveness, correlating the scores of executives and their direct reports with those of the teams of those direct reports, we find some truth in this: we do see some leaders performing substantially better than their bosses. But we also see influences, good and bad, cascading down the line.

For this study we matched up data from 6,094 leaders (whom we will arbitrarily label “alpha leaders”) with their direct reports who were also leaders (whom we’ll call “beta leaders”) and the beta leaders’ direct reports. We assessed the overall effectiveness of each leader and the engagement level of that person’s direct reports.

First off, examining the best (top 10%) and worst (bottom 10%) of the alpha leaders (as assessed by the beta leaders who work for them), we were able see a substantial difference in the engagement levels of the beta leaders (as assessed by their direct reports)Not surprisingly, beta leaders who worked for the worst alpha leaders suffered; their engagement was abysmal, averaging in the 24th percentile.  Meanwhile, the average engagement level of the betas who worked for the best alphas was at the robust 82nd percentile. This mirrors our global study of these same variables with over 30,000 leaders.

One level down, the effect is similar, but not as strong in either direction: Engagement levels of teams headed by beta bosses laboring under horrible alphas average in the 39th percentile while those of teams headed by betas working for the best alphas are only at 61th percentile, considerably lower than their bosses.

If alpha leaders had no effect on beta leaders, we’d have expected the average beta leader engagement scores to be at the 50th percentile, since with this large a sample, the good and bad leaders would balance each other out. So clearly, it’s not easy to be a buffer: a bad boss is a drag on a leader’s effectiveness. In fact, teams rated the leadership effectiveness of the beta leaders who worked for the worst alphas 11 percentile points below average, while teams rated the betas working for the best alphas 11 percentile points above average.  The symmetry here is striking.

Still, our data show that it is possible to work for one of the worst leaders and yet be rated as one of the best yourself. While 14% of beta leaders working for the worst alphas fell themselves in the bottom 10% in leadership effectiveness, 7% of those harried betas were rated by their direct reports as among the top 10% of leaders. At the same time, fully 24% of beta leaders working for the best alphas were themselves also in that top group, while only 7% of them fell in the bottom 10%.

Is Your Boss Protecting You From His Boss? Chart

What are we to make of this?  First, we’d argue that our data show, happily, that great leaders do more good than poor leaders do harm. And to those who say their destiny is in their own hands, we’d say they could be right — the cycle of poor leadership can be broken.

On the other hand, we’d argue that good leaders are expending a lot of energy they could be using more productively when they have to manage and buffer a bad boss. This should be blindingly obvious. And yet, so often in our practice senior leaders ask us to “fix” the leaders below them. The reality is our job would be much easier if the leaders at the top were as highly committed to fixing themselves first.


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Taking Over from an Incompetent Team Leader

Becoming the leader of an existing team can be challenging, but taking over from an incompetent leader is more difficult. Incompetent leaders are not only ineffective at achieving the team’s goals. They think and act in ways that detract from and undermine the team’s performance, working relationships, and well-being. Consequently, in addition to forging agreement on the normal issues of mission, goals, and roles, incoming leaders often find their new team in disarray, dealing with conflict and stress. Building a stronger team means addressing these emotionally-laden issues.

There are several steps leaders facing this situation can take:

Tell team members what you know. Your new direct reports want to know what you understand about the leadership deficit they have faced and how it has affected the team. Your purpose isn’t to criticize the previous leader or to be omniscient; it’s to show the team that you have some understanding and appreciation – however limited – of the challenges they have faced and the effects it has had on the organization, the team and them. By telling people what you know, you also model transparency, a value that may have been lacking in the previous leader.

Be curious about what the team has experienced. If you know only a little about what the team has been through, say so. But even if you have worked with the team or been a team member, get curious and ask about the challenges they have faced and what concerns they have. Incompetent leaders leave behind disarray, conflict, and stress. By understanding what they have experienced, you develop a more complete picture of the issues that you and your team will need to address to move forward. Your curiosity also shows that you are interested in their well-being, another value that may have been lacking in the previous leader.

Temporarily suspend judgment about whether team members are resisting changes to improve team functioning and accountability. Teams that have been led by incompetent leaders often have insufficient or stifling structures, processes and accountability. Team members have received mixed messages about what is expected of them and they have often been treated poorly, without regard to their well-being. It’s easy to think that because you are increasing predictability and psychological safety, team members will quickly and enthusiastically embrace your changes. But team members may welcome the changes and have concerns about effects of the changes. They may worry that you will use the increased accountability punitively or that the changes in expectations will reveal their weaknesses, which will put their jobs at risk. As a result, they may not fully implement the changes. It’s easy to infer that these members are simply resisting change. If instead, if you get curious and understand they concerns, you can design team changes in a way that address the concerns at the same time it achieves the results the team needs.

Be careful about assessing team members’ knowledge and skills based on their initial performance. Similarly, if team members aren’t performing their jobs adequately, it’s easy to infer incorrectly that members can’t perform their jobs. But, sometimes it’s more complex than that. Team members’ knowledge and skills may be masked by the dysfunctional structures, processes, and expectations that the previous leader created and within which team members operate. Until you start to change these conditions, it can be difficult to tell if team members have what it takes to do the job.

Explain your behavior; don’t make team members guess. As you assess the current team’s functioning and work with the team to make changes, don’t assume that you can allay members’ concerns simply by acting effectively. Team members’ anxieties about the previous leader can easily lead them to misinterpret your comments and behaviors. To reduce this possibility, consistently explain why you are doing what you’re doing and why you are saying what you’re saying. This also enables you to share your leadership philosophy and set expectations for how you want others to lead.

You may be thinking that you don’t have the time to follow these steps; you need to get some team results fast. There is a paradox here. If you start by quickly changing team structures, overall it will take more time to get better team results than if you spend more time to understand, appreciate, and respond to team members’ needs and concerns before making changes. Smart leaders practice what systems thinkers long ago learned: Go slow to go fast.


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