Leadership Optimality in an Imperfect World: August 2010

Once upon a time, a young plant manager of a heavy assembly operation walked through his plant and saw significant risk of injury to the team members; he instituted a required safety shoe and safety glasses policy (that the company would pay for). Next week, the local union filed a “grievance” (formal complaint) against the plant manager. The parent international union had to intervene (and educate) the local union to withdraw the grievance; the union only withdrew in fear of a future lawsuit that may incriminate them for an accident in the plant. As that plant manager, it felt as if I was slapped on the face for trying to do something good.

Different work experiences have allowed me to observe similar mistakes, negligence and waste, in large or small companies, that are difficult to explain.  As engineers, we are trained to attain process optimality; in many business environments, such optimality often emerges from a series of compromises that managers make, to keep harmony or simply avoid making the tough decisions.

This week, I walked to through a large multi-national plant at the cradle of the spectacular mountains in Northwestern Virginia. Recently, we sold them spare parts, to retrofit a piece of equipment; the young engineer, who gives me the tour, believes that it would have been the best option for their company to have us (the original equipment manufacturer) re-build this product and give them a warranty on the re-built equipment. The job was awarded to a local mom/pop contractor who charged them $50k more than my company had quoted. The frustrated young engineer, signals his hand underneath a table to describe an impropriety in their purchasing behavior.

Later, we walk through areas where the yellowish-brown effluent from the paper making machineries flow all over. You notice many side streams of these untreated fluids flowing into the pristine river by the plant where four elegant swans are swimming on this humid mid-summer day.

In twenty-first century America, such scenes of alleged bribery, gross violations of environmental or safety regulations, are difficult to comprehend. Every day, in thousands of  businesses, imperfect decisions like these, are made in a series of small accidents that add up to create our the imperfect business eco-system.

Human beings, intrinsically, want to do the right things – we are aware of consequences of our actions; we still make imperfect compromises with our every-day lives. Having once walked in their shoes, I know that these engineers and plant managers want to do the right things – meet environmental standards of water-discharge, treat their people right – “do good” for their communities. But in a complex world of running a plant, business or service facility, things are going wrong all the time and your reaction is typically dictated by what you are measured by.  In my past manufacturing experiences,  I was usually measured with one objective – make more product.

As leaders, we must align our organizational incentives to “balanced objectives”.

Early in my career, I was trained that businesses have only two goals: Make as much money as possible – for as long as possible. More often, this goal is misunderstood, misinterpreted and misrepresented. If one keeps the longer term view of “for as long as possible”, we would not pollute our rivers – treat our teams unfairly or the communities we function in, wrongly.

If you ask a stockholder in any company – would you like to maximize profit of your stock knowing that it hurts people and communities – or have child labor in factories – or destroy our environment – versus, given the choice of “balanced objectives” – profit and doing good – the typical stockholder would pick the balanced scorecard.  But rarely are stockholders given such a choice.

The world doesn’t run on binary choices of 1 or 0; making profit does not need be mutually exclusive of taking care of our teams and our surroundings. We can choose the elegant solution and want both – and deliver both. It’s a choice. As leaders, we have to make that choice – and communicate our dual expectations, clearly.

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6 thoughts on “Leadership Optimality in an Imperfect World: August 2010

  1. Great blog entry about the world we currently live in as business leaders. I whole heartedly agree with you that stockholders should and would like to see a balanced measuring matrix on company performance. Far too often in today’s world there is a laser focus on the next quarterly earnings report and far too little focus on the progress towards longer term goals which include much of what you have written about in today’s blog. While I know and understand that the market is a necessary way for capital to move in and out of businesses, I have often wondered at my own Company what decisions would be made daily if we were taken private and not beholden to the next quarterly report. That is a topic for another blog overall. Great way to stimulate some thought on a peaceful Saturday morning. Thank you.

    1. Brad: having worked for three private and 2 public companies in my life, I can assure you that dialog and pressures of for the next quarterly report, are very different in private companies. However, the expectation to perform is still there. We just don’t do silly things that may harm us later. I am glad you liked the blog. Thanks for the encouraging comment. Enjoy the rest of the weekend!

  2. Zain,
    At a micro level, you’ve captured the spirit of the pioneering work of Adam Smith, originator of the economic philosophy of Capitalism. Balancing profit motive with the moral imperative of common good should be the guiding principle of business-industry-finance at whatever level, as was underscored in Smith’s Wealth of Nations.
    Continue blogging on the balanced approach to capital formation.
    Best,
    Zillur R. Khan

    1. Zillur, you must have read some different edition of Wealth of Nations. What Smith tried to demonstrate was that when people follow a profit motive and work towards their own self-interest, and so long as injustices are not committed, the common good will be served. He does not suggest that there is a moral imperative to work towards the common good, and in fact would almost certainly argue to the contrary. No individual is in a position to know what the common good is, but we are all in positions to know what would be good for ourselves. So long as justice is upheld, the best way to serve the common good is to act in one’s own interest.

      Doing so can lead to solutions in business that turn out to be wildly beneficial to all involved. For example, I do aid and development work in Afghanistan. They wanted me to implement a program in which we would give sheep to the poorest 20% of an Afghan village, as a means of raising their economic conditions. As a business move, doing so would be neither just, nor in my interest; those sheep are worth something, and I should see a return on my investment. Also, the poor did nothing to deserve these sheep. That these programs don’t work is evidenced by Afghanistan’s continued economic underperformance, nine years after the invasion– concern for the common good notwithstanding.

      By giving away sheep, we depress local sheep prices, destroying the very businesses we wanted to create. Also, because people will just as soon eat a free sheep as raise it, we have to require that they not sell the sheep for one year. We also require that they give away a ewe’s firstborn to another family. These conditions confuse ownership and inhibit economic activity. These giveaways destroy incentive, economic linkages, and personal pride, and they reduce people to beggary. I refuse to give sheep away.

      Now, Adam Smith recognized three fundamental forms of income: the wages of labor, the rent of land, and the interest of stock. The poor have no stock and I can’t use their land. They don’t have money either, but they do have labor. They can work for sheep. The more work they do, the more sheep I will give them, and whatever they do with those sheep is up to them. This is also open to everyone, becase ‘the poorest 20%’ is a meaningless, arbitrary category.

      To find a work project, I go to the village elders. They know the needs of the village better than annyone, and I want to help these guys because if the elders are strong, that helps keep the Taliban out. I let the elders choose the project, I let them organize the workforce, and I let them hand out the sheep. (My field team is there to spread the word among the village, and that transparency keeps the elders honest.) They get all the credit.

      The benefits of this are huge. Jobs are created right away that keep the youngsters busy and away from the Taliban. A community work project gets accomplished that benefits the whole community. People who need sheep have a chance to get sheep. People who don’t need sheep can sell their labor to someone who does, and economic links are built. As people trade sheep and labor amongst themselves, market forces drive resources to those who can do the most with them. Established sheepherds are protected, because their sheep-for-money can compete against my sheep-for-labor. The elders are strengthened and drawn closer to our side. The poor have more sheep, just like we wanted, but they also have a stronger, healthier community. Everyone wins.

      As a business move, this is good for me, because for the same investment in sheep, I get a healthy village whose leadership is on my side. That’s exactly what a counterinsurgency needs to win, so that’s very valuable to me. It’s worth a lot more than a miserable village with depressed sheep prices and poor people living from one handout to the next.

      Put into practice, this “aid-for-labor” approach has been going for more than a month now, and the results have been spectacular. The villages decided to build new irrigation canals for themselves, and they’re working almost faster than I can pay them. The next lot of sheep ships to the villages tomorrow. The canals will improve their prosperity for decades to come, and that was a result I could never have brought about if I’d tried to discern the “common good.”

      Zain, I agree with you when you say that people intrinsically want to do the right thing. People are basically good, but easily distracted. Also, they tend not to see beyond what Thomas Sowell calls Stage One. That short-sighted sheep giveaway is a good example.

      As a leaders, if we want to get beyond Stage One, then we have to evaluate policy with an eye towards incentives and constraints. If somebody at that Virginian paper plant took a kickback, then there was almost certainly a lack of oversight that helped that individual give in to temptation. That’s an organizational flaw. A constraint (oversight) that should have been in place wasn’t there. We’ll probably never know the details, but I’d be willing to bet that the missing oversight could be traced to favoritism in some way; somebody amassed more power than he was justly entitled to, and a kickback was the ultimate result. Watch out for the tiny injustices in an organization. Injustice’s effects are subtle, but far-reaching.

  3. Zain, I cannot agree with you more on that an enterprise should have a balanced goal. Business does need to make profit. At the same time, business leaders have to be aware of their social responsibilities. A successful company should be a good citizen to its community also. I really enjoy reading your blog. Please keep me on the loop. Whenever I read your article, it always brings memory back to me when we were business students in the University of Toledo and doing class projects together.

    1. Thank, Kunping for your thoughtful comment. University of Toledo was a great place to learn with excellent teachers.

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