All About Business

SAVING THE AMERICAN DREAM

2012-01-18T11:39:00.004-05:00

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Dueto the deep recession and the large number of unemployed, we are currentlyobsessed with income inequality: the “unfair” distribution of wealth in oursociety. It’s not that the unemployed oreven the poor are expecting the comfortable middle class to give up a portionof their assets or income. They have faith in the possibility that they too canparticipate in becoming a member of the middle class, or even the wealthy. Weare raised to believe in the American Dream while the rest of the world brandsour nation the “land of opportunity.” But since the 1980s, as incomedistribution has become less equal, and especially under today’s dire economic circumstances,both we and the rest of the world, especially the young and middle aged who arerebelling, doubt the validity of our faith.

Today’scircumstances are hardly new. Most societies have had their rich and theirpoor, some in which the mal-distribution of wealth is just as extreme, or moreso, than now. Take the so called robber barons of the late 19^th andearly 20^th centuries whose wealth was just as outrageous as that of ourbillionaires. Back then Thorstein Veblencalled it “conspicuous consumption” and urged that something be done about it.Of course, back in those days there was no income tax. Recently, I stayed at a ten room mansion withservants’ quarters built in the 1830s by a wealthy ship building family, nowconverted into a Bed & Breakfast.The original family lived like royalty in this magnificent home. Such homesabound in many American cities, bearing testimony to the wide differential ofwealth between a small minority and the majority. We expect such grandiosity in England with itslanded gentry based on birth, but we also had similar differences in our owncountry based on wealth.

Iwas old enough to be aware of the toll the Great Depression was taking on ourpopulation with its long bread lines, a 30% unemployment rate, our greatMidwest farms turning to dust, and people on the move, tearing up roots, searchingfor work. My parents had to move from acentrally heated apartment to one heated by an oil burner in the kitchen, whichsoon caused a fire one terrifying night forcing us to abandon all weowned. My father hated the bigcorporation where he worked because it kept cutting his wages. Yet, he neverflinched from believing in the American Dream, which encouraged him to starthis own upholstering business, thus allowing him to make a decent, although notaffluent, living for the rest of his life.

What did the future hold for his two sons?The war intervened and we survived. Once I returned home, the federal government paid for my education atone of our great universities, hopefully preparing me for a successful career.But on graduation, with a recession in full force, there were no jobs to behad, especially for one without any prior employment or job experience. Ashamed,I was forced to resort to temporarily collecting an unemployment stipend tosurvive. Had my education been a waste? Likemy father, perhaps because he was my model, I believed in the American Dream,the possibility of being successful, but not necessarily rich. Over the nextfifteen years, I worked for a number of companies, both large and small, makinga modest living. However, I was consistently unhappy with my jobs, partlybecause I witnessed gross mismanagement, unfairness in dealing with employees,and believed that I could and should do better. I believed that, like my father, I must have my own business in order tomake a decent living and be happy. In other words, I alone could shape mydestiny. Isn’t this the American dream, the individual dependent on his own abilitiesto be a success, in a political environment that does not stand in his way? Butthen it was only a dream; I had hardly a spare penny to my name.

EventuallyI found a wealthy individual willing to modestly invest in my idea of a startupin a trade I had learned while working for others. The federal government,through a Small Business Administration guaranteed bank loan, provided me themuch needed early operating capital. Ever since, with appreciation for what thefederal government did that enabled me to succeed, I pay taxes gratefully andhonestly. In the beginning, supporting a family and living on cheap food for thefirst five years, I lost money and was ready to quit. But, miraculously, just before I was ready togive up, sales improved and in a few months the company passed into the black. Overthe next twenty years, the company grew to over one hundred employees andbecame the most profitable in its industry. But it wasn’t a straight line up; when recessions struck we had years of loss when the future appeared uncertain.

After a decade, mypersonal earnings exceeded anything that I had imagined at the outset, whichwas simply to make a decent living. I graduallycame to realize that what I had created had put all those people to work,enriched the communities in which I had established facilities, and addedsubstantially to the local and federal governments’ take in taxes. Indeed,rather than my employees resenting my good fortune, for example, they insistedthat I drive a Mercedes rather than my low budget Toyota. They felt that as thecompany’s top dog I should appear successful .

Still,my conscience confronted me: I was personally earning ten times more than theaverage employee. Is that fair? Can such a differential in earnings bejustified? Of course, the wages paid to the employees were at the going rateand they received cost of living raises every year automatically. As the CEO Ihad no idea where my own wage limit lay. Having to justify in my own mind myhigh salary, my success, I resolved the conflict in two ways. First, the enterprise had been my idea; tobring it into fruition I had sacrificed my family’s standard of living; I had signedloans that were collateralized by all that I owned, including my home. In otherwords, I had risked all to create the business, including, were I to fail, my belief in myself– and perhaps my belief in the American Dream. Second, I shared with ouremployees, giving them stock in the company each year, empowering them to makedecisions regarding their own bailiwicks, and establishing a system thatenabled them to increase their wages through their own extra effort. As a result, employee turnover virtuallyceased, confirming that I had created a happy and secure environment.

Although I havelived the American Dream, I have no illusions that I could have failed, thatluck, being at the right place at the right time, knowing people who could helpme, played as important a role as my own abilities. And I must also attributepart of that success to my excellent education which taught me how to thinkrationally and understand how the world works. Indeed, I made mistakes, evencoming close to failure on two occasions. I do not see myself, my past success,as harming anyone, of depriving anyone of their own opportunity to succeed. Infact, I feel proud that I was able to help so many, to give them jobs andsecurity. Were anyone to resent my so-called wealth, I would consider themunfair and unjust.

However,I don’t believe that people like me, who have made good by dint of their ownstruggles, are the true target of the blatant resentment of those protesters whoare less well-off. Rather it’s the super rich, the billionaires who displaytheir wealth conspicuously. Such people, either through luck, or ability, orboth, have become super wealthy because of the way life is, not just or unjust,deserved or undeserved. Life is unfair. Of course, our task is to make thingsmore fair as best we can. Our sense of fairness demands that there be a logicalconnection between effort, andultimately results, and reward.

No one needs billions of dollars to live welland be happy. The yachts, the private jets, the multiple mansions are notessential to living a good life. I cannot envy such individuals their wealthand power, although it seems unjustified and unfair. I believe, however, thatthey owe it to their nation, to this society, to share their wealth; and the surestway to achieve that is to be taxed, at least by fifty percent of their income,or even more. Outrageous levels of incomeinequality must be curbed because it destroys society’s morale. Rather, we musttrust in the ethic that hard, honest work reaps a just reward. The real challengein life is to be creative, to contribute to the common good, not to accumulateexorbitant wealth for its own sake. Too many executives, some even fired forfailure, have raked in multi-million dollar windfalls undeservedly. America’sreward system desperately needs an overhaul.

Solet us rally to preserve the American Dream, because the current crisis will indeedpass, and opportunity will return.Having lived it, I know what it is to be down and out, and I also know that ifwe stop believing in the future, we are doomed.
( More essays like this one are available in two of my business books: BUSINESS NOT AS USUAL - Volumes 1 & 2 on the Kindle at a mere $.99. Learn how to increase the bottom line beyond expectations.)

HOW TO REDUCE UNEMPLOYMENT THE LOGICAL WAY

2012-01-14T17:50:00.002-05:00

Todaywe look to the private sector to get things going again but that’s futile. It’sa fundamental fact that businesses won’t hire unless their sales volumejustifies hiring. From an entrepreneur’spoint of view, only the government can kick-start the economy by puttingworkers to work building infrastructure, supporting cutting edge innovativeprojects, and helping the states maintain their services. This should includethe formation of government run programs similar in design to the CCC and WPAthat put people back to work during the Great Depression. This would providetangible income to the unemployed and help eliminate the depressing feelingfrom being on the dole. It would alsoreduce the need to fund unemployment which strains states’ budgets.

Ofcourse, government could motivate corporate executives to invest in theircompanies, upgrade their equipment, increase their research, and expand theirmarkets by offering tax write offs, but this can produce only marginal results.Eliminate the income tax on business altogether if you want dramatic results.That would make our nation a mecca for business startups. After all, acompany’s profits are used either for reinvestment, acquisitions or salariesand wages, which are immediately taxed. When we were riding high in my companyunder an Employee Stock Ownership Plan (ESOP) allowing a percentage of ourprofits to accumulate untaxed, we put our cash to work improving efficiency,granting bonuses to our employees, and expanding our sales effort which led tomore hiring. Then it was mandatory to make use of the money under federalrules. Smart government policy should be psychologically intelligent. Ratherthan seeking the wisdom of strictly economic advisors, and academics, theadministration would do well to have psychologists on its staff who know how tomotivate people to follow a desired course of action. In addition the President should have on hisstaff a representative from Small Business, one who is currently or who hasbeen a small business CEO.

Longerterm we should hire well paid teachers for the primary and secondary gradesoffering the basics, how to calculate, how to read, how to write, learning ourhistory, courses essential to qualifying for today’s and tomorrow’s jobs. Andthe best investment of all, as proven by my personal experience, is to offer afree college education modeled after the GI Bill to all who qualifyacademically. As I indicated, this was a major factor that led to mygeneration’s prosperity. Today, while my three kids are holding their own,their standard of living still doesn’t match the one they were raised in.

Now,for all the wealth I had generated for my employees and community, for all thesuccess I had experienced as a devotee of the free enterprise system, I havebecome its victim. In an effort to counter the recession, the Fed’s less thanzero interest rate has inadvertently reduced my standard of living. As thestimulus proved to be inadequate to increase business activity sufficiently,the value of my investments are on a seesaw. Both political parties are at irreconcilableodds while our politicians exhibit little regard for the nation’s welfare, sothat nothing can get done, no remedy can be invoked to improve conditions. Nodoubt those who had made good are affected by the recession, but not nearly asmuch as the unemployed who have no nest-egg to fall back on. Having doneeverything right, having worked and fought hard to win in our mercilesscapitalistic system, my victory is now compromised, and my faith in freeenterprise rendered naïve. But is it really the system that’s at fault? No, it’s due to the outrageous folly of the financiers(worldwide) in charge who in their greed and foolhardiness ran risks that mygeneration had learned from the Great Depression not to run. When I read todaythat banks are still willing to issue mortgages to people with no down paymentI fear the lesson, incredibly, has not yet been learned. So, as I used to dowhen in the past my business was threatened by the economic folly of ourleaders, I’m simply “gonna” hunker down and hope for the best.

(Take a look at BUSINESS NOT AS USUAL, Beyond the Bottom Line, for more business wisdom.)

THEN AND NOW

2011-12-31T16:44:00.002-05:00

Being a member of the World War IIgeneration, and old enough at the time of the Great Depression to understandits impact on my parents and on the city in which I lived, I cannot help butcompare today’s generation’s response to the current Great Recession.

My father, while still a nightmanager for a large communications corporation which kept cutting his wages, startedhis own small custom upholstering business in the midst of the Depression.Since sales were erratic he hired only part time employees, some of whomdepended on community welfare in order to survive. Despite the poverty there was a marvelousesprit de corps among the workers. Indeed, as a boy I recall the enormousrespect I felt for each worker in the shop, while marveling at their respect andconcern for each other. In today’s world we’d probably dub them a “supportgroup.” I recall that even competitors helped each other in a pinch: if my father ran out of a supply of, saytacks, simply by asking, a competitor came to his rescue. I don’t have a sensethat such an attitude is prevalent today when I hear that our law makers arewilling, for example, to let a worker’s unemployment compensation cease afterits expiration. How can that worker possiblysurvive? There’s a hard heartedness in our culture today that didn’t exist backthen.

Let’s compare our education systemsbetween then and now. Today we are more tolerant of unruly students. Often theyhold back the progress of an entire class. Back then such a student was sent tothe principal where he or she received a “rattan,” a physical slap in the handby a ruler. While I don’t approve of physical punishment, I must admit that itworked. I recall being appalled recentlyin a discussion I had with our current school superintendent in which she insisted thatslow students be mingled with topstudents, as if the brilliance of the best would rub off on the worst. In the city in which I lived as a boy, if astudent received all As and Bs by sixth grade, he or she was eligible to attendseventh and eighth grades at a “Preparatory School” where French and Algebra wereincluded in the seventh grade curriculum, and Latin was added in eighth grade.As a result the student could also elect to complete high school in three andone half years. Why in education would we mingle our best and brightest, thefuture leaders of our nation, with the ordinary, with the less gifted, the lessmotivated? By the way, in the city of my upbringing, the “Preparatory Schools”– there had been two of them – have been eliminated.

“If it ain’t broke, don’t fix it.”But we do “fix it” with our current educational system and usually make itworse. The education I received back inthe nineteen thirties and forties has equipped me extremely well to deal withmost challenges in my life, enabling me to graduate from one of the world’sgreat universities, run a manufacturing company successfully, and ultimatelybecome an author of both fiction and non-fiction. Meanwhile our educators keepexperimenting despite no need to do so: although I excelled in math all throughhigh school and college I couldn’t fathom what my kids were being taught in themath they asked me to help them with whenever they got stuck with theirhomework.

As I compare the knowledge andjudgment among today’s adults, especially among our leaders, with those of myday, I suspect the current generations are products of a failed educationalsystem. I’m reminded of a recent eventwhen a local school teacher asked if I would submit to an interview by a sixthgrade student regarding my WWII service. To my disbelief, the student, unableto even know what to ask, was totally unaware of what that war had been about.

This brings me to the lessons thathistory can teach us, but that some of us ignore because it doesn’t support our visionof the way things should be. As anexample, let’s take the “Great Depression” which our then government tried todeal with, succeeding in some ways, failing in others. Of course, it’s said bymany that it took a war to rescue us from the Depression, as if war was theonly solution. True, millions of men and women were taken from the economy tofight, while those remaining at home, especially women who hadn’t workedbefore, replaced them. But they were producing goods that destroyed, ratherthan goods that enhanced our lives. By increasing government spending ondomestic state and federal projects, especially involving long terminfrastructure, we would be improving all lives by putting the unemployed backto work in a constructive way. Add tothat the federal funding of a freecollege education for all who qualify. By the way, I went to college fully paidfor under the GI Bill. It was the best investment, yielding the highest returns,our government had ever made. Programs such as these would stimulate theeconomy just as effectively as going to war. By creating rather then destroyingwe can achieve the same ends.

Being well into my senior years,I’m deeply concerned about our healthcare system. Back “then” the doctor cameto our home; in fact I don’t recall ever seeing a doctor’s office throughout myoften sickly childhood. Because of his low overhead his fees were also low. Hewas a true family doctor; he knew well each member of the family, as he watchedover us through the years while my parents aged and we kids grew into adults. Contrastthat with today’s doctors who always refer me to an expensive specialistwhenever anything out of the ordinary shows up. Just recently, I phoned mydoctor whose office is an hour away to consult about a medication. The officereceptionist said that I’d have to come in. Why travel two hours for the answerto a simple question over the phone, I asked. Have the doctor return my call.The doctor can’t do that, the receptionist responded. I should have figured that out, right? Ofcourse, Medicare will pay the doctor for a visit, but not for a phoneconsultation.

My childhood was rife with illness,some of it so serious that I had to be hospitalized at one point for nearly twomonths. Part of the reason for this was because I contracted Scarlet Feverwhile in the hospital and had to be isolated. My parents, having no medical insurance, spent the next decade rightinto the Depression repaying the doctor and the hospital. But no one was everturned away.

Now as against then, our healthcaresystem is being played dishonestly by who knows how many practitioners. Onseveral occasions, my Medicare reports have indicated payments for incorrect orfalse doctor’s services. I never heard of the doctor listed, I never saw such adoctor, I may have been out of state the very day I had the allegedappointment, yet Medicare and my supplemental insurance paid the undeservingprovider. Certainly, I would phone or mail in a statement stating that no suchservice was given. But that would be the last of it; I’d have no idea how theissue was resolved. Indeed so often did it happen that a few years ago I wrotea letter to the administration suggesting a way to eliminate the problem: givethe patient an incentive, a piece of the recovered amount. Else why would apatient be motivated to go to the trouble to report a fraudulent claim? No response came forth.

The above lists only a fraction ofthe differences between then and now. Life now is vastly and needlessly morecomplicated than it was then, yet life then was even harder than it is for mostof us today. We have done this to ourselves. Today there’s plenty of violencein the world, but nowhere near the scale of violence the world knew then and Ihad experienced. We lose lives now by the single numbers; back then we lostlives by the thousands. Today we have advanced amazingly in a scientific sense,discovered great truths about our universe, even about ourselves, yet we oftenlive in denial even when the truth is staring us in the face, such as thefutility of war, and the need to compromise for the common good. Our only hopelies with the coming generations, because, as I see it, the current ones havelost touch with reality.

DEBUNKING CONVENTIONAL WISDOM

2011-12-18T09:15:00.000-05:00

Like parents raising a child, most people in business learnon the job. Even those who attend business school are inadequately equipped.Such facilities provide the tools but not the essential judgment, which can’tbe taught. It is an inherent quality that is tempered by experience. Only bydoing can we unlearn the notions of conventional business wisdom.

In our small company, it was our willingness to cast asidethose notions that led to our survival and continued success. What follows is acomparison of our assumptions and reality.

• By offering asuperior product, superior service, and a competitive price, a company is boundto succeed.

Not so. Not until we called on the trade long enough andfrequently enough to establish relationships did we begin to make it. Theadvantages we offered were less important to our success than the humanconnections we cultivated.

• Honesty pays.

Not necessarily. Over the years we failed to sell certainmajor accounts because our competitors indulged in payola. We could havesecured some of the business were we willing to compete on the same basis. Weweren’t. Although honest companies may have happier employees, a sense ofpride, and a clear conscience, they often have to sacrifice gain.

• CEOs thrive on risk.

Not this CEO. Every risk I took was calculated. I made surewe could survive a worst-case eventuality. My calculations failed only where Imisjudged how bad a worst case could be, such as the loss of a major customer,an oil embargo, or an unprecedented 21 percent interest rate. Indeed, I stroveto minimize risk in every policy decision I made. (I didn’t consider going intobusiness much of a risk, yet it was the biggest risk of all.)

• Recessions are badfor a business.

The key words are “a business.” Recessions are bad forbusiness in general, but not for a business. Recessions forced us torealistically examine how to survive. Indeed, they compelled our entire organization to apply itsingenuity and imagination to coping with the crisis. We eliminated layoffs andadopted innovative management methods: more openness, incentive systems, andways of conserving materials and energy.

We learned, for instance, that internal cost cutting wasmore productive than struggling to increase sales in a contracting market. Welearned that it was wiser to take action where we had control rather than tryto contend with areas where we had minimal control. Recessions taught us new ways to manage and lessons we would neverhave learned had they not occurred. By ridding ourselves of past excesses, webecame healthier.

• Competitioneliminates poorly managed companies.

Not all failing companies fail. They hang on, damaging theirindustry by compelling competitors to replicate their self-destructive policiesin order to compete. As more suppliers come upon the scene, few, if any, dowell. The industry becomes saturated, its participants dragging on year afteryear in a war of attrition. We despised them. Give us a successful competitoranytime.

• Unions are good foremployees, bad for companies.

Not all companies. We had no union, but our nearestcompetitor did. Their union struck almost every year, usually at the peak ofthe production season. That was good for our company. The union failed severaltimes to organize our shop. Why? Our benefit package was superior to thatoffered by the union - we were an employee-owned, open company. And though ourwages were slightly less than our competitors', our employees' annual take-homepay was far larger due to the absence of layoffs (We were able to avoid layoffsdue to job versatility, which is typically prohibited by unions.)

• Employees distrustmanagement.

Implicit in this statement is employee culpability, whichdoesn’t square with reality. In the early 1990s Prime Minister Miazawa of Japanwas incorrect in condemning the American worker for being lazy. The culprit isoften American dictatorial management. It forgets that humans perform best whenmotivated. Employees are conditioned not to trust, because management—nottrusting them—is secretive and places profits ahead of the employees’ welfare.Trust must be mutual. One side has to take the initiative of trusting theother. Only after we listened, invited our employees to participate indecisions affecting them, opened up our closely held company, revealed ourfigures, and proved we were sincere in sharing did the employees trustmanagement and say what they thought. Management and workers alike, were likebirds freed from their cages.

• Administrativeprocedures and good record keeping are essential to a smoothly runningoperation.

True, except when they become ends in themselves. When acompetitor’s vice president joined us, he was startled to learn how littlepaperwork we had and how brief and direct our procedures were compared withthose of his former, large, long-established employer. Once forms andprocedures are entrenched, they tend to become a way of life even after theyare obviously obsolete.

• Just as managementseeks first to maximize profits, employees seek first to maximize income.

Not necessarily true. Management tries most to minimizerisk. Employees try to do the same by striving for security. Our company washappiest and most efficient after we eliminated layoffs. Our total employmentroster consisted of a corps of long-term employees, none of whom had less thanfive years’ seniority. Creating a structure of guaranteed security leads toready solutions to most other issues.

• The free enterprisesystem is just, fair, and efficient.

Hardly. The income spread between most CEOs and theirworkers is outrageous. The super-rich are more numerous than ever. More peoplereceive outlandish compensation for activities (law, accounting, and financialtrading) that contribute little or nothing to production and creativity. Thesystem wastes an enormous amount of talent. Our accountant rejoiced every timeCongress complicated the tax laws. And our lawyer was strikingly imaginative inmanufacturing causes for adversarial action where, in our view, none existed.

It is also a system of success of the fittest.Because life is often mindless, we strive to make it somewhat just. Under thefree enterprise system, a business leader has a choice to be just or unjust.That’s the wonder and often the tragedy of it.

INCUBUS AMERICANA

2011-11-14T09:50:00.001-05:00

The American Dream. I don’t recall when I first heard about it. Probably in a high school American history course. But it seems I’ve always known of it, much as I’ve always known how to pledge allegiance to the flag. It came naturally. It’s a concept, no, a precept, an article of faith similar to the belief that anyone can grow up to be president. It used to beat inside me with every bloody contraction of my heart.

Every American knows the Dream, and so do many, many citizens of the rest of the world. For the few who don’t, let me describe the American Dream in part as if captured in a short movie. After all, dreams are usually very pictorial. The morning is bright. Here is a man in his forties dressed in a neatly pressed business suit with a white shirt and tie. He is backing his late model gleaming silver four-door sedan down a driveway from a two-car garage. We can just make out his wife’s late model gleaming cream colored station wagon standing in the other garage stall.

The garage is attached to a gleaming two story white house. In front a well-groomed, well fertilized gleaming green lawn stretches to a prim street lined with shade trees. His wife, still in her bathrobe, her face made up smooth and gleaming, stands in the doorway blowing him a kiss goodbye. Only moments earlier the school bus picked up their son and daughter.

That is the picture. Add to it a few facts about their lives. He is off to his office where he bosses others and makes important decisions. Is he liked or, at least, respected? Are his decisions correct or, at least, wise? Irrelevant! The wife must immediately repair to the kitchen to stack the breakfast dishes in the dishwasher. Then she must head to the bedrooms in time to make the beds before the cleaning lady arrives. Are they happy, you ask. What kind of question is that?

I no longer believe in the American Dream. But I don’t advertise my loss of faith. It would be foolish, especially for one in my profession. Not that I would be accused of treason, or jailed, or even ostracized as, no doubt, would be the case were I living under a dictatorship. I am free, free as a fish in the sea, for I am a certified public accountant, you see; my clients, everyone of them to a man (Oh, poor woman, the American Dream, always a man’s dream, is now yours too.) worship at the altar of the Dream. If for a moment they ceased to believe in it they would lose their incentive to go on with the rat race.

May I tell you a little more about myself? When I started in business, my office was little more than a cubicle facing an alley in the rear of an 1890’s office building. In those days I had no partners, only one girl in the office, no computers and no headaches. Today I have a dozen partners, who knows how many girls in the office, a floor of offices decorated by a famous interior decorator, an IBM computer that I don’t understand; and headaches galore. You might say I have achieved the American Dream. But wait, there’s more. I’m separated from my wife of thirty-five years; I have a mistress; my kids keep in touch so they can ask me for money, I ‘ve developed a pot-belly, and I don’t sleep well. You might ask what has all this got to do with my being the product of the American Dream? Everything. What about happiness, self-fulfillment? Yes, if I had the courage I’d forget the Dream I no longer believe in although I’m its living example, and establish again a little cubicle of an office with only one girl to answer the phone and keep the books. I’d call my wife and tell her how much I miss her. If I had the courage.

(I found this story in a forgotten file. It was printed in dot matrix which leads me to believe that the story was written about 30 or 40 years ago. Its timeliness amazes me as the current generation feels disillusionment in the American Dream. I, too, must have had similar doubts when I wrote the piece during a serious downturn in the economy.)

BUSINESS: THE PERPETUAL WAR

2011-10-31T13:07:00.000-04:00

When I started in industry, my boss used to say: “I’m all for the competitive system, except the part I’m in.” Decades later as CEO of my own intensely competitive business, I felt the same way. Indeed, I could have been dubbed the Henry Higgins (of My Fair Lady fame) of the business world if you heard me complain, “Why can’t a customer be more like a friend?”

A shocking thing happened to our plastics coloring materials company. Our biggest customer, one of America’s largest plastics consumers, whose purchases constituted one third of our sales, seemed to be abandoning us for no reason. For the first five years of our relationship, we were its sole supplier, because no competitor could match our quality or service. When eventually our customer found additional sources, we understood. After all, we too were proponents of multiple sourcing wherever possible.

In fact, we felt an unanticipated sense of relief when the customer’s orders leveled off. We had grown increasingly uncomfortable as the customer’s purchases occupied a larger portion of our total sales. It had already become necessary to install extra production machinery (and increase long-term debt) just to maintain the expected high-grade service. How do you tell a customer—or yourself—that you don’t want more business?

When after increasing our capacity we noticed a gradual, yet steady, drop in the customer’s purchases, we became alarmed. After asking the reason for the decline, our salesman for the account reported that it was only temporary—the company’s product sales were off. Really? Historically, the customer, a global manufacturer of a uniquely recession-proof line of quality plastic housewares, had experienced steady sales growth through good times and bad, and times were still good.

The decline continued for most of the year, and the additional machinery we had dedicated to serving the customer’s demands stood idle. Despite pressuring our sales staff to drum up sales elsewhere, we were unable to compensate for the loss of business fast enough. It was time to confront the king and find out what was truly going on in Denmark—presumably something rotten.

And it was indeed rotten from our perspective. The customer confessed to gradually installing an in-house operation to manufacture the products we had been supplying. The only orders we were receiving were for items whose manufacture it had not yet mastered.

Our initial reactions were anger and hurt. Is this the treatment we should expect after a decade-long relationship? We had worked holidays and Sundays at double time to meet frequent emergencies, and produced a product that met specifications far stricter than any required by the rest of the trade. Is this proper consideration from a customer whose welfare we had placed ahead of our more than three hundred other accounts.

The silence of our excess equipment troubled us. Not knowing how committed the customer was to its course, we submitted a proposal that we expected would at least give them pause. The customer admitted having periodic difficulty matching our quality. Our own employees, some of whom had relatives who worked for our customer said it was experiencing unprecedented downtime on its production lines. Our proposal: After revealing our costs, we would arrive at a mutually agreed on price that would allow us a reasonable profit.

We were offering drastic price reductions because we had been selling from strength and had commanded comfortable margins. It was doubtful that the customer could ever expect to match our low costs. Typical of most large corporations, its operation was loaded with overhead far exceeding ours. We also suggested that it was difficult to acquire our kind of expertise. Their response: “We can hire all the experts we need.” We were turned down categorically. In a few months, orders ceased.

Three years later our sources told us that our former customer still had problems duplicating our quality. To minimize downtime on its production lines, it had to compromise and accept substandard in-house material that it would have rejected from us. Attaining the quality that we had achieved had taken five years, and further improvement was continuing. The customer had obviously underestimated the length of the learning curve.

The customer had made a grave blunder. If reducing costs was the primary goal, it could have had that immediately. Instead, the start-up, including an overinvestment in people and ultra-sophisticated equipment, severely increased costs. (Big companies rarely keep it simple, preferring to go all out.) More likely, it wished to control the source of its coloring supplies. Had it tested us, it might have succeeded in buying us out—if not all, possibly a piece of us. Everything would have been in place. It would have had a stable full of customers to keep production going around the clock, further reducing unit costs.

Why must business relationships be so adversarial in the United States? Our customer initially denied its intentions, deceived us, and gave us no warning. Had we known earlier, we would have been able to take precautions rather than add machinery. When we were willing to bare our secrets, we were shut off. A brutality can underlie many business relationships, not only among competitors but also between management and worker, customer and supplier, the company and the bank.

The Japanese have devised a support system, the kieretsu. It consists of a group of interlocking companies, often including a bank, as a competitive entity that works effectively toward eliminating duplication and waste generated by inefficient competition among fellow members. Our approach to this customer had been a feeble step toward that end.

As a mature company, we probably would have welcomed joining a kieretsu if they existed in the United States. On the other hand, if such groups were pervasive, how would we have started, who would have helped finance us, and how would we have broken into an established, closed system? Perhaps we need both systems operating in tandem. Still, given the system we’ve got, I ask: Why can’t a customer, an employee, a supplier, and a banker be more like a company’s friend?

(For more, please read BUSINESS NOT AS USUAL, a collection of business essays by Hugh Aaron at www.StonesPointBooks.com.)

THE GENERATIONS

2011-10-14T12:52:00.001-04:00

The question "Can We Survive a Crash" concerns an issue that has troubled me ever since 9/11. After that debacle we witnessed the coming together of Americans against a common enemy that I hadn't seen since WWII. It struck me then that the current generations may well be no less great than the so-called "greatest generation" of the WWII era of which I am a member.

It is true that today's generations have not been tested by a great depression or a world at total war, and it's also true that the so called echo boomers, today's kids, think in terms of team work rather than individual initiative, and are seeking the protection of authority figures. But it may also be true that it takes a crisis for each generation to show its mettle. Now a crisis has struck, not as severe as the one my generation experienced, but severe enough to test today’s generations.

A few years ago the Senior Spectrum of Rockland, Maine did a reading of a play that concerned two generations, one that ran the nation in the twenties and thirties, and one from World War II. Although those generations are often lumped together, they are not the same. The older generation carried the memory of the first World War slaughter, and experienced the struggle of the great depression in which in excess of 25 million people were unemployed in a population less than half the size of ours today. In the play the father recounts that time in which, despite the poverty, people helped one another. Were it not for a charismatic Roosevelt the nation may well have had a revolution. Many of our citizens had joined the Communist party, a collective system, as a way out.

The World War II generation consisted mainly of the sons and daughters of that generation, some 12 million of us. More than a half million of us died in battle. At home we produced more than any nation on Earth. After we returned home from the war victorious, the world seemed clean again with opportunity unlimited. The United Nations held the promise that war as an instrument would become obsolete. Rebuilding Europe and Japan, we alone had the atomic bomb, and at that time had no inkling of Stalin's madness and the atrocities he had committed against his own people. Solving any possibility of high unemployment, the GI Bill enrolled millions of us in college, the best investment in its people that our government has ever made. Compared to our parents we were optimistic, energetic, innovative, and became the most successful American generation up to that time. It was easy: the war had created an enormous pent up demand that would take years to satisfy.

The sons in the play, representing the WWII generation, apart from their parents of the Great Depression generation, saw life and the future quite differently. The earlier generation was cautious and frightened, while the post war generation was daring and creative. Yet both were successful in coping with the crises of their times. So each generation's experience conditions it and molds its attitude and style. And each generation meets the challenges, the failures and successes, in its own way. How well it does so, whether it wins or loses, takes the wisdom of hindsight to discover. None of us can make a reliable judgment from the vantage point of our own experience. How we deal with today’s disaster has yet to be played out, but so far it appears that we’ll have to wait for the current generation to undo its mistakes or else the next generation to restore us to sanity.

REFLECTIONS ON BEING AN ENTREPRENEUR

2011-10-01T11:32:00.001-04:00

A few months after starting my own business, I discovered that an entrepreneur’s life is radically different from that of an ordinary mortal. Every act, every decision I made as an entrepreneur was rational, even when rational solutions weren’t called for—when dealing with people, for example. For another thing, I was keenly aware that the consequences of every decision would eventually be revealed with stunning clarity in a single composite figure: the bottom line. Third, I was fanatical about trying to direct the course of events toward specific business goals—an activity that was often fruitless.

These entrepreneurial characteristics—the rationality, the profit figure as the measure of performance, and the relentless dedication to a single purpose—had profound effects on my physical and mental state and my relationship with my family. They ranged from stomach problems to anxiety attacks to divorce. Clearly, the entrepreneur’s life is an intense form of existence.

As a novice businessman, I became convinced that mindless, entropic forces prevailed; their sole purpose was to undermine my attempts to keep the business in the black. Too many prospective customers refused to cooperate and do business with us. Those who did contested our prices. The competitors refused to steer clear of my customers. The vendors refused to budge on price and insisted on impossible thirty-day terms. Employees didn’t show up to service that emergency order or they quit just at the long-awaited moment of achieving peak job performance.

It seemed like a conspiracy devised by the cruel, hostile world of free enterprise. The business was like a child that, left to its own devices, would damage itself. To survive, it had to be nurtured and guided by a doting parent: me. Until I took this point of view—that of the parent to the child—I was in constant turmoil, outraged by the people and events that weakened my company’s health. But like any neurotic parent, I too did things that had a deleterious effect on the enterprise. As with any parent-child relationship, the business mirrors the CEO’s personality: a neurotic parent is bound to spawn a neurotic child.

One example of my inept parenting is typical. When the business was in its infancy, I was overprotective. Why not? Wasn’t it totally dependent on me? When it became an adolescent and acquired a number of employees, it began asserting itself and taking off in directions that weren’t always in its own best interests. For example, our receivables might be allowed to languish too long and cause a cash flow problem, or our equipment would continually break due to insufficient maintenance. Yet I refused to let go, to acknowledge that others could bring the operation under control. I was slow to delegate and let the employees do the day-to-day directing.

My pride was another example of parental incompetence. As the “child” achieved a measure of success, I ignored caution and egged it on to expand as if there were no limits, as if the thriving economy would endure forever. Then a virus struck: a deep recession. After an operation, and the removal of some parts—without which death would have been certain—the child slowly regained its health and I found humility.

Though the child grew into a confident adult, I reserved one aspect of control for myself: keeping it on track. Even in one’s personal life, staying on track is a lifelong pursuit. (Genius is the result of doing so better than anyone else.) In my pre-entrepreneurial days, I was easily distracted from whatever path I was on. But without a bottom line to reckon with, as in a business, staying on track was never a life-or-death matter. Every instance in which the business digressed, such as pursuing markets in which our expertise was limited or entering into unrelated fields, such as equipment that would enable our customers to dispense our plastic coloring products, the results never justified the time, energy, and money invested.

Staying on track involved more than keeping an enterprise headed in a consistent direction. As in raising a child, a business must follow certain rules and procedures. Because people tend to break rules and abjure procedures, I soon became a law and order fanatic. But under this yoke, initiative and daring declined and we seemed to stagnate. Against my nature, I loosened up and allowed a little chaos. Clearly, staying on track was a balancing act. I told myself it was okay, even beneficial, to veer a little off center to make things exciting and keep everyone alert.

The child/adult metaphor breaks down at a certain point in the life cycle of a business. An enterprise may grow old—even inefficient and senile—but the right doctor can restore it. I guided my business through infancy to comfortable old age, in which it could take life easy as it reaped the benefits of its twenty-year struggle. But I knew that it couldn’t rest for long. I knew that, unlike myself—in whom the aging process was irreversible—the business had the capacity to recapture the innovative surge of its middle years. So I sold my aged child and gave it an opportunity for renewal. A few years later, I learned that the business had given birth to a few satellites. Now in my mid-sixties, I’m a proud grandfather. I wouldn’t have wanted it any other way.

(MORE ESSAYS ON MANAGEMENT CAN BE FOUND IN Business Not As Usual AT AMAZON.COM.)

WHY MY BUSINESS ALMOST FAILED BUT DIDN'T

2011-09-17T12:28:00.002-04:00

Ken Elias’s article “Why My Business Failed” in The Wall Street Journal reminds me of why my own business didn’t fail but almost did—twice.

The first near-death occurred when my business—in plastics materials—was only a year old. Sales hadn’t grown sufficiently to stanch losses. Yet our operation was lean. Debt had so mounted that the company showed a serious negative net worth. As CEO, drawing a minimal salary and putting in long hours to avoid having to hire people, I had almost exhausted my savings. Doom seemed inevitable.

But I knew there was a market for our products. I had successfully sold similar products to a hundred industrial customers while I was a salesman for a large, well-established corporation. I knew that our products were superior to those of our competitors. So with faith in what we had to offer, and faith in our ability to sell it, I believed we would eventually succeed—given time and money. We secured capital, despite our negative net worth, with a personally signed bank loan guaranteed by the Small Business Administration. By the end of the second year of keeping down costs, we turned the corner into profitability and remained there—until the second calamity struck nine years later. But for now I had learned four lessons. Believe in what you have to sell and your ability to sell it. Don’t overreach your financial capacity to deliver. Have enough capital to stick it out despite losses. And be prepared to risk all.

For most of the next decade the company took calculated risks, risks that would not devastate us were they to fail. We added plant space three times, purchased advanced machinery year after year, pioneered computer-derived formulating in our lab, and tried various management techniques to motivate our people. And we chose a high-end, less competitive niche in the market that seemed safe.

Then several things happened, although not all at once, that turned our calculated risks into dangerous ones. The first was unanticipated. As a result of differences among the partners, the company agreed to buy out one of them, which imposed an enormous burden on cash flow for years to come. Second, key personnel defected en masse and established their own business in competition with us. Third, other competitors, having mastered their quality problems, pursued the market in which we had an almost free hand, and were cutting prices. Fourth, our largest customer, accounting for one third of sales, decided to manufacturer our product in-house and abandoned us without warning. While these events were going on, inflation grew at a rampant rate. Profits went into a free fall.

At first there was denial—our decline was only temporary, we said—but eventually we recognized that growth was a thing of the past, at least for a while, and our situation was now a matter of survival. We had to contend with the fact that a good portion of our machinery remained idle; we had much more plant and office space than we needed; and the mortgage and the bank loans for which the machinery was collateral still had to be paid. Our overhead and debt, accumulated during years of profitability and growth, had become a dead weight. So had many of our highly trained, loyal, and skilled people. We knew we had to cut our margins in order to retain our existing business. To do so, we let management people go, cut wages (including and especially the CEO’s), laid off workers, made sure that every penny spent was necessary, and hunkered down for the duration. We couldn’t know whether this approach would lead to success or failure, but we didn’t see another way. I learned another four lessons from this experience. A company’s success can be the breeding ground for its demise. A business rarely has it made. The unimagined worst can and often does happen. And recognize the hard truth early on, then act on it without delay. That’s the first and most important step in a rescue strategy.

Bringing our expenses in line by reducing sales helped us to stabilize our bottom line and reverse the decline. But what really enabled us to win was our faith in what we had to offer, and our belief in ourselves.

(Read more about how my business survived three recessions in Business Not As Usual at StonesPointBooks.com.)

THE FREE ENTERPRISE SYSTEM: AT WHAT PRICE

2011-08-23T14:54:00.001-04:00

When I worked for someone else and my boss would say, “I love the free enterprise system, but I’d love it more if I had a monopoly,” I always laughed. Not until I had my own business did I fully appreciate what he meant. Now that the Communist system has been discredited, it follows that the free enterprise system is being touted as the world’s nirvana. But as CEO of my own company, I soon learned that it’s far from it. For all the freedom it allows, for all the opportunity it affords, it demands a price, sometimes one so high as to be life threatening.

We, the free enterprise businessmen and-women of the world, should, in all fairness, level with the once closed societies who have chosen to adopt our system. We should tell them what they’re in for.

When I began in business, there were few competitors serving the market. Within a year after we established our staying power, we grew exponentially. Those were heady times: our prices were rarely questioned. Within five years, all that changed and we were fighting—by lowering prices and improving service—to retain the business we had.

It was hard on the nerves.

I knew that life would never be the same when a long period of employee turnover began. By letting our weaker-performing workers and staff members go, we sought through painful trial and error to develop a corps of superior ones. Tension and insecurity abounded. The perpetrators of mistakes were castigated, because our costs no longer allowed for error. The system demanded we forsake a portion of our humanity. Rationality ruled. We mercilessly beat down our suppliers to their rock-bottom prices, and we delayed paying our vendors for as long as we could. If we didn’t call it war, we took the attitude that every employee, every customer, every vendor, every government (local, state, and federal) was our enemy. After all, each entity tried to charge us more than we wished to pay, or pay us less than we wished to charge. That’s the way the free enterprise system works.

It's very hard on the nerves.

Then we had several close calls—a recession now and then, for instance. The free enterprise economy is a sneaky thing: it lulls you into complacency, then strikes at your heart without warning, like a coiled snake.

Then we had a partnership war, as trying and destructive as a bitter divorce. With private ownership, such possibilities are rife. It took years to recover from the damage.

It’s very hard on the nerves.

Then several key employees banded together and defected to form their own business in competition with us. Such spawning of companies is endemic to the free enterprise system. I couldn’t even be angry. Hadn’t I left my former employer to do the same thing?

But it was hard on the nerves.

Then a major account left us to produce our products in-house after we had expanded our capacity to better serve it; more than 30 percent of our sales were lost in one stroke. Nowhere is it written in the free enterprise system that a customer should be considerate of or forthright with its suppliers.

Yes, it's very hard on the nerves.

Then you arrive home after a long, tense day at the shop and your wife complains that you devoted too little time to the family. You argue that the business is in trouble and needs your attention. The business is always in trouble, she says. The business places the food on the table, you counter, and pays the rent. You reach an impasse.

It never stops being hard on the nerves.

Despite it all, we were able enough warriors to defeat the opposing forces, or at least hold them off. Finally, after fifteen years of riding a wave of frenzied peaks and dull valleys, we struck a decent period of persistent stability—the Reagan era. Indeed, for the first time in our history, the company began accumulating more cash than we needed.

Not being used to this, I found the dilemma unsettling. Should we save the cash to tide us over the next recession, or should we use it to grow? No question that a recession would occur sooner or later. But if we didn’t invest in ourselves, we were bound to slide backward. The competition certainly wasn’t letting up. That’s how it is with the free enterprise system.

Then, as my income rose to more than sixteen times that of our workers, I had a sense firsthand of the grossly unequal distribution of wealth that the free enterprise system promotes. True, I had taken the risks and suffered through the most terrifying downs, but I knew I didn’t do it for the money. I did it because I needed to prove that I could. I wanted to be independent and able to react. That freedom is the most valuable contribution to the individual and society that the free enterprise system offers.

As the company’s wealth increased, I shared it through an all-employee stock ownership plan, generous benefits, and incentives for extra performance. None of the employees seemed to mind my affluence. Rather they accepted it as well earned. Most knew they wouldn’t take the risks that I did. And some, especially those who were still young and wished to control part of their destiny, might yet try their hand at it. To them the free enterprise system was highly inviting. I warned them to be prepared: it would be mighty hard on the nerves.

(This essay is taken from a published collection BUSINESS NOT AS USUAL, The Story Every CEO in America Should Tell, but Won't.)

WHAT'S SO BAD ABOUT INFLATION?

2011-08-03T10:11:00.001-04:00

A Little History

When I started in the business of manufacturing colorants for the plastics industry in the mid-1960s, prices were fairly stable. Although I recall complaining that the 6 percent we had to pay for money then was confiscatory, ten years later we were paying as much as 21 percent and seemed to be working solely for the bank. I seriously wondered whether being in business was worth it. But by the mid-1980s we had adapted; interest rates were falling and our profits were climbing.

Since the mid-1980s, business has operated in a deflationary environment, although past history has taught us that this couldn’t last. During this time we’ve had both prosperity and recession. For the late nineties the period fairly replicated the low inflation of the 1950s and early 1960s, although, then, an inflation rate even lower than today’s was considered a threat to our standard of living and social harmony. For the last two years of the nineties the Federal Reserve Bank, seeing inflation on the horizon, had been raising interest rates and heading the economy back to where we were in the mid-1960s. Was that so terrible? Could business navigate in a world of increasing interest rates and maintain a solid bottom line? Prosperity and recession aside, the answer is, only to a point.

In the early years of our business, when we were borrowing at 6 percent, our return on capital was about 20 percent. On this basis, borrowing at the prevailing rate simply made sense. Our customers were of the same mind, so they and we had every reason to grow. It was a heady period. But by the late 1960s and early 1970s, prices had begun climbing, including ours, and our customers were resisting. We tried to pass on increased raw material costs while absorbing mounting operating expenses, with mixed success. Although our company had no union, at Christmas we habitually increased the wages of our employees by an amount equivalent to the inflation rate. (This was in addition to merit and longevity raises.) It seemed only right that our people not suffer a decline in their standard of living.

Still, we considered inflation the businessman’s friend. The more we borrowed, the better our net worth became. By investing in the plant, machinery, equipment, and inventory, which kept increasing in value, we only enhanced our balance sheet. How could we lose?

Then, in 1973, the oil embargo struck and by mid-1974 its full inflationary effect had pervaded the economy. The plastics industry was affected more than other businesses. With our raw materials either based on petrochemicals or requiring large quantities of energy in their manufacture, their prices skyrocketed. We had to pass the increases on to our customers. But no one complained. In fact, they considered themselves lucky to get goods at all. (In 2000 and 2001, a rise in the price of oil had contributed to similar price increases for both goods and services, and again in the latter half of 2003 and all of 2010 and 2011.)

Soon, as shortages developed, we were on allocation based on the volume of our past buying. Many of our competitors whose credit standing was not as good as ours were cut off completely. Some vendors insisted that we purchase goods on a C.O.D. basis regardless of our excellent credit record. Nevertheless, this too was a heady time, because we could sell all we could manufacture and then some. We could, if we wished, purchase a raw material at forty cents a pound and sell it without removing it from its containers for one dollar a pound. Certainly, this would have been far more profitable than incorporating the raw material into our own finished goods, but because we knew that someday all this would end, it seemed more important to keep our customers supplied and maintain their goodwill for the future. Furthermore, we were making money hand over fist. If the challenge to keep ahead of inflation was unprecedented, most businesses—including ours—succeeded heroically.

Eventually, under Paul Volcker, the Federal Reserve began its campaign to terminate the seemingly untrammeled inflationary spiral, which meant raising interest rates. At the beginning, Volcker’s policy made sense to us in business, because life simply wasn’t normal. We wanted an end to shortages and ever-increasing prices, even though we had adapted well to the economy’s new rules of behavior. But most businesses, especially smaller ones, hadn’t reckoned with the devastating effects of the outrageous interest rates that lay ahead. As the bank imposed increasing interest charges on our line of credit, we began to squirm. Although we could now pass on increases in our raw materials and operating costs, we couldn’t pass on our increased cost of money. The past strategy of being highly leveraged to take advantage of inflation had suddenly turned on us.

We pleaded with the bank for relief. They insisted that their cost of money precluded giving us a break. I suggested that they were damaging their investment in us (I called it killing the goose) to no effect. At the interest rate peak, our total cost of money exceeded our operating profits. We were thus trapped: we couldn’t generate sufficient cash flow to reduce debt, nor could we borrow to grow and hope to increase profits. Quite literally we were working for the bank. One way out—to sell the company—would have been futile. Due to the high cost of money, acquisitions were dramatically down.

All we could do was ride it out. We found a bank that extended us a credit line a percentage point or two below that of our old bank. But it was only when interest rates and prices began falling that our bottom line recovered.

The lesson was clear. We could tolerate inflation with aplomb, even enjoy its benefits, but we couldn’t tolerate the high cost of money. The two didn’t necessarily occur simultaneously. The best of worlds for us was in the early 1960s, when we borrowed cheaply and inflation was minimal. (This condition has been replicated in the mid-1990s through 2004 under fed chairman Greenspan’s aegis.) Because inflation derives from the relationship of money to goods and services available, it would seem that controlling that relationship through ways beyond interest rates alone would make for a happier economy. But then I’m only a businessman, perhaps a representative one, who reacts in ways that economists and our government study and try to anticipate. So, I’d like to ask a stupid question: What was right in the early 1960s (and the 1990s) that can’t be duplicated now and forever?

Read BUSINESS NOT AS USUAL for more about managing a business through hard and easy times.

STORIES FROM A LIFETIME

2011-07-13T14:56:00.000-04:00

This, my newest book, will, I believe, have at least one story that you will relate to. Several of the stories are about the lives we lead. Some have business settings, others are war experiences. In any case, here's why I'm confident there's a story for you within this collection:

A MESSAGE FROM THE AUTHOR
It’s a fact that living, being alive and experiencing life, is, by itself, an amazing experience. Regardless of our age, if we look back on our lives we are bound to find something or someone marvelous, unforgettable: a person, an event, even a dream. And when we look back from the vantage point of an elderly person, we have only the long past to ponder because there’s so little time left in the future. In our old age we think about our life’s experiences, especially the crucial ones that molded us into the persons we’ve become, and marvel at them. That experience, those events, those people, are the sources of the stories you will find in Stories from a Lifetime. All of us are important, not only to ourselves, but to the people around us, and we carry them within us to the very end. All of us have such stories to tell, different from your author’s, of course, but no less moving, no less inspirational. So as you read each tale, think of your own stories, beginning with your childhood to where you are now.

WHAT MAKES A CEO GO?

2011-07-11T13:57:00.000-04:00

Picture an organization, whether a business, a nation or an army, as a ship. All the participants are its crew, and the leader is the helmsman. He or she - the CEO, the President, the Dictator, the General, the Captain - determines the direction of the vessel, the destination, and the strategy for getting there.

It’s obvious that without this helmsman it would be virtually impossible – unless luck intervened – to get anywhere. Rarely does anything go according to plan. The ship sails on an ocean of entropy. So the necessity of having a helmsman, a CEO, is clear.

But more important is the necessity of having a competent CEO. Under his or her leadership the destination – shall we call it the bottom line? - will be reached. An incompetent CEO is no better than having none at all, or maybe worse. Such a leader will allow the ship to founder on shoals, in business parlance: bankruptcy.

It’s not difficult to determine who in practice is competent or not. It shows up in the bottom line, an honest bottom line, not a manipulated one. Sooner or later, a manipulated bottom line will ultimately reveal the incompetence of the CEO regardless of how much he or she is revered. Manipulation doesn’t necessarily imply dishonesty, but merely a desperate attempt to prevent the business from declining or going under until some method of rescue is devised – a new strategy perhaps, a loan, an angel, or a replacement CEO.

While working for other companies, I was never clear about what their CEOs did. They had elegant offices, earned enormous salaries, drove fancy autos, and commanded respect. I could only assume all this was deserved. But there were times when I had doubts, especially when strikes occurred, or I witnessed waste, or the failure of management to recognize talent, or employee morale was low. So I can only refer to my own experience as CEO of a small, successful – some years more successful than others - manufacturing company to explain what we do.

As CEO, I am a number maniac. I study figures from daily reports prepared by department heads on what had transpired in the business during the previous twenty-four hours. They tell me how much we produced and shipped, how much we sold and how much money we made or lost that day, and if the latter where did we lose it and why?

I am a listener. I listen to the responsible department heads suggest some remedial action – perhaps change a procedure, increase a price, or fire an employee.

I am a decision maker. I decide whether to act on the suggestions.

I am a confidant. Anyone can enter my office and talk about anything they wish – a problem in the company, personality conflicts, even personal problems, all held in confidence.

I am a communicator. At the end of each month, and each quarter, I pore over the profit and loss statement, compare it with projections. I huddle over it with my key people, and review it at a meeting with all the employees. So my job as CEO is, first, to understand what is going on within the company, daily, monthly, and quarterly, to see whether it’s operating as planned, and if not, to make the changes, which would bring us to our destination. And second, I communicate this to all interested parties: not only the employees, but the board, the stockholders, and the bank. Any CEO who does not understand what is happening in his or her company is by definition incompetent. It is the CEO’s job to know and to let others know.

I am a goodwill ambassador. I AM the vendor company personified. Either with a salesperson, or alone, I visit key accounts, have lunch with its CEO or the purchasing agent, listen to complaints, make deals, lend the entire weight of my position to support our salesperson and gain the confidence of the customer. This occurs at least once a year with all key accounts.

I symbolize the company. I speak to every employee as frequently as possible. This is crucial. I speak to the community, the bank, the government, and our vendors, on behalf of the company. I speak to the board of directors. They must not be a rubber stamp. They question me, and although I can ignore their advice without fear of reprisal, it behooves me to take it, else why do they exist?

A CEO is worth many times more than any other employee. No argument there. But he or she is subject to the same conditions as any employee: perform or leave. It’s no secret when a CEO hasn’t performed. It shows up in advance of the bottom line. It shows up in low employee morale, in the CEO playing rather than working, in the absence of innovation, and of growth, in not adapting early on to the economic situation, in the lack of conservative financial policies, and in the failure to minimize risk. How many CEOs in our time have brought their companies to ruin by being foolhardy? How many CEOs have bought companies whose cultures are incompatible with theirs, incurring debt that ignores a worst case economic downturn?

So what makes a CEO go? According to the dictates of our free enterprise system, it’s money. In large companies boards will reward the CEO with a salary and perks hundreds of times more than a company’s average employee receives and in so doing reduces the earnings of the company’s stakeholders. Such a reward, when tied to stock options, may even be unintentional should the company’s stock value skyrocket and become overvalued. This is what happened in the most recent stock market bubble.

Does any CEO in good conscience really believe that he or she is worth, say, five hundred times more than the company’s typical employee? Would he or she be willing to work for half that much, a quarter that much? Is money the CEO’s sole motivation to succeed? What about the inherent satisfaction derived from the challenge, the prestige, from the job itself?

The CEO owes the company for being appointed, not the other way around. Outstanding business leaders often sacrifice income to serve the nation. Ask, why is the office of the President, the CEO of our country, so poorly paid yet so sought after? A CEO should have enough dedication to his or her company to sacrifice when it’s in trouble. A company is bigger than any individual within it, including the CEO. Yet the rationale behind the reward given many CEOs today is that they are more important than the company and its employees.

Conventional wisdom has it that talented CEOs are at a premium, that the only way a company can attract a first class CEO is to offer a bundle of money and perks. Perhaps, but the proof of the opposite is in the practice. Too many CEOs heralded for past successes have ultimately failed, yet they departed richer than ever. Every CEO knows luck plays a major role in his or her success navigating the capitalist system. And most critical of all is the company’s employees without whose dedication, creativity, and talents no CEO can succeed. Too often it is forgotten that leaders do not perform by themselves, that from their followers they get their best ideas and avoid making their worst mistakes.

For more essays like this visit www.StonesPointBooks.com and read the reviews of 3 unique business books: BUSINESS NOT AS USUAL - Volumes 1 & 2 by this author, and DRIVEN by Max Barnet.

CHANGE YOUR CORPORATE CULTURE AND WIN

2011-07-01T10:38:00.000-04:00

I want to take issue with Peter Drucker’s article in The Wall Street Journal, “Don’t Change Corporate Culture—Use It.” I have no argument with Mr. Drucker’s thesis that, “There is a . . . need to change deeply ingrained habits in a good many organizations,” and the contemporary needs of business “require . . . changes in behavior.” But we part company when he states categorically that “changing behavior works only if it can be based on the existing culture.”

Mr. Drucker may well be correct when he attributes culture to the initial failures of India and China to adapt to economic reforms. However, one can also point to other cultures where radical change has been successful. Take the transformation of Nazi Germany from dictatorship to postwar democracy. If the ancient ways of Chinese culture are so fundamental and recalcitrant, how do we explain its adaptation to communism on the one hand and on the other the earlier success of modern capitalism among the mainland Chinese on Taiwan? Or currently the thriving free enterprise in Communist China? Cultures do evolve and accept modification as needs change, leading either to their enrichment or destruction.

I disagree with Mr. Drucker’s counsel that, “If you have to change habits, don’t change culture.” This smacks of the behaviorists’ view that we can change our ways without knowing their origin or understanding their historic (and currently obsolete) role. Such behavior changes are superficial. To ensure that a change is solidly a part of ourselves, we must also change our attitude, our way of thinking, perhaps even our values, beliefs, and customs—in short, a major part of our culture.

But which level of culture does Mr. Drucker suggest we ignore? Does he mean, when referring to other national cultures, our Western American culture? Or does he recommend we ignore the various subcultures: the company’s, the region’s, the ethnic group’s, the family’s? Assuming that the larger culture is consistent with a company’s goals (and often this is in doubt), can the same be said for its inherent microculture?

One company I worked for was notable for the fear that its CEO’s cruel arbitrariness aroused in its employees. Another succeeded in generating distrust and suspicion among its employees because its CEO rarely kept a promise. Another had universally angry employees who went on strike against a stingy, adversarial management every other year. Yet another made its employees feel important and secure under a caring and respecting management.

These are a few of the micro-cultures I encountered in the multitude of jobs I held, from factory worker to assistant to CEO. In every instance, including the largest corporation and the smallest private firm of just a few employees, the company was a hierarchical dictatorship. Usually the cultural ethos was antipathetic to the company’s stated goals. It rarely motivated the employees and generally failed to promote efficiency, thus minimizing the firm’s potential for profits.

In most cases it would have been futile to take Mr. Drucker’s advice to expect “results—not by doing something different but by systematically doing something everyone had known all along should be done, [and they] had in policy manuals and had been preaching. . . .” Quite the contrary, the employees in those companies were doing precisely what they were told to do, what the “book” said to do, but not what they, if consulted, would have preferred to do in the interest of the company.

Ironically, within our democratic tradition, our business subculture is resoundingly antidemocratic. How big a leap would it be for a business to change from a culture in which managers give commands to one in which employees participate in matters concerning their specific jobs or even beyond? We all acknowledge that ruling by consent of the governed leads to greater human happiness. And we agree that having a free and contented people is generally more creative and productive, to which our country gives ample testimony. To convert a business from dictatorship to democracy (for the purpose of improving the bottom line) involves far more than simply changing behavior, or following a policy manual, as Mr. Drucker would have us do. Such a conversion, however, is not beyond us as Americans to appreciate and admire.

I agree with Mr. Drucker when he writes: “. . . changing habits and behavior requires changing recognitions and rewards.” During my CEO years, I found that “recognitions and rewards” were powerful motivating factors, endemic not only to our culture but also to our human need for approval. But they could also lead to excessive competitiveness, the exploitation of others, overweening ambition, and ultimate inefficiencies. In other words, reward for individualistic behavior often negated team effort, which is essential to the smooth running of an enterprise. Unfortunately, the very nature of an organization requires some sacrifice of an individual’s special interests. More than once for the sake of peace, we had to fire competent, superior individuals for whom recognition and reward weren’t enough.

Team reward is something else. Here cooperation is encouraged rather than the competitiveness engendered by individual reward. Here the superior person is expected to contribute that superiority in both monetary and recognition terms. Of course, it’s for a cause beyond himself or herself. It’s for the team, and ultimately the company. It works. We did it. Yet the team principle runs counter to our deeply rooted individualistic behavior. Though our employees undertook a radical cultural adjustment to become team oriented, they suddenly seemed more relaxed, more cooperative, more dedicated, and more secure on the job after they participated in a team incentive system.

And Mr. Drucker, this was all new. We had already used up old procedures that no longer worked by the time we realized that our company had not only to change its ways but also it’s culturally based assumptions.

Certainly to make changes consistent with our culture is far easier, as Mr. Drucker urges. And changes are not always necessary. Although the American automotive industry would rather lobby our government to restrict imports, the industry need not undergo a cultural change to make better cars. Nor does it require a cultural change to revise the American corporate habit of granting outlandish monetary rewards to top executives for mediocre performance. Our culture has a penchant for making things “good enough” rather than striving to make them “perfect,” an attitude the Japanese were known to have before World War II. They changed and their culture remained intact. But it may take a change in our culture to overcome the adversarial tendencies of American business. There’s a reluctance to cooperate with those on whom a business depends.

In fact, I suggest that American business must change some of the general aspects of its micro-culture; otherwise, it may fall behind businesses within cultures—both local, national and international—that recognize and meet the need for excellence in today’s increasingly competitive global economy. This may require a wrenching revision of our own national culture by leaders who refuse to coddle mediocrity and dare to question our current failing values.

ALWAYS TAKE A SECOND LOOK

2011-06-05T17:21:00.000-04:00

A Recommendation from the Board of Directors

In the thirty-six months it had existed, our company's Midwest operation had never turned a profit. More recently, its losses had increased due to a deepening economic slowdown. I had taken the position that we should shut it down until the economy recovered, and service its market from our East Coast plant, which had plenty of idle capacity. At a board meeting, I exhibited on the blackboard a hypothetical P&L statement showing the sums we could save by adopting my proposal. My partner had refused, arguing that three years hadn’t allowed the operation sufficient time to prove itself.

Not only did I consider his stand unrealistic, I saw it as rooted in pride. He couldn’t bear the idea of backsliding. A policy difference between fifty-fifty partners leads only to a stalemate. This was but one of our many disputes which resulted in our breakup. After the split I expected to have my own way. This proved to be naive.

At the first board meeting after my partner’s departure, the agenda called for tackling the continuing problem of the Midwest plant’s losses.

Before the breakup, the five-member board (of which I was chairman) had remained noncommittal about the facility, not wishing to exacerbate the conflict between the partners. Now, expressing their true thoughts, the members insisted that my partner had been correct. They reasoned that the company had spent a substantial amount getting started and had established a foothold in the Midwest that could not be served as well from the East Coast. Moreover, abandonment would mean losing a cadre of competent and trained workers.

Thinking all along that they had been solidly behind me in the battle with my partner, I was extremely upset. Though tempted to use my power as the majority stockholder to overrule them, I knew to do so would certainly destroy their motivation to serve. I gave in under the condition that we would review the status of the Midwest operation in six months, a face-saving proposal to which they readily agreed.

Still, I found the constant drain imposed by the operation hard to swallow. The board, by its action, had forced me to search for a more creative approach than simply calling it quits. Because the Midwest operation replicated the larger one in the East and utilized identical machinery and processes, I searched for clues in the P&L statement. A comparison of costs between the two plants would be fairly valid.

On comparing both plants’ variable (controllable) costs as a percentage of sales, I found the Midwest plant’s expenses dramatically higher: labor 25 percent more, shipping 50 percent, phone 200 percent, raw materials inventory 50 percent, and production waste 300 percent.

Although the figures supported my diagnosis of weak sales, the real problem was poor management. The Midwest manager, a local man and the third in three years, had been hired for his proven managerial expertise. Although always cooperative and congenial and apparently dedicated, he had a management style that was far less consensual than ours. And he insisted on doing things “his way” rather than “our way,” which often led to conflict between him and the East Coast staff.

I flew to the Midwest facility. For two days and nights the manager and I reviewed the startling contrasts between the two operations’ figures. We discussed in detail ways to bring costs in line. He felt confident that he could not only match our performance but surpass it. Although I failed to discover precisely why his costs were higher, I departed feeling optimistic.

It was wishful thinking. After three months, nothing had changed and the acrimony between him and the East Coast staff had worsened. Though I loathed the idea of having to hire a fourth manager in a little more than three years, and had lost confidence in my ability to find the right person, I began thinking of a replacement. What had I been doing wrong? What had I missed?

The manager’s distance from headquarters was a factor; he had more autonomy than our East Coast manager. And as a local man, he wasn’t familiar with the ways and culture of the eastern plant. Finally, being distant and separate, he didn’t feel—and we didn’t help him feel—that we were all one company.

Wouldn’t it be smart to choose a man from within, one of “our own” men, trained at the mother plant, already in tune with our culture, and a proven quantity? I approached three supervisors. None was willing to relocate regardless of a substantial wage increase and other incentives. Consequently, after dropping some qualifications and considering second-echelon candidates, I chose a foreman with only a high school education. But he was a hard worker and imaginative in the way he performed tasks, and, most important, he had won the respect of the people who worked for him. I offered him a substantial wage increase and a potential year-end bonus of 10 percent of the operation’s pre-tax profit. He took the job.

Six months after my wish to close the Midwest plant had been overruled, it was time for the board to convene and reconsider the fate of the operation. Although our new man had been on the job only two months and the operation had not yet shown any significant improvement, I endorsed keeping it going. I said I had taken a second look and found that the plant’s troubles were not due to weak sales but flawed management. I wanted to give the operation a chance to succeed under the new manager.

Within a year, it did. Five years later, still under the same manager, it showed figures that were the envy of the East Coast plant. In fact, during the next economic downturn it generated sufficient cash flow to offset the East’s unprecedented losses.

THE DARK SIDE OF CAPITALISM

2011-05-11T12:27:00.000-04:00

The free enterprise system endures. We are now the economic model for the failed socialist nations. Their failure vindicates our stubborn insistence that capitalism is the best way. But is it? How well does it satisfy our human needs? After all, satisfying needs is what every economic system strives to do. If our system leaves something to be desired, what can we do about it?

An entrepreneur’s responsibility is to the bottom line; otherwise, the enterprise fails. However, the entrepreneur’s responsibility to employees, customers, vendors, and the community is arbitrary and then only to the extent that these parties serve the interest of the enterprise.

Entrepreneurs often feel free to accumulate all the wealth that their luck and ability can generate. Even if successful businesspeople are criticized for not sharing with the less fortunate, their success is still admired, emulated, and envied. Because wealth is power, it commands everyone’s respect. Character and integrity are often secondary considerations.

The free enterprise system is based on Adam Smith’s principle that the pursuit of self-interest benefits the common good. History would indicate that self-interest more often benefits the uncommon good. Government then intervenes to even things out. A corollary to Adam Smith’s principle is the underlying assumption that what’s good for business is good for the nation. In this assumption lies the nexus of our trouble. Only when a business’s abuses are blatant are its actions restricted, and then only in response to the organized expression of outrage.

We are so caught up in the system, we fail to realize that our business methods have inflicted more subtle damage upon us. Though our businesses have scarred the landscape, polluted the air and water, created recessions and compromised our health (in effect, degraded the quality of our lives), we are slow to acknowledge that the system may be at fault. Who can possibly claim that the interest of business—its bottom line—has consistently benefited the common good?

Business—due to its competitive, warlike nature and inherent rationality—has fostered the alienation of individuals from family, from self. We are a people obsessed with a warrior mentality in which human feelings and values are consumed in the battle of the bottom line. In the name of making a living, we forsake our dreams, do what the boss says, and become a member of the crowd. Such features of business do not benefit the common good.

Our culture is rife with hype, fakery, and outright dishonesty on an enormous scale. Through media advertising business propounds half-truths. It makes unsubstantiated, deceptive claims. Advertisers seek to manipulate our minds rather than try to convince us by means of honest argument and reliable data. This in pursuit of a better bottom line. We are demeaned by it. We are so confused that we value appearance above substance. Are we a nation of fools to be so responsive to falsehood? Can one say that this condition wrought by business has accrued to the common good?

For the sake of the bottom line, business compromises the very health of our nation. The Fast-food chains purvey food with little nutritive value, even food that damages our health. Cigarette companies thrive while we die of cancer and heart disease caused by their products. Our food-producing corporations hawk cereals stripped of nutrients and laced with sugar. Soft drink companies provide nutritionally empty formulas that destroy our teeth. The cost to us, the so-called beneficiaries of Adam Smith’s self-interest, is enormous.

Let’s reverse our assumption. Make it instead: what’s good for the country is good for business.

Conditions in America and the rest of the world are far different from those prevailing in Adam Smith’s day. Our world is smaller and incredibly crowded. Due to our numbers and our advanced technology, the volume and nature of pollution have exceeded levels unimaginable then. No longer is there room enough in the nation or the world to hide the waste. We live in its midst. There is no escape.

Beyond the vast numbers of people, industrial plants, homes, office structures, and retail outlets and malls, is the sheer size of things. The scale of our cities, farms, institutions, and government is so great that we feel lost, dehumanized. No wonder we are alienated from one another. Yet we impact on one another as never before. As we protect and enhance our special interests, we compromise the common good.

If the good of the country were to come first, business would not be allowed to forsake it for the bottom line. A business would reclaim the land it spoiled, reforest the hillsides it clear-cut, and utilize available technology to eliminate air and water pollution. It would apply its resources to replace harmful products with beneficial ones.

In this scenario, some businesses would go under. New ones would rise. Prices might climb, for they would include the cost of maintaining the high quality of our lives. But not necessarily. Were our government to abandon the taxation of capital, it could insist that business apply those funds to the benefit of the common good. If a business’s interest and that of the entire nation ceased to be in conflict, the business would either get its act together or fail.

To counteract the deceptive practices of business, the government has intervened by insisting on honesty concerning products. Given time, the most forceful regulator is the market itself. The public eventually learns the truth. The American automotive industry never stood a chance once the word spread that Japanese cars were superior. Since American cars were cheaper, quality, not price, was the issue.

The lies and omissions that business spreads about its products merely validate the public’s cynicism. The pity is, business is slow to learn its lesson. It still seeks to foist inferior products on us at higher prices by seeking protection against superior foreign competition. The solution is simple: become as good or better. If you can’t, then fail. A business producing mediocre goods with mediocre employees does not benefit the common good. The quality of our lives suffers. Indeed, mediocrity is pervasive in our society, from our schools to our products and services.

Must the drive for profit necessarily cost us self-fulfillment? It has been demonstrated time after time that an enlightened management policy that encourages employee participation, drawing on the creative powers of all within an organization, enhances the bottom line. A human business approach that recognizes the whole person results in increased productivity. A dictatorial, secretive management style, so prevalent in America, works—but less efficiently. In terms of human happiness, it fails absolutely.

Theoretically, our elected government is designed to meld local interests with the general interest. More often, however, it does the opposite and sacrifices the unrepresented common good for the interests of business. At times it also sacrifices business interests and the common good simultaneously, as in the case of banks, the old savings and loan debacle, and falsely rated investments. Our federal representatives solicit the largess of business to retain power. Consequently they subscribe to the precept that what’s good for business is good for them is good for the country.

Thus, government-owned water is sold to large farming corporations below cost, at taxpayer expense. Does it make sense to grow thirsty rice crops in the desert valleys of California? Pollution laws are ignored in the case of large employers. Timber, oil, gas, and minerals on public lands are made available at low cost to businesses. Much of our wilderness has been desecrated. To protect special industries, energy policy is either nonexistent or not in the common interest. The government is only the sometimes friend of the people. Often it has ambivalent feelings toward business. Seemingly without a clear policy, it has helped some and harmed others. It needs a consistent philosophy based on what’s beneficial to the common good.

Most businesses eventually die, but many, especially the giants, transcend time, as long as their products and services remain current. Such businesses look beyond the present. To prosper in the long term, they must concern themselves with the health and welfare of their employees, their customers, their vendors, and their sources of capital. They are all necessary participants in their success, all beneficiaries of the common good. Any business that does otherwise will be, in the span of history, short lived.

The narrow view—that what’s good for business irrespective of whether it’s beneficial to the nation—is obsolete. The abuses are now too obvious. Business must awake to the logic of the common good, see to it that its interest and that of all the nation’s people—yes, of the world’s people—coincide.

THE PENALTY OF SUCCESS

2011-05-02T15:48:00.001-04:00

George Bernard Shaw once said that only fools aren’t conservatives by the time they’re fifty. When, as a young man and a middle management employee, I read Shaw’s statement, it seemed outlandish. I was as liberal as they come without being a socialist. The inequities in the world troubled me deeply and still do. But in my fifties, having tasted some success in business, I moved to the right.

The move wasn’t prompted so much by selfishness and self-interest as by a deeper insight into the ways of the world based on my business experience. As an employee I had no concept of my employers’ risk. Seeing their opulent lifestyles, at least compared to mine, I felt they were lucky and I wasn’t. My employers were merely examples of the world’s injustice. It never occurred to me that they had to endure near failure and personal sacrifice in the early days of their business and perhaps still did.

Once I set out on my own, my thinking underwent a radical transformation. After experiencing the demoralizing vicissitudes of starting a business, I finally succeeded after a few years. But I had to constantly fight to just maintain the hard-won status quo. I soon found myself taking stands and espousing a philosophy that I had once abhorred.

I suddenly believed that there should be no limit to the reward one receives for risk, hard work, and genius. With this thinking, however, came confusion; I still believed that we should strive to correct the grossly uneven distribution of wealth in our country and the world. Although in the United States we have more opportunity than in most other places, it is still far from equal. In effect, in my attempt to reconcile these opposing ideas, I had become a microcosm of perhaps the most challenging task facing our capitalistic system. It is the root of our political differences.

I soon saw that as a result of my starting a small business, the contribution it made to the general welfare far exceeded anything that I had contributed as a corporate middle management employee. The company eventually put more than a hundred people to work. The taxes paid by the employees, the company, and me to our government and the local community over the years were enormous. The goods we bought, the services we demanded from our suppliers, and the products we furnished our customers created employment for others.

Clearly, a multiplicity of benefits to the economy flowed from our single small enterprise. How could I possibly conclude that I didn’t deserve the high six-figure salary I was earning, that after all my trials and tribulations my success was sheer luck? How could I deny that even if our decisions were guided by self-interest, they helped the common good?

But I soon discovered that others, especially politicians, think as I thought before I became an entrepreneur. Instead of viewing entrepreneurial achievement as a benefit to the common good and something deserving reward, they view it solely as a revenue source. What’s missing in such thinking is an appreciation of what makes a business a success. It is simply the human desire for reward, both monetary and emotional. Remove that—kill it by taxing it away—and the enterprise and all the good it does will stagnate.

Knowing how much to tax a business or an individual without destroying incentive is a skill rarely practiced by our politicians. But common sense tells us that a smaller tax rather than a bigger one provides a greater incentive to work and succeed. What simply does not apply to entrepreneurs—if it does to anyone—is the premise that the more money an earner is left with after taxes, the less he or she will work. Money, although not the sole motivator, is the major measure of an entrepreneur’s success.

That investment, wealth, and the entrepreneurial spirit are things to be exploited rather than encouraged pervades our society. Improve a home or convert an eyesore into a desirable property and the owner is penalized with a tax increase. Never mind that it adds to the visual quality of the community and encourages others to do the same. Earn more and move into a higher tax bracket. Forget that at some point it becomes a disincentive. Sell a long-held asset and have it taxed as if inflation had no role in its increased value. Visit a doctor or a lawyer and be charged more than the average person.

From my vantage point as a one-time liberal and present-day economic conservative, I dream that one day our society will be so enlightened as to encourage us to invest in enterprise and beauty, that it will tax just enough to make investment worthwhile, and that it will understand that for each of us to be motivated, we must feel that we receive as much as we give.
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You may read more of my essays in both of my business books, BUSINESS NOT AS USUAL Volumes 1 and 2 found on www.StonesPointBooks.com or Amazon.com.

THE MANAGING COLLECTIVE

2011-04-10T19:23:00.000-04:00

I desperately needed ideas. The company’s progress was stalled due in large part to a slowing economy. But it was also due to a certain apathy (even within myself), and a hardening of our ways that had developed during the previous decade.

It would have been easy to pay a management consultant to tell us what to do. It would also have been defeatist. After all, I owed what success I had to applying my own resources. And I already had well-paid managers in place who knew the company better than anyone else. But I’d never asked them to look beyond their own bailiwicks or sought their opinion of what was wrong or encouraged their suggestions on what to do about it. Right under my nose were the most qualified consultants I would ever find.

We met every weekday morning in my office between eight and nine, before the phones starting ringing. Seven members of our small company (now with fewer than a hundred employees) were steady attendees: the vice president of production, the first-shift supervisor, the technical director, the office manager, the sales manager, a rotating production worker who participated for a week, and I. If a salesman or the visiting manager of our satellite plant happened to be in the office, he was also invited.

Our purpose was to develop new ideas and let them fly no matter how ridiculous they sounded. Everyone had a turn to speak and if what he or she had to say wasn’t completed within the hour, it was carried over to the next morning.

Though presiding, I maintained a low profile and let the other members of the group argue their thoughts freely. I might ask a question here and there or toss out a problem I’d been wrestling with. But it was not management by consensus; no vote was taken. I reserved the authority to decide which idea was worth trying. Everyone understood that I, as majority stockholder, had the most to gain or lose.

My first task was to break their habit of restricting their thinking to their own jobs — a natural and regrettable result imposed on us by the organizational structure. Traditionally, only the CEO sees the “big picture” and is the one who makes the big decisions. I wanted everyone to be a figurative CEO, to be in my shoes. Although each individual in the group had different and well-defined responsibilities, all had to put aside any claim to expertise or superiority and accept both criticism and ideas that concerned their departments. We were all equal during the meeting and every opinion was respected, but outside the meeting we reverted to operating within the clearly established lines of responsibility, which could not be crossed.

The unpredictable member of the group was the rotating worker. That person might be a young woman from the office staff or a tough old hand from production. Many workers, unaccustomed to membership in the inner sanctum and feeling intimidated sitting with the brass, initially only listened. But with encouragement, by their second or third turn the timidity disappeared.

From these people came the practical, down-to-earth solutions that startled us by their insight: re-using our plastics waste to clean machines between runs, and hiring two of our workers who had once been in the cleaning business to replace our unsatisfactory cleaning service. Their moonlighting added to their income, and their quality job pleased their coworkers.

Some workers begged off attending our meetings, saying they had nothing to contribute and had no wish to hear the problems. But they couldn’t avoid hearing them. Walking through the plant I’d overhear discussions on what went on at our meetings. Most worker members, proud of their participation, were quick to spread the word to all corners of the company.

The range of ideas that flowed from these meetings was enormous, from hiring and firing people to changing banks to devising compensation plans to seeking new markets to establishing long-range goals and ways to achieve them. The collective dealt with virtually every aspect of running the business, culminating in incentive plans for all levels of the company (except top management) that ultimately eliminated most of our structural problems.

After two years, the meetings degenerated into spurious discussions and boring recitals of petty complaints better dealt with at a lower level. Thus the group contained within itself the elements of its own demise. Owing to the collective, the company reached a new and prosperous stage of life. But an indicator of the collective’s effectiveness was that it eliminated itself. Problems had been its raison d’etre; without them, it had no reason to exist.

WHO IS RESPONSIBLE WHEN BUSINESSES GO AWRY?

2011-03-28T17:05:00.000-04:00

The Public Corporation

I am a stockholder in many public corporations but I wish I weren't because I know there's a good chance that management and directors are in cahoots to retain their positions and deny the stockholders what is in their best interest. For example, when a board recommends voting against a declassified board, for a golden parachute agreement, or against disclosure of political contributions, etc. I realize it is not on my side as a stockholder. The board's cohorts, the executives, preserving their power, place their own personal welfare ahead of the company's. The directors to whom the executives are supposed to be directly responsible, if they are not in cahoots, are not savvy enough to know when they are being hoodwinked.

When the annual reports arrive at my door, I read the CEO's and Chairman's optimistic spiels, then look at the figures and find they often don't jive. I feel I'm being sold a bill of goods. Reading the bios of the directors up for election, I see that many are celebrities or from academia that have no business background whatever that would qualify them to perform the required oversight. When George Mitchell was chairman of Disney he publicly stated that the board's job is simply to protect and advance the interest of the stockholders. But that's only half the job; the other half is to be able to read a P & L Statement and Balance Sheet intelligently enough to ask questions and offer advice.

Besides having worked for public corporations, I've also worked for closely held companies, and for one in which I was majority owner. As its CEO, my company took precedence over me because were it to fail, so would I. Were I to take an exorbitant salary, the company would suffer, and I'd incur the resentment of my employees. Every dollar had to be productive. My primary interest was the future of the company upon which the employees, the customers and the community depended. Though I was top dog, I had a knowledgeable board of directors who held my feet to the fire and on occasion prevented me from making bad decisions.

One member was a lawyer who advised me on what was legal or not in our dealings with the outside world. Two were people from our industry who understood how our products were made and their markets. One, although not technically a director, was our accountant who served strictly as an advisor to the board. And one was a company executive who was sympathetic to, and understood the needs of, our employees. All ran the risk of being liable for possible illegal acts by top management, so the company protected them with liability insurance policies. One director, a professor at the Harvard Business School, resigned when things began going badly for the company – which proved to be temporary. But there was no question the directors felt that they were responsible for what I and my executives did, both good and bad.

Of course there are corporate executives who are competent and dedicated, but not in the same way as a business owner. I recall attending a course for small company presidents at Harvard in which CEOs from public corporations lectured us on various management issues. When they let their hair down in the dining hall they said they were envious of us; they'd give their right arms to be running their own businesses. So what did they envy? Certainly not our incomes which couldn't compare with theirs, nor our prestige, since none of us would have been invited to lecture at the School or write an article in the Review. It was our autonomy, the bald responsibility we took for our own actions, and the testing of our ability to succeed on our own merit -- or fail for lack of it.

This tells us something about the corporate CEO's mindset. He or she is besieged by forces within the organization, including the inexpert board, which must be sold on the idea that all is well, or is headed that way. Responsibility? The organization is so large that bad things could be going on that the CEO couldn't even imagine. Merit? Make the bottom line look good for the short term to please the stockholders, and more to the point, make it so the CEO can cash in those options as the price of the stock temporarily rises. So the CEO is on a constant campaign to quell bad news. No wonder those CEOs envied us. It's a hell of a way to run a business.

Of course, none of this is real. That is, the CEO knows, has to know, about the bad things that transpire within the company. To deny it is to admit incompetence. The CEO knows that short term thinking, catering to the stock price, could well lead to his or her demise, so why not make hay while the sun shines? The CEO knows whether he or she is up to the job, and if not, to obfuscate and cover up through force of personality. The CEO has a built in constituency: the board. Most members are his friends? And those that aren't will soon be.

So where does the ultimate responsibility lie in a public corporation. Not on the CEO who does not have the freedom, or the mental orientation, to behave like a sole proprietor. Some suggest that it should be the employees. Make them stockholders and all will be well. In a sense, the employees are the easiest stockholders to fool. The last to know the truth, they are subject to executive propaganda daily. In my closely held company, which eventually became partially employee owned, we had to teach the employees how to read our financial statements so we could intelligently discuss our predicament, otherwise how would they know and believe what was true? As an aside, some believe that employee ownership results in a more productive, happier company. I found that it made no difference, that the younger employees saw the benefits of ownership too far into the future to matter, and the older employees couldn't wait to cash in. What did work was running an open company in which reward was tied to productivity.

Our democracy has checks and balances via three governmental divisions overseeing each other, yet this is not the case with most corporations. Were a board to perform conscientious oversight, demanding full disclosure, there's no doubt that it would be at odds with management. Precisely! Then the board could do its proper job of questioning, advising, and consenting.

The ultimate responsibility in a public corporation lies with the board. Its function is to scrutinize and understand. If the CEO’s cohorts do bad things, say steal from the company, or commit illegal acts, it is responsible just as much as the CEO is responsible. Responsibility must rise to the very top. We held Nixon responsible for Watergate and forced him to resign, Johnson responsible for expanding Vietnam and forced him not to run again. As Truman, the ostensible chairman of the board, understood, the buck stopped with him. But, for examples, at Enron and Worldcom, Tyco, Rite Aid, Adelphia, and Parmalat one would think that the boards didn't exist. None have been held responsible for the gross violations of trust that were committed.

If such responsibility were enforced, one might say that it would be virtually impossible to find competent people to serve on boards. True, fewer would be willing, but those fearless, courageous ones, who believed in their own competence and ability to dedicate themselves as overseers, wouldn't hesitate. You could be sure celebrities and big name academics would not apply. The board member must know how a business operates, must demand detailed information on every aspect of the business, must be impeccably honest, and, perhaps most important of all, must establish a high moral code to which he or she insists the corporation adheres. Knowing that the board is ultimately responsible, is liable, the CEO and the executives will be reluctant to go off half cocked for fear of discovery within. Until we have genuine internal corporate oversight we will not hear the end of corporate tragedies and the financial ruin of employees and stockholders due to executive transgressions.

LOCATING THE COMPANY IN PARADISE

2011-03-04T17:02:00.000-05:00

Over lunch, the representative in our Maine district asked what it would take to attract business to our state. Because our legislature consisted mostly of lawyers and non-entrepreneurial types, he was seeking a businessperson’s point of view. Having read press reports of the enormous tax breaks granted, bonds floated, and infrastructure installed by other states to attract industry, I doubted whether our sparsely populated state could compete, or should. Indeed, since I moved here in 1989, I discovered that our state has been struggling to retain what industry it already has.

Maine is a fine place to retire to, but would I have located my plastics raw material manufacturing company here, particularly in this midcoast district? The answer was no, and I began enumerating the reasons. They were not new. They had been publicized by our political candidates and in the editorial pages of our newspapers for years.

Being among the ten top taxation states in the country, Maine needed lower property and income taxes, lower workers’ compensation insurance costs, cheaper electric rates, and economic incentives in the form of financing and tax breaks. Certainly my small manufacturing company would have evaluated all these elements before relocating our headquarters or building a satellite plant anywhere.

Still, had the state revamped its policies in our favor, would it have been crucial to us? Again the answer was no. The salient question that a community should ask is what it can offer that contributes most to a particular company’s bottom line over the long haul. The answer can be found in the reasons why we located our two facilities where we did.

In the states in which we operated, income taxes constituted 0.6 percent of our sales, property taxes and rent slightly more than 3 percent, insurance less than 1 percent, and utilities about 2.6 percent. In other words, had the state of Maine rated tops in comparison to other states (or the states we were in), only 7.2 percent of our sales cost would have been affected, and this obviously by only a fraction. Clearly the advantages that any state could offer us with respect to the above elements weren’t earthshaking. But what were?

Although we welcomed any deal, the deciding factors had more to do with how a locality could improve our capabilities as well as reduce our major costs and what quality of life it offered our employees. In our industry, the cost of raw materials made up almost 50 percent of our selling price. Because we received these materials in bulk to save money, and shipped them similarly, we needed easy access to a major highway. We had moved from the city in which we were located when we were a young, growing company because the industrial park there wasn’t accessible to such a highway. The town we moved to gave us a tax break for the first five years, when we most needed it, although being on a superhighway and in a community that clearly welcomed us was far more important.

Because we were a more capital intensive than labor intensive company, our factory payroll—exclusive of sales and administrative salaries—was barely 8 percent of sales, still a substantial percentage for a single item. By moving to a town within easy commuting distance of our existing employees we lost no one. The community we chose for our satellite plant (although it presented no financial incentive) offered a well-educated labor pool that was known to have a good work ethic. Thus, our labor costs remained in line in both places.

Both communities in which we located had excellent schools, an adequate infrastructure, a welcoming attitude, and—most important—proximity to our customers. Ours was a service as well as a product business. Customers often ordered on an emergency basis. Nearness to our market was perhaps our most important consideration. It was essential that each location enhance our capability to serve the trade.

So, even if Maine had given us the best economic environment possible, we’d still have it down on distance from market alone. Had we been, for example, in the computer chip business or the software business (products inexpensive to ship) or the furniture manufacturing business (nearness to forests), we would have chosen it”? Maine’s work ethic is good, but its pool of educated, trained people is limited. Were its schools producing more competent young people and its politicians more favorably disposed toward the kind of businesses that would find easy access to raw materials Maine would be attractive. Its quality of life is unsurpassed.

Recently a group of Japanese visited our small midcoast city hoping to find a way to do business with some of the few industries we have here. But none of our major business executives showed up to greet them. A community’s attitude counts as much as the substance it offers. In the final analysis, we jointly create our own collective prosperity—or stagnation.

THE SIX DEADLY SMALL BUSINESS SINS

2011-02-22T14:33:00.000-05:00

Peter Drucker, in listing the five deadly business sins in a Wall Street Journal article, supports them with convincing examples, from IBM to du Pont. Are these impressive sins that apply to big business also valid for small business?

The differences between big and small business are enormous. When the executives of one are imported to the other, they find it difficult and often impossible to cope. In a small company, cause and effect is much more direct and swift. Decisions are made and/or changed with alacrity. A small company usually specializes in serving only a fractional portion of a total market. A small company is more personal; there’s less distance between the customer, the employee, and the CEO. And a small company has less available capital.

Based on my experience as CEO of a small manufacturing company and a former employee of several large corporations, here is a different list. It suggests six deadly small business sins.

• Grow for growth’s sake. As our company expanded we went into extensive debt, even as interest rates were rising. When hard times struck, as they were sure to do, the payments to the bank nullified our profits. Later on, having learned our lesson, we moderated growth and debt sufficient to meet the worst eventuality. Profitability mounted and our staying power improved.

Corollary to this is the sin of thinking that when business is good, you’ve got it made.
• Be all things to all customers. We found it self-destructive to furnish willing customers with products we were not expert at manufacturing or the competition could produce at less cost. Not only did we lose money producing such products, it interfered with our ability to service profitable customers in our special niche.

• Sell high volume at low prices rather than low volume at high prices. This would appear to be counter to Mr. Drucker’s admonition that cost-driven pricing is a mistake. It is for a large corporation, but not necessarily for a small company. We left the high-volume commodity market to our competitors as we concentrated on the specialty, superior quality market. As a result, our year-end profits often matched and even exceeded those of our large competitors. We also slept easier.

• Think that when things are going well, you need only maintain the status quo. In truth the smoothly operating status quo is usually not only a temporary condition, it’s dangerous. When we had reached what until then was the apex of our success, when business seemed to be a lark and we had become loose, our biggest customer, making up one third of our sales, dumped us. Happiness can lead to complacency, and in business this inevitably leads to a fall.

• Keep people on who are doing a fair job but whose replacements could ostensibly do better. The world is full of competent people. It takes years and much trial and error to find the best person for a particular job. This was my most common sin as CEO. Agonizing over letting people go (remember, small business is more personal), I often settled for marginal performance. Yet when we fired someone, or someone whom we should have fired quit, the successor usually turned out to be better.

These two sins are less universal but no less deadly.
• Take on a partner or partners to make running the business easier. Although diluting the risk and sharing the responsibility with another seems logical, it is psychologically unsound. The chances of a partnership working out are hardly more than that of a marriage.

The operating styles of my 50 percent partner and I were so different that we rarely saw eye to eye. In a crisis we clashed irreversibly. If you must have a partner, controlling ownership of the company is mandatory. It’s better to suffer in the short term with fewer funds and more responsibility and take on an employee instead of a partner.

• Hire your friends and relatives, because they will be more loyal than strangers. To do so is contrary to the impersonal, rational demands of a business. From the outset the relationship can be loaded with emotional baggage. I have experienced nothing more painful in business than firing a friend or relative for failure to do his or her job well. It had bitter repercussions within my family that endured for years.

These sins are not new. Avoid them, or discover the error of your ways.

BOOST THE ECONOMY: DON'T TAX BUSINESS

2011-02-03T09:59:00.000-05:00

To the general public business is suspect if not downright evil. Yet most of us make our living employed by businesses. Why then, we might ask, the inconsistency? For one thing, we all recognize that business has a bias: to make a profit. And for another, it is so focused on that goal that it will exploit its employees, contaminate the environment, cheat on taxes and pay its CEOs outrageous compensation. As a result, we feel the government should tax them to the hilt. So it does.

But this view of business is simplistic. Of course, our governments should regulate business against monopoly and other practices that damage our well being, Since our society depends on business for our very survival, we should also support it, help it succeed, and encourage it to grow and innovate. How to do this? Don't tax it. Eliminate one hundred percent of the business income tax. No way, that's too radical, you say? The Federal government would go bankrupt. Really? Let’s explore what would actually happen were the business income tax to cease.

What does a business do with its profits? There are only three ways it uses them. One is to pay its employees taxable wages and bonuses. And the more it pays its employees the more income taxes they pay. Actually, when a business pays income taxes it has less money to pay its employees. A second way a company uses its money is to reinvest it in the enterprise, add employees, purchase new equipment, increase research, and expand. That’s good for the economy, right? A third way is to dispense dividends to its stockholders who consequently must pay more total capital gains taxes, or purchase its own stock on the market thus increasing share value. (By the way, few small businesses which are generally closely held pay dividends.)

In the first and third way, our government receives tax dollars directly. In the second way, the government's tax take is deferred until the business's investment in itself begins to pay off. But in all three cases the government gets whatever share of taxes it stipulates. In other words by not taxing business directly government is not deprived of its income. In fact its income is enhanced as the un-taxed business grows more rapidly by using the money it used to pay for taxes.

I write this not from speculation or theory, but from having been a CEO that, for two decades, ran a manufacturing company that grew to one hundred employees. During the first five years of the operation we had losses, which the government, our good partner then, allowed us to deduct from later profits. After we worked off the losses and profits began to mount, it became obvious that the government was only our fair weather friend. Just when we needed cash to support that early growth phase, taxes slowed us down. Since our borrowing ability was still limited, because of the income tax levied on us we had to wait three more years to add much needed manufacturing space and equipment.

Despite the fact that we were in a fifty percent tax bracket at the time (still a hefty thirty-five percent today), by our fifteenth year in business we were operating a plant in the Northeast and one in the Midwest and growing. Still, I began to wonder whether it was worth continuing because we had to share so much of our profits with the government. When the Congress enacted The Employee Stock Ownership Plan (ESOP) law, which allowed management to purchase stock on behalf of all the employees from a percentage of its profits, thus returning cash to the company's treasury for its own use, I recognized an opportunity to reduce our tax. We thus began expanding again, not only by using the ESOP generated cash, but also from increasing bank borrowed funds due to our new solid credit standing.

Ours was a prime example of how reduced income taxes could benefit not only those directly involved with the company, but also the community and the nation. Take that notion a step further by eliminating a company's income tax entirely, and it's obvious that desirable consequences will follow. But it would take political courage for our Congress and the Administration to propose such a policy today. Americans would first have to get over the idea that business is to be exploited rather than encouraged to do what it does best: fill such human needs as providing one's livelihood, producing essential products and special services, promoting cultural activities, and fulfilling the very basic need to feel useful.