The Right Stuff About Buying a Franchise – Lesson 1: The L Word

Location.  Location.  Location.  It’s true.  Location is the most critical factor in the success or failure of any new franchise business, and most other businesses, for that matter.

 

Some franchisors have locations already available for the consideration of potential franchisees.   Some facilitate the purchase of existing outlets in established locations from franchisees looking to sell.  Others may leave the choice of location entirely up to you, although they will normally keep a watching eye on your choice.

 

When I returned from teaching an MBA class in New Venture Creation at Utah State University in 2001, I explored franchise ownership for the first time.  I had enjoyed teaching about franchising and had enjoyed excellent customer experiences at franchises such as Subway, Cold Stone Creamery, and Boston Market.  At the time, none of these brands were established in Australia in any meaningful way.

 

Thus, soon after our return, I attended a Subway meeting for potential franchisees held at south-western Sydney.  After Subway’s Regional Manager informed us that franchisees must first select their own location, I discussed with him two possibilities I then had in mind.  To the first, he said that the site, a shopping centre under construction, was already taken by a new franchisee.  My second suggestion was a regional shopping centre then several years away from development.  Unfortunately, it too was taken, this time by an existing franchisee in a nearby area.  Since I had no other good alternatives, I let the idea drop for a time.

 

I got back on the franchise horse via the purchase of an existing bookstore franchise in late 2007.  Fronting a pedestrian plaza in the middle of a regional business district, I confirmed the value of its location by sitting out front of the store and counting customers as they entered and left one afternoon.  I counted both buyers and browsers for about 20 minutes.  The numbers looked good.

 

Looking back, they were good, but perhaps not as good as I had first hoped.  Why?  Because I had observed the store during that time of day when it was, by far, at its busiest.  It was lunchtime, and I have learnt since then weekday lunchtimes, from noon until around 2:00pm, can account for 70 percent or more of the day’s takings.

 

Therefore, while the store continues to perform well, it would work a whole lot better if the lunchtime crowd was representative of customer flows and revenues across the entire day.  It’s not, and that’s life.

 

At another time in the recent past, I created two temporary retail stores at other locations, taking advantage of the busy pre-Christmas period to sell as much as I could in as short a time as possible.  The first was again at a place disproportionately favored by the lunchtime crowd, however the rent and overheads were sufficiently low to make the economics of the store work in my favor.  It did pretty well.

 

The second store was much larger, something all retailers would normally see as a huge positive, however the building itself was isolated from the main center of a regional shopping mall.  While it received plenty of passing automobile traffic as they entered and left the car park, the effort required for shoppers to actually come across to the building worked against its success.  While I didn’t lose money on the deal, I had paid a much higher rental for the site in the hope that the additional space would mean higher sales.  I was wrong.  It was not nearly the goldmine I had hoped it would be.  Ironically, the building had formerly been a Boston Market, a franchise that didn’t last long in Australia since it didn’t catch on.  Perhaps I should have learnt from their failure at the site some years before.

 

The other day, a friendly supplier gave me a great piece of advice.  He said that the target for any new retail store should be an average of 15 people walking past the location every minute.  While I suspect that many stores may still succeed with fewer pedestrians than this, it is a great “rule of thumb” against which we can evaluate any locations we are seriously considering.

 

This is the kind of research that only you can undertake.  Franchisors will cover themselves in legalese to ensure that they are not held accountable for any preliminary estimates of customer numbers and turnover.  The owners of shopping malls will do the same.  This is a job for you. 

 

Learn from my mistake.  If it is an existing site, survey the traffic flows at various times of the day and at different days of the week.  If you are thinking about an entirely new site, find comparison shopping centers and malls that have similar demographics to yours and a similar mix of tenants and make counts of the shoppers walking in and by stores like yours.  You will need to allow for the fact that the center may have grown its traffic over time, whereas a new mall will take time to pull a crowd, particularly in today’s challenging retail environment. 

 

If you get it right, however, a great location will ensure that your franchise business is a true boomer rather than a business which is here today and gone tomorrow.

Can Good Leaders Be Good Everywhere?

Richard Branson’s latest book, Business Stripped Bare (Random, 2008) is, like Losing My Virginity, an absolute cracker.  For business leaders and entrepreneurs, it provides some marvellous examples of entrepreneurial success and failure as well as a great deal of food for thought.

It is thanks to global business leaders like Richard Branson that we can drill down into the roller coaster world of the global entrepreneur.  It is also thanks to Branson that we can see how business leadership can be infused with a sense of humour, a truck-load of passion, and a focus on working backwards from the real needs of the customer.

The Virgin empire extends from planes and trains to credit cards and mobile phones.  It has successfully diversified in an era in which diversification was viewed as a strategy of last resort.  Despite growing to become one of the globe’s biggest companies, Virgin’s corporate culture retains the energy and dynamism of its founder.

One of Branson’s most powerful insights is that even the most complex of businesses should be reducible to a simple understanding of its key elements.  If, like the failed dot coms of the last decade, it remains complex and impossible to understand, it is thus either shrouded in the mists of jargon and technocrap, and thus ripe for a new entrant or, at its core, is fundamentally flawed.

On this basis, none of us should be scared about learning the ins and outs of a new industry, winnowing our deepening understanding into a progressive search for new business opportunities.  Branson records, for instance, that he learnt the basics of running a new airline in just four months,

Four months to learn how to deliver an airline.  Not easy.  But definitely doable.  Those business leaders who seek, in interviews and in their writings, to turn their industries into complex puzzles…these people really, really annoy me…To listen to them, you’d think you must be born into an industry to make any headway in it.  And this is rarely true unless you are truffle hunting…The volume of information you’ll need to hack through will be high…but the underlying business model is always fairly simple.

For entrepreneurs, this is great news.  With hard work, you should be able to understand the mechanics of an industry and detect who is doing well and who isn’t.  Poorly or unmet customer needs will often arise as you undertake your homework.  Opportunities to establish a start-up, buy an existing player, or form an alliance may well appear.  Alternatively, you may conclude that the returns of pretty much everyone in the industry do not justify your further efforts and capital.  If so, nothing dramatic has been lost.

For business leaders and executives, however, I think that we need to take care in applying the Branson philosophy across the board.  Consider the Coles Supermarket brand in Australia, for example.  Coles has long sought to match its major competitor, Woolworths, in its offerings, customer service, and brand image, but has yet to succeed.  Recently, it was purchased by Australia’s Virgin-equivalent, the diversified Wesfarmers Group, however it has not shown any serious signs of improvement.  Prior to the Wesfarmers takeover, it had given a high-profile and highly-respected business leader, John Fletcher, the time and resources to bring it back to health.  Fletcher, however, could not sufficiently improve an extremely tired corporate culture and declining brand.

In the global context, consider too the business career of “Chainsaw Al” Dunlap, who rode on the coat tails of a slash-and-burn philosophy that had appeared successful at Sunbeam in the United States and at Kerry Packer’s Australian Consolidated Press.  Appointed to save the languishing paper products giant Scott Paper, however, he failed miserably. 

The lesson for executives is that we must seek to match strength to context.  If a leader’s philosophy and style do not align with the array of variables together contributing to outstanding outcomes, all may be lost.  Some of these variables, such as the global and national economic environment, the support of one’s board, and the availability of key personalities to complement and support the leader’s approach, may be wholly or partially outside one’s control.  At times, an organisation’s decline may be terminal, impervious to whatever the leader tries.  Just this week, the giftware firm Wedgewood, as old as industrial life itself, sputtered to an end for this very reason.

So, while the critical ingredients for great leadership may be true everywhere – commitment, passion, ethics, and so on – these may be necessary but not sufficient ingredients for great leadership outcomes in specific situations.  What is missing?  Being in the right place at the right time and, perhaps, a dollop of luck.  Hardly the things that can be taught in MBA schools, but the reality of the messiness, and excitment, that is organisational life.

The Relevance of Our Management Theories for China

Last week I had the privilege of giving two and a half days of management education to HRM managers from China’s Customs Department.  What an amazingly part of the Chinese Government that must be, especially given the phenomenal growth of China’s trade during the last two decades.

My teaching philosophy has changed in recent years as I have reflected on my experiences living in China last year while teaching at a university in rural Henan Province, as well as having taken teaching visits to Guangzhou during 2000 and 2002.  I am now certain that our most popular theories of management and leadership must be taught cautiously and with qualification in the PRC, and perhaps with similar caution in other parts of Asia.

To start with, the Chinese culture is, for the most part, radically different to that of North America, the UK, much of Europe’s, and Australia’s.  To recall Hofstede’s influential studies of cultural difference, the Chinese are high in their long-term orientation (a value Hofstede referrred to as the “Confucian orientation”) and power distance (expressing an ongoing preference for centralised power), medium in uncertainty avoidance (that is, they prefer more certainty over less, but not as strongly as elsewhere), and low in individuality.

In contrast, Australians are extremely high in their focus on the individual (rather than the collective and group) but much lower than the Chinese in power distance (Australians consider themselves egalitarian), uncertainty avoidance, and in the possession of a long-term orientation (for most of us, a month is the long-term!).

So, consider a few examples.  Maslow’s hierachy of needs, for instance, starts with the assumption that individual needs are important.  Try telling that to someone who subsumes their own needs to those of their families, living in far-off cities and living as modestly as possible in order to send as much money home as may be spared.  The Maslow pyramid also suggests that our ultimate need is to “self-actualise”, or to truly fulfil our potential and desires.  As far as I can tell, there is no direct translation into Chinese for the concept of self-actualisation.  It’s focus on individual fulfilment as the ultimate end has historically found no basis for comparison in the Chinese culture.  While there may be exceptions as some aspects of Hollywood culture seep into the behaviour of young Chinese, the reality remains that meeting one’s own needs is a flow-on benefit from first meeting the needs of one’s family, not an end in itself.

Let’s consider another example.  A great deal of western leadership theory relies on notions of shared power and empowerment, as well as a distinct preference for a good dollop of decentralisation of authority and responsibility.  In the vast majority of Chinese organisations, you may as well be recommending that they trade sandwiches for rice in the lunchroom.  Deep within the Chinese culture, taking root over many centuries, the philosophy of knowing one’s place, doing one’s duty, and seeking to rise up from one level to the next on the basis of one’s seniority and loyalty to boss, organisation, and party, continue to take great predence over pursuing any of the perceived benefits that may arise in a less rigid approach.

Thus, while some movement towards western practise has been detected by organisational researchers, particularly in the offices of some multinational corporations, across-the-board evolution is sometimes slow, often patchy and, in many locations, non-existent.  Yet, the vast majority of MBA and similar programs in China use western textbooks translated directly into the local idiom.  While there may be the odd example of a Chinese company, theoretically the books reflect the view that western theories may be transplanted without reflection or adaptation.

I do hope that this changes in time, since to do otherwise does a disservice to the Chinese students of our programs and the fields of leadership and management more generally.

The Meaning of Success

What is the meaning of success?

Our culture defines success as having achieved all there is to achieve, as amassing all of the assets one can amass, and as earning as much as is humanly possible during our alotted three score and ten years.

In his book How to Get Rich (Ebury Press, 2007), British entrepreneur Felix Dennis ponders this critical question.  Over four decades, Dennis has established a global magazine empire valued at hundreds of millions of pounds.  Beginning with nothing in the 1960s, he springboarded off a biography of the late kung-fu icon Bruce Lee to aggressively dominate the market for computer magazines before diversifying into other segments of the publishing industry.  His mens’ magazine, Maxim, remains one of the most popular in the world.

While the business grew, Dennis spent years in a self-professed life of debauchery, wasting millions of pounds on wine, women, and drugs.  These days, he oversees his empire from afar, living on the Caribbean island of St Vincent, writing poetry and feeding stray cats.  He is, he says, generally content.

Felix Dennis performs a great service in his “anti self-improvement” book.  He lays the process of getting rich before us, as well as its associated costs, in brutal starkness.  He tells us that we will not become rich if we lose focus, nay, obsessiveness, in our pursuit of success.  He states that there will be significant costs in the journey.  We may lose friendships and will inevitably destroy those relationships we would now claim are of most value to us.  We will inevitably become harder, coarser, and more uncouth.

Will riches make us happy?  Dennis responds resoundingly in the negative,

  I am now very rich.  Am I happy?  No.  Or, at least, only occasionally, when I am walking in the woods alone, or deeply ensconced in composing a difficult piece of verse, or sitting quietly with old friends over a bottle of wine.

Further, he argues that the rich are generally an unhappy lot, so exhausted by the demands of others to share their wealth that they become paranoid and insular, turning inwards and finding solace only with those who share their burden, their similarly-wealthy friends.

In spite of these claims we recognise for their inherent truthfulness, many of us remain on the treadmill of success and riches.  Our culture and our mind screams at us that only in achievements and possessions can we find true meaning.  Only in glorifying in our status and our money can we truly self-actualise.

Felix Dennis concludes that it has all been very much a life of chasing the wind.  Too much time is wasted in the chase.  He would gladly give you or I every penny of his wealth if we could give him back his youth and, that rarest of resources, time.   Accordingly, to those who are young, he says, you are infinitely richer than I can ever be again.

Instead of engaging in such meaningless, costly pursuits, perhaps a healthier approach is that outlined by Timoth Ferris in his wonderful book, The 4 Hour Workweek (Random, 2007).  Ferris would say that Dennis approached his quest for riches arse-about.  Rather than moving with the vague notion of “getting rich”, potentially creating a never-ending quest as we pursue a rubbery definition of “rich” that ratchets up as our lifestyles demand, we should first begin by defining how much we need each week and month to sustain the lifestyle to which we reasonably aspire. 

Thus, rather than needing $10 or $20 million to afford the lifestyle residence, holiday homes, and first-class travel, we need only enough cash to sustain a comfortable residence, holidays based on rentals and lower-cost destinations, and sufficient funds to buy our way out of the 60 and 80 hour weeks currently killing so many of us, one way or another.

Having a nice lifestyle is not impossible, even when we wish to also maintain our friendships and intimate relationships.  It means, however, that we should redefine success and its fruits in a new way.  To paraphrase Stephen Covey, we must begin our quest with the end in mind.

The Last Word on Office Affairs

On Channel 7 this week, we saw the last episode of Alan Sugar’s UK version of The Apprentice.  The series, originally shown in the UK in 2006, saw Michelle Dewberry, a 26 year-old telecoms consultant, snatch victory from the hands of Ruth Badger, a hard-talking and tough sales consultant from England’s north.

Checking to see what became of Michelle Dewberry following her victory, I was astounded to read that she’d had a fling with fellow contestant Syed Ahmed during filming, and appears to have continued the relationship for some time afterwards.  In fact, several months after The Apprentice, Dewberry miscarried Ahmed’s baby.  On this basis, the fact that Dewberry picked Ahmed as her second choice team-member in the last episode is far less surprising than it might have been.

This raises the question of office affairs, an issue especially relevant as we radidly move toward the season of office Christmas parties.  Are they acceptable or unacceptable?

Unless two singles with no other attachments and who don’t work directly with each other happen to meet and develop a relationship (which is something different to an affair, since an affair implies that the relationship is occuring in secret or alongside existing attachments), the bottom line is that office affairs are always out of order. 

For those already attached, someone (or more than one someone) will be hurt, often catastrophically.

For those whose work is negatively affected by the relationship, the coupling is both unwelcome and unhealthy.

If the affair brings down the productivity and personal effectiveness of those involved, it is similarly unhelpful.

This one is close to home for me.  My late father began an affair with his secretary some years before I was born.  When I was six, he left home for the last time, subsequently marrying his secretary and moving away, wanting little to do with his former life.

In a possible echo of my father’s life, I was once tempted in a similar fashion.  Thankfully, sense prevailed, after much angst, and I can happily say that my 18-year marriage to Wendy was strengthened rather than diminished through this challenging time.

Why are office affairs more common than they once were?  First, we live in a culture that encourages us to move on to the next model of whatever it is we value.  Don’t like your car?  Upgrade.  Don’t like your house?  Borrow some more and move up?  Don’t like your wife?  Trade her in or carry on illicitly.  Second, family law has evolved to the point that divorce need not be anybody’s “fault”.  For anyone who strays, that means that they can keep half of their assets even though they may have been almost completely responsible for the breakup of their partnership.  The “progressive” Family Law Act of 1975 is behind this outcome.  Perhaps that’s why my father left in 1974 and divorced in 1976!

Perhaps most importantly of all, we tend to spend much more time in the office than we once did, expect to build friendships and solid relationships in the office, and build our identities around our professions and our status in the organisational hierarchy.  So, we are less often at home, exhausted and grumpy when we are, and rarely feel the satisfaction from tasks at home than we take when given a promotion or bonus or pat on the back at work.

For us aging guys, the possibility of an illicit affair can also create excitement in that potentially challenging middle period of our lives.  It can remind us of our virility, of our perceived attractiveness, and of our continued standing as “masters of the universe.”

Bollocks and tosh.  In reality, it is a failure of self-discipline and a victory for the boys within us, still demanding to be kings of the playground, to be envied as ”the guy with the best girl in the class”.  It is an indicator that there are significant parts of us yet to mature to adulthood.  It is a sign that parts of our lives require radical reshaping if we are to reach old age with any shred of dignity and self-respect.

That’s a tough call. 

It’s also a true call.

I’m with you.

Corporate Crap and Leadership

A few months ago, I brought a guest CEO along to an MBA class I was leading.  Don Grover is CEO of the Dymocks Group of Companies, a privately-held, diversified corporation comprising significant holdings in the rural and commercial property sector, in addition to Australia’s oldest and best-known retail book chain.

One of Don’s comments stuck with me.  He stated that ‘leaders who fail are often the ones who start to believe their own bullshit.’  In other words, leaders need to keep their feet fully grounded in reality.  They also need to understand that their feet are made as much of clay as the next person’s.  When power corrupts and pride prevails, however, this is far easier said than done.

One strategy that can help corporate leaders to remain rooted rather than “rooted” is to remain sceptical of the latest buzzwords and jargon.  The old game of “Buzzword Bingo” for non-managers to use during boring, jargon-laded meetings had more than an dollop of truth.  Words and phrases like leverage, core-competence, synergy, and value chain were progressively bent out of all shape, becoming hollow excuses for meaningful communication.  Similarly, picking the low-hanging fruit and stepping up to the plate are still bandied around with joyful abandon.

There is another beauty I’ve extracted from today’s Sun-Herald.  The Premier of NSW receives public sector correspondence on pink paper.  Where the Premier wishes to receive a departmental briefing, a bureaucrat had decided to publish such requests on paper of a lime colour.  Thus,

When pinks are prepared in response to limes, the lime must be clipped in front of the pink.  The pink, with lime, should be submitted as usual…Once approved, the executive officer ODG wil copy and deliver the lime to the appropriate member of the Premier’s office.

Before those of us outside the goverment sector chuckle too loudly at such bureaucrap, consider some of the rubbish being written by HR professionals (recently lambasted by Leo D’Angelo Fisher in Business Review Weekly):

Once attracted, if emplloyees are not transitioned into a seamless, tailored, proactive and evolving retention program, employers will not retain their team members in the long-term…Our approach to employee retention is based on a fluid employer branding strategy, which is open to change and adaptation pending ongoing feedback from our team members.

Why does anybody continue to write such nonsense?  Because it keeps them in a job.  Because information is power.  Because manure-heaps of unclear sentences provide rules and guidelines and policies and procedures that can cover nicely cover one’s arse at the first sign of trouble.  And, in a corporate environment in which odd-balls can take offense or sue or complain at the first sign of conflict, such reasoning contains a certain logic.

That doesn’t excuse it, however.  Whilever corporate crap continues to flow, customers are queueing and our most critical external relationships are flagging.  Inefficiencies are mounting, productivity is plummeting and, as time passes, moving against this indefensible nonsense becomes more risky and less appealing.  As we move into more challenging economic times, it will thus take smart, tough leaders to sort this out.  Fiefdoms will need to be dismantled and those whose work is no longer moving the organisation forward will require redirection, assuming that they can provide future organisational value.  If not, their worth must be questioned.

Do it.  Unless you do, your organisation will drift through the coming recession with less flexibility and resilience than ever.  Challenging periods actually provide the best possible time for the style of leadership that redirects and renews.  The starting point is to cut to the chase and confront the crapsters with brutal directness.  It also demands that we confront ourselves with our own crapster tendencies.  How often do we resort to the inane and the cliched when avoiding the hard work of meaningful communication? 

As always, real change starts with each of us.  Only then can we expect anyone else to take our views seriously.

The Credit Crisis and the Confidence of Gen Y

As I write, it is constantly being stated that there is a crisis of confidence in our markets.  The global financial system is in tatters, our currency is dropping like the proverbial fly, and consumer confidence is progressively sliding.

So much of our society, and indeed our daily lives, depends on confidence.  We have justifiable confidence that our vehicles will take us safely to work and justifiable confidence that our assets are safely protected by our insurance policies if we arrive home and find our homes ransacked.  Until now, we’ve had confidence that our jobs will be safe into the future and, if not, that we can find a new position quickly if push really comes to shove.

We’ve got to possess this confidence if we are to continue moving onwards and upwards, whatever the situation.

Yet, we live in a world where many have yet to face the crisis of self-confidence that inevitably arises when the foundations of our lives are radically unsettled.

Generation Ys (born between 1977 and 1995), now aged 13 to 31, have not yet faced global economic turmoil of the kind confronting us now.  Gen Ys have yet to experienced widespread job loss and the subsequent impacts of long-term unemployment, nor have they been threatened with the loss of their cash or their homes.  In addition, they have been raised in an era in which the creation of self-esteem has been as vital an element of the educational curriculum as has reading and writing.

This may not be a bad thing.  If high levels of self-esteem turn out to buffer Gen Ys against the negative shocks of career or lifestyle changes, it will be viewed as a powerful response to the anti-esteem philosophies that dominated the lives of their generational predecessors.

If, on the other hand, self-esteem turns out to be a very different cognitive dimension than resilience, its very brittleness will be quickly exposed as we enter a more challenging era.

In recent years, I have been amazed at the self-confidence and faith in the future of my MBA students.  I have long been amazed, and also puzzled, by the self-confidence of the Gen Ys as they have exited the boardrooms of Donald Trump’s or Alan Sugar’s The Apprentice, whether in the USA or the UK.  Time and time again, young executives first humiliated and then eliminated have expressed an incredibly high level of confidence in themselves as they sit in the taxi and ride home.  Rarely is any regret expressed for mistakes made on the show.  The most often-expressed sentiment verbalised is, to summarise, that Mr Trump (or Mr Sugar) would have hired me but for (excuse listed here) ……. OR I was still the best candidate, Mr Trump (or Sugar, or my colleagues) just didn’t recognise it.

Until now, I’ve thought these folks totally delusional.  An alternative view, and one which may or may not play out in practice, is that the escalation of one’s own commitment to oneself may provide the armour from which the vagaries of the future may simply rebound as harmless arrows.

Which is it?  I think that too much self-confidence is a significant liability.  We can, unless careful, escalate our degree of commitment to ourselves and our worldviews to such an extent that it is only a matter of time before such hubris pops our bubbles.  Indeed, Donald Trump’s failure and near bankruptcy in the early 1990s owed as much to his extreme narcissism and success-fuelled perceptions of self-infallibility as it did to the global economic slowdown of the time.  Trump’s reflection on this period is that we would all do well to stay focused, maintain our momentum, and keep grounded in the changes demanded by our changing environments.

This is good advice.  I remember feeling on top of the world in 1990, about the same time at which Mr Trump hit the deck.  I was newly married, had a new home, and a great job.  Within moments, I was made redundant and faced the loss of our new home as interest rates of 18% made mortgage payments virtually impossible. 

We survived through three responses.  The first, from me, was to take part-time work wherever I could find it, whether mowing lawns or teaching part-time at the local college, alongside my wife’s employment as a teacher.  The second was that we cut our cloth to suit our budget, scrimping and saving where we could to keep the coins in our our pockets. 

The third arose when close friends, seeing our struggle, lent us sufficient funds to help us over our financial hurdles.  It was this generosity, more than anything, that now leaves me with the faith that Gen Ys will see their way through current and future crises.  They are more relationship-driven than any other generation.  They are tribal, relying on their friendships with other Gen Ys as fixed points of life while the marriages of their parents came and went and as the pace of life and of technological and cultural change accelerated.

Relationships are really a key success factor in surviving crises, alongside having sufficient self-confidence to own our personal circumstances and then responding to our situations in positive and healthy ways. 

Gen Ys are thus ready for anything that life throws their way, today or tomorrow.  More power to them.

Ethics, Shmethics…James Hardie and Me

When I was a youngster, I loved the name James Hardie.  You see, from 1979 until 1981 I was ballboy for the Parramatta Rugby League Team.  The jerseys of our premiership-winning team of ‘81 proudly bore the names Hardieflex and Hardieplank.  I retain one of these jerseys to this day.

A drive across our cities reveals that Hardies products seem to clad entire suburbs of our nation’s homes.  Their brake linings slowed and stopped cars and trucks thoughout the nation.  Yet, there were dark linings to more than the brakes, for the raw material central to the Hardie product line was the lethal substance asbestos.  In fact, the Hardie headquarters was called “Asbestos House.”  Asbestos, a fibrous silicate, was extremely popular because of the strength of each of its thousands of silica strands.

A significant story in the business pages of today’s Sydney Morning Herald reports on the court case currently brought by the Australian Securities and Investments Commission (ASIC) against several directors and executives of James Hardie Industries.  ASIC claims that the defendents were fully aware that the compensation foundation established by the company to support those who contracted cancer after working with absestos at Hardies would be woefully inadequate yet publicly stated the opposite.  Not only was their leadership approach less than ethical, it was allegedly illegal.

It reminded me of a time several years ago when, as CEO of a major industry association, I met with Hardies executives and had to consider whether to accept James Hardie sponsorship of an international conference of which I was the host. 

Here is what I said at the time:

Today I met with senior executives from a company which has been on the front pages of our newspapers for the last month.  It has achieved infamy for supplying a product which turned out to cause often-fatal serious illnesses to the workers who mined the raw material and manufactured the products using the substance.  While putting aside some money for future claims, these were massively inadequate, and the firm was subsequently and understandably hammered by a government inquiry which brought them kicking and screaming to the negotiating table.  Eventually, it agreed to fund the future costs of compensating those made sick by the substance, however by then the company’s name, image and reputation was damaged, almost beyond repair.

Why would any company wait so long to offer the levels of  compensation and the kind of compassionate response which was always going to be required?  Hadn’t they learnt the lessons of firms around the world who had become tabloid fodder for not doing the very minimally socially responsible thing?  Even companies who were not in the wrong, like Arnotts Biscuits and Herron Phamaceuticals, had shown how to handle negative publicity after their products were tampered with by idiots trying to make some point or other.  Those organisations immediately went into damage control, quickly removing their products from supermarket shelves and providing daily information to consumers and the media about their efforts to resolve the situation.  When the products were reintroduced, these companies launched substantial publicity campaigns to demonstrate their commitment to consumer service and product safety.

 I also wonder about the company’s commitment to its people.  Perhaps an obsessive focus on the bottom line led to its failure to right past wrongs, but surely the lives of the thousands of employees around the world who depend on the company for a living meant something to senior executives and its board of directors.  Then again, perhaps not.

 What I can’t understand is that some executives and their boards, although thankfully small in number, seem to be stuck in some kind of 1960s or 1970s industrial timewarp.  Although I leaned more towards a Milton Friedman style approach to social responsibility  for much of my working life than I did the more activist variety historically favoured by the Anita Roddicks and Richard Bransons of this world, this is really a no-brainer.  No company can afford the exponentially increased forensic focus of a hostile media which occurs when people make indefensible corporate decisions.  No company can sit calmly by while its years of commitment to an industry slide messily down the ethical drain.  Yet, it still occurs, all too regularly.

What can we draw from this?  I’ll go out on a limb on this one.  Since we live in a world of moral relativism, a world characterised by spin and subjectivity, we cannot be surprised when individuals and companies pursue naked self-interest rather than virtue and honour.  Doing the right thing in today’s environment appears to be defined as doing the right thing firstly by oneself, secondly by one’s team and company, thirdly by one’s industry and its culture and, running a distant last, doing the right thing according to the mores and values of the surrounding community which, by the way, sustains the enterprise in the first place. 

Charles Colson once said that we live in a world of “men without chests”, a world in which there is no tempering process between the rational thoughts of the minds of individuals and the potential for darkness and misdeeds which resides in their hearts.  If this is so, it will take a whole lot more than enlightened self-interest to avoid the corporate sins of the future.

In his excellent book, Asbestos House (Scribe, 2006), Gideon Haigh concludes that the sins of the Hardie fathers were far more those of omission than they were of commision.  It was what they didn’t do, but could have, that led to decades of inaction and insensitivity.

One of the upsides of our more-transparent society is that these kinds of dark secrets are exposed for the inexcusable sins that they are.  Ethical leadership demands a style of leadership that keeps no skeletons in the cupboard.  To the contrary, it demands leadership that opens all parts of our organisations to the light, consistently and transparently.

And what of our Hardies sponsorship?  My board took the view that those companies who were without sin should cast the first stone.  Since none were blameless, we should and did accept the funds of this corporate wrongdoer.

Deserved? Senior Executive Pay Today.

In 2000, Jack Welch earnt more than $150 million during his last year as CEO of GE.  His firm had delivered shareholder returns averaging more than 26% year-on -year for his final 6 years in the role.  GE’s performance placed it in the top 20% of the S&P 500.

Jeff Immelt is Welch’s successor.  In the first 6 years of his reign, the returns to GE shareholders have averaged 0.03%, placing it in the bottom 25% of the S&P 500.  As best as I can tell, Immelt’s remuneration, which includes generous stock options, is in the range of $15 to $25 million a year.

This brings us to the elephant in the room.  Welch has long been called one of the world’s great business leaders.  Nonetheless, he spent his early years as CEO, the “neutron Jack” era, blowing the GE structure to pieces before beginning its recreation.

Writer Rob Walker noted in 2001 that our reliance on shareholder returns as the indicator of leadership success may be highly misleading, since investor confidence across the board significantly blew out US price-to-earnings ratios during the 1990s, adding billions to company values without parallel improvements in the underlying profit-creation capacities of these firms.  Further, a reading of GE’s history over the last century reveals a consistent pattern of excellent returns from one decade to the next.  You can find Rob Walker’s excellent article at http://robwalker.net/html_docs/welch.html  In his own books, Welch is also generous in his praise for his predecessor, Reg Jones, further evidence of the foolishness of the view that, “In the beginning was the Word, and the Word was Jack….”

In Australia, the Macquarie Bank is being increasingly criticised for its approach to executive pay.  The Mac Bank model relies on the purchase of infrastructure assets such as airports and toll roads.  The fees paid by users of these facilities are fed into profit streams in the normal manner, however the infrastructure is sold on to investors via other Mac Bank funds.  Their contributions pay management fees to Mac Bank, thus keeping the bank’s executives in the financial clover.  In my most recent textbook, I noted that the CEO of Mac Bank had received more than $21 million in remuneration in 2005-2006, while the company’s overall salary bill for its 5,700 employees resulted in mean wage of $186,000 per employee (including the assistants and office juniors and mail boys – that’s mean but not so mean!).

Here is my bottom line.  Capitalism depends on the generosity of its stakeholders for its continued existence.  Capitalism’s stakeholders include the punters with mortgages and weekly rent bills who work hard for $15 or $18 or $25 an hour.  Their ability to buy houses and pay rent has rarely been lower than it is today.  Why?  Easy credit, the world tells us.  Why easy credit?  Because bankers being paid ridiculously high amounts of money to return ever-increasing levels of profit invented various houses of cards that were denoted as “derivatives”, “hedge funds”, “securitisation mechanisms”, and “naked short selling”.

The globe’s scarcest resource right now is not credit.  It is virtue. 

Virtuous behaviour is behaviour with a conscience.  It is behaviour that transends today’s short-termism and instead incorporates those values that are forever important and forever relevant….generosity of spirit, generosity of wealth, generosity of both heart and mind.  In summary, generosity within the disciplines of humility and unselfishness.

Truly great leaders, in every industry, possess this generosity in spades.  Jim Collins called them “Level 5 Leaders”, but wondered if there was any means of developing such leaders since those he studied had forged their humility and strong will in the crucibles of personal crises or while at war.

Real leadership of this kind can indeed be developed.  The stories of many of the world’s great comebacks from failure and disappointment (George Foreman, Dion di Mucci, Dave Dravecki) begin with a moment in which we see ourselves for the narcissists we tend to be.   We may need a movement of the spirit, however, to affect real personal change.

While self-confidence is an absolute necessity for corporate success and indeed success, in the world’s terms, in most endeavours, unless this self-confidence is couched in the cradle of humility, it all too easily becomes hubris.

Hubris is the enemy of virtue.  Without virtuous behaviours, however, we are all shot ducks.

It is virtue we need right now, a new “reformation of manners”, to recall a similar movement from English history in the 17th and 18th centuries.

Reformations always begin with individuals.  That’s you, and that’s me.  Virtuous behaviour begins with us.  It’s time to start with ourselves, becoming the exemplar that spreads.

The Twisting Road of Leadership – Welcome to StratLeadership

I hope that you’ve found my website because you think it may not be “just another rah-rah leadership site”.  You know the kind, the sites that make you feel inadequate because no matter how you measure up, you’re just not Jack Welch or Bill Gates or Richard Branson or Gail Kelly.  You’re you. Sure, you try to think positively, move your company in new directions, and find that piece of cheese which someone apparently moved on your behalf.  But you do it in your own style and your own way.

It’s okay to learn about these leaders, to admire and even to learn from them, but you and I are not them and need to also create our own way of doing things.  In fact, it’s critical that we do.
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