Thursday, December 24, 2015

How to Justify a Breathtaking CEO Pay Ratio

By Theodore Kinni
strategy+business, December 22, 2015

In August 2015, the U.S. Securities and Exchange commissioners voted 3-2 in favor of a new rule that requires public companies to report their CEO’s total annual compensation as a ratio to their employees’ median pay. The SEC didn’t rush into this decision. Far from it. The vote came five years after the passage of the Dodd-Frank Act, which mandated the rule, and two years (and 280,000 public comments!) after the SEC announced that it would consider complying with that mandate. Moreover, the rule has plenty of loopholes. For instance, it doesn’t apply to companies with annual revenues below US$1 billion. And it doesn’t take effect until 2017.
The delay and controversy were blamed on a number of plausible causes: that it was a ploy by unions to gain negotiating leverage; that it didn’t measure anything of consequence; that it would cost too much to implement. But it’s hard not to believe that the real reason corporate lobbyists and leaders weren’t enthusiastic about a swift adoption of this rule was fear. As the Economic Policy Institute has shown, the ratio of CEO pay in major companies to the median pay of their employees is somewhere around 300:1. Formally reporting such ratios in stark terms would likely add fuel to the already roaring fire surrounding economic inequality. In 2014, according to a Pew Research Center survey, the people of Europe and the U.S. pegged economic inequality as “the greatest danger to the world.” (In 2015, inequality dropped a ranking or so because ISIS took the top spot.)
The leaders who fret about class warfare might want to add Harry G. Frankfurt’s slim book, On Inequality(Princeton University Press, 2015), to their reading lists. Frankfurt is a professor emeritus of philosophy at Princeton University. He is also the author of On Bullshit (Princeton University Press, 2005), which topped the New York Times bestseller list a decade ago and opened with this provocative line: “One of the most salient features of our culture is that there is so much bullshit.” His definition of this barnyard epithet: a widespread tendency for people to use words and language to obfuscate.

In his new book, which contains adapted versions of two previously published papers, Frankfurt argues that much of the discourse around economic inequality fits the bullshit bill. He finds nothing morally objectionable about economic inequality per se. “The egalitarian condemnation of inequality as inherently bad loses much of its force, I believe, when we recognize that those who are doing considerably worse than others may nonetheless be doing rather well,” he writes.
On the other hand, Frankfurt also finds nothing inherently beneficial about economic equality. “Inequality of incomes might be decisively eliminated, after all, just by arranging that all incomes be equally below the poverty line,” he writes. “Needless to say, that way of achieving equality of incomes — by making everyone equally poor — has very little to be said for it.”
This might make On Inequality sound like a straw man argument for astronomical CEO salaries. But Frankfurt does not let companies off the hook. Rather than strive to eliminate inequality, he says we should focus on eradicating poverty. He proposes a “doctrine of sufficiency,” which asserts that we have a moral obligation to see that everyone has “enough” money. Frankfurt defines “enough” as a standard that allows people to live a happy life or, at least, one in which their unhappiness cannot be alleviated by more money.
Indeed, what does it matter if some employees have more than others, as long as all employees have what they need? Isn’t this the reasoning behind ideas like the $15 minimum wage? Fast-food workers across the U.S. aren’t going on strike for hikes to CEO-level pay. They simply want to earn enough from their work to live above the poverty line.
On Inequality contains plenty of fuel for flameouts on both sides of the economic inequality debate. And I suspect that Frankfurt would welcome them. (Certainly, they could help him sell lots of books.) But I came away from this volume thinking that any CEO who could run a profitable business that also provided a reasonable living for each of its employees would richly deserve a breathtaking pay ratio.

Saturday, December 19, 2015

Rita Gunther McGrath’s Required Reading

by Theodore Kinni
strategy+business, December 9, 2015
When Rita Gunther McGrath studied the 4,793 publicly traded companies with market capitalizations of US$1 billion or more, she could find only 10 that had achieved at least 5 percent annual growth in net income from 2000 to 2009. What distinguished this handful of companies whose performance had weathered the biggest bust since the Great Depression? They acted as if, as McGrath told me in a 2014 strategy+businessinterview, “whatever they were doing today wasn’t going to drive their future growth.”
This finding dovetailed nicely with the Columbia Business School professor’s conviction that competitive advantage in many sectors was becoming increasingly transient — and that companies planning to capture such an advantage and ride it into the sunset were in for a jarring trip. McGrath made a compelling argument for this thesis in The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business (Harvard Business Review Press, 2013), which Walter Kiechel chose as the best strategy book of that year.
McGrath was delving into the challenges of attaining competitive advantage long before the study. In collaboration with Ian C. MacMillan of Wharton’s Sol C. Snider Entrepreneurial Research Center, she also wrote The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertainty (Harvard Business School Press, 2000),MarketBusters: 40 Strategic Moves That Drive Exceptional Business Growth(Harvard Business School Press, 2005), and Discovery-Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity (Harvard Business Press, 2009). 
I asked McGrath, who is ranked among the top 10 global gurus on theThinkers50 list, what books — aside from her own — she recommends to executives determined to cope with the fleeting nature of competitive advantage. Here’s her reading list.
The Little Black Book of Innovation: How It Works, How To Do It, by Scott D. Anthony (Harvard Business Review Press, 2011). Too often, companies invest in the trappings of innovation — boot camps, workshops, the occasional visit to Silicon Valley, skunkworks — instead of the actual work of innovation. In this readable, practical book, Anthony draws on years of consulting experience to explain how to make innovation actually happen. Chockablock full of real stories of successes and failures, red flags and remedies, the book is a great primer for anyone tasked with creating new products, services, and platforms in their organizations.
American Icon: Alan Mulally and the Fight to Save Ford Motor Company, by Bryce G. Hoffman (Crown, 2012). Hoffman’s riveting reportage describes how Mulally, an auto-industry outsider (he was a longtime Boeing executive) successfully transformed Ford’s toxic culture and losing product strategy in the late 2000s. Mulally’s financial wizardry erased billions in debt and his attention to both the hard stuff (eliminating brands, streamlining structures, moving resources to where they were needed) and the soft stuff (changing the culture, creating a One Ford leadership team, honing the values, making hard HR choices) set the company up to exit the Great Recession in fine form. Ford was the only member of the Big Three that didn’t need a bailout. Every page of the book has valuable lessons for any leader seeking to create a stellar organization and culture in today’s transient advantage economy. 
Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, by Alexander Osterwalder and Yves Pigneur (Wiley, 2010);The Four Steps to the Epiphany: Successful Strategies for Products That Win,by Steve Blank (K&S Ranch Press, 2005). I suggest reading these two books together because they have taken the planning and design of new ventures to a higher level. They provide a set of bedrock concepts and a methodology for lean entrepreneurship. Their authors will help open your mind to the possibilities of different business models, to new ways of sequencing investment, and to nurturing entrepreneurship within large, established companies. No senior executive responsible for growth should be without this two-piece toolkit. 
The Hard Thing about Hard Things: Building a Business When There Are No Easy Answers, by Ben Horowitz (HarperBusiness, 2014). Every chapter of Horowitz’s no-holds-barred book offers hard-won lessons for the CEOs of startups and rapid-growth tech companies. Unlike the pablum that many business book authors deliver, this entrepreneur and VC (Horowitz is a co-founder of Silicon Valley firm Andreessen Horowitz) refuses to sanitize the story: for instance, he admits that CEOs often don’t have great choices and, instead, must find the least-worst option to take their companies forward. Most endearing is Horowitz’s inclusion of details from his personal life in the book. This is as close to the whole story as you can get.