More From the Bears

Another thoughtful and provocative ecomonic analysis site. These ideas run in tandem with what I posted just below. As I say, I am by nature an optimist, but these underlying economic dynamics are hard to ignore (emphasis added):

My views – elaborated in several ways since last October- are still, even after the recent market turmoil, well out-of-consensus. There is still out there the wishful-thinking view that the current turmoil is a temporary blip and, thus, a buying opportunity rather than the beginning of a bear market. Consensus still argues that the US will grow at 3% in Q2 and for the rest of the year; and that global economic growth will remain sustained. I beg to disagree on all fronts. Let me elaborate my bearish views (that have not changed much since last October; so no Monday morning quarterbacking here).

I have been saying for a while that in 2006 Three Ugly Bears will scare the growth Goldilocks in the US and abroad. The Three Bears are: first, higher inflation –both core and headline – leading to higher interest rates in the US and the rest of the world; the era of cheap money feeding asset bubbles is over. Second, an oil and commodity price shock that is stagflationary for both the US and all other oil importing countries. Third, the fizzling out – to avoid saying bursting – of the housing bubble in the US and in many other economies where this bubble fermented for too long via the drug of easy liquidity. The US consumer is altogether shopped out, over-indebted, with negative savings and now bombarded with high oil prices, fluttering housing and rising short and long rates. The poor consumer also suffers from a slumping labor market generating a pathetically low number of jobs, flat real wages and suffering of the redistribution of income from labor to capital (as the profit share of the economy has surged); on top of it all, the equity market downturn has negative wealth and consumer confidence effects. Thus, real consumption growth in Q2 will be a meager 2% and, since consumption is 70% of consumption [sic - I think he means GDP], Q2 growth will be at best 2.5% and falling towards 2% - if not lower – by Q4.

Hat tip to my friend, attorney Hale Stewart.

Economy Singin' the Blues?

I highly recommend the blog, The Big Picture. In five paragraphs as part of a larger post, they capture what's going on now in the US economy, and it ain't pretty. In the world of blogs, it's a trite cliche to say "read the whole thing," but still, sometimes it applies:

Let's review: Why might we think these numbers make so little sense to begin with? We know (at least those of us who have been paying attention) that the economy has been unusually Real Estate dependent this cycle. We have seen a vastly disproportionate amount of new job creation come from the Real Estate complex (including agentsm, mortgage brokers, etc.) We also know that the Housing market has cooled dramatically -- those of us paying attention also saw the beginnings of this as long ago as August 2005.

Further, we know that by just about every historical measure, this has been the weakest job creating recovery cycle in the post WWII era. We have previously noted that the unemployment rate is down due to NiLFs: Not In Labor Force. Barron's described it as "the incredibly shrinking labor force, a phenomenon that's largely responsible for the deceptively modest unemployment rate." The labor participation rate touched is near 15-year lows.

Using other measures that include these slackers, unemployment is actually much higher than the reported 4.6%: The well respected Liscio report noted the actual number could be much higher of a jobless rate. If one includes the so-called marginally attached workers and part-timers who really want to be working full time, the unemployment rate weighs in at a formidable 9.4%.

Jobs that we are creating by and large have been paying less and offering weaker benefits than the jobs they have replaced. (This is a factor in the negative savings rate, but let's save that discussion for another time). One notable exception to the weaker pay has been the home construction industry. These jobs have been relatively high paying. The sector has been a major source of new job creation, from real estate agents to mortgage brokers to Loews and Home Depot.

It should come as no surprise that as the entire sector has cooled, so too has the jobs creation associated with it. We now have the biggest inventory of new and existing homes for sale we have seen in nearly a decade. Realtors have said that home sales are now a 'buyer's market'. New home builders are witnessing the rise of a Ghost Housing Market, where specualtors walk away from their down payments, rather than close on a property which has declined significantly in price.

Tip to this blog via email from my friend Hale Stewart.

More Gloomy News

First up, is NASDAQ crashing?

The NASDAQ 100 has been crashing since May 8th, but has anybody noticed? Since the NDX topped at 1,721 on May 8th, three days before our last Hindenburg Omen, the NASDAQ 100 has crashed 15.94 percent. It is down nearly 18 percent since its January 11th top, and is down 12 percent for the year.

Then, on the heels of my post on Friday, the New York Times weighed in with this over the weekend:

July 29, 2006

Housing Slows, Taking Big Toll on the Economy

By VIKAS BAJAJ and DAVID LEONHARDT

The housing industry — which largely carried the American economy through the tribulations of the 2000 stock-market crash, a recession and climbing oil prices — has lost its vigor in recent months and now has begun to bog down the broader economy, which slowed to a modest 2.5 percent growth rate this spring.

That was a sharp comedown from the 5.6 percent growth rate of the first quarter, the Commerce Department reported yesterday, caused in part by the third consecutive quarterly decline in spending on houses and apartment buildings, after several years of rapid growth.

“It hasn’t slowed down a little bit — it has slowed down a lot,” said Doug McCraw, a developer who has scrapped his plans for a 205-unit condominium tower in a neighborhood just north of downtown Fort Lauderdale, Fla. “Anybody who did not have a shovel in the dirt has chosen to wait till the market settles.”

The housing slowdown is perhaps the clearest effect of the Federal Reserve’s two-year campaign of raising interest rates in a bid to tap the brakes on the economy and reduce inflation. That campaign has been largely successful, with the decline happening gradually while other parts of the economy, mainly the corporate sector, pick up much of the slack.

“Housing is going from being far and away the most important contributor to growth to being a measurable drag, and it’s happening gracefully so far,” said Mark Zandi, chief economist of Moody’s Economy.com, a research company. “But there’s now a growing and measurable risk that things don’t go according to plan.”

The biggest risk, economists say, is that the optimism that fed the real-estate boom will reverse dramatically. The number of homes for sale has surged in recent months, particularly in once-hot markets, like the Northeast, Florida, California and parts of the Southwest. As builders delay land acquisition and construction it could reduce employment and spending in the coming months.

More broadly, just as rising housing prices during the boom added to Americans’ sense of wealth and well-being — encouraging them to spend more on a variety of goods and services — the reverse could dampen sentiment and lead consumers to pull back on their purchases.

While the fate of housing prices has received far more attention recently than real estate’s role as an engine of job growth, the sector has also become one of the country’s most important industries. Residential construction and all the activity that swirls around it — mortgage lending, renovations and the like — account for roughly 16 percent of the economy, making it the largest single sector, slightly bigger than health care.

For much of the last five years, housing — along with health care — was also one of the only reliable generators of jobs. From the start of 2001, when the Fed began cutting its benchmark rate to steady a faltering economy, until early last year, the housing sector added 1.1 million jobs.

The rest of economy lost 1.2 million jobs over the same period, according to an analysis by Moody’s Economy.com.

Housing continued its rapid growth last year, and other industries began hiring in far greater numbers than they had been, creating the healthiest national job market since 2000. In the last few months, though, three pillars of the housing sector — homebuilders, mortgage lenders and real-estate agencies — have stopped adding to their payrolls, and overall job growth in housing has begun to slow.

In South Florida and Las Vegas, where contractors until recently complained that they could not find enough workers to begin work on many projects, developers are scrubbing plans for new condominiums because they cannot sell enough units to get construction financing.

Mr. McCraw, the developer in Fort Lauderdale, said slowing condo sales and a 35 percent jump in the cost of construction materials like steel, copper and concrete convinced him to shelve his project. He is now considering building office space, where demand remains strong, or simply waiting for two years.

In Las Vegas, cranes are still busily at work on new casino projects but dozens of gleaming condominium towers that were slated to sprout up a few miles from the Strip are not likely to be joining the city’s neon-bedecked skyline soon. John Restrepo, a real estate consultant in the city, estimates that only about 7 percent of the 60,000 condominium units that were announced and under construction as of the first quarter of the year are actually being built today.

Among the high-profile projects that were scrapped is Las Ramblas, an 11-building, $3 billion condominium and hotel complex being developed by the Related Companies and Centra Properties and had investors like the actor George Clooney.

“The period of irrational exuberance we saw in ’04 and ’05 and the gold rush fever has gone away,” Mr. Restrepo said.

The Commerce Department said yesterday that housing investment fell at an annual rate of 6.3 percent last quarter, after dropping less than 1 percent in each of the two previous quarters. It grew at roughly 9 percent a year during the previous three years.

That sound you hear in the background is just the mortgage lenders knocking wood and buckling down. Soon enough, when the less sophisticated of the many recent homebuyers see their ballooning ARMS force them from their homes, selling into a down market, those same mortgage lenders may not want to answer unscreened phone calls from former clients for a while.

Let's hope the worst does not happen: think happy thoughts!

Stormclouds on the Economic Horizon

I'm an optimist by nature. I really am. But I'm also not a fantasist, and I'm getting much more sensitive to what appear to me to be delusional bouts of happy talk in society and the markets.

Is anyone here old enough to remember the nasty word, "stagflation?"

Check this out from the Associated Press today (emphasis in bold added, see commentary below):

Economy Slows Sharply, Inflation Heats Up
Friday July 28, 9:57 am ET
By Jeannine Aversa, AP Economics Writer Economy Slows Sharply, Inflation Heats Up in 2nd Quarter, Commerce Department Says WASHINGTON (AP) -- The economy's growth slowed sharply in the second quarter, logging just a 2.5 percent pace as consumers tightened their belts and spending on home building nose-dived. Inflation, however, shot up.

The latest snapshot of gross domestic product released by the Commerce Department on Friday showed that the overall pace of economic activity in the April-to-June quarter was less than half that of the January-to-March quarter, when the economy zipped along at a 5.6 percent annual rate, the fastest in 2 1/2 years.

Gross domestic product measures the value of all goods and services produced within the United States and is considered the best barometer of the country's economic standing.

"The economy has significantly throttled back but inflation pressures are developing more fully," observed Mark Zandi, chief economist at Moody's Economy.com

On Wall Street, though, stocks rallied on the hope that slowing growth would convince the Federal Reserve to take a break from raising interest rates. The Dow Jones industrials were up 84 points and the Nasdaq gained 25 points in morning trading.

The second-quarter's performance -- which reflected the bite of high energy prices and rising interest rates on people and businesses as well as a cooling in the once red-hot housing market -- was weaker than the 3 percent pace analysts were forecasting.

The 2.5 percent pace was the slowest since a 1.8 percent growth rate in final quarter of 2005, when the economy was suffering fallout from the devastating Gulf Coast hurricanes.

Even though the economy cooled in the second quarter, inflation heated up.

An inflation gauge closely watched by the Federal Reserve showed that core prices -- excluding food and energy -- jumped at a 2.9 percent annual rate in the second quarter -- far outside the Fed's comfort zone. That was up from a 2.1 percent growth rate in the first quarter and marked the highest inflation reading since the third quarter of 1994, when core inflation rose at a 3.2 percent pace.

The inflation reading was taken before the latest run-up in energy prices. Oil prices hit a record closing high of $77.03 a barrel on July 14. Gasoline prices also have marched higher, topping $3 a gallon in many areas.

In a separate report from the Labor Department, employers' costs to hire and retain workers picked up in the second quarter, a development that also could raise some inflation concerns.

Compensation costs -- including wages and benefits -- rose by 0.9 percent in the April-to-June period, up from a 0.6 percent increase in the first quarter. Economists were calling for a 0.8 percent rise.

Although Federal Reserve Chairman Ben Bernanke said he is concerned about rising inflation, he told Congress last week that the Fed believes moderating economic activity will eventually lessen inflation pressures.

That assessment raised hopes on Wall Street that the Fed might take a breather in its two-year-old rate-raising campaign at its next meeting, on Aug. 8. Some economists, however, continue to predict that rates will be bumped up again at the August meeting to ward off inflation; after that, they think the Fed may move to the sidelines.

The report comes as President Bush is getting low marks from the public for his handling of the economy, according to a recent AP-Ipsos poll.

With energy prices and borrowing costs rising, consumers turned cautious in the second quarter. They boosted their spending at just a 2.5 percent pace, down from a 4.8 percent growth rate in the first quarter. Much of the weakness was in consumers' appetite for big-ticket goods, such as cars and appliances.

Businesses also tightened the belt.

Spending on home building was cut by 6.3 percent in the second quarter, the deepest dip in nearly six years -- since the third quarter of 2000. Rising mortgage rates are clipping demand.

Businesses sliced spending on equipment and software at a 1 percent pace, the first cut in just over three years.

Government spending also was more subdued, growing at a pace of just 0.6 percent in the second quarter, compared with a 4.9 percent growth rate in the first quarter. The federal government cut spending in the second quarter, while state and local governments boosted spending.

As the economy has moderated, so has job creation.

For the April-to-June quarter, employers added an average of 108,000 jobs a month, the government reported earlier this month. That's down from the average of 176,000 a month for the January-to-March period.

Along with the latest GDP report, the government issued annual revisions that showed economic growth was slightly less than previously estimated for 2003, 2004 and 2005. The main reason for the downgrade: business investment in computer equipment and software wasn't as strong as previously thought.

As a result, the economy last year grew by 3.2 percent, rather than 3.5 percent. In 2004, economic activity expanded by 3.9 percent, instead of 4.2 percent. And in 2003, the economy's growth was 2.5 percent, versus 2.7 percent.

The revisions also showed that core inflation rose by 2.1 percent for all of 2005, a tad higher than the 2 percent reading previously estimated. Core inflation for 2004 was unchanged at 2 percent but was pushed up a notch to 1.4 percent for 2003.

Growth is becoming more anemic and prices are going up. This comes on an economic foundation in the US where middle class earnings have remained flat in real terms while the highest income brackets have accumulated wealth to a degree not seen since the Gilden Age in American history. I'll have to link to the data on that in a future post; I don't have time to get it right now.

Oh, I put that third quarter, 2000 in bold for a reason: that was just before the last recession we experienced here in the U. S.

When you look at our national debt and fiscal irresponsibility, coupled with the very real threat of a not-so-soft landing in home value deflation, and the stratification of income across the U. S. population, you have the conditions for potentially major realignments in politics and culture, and therefore on regulations on business. Don't shoot the messenger: the political polls tell much the same story.

The Fed is in a bind on interest rates, because there is price pressure upward, fed in part by energy costs not about to go down and global instability in the Middle East. If the Fed raises rates, given slow growth and the threat on home values (so many ARM's out there financed the housing boom, ready to cut lose with new rates), many people can find themsleves priced out of their mortgages, forced to sell in a down market. If the Fed ignores inflationary pressures, prices and input prices may continue to rise.

Watch consumer confidence, because the wealth effect created by rising home vales has fueled much of our apparent growth these last few years. If that evaporates, look out. Oh, and one more thing: new job numbers are usually under the baseline of 150,000 per month, not over, and that does not account for the very large historic increase in the number of people not even in the labor market anymore. They're not counted in the unemployment figures, but they still exist. And even the new jobs created tend not to be jobs with security, health insurance or other benefits of the caliber the middle class anjoyed during the twentieth century post-war boom period, when wealth was far more evenly distributed across the population.

This here optimistic bull has become more than a bit bearish. As I have time in the future, I'll link to more source material to illustrate the points I'm making here. As this is generally a leadership blog and a business blog, not an economist's blog, my focus on these matters is secondary. Still, I try to stay informed.

SEC Announces New Exec Compensation Rules

The new rules include greater depth of disclosure of the value of stock options, in the wake of the backdating options scandals (that's fraud, for those keeping score at home).

I'm of two minds on this. On the one hand, I understand and actively preach about the difference in productivity and organizational performance top leaders make. On the other hand, I'm of the studied belief that we don't actually reward leadership merit and performance as much as we reward loyalty and longevity among those of us with strong connections. We talk a good game about merit in our executive ranks, but we usually talk about it for other people, particularly the higher we are on the Fortune 500 ladder. Some of us are fat cats who desperately need a diet. We're not entitled to multi-million dollar incomes just because we've been around a while and have gone to the right schools.

This is from today's Wall Street Journal (online subscription required):

SEC Issues Rules
On Executive Pay,
Options Grants

Backdating Scandal Leads Agency
To Force Increased Disclosure;
Other Perks Will See Light of Day

By KARA SCANNELL and JOANN S. LUBLIN
July 27, 2006; Page C1

For the first time since the options-timing scandal mushroomed this year, federal regulators laid out requirements directing companies how to disclose their grants of stock options.

The new rules won't bar corporate boards from giving executives options at propitious times, but would instead shine a spotlight on such practices through increased disclosure. The guidelines are part of a sweeping overhaul to executive-pay disclosure the five-member Securities and Exchange Commission approved yesterday in a unanimous vote.

The rule takes effect in proxies filed by companies whose fiscal years end after Dec. 14. It will force companies to provide a total compensation figure for each of its top five executives. That number can be used to compare compensation across companies and industries.

SEC Chairman Christopher Cox has made revamping executive-pay disclosure a priority, so investors have a better handle on perquisites, deferred compensation and stock-option grants, payments that have been shrouded in fine print or not disclosed. To win the support of business groups, though, he has been careful to avoid the appearance of trying to set executive pay.

Some groups were hoping the SEC would go further, and had lobbied the SEC to require companies to give shareholders an advisory vote on executive pay.

"We're giving shareholders the information, but we're not giving them any power to take action on that information," said Richard Ferlauto, director of pension-investment policy for the American Federation of State, County and Municipal Employees in Washington. Investors, he added, haven't gained any power "to moderate pay that's not deserved."

[snip]

The SEC is investigating about 80 companies that may have "backdated" or timed the option grants to executives to benefit their payout. Options offer the right to buy stock at a specified "exercise" price, usually equal to the market price on the date the options were granted, so backdating them to a date when the price was low makes them potentially more valuable.

Last week, federal authorities filed civil and criminal securities-fraud charges against the former chief executive of Brocade Communications Systems Inc. and another executive, while a third faces civil charges. The three are accused of boosting the potential value of the options and concealing millions of dollars of compensation expenses from shareholders.

Companies will now be required to include a table with the value of the options on the date of the grant, and the closing market price on that day, if it is greater than the exercise price.

The reason for this table is to highlight any attempt by companies to give executives options priced below the value on the date they were granted. If there is any difference, companies will need to explain how they arrived at the exercise price. The murky disclosure on this topic is one issue that has arisen in the recent probes.

"As a result, compensation practices are going to change," predicted John Olson, a senior partner at Gibson, Dunn & Crutcher in Washington who advises corporate boards. "You will see fewer option grants, less out-of-cycle option grants and more careful monitoring by boards and compensation committees" of option usage, Mr. Olson said. SEC officials "are using a disclosure standard to impact corporate behavior."

For instance, he said, certain boards may restrict their CEOs' authority to dole out sizable option awards to new key employees below senior management, and increase board involvement in such decisions.

The intensified focus on option-award timing also may persuade more companies to take a tougher tack on when options can be given. They will have to disclose, for instance, whether management usually gets grants several weeks before the release of quarterly earnings.

"To the extent companies didn't have a formal policy in the past, they're going to have to have one, because investors will expect that," said Mark Borges, a former SEC official who now is a principal at Mercer Human Resource Consulting in Washington.

In addition to the option disclosures, the new rule will require companies to explain in plain English the rationale behind compensation decisions. They also will need to disclose pay incentives, unless a company can demonstrate the information is confidential or competitive.

And companies will have to disclose perquisites paid to executives if they exceed $10,000 in the aggregate. The rule will also call for the inclusion of two new tables, one to disclose pay to directors and another that would require the pension and retirement benefits owed to each of the five named executives.

Fish Story: The One that Got Away

If you come home with a story about the great, big fish you caught and fought for an hour before a shark ate it on the way into the boat, you do well to have it on tape.

Smart People Can Do Dumb Things

This excerpt is from today's Wall Street Journal (subscription required). It's a nice follow up to the previous article on executives and ego.

Smart people do dumb things most particularly when their egos get in the way. Pride goeth before the fall. I see this in my negotiations consulting frequently: highly competitive people can be more intent on winning than they are in strategic good sense. That said, we all make mistakes. Some, like this one, can be expensive indeed:

Great Buyout Tactics
Don't Guarantee Success
July 26, 2006; Page C1

Tactical brilliance isn't the same thing as smarts.

When Boston Scientific swooped in to bid for heart-device maker Guidant late last year, it looked like one of the savviest moves in the recent takeover boom. Johnson & Johnson had agreed to buy Guidant and then lowered its offer dramatically as its target struggled with defects and recalls for its implanted heartbeat defibrillators.

Jim Tobin, Boston Sci's frank chief executive, explains how the deal went down this way: J&J "didn't see something other than that they could buy it for less than they agreed to pay in the first place. There was no grand strategy. That opened the door for us and we stepped in." In short, J&J executives "painted themselves into a corner."

Boston Sci, on the other hand, had a clear line of attack: "The game theory from our point of view was that they might not come back at all given that they were limited" by their low-ball bid, Mr. Tobin says.

In the view of Wall Street, J&J had bungled the negotiation badly. In December, I agreed¹, writing that the company's bidding tactics were "myopic and greedy." The argument went that now Boston Sci either would win Guidant or force J&J to pay more and look foolish while doing so.

Who looks foolish now? Losing Guidant seems like the better outcome. Usually it's absurd to declare an acquisition a success or failure within the first several months. Boston Sci closed its $27 billion purchase of Guidant only in late April. But there's little question that investors have lost faith. Guidant has had more recalls since the acquisition, and growth in the defibrillator market has tapered sharply. Further, concerns about the safety of drug-coated stents -- tiny metal scaffoldings that prop open arteries -- have mounted.

J&J was either smart or lucky or a little bit of both. And its investors are much better off. Since the deal closed in late April, Boston Sci's stock has cratered 26%. J&J's stock is up about 6% in that time, and it got an unusually rich $705 million breakup fee when the deal fell apart.

Questioning the wisdom of the acquisition puzzles Mr. Tobin. Knowing then what we knew now, would he have taken over Guidant? "Absolutely," he says. "The issues that have arisen so far -- we've been in this only 90 days -- were known in due diligence in advance. They are exactly what we expected." The stock's performance, he adds, "would indicate we have surprised some people and I don't understand how that could be true."

Already Wall Street is bracing for disappointing numbers from the combined company. The company now is expected to earn $1.57 a share in 2008, down from the average analyst estimate of $1.65 three months ago, according to Reuters Estimates.

Right after it outmaneuvered J&J, Boston Sci forecast that its revenue would rise between 12% to 14%, resulting in as much as $12.3 billion in 2008 and $13.8 billion in 2009. Bernstein Research now expects that revenue will be $10.6 billion in 2008 and $11.1 billion in 2009.

Mr. Tobin concedes the defibrillator market has slowed more sharply than expected: "If there is one surprise in this, it is the overreaction of the marketplace." He expects the market to bounce back.

There are many lessons for Wall Street here:

Don't be dazzled by short-term tactical masterstrokes.

Twelve Questions Great Bosses Ask

I originally published this content in this "What's Up, Doc?" newsletter from the archives, and it retains my copyright. You can find more newsletters at this link on my business home site. Actually, there's a lot of free, "how-to" content for leaders on the site, and there's a search feature as well, on the lower right side of any page. I thought I should share it on the blog since I am so often asked about it.

I recently compiled this list to help a client, and now, all of you benefit! Great bosses get the answers to these questions and remain in close enough contact with their direct reports to know the answers and how they may change. The main point is to create an open, trusting dialogue over time with your direct reports. The value of what you learn through these questions should be obvious, but less obvious is this: by using these questions to create a trusting relationship, any boss is in a much stronger position to make corrections that stick and shape ongoing performance. At the end of the day, your effectiveness as a leader is based on your ability to help people improve performance and learn. Use this question list to guide your efforts.

1. What do you enjoy most in your current work?
As a boss, you’re not obligated to assign only work that your people will enjoy. However, it is to your advantage to know what they enjoy. They will tend to do best what they enjoy most. Peak performance is your friend.

2. What do you enjoy least in your current work?
Again, just because someone may not like a task, it may need to be done. If it’s a core part of the job, then perhaps the person is not best for that job, and should be helped to find another position. If work assignments can be distributed through a team so that people can do what they most enjoy doing without sacrificing overall quality, then you win. Take note of what people dislike doing.

3. Who influenced your career choice, and how?
You should know why and how your people came to make their career choices? By default? Out of genuine interest and passion? You also want to know the best ways to influence your people, so knowing who has influenced them in the past, and how, is to your advantage. But of course, you have a responsibility to use your understanding responsibly, not manipulatively, or against your employees’ interests. Also, before you can help people move forward with their future, you need to know how they got to be where they are today. Understanding history is important.

4. From whom did you learn to become and behave like a professional?
This is another in a series of role model related questions. If you want to have a beneficial influence on your people, for their good and the good of your organization, you have to know what style and type of personal influence works best for each of your best reports. Also, by dealing with your people as professionals, and talking about professionalism, even for jobs that are considered to be of low status, you can inspire your people to think of themselves as “professionals,” and to act accordingly. You can also open up a continuing conversation of what it means to be and act like a professional, making job performance a matter of personal pride. Of course, to talk about this credibly, you had better be consistent and worthy of imitation in your own professional comportment.

5. Who have been your primary role models? What did you really admire about them?
When you learn what your people admire about the most influential people in their lives, you learn about their values. Different traits will come up for different people on your team. When you seek to understand what motivates each of your people, you had best have insight into each person’s unique values systems. A blanket corporate approach to “values” will only go so far. Great bosses motivate their people based in individual understandings of each team member.

6. Who in your life has taught you the most? What was it about that person's communication style that really worked for you?
The first part of the question helps you to establish a connection with your direct employees as people, not just as workers. If you want to be a great boss, your people need to feel you respect and understand them as people, and not just as means to some corporate or organizational end. The second part of the question is key for you if you want to know how best to communicate effectively with each team member.

7. How do you think you learn best?
Most people don’t know how to answer this question, as they have never thought about it. So , you can offer multiple choice answers:

a. Demonstration and observation
b. Personal, independent trial and error
c. Talking, asking questions, hands-on coaching
d. Reading
e. Audio resources such as tapes, CD’s, etc.
f. Traditional classroom training or seminars (this is not likely to be the best option for anyone!)

If your job as the leader is to help your people learn and adapt as your organization grows and adapts, don’t take a one-size-fits-all approach to helping your people learn. And guess what? It’s your job to help your people learn. Great bosses are teachers, or at the very least, they make sure their people have access to the people and resources (sometimes other team members) they need to learn. It’s not primarily the responsibility of someone in a human resources or training department to see that your people are learning: it’s your responsibility as the boss.

8. How can I become more effective in helping your success?
Ask this question a lot. The first time you ask, you may get no response: not many employees really believe there will be no consequences to saying something to the boss that could be interpreted as criticism. Great bosses are more interested in being effective than in appearing to be right. Ask the question, and listen. Everyone knows you’re not perfect, so get the information you need to be better, even when the employee you ask may be difficult or unreasonable. Just asking does not obligate you to agree, but you’ll never learn about your blind spots as a leader if you shut your eyes and ears. Even unreasonable people can see things about authority figures that may need attention.

9. In ideal circumstances, how often should I check in with you just to see how you are doing?
One person’s micromanagement is another person’s support. Find out the preferred mix for each person. On balance, you should use your time as a reward for those who do well, and minimize the degree to which you are always making corrections to your weakest performers. If they are that weak, they are in the wrong job. But still, you should know what the right mix is for each team member’s style, and learn to adapt your style accordingly. Some managers are more active with oversight by nature, and some like to be very hands off. Extreme styles in either direction are problematic, and the best style is to take an individualized approach.

10. What do you feel you do best?
Always give your people a chance to brag to you. They like to have the chance to say what they think they do well. You might learn something you don’t know, and your people will derive intrinsic satisfaction from your implicit act of listening to and recognizing their strengths. Besides, no one will listen to you about areas you think they can improve if they don’t think you understand what they do well.

11. Who is the best "boss" you ever had? What about that person made him/her the best?
It should be obvious why this question is good for great bosses to ask. If another boss has been successful, it’sbest not to have to reinvent the wheel when learning to lead each of your team members. Model your style, as much as you can, based on what you hear.

12. In what ways would you like to grow more?
You can break this out in a few dimensions:

a. Technical skills or certifications?
b. Communication skills?
c. Language skills?
d. Customer service skills or conflict resolution abilities?
e. Learning how to be a better mentor or guide to other team members or new employees?
f. Listen for, but don’t prompt for, a desire to grow in management responsibilities.

Be sure you know what your people want to learn. Compare this with what you would like them to learn. Help them get the learning experiences they need, especially if you can tie extra, rewarding learning experiences with high performance. Extra learning should be a perk you offer to your best people, to reward them, to help your organization grow through its people, and to show weaker performers that the way to get your time and attention is to deserve it through their actions.

The Destabilizing Influence of the Internet

No doubt I'll be returning to this subject, because the effects of Internet access on existing power structures in business, culture, media and government are just in their beginning stages. Here's the latest manifestation of the story that I've come across, in the quoted article below.

The questions, for Western societies in particular, include how much we believe in free speech and open societies? Are open societies ultimately in the interests of business (to me that answer is a resounding "yes!")? Are we ready for the way the Internet is transforming society the way the advent of the printing press did, or will we take steps (as the U. S. telecom lobby is now doing, to create new revenue streams and protect established markets) to discriminate against access to non-obscene content, ideas, products and services that cannot pay a hefty preferred-distribution fee?

Here's the article snippet, with my bolded emphasis added (notice the home address of this site is through blogspot):

July 22, 2006
India Calls It a Technological Error, but Blog Blockade Continues
By Somini Sengupta

NEW DELHI, July 21 — After two days of angry inquiries and charges of government censorship, the Indian government took a step Thursday toward explaining a mysterious blockade on personal blogs, calling it “a technological error” that would be repaired soon.

In an e-mail message sent early on Thursday, India time, an official at the office of the Consulate General of India in New York said the order to block a handful of Web sites, including the popular blogspot.com, which plays host to thousands of personal blogs, had been prompted by the discovery of a site that contained what the official called “two impertinent pages” rife with material considered to be “extremely derogatory references to Islam.”

In an effort to stave off potential sectarian violence, the official said, the government’s Department of Telecommunications instructed Internet service providers to block access to the two pages. “Because of a technological error, the Internet providers went beyond what was expected of them, which in turn resulted in the unfortunate blocking of all blogs,” the official explained.

As of Friday, however, the sites remained blocked.

The consulate’s response came a day after a number of news articles on the matter appeared in the American news media, including The New York Times and The Wall Street Journal. It remained unclear why, despite repeated efforts, officials at the Department of Telecommunications in the capital, New Delhi, refused to provide any explanations for the blockade earlier this week.

The blockade has sown anger and confusion among Indian bloggers, who accuse the government of censorship and demand to know why their sites have been jammed.

Among the speculations that had been offered was that certain blogs could be used by terrorists to coordinate operations.

The terrorism issue gets muddy, given the tools governments are now using to sift through all digitized communications, including voice data, to flag targeted keywords for review by counterterrorist, government intelligence agencies. This has brought great controversy in the U. S., since the 4th Amendment to the Constitution requires a court order for the monitoring of citizens' interactions, and apparently this has not been happening. Internationally, there is no real prevailing law.

The potential for the abuse of surveillance power, unchecked in the hands of a state, is there for the taking. History ( ahem!) provides a clear guide on the matter. And yet, societies seek security, and commerce benefits from stability. While there's a lot of money to be made from war, perpetual war tends not to benefit anyone, including the business community. Unstable international markets and unpredictable energy prices are bad for most businesses and economies.

The systems for protecting otherwise open societies, free speech, innovation and commerce in the Internet age are not yet established. My main point, however, is that the Internet, and blogs like this one, apparently now barred in India (where I do have newsletter subscribers), are raising new questions and destabilizing established institutions and systems of authority.

This does not even begin to adress when online sites and communities form with the specific purpose to monitor and criticize a given company. That's a new headache few businesses are prepared to comprehend. Now, potentially, everyone online has the power of the "printing press," with no barriers to entry.

That's a new world order indeed.

(The image above is of Gutenberg's printing press)

Backdated Stock Option Indictments

As discussed here, we should be cleaning our own house. This story and permutations of it are not going away. There will be more stories like this:

2 Are Charged in Criminal Case on Stock Options
By Damon Darlin and Eric Dash

SAN FRANCISCO, July 20 — Federal prosecutors on Thursday filed the first criminal charges against executives in a mushrooming investigation into the possible manipulation of stock options.

Gregory L. Reyes, the chief executive of Brocade Communications until January 2005, and Stephanie Jensen, the vice president for human resources until 2004, were each charged in a criminal complaint with one count of securities fraud. Prosecutors said the two doctored the minutes of board meetings, job-offer letters and other documents to make it appear that employees were granted stock options at an earlier date, when the share price of Brocade was lower.

The Securities and Exchange Commission also filed a civil complaint, which named Brocade’s former chief financial officer, Antonio Canova, as well as the other two executives. (Mr. Canova, who resigned in December 2005, was not named in the criminal case.)

The criminal complaint is the most significant step yet by investigators in what is shaping up to be a large-scale scandal in the corporate world. Corporations — from small technology companies like Altera and Mercury Interactive to industry giants like UnitedHealth — have been ensnared in investigations into whether their executives or boards improperly granted stock options at attractive prices.

Now that prosecutors in San Francisco have fired the first volley, many lawyers said they expected a flurry of indictments to follow.

“I think we’re going to see a quick succession of cases,” said Scott S. Balber, a lawyer with Chadbourne & Parke who would not say whether any of his corporate clients had been contacted by regulators regarding the backdating of options.

I can't wait to hear the howls of outrage when more draconian regulations come. When we won't police ourselves effectively, we invite outside political forces to do it for us. That would require focusing on more than just quarterly earnings. Can we walk and chew gum simultaneously?

Chuckles: Schizophrenic Pooch

Funny, in a weird way.

Leadership and Ego

For this month's featured column, let's take a look at the complex topic of leadership and what we commonly refer to as "ego." What is a healthy leadership ego? How much ego is "too much" ego? What about not having enough ego? Here are some thoughts, based on a few hundred formal assessments and my work with coaching clients:

Confidence versus Arrogance
In English, the word "ego" is used to connote a range of things. It can be used in a positive, perhaps more clinical context ("healthy ego") and in a negative, perjorative context (too much or overbearing) "ego." This confuses the conversation and tends to confuse people's thinking on the subject. Before we even get rolling on the topic of ego, it's important to point out these divergent uses of the word "ego." In this discussion, I mean by ego a person's sense of the self and one's own capacities. A healthy ego for a leader includes a great deal of self-confidence, where confidence assumes a kind of unassumed and unexamined, default position in the world. . . a reflex one does not have to cultivate or self-consciously assert. This level of confidence in the ideal leader goes above and beyond what is common and still healthy among the vast majority of people. However, this same level of uncommon self-confidence will sometimes be perceived as arrogance by others, and sometimes they will be right. In fact, we label as "arrogance" any manifestation of self-confidence we find unpalatable. We may or may not be right in perceiving a strong ego that way. Sometimes our perceptions say more about us than they do about those we may observe.

Competitiveness and Ego
Competition is good. Leaders like to compete. They like to set benchmarks and goals for themselves and others, preferring measurement against external standards to assessments based on mere activity or effort. Confident people like to compete. On the other hand, competitive people whose drive to compete leads them to burn bridges or lack empathy for other people, perhaps even devaluing others and their talents, make poor leaders. It's not that strong leaders don't like competition, but strong leaders also possess the interpersonal awareness and skills to know how to compete in ways that do not undermine or break trust with others. Strong leaders hate to lose and may not always be graceful losers, but they learn to temper their reactions so as not to break faith with others. This is always a complicated balance to sustain for any strong leader. The bottom line is, healthy egos prefer competition and external standards through which to measure - and improve - performance.

The Desire to be "The Best"
I've never met a strong leader who did not strive to be the best at what they do. Healthy egos may not advertise that they want to be the best, or that they believe they are the best, but more often than not, this is what high perfomers believe or strive to become. I've heard some people suggest that this drive to be the best is necessarily a sign weakness or insecurity, but it's not. True, some insecure people try to overcompensate for a lack of talent by pushing too hard to do what they cannot, but the difference here is in the amount of talent at one's disposal, not in the actual desire to be the best.

The Wisdom to Know How to Be the Best as Leader
Strong leaders aspire to be great leaders and therefore study how to improve. As they discover that they become better leaders by surrounding themselves with highly talented people who are probably more talented in one or another area of performance than they are themselves, leaders accept the need to help others shine while connecting and guiding collective effort. This means that great leaders have a very strong ego but are willing to sublimate that ego to developothers' talent and shine the spotlight on other highly able people. While there are good leaders with less competitive fire who find it easy to shine the spotlight on others, encouraging them and promoting their growth, they tend not to bring about the very best results. They just lack the drive, the fire in the belly, to do so. On the other hand, highly competitive people don't always find it in themselves to sacrifice some degree of attention, the need to be seen as the star, in order to become the best leaders who make other people great. Those who possess both the drive to be the best and the wisdom to sublimate their desire to be noticed make the best leaders. That takes a kind of wisdom to manage one's own ego toward productive ends.

Gender and Leadership Ego
In the West, we accept women as leaders a bit more than is generally done elsewhere, but even here, we're subject to common misperceptions and biases regarding women as leaders. Strong competitive, bold behaviors exhibited by men are often labelled and perceived quite differently when they are exhibited by women. We are less tolerant of a strong, competitive leadership egos among women than we are among men. Some women do possess the drive to be the best, and in my experience, women are no less talented as leaders than are men, even if they may face more significant social hurdles to establish credibility as leaders. Thankfully, more women are overcoming the habit of underestimating their own talents as generations pass. We know from research that current leaders are more likely to identify and mentor young talent that reminds them of themselves, and so, when current leaders are mostly men, this means men get fast-tracked more than women do. When some men mentor women, the dynamics of gender can make a minfield of the process, especially when some men really have. . . other agendas in mind. It's very helpful for strong, accomplished women to mentor other women, though it's certainly possible for men to mentor women as well. It just requires a greater degree of self-awareness on the part of the male mentor, and a semsitivity to the special barriers to social legitmacy women face when taking on leadership roles.

Did Gandhi Have A Big Ego?
Anyone who believes the fate of his country rests on whether or not he eats has a huge ego. And yet, Gandhi is seen as humble, and rightly so, for he put the interests of the people of his country above his own survival, and carried himself with great self-effacement of demeanor. I use this example to illustrate something about a leader's ego: strong leader's have huge self-confidence, and yet, they put their competitive energy and passion to the service of higher ends involving people or causes greater than themselves.

Are Selfish Ends Bigger than Larger Goals?
This brings us to my final point about great leadership ego: no matter how confident a leader may be in himself and his talents (or herself and her talents, let's not forget!), the most effective ones channel their efforts to causes and missions greater than their own personal ambition. People will follow a strong, moderately selfish leader out of convenience or self interest, but people will (in some cases, literally) walk thourgh fire for leaders with strong values and ethics whose mission is ultimately to serve others in some fashion. A healthy, strong leadership ego is at once self-aware without being highly self-regarding. People know the difference. They always know the difference.

We Should Be Cleaning Our Own House

In America's executive suites, we should be cleaning our own house. Only a minority of us are corrupt, but we all know that dicey or illegal shenanigans are fairly commonplace: who's kidding who?

However, we won't clean our own house, because historically, we never do. These things go in cycles. What's going to happen? New political movements and regulations will step in to do the job, roughly, often clumsily, with a good deal of overreaction. And it will be our own fault.

From the New York Times:

July 17, 2006
Study Finds Backdating of Options Widespread
By STEPHANIE SAUL

More than 2,000 companies appear to have used backdated stock options to sweeten their top executives’ pay packages, according to a new study that suggests the practice is far more widespread than previously disclosed.

The new statistical analysis, which comes amid a broadening federal inquiry of the practice of timing options to the stock market, estimates that 29.2 percent of companies have used backdated options and 13.6 percent of options granted to top executives from 1996 to 2005 were backdated or otherwise manipulated.

So far, more than 60 companies have disclosed that they are the targets of government investigations, are the subject of investor lawsuits or have conducted internal audits involving the practice, in which options are backdated to days when the company’s shares trade at low prices. They include Apple Computer, CNet and Juniper Networks.

Last week, the United States attorney in San Francisco announced a task force to investigate the backdating of options, which appears to have been particularly popular in Silicon Valley during the 1990’s dot-com boom. The study found that the abuse was more prevalent in high-technology firms, where an estimated 32 percent of unscheduled grants were backdated; at other firms, an estimated 20 percent were backdated.

An author of the study said the analysis suggested that the disclosures so far about backdated stock options may be just the tip of the iceberg.

“It is pretty scary, and it’s quite surprising to see,” said Erik Lie, an associate professor of finance at the Tippie College of Business at the University of Iowa.

Professor Lie said the findings were so surprising that he asked several colleagues to check his numbers. Together, they concluded that the numbers probably erred on the low side.

The study by Professor Lie and Randall A. Heron, of the Kelley School of Business at Indiana University, was posted Saturday to a University of Iowa Web site. Using information from the Thomson Financial Insider Filing database of insider transactions reported to the Securities and Exchange Commission, the two men examined 39,888 stock option grants to top executives at 7,774 companies dated from Jan. 1, 1996 to Dec. 1, 2005.

The findings were based on an analysis of whether share values increased or declined after option grant dates. “Half should be negative and half should be positive,” said Professor Lie. “That’s the underlying logic.”

But the analysis revealed that the distribution was shifted upward.

“This is not random chance. It’s something that’s manipulated, clearly,” said Professor Lie.

Of the companies examined, 29.2 percent, or 2,270, had at some point during the period manipulated stock option grants, the study estimated.

Recommended Film: Walk the Line

You can find a whole bunch of links to film reviews of Walk the Line here.

I finally saw this on DVD last week. It's a pretty straight up biopic. It follows the narrative conventions of the form, and so could have been hackneyed or cliched but for its strong performances.

My father took me to see Johnny Cash with June Carter Cash in. . . maybe 1978 or '79 or so. I was just a kid, but I remember the show. The film adapts his life, taking liberties with chronology and many details, but it does a good job.

Of course, the depiction of the characters is a bit sanitized, but that happens whenever you fictionalize the life of a real person. Real people are complex, and the narrative arc of success-failure-redemption of the movie's plot nevertheless captures something true, however familiar, about human nature.

I want to dwell on that for a moment in the wake of my post last week about Richard Scrushy, wherein I advised him to get his life right, reform himself and own up to his crimes. I see this with many talented people, people of genius even, of whom Cash was one: they can often fall prey to their own demons in a big way. I don't know why that is, and though I've studied creativity a good deal, I will simply say great talent or intelligence does nothing to immunize a man or woman from great foolishness, even sometimes criminality. Some err through malice, others simply through idiocy, self-absorbtion or some tragic moral blindness.

Cash's empathy as a songwriter flowed from his basic sense of fairness, identification with the little guy and his humanity, and he was able to use these abilities to accept help when it was offered so he could get himself beyond his addictions. Good for him. I've known leaders who have been able to do the same after making big mistakes, either in their personal lives or their professional lives. But it takes a willingness to learn from failure and to accept a degree of dependence on someone you can trust for change to come. Executives are notorious for refusing to accept such perceived weakness, but the ones who really become great are not so afraid.

Today we learn that Ken Lay died in his Aspen, Colorado bed after robbing a whole lot of people of their money and their livlihoods through his company's wholesale fraud. He had been convicted but not yet sentenced. I don't know if he ever had resolved to get his moral house in order, and in my experience that's a decision that takes deeper root as a person dedicates himself to follow that path after failure. But Ken Lay never paid for his crimes, other than in legal fees.

Richard Scrushy has a chance to begin to turn things around. I never bet that a person will change: the safest bet in any case is that any given person will not change at all. But in the general case, I know that some people do. I've seen people do it and it can be quite inspiring. That's why movies like Walk the Line are popular, not simply because they tell a tale about popular cultural icons, but because they include a message that none of us, no matter how flawed, is beyond hope.

The Rise of Europe: UK and Germany Make Nice at World Cup

From the New York Times:

July 1, 2006

At World Cup, No More World War for British and Germans

By RICHARD BERNSTEIN

BERLIN, June 28 — World War II, which, of course, officially ended six decades ago, seems in a way to be finally over as the World Cup unfolds in Germany and the English and Germans are full of praise for each other.

It was only a few weeks ago as the World Cup neared that British officials were issuing stern warnings to Germany-bound English fans against mocking the Germans by giving Nazi salutes, goose stepping, and so forth.

And it does not seem so long ago that the 1996 European Championship was being played in Britain, and the English tabloids printed pictures of tanks and Nazi helmets and headlines like "Let's Blitz Fritz!"

There have been almost no serious examples of that sort of thing this time, just as there has been relatively little of the British hooliganism that some were predicting a few weeks ago would be a common danger to German lives and property.

Instead, there have been scenes like the one described the other day by the newspaper Stuttgarter Zeitung, after a melee in which some 300 English fans in Stuttgart were taken into custody, and there were some fights between English and German fans. "What the headlines missed was the gigantic party only a hundred meters away, where fans from the island were partying peacefully with Germans," the paper reported.

Then there was the account, received by the British Embassy in Berlin a few days ago, about a group of English fans who set out to burn the German flag until some other English fans stopped them.

"If Germany were a woman, England would be her late admirer," the newspaper Bild Zeitung's British correspondent wrote this week, characterizing the view of Germany filtering back to England, "someone who, out of ignorance, nearly let this beauty slip through the net."

According to The Sunday Times, which used the words "young, lively, anarchic and brilliant" to describe Germany: "It seems as though the British suddenly want to make up for all the nasty slander of the past."

The new, informal British-German treaty of peace and friendship is all part of the good mood in Germany as the World Cup unfolds, a mood that is part relief that none the potentially diplomacy-shaking bad things — hooliganism, terror attacks, infuriating security precautions, mammoth traffic jams — have taken place on a wide scale, at least not yet.

But when it comes to Germany and Britain, of course, one is talking not only about a history of devastating wars that find a way of being refought over and over in the newspapers and in popular opinion, but also one of the fiercest soccer rivalries on the planet.

In a much-remembered final in 1966, West Germany lost to England on an English shot that the referee said had crossed the line but that the Germans felt rather strongly had been blocked. After that, and until 1994, England reached the final stages of the tournament four times, and three of those times was knocked out by Germany.

Then came the ferociously contested European Championship of 1996, when the tabloids went to town on Germany's wartime past, to such an extent that the editor of The Daily Mirror, which published five pages of faked pictures of the German team wearing World War II helmets, publicly apologized for going too far. In any event, to the disappointment of the English fans, Germany knocked their team out in the semifinals and went on to win the tournament.

It isn't that everybody is behaving well. There have been plenty of English fans singing the 10 German Bombers song — in which the Royal Air Force knocks all the planes down — and a few hundred British fans have been arrested for rowdiness. But mostly there has been a sense of delighted discovery of Germany by the English, who have expressed surprise that Germany is not a country of leather shorts and humorless people who work all the time and even approach their pleasures, like soccer, with grim determination.

"The British press has to be here, and they are confronted with reality," Cornelia Naumann, program director of the British-German Society in Berlin, said. "That's the basic point. When you are far away you can project so many of your stereotypes on another country or person and there's no reality test. Now there is a test and the Germans are doing quite well," she added.

"There's an assumption that the English and Germans don't get on, but I've always thought this was exaggerated," Jonathan Brenton, head of media at the British Embassy in Berlin, said. "The truth is we work together very well."

In the international business community, we know the EU has its problems coming together, but the longer term trend is toward greater cooperation and economic growth. Cooperation makes for economic and political strength, and that's good for business. As investors survey the prospects for the EU's future, small signs like this one of new generations eschewing old animosities matter. Politics follows popular cultural movements, and not vice-versa.

It helps that Europeans are making a new assessment of geopolitics, as polls reflect. American geopolitical isolation, loss of moral standing, militarism and out-of-control debt don't strengthen American prospects, as economic allies subtly band together to fill the competitive vacuum created by loss of U. S. standing. My international business friends and colleagues all note how Americans are received quite differently abroad now than they were ten years ago. In international contexts, when there are fewer clear rules in place to enforce contracts, trust and ad hoc security bonds are necessary to make business deals work. Loss of American stature and trust are bad for American business.

It's great to see old wounds begin to heal between the UK and Germany. I'm not trying to build up the small signs noted in this story to be more meaningful than they are, but they do in my estimation betoken a growing trend. Furthermore, though the article does not mention it, the notable decline in American popularity in Europe is part of the backdrop of this story, without doubt. American business leaders should take note.