Friday, September 26, 2008

The Global Financial System

The current financial crisis provides a useful learning opportunity for all organizations as they consider their risk of a catastrophic failure of any kind - be it physical, technical, or organizational.

The global financial system is a good example of a complex system, as first defined and described by sociologist Charles Perrow. Complex systems are vulnerable to catastrophic failure, according to Perrow, if they have two attributes: high interactive complexity and tight coupling. By interactive complexity, he means that the system has many elements that interact in ways that are hard to predict and know in advance. By tight coupling, he means that different elements of an organizational system are highly interdependent and closely linked to one another, such that a change in one area quickly triggers changes in other aspects of the system. If we have learned anything over these past few weeks, it is that the global financial system exhibits high interactive complexity and tight coupling.

In a system with these attributes, large-scale failures result from a series of small errors and failures, rather than a single root cause. These small problems often cascade to create a catastrophe. Accident investigators in fields such as commercial aviation, the military, and medicine have shown that a chain of events and errors typically leads to a particular disaster. We see the same thing here with the global financial system. A problem that began with failures in the subprime mortgage market has cascaded to cause huge disruptions in many different parts of the global financial system and the economy more broadly.

Organizations of all kinds should take note. Do they operate systems with high interactive complexity and tight coupling? Could a small failure cascade to create a chain of errors that leads to major catastrophe? Every organization should look in the mirror and examine its vulnerability in light of these concepts.

Monday, September 22, 2008

Helping Employees Cope with Economic Turmoil

With turbulence and turmoil in the capital markets, employees in all industries are feeling a bit anxious these days, both about their net worth and their job security. For good reason, employees find themselves distracted from their day-to-day work. It's very easy for rumors to spread in the workplace about potential problems at a particular company, as well as the prospect of layoffs. The rumors and distractions can have a serious detrimental effect on employee productivity. How can managers cope with this problem?

First, they must communicate even more often than usual. They have to be very transparent about the economic condition of the firm. Managers also need to provide updates as to how external events are affecting the firm's business, i.e. how does overall economic growth correlate with the firm's profitability? How does Wall Street's woes affect the firm's profitability?

Second, they must go to great lengths to educate the workforce about the financial drivers of the business and the current state of the business. Many employees will need help understanding key financial metrics, as well as key causes of stock price changes.

Third, managers must be brutally honest about the state of the business. Just as top managers never like to be surprised by bad news, so too lower level employees don't want to be shocked. People will appreciate the candor.

Fourth, don't let the remedies come out in dribs and drabs (if possible). It's much better to assess the whole situation and announce the entire regimen of tough medicine required to cure the patient, rather than issuing one prescription after another over the course of many months. The initial pain will be great, but then the company can move on.

Finally, managers need to be very proactive about rooting out and disproving false rumors that pop up around the workplace. Letting fears, doubts, and misinformation linger can be very harmful.

Saturday, September 13, 2008

Is Television Good for Kids?

The Wall Street Journal had a provocative article last week about new research exploring whether television might actually be good for children and families in some ways. Here is a short excerpt from the opening to the well-written, in-depth article:

"University of Chicago Graduate School of Business economists Matthew Gentzkow and Jesse Shapiro aren't sure that TV has been all that bad for kids. In a paper published in the Quarterly Journal of Economics this year, they presented a series of analyses that showed that the advent of television might actually have had a positive effect on children's cognitive ability."

The article goes on to cite the findings from the study:

"The variation Mr. Gentzkow and Mr. Shapiro exploited was the timing of the introduction of TV into different cities. Television began taking off in the U.S. in 1946, after a wartime ban on TV production was lifted. But the Federal Communications Commission stopped granting new commercial television licenses from September 1948 to April 1952 while it made changes in allocating broadcast spectrum. There was a long lag between when some cities got television and when others did. The economists then looked at results of a survey of 800 U.S. schools that administered tests to 346,662 sixth-grade, ninth-grade and 12th-grade students in 1965. Their finding: Adjusting for differences in household income, parents' educational background and other factors, children who lived in cities that gave them more exposure to television in early childhood performed better on the tests than those with less exposure. The economists found that television was especially positive for children in households where English wasn't the primary language and parents' education level was lower."

Now, of course, there are limits to how much we can generalize from this study, as the article points out. The findings are from a different era, when the content on television was quite different (i.e. far less trashy). Moreover, they are seeing positive effects specifically in households where English was not the first language, i.e. immigrant households. Yet, I find the research intriguing, because I was raised in a household where English wasn't the first language. My parents came over from Italy just three years before I was born. We did watch a fair bit of television when I was young. Since my parents didn't speak much English at the time (or at least it was broken English), the television may have been beneficial in helping me learn the language. I think it's at least plausible that it could have had some positive effect. Having said that, I don't think my kids are in the same situation. They have plenty of other avenues for learning to speak, read, and write English, and they don't need the television to help them!

Can winning sports teams make us more productive employees?

The Boston Globe had an interesting article last week on the topic of whether a winning team can actually enhance the financial well-being of its fans. It cites research by economist Michael Davis and psychologist Christian End. The article explains the study:

"A winning NFL football team increases the incomes of the people who live and work in its hometown by as much as $120 a year. And while the study doesn't identify exactly what causes the boost, the authors point to psychological literature suggesting that winning fans are at once harder workers and bigger spenders. In short, buoyed by the team's success, we work longer hours, take bigger risks, and shop more avidly, all of which helps the local economy."

I'm not at all sure that this psychological impact on a team's fans merits the large public subsidies often given to sports teams to build new stadiums, but it is certainly fascinating research about how our moods might affect our productivity as workers.

Tuesday, September 02, 2008

Guest Post - Leading from the Wings

Leading From the Wings

This post was contributed by Heather Johnson, who writes on the subject of California teaching certificate. She invites your feedback at

Walking down memory lane, I recall a friendly basketball match that I played against the sophomores as a freshman in college. I was new, and so were the others on my team. We had not yet had time to get to know each other well, the strengths and weaknesses that each of our games brought out. So when it came to choosing a captain, a teammate was chosen at random. But as the game progressed, we seemed to be drifting like a rudderless boat thrown at the mercies of a wild sea. We had no game plan, no team work, and most of all, no commitment.

After a poor show in the first half, I decided to take control of things even though I was not the designated leader. The game we’d played so far had offered me a peek into both the strengths of my teammates and the weaknesses of my opponents. Armed with this insight, I outlined plays and strategies for the second half during the interval. We didn’t win that day, but the loss was far from humiliating. We had redeemed ourselves during the latter part of the match.

I learnt a valuable lesson in leadership that day – it’s not just designated leaders who must lead all the time. Team members with a sense of responsibility and an innate aptitude for management are equally at fault if the team goes astray. In fact, they are more to blame, because they know what they must do and yet they fail to do it for various reasons. They may fear alienating or offending the appointed leader, they may be too lazy to take on the onus of leading the team, or they may be too shy and apprehensive to come forward with their ideas.

We can use these points to define a true leader – one who knows what needs to be done and is not afraid, reluctant or timid to do it in a way that is appreciated and admired by everyone else on the team. A leader guides rather than controls, listens rather than talks all the time, works with the team rather than make them do all the work, shares credit with everyone and takes blame alone, and thinks things through before actually implementing them. A good leader knows that the best way to motivate is through encouragement and not fear and that praise is more important than recriminations.

A true leader does not ask for credit for a job well done, which is very important in the kind of scenario I outlined above. Leadership driven by a love for the spotlight is as fleeting as a shooting star – a flash of brilliance reduced to ashes and dust. Leadership must focus on the goals at hand and take the right decisions using the right people to reach those goals in the most efficient way possible. Publicity lets others know that you’re a good leader, but fame is a fickle friend that deserts you the moment you make a mistake. Leadership that’s driven by a love of achievement alone is the kind that’s head and shoulders above the rest, the kind that lasts a lifetime, no matter where the cameras are focused. You don’t have to be the star of the play to feel a sense of achievement; it’s infinitely better to be the director in the wings who pulls the strings and calls the shots. After all, no matter how entertaining the puppets are, there’s no show without the puppeteer!

7 Ways to Fail Big

Paul Carroll and Chunka Mui have a provocative article (Seven Ways to Fail Big) in this month's issue of Harvard Business Review. They studied the 750 of the most significant business failures from 1981-2005, and they identified some key lessons from those cases. While one might quibble with their methodology or even with some of their conclusions, it certainly makes for interesting reading. The article should be commended for not only providing a list of the mistakes that were most often made, but also for offering some suggestions on how to avoid these catastrophes. I especially liked their two sidebars titled "The Devil's Advocate" and "Questions Every Company Should Ask." I think executives would be well-served to consider the techniques presented in those portions of the article.