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 / Winter 2009 / Issue 57(originally published by Booz & Company)


Best Business Books 2009: Management

Government will play a much larger role in the new world order, especially the regulatory sector, says Colvin. A few years after Hurricane Katrina, when “government looked incompetent while business rode to the rescue,” the opposite view has taken hold: “Business screwed up, government steps in.”

Whether you subscribe to that view or not, Colvin thinks that the faster and more effectively managers respond to these changes, the more likely their companies are to do well. What do managers need to do? To begin with, says Colvin, managers must avoid falling back on outdated models in their rush to respond to today’s stresses. For example, they should not “obey ancient instincts from the industrial age” and treat workers as expendable. The best companies and leaders will take a more enlightened view, says Colvin, using the opportunities created by the downturn “to begin practices they should have been using, to improve the quality of their people, to increase employees’ loyalty and motivation, to build the culture.”

One of those not-to-be-missed opportunities is getting compensation and incentives right. It’s time to jettison pay programs that encourage executives to take high risks by limiting the negative consequences. Colvin suggests following the example of companies like Deere & Company, where incentives are based on economic profit, which includes capital costs, and bonuses are paid out over four years and subject to cancellation if performance is not up to par, a system that Deere CEO Robert Lane told Colvin he likes because “it encourages long-term thinking.”

Which brings up another opportunity afforded by the downturn: freeing managers from providing earnings guidance to the investment community. Colvin describes earnings guidance as a game that has developed so gradually that “those in its midst may have trouble seeing how insane it has become.” (As one of the developers of the Aspen Institute’s 2007 Aspen Principles, a series of signatory statements promoting long-term management and value creation strategies, I agree. The principles advocate that companies stop providing short-term financial guidance altogether.) Companies such as GlaxoSmithKline and Unilever have suspended guidance, and Colvin suggests that the time is right for others to follow suit: “While suddenly ceasing guidance in good times may alarm investors, they understand that in a historic recession even the best companies can’t predict results a year down the road.”

Colvin also sees this as a good time for managers to consider environmental initiatives, despite the conventional view that going green is a luxury a company can ill afford in a downturn. He argues that “seeing the business from an environmental perspective can be a great idea in distressed times because it can reveal cost saving opportunities that had previously been invisible.”

The author also recommends going against the conventional practice of immediately cutting spending in R&D and advertising during down times, citing research showing that companies that continued to invest in these areas during the 1990–91 recession retained their competitive advantage and became top market performers, undercutting many managers’ assertions that the stock market would “punish them for spending more and cutting less than competitors during a recession.” (See “Profits Down, Spending Steady: The Global Innovation 1000,” by Barry Jaruzelski and Kevin Dehoff, s+b, Winter 2009.) Successful companies, says Colvin, “play offense, not defense, during a recession…. [They] see opportunities to build advantages when their competitors have in effect taken themselves out of the game.”

Colvin’s overarching prescription is to make changes now, while employees are looking for something that will move them beyond anxiety or despair. Citing research on military leadership during crises, he notes that people respond better when their leaders help them see stressful events as challenges from which they can learn and benefit. “A crisis is the optimal moment for personal growth,” writes Colvin. “It is also the best time for a company’s own personal growth, the improvement of its culture.”

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