Why Tom Brady’s Deflategate Win is Bad for Leadership

Why Tom Brady’s Deflategate Win is Bad for Leadership

Tom Brady’s lawyers convinced a judge this week (9/3/15) to over-rule his four game suspension for using under-inflated footballs in playoff games.  This could seem like making a mountain out of a molehill, if it wasn’t so important a statement about bad leadership.

In 1925 golf legend Bobby Jones was playing the U.S. Open when he called a penalty on himself.  He claimed that as he moved his club near the ball during his set up he “felt the ball move.”  The judges asked the other players if they saw anything which should cause a penalty, and they said no.  The judges asked the spectators if they say the ball move, and unanimously everyone said no.  So the judges told Mr. Bobby Jones that he need not call a penalty, and he should play on.  But Mr. Jones said that he was sure, so he called the penalty on himself.

He lost the U.S. Open by 1 stroke.  Had he not called that penalty he would have been in a playoff and may well  have won.  And that is the kind of thing which creates a legend.  Leadership based on honor and ability.

DeflategateIt strains credulity to think Mr. Brady did not know he was playing with under-inflated footballs.  This man has won four Superbowls, and been named most valuable player (MVP) 3 times.  He is an athlete in the top 1% of professional football players.  He touches the football on every play he is in the game, and he has thrown millions of passes in games and practices over his long career.  Yet we are to believe he could not feel that these balls were somehow different?

I am a lousy golfer, not nearly good enough to play in amateur, much less professional, tournaments.  Yet even I can tell the difference in a golf ball, which I hit with a 3 foot long stick that has a mallet on the end.  Professional golfers can talk eloquently about the feel of a golf ball and how it shapes their shots.

Yet we are to believe that Mr. Brady does not have enough sense of feel in his multi-million dollar hands to notice these balls were under-inflated and thereby easier to control?  Few professionals believe he did not know.

Tom Brady had his opportunity to call a penalty on himself, and he did not do it.  He could have told his coaches, management or officials that the balls felt soft and this should be checked.  But his desire to win kept him from pointing out something minor – but something upon which winning or losing could have turned. Then, when he was caught and it was proven he used under-inflated balls, he had the opportunity to say “this was wrong, and I will accept whatever penalty in hopes that this never happens in professional football again.”  But instead he refused to accept his penalty and sued the league.

This is NOT the stuff upon which legends are made.

Mr. Brady is a role model for thousands, possibly millions, of football fans and young aspiring athletes.  He had the opportunity to show great leadership.  Whether Mr. Jones would have won that U.S. Open or not, he forever showed that athletic leaders should never stoop to cheating.  No matter how small.  Not only by winning golf tournaments did Mr. Jones become a leader, but by his behavior he demonstrated leadership requires honesty, integrity and trust.

As head of the NFL, Mr. Roger Goodell has used this experience to reinforce the better parts of athletic competition.  He tried to demonstrate a commitment to athletic leadership and fairness.  He did not ban Mr. Brady from the sport, but rather told him he must sit out 4 games for his error in judgement as a leader.  This is not unreasonable, and Mr. Goodell gave Mr. Brady an opportunity to demonstrate leadership, and his own commitment to the principles of good leadership.

Mr. Brady could have used this opportunity to help himself, his teammates, his coaches and everyone who watches sports understand the role of a leader.  But instead, he chose to argue for the concept of win at any cost.  He will forever be remembered as someone who probably cheated, when perhaps cheating was not even necessary to win.  And he will be remembered for promoting to millions of fans and followers that winning at any cost – even if you have to go to court – is more important than demonstrating good leadership.

When leaders think they are beyond punishment, bad things happen.  Look at Bernie Ebbers of Worldcom, Dennis Koslowski at Tyco and Jeffrey Skilling at Enron.  To them winning was all that mattered.  They hurt millions of employees, customers, suppliers and investors with such hubris.  They were bad leaders, and bad role models.  While Mr. Brady will not go to jail, his role in teaching bad leadership principles is fully entrenched – and likely will affect many more future leaders than the worst American business has thus far produced.

 

 

Regulations Work – Applaud SOX and Dodd- Frank

Regulations Work – Applaud SOX and Dodd- Frank

Last week the National Association of Corporate Directors (NACD) pre-released some results of its 2015–2016 Public Company Governance Survey.  One major finding is that the makeup of Boards is changing, for the betterment of investors – and most likely everyone else in business.

Boards once had members that almost never changed.  Little was required of Directors, and accountability for Board members was low.  Since passage of the Securities Act of 1933, little had been required of Board members other than to applaud management and sign-off on the annual audit.  And there was nothing investors could do if a Board “checked out,” even in the face of poorly performing management.

But this has changed.  According to NACD, 72% of public boards reported they either added or changed a director in the last year.  That is up from 64% in the previous year.  Board members, and especially committee chairs, are spending a lot more time governing corporations. As a result “retiring in job” has become nearly impossible, and Board diversity is increasingly quite quickly.  And increased Board diversity is considered good for business.

Remember Enron, Arthur Anderson, Worldcom and Tyco?  At the century’s turn executives in large companies were working closely with their auditors to undertake risky business propositions yet keep these transactions and practices “off the books.”  As these companies increasingly hired their audit firm to also provide  business consulting, the auditors found it easier to agree with aggressive accounting interpretations that made company financials look better.  Some companies went so far as to lie to investors and regulators about their business, until their companies failed from the risks and unlawful activities.

Sarbanes-OxleyAs a result Congress passed the Sarbanes Oxley act in 2002 (SOX,) which greatly increased the duties of Board Directors – as well as penalties if they failed to meet their duties.  This law required Boards to implement procedures to unearth off-balance sheet items, and potential illegal activities such as bribing foreign officials or failing to meet industry reporting requirements for health and safety.  Boards were required to know what internal controls were in place, and were held accountable for procedures to implement those controls effectively.  And they were also required to make sure the auditors were independent, and not influenced by management when undertaking accounting and disclosure reviews.  These requirements were backed up by criminal penalties for CEOs and CFOs that fiddled with financial statements or retaliated on whistle blowers – and Boards were expected to put in place systems to discover possibly illegal executive behavior.

In short, Sarbanes Oxley increased transparency for investors into the corporation.  And it made Boards responsible for compliance.  The demands on Board Directors suddenly skyrocketed.

In reaction to the failure of Lehman Brothers and the almost total bank collapse of 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.  Most of this complex legislation dealt with regulating the financial services industry, and providing more protections for consumers and American taxpayers from risky banking practices.  But also included in Dodd-Frank were greater transparency requirements, such as details of executive compensation and how compensation was linked to company performance.  Companies had to report such things as the pay ratio of CEO pay to average employee compensation (final rules issued last week,) and had to provide for investors to actually vote on executive compensation (called “say on pay.”)  And responsibility for implementing these provisions, across all industries, fell again on the Board of Directors.

Thus, after 13 years of regulatory implementation, we are seeing change in corporate governance.  What many laypeople thought was the Board’s job from 1940-2000 is finally, actually becoming their job.  Real responsibility is now on the Directors’ shoulders.  They are accountable.  And they can be held responsible by regulators.

The result is a sea change in how Boards behave, and the beginnings of big change in Board composition.  Board members are leaving in record numbers.  Unable to simply hang around and collect a check for doing little, more are retiring.  The average age is lowering.  And diversity is increasing as more women, and people of color as well as non-European family histories are being asked onto Boards.  Recognizing the need for stronger Boards to make sure companies comply with regulations they are less inclined to idly stand by and watch management.  Instead, Boards are seeking talented people with diverse backgrounds to ask better questions and govern more carefully.

Most business people wax eloquently about the negative effect of regulations.  It is easy to find academic studies, and case examples, of the added cost incurred due to higher regulation.  But what many people fail to recognize are the benefits.  Thanks to SOX and Dodd-Frank companies are far more transparent than ever in history, and transparency is increasing – much to the benefit of investors, suppliers, customers and communities.  And corporate governance of everything from accounting to compensation to industry compliance is far more extensive, and better.  Because Boards are responsible, they are stronger, more capable and improving at a rate previously unseen – with dramatic improvement in diversity.  And we can thank Congress for the legislation which demanded better Board performance – to the betterment of all business.

Are You More Like Rupert Murdoch Than You Think?


Bernie Ebbers (of WorldCom) and Jeff Skilling (of Enron) went to prison.  Less well known is Conrad Black – the CEO of Sun Times Group – who also went to the pokey.  What do they have in common with Rupert Murdoch – besides CEO titles?  The famous claim, “I am not responsible” closely allied with “I’ve done nothing wrong.” While Murdoch hasn’t been charged with crimes, or come close to jail (yet,) there is no doubt people at News Corp have been charged, and some will go to jail.  And there is public outcry Murdoch be fired.

Investors should take note; three bankruptcies killed 2 of the organizations the ex-cons led and investors were wiped out at Sun Times which barely remains in business. What will happen at News Corp? Given the commonalities between the 4 leaders, I don’t think I’d want to be a News Corp. stockholder, employee or supplier right now.

How in the world could something like this happen?

Like the infamous trio, Rupert Murdoch was, and is, a leader who defined the success formula of his company.  As time passed, the growing organization became adroit at implementing the success formula, operating better, faster and cheaper.  Loyal managers, who identified with, and implemented intensely, the success formula were rewarded.  Those who asked questions were let go.  Acquisitions were forced to conform to the success formula (such as MySpace) even if such conformance created a gap between the business and market needs.  Business failure was not nearly as bad as operating outside the success formula. Failure could be forgiven – but better yet was finding a creative way to make things look successful.

Supporting the company’s success formula – its identity, cultural norms and operating methods – using all forms of ingenuity became the definition of success in these companies.  This ingenuity was unbridled, even rewarded! Even when it came to skirting the edge of – or even breaking – the law.  Cleverly using outsiders to do “dirty work” was an ingenious way to create plausible deniability. Financial machinations were not considered a problem if there was any way to explain changes.  Violating accounting conventions not really an issue if done in the pursuit of shoring up reported results.  Moving money wherever necessary to avoid taxes, or fines, and pay off executives or their friends, not really a big deal if it helped the company implement its success formula.  Any behavior that reinforced the success formula, as the leader expressed it, made employees and contractors successful. 

Do the ends justify the means?  Of course! As long as the results appear good, and the leader is taking home a whopping amount of cash, everything appears “A-OK.” 

Is this because these are crooks?  Far from it.  Rather, they are dedicated, hard working, industrious, smart, inventive managers who have been given a clear mission.  To make the success formula work.  Each small step down the ethical gangplank was a very small increment – and everyone believed they operated far from the end.  If they got away with something yesterday, then why not expect to get away with a little more today?  What are ethics anyway?  Relative, changeable, difficult to define.  Whereas fulfilling the success formula creates clear, measurable outcomes!

What is the News Corp’s Board of Directors position?  The New York Times headlined “Murdoch’s Board Stands By as Scandal Widens.”  Mr. Murdoch, like any good leader implementing a success formula,  made sure the Board, as well as the executives and managers, were as dedicated to the success formula as he.  Through that lens there are no difficult questions facing the Board. Everything was done to defend and extend the success formula.  Mr. Murdoch and his team have done nothing wrong – except perhaps a zealous pursuit of implementation.  What’s wrong with that?  Why should the Board object?

Could this happen to you, and your organization?  It may already be happening.

Answer this option, what’s more important to you and your company:

  1. Focusing on and identifying market trends, and adapting your strategy, tactics, products, services and processes to align with emerging future trends, or
  2. Focusing on execution.  Setting goals, holding people to metrics and making sure implementation remains true to the company’s history, strengths and core capabilities, customers and markets? Rewarding those who meet metrics, and firing those who don’t?

If it’s the latter, it’s an easy slide into Murdoch’s very uncomfortable public seat.  Very few will end up with an Enron Sized Disaster, as BNET.com headlined.  But failure is likely.  Any time execution is more important than questioning, implementation is more important than listening and conforming to historical norms is more important than actual business results you are chasing the select group of leaders exemplified today by Mr. Murdoch.

Here are 10 questions to ask if you want to know how at risk you just might be.  If even a couple of these ring “yes,” you could be confidently, but errantly,  thinking everything is OK :

  1. Is loyalty more important than business results?  Do you have people working for you that don’t do that good a job, but do exactly what you want so you keep them?
  2. Do you hold certain aspects of your business as being beyond challenge – such as technology base, meeting key metrics, supporting historical distributors (or customers) or operating according to specified “rules?”
  3. Do you ask employees to operate according to norms before asking if they have a better idea?
  4. Does HR tell employees how to do things rather than asking employees what they need to succeed?
  5. Do employee and manager reviews have a section for asking how well they “fit” into the organization?  Are people pushed out that don’t “fit?”
  6. Are “trusted lieutenants” moved into powerful positions over talented managers just because leaders aren’t comfortable with the newer people? 
  7. Are certain functions (finance, HR, IT) expected (perhaps enforcers?) to make sure everyone operates according to the historical status quo?
  8. Is management meeting time spent predominantly on internal, versus external, issues?  Talking about “how to do it” rather than “what should we do?”
  9. Is your advisory board, or Board of Directors, filled with your friends and co-workers that agree with your success formula and don’t seek change?
  10. Do your customers, employees, or suppliers learn that demonstrating dissatisfaction leads to a bad (or ended) relationship?

 

Why Amazon out-grows Wal-Mart – Overcoming Bias


Summary:

  • Everyone discriminates in hiring – just some is considered bad, and some considered good
  • Only “good discrimination” inevitably leads to homogeneity and “group think” leaving the business vulbnerable to market shifts
  • Efforts to defend & extend the historical success formula moves beyond hiring to include using internal bias to favor improvement projects and disfavor innovations
  • Amazon has grown significantly more than Wal-Mart, and it’s value has quadrupled while Wal-mart’s has been flat, because it has moved beyond its original biases

The long list of people attacking Wal-Mart includes a class-action law suit between former female workers and their employer.  The plaintiffs claim Wal-Mart systematically was biased, via its culture, to pay women less and limit their promotion opportunities.  The case is prompting headlines like BNet.com‘s “Does Your Company Help You Discriminate?” 

Actually, all cultures – and hiring programs – are designed to discriminate.  It’s just that some discrimination is legal, and some is not.  At Google it’s long been accepted that the bias is toward quant jocks and those with highest IQs.  That’s not illegal.  Saying that men, or white people, or Christians make better employees is illegal.  But there is risk in all hiring bias – even the legal kind. To avoid the illegal discrimination, its smarter to overcome the “natural bias” that cultures create for hiring.  And the good news is that this is better for the business’s growth and rate of return!

Successful organizations build a profile of “who did well around here – and why” as they grow.  It doesn’t take long until that profile is what they seek.  The downside is that quickly there’s not a lot of heterogeneity in the hiring – or the workforce.  That leads to “group think,” which reinforces “not invented here.”  Everyone becomes self-assured of their past success, and believes that if they keep doing “more of the same” the future will work out fine. Whether Wal-Mart’s hiring biases were legal – or not – it is clear that the group think created at Wal-Mart has kept it from innovating and moving into new markets with more growth.

Markets shift.  New products, technologies and business practices emerge.  New competitors figure out ways of providing new solutions.  Customers drift toward new offerings, and growth slows.  Unfortunately, bias keeps the early winner from accepting this market shift – so the company falls into serious growth troubles trying to do more, better, faster, cheaper of what worked before.  Look at Dell, still trying to compete in PCs with its supply chain focus long after competitors have matched their pricing and started offering superior customer service and other advantages.  Meanwhile, the market growth has moved away from PCs into products (tablets, smartphones) Dell doesn’t even sell.

Wal-Mart excels at its success formula of big, boring, low price stores.  And its bias is to keep doing more of the same.  Only, that’s not where the growth is in retailing any longer.  The market for “cheap” is pretty well saturated, and now filled with competitors that go one step further being cheap (like Dollar General,) or largely match the low prices while offering better store experience (like Target) or better selection and varied merchandise (like Kohl’s).  Wal-Mart is stuck, when it needs to shift.  But its bias toward “doing what Sam Walton did that made us great” has now made Wal-Mart the target for every other retailer, and stymied Wal-Mart’s growth.

A powerful sign of status quo bias shows itself when leaders and managers start overly relying on “how we’ve done things here” and “the numbers.”  The former leads to accepting recommendations fro hiring and promotion based upon similarity with previous “winners.”  Investment opportunities to defend and extend what’s always been done sail through reviews, because everyone understands the project and everyone believes that the results will appear. 

Nearly all studies of operational improvement projects show that returns rarely achieve the anticipated outcomes.  Because these projects reinforce the status quo, they are assumed to be highly accurate projections.  But planned efficiences do not emerge.  Headcount reductions do not happen.  Unanticipated costs emerge.  And, most typically, competitors copy the project and achieve the same results, leading to price reductions across the board benefitting customers rather than company profits.

Doing more of the same is easily approved and rarely questioned – whether hiring, or investing.  And if things don’t work out as expected results are labeled “business necessity” and everyone remains happy they made the original decision, even if it did nothing for market share, or profit improvement.  Or perhaps turns out to have been illegal (remember Enron and Worldcom?)

To really succeed it is important we overcome biases.  Look no further than Amazon.  Amazon could have been an on-line book retailer.  But by overcoming early biases, in hiring and new projects, Amazon has grown more than Wal-Mart the last decade – and has a much brighter future.  Amazon now leads in a large number of retail segments, far beyond books.  It has products which allow anyone to take almost any product to market – using the Amazon on-line tools, as well as inventory management.

And in publishing Amazon has become a powerhouse by helping self-published authors find distribution which was before unavailable, giving us all a much larger variety of book products.  More recently Amazon pioneered e-Readers with Kindle, developing the technology as well as the inventory to make Kindle an enormous success.  Simultaneously Amazon now offers a series of technical products providing companies access to the cloud for data and applications. 

Where most companies would say “that’s not our business” Amazon has taken the approach of “if people want it, why don’t we supply it?”  Where most organizations use numbers to kill projects – saying they are too risky or too small to matter or too low on “risk adjusted” rate of return Amazon creates a team, experiments and obtains real market information.  Instead of worrying whether or not the initial project is a success or failure, market input is treated as learning and used to adapt.  By continuously looking for new opportunities, and pushing those opportunities, Amazon keeps growing.

Every business develops a bias.  Overcoming that bias is critical to success.  From hiring to decision making, internal status quo police try to reinforce the bias and limit change.  Often on the basis of “too much risk” or “too far from our core.”  But that bias inevitably leads to stalled growth.  Because new competitors never stop beating down rates of return on old success formulas, and markets never stop shifting. 

Wal-Mart should look upon this lawsuit not as a need to defend and extend its past practices, but rather a wake-up call to be more open to diversity – in all aspects of its business.  Wal-mart doesn’t need to win this lawsuit neary as badly as it needs to create an ability to adapt.  Until then, I’d recommend investors sell Wal-Mart, and buy Amazon.com.

Chart of WMT stock performance compared to AMZN last 5 years (source Yahoo.com)

WMT v AMZN 4.11

Go to Jail? – RICO, BP, Enron, Worldcom


What do Tony Hayward, Jeff Skilling and Bernard Ebbers possibly have in common?  They all might end up convicted felons

While this may sound ridiculous, and very, very scary to corporate CEOs, nobody expected Skilling, the CEO of Enron, or Ebbers, the CEO of Worldcom, to go to jail.  They were hailed as heros, and admired for their leadership of large, high growth companies.  Yet, Ebbers is waiting out a 25 year sentence, convicted of acting illegally in the value destruction at Worldcom (CNNMoney.comEbbers Gets 25 Years.”)  And Skilling is working on a 24 year sentence for the downfall of Enron (CNNMoney.comSkilling Gets 24 Years.”)

Now, BusinessWeek.com is asking if the same fate awaits Tony Hayward in “The Oil Spill:  Will BP Face Criminal Charges?  As the spill goes on and on, and the damages increase, the public sentiment against BP is increasing.  If the spill goes around Florida to the east coast there will be millions more citizens, and businesses, affected.  It is clear that many laws were broken, as the article lays out.  So it’s not a mute question that an aggressive prosecutor would go after imprisoning Hayward.

As reprehensible as many may find each of these 3 men, how did they end up facing criminal prosecution?  Even The Washington Post has asked Did Jeff Skilling Do Anything Illegal?  A Harvard MBA and former McKinsey partner, Mr. Skilling calmly described the practices at Enron completely unapologitically. He was certain he’d done nothing wrongMr. Ebbers was a devout Christian and Sunday School teacher who claimed all through the trial and to reporters on the way to jail he’d done nothing wrong.  I’m sure Mr. Hayward believes similarly.

What all 3 did was simply push the Success Formula too far.  Worldcom, Enron and BP were wildly successful companies.  They created Success Formulas that earned billions of dollars.  For years they grew.  But unfortunately, they kept trying to push the Success Formula to better results when market shifts left that formula earning lower returns.  Rather than recognize that lower returns were an indication of a Success Formula needing change, they dug in their heals and “got creative” in Defending & Extending it.  They used “best practices” to lower costs, and to seek out financial machinations which would allow the business to look more profitable – even as they undertook more, and more risk. 

To them, taking risk rather than change the Success Formula wasn’t thought of as risk.  They were out to protect something they felt had to be protected, at all cost.  The Success Formula that had made money for years, enriching not only themselves but investors, employees and suppliers.  They were blind to the added risk, because it was assumed that doing incrementally more was the “right thing to do” for the company.  They were doing what they believed were “best practices” for the “health” of their companies.

Defending a Success Formula can become very risky, as I wrote in ForbesBP’s Only Hope For Its Future.”  Years of doing the same thing, only more, better, faster, cheaper, makes it harder and harder to do something different.  The culture and decision-making systems are designed, and modified — Locked-in — to push employees to make the same decision over and over, regardless of risk.  In BPs case we now know that cheaper parts and practices were employed to improve profitability – something each employee felt was in the company’s best interest.  Only, in the end, it served to layer risk upon risk – and lead to an eventual disaster.

Are you “doubling down” on risk in your business?  Are you investing more and more into trying to improve returns in a business that is earning less and less – and growing less and less?  If so, you could be setting yourself up for disaster as well.  Let’s hope in doing so you don’t run afoul of the law.  25 years in prison is a hefty price to pay for spending too much energy “focused on your core” business at a time when you should be looking for new ways to expand and grow where the risks are less.