Failures – exposed, reflected upon, considered

Here is a piece about leadership “sins” as categorized by management/leadership guru Drucker.

The Sin of Pride

The Sin of Pride is almost always considered the most serious of the Seven Deadly Sins. Yet it seems so innocuous. My wife calls it “being full of oneself.” I believe feeling proud of what a leader has accomplished or is accomplishing is perfectly acceptable. The problem comes when one feels this pride to the extent that the leader believes himself so special that ordinary rules no longer apply to him. That’s where many leaders go awry.

The Sin of Lust

I once heard a retired leader of a large organization of almost a million members speak about his challenges of leading this organization. “One of the biggest problems,” he said, “was newly promoted senior executives. I may be exaggerating a little,” he continued. “But it seemed almost that as soon as we promoted a man to be a senior executive, he suddenly decided that he was God’s gift to women.”

This individual spoke at a time when almost all senior executives had been male. However, I do not think that one would find much difference with female executives. There is unfortunately a feeling among some leaders that they have “arrived” and are “entitled” to additional sexual gratification as some sort of fringe leadership benefit. In one online survey done by the White Stone Journal, The Deadly Sin of Lust was the most frequent of the Seven Deadly Sins self-reported as “my biggest failing.” So this sin is hardly uncommon. However, it can have very unfortunate consequences. In any workplace it creates jealousies, feelings of favoritism, a lack of trust, damages people and relationships and more.

The Sin of Greed

The Sin of Greed is a sin of excess. It frequently starts with power. Leaders have power, and unfortunately having power has a tendency to lead to corruption if the leader isn’t careful. This may start with the acceptance of small favors and grow into vacations, loans and worse. How do these things happen? A leader sees others with more than he has. Questions may be raised in the leader’s mind as to why others have so much more, yet (in the leader’s mind) are far less deserving. Maybe a small bribe is accepted. It may not even be seen as a bribe, just a favor between friends. If the leader allows himself to be seduced in this way, greed can take over. Unlike the movie, greed is never “good,” even as a motivator, and though Drucker analyzed and approved many motivations, greed was not one.

The Sin of Sloth

The Sin of Sloth has to do with an unwillingness to act. Sometimes this is due to laziness. More often it is an unwillingness to take on work that the leader considers is beneath him. I have many times seen leaders watching critical work that must be completed and for which they were also qualified to do. Yet they stood around “supervising” when they could have given real help to their subordinates and to the mission that they were responsible for accomplishing. In too many cases, good men and women fail because their leader failed to help or take action in other ways. Make no mistake about it, The Sin of Sloth leads to disaster. Leaders must be proactive and they must take action.

The Sin of Wrath

This sin has to do with uncontrolled anger. There is a time for anger in leadership when it serves a definite and useful purpose. As Kenneth Blanchard and Spencer Johnson taught us, you can take one minute to make a correction and include the words “I’m angry” and then tell the recipient why. Moreover, anger does have a useful function in that it can mobilize psychological and physical resources to do something about a problem.

However, leaders need to avoid repeated and uncontrolled anger because it can have negative impacts on their leadership. It can destroy morale, does not guarantee a lasting effect in correcting problems, and in effect requires surrendering anger as a tool for the times when expressing it is really useful and appropriate. Moreover when in an angry state, anger causes the leader a loss of self-monitoring capacity and the ability to observe objectively.

Drucker taught leaders to analyze their environment and to determine what actions that have already occurred mean for the future before taking action. Using anger as a single response to all leadership challenges prevents us from doing this analysis. It prevents the leader from making good decisions and may prevent the leader from taking the correct action appropriate to the situation. Actions taken during uncontrolled action are frequently in error and require additional work to undue the consequences of these mistakes later.

The Sin of Envy

With the Sin of Envy, the leader is envious of what is enjoyed by someone else. This may or may not be incorporated with greed. The sin usually leads the leader to make decisions and to take actions that will be to the disadvantage to the object of his envy. So a leader who falls victim to this sin may deny an earned promotion to a qualified subordinate, attempt to destroy another’s reputation or in other ways attempt to make himself feel better by lowering the situation of another. This is obviously harmful to this other individual, hurts the organization and is probably harmful to the leader who perpetrates these actions.

The Sin of Gluttony

Most think of food or drink with this sin, but for the leader it has a far more ominous connotation. The Sin of Gluttony was the one that most frustrated Drucker. Expensive food or drink is scarce. Therefore excessive consumption can be seen as a sign of status. But gluttony need not apply only to food.

Drucker knew how hard managers had to work to do their jobs as they needed to be done, and he had defended high salaries for top managers early in his career. However skyrocketing executive salaries caused him to drastically alter his opinion. Drucker said and wrote that executive salaries at the top had become clearly excessive and that the ratios of the compensation of American top managers to the lowest paid workers were the highest in the world. Moreover, this difference wasn’t slight, but differed by magnitudes. He said this was morally wrong. The ratio of average CEO compensation in the United States to average pay of a non-management employee in the United States hit a high in 2001 of 525 to 1. Drucker recommended a ratio of no more than 20 to 1.

The Sin of Gluttony was to be avoided for good leadership. Interestingly, Drucker drew a parallel of high executive salaries with the demands of unions for more and more benefits without an increase in productivity. He said we would pay a terrible price for these examples of gluttony and that “it is never pleasant to watch hogs gorge.” As I write these words, we are paying this price.

There are things that a leader must do, and things he must not. The Seven Deadly Sins are those that Drucker maintained that leaders must not do.

The current and foreseeable “big” thing, as seen from an Internet user’s perspective, is the social media. As for anything considered or perceived as fashionable, social media has its own caveats. Testimony to that are (some of  the) social media approaches illustrated below (see the full article here), which guarantee an eventual failure of any sustained endeavor, be it in personal or professional life and career.

Doing nothing ’cause you’re scared of what people will say. People are going to talk, with or without you. Wired)

Pretending to be somebody else. When is it ok to lie to a customer? (mumbrella)

Selling your product all day, everyday. Social Media is about capturing interest, not just sales. (The Next Web)

Failure to respond when asked a reasonable question. It’s a crime to have a presence yet ignore customers. My favourate is @VlineInform

Plagiarising bloggers content. Most bloggers are overtly happy with a mere hat tip. (Journalism.co.uk)

Not personalising your profile. People want to know who you are, what you’re about. (Webinknow)

Blocking access to Social Media in your workplace. For so many reasons Social Media can be an allie or enemy. (Chris Brogan)

Thinking people care about your product. Your product, probably boring. Find an interesting angle. (Emergence Marketing)

Calling your product green when your website isn’t. Many make big claims, few think about their power sucking web presence.

Not understanding how Social Media fits into your marketing mix. Hailed the death of print media… it’s not, it’s a communication tool. (The Oyster Project)

Relying too much on online research. There’s a wealth of info online, it may not all be valid. (Pigs Don’t Fly)

Failing to listen. Social isn’t always about talking, it’s just as much about listening. (Just Another PR)

Not recognizing that you are shooting at the moon…You’re going to fail, lots. Social requires commitment.

Thinking you can’t contribute to a community, just sponsor it. Enthusiasts are already coming together? Why not ask how you can get involved?

Thinking ‘news’ is the only thing that can be talked about online. There’s a plethora of opportunity on the social web. (Search Engine Land)

Saying something, just for the sake of it. There’s no rules to success, just be honest and interesting. (Online Marketing Banter)

Relying on strategic thinking alone. Social media is the worlds largest experiment – recognise you may need to fail to learn.

Using the exact same strategy and content across multiple networks. Love it, you update Facebook & Twitter with every new presser. (Search Engine Guide)

Not measuring / monitoring your activity. Yes it’s possible! (I.e. – Radian6, Buzz Metrics, Dialogix)

Trying to get as many followers as possible. Large unresponsive list = bad, smaller profitable base = good. (digitalOZ)

You treat Social Media as another advertising medium. It’s different. (MediaPost)

The list above is what I consider the most relevant and important failure-leading  approaches espoused frequently by both individuals and businesses while using social media.

You have an idea – everyone has an idea – but so what? Just because you have what you consider a bright, innovative idea, doesn’t make it automatically into a ready-made product, service or any other added value to what already exists. To make sure your idea is worthy, firstly, bounce it off of as many different people – anyone who might give you a valuable input or opinion whether from within or without a relevant domain or field for you – and open your mind to critique (adding new value to your idea) as much as possible.

Once you start considering (a hitherto unconsidered) factors stemming from breaking initial presuppositions, stereotypes, narcissistic flavors and just plain and simple information about market, competition, trends that somehow slipped through your fingers, you will start clearly seeing, visualizing what you are after.

Next, execution.

But, wait a minute. Even in execution there are ways and ways. The latter is what you must consider if you financial situation is still  (or will shortly become) somewhat shaky.

In this era of mushrooming Internet technologies – especially web 2.0-related/devised – doing business online or putting an online business presence is becoming easier by day. Traditional means of creating, building and sustaining a business are either becoming obsolete or reinventing themselves. There luminaries like Umair Haque who has awesomely created Awesomeness Manifesto and much more.

And of course, with the current economic situation, we are all looking how to do it a 21st-century-style-innovative and to save money while doing it.

Let’s take an illustrative example. In 2004, Heather Allard “started 2 Virtues Inc. to bring my inventions, Swaddleaze and Blankeaze to market.”

She spent in excess of $54K (even without product manufacturing).

If I started 2 Virtues now in 2009, I’d do things so differently.  I could start a business for under $1000 by doing these 5 things:

1. Skip the Website
2. Hire a Freelancer
3. DIY
4. Become a Social Butterfly
5. Free Stuff

If you read carefully the entire article (containing many nice tips, free tools and additional links) you will see how Heather – if she started in 2009 with all her current knowledge and experience – would have been able to economize on practically every aspect of her business initiative, thanks mostly to the Internet and free online tools, methodologies and techniques.

Instead of $54K, you can spend <$1K. What do you think about that?

The Entrepreneur magazine has asked three successful entrepreneurs to describe a scenario of doing things all over again if they had a chance. Below is their response.

Entrepreneur

Sunny Bonnell, 33, co-founder of Motto Agency, a brand and design firm in Myrtle Beach, S.C. Founded in 2003, the company’s year-end sales are projected to reach about $1 million.

Lesson Learned

“As a woman business owner, I would have reached out to organizations like Count Me In for Women’s Economic Independence a lot sooner than I did. They have helped me build our networks on a national level (i.e., establish partnerships with FedEx, OPEN from American Express and Dell) and given us access to mentorship, marketing opportunities and business resources.”

Entrepreneur

Anthony Mongeluzo, 28, founder of The Pro Computer Service LLC, an IT services company in Medford, N.J. He founded the company in 2002 and now has annual revenue in excess of $2 million.

Lesson Learned

“I would have treated my company like a real business and not looked upon it as a stepchild. I would have given it the same full effort every day and not wasted my energy from 9 to 5 with my employer grasping for a moment or two to sneak in a quick call to one of my clients.”

Entrepreneur

Kris Putnam-Walkerly, 40, founder of Putnam Community Investment Consulting Inc., a Cleveland-based philanthropy consulting firm for foundations and nonprofits. She founded the company in 1999 and projects 2009 revenue to approach $1 million.

Lesson Learned

“I should have conducted more regular financial analysis of the business early on to help me understand which types of services and clients were most profitable and to allow me to make more informed decisions as I grew.”

Personally, I am also still struggling with my own startup, Elegua, to have it gain sufficient traction, especially considering that I and my partner are on a bootstrapping mode till now. And we both fall into the “lesson learned” of the second entrepreneur,  Anthony Mongeluzo, above. My previous initiative, OpenCoffee Club Cairo, is also sort of put on hold, as the inaugural meetup didn’t attract a threshold number of local entrepreneurs, startup enthusiasts, VCs, techies and individuals interested. This reminds me as well to give it another push, as I also got a recent feedback to renew my effort. Hence:

Lesson Learned

Persevere, persevere, persevere. Perseverance, especially in cultures/societies with corresponding 0-market knowledge of or unadapted mentality to the ideas of the business initiative in question, it is vital to persevere and however steep a climb it might seem, there is always a societal learning curve, which, once the tipping point is achieved, will become self-sustainable.

Given its complete novelty and unawareness in the MENA region and in Egypt, I think I will give it another try.

What are your experiences and lessons learned?

P.S. I know it has been a long time since my last post. My own side projects and my work prevented my “blogging creative juices” from running. I will try to be more systematic henceforth.

I am a big fan of Guy Kawasaki (and his blog), having recently purchased and consumed his last book “Reality Check.” One of the chapters of the book, and the corresponding post on his blog, he refers to a book called “Why Smart People Do Dumb Things” pointing out four reasons why smart, intelligent, powerful, and rich people end up in disastrous situations.

Hubris. Pride to the point that you no longer feel shame, no longer believe that you are subject to public opinion, and no longer need to fear “the gods.” Examples: Gary Hart’s involvement with Donna  Rice that ended his run for the presidency and the Dennis Kozlowski’s (Tyco) $2 million toga party.

Arrogance. From the Latin word arrogare: “to claim for oneself.” Arrogant people believe they have  claim to anything and everything they want–they are “entitled” to it. King David, for example, felt  entitled to the wife (Bathsheba) of one of his soldiers. Modern day King Davids feel entitled to corporate jets and an entourage to tell them that their keynote speech rocked.

Narcissism. Self absorption to the point that you are blind to reality. The world only exists to provide you gratification. Examples: Richard Nixon and Watergate; the Clintons and Whitewater—really just about every politician and CEO who falls from grace.

Unconscious need to fail. If you think failing is hard, try winning. The questions that go through people’s minds when they they are on the doorstep of success are: Do I really deserve to win? Do I want the pressure of constantly having to win in the future? Can I really handle success? Perhaps this explains why professional athletes still take performance enchancement drugs even after watching their colleagues get busted.

The authors of the book prescribe a six-dimensional set of remedies:

1. Accept yourself
2. Accept others
3. Keep your sense of humor
4. Accept simple pleasures
5. Enjoy the present
6. Welcome work

The same book goes on mentioning why smart companies do dumb things. Here the list is more sophisticated.

• Consensus
• Conviction
• CEOs
• Experts
• Good news
• Lofty ends

Guy adds another three additional factors that make smart companies do dumb things.

• Budgets
• Greed
• Arrogance

From my limited experience, I would also add (to make few implications more explicit):

• Lose of focus/vision
• Lose of touch with reality
• Willingness, inability and perseverence to overstretch

Finally, an excellent book (that took six years to complete) by Syney Finkelsteen, “Why Smart Executives Fail,” draws on an unprecedented research of the corporate history and showcases some of most flagrant examples of brilliant and smart executives who caused their companies to fail.  He lists seven habits of spectacularly unsuccessful executives

1. They see themselves and their companies as dominating their environments.
2. They identify so completely with the company that there is no boundary between their personal interests and their corporation’s interest.
3. They think they have all the answers.
4. They ruthlessly eliminate anyone who is not 100 percent behind them.
5. They are consummate company spokespersons obsessed with the company image.
6. They underestimate major obstacles.
7. They stubbornly rely on what worked for them in the past.

Another excellent article (below) about virtues of business/entrepreneurial failure.

I believe that failing daily does two things, it teaches me what I need to do better; and it reminds me of what failure feels like. Both are awesome outcomes.

Temperance (Gluttony)

“The downside to this level of ambition is that it’s not complicated to overload yourself. I’ve learned that ambition minus realism often equals failure.”

The truth is that ambition always has a lack of realism. Its impossible to believe you will one day be the best without believing first that you are capable of being the best. You have to be unrealistic in your expectations to truly become successful. Its the lack of realism that creates the potential for failure.

The best failures are measured and tempered with self control. Understand the downside of any potential failure. Keep the failure contained through careful understanding.

Charity (Greed)

“Sacrificing your core business by spending too much time on non-core ideas…It’s important to realize that not all ideas are worth pursuing”

Yet many people eventually fail through anlysis paralysis. I have a standard equation, out of 10 ideas, 8 suck. 1 is decent, and one is fantastic. To understand success through failure, one must be willing to become creative and think uniquely about the problem. By ideating, over time, several solutions are born. Being generous with yourself and allowing the ideation to occur, develops the potential for mass, measured failure.

And, failure always leads to success.

Diligence (Sloth)

“Where it can become mostly problematic is when it keeps you from seeing a project through to the end.”

I get what Jeffrey is saying here. Starting projects is easy. The middle is not that hard, but to finish? Often its a Herculean effort. Why? Because the completion of a project allows you to determine if it was a success or failure. The completion of a project allows OTHERS to say if its a success or failure.

Its often easier to live in the grey area of undone, than it is to live in the world of definition.

With failures its the same way. My favorite saying is “failure is not what you do, but what you do after.”

Persevere. Fail a lot. Fail early. But be amazing once the failures teach you how to succeed.

Chastity (Lust)

“Getting lured away from what you need to do by what you want to do.”

Lust is an interesting sin. By definition, Lust involves a lack of thought with a focus on immediate gratification. So how does the virtue, Chasity or Purity work with failure? Failure is pure. There is nothing about failure that can be soiled. Each failure creates the same emotions, usually regret and disappointment, and each failure creates the same reality. Yet, each failure, when learning occurs, also creates the very real case of being one step closer to success.

It is impossible to do nothing but succeed if each failure is coupled with learning. You dont have to lust after success to achieve it.

Humility (Pride)

“Success has this extra-special way of super gluing on the ‘I’m so awesome’ blinders and fooling you into thinking that you’re the smartest person alive.”

The greatest thing about consistent failure, is that it reminds you that you cant solve every problem. That you arent the greatest. That at the end of the day only the outcome matters in the measurement of success, not the process.

Failure teaches us that the real talent is the recovering and learning from failure. Turning that failure (perhaps matching it to a previous failure) into a road map for success is what separates the great from the good.

Allow the emotion of humility to provide you the open-mindedness to review your failures in such a way as to improve incrementally and move towards success.

Patience (Wrath)

“Wrath is energy, and like all energy it can be used to good or evil. I like to think about the ratio of windshield to rear-view mirror and use that idea to focus my energy on what’s next.”

If wrath is energy, then patience is focused energy. Its hard to fail, fail and then fail again. You want to push, you want to accelerate the process. You move into a world of immediate gratification and would rather skip to the success part of the adventure.

Patience is not just a function of waiting, or sitting idly by. Patience is actually a function of perseverance.

If you read Jeffrey’s post, and remove the “Seven Sins” metaphor, every point he makes actually is interwoven. Words like energy, focus, hard work are repeated themes.

Failure becomes a part of the process, removing the need for a perceived failure end point.

Satisfaction/Kindness (Envy)

“Just stay true to your original plans; see them through; and understand that more-often-than-not, these new and exciting concepts are rarely vetted for use beyond their original purpose, thus having the extreme ability to only add layers of complexity to what you already do.”

Envy kills success. Focusing on competitors is a horrible action that causes most companies to lose focus. If you are doing what you need to do, focusing and understanding the market, your competitors dont matter.

Envy creates failure. Simple enough.

But, the key to all of this, is if you understand the importance of failure to the creation of success; you will also experience true satisfaction.

You have succeeded and failed completely.

And, becoming a success at the end of the day is the greatest satisfaction.

There are not many books, which have a foreword by Warren Buffet and universal acclaim from likes of Bill Gates, Jack Welch, Rupert Murdoch and even George H. W. Bush. Indeed there is only one such book that I read: “The Ten Commandments for Business Failure” by Donald Keough.

Donald Keough had an inconspicuous beginning of career in broadcasting business with WOW-TV as a game telecaster and host of daily talk called Keough‘s Coffee Counter, which was followed by a position at a regional food wholesaler Paxton and Gallagher – sponsor of his talk show.

There followed series of renamings, restructurings and acquisitions, which landed his company in The Coca-Cola Company, where he spent next 43 years of his life (1950-1993), of which as President and COO of The Coca-Cola Company during 1981-1993.

“If you wanted to invent a human personification of The Coca-Cola Company, it would be Don Keough. He was and is Mr. Coke,” as Warren Buffet, his Omaha friend of youth, wrote in the foreword of the book.

He was once asked to give a keynote speech at a large customers meeting in Miami, which had a theme “Join the Winners.” Essentially, he was asked to speak on how to be a successful business leader and how to win. He refused by telling that he could not but instead proposed to talk about how to fail and offered guarantee that anyone who followed is formula would become a highly successful loser.

His Ten Commandments for Business Failure (see below) come from subsequent refining over time of that speech, which drew on more than 60 years of corporate experience from the bottom to the top in a company whose chief product is thought to be the second most widely understood word in the world after ‘OK’!.

1. Quit taking risks

When your product/service generates enough sales or things start looking better, stop taking risks. Don’t pay attention to challenging opportunities, new markets and expansion possibilities that might put you out of your current comfort zone.

2. Be Inflexible

You know better than anyone else, to which your success is a testimony. When conditions around you change, remain inflexible because you have the winning formula already. Keep on keeping on.

3. Isolate Yourself

You should not try to find out the truth or the reality. Only ask to know what is good. Create a climate of fear, put yourself first, take all the credit, take no blame. This way you will not only not know what you don’t know, but you will develop a sense of being absolutely right.

4. Assume Infallibility

It never is your fault. We live in a complex world with so many unaccountable for and unknown parameters, and, hey, let us not forget bad luck and wrong timing.

5. Play the Game Close to the Foul Line

Illusion yourself, cherish a cult of personality, make small pillow talks and remove words “morality” and “ethics” from your vocabulary. No-one needs them.

6. Don’t Take Time to Think

Why think? We have all the computer power, AI and advanced technologies to think for us. We have better things to do. And not to forget there is all this information we have to process and digest. Thinking was an idle pass-time for 19th century philosophers.

7. Put All Your Faith in Experts and Outside Consultants

The word “expert” implies knowledge and experience. When there is a problem, you should talk to the best in the field – experts and consultants with 6-7 digit annual salaryies and deservedly so. You are only aware of and operate your business to its current extent. Experts will help you make it better, like they always do with every other business.

8. Love your Bureaucracy

Love your bureaucracy. Forms, titles, responsibilities, chain of command. It is wonderful to have those all in your company and the more the better. After all, these are results of long evolution of human thought and activity. Everything and everyone have to have their place and be solidly regulated, interlinked and monitored.

9. Send Mixed Messages

This world is so diverse and sophisticated. You should not withhold the traditional celebration or retain a reward for those who perform badly this year, ignoring for the moment the detail that their bad performance just cost a fortune to your company. Things always go out of control in this world, bad luck. It would surely be better next year.

10. Be Afraid of the Future

Only clairvoyants have an inner vision to glimpse the future. They are so rare to come by. So you should be very cautious because you never know what will happen next. Maybe a war will start and oil prizes will go up. Maybe another Katrina. Usually nothing good happens.

And his bonus 11th Commandment.

11. Lose your passion for work, for life

You made enough money and your business is doing fine. You worked hard. Now is time to play hard. Forget about work for a while, at least. Go play golf.  You work to live, not vice versa.

The period between 1968 and 1973 was actually a very good one for the American auto sector. Yet difficulties emerged by the early 1970s. Detroit was far too dependent for profit on large cars and had not paid enough attention to safety or fuel-efficiency. The energy crisis (partly helped by ousting the Iranian Shah), regulatory demands, and a cyclical downturn in the market were instrumental in pushing Chrysler, the weakest of the “Big Three” automobile manufacturers, to the edge.

In July 1979, John Riccardo, the then Chrysler chairman, went public with the depth of Chrysler’s difficulties, admitting that Chrysler was bleeding red ink. Second-quarter losses reached $207 million. As summer turned to fall, the news from Chrysler was bleak. Chrysler’s 1979 $1.2 billion loss was the largest recorded in US corporate history. By the end of 1979, the company was teetering on the brink of bankruptcy. Chrysler owed $4 billion, nearly 10% of all US corporate debt. Eighty thousand unsold vehicles worth over $700 million sat on dealer lots. Riccardo called for immediate federal assistance: a $1 billion US tax holiday, a two-year postponement of federal exhaust emission standards (worth $600 million to the company), and concessions from the United Auto Workers. Otherwise, he warned, the company would fail.

Enter Lee Iacocca. By 1964, Iacocca, a Princeton graduate, had already cemented a place in automotive history by bringing out the revolutionary Ford Mustang, which was an immediate and enduring success. Iacocca became Ford president in 1970, until Henry Ford II fired him in 1978. He was hired as president of Chrysler in 1979, tasked with turning around the faltering company.

Iacocca echoed Riccardo warning that without some sort of federal aid, Chrysler would most certainly fail. Chrysler’s impending demise was potentially the largest in history, and for many the company’s crisis represented the end of American postwar economic hegemony and the deindustrialization of North America. As Congress and the Carter administration haggled over the final aspects of a bailout bill, Chrysler faced its darkest days. To avoid running out of money, the company simply stopped paying suppliers. Finally, to the relief of over 250,000 Chrysler workers, in January 1980, President Jimmy Carter signed the bill Chrysler Corporation Loan Guarantee Act of 1979. The plan provided $1.5 billion in loan guarantees, but required the company to secure another $1.43 billion in private financing, concessions from banks and suppliers.

The turnaround in Chrysler’s fortunes came swiftly and stunningly. In July 1981, just two years after Riccardo’s fateful admission of Chrysler’s dire financial straits, Iacocca announced that the company had turned a profit for the second quarter. Although it was a meager $11.6 million (compared to the company’s 1979-81 losses of $3 billion), these profits were followed by a tidal wave of income, and in 1983 Chrysler paid off its federally guaranteed loans seven years ahead of schedule. Chrysler’s amazing recovery did seem, indeed, to be a miracle, and there was no doubt who had been the miracle worker behind the turnaround.

By the 1980s, Iacocca was heralded as a possible presidential candidate; motivational speakers talked about “Lessons from the Great Leaders: From Hannibal to Iacocca.” He was a television celebrity appearing in Chrysler commercials and in an episode of Miami Vice; even a children’s play was written about his amazing story. In 1985, Iacocca wound up on the cover of Time magazine.

However, the popular version of the Chrysler story with its excessive emphasis in the role of the government is a myth, which clouds and distorts important issues involved in the larger question of business-government relationship. Confronting the Chrysler myth with Chrysler facts reveals Chrysler’s real financial condition and the real impact of those federal guarantees. It shows that if the bailout is indeed the model for an American industrial policy the consequences could be disastrous.

Myth 1: Government loan guarantees prevented the Chrysler Corporation from going bankrupt.

The truth is that the Chrysler has gone bankrupt by every normal definition of the word. Starting from 1979, Chrysler had renegotiated its debts and restructured its organization in a way that greatly resembles a company going through Chapter 11 bankruptcy. Its creditors, like those of bankrupt firms, were forced to swallow sizeable losses.
This was the result of a clause in the Chrysler Corporation Loan Guarantee Act of 1979 that required creditors to make certain “concessions” to Chrysler. With this clause to exploit and with Treasury Department officials pressuring its creditors, Chrysler was able to pay off more than $600 million in debts. In addition, the company was allowed to convert nearly $700 million in debts into a special class of preferred stock, worthless in the financial markets because the shares earned no dividends and were unredeemable for some time.
Chrysler’s creditors were not alone in being socked by the company’s quasi-bankruptcy. The firm’s workers had paid an even greater price. Despite the fact that the loan guarantees were approved by Congress mainly to protect jobs at Chrysler, the company has sent home nearly half of its employees, cutting its white collar work force by 20,000 and laying off 42,600 of its hourly workers since the loan guarantees were signed into law. Many observers complained that the number of employees laid off at Chrysler in this period is at least as large than the number of jobs that probably would have been lost had Chrysler actually been forced into bankruptcy.

Myth 2: Loan guarantees were justified because Chrysler’s financial problems were brought on by the federal government.

Although federal regulations have certainly played a part in the financial decline of the automobile industry, these rules apply to every firm in the industry, not just Chrysler. It was Chrysler’s management, rather, which put it on the road to bankruptcy. Throughout the late 1930s and into the early 1940s, Chrysler was the second largest car manufacturer in America, ahead of Ford. The company’s problems began shortly after WW2, when it decided to stick with prewar manufacturing and styling methods instead of retooling to meet the expectations of postwar automobile buyers. Ford and GM, in contrast, developed a sleek and streamlined design that sold well.
By the time Chrysler’s management admitted their mistake in the 1950s, the company had slipped to third place among the nation’s automakers. But because Chrysler’s new management reacted by emphasizing sales and production over engineering, the firm’s cars were little more than delayed copies of Ford and GM products. Regulations may have played a part in forcing Chrysler over the edge, but the stage had been set for Chrysler’s problems long before seat belts and bumper standards were a gleam in the regulators’ eyes.

Myth 3: Loan guarantees cost nothing since Chrysler had not gone bankrupt.

Under the provisions of the Loan Guarantee Act, Chrysler was supposed to compensate the federal government for the risk that the government has taken in making the guarantees. The House Committee on Banking, Finance, and Urban Affairs defined this risk as “the difference between the rate that the guaranteed loans carry and the rate that Chrysler would be required to pay if the loans were obtained without the federal guarantees.”
Just how large is the difference between the two rates? In early 1980, Chrysler was able to issue government-guaranteed bonds at an interest rate of only 10.35%, while Ford was forced to pay about 14.5% for its unguaranteed bonds. If Chrysler did not have the loan guarantees, it would almost certainly have to pay a higher interest rate on its bonds than the more secure Ford. In addition, Chrysler paid only 1% government guarantee fee, amounting to $12 million a year. Chrysler attempted to make up the difference by giving the government 14.4 million “warrants,” which are certificates that give the government the right to purchase a share of Chrysler stock at $13 a share. In early 1983, Chrysler publicly demanded that the Treasury Department return the warrants to Chrysler, claiming that cashing in now-valuable warrants would amount to “usury.” Due to adverse public reaction, a Chrysler spokesman said that the company “would not press” the demand at this time. Moreover, Chrysler had petitioned the federal government to reduce the 1% loan guarantee fee to the statutorily mandated minimum of 0.5%.

Myth 4: Chrysler’s top management took deep salary cuts until Chrysler’s financial problems were resolved.

When Chrysler was petitioning the federal government for the financial assistance it wanted, in 1979, the company announced its Salary Reduction Program. Executive salaries were cut 2-10%; Lee Iacocca reduced his salary to one dollar a year (although it was made clear that, under the program, Iacocca would collect the balance of a recruitment bonus due to him in 1980). If Chrysler’s financial performance was adequate after two years, the executives would be eligible to receive retroactive salary payments to make up for these reductions.
Despite the fact that Chrysler lost nearly $500 million in 1981, the Salary Reduction Program ended that year, and executive salaries were restored to their 1979 level. Moreover, the company made retroactive payments to its executives for about two-thirds of the income they lost while the program was in effect, on the theory that its stock price in 1981 was about two-thirds of its 1979 price. Iacocca himself received over $360,000 in salary supplemental payments and director’s fees in 1981.

Myth 5: Chrysler’s profitability showed that it is on the road to financial recovery.

Chrysler’s supporters were elated when the company reported a net profit of over $170 million in the first quarter of 1983 — the largest quarterly profit in the company’s history. Chrysler claimed that cost cutting has been an important factor in the company’s success. At the time, Chrysler’s cost cutting program provided little optimism for long-term profitability.

• Chrysler’s massive losses in 1979, 1980, and 1981 have given the company large tax deductions to cut its tax bills almost to zero throughout the 1980s.

• Chrysler boosted R&D spending from $161 million in 1972 to $358 million in 1979 (or $207 million in 1972-equivalent dollars). But between 1979 and 1982, R&D spending was cut to $307 million (only $133 million in 1972 dollars).

• In January 1982, Chrysler reached an agreement with the UAW to defer $220 million in pension fund contributions.

• In January 1981, Chrysler negotiated special concessions from the UAW that saved the company more than $600 million in 1981 and 1982.

Summarizing…

After suffering a big decline in the period from 1978 to 1983, the industry experienced the benefits of resurgence in consumer confidence that, while not inevitable, was expected in the highly cyclical auto sector. The more general economic turnaround, accompanied by a decline in record-high interest rates that benefited car sales significantly, boosted this confidence. Chrysler’s new products (K-Car and the minivan) were also appealing to consumers. Trade policies helped fuel the Chrysler and Big Three rebound. The 1981 “voluntary export restraints” imposed by President Ronald Reagan’s administration on Japan provided some relief for American carmakers. On his part, Iacocca undertook four major strategic moves, (in addition to restructuring and cost cutting) which helped Chrysler to turnaround its fortunes and eventually go out of the red.

First, Iacocca used Chrysler’s dire situation to convince the vast number of individuals, groups, and interests affected by the crisis (as well as the public) that saving the company his way was the best and only option for Chrysler. Iacocca needed to keep the company afloat while emphasizing the organization’s precarious situation of being “on the brink” to achieve management goals.
Iacocca needed little help in publicizing Chrysler’s situation. Headlines screamed that an estimated 400,000 workers would lose their jobs if Chrysler failed, and that unemployment in Detroit would jump from 8.7% to 16%-19%. The American economy would lose $30 billion or 1.5% of America’s entire GDP. At a time when America’s trade balance was already in sharp deficit, a Chrysler failure would add a further $1.5 billion. These dire warnings became Iacocca’s talking points to the nation. Pragmatism with a dash of patriotism proved to be Iacocca’s most effective tool in convincing Americans of both the severity of the crisis and the need for aid.

Second, Iacocca asked the American government for aid. He had to persuade Americans that government aid through loan guarantees was not only necessary in this case, but also not un-American. Iacocca recalled that during the debate over Chrysler’s fate, “Everybody was beating on us. Everybody saying, ‘How dare you violate the altar of free enterprise and ask for a loan guarantee?’ . . . We did not take taxpayer money. We had a guarantee, but for fifty years they’ve guaranteed.” Unsurprisingly, many both within the auto industry and without saw this as anathema.

Third, Iacocca successfully managed and negotiated the myriad networks of management, unions, suppliers, and banks within the Chrysler constellation to position the company to take advantage of the government loan package. Among Chrysler employees, Iacocca had to fire thousands of managers and salaried staff. On the union side, the UAW leadership was mostly onside and agreed to concessions, though not without acrimony. Similarly, many suppliers initially balked at the concessions required by the company, though they all eventually agreed. Perhaps most difficult of the stars within the Chrysler constellation were the banks.

Fourth, Iacocca made a conscious decision to become the very public face of the company and utilized his skills as a salesperson to create a marketing and communications strategy that made him the central actor in this Chrysler turnaround strategy. Along with communicating to the company’s workers, Iacocca took the step that was perhaps the most pivotal in the Chrysler turnaround story. He leveled with the American people. This effort started small, with Iacocca signing “open letters” to the American people, in the form of full-page newspaper and magazine articles placed at the height of the crisis. The ads attempted to debunk the “myth” of Chrysler’s “gas guzzlers” and clarify Chrysler’s situation. Then came the commercials, which utilized Iacocca’s marketing skills (“If you can find a better car, buy it”) and natural charisma, which helped saving the ailing Chrysler.

A brief but illuminating summary of recent blunders of Henry Paulson, an expert on the Great Depression.

Treasury Secretary Henry Paulson made some disastrous decisions that had major unintended consequences.

One of those was the decision to nationalize Fannie Mae and Freddie Mac. Once the government took over Fannie Mae and Freddie Mac, supposedly preemptively, shareholders of every other financial company that perhaps needed capital were left with no choice but to sell aggressively, fearing the government might decide to preemptively wipe them out also. This made it impossible for any company to raise the capital it needed or wanted.

About a week later Lehman Brothers filed for bankruptcy, Merrill Lynch was forced to sell to Bank of America, and AIG was extended a huge government loan, all completely or nearly wiping out shareholders.

Then Paulson forced nine major banks to receive capital infusions from treasury, effectively partly nationalizing them, and creating a huge American Sovereign Wealth fund.

The above referenced nationalizations created a bizarre situation where the government contended that financial institutions needed more capital, and that it should be private capital that will solve the problem. But the government also indicated that it stands ready to provide additional assistance in the future, thus destroying the equity stakes of those prospective capital providers. Why would private capital invest, if it believes it is the policy of the government to later intervene and dilute it?

Enter the pernicious crash of October-November 2008.

The smartest CEO, John Thain of Merrill, understood the new landscape before anyone else and quickly sold at the then still available price, albeit a fraction of his company’s value at its peak. In doing that he saved Merrill from the ignominious fate it was inevitably headed towards, the same fate that awaited Lehman Brothers.

And by letting Lehman Fail, the counterparty risk was unleashed on the economy of the world, as Lehman was involved in thousands of trades all over the globe and was much bigger than Bear Stearns. That brought to the forefront the systemic risk that is now looming above us like a dark cloud. All of a sudden even money market funds were losing principal. Secured bond holders are losing money (unlike the creditors of Bear Stearns, Fannie and Freddie, who emerged whole). Nobody knew who could be trusted, and short term credit markets ceased to function, severely impairing the economy further.I believe Secretary Paulson’s policies aggravated the crisis. At the moment, Citigroup and JP Morgan are struggling; locked out of the market for private capital and their shares are in free fall. Despite major capital infusions, most financial stocks are down sharply. The nine institutions that received the first cash infusion from Washington have seen their shares fall more than 40% since then. Goldman Sachs last week was trading at a value less than just the amount of money it raised recently. So many financial institutions are failing, making the federal government their built-in savior and enervating the Fed’s resources with their insatiable demand for fresh cash.All this is making it palpably clear that the Treasury’s policy did nothing to build confidence or stabilize the markets. The sickening, precipitous drop of the equity markets in October and November are the market’s judgment on the merit of Treasury’s policies.

Here is the original article from the Huffington Post.

He accepted his errors by saying, “We’re not proud of all the mistakes that were made by many different people, different parties, failures of our regulatory system, failures of market discipline that got us here.” His solution was then and now to “buy bad assets and the administration has allocated $US100 billion for that portion of the program,” referring to the $700 billion bailout program.

His approach however looks more like a band-aid, which will postpone but by no means prevent a near certainly future problems in the financial markets. As one shrewd expert admits, “The government cannot repeal the law of gravity and stop markets from falling. Nor can it turn back the clock to reverse our financial blunders.”

The currently prevalent and rather dogmatic approach of avoiding filing for the Chapter 11 is mostly due to a misconception. It is commonly thought that a company or an organization filing for the bankruptcy (immediately) ceases its activities and (virtually) its existence. This is wrong. Usually the causes (especially in high-tech cases) to file for Chapter 11 include overwhelming debt, defensive maneuver against temporary legal liabilities and need for reducing labor problems. For the duration of being under the Chapter 11 protection, the company/organization continuous its operations. The difference mainly comes in guise of added supervision and control. The debtor usually remains in possession of the company’s assets, and operates the businesses under the supervision and control of the court and for the benefit of creditors. The debtor in possession is a fiduciary for the creditors. The objective and desired result of the Chapter 11 protection is make the company cut costs, re-orient itself and streamline in resources in efficient manner in order to return to profitability. Although admittedly the rate of successful Chapter 11 reorganizations is low (estimated at 10% or less), it is still a better solution, and is not only considered by small and medium but by large multinational corporations such as GM (which follows the same path of peering into the public money instead of doing an internal restructuring, refocusing and cost cutting as was done to save IBM in a similar case in 1993). In addition to other benefits, for the GM case, Marketing expert Seth Godin goes to the extreme of proposing, “Use the bankruptcy to wipe out the hated, legacy marketing portion of the industry: the dealers.” And then adding, “We’d end up with a rational number of “car stores” in every city that sold lots of brands. We’d have super cheap cars and super efficient cars and super weird cars. There’d be an orgy of innovation, and from that, a whole new energy and approach would evolve.” I agree.

Companies coming out of the Chapter 11 (usually few years after the initial filing) are leaner, healthier and better positioned. The most famous case in point is WorldCom.

One way or another, financial policies so far espoused by the US Treasury and Fed not only come short of calming markets and inducing confidence in money-needing banks, but also continue wasting tons of taxpayer dollars, imposing a heavy financial burden on younger generations.

A bit of historical perspective is here.

Year 1993, a once-mighty behemoth IBM, a former pacesetter in its field with a sterling reputation that was slowly fading into history, was considered a “state in a state” with 300,000 employees, billions dollar budget and its unique culture and myriad of rules and regulations.

However, IBM was then losing ground and money to likes of Apple, Intel and Microsoft. IBM offered early-retirement buyouts to employees shortly before Mr. Gerstner arrived. The company expected 25,000 people to take the offer, but about twice as many did. As employees headed for the exits, predictions of IBM’s demise were commonplace in magazine articles and books. The mainframe computer, IBM.’s lifeblood, was said to be dead. The future belonged to the fleet-footed leaders of the personal computer industry, Microsoft and Intel. To compete, IBM was pursuing a plan to break up the company into a collection of smaller ones.

Enter Louis V. Gerstner Jr., an outsider to the technology industry with a reputation as a leader and strategist, a management gun-for-hire whose résumé included RJR Nabisco, American Express, McKinsey & Company and Harvard Business School (graduated in 1965).

The IBM he saw he later described (in his book and subsequent seminars) in evocative metaphors and equally astounding ways. He likened the company to an elephant, the late Roman Empire, the Kremlin, the Titanic and an animal raised in captivity that is suddenly returned to the jungle. Still, most persuasive is IBM as the sick patient. When Gerstner arrived, the company was sclerotic, senile and hemorrhaging. It lost $5 billion in 1992 and $8 billion in 1993. Its market share had dropped 50%; 45,000 employees had just been laid off.

A few weeks after Mr. Gerstner joined IBM, a chauffeured car, as usual, arrived at his Connecticut home one morning to pick him up. As the car drove up, he was surprised to see someone already in the back seat. It was Thomas J. Watson Jr., the then 79-year-old former chief executive and son of the company’s founder. He told Mr. Gerstner that he was angry about what had happened to ”my company” and urged Mr. Gerstner to shake it ”from top to bottom.”

Mr. Gerstner, no stranger to big companies and bureaucracy, was stunned by what he calls ”the extraordinary insularity of IBM” That resulted in a pathological focus on internal process at IBM instead of on customers and the marketplace. Three weeks into his job as the newly installed chairman and CEO in 1993, Gerstner was presiding over his first meeting at the company on the topic of strategy. Everyone in the room was actively sharing ideas. “After eight hours I didn’t understand a thing,” Gerstner recalled. Too much terminology, too many abbreviations, too many insider-oriented information pieces and references.

At one of his first meetings, Gerstner was the only attendee not in a white shirt (he wore blue); the next time he faced a sea of colors, and he soon rescinded IBM’s famously rigid dress code.  Discussion at that IBM meeting, he said, seemed to be conducted in almost a private company code, like another language. Gerstner was not hearing the dispassionate, cost-driven analysis that he had been hoping for. The meeting, however, was a pivotal one for him at IBM, because it made him realize what he was up against in his charge to restore the once-great company to health.

The corporate culture could be described only as feudal. As one example, Mr. Gerstner reprints what he terms ”one of the most remarkable documents I have ever seen”: a 60-page memo from a human resources director to an aide of a senior IBM executive. It told the aide, among other things, to reset the three clocks in the executive’s office each day and included detailed instructions on how and when to buy and resupply the executive with his preferred chewing gum (Carefree Spearmint sugarless). Mr. Gerstner cited this as an instance of the ‘’suffocating extremes one could find all too easily in the IBM culture,” and he named the executive, who voluntarily retired just after Mr. Gerstner took over.

Within the first 100 days, he made the important decisions to keep the company together, reduce costs sharply and change the way IBM did business, overhauling sales, marketing, procurement and internal systems. He didn’t break up the company, as many were advising in response to his smaller, nimbler competition. He didn’t try to divert attention by acquiring new revenue streams, as many investment bankers were urging. Instead, he slashed prices to get badly needed cash and regain market share. He held a fire sale of unproductive assets. And he laid off 35,000 more employees (but he put so much human touch in this difficult decision: compassion and care).

He writes that the choice to keep the company together, reversing the course set by his predecessor and endorsed by the board, was ”the most important decision I ever made – not just at IBM, but in my entire career.” He based it on strategic analysis and instinct – and listening to customers. His bet was that IBM’s competitive advantage would be as the ”foremost integrator of technologies” to solve business problems for corporate customers. So much of what IBM did since then flowed from the one-company decision – the changes in sales, marketing, organization and compensation.

Before long, Mr. Gerstner also realized that trying to recapture control of the personal computer business from Microsoft was quixotic – costly, time-consuming and yesterday’s war. By the mid-1990’s, IBM’s technical leadership had noticed the Internet, and took the view that the coming ”networked world” would lead the way to the post-PC era, undermining Microsoft’s grip on the industry. ”Desktop leadership might have been nice to have,” Mr. Gerstner writes, ”but it was no longer strategically vital.”

Perhaps most important, though, Gerstner, the nontechie generalist, listened to those who anticipated that the PC revolution was entering a new stage. Few in the business then foresaw the big-system foundations of today’s networked world, in which corporate customers need soup-to-nuts services provided by a global information technologist. The now common phrase ”e-business” was coined by IBM.

He kept the company together, cut payroll and other costs, reduced IBM’s dependence on hardware and built up the services business. Under his leadership, IBM deftly caught the Internet wave, grasping its significance and translating it for baffled corporate customers. Such nimble exploitation of a fast-moving market opportunity was foreign to the old IBM.

After ten years into his job, in 2002, Gerstner left IBM with 65,000 more employees than when he arrived. The 2001 profit of nearly $8 billion marked the eighth straight year of black ink (though the company is carrying heavy debt). IBM was again an industry leader. Its culture and management were completely overhauled and put again onto the cutting edge.

He then wrote a memoir where he documente his years at IBM. ”Who Says Elephants Can’t Dance?” is not about IBM’s Lou Gerstner; it’s about Lou Gerstner’s IBM – and, by extension, that of his predecessors, since that is what he inherited in 1993. The book can seemingly serve a good case in point for current crisis-stricken GM, which is also predicted to file Chapter 11 if not rescued by the American government.

The book has no photographs, and its first sentence is, ”This is not my autobiography.”