Two Forces of Globalization

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Your own acts tell the world who you are and what kind of society you think it should be.

Ai Weiwei

We are in the midst of an unprecedented transition globally. This change is historic, cutting across all segments of society, and is not happening in a predictable way. Two examples from the past year illustrate this historic moment in time.

Independence referendums in Scotland and Catalunya, as well as movements in Wales and Northern Italy, show that there is strong sentiment for separation from the countries where they currently belong.  As the picture above from the demonstrations in Glasgow leading up to the Scottish referendum vote says, "You are better than you think you are."

In Greece, a national referendum showed that the people of the nation desired a non-austerity solution to their nation's financial crisis. Yet, the country's financial crisis demonstrated that the nation of Greece was no longer in control of its own welfare. It had lost it to the Troika of the European Commission, the International Monetary Fund and the European Central Bank as they sought to impose austerity measures upon the nation.

While the reach of governing institutions, whether national governments or global supra-national ones, has grown over the past two hundred years, another global phenomenon is emerging represented by the capacity of individuals to create small, focused entrepreneurial organizations and movements to affect change on a global scale.

We now find that there are two forces for change functioning within this 21st. century global context.

One is the force of global integration of business and government.

The other force is of personal initiative operating within the context of networks of relationships.

It is at the point of interaction between these two forces that this historic moment of transition is taking place.

The Force of Integration

This first force seeks to integrate all functions of society into one seamless efficient system of governance by global institutions.

The people and institutions at the center of the preeminent expression of this global force believe that it is through the integration of economics and governance that a peaceful and prosperous world can be achieved.  These international institutions emerged after the First World War to manage how the nation-states of the world interact to create peace and prosperity.

Emerging the past half century are similar movements like ISIS that want to want to integrate global governance through the eradication of people and nations who do not follow their strict line of belief.

These two very different versions of globalism share a belief in integration, but through different means.

This drive for integration is the logical unfolding of the modern hierarchical organization. Whether in business or government, integration enhances efficiency and the control of variables that affect the functioning of large complex institutions. Remove the inefficiencies and you achieve success. Unfortunately, human beings tend to represent the greatest form of variation in these large organizations.

The theme of integration has emerged in popular young adult novels and films like The Hunger Games, Divergent, The Maze Runner and The Giver. In each of these narratives, a governing authority seeks to or has accomplished the integration of society by controlling how each person functions within that world. In these stories, characters of a particular independence of character and diversity of talent foster a crisis of change for the governing systems of society through their own personal leadership initiative to bring people together to resist the forces of integration.

The Force of Personal Initiative

The second force is reflected in the native desire of people to live lives and do work that matters. These acts of human initiative operate within the context of relationships of trust and mutuality, and are facilitated by the growth of computing and communication technology.

Many of these acts of personal initiative are done without recognition. The gift of a meal to a hungry person. The mentoring that takes place in scouting, sports and in youth club programs. The volunteering that takes place in local communities through religious congregations and community non-profits. Entrepreneurial programs to train and develop the leadership of new businesses. Event planners who bring people together to support local programs. The meetings over coffee where community understanding and healing begin to take place where conflict has existed. In each situation, the beginning of the effort starts with a person taking initiative, and then, grows through the networks of relationships that emerge at both the local and global level.

We can see this force of personal initiative in the central characters of the stories mentioned above. Their motivation to act comes from a source of inner values that move them out of the crowd into a place of influence.

Katnis in The Hunger Games steps forward to compete in the games instead of her sister.

Tris in Divergent is motivated by an inner sense of justice about the importance of family.

Thomas in The Maze Runner discovers within himself a calling to serve the members of The Glade by leading them through the maze to a safer place.

In The Giver, Jonas discovers within himself an emotional depth that is expressed in his love for Fiona, his desire to save the infant Gabriel, and, ultimately to take action to cross the boundary that will release memories both painful and joyful back into society.

These two forces are not necessarily incompatible. However, the challenge is how the legacy institutions of global hierarchy can adapt to growing importance of networks as the structure for human work and community.

The particular context of this great transition are the structures of society, government, business, communities, and the non-government organizations that serve people.

The Context of Organizational Structures

It is important to understand how organizational structures function in society.

Organizational structure has no voice, but it has force.

It is invisible because its presence is so comprehensive.

The force within every organizational structure is to resist change. It seeks regularity, consistency and efficiency.

Real change cannot happen without change to the structures of society and organizations.

How many carriage makers went out of business a century ago because they could not change from making horse drawn buggies to automobiles?

How many small businesses and religious congregations closed their doors because they could not adapt to changes in their neighborhood or the technology of their business?

How many communities now languish because they could not adapt to changes taking place in the larger society?

In ancient times, kings would build a wall around their city to guard against the invading forces of change. Today, physical walls don't work. They have been replaced with political, legal and economic walls. The fortress walls of today are under threat, and are just as susceptible to collapse as those ancient ones.

Today, the structure of integration seeks to create an orderly and efficient system of governance throughout global society.

The institutional force of integration is hierarchical, operated by an elite circle of global leaders, who hold authority over the whole system.

In business, when one company totally dominates the marketplace, so that all their competitors are in effect dependent upon them, we call this a monopoly.

In politics, if a small group of people hold dominant control over the governance of a city or a nation, we may call that an oligarchy or a dictatorship. The history of nations and empires is filled with examples of these kinds of hierarchies. We can also see that they are unsustainable.

The mandate of hierarchical structures is to bring control to all facets of business or society.  In a global context, this governing hierarchy trumps democratic choice. This is the one lesson of the Greek crisis.

The question that interests me here is whether this trend can last.

Has the power of personal computing and communication technology, as it has expanded globally over the past 25 years, now made it possible for many things to be done without the requirement of an hierarchical authority?

I do not believe that the future is either utopian nor dystopian.  I do see that global networks of human relationships are structured very differently. Its power to adapt and to extend its reach quickly without prior expectation is remarkable.

At the heart of the network is the individual who initiates and acts to create opportunities within relationships of trust and mutuality. 

Hierarchies are not built on trust, but rather on the integrity of the system.

Networks, on the other hand, only function well when there is trust at the center of the relationships.

Both systems are inherently fragile and susceptible to change from outside forces.

Hierarchy-NetworkRelationships

I have thought a long time about the difference between these two structures. Increasingly, I am convinced that hierarchy is a structure that functioned well in an earlier era, but no longer. 

The authors of the introduction to Jean Baudrillard's In the Shadow of the Silent Majorities, characterize a shift that has taken place in the society where Henry Ford's factories once were the norm.

"The dominant characteristic of Fordism was repetition and stability. Post-Fordism, to the contrary, brings out instability and adaptability, all qualities instilled by advanced capitalism."

In effect, the direction that we are moving globally is from a world of regularity and predictability to one where there are no givens. Some of the skills required for this new world are ones of adaptability, collaboration and personal accountability.

With this disintegration of traditional hierarchical institutional structures comes opportunities that are present directly in front of us each day.  As a result, networks of relationships provide a structure that more easily provides a globally dispersed people the capacity to work in concert towards shared goals.

Five Questions for Understanding

My search for understanding about these two global forces has been driven by the following questions.

How did we get to this point of significant transition in how we live and work?

What is the long term impact of the growth of networks? What is the future of global hierarchical systems of economics and governance? Can they adapt by adopting the relational structures and values of networks of relationships?

Who is most significantly benefited by this interplay between the forces of integration and the network?

Where is this leading? What changes are coming that we can barely imagine right now? What opportunities will come with these changes?

What obstacles make it more difficult for networks of relationships to reach their potential impact? What must each of us as individuals do to alleviate those problems?

We are on the verge of seeing a great calamity as the structure of supra-national institutions diminish in credibility and effectiveness. The dependence that national governments have placed on these supra-national institutions to managed progress towards global peace and prosperity will become more difficult. 

In effect, these global institutions are painting themselves into a corner from which there is no easy exit. This is what I see in the Greek crisis.

The conflict between the forces of global integration and the power of personal initiative expressed through networks of relationships is the context of this growing crisis.

It does not have to be, however.

All we must do as leaders and global citizens is to begin to take personal responsibility for the world at our finger tips, by acting to make a difference that matters, by building networks of relationships that facilitate greater capacity for organizations and communities to adapt to a changing world.

I return to the quote of Ai Weiwei that began this post as a fitting place to end.

Your own acts tell the world who you are and what kind of society you think it should be.

May each of your actions build strength in your own circle of impact.


Leading by Vacuum

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"Nature abhors a vacuum."

Aristotle

Physics IV:6-9


Aristotle is speaking about flow.

See the two channels in this stream. One is meandering and the other is more direct. The meandering one has established its own path which is different from the wider stream bed. I've seen this before in streams near my house as a child. The stream bed was dredged of silt, and it looks like a long straight culvert. Within a few months, the meandering curves return. Flow finds its own path of least resistance.

Professor Adrian Bejan writes,

"Everything that moves, whether animate or inanimate is a flow system. All flow systems generate shape and structure in time in order to facilitate this movement across a landscape filled with resistance..."

It applies to the function of leadership in a way that may surprise you.

Hierarchy of  Structure

The conventional view of leadership is that it is a role within an organizational structure. The people within that structure are divided between leaders and followers.  It looks sort of like this diagram. Responsibility is set at the top and accountability is to the level above. It is built for order, control and efficiency.

This kind of structure worked for a long time, many millennia, for many reasons. Principally, limited access to education and technology kept many people from advancing beyond the physical labor of the family farm or the factory. These cultural situations acted as restrictions on the growth of this structure. Sources of friction, like these, are rapidly being removed, the result is that the place of leadership in organizations is changing.

By place I mean function. The function of leadership in this older hierarchical model was management. The function of leadership in the future will be something quite different. Instead of managing order, it is creating opportunity for leadership.

FlowLeadership

The Flow of Leadership

A vacuum is an open space.

Think of two spaces. A bowl full of water and a sponge.

The sponge is less dense, has more open space than the water in the bowl. Place the sponge in the bowl, and the water flows into the sponge until it can hold no more.

Take that same bowl of water, and leave it out on your kitchen counter long enough, and the water in the bowl will evaporate into the air. The water in the bowl is denser than the air. However, for it to flow into the air it must change into water vapor. 

This metaphor describes the changes and differences that I see in leadership between the 20th and 21st centuries.

In the older model, the corporation absorbed the raw talent into its organizational structure.

Today, there are fewer corporate jobs, and so people are adapting to a world of independence, entrepreneurism, and networks of interdependency.

This is the difference is between a closed system of a few leaders and many followers and an open system where everyone can function as a leader. It may depend upon how you define leadership.

These changes, however, are not caused by our ability to define words. Instead, it is defined by our ability to interpret the natural changes that are taking place all around us.

Adrian Bejan's point above is that nature's pattern is one of flow from one place to another following the path of least resistance. I recommend his book, Design in Nature, as an introduction to an understanding of flow in science.

The flow of leadership then is to remove the barriers, the restrictions, the obstacles and the controls that bar people from developing as leaders.

Is leadership, then, a function of management or is leadership a function of who we are as human beings?

Or, let's reverse the question.

Are human beings born as management functions? Or, are we born to lead, to make a difference with our lives?

It isn't a question of nature versus nurture in human development.

It is instead a question of how human beings function in modern organizational structures.

It is a question of human purpose first, and, and organizational purpose and structure second.

Remove the barriers that block human beings from fulling their potential, and leadership develops.

Create openness, and leadership throughout the social and organizational setting will result.

Leadership in the 20th century was a product of organizational structure. Leadership in the 21st is a product of human action.

Simply put,

Leaders take personal initiative to create impact, to make a difference that matters.

The flow of leadership, therefore, is the change that results from the human action rising from the individual initiative that fills the open spaces of opportunity to create the impact that is needed in each individual situation.

This means that in organization structure after 20th. century models must change

The role of executive changes from one who manages processes to one who facilitates the creation of opportunity and the development of the practice of leadership throughout the company.

The structure changes from a monolithic hierarchical one to a collection of smaller, networked communities of leaders.

In this respect, companies are no longer simply places of employment, but rather places of human formation.

The transition is not an easy one, but a necessary one. It is not easy because the most fundamental structure of the modern world is required to change. What is that structure? The concentration of power and affluence into the hands of those who are designated as leaders.

SharedLeadershipImpact

Leading by vacuum

The title of this post is a way I have come to describe what happens in an organization that opens up the opportunity for people to learn to take initiative to create impact.

We create a leadership vacuum when we refuse to do that which we are not able to do.

In other words, I only do that which I can do.

This isn't a rationalization for the avoidance of responsibility.  It is rather an intentional recognition that each person has gifts to offer to the functioning of the organization. When leaders claim more responsibility, more authority, or more control than they are effectively able to manage, they are at the same time restricting the possibility for the leadership potential of others to be realized.

Here's how it works.

1. Do that which you can do. Invite others to do that which they can do. Be a team of shared initiative and contribution.

2. Celebrate your values by creating a culture of unity and commitment to a shared purpose for your relationships and your work together.

3. Create an organizational structure open to change and personal initiative to create impact.

An open structure of shared responsibility for each person to realize their own potential for making a difference that matters is the future of organizations.

Executive leaders as a result push the responsibility for developing the processes and policies of the company down the organizational chart to the point of implementation.  They also are constantly communicating the Why of the companies values along side the How of the companies policies and approach.  They do this by being clear how the values of the company are functioning throughout the organization. 

Like a stream, openness for leadership helps the organization finds its path of least resistance to create impact.

Like a vacuum, where there is openness to make a difference, people step forward to fill the space provided for them to make a difference. When each person does what they do best through their own personal initiative to create impact, then the leadership capacity of the organization expands to become its greatest asset. This is 21st. century leadership.      

Update:

This post was published March 4, 2012 as an introduction for two presentations that I gave in Ventura, California, March 16-17, 2012. Here are links to those two presentations.

The Flow of Leadership

The Flow of Community

A follow up to this post was published as Still Waters Still Flow.

 Attribution Some rights reserved by Phillie Casablanca


Parallel Structures of Networks of Relationships


Structure - Collaborative into Hierarchy
One of the questions that continues to dominate many of the conversations that I have with organizational leaders is the one related to how they should structure their business.

For example, yesterday in a conversation with a friend and client, we discussed the role of the administrative assistant in his business. Like many small businesses, this role has shifted from an essential one to a discretionary one. Many employment positions have gone away because the benefit does not match their cost.

The issue isn't whether the tasks that these people do are not valuable.

The issue is whether the role as defined is.

This is a picture of the shift being taken in many places from a traditional hierarchical business structure to one that I call a parallel one. This parallel structure is a network of relationships.

Hierarchy-NetworkRelationships

As you can see by this chart, there are some real differences between the traditional approach to organizing a business, and one built around relationships.  This shift is hard for everyone who has spent their work life in a hierarchical structure.

In the traditional approach, a person is hired to fill a position. That position has a job description that outlines the specific tasks and responsibilities that they are to do. The employee's expectation is that is what their time at work will be like each day. Completing tasks that are assigned through the organizational design of the company. Responsibility is passed down to the employee,while authority is held at the top. This system worked well during an era of easy growth and social continuity.  It does so because the ultimate purpose of the organization is institutional integrity.

In a network of relationships parallel structure, the job description is also relational. It means that the individual's character and engagement with people is part of what makes them a valued employee. Some may think this has always been true. And that is correct. These parallel structures of relationships have always formed when a specific need emerges. But they were seen as temporary or adhoc, not a permanent or essential part of the organization's structure.

What We Want

The greatest business failure of the past thirty years has not been scandals or financial collapses. It is the failure of business to understand the value of their employees. This failure originates in the structure of businesses.

If employees are functionaries in an administrative, production system, then their value is diminished, by let say at least 30%, and in some cases twice that.

If the business is organized to create order, then employees are hired to comply with that order. Institutional integrity becomes the goal of the organization.

However, in a network of relationships model, people bring much more to their work. This is what the team building movement has been teaching us for a generation. How people relate and work together is a key ingredient in an organization's success.

I suspect though that here again the value of the individual to company is still not perceived well.

If you were to sit down with each employee for coffee and talk about their lives, you would find what I am finding. There are three things that they want. Everyone says them differently, but they can be summarized simply. 

Life-Work Goals
People want their lives and work to be

Personally Meaningful,

          Socially Fulfilling, and

                    Make a Difference that Matters.

This is what we all want. We want the values that matter to us to be central in how we live. We want some kind of purpose for our lives. There needs to be a point to it.

We also want our relationships to be healthy and whole. We don't like conflict. We don't like to be manipulated, to be taken for granted, or to be used for someone's selfish purposes. We want to walk into work hopeful and excited about the opportunity to share my day with the people with whom I work.

We want to feel at the end of the day that we did something that made a difference. Listen to what people say when they talk about a good day. One where they accomplished something. They overcame a challenge or an obstacle and succeeded at it. Also, they did something for someone else that was appreciated. It made a difference. There was real satisfaction in helping solve person's problems. That's what we want.

The Circle of Impact Connection

The lesson for me when I began to see this picture emerge is how congruent it was to the three dimensions of leadership that I had identified as the Circle of Impact.

Circle of Impact- simple
The three dimensions that command every leader's attention are Ideas, Relationships and Structure. We tend to segregate them, thinking that it is easier that way. Instead it creates confusion and greater complexity. That is why the four Connecting Ideas - Purpose or Mission, Values, Vision and Impact - are essential tools for helping link together the three dimensions.  And it begins by clarifying the Connecting Ideas.

The Circle of Impact applies to both kinds of structures, traditional and parallel, because this is a basic, fundamental understanding of all organizations, regardless of type. Every organization must address its ideology, its social context and how the business is structured to achieve impact. All of them. However, here's the difference.

The parallel structure, described above, is a Network of Relationships. Just like in a traditional hierarchical setting, this organizational structure requires attention to the Connecting Ideas, relationships and the organization of their work.

Networks of Relationships are formed around a Shared Mission and Shared Responsibility, where leadership, authority and responsibility to contribute are shared.

From this perspective of Shared Leadership, the responsibility of the individual is to take initiative to create impact. This is the most basic contribution of the team member. And because the group is organized as a network of relationships, their collaboration and communication is an essential focus of their relationships.

Three Contributions

Most of us have experienced team work where there was a genuine experience of coming together as a group of shared purpose and contribution. And most likely, we see these experiences as the exceptions in our lives.

Let's return to my conversation with my friend and client about the administrative staff person in his office.

How can this perspective about parallel structures, networks of relationships, shared mission, shared responsibility, shared leadership and impact fit into his traditional business structure?  

It begins with recognizing that each individual has unrealized potential waiting to be released. Everyone of us wants to work in an environment that is personally meaningful, socially fulfilling and makes a difference that matters. If that is so, then the first step is figuring out how those three personal goals can become the basis for the contributions of each person.

As a result, each person contributes that which is personally meaningful. Each person contributes in their interpersonal interaction that which is socially fulfilling. And each person contributes out of their own talent, expertise and character of personal initiative those actions that create the impact that makes a difference that matters.

For each person to do this means that the social structure of the business must change. And this shift is based on what each person shares with the whole of the organization.

SharedNetworkRelationships
Here's the insight that is a key to understanding this organizational change. Because these networks of relationships are parallel structures, they can work along side of, and even within the traditional structures of hierarchy. In fact they always have. But rarely as a core strategy, but rather as a tactical approach to team work. 

We can see this is the way businesses define positions of employment. Instead of focused on contribution, the emphasis has been task oriented. As result, the value of the employee is not realized, and it makes the case for reductions in force must easier to make.

The future belongs to these parallel structures. Let networks of relationships form. Let them take collective initiative to make a difference that matters, then new vitally and impact will emerge.


The Two Levers of Culture

Organizational culture is an important driver of any business. 3891544806_a7b01c8a63_b But culture is often seen as some vague organizational presence, typically personalized in the senior leader or owner. Culture is much more. 

For example, take a person. Hair, skin color, gender, height, shape, family lineage, geographic location and many other facets of a person are the things that distinguish us. But our hair, or lack of it, does not define us a whole person. It is all these things and more. The whole of a person is very similar to what we think of as the culture of an organization or a town. 

The culture of an organization therefore is something whole and complete, always shifting and changing as the context and the people within the organization change. Changes that are happening on a global scale are requiring us to pay more attention to precisely what is the culture of our businesses.

The shift that is taking place in organizational cultures is not incremental, but transformational. The mechanistic culture of the Industrial Age, think Henry Ford, defined the culture of most businesses over the past century. Today a more organic culture based on human interaction is emerging.

Australian Futurist Ross Dawson sees this Transformation of Business being driven by the following developments.

Flexible organizational structures

Distributed innovation

Tapping talent

Dynamic strategy

Scalable relationships

Governance for transformation

What drives these drivers? People, and the changes that they bring to their work in organizations.

A New Kind of Culture

Zappos.com is known for being a unique place to work. Its organizational culture stands out as distinctive. It is one of many businesses that have figured out how to engage its employees so that they want to give their best to their work.

Read the latest edition of their culture book (free for the asking at Zapposinsights.com), and page after page are brief stories by employees of their love and commitment to Zappos. Is Zappos the answer to the question about what the culture of work will look like in the future? No more so than any other business is the answer for every other business.  Zappos does provide an indicator of the kind of cultural change that is possible.

In the 2010 Zappos Culture book, CEO Tony Hsieh explains the Zappos culture.

“For us, our #1 priority is company culture. Our belief is that if we get the culture right, most of the other stuff – like delivering great customer service, or building a long-term enduring brand and business – will happen naturally on its own. … So what is Zappos culture? To me, the Zappos culture embodies many different elements.  It’s about always looking for new ways to WOW everyone we come in contact with. It’s about building relationships where we treat each other like family. It’s about teamwork and having fun and not taking ourselves too seriously. It’s about growth, both personal and professional. It’s about achieving the impossible with fewer people. It’s about openness, taking risks, and not being afraid to make mistakes. But most of all, it’s about having faith that if we do the right thing, then in the long run we will succeed and build something great.”

Tony Hsieh understands what Daniel Pink, in his book Drive: The Surprising Truth About What Motivates Us, describes. Pink sees that people today are not motivated to excellence in their life or work by fear of punishment or just by financial rewards. Instead three personal factors - autonomy, mastery and purpose – are the key motivators.

Two Levers of Culture

At a deeper level, organizational culture is a values structure, especially those focused on purpose and mission, and respect, trust, openness and mutual reciprocity.

We can describe this human centered system by identifying two levers. These levers provide energy and strength to the system. One is self-leadership. The other is the functioning of the organization as a Community of Leaders.

Self-Leadership

The old industrial model of leadership was built around the idea that leaders control and the rest follow. That worked when followers lacked education and training, and business systems were relatively simple and predictable. Today, nothing is simple, and the complexity of organizational systems is such that talent has become an important differentiator between businesses.  Talented people need development and the right culture to be able to reach their potential.

These changes also mean that each employee has greater responsibility for their work than ever before. That responsibility is carried out through their own personal initiative.

Personal initiative is the origin of all leadership. Without it, nothing begins or is sustained. In the past, this initiative came from a small, select group of people in positions of leadership. Now, leadership is less a role and more the way a person conducts themselves within the culture of the company.

Personal initiative is product of self-leadership. It comes from the individual him or herself. It is that expression of inner motivation that turns a person who is only there to do the job assigned into a person who is a creator and contributor to the developing success of the company.

Where does this drive for personal initiative that is leadership come from?

It begins with values. Not generic ones that appear on rest room walls with not so subtle reminders to do your best. Rather these values are personal ones that transcend the individual and form a basis for collaboration. These are the kind of values that are expressed by Zappos employee Darrin S. in the 2010 Zappos Culture book.

One of the best bits of advice I've ever received was, "Surround yourself with people that make you want to be your best self."

My Interpretation of "best self" is this:

- Purpose greater than one's own personal interests.

- Fear of stagnation

- Relentless quest for the truth in decision making.

- A thrill for the unknown when the right answer is difficult to determine.

- Trust in the effort of others.

- Genuine desire to watch others succeed.

Zappos has a high concentration of people with these values and the Zappos Culture is a product of these people.

People like Darren are self-motivated to lead from their individual place within the company's structure. They look for ways to contribute, to innovate, and to create an impact that matters.  Grow up a company filled with people like Darren and the company is transformed into a culture of committed contributors.

Community of Leaders

Two experiences inform my understanding of the phrase "community of leaders."

One was a project where issues that began at the lower level of the company's structure would get passed up the line until it reached the head of the business unit. Instead of the issue being a dispute between two people or the performance of one person, as the issue was passed on, it changed into being a dispute between the union and the company.  It was a culture problem. Managers and supervisors avoided taking responsibility because of a culture of mistrust.

The second experience was the tour of a local hospitals where we had the opportunity to meet and dialog with department heads and floor leaders. My opinion of the organization changed as I found middle-tier leaders who not only had a tactical and technical grasp of their specific area of responsibility, but also had a strategic grasp of the region's healthcare issues with an understanding of how the hospital was positioned to meet them.

A Community of Leaders is a way to describe an organizational culture where self-leadership is wide spread. It is more than just a collection of self-led people. It is an emergent culture where the whole is greater than the sum of its parts. The key change is relational and social.

As I describe above, a culture that avoids responsibility is not a culture where the relationships function well. Lack of respect and trust in any social system is sclerotic, creating an environment that is rigid, unresponsive and unable to adapt.

How many times have I been in a planning meeting with an organization and the group is pushing for greater accountability, not greater trust.  In effect, they are looking for scapegoats to blame poor performance on.  It is a symptom of a failing culture.  If people are not willing to take initiative, to build open, respectful relationships, then something is wrong. I know this is the norm in many, many organizations. Conduct anonymous surveys of employees, and you'll hear it. The social/ relational dimension of an organization is not a second level area of leadership, it is the connectional, the ligament, the glue of the system.

A Community of Leaders is an organization whose self-led members contribute through the leadership of their own personal initiative to build relationships of respect and trust. In order to see this, we have to think a bit differently about how an organization can be a community.

There is the formal structure of departments, business units and process. And then there is the informal structure of relationship. It is this latter structure that needs development in most organizations. It is developed by creating a culture of respect and trust. 

What can an executive leader of a company do to create a community of leadership culture?

First, YOU cannot create it. WE have to create it.

It cannot be controlled or mandated. It must be permitted to happen. There must be openness and freedom for people to take initiative to create the social environment that allows them to show up like Darren S. of Zappos to be their best every day. All you can do is support and facilitate, and most important join them as a co-participant.

Second, you have to understand what people want. Three Goals of Life-Work - Simple

 1. People want their lives and work to be Personally Meaningful In other words, there are ideas, values, a sense of purpose or personal calling that they want to express in the way they spend every day.  Work is personal, and becomes professional as it defines and guides their relationship to the company. The more a person’s core values are in synch with his or her work and aligned with the company’s mission, the more significant the workplace becomes as place to invest oneself in high endeavors and excellence in performance.

2. People want their lives and work to be Socially FulfillingThey want their relationships to be whole and healthy, for respect, trust and openness to be valued and practiced in the workplace. This is more than just about the functioning of a project team or a business unit. There is unfulfilled desire that informs the cynicism and fear that is prevalent in so many organizations.  It is a belief that better work results from relationships of trust and respect.

3. People also want their lives and work to Make a Difference that Matters This desire is more than just to being successful or having a fun.  People want to see the product of their effort at work creating a lasting benefit for their customers and clients.  The sense of accomplishment that comes when one’s mission or their company’s mission is fulfilled through their contributions is what I identify in people. To Make a Difference that Matters is to create change. 

Third, you have to be an example. If you are, then people will follow you. Deeds are much more important than words. If you are starting from square one, then let me suggest you take on developing the Five Actions of Gratitude as a discipline of relationship building within your company.

The Five Actions of Gratitude are five strategic actions that elevates the collaborative work as an organizational asset.

The Five Actions of Gratitude are:

Say Thanks in gratitude to those who make a difference that matters in your life and work.

Give Back in service to those who make a difference that matters.

Make Welcome in open hospitality, inviting people to take personal initiative to make a difference that matters

Honor Others in respect and recognition, as the foundation of healthy relationships.

Create Goodness through one’s own personal initiative to make a difference that matters in life and work.

What I have found is that the greatest change happens within us. The world's needs are not as insurmountable as our own fear and reticence to change.  It may be part ego, but what I find more often is that it is our lack of confidence in being able to succeed.

To take these three steps:

1. Letting go to let a community of leadership culture to develop,

2. Facilitating the development of a corporate culture which allows for people to find their life and work to be Personally Meaningful, Socially Fulfilling and To Make a Difference That Matters, and,

3. Making the Five Actions of Gratitude the basis of your personal and professional relationships,

will initiate a process of personal change that creates the opportunity for others to join you.  As a result a cultural change will take place that will release the unrealized potential that resides in every company. 

People are the levers of strength and change in organizations. Encourage their self-leadership and the result is a community of leaders. This is the future, possibly the only future that we have.

SelfLeadershipInLife-Work
Self-Leadership in Life and Work is available for download.


Tradition and Change, part two

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In my previous post, Tradition and Change, I reflected on the change in society evident in the Luchino Visconti's film, The Leopard. The picture illustrates the change that took place when traditional European aristocratic society shifted to a modern middle class democratic one. Our experience in America is different because we were not an aristocratic society but a nation of immigrants who came here as a part of the change we see in the movie, only a century before. 

Over the past the century, a similar conflict between tradition and change has been occurring here, as it has in Europe.

Traditions are values that are shared by people and whose practices form a society.

Several years ago, when working on a values project for a company, the members of the committee that I worked with kept saying that their goal was to get back to a time twenty years in the past when the company was more like a family.

What did they mean when they said they wanted their company to be more like a family?

A family is a society with its own traditions. A company can have traditions or not. It depends on its leadership. In this case, the previous leadership had placed their own enrichment over that of the company. As a result, a wedge was driven between the senior executives and the rest of the company. This group of employees wanted a return to a more traditional social environment in the company.

During the past century or so, a mythology of the individual has grown up that places the welfare of the individual above that of society. When this happens, traditions are shredded as constraints upon the individual.

In psychological terms, we could say that when the individual places his or her wants above that of society, that we have something a kin to the adolescent child who is seeking independence from the constraints of the family. 

In other words, traditional society that binds one person to another or one group to another is viewed as a liability, not an asset to the forward progress of society.  

The elevation of the individual above society, not the elevation of the individual's development as a member of society has created the crisis, conflict and divisiveness in the public arena that we find in the world today.

However, if you look away from those who promote the dichotomization of society into me or us versus them relationship, you'll see the lingering remnant of a traditional society as played out in individuals who willing place the betterment of society ahead of themselves.

This is what I see in young people who upon graduation from college, or even high school, go to places of need to teach and to work for the development of people and their local societies. It is what I saw in the people who moved to the gulf coast of Mississippi to help bring hope and recovery following Hurricane Katrina.

This same attitude of sacrifice is what makes a traditional society work. A traditional society that is focused on the greater good.

Reflect with me on the nature of kindness. Look at this quote from Aristotle on kindness

Kindness -- under the influence of which a man is said to "be kind" -- may be defined as helpfulness towards some one in need, not in return for anything, nor for the advantage of the helper himself, but for that of the person helped. Kindness is great if shown to one who is in great need, or who needs what is important and hard to get, or who needs it at an important and difficult crisis; or if the helper is the only, the first, or the chief person to give the help. Natural cravings constitute such needs; and in particular cravings, accompanied by pain, for what is not being attained.

This expression of kindness is at the heart of how a society can sustain itself. Notice that the kindness shown is self-giving. It contributes to those in need, rather than as something beneficial to the giver.

Traditional societies are built upon individuals giving to one another. They require the individual to give up part of their prerogatives as an individual to gain what they cannot have alone.

The criticism of traditional societies is that they are not progressive or modern. If however, to be a progressive or modern society is to pit one person against another, one group against another, then that is not progressive, but regressive and barbaric.

Traditions are values that join people together in a common purpose. As leaders, we must look to how we can create traditions that provide people an environment to grow, and a platform to lead, as members of a society of leaders.

At the heart of these traditions is the recognition that kindness is a way to understand how we are to function in society together. The response to kindness by another is gratitude, to say thanks, and return that kindness is some manner.

The challenge before us is, not our understanding or valuing these ideas of traditional society, but rather the acceptance and willingness to give, contribute, and even make personal sacrifices to make a society work. 

Personal sacrifices cannot be coerced or prescribed, but freely made out of the kindness of one's own personal commitments. This is an individualism of personal responsibility and maturity that is the remnant of tradition that is holding modern societies together.

For five centuries, the value of the individual has grown to have prominence over a perception of society that is now anachronistic. Those ancient and medieval societies were not traditional societies of one person or one group, joining with others to create a society of opportunity. They were societies built around the power of a governing elite, not unlike what we have today.

The American experiment in freedom, for the individual's right to life, liberty and the pursuit of happiness, is not about the individual alone, but of a society of individuals who join together to create the conditions for their fulfillment.

Today, connection, collaboration and service are values that are uniting people together to create organizations and communities that are traditional in nature. In these places, openness and accountability are practices that build strength and sustainability. 

For a very long time, the image of the individual standing alone in the crowd, isolated and alienated from the conditions that can bring genuine happiness has been present in my mind. Even as human connections expand through the use of social technologies, the individual remains alone until a relationship of mutual commitment and accountability is formed.

A traditional society is built upon values that unite people around a common purpose and a vision for the difference that they can make together.

The perception that a traditional society stands against change and progress is a false one. It is only by creating a society of shared traditions that social change can be progressive and beneficial to the whole. This is how all social change becomes sustainable. Without the values that are embedded with tradition, we are subject to the whims and emotions of the moment, to those whose eloquent persuasiveness present a false, but attractive perspective, and, to appeals for change that are essentially divisive and self-serving.

The Leopard's Prince, Don Fabrizo Selina, understood that change in concert with tradition is how the future is embraced with the least disruption to social. This truth we have lost. As a result, the change that our society will go through in the future will be more disruptive and painful than it needs to be. It is a choice that in large has been made by our contemporary "aristocratic" leaders. What they fail to realize, or do not care to acknowledge, is that their abandonment, not of the past, but of tradition, sets the stage for their own irrelevance.


Creating healthy partnerships

Leveraging our businesses by collaborating with other businesses is one way not to get trapped by the pressure to commoditize our products and services. It is easier said than done. Yet, it needs to be done so we don't get priced out of the market.

A couple years ago, I received a question about how to organize a business partnership that address this question. Here's some of what I wrote then.

First their question: Another company and ours are joining forces to provide services to a third company. Our two companies provide different services and do not ordinarily compete for the same projects. What advice could you offer about how we organized this partnership?

It is essential that the partners are clear about the scope and substance of the project. Included in this perspective is clarity about what is your companies’ responsibilities for the project.

Clarity of understanding is a communication task, and communication is where most partnerships begin to fail. Your individual assumptions and perceptions of what constitutes the project and your roles and responsibilities are the where you need to begin.

One way to explore this is to ask: “Do I understand what is expected of us to complete this project?” If you have any doubts, then you then you need to talk some more.

Your project plan should identify the specifics about what is the timeframe, sequence of steps, expectations for performance and compensation. Do this and the more likely the project will be completed on-time and within budget.

The key is to an effective negotiation is for both of you to work toward what is mutually beneficial. If you or the other firm plays a game of cutthroat, you’ll both be sorry. When a partnership agreement is equitable for both sides, then many of the issues of conflict that plague partnerships can be alleviate.

Does having a mutually beneficial, equitable business relationship mean that everything is equal?

No. Equally is really an idealistic term that is rarely achieved in life or work.

Instead, approach your agreement from what is fair. This fairness needs to begin with what is fair to the client by answering the questions about the structure and responsibilities of project. Only then, can you identify more precisely what is fair compensation for the partners involved.

In addition, pay attention to these areas of potential conflict.

First, avoid being the nice guy and accepting responsibility for work that is the other company’s. Your division of responsibility should be clear, mutually acceptable, and fairly compensated.

Second, avoid basing your perception of progress on the assumption of that your partner will work as diligently as you. Unless you have worked together before, assume that you need more information on their company’s progress than you typically would get. This is an issue of communication and accountability.

In your negotiation to become partners, you need to discuss how you will be mutually accountable to one another.

In many partnerships and businesses, the word “accountability” incites passionately negative reactions. At issue is your ability to trust one another. If you can, then you can establish a mutually beneficial process for holding one another accountable for each other’s progress. It is important that you establish agreement before you begin. It will save you both headaches in the long run.

Third, avoid ambiguity; be clear about what must be done and who is responsible. Avoid making commitments where the conditions are ambiguous. Treat every “if-then” agreement – “If we are ahead on time and money, then …” – as a commitment that you will have to fulfill. Adding possible situations creates confusion, and adds to the project the temptation for the project to grow beyond its budget and time frame.

Fourth, make one person the project manager who is responsible for the project. If if there is a clear division of work, it is important to center accountability in one person whose job is to coordinate the contributions of the partners. 

In negotiating any type of partnership agreement, make sure that you are absolutely clear about roles, responsibilities, compensation, and performance expectations. Get it in writing as well. Do this and you’ll find your partnership experience a successful one.


The Death and Rebirth of Accountability - Tom Morris

My friend, Tom Morris, writes in his Huffington Post column,

In recent years, we've been witnessing throughout the culture a major and disturbing social death: the death of accountability. In politics, business, and all our major institutions, people have been doing whatever they can to avoid any form of accountability for their actions, and they've unfortunately managed to achieve this on a truly disturbing scale.

Tom digs in deep. In a few short paragraphs, he provides a clear picture of where we are and what we've lost. He describes four ways that we have lost accountability in our society. They are Displacement, Denial, Deflection and Diffusion. Here's what he says about the last one.

Diffusion: This may be the problem most distinctive to recent events. Once a threshold of complexity has been crossed - in organizations, industries, or societies - it can become nearly impossible to pin responsibility on anyone in particular, even apart from bold denials, displacements, and deflections. As long as no one steps up and takes responsibility, it's exceptionally difficult in situations of great diffusion to identify where the buck stops. A climate of diffusion, of course, also allows for more effective displacements, denials, and deflections.

Without change, the cycle of decline will continue.

Where do we go from here? I'm convinced that accountability has to begin with the individual. Institutions are simply the products of human actions.  It must happen at the local level and percolate up to Washington and Wall Street.

This where the past conditions for accountability can be reborn as we link the virtual world with the local. Tom writes about the importance of Proximity, Longevity and Density. None of these describe most of our virtual relationships that we have through various social media outlets.

I can express my heart-felt feelings of concern for someone online, but there really are no prospects for us to be together, know each other for a long time and be together in a community of people who are involved in a wide diversity of intergeneral activities together.  This means that our virtual community is not a replacement for our local community of family and friends. It does mean that social media provides local relationships a way to interact in a more immediate way than is often possible. After after the letter, the first social media innovation that truly provided immediacy in relationships was the telephone.

Ultimately, if accountability is to return with any significance, it will happen because individuals like you and me are willing to place ourselves into relationships of accountability.  We'll have to figure out how this is to be done. If we have not experience of accountability, how then can we expect Wall Street and Washington to lead.


Peter Drucker and the New World of Economics, Society and the Individual

A couple days ago, I was compelled to pull off my book shelf a couple of books by Peter Drucker, that I had read in the early 1990's.  I wanted to see what he had to say about economics, globalism and entrepreneurialism that may be relevant to what has been taking place recently.

Peter Drucker, who died at the age of 95 in 2005, was an Austrian born journalist, lawyer, and academic, who came to America in the late 1930's and became known as the father of modern management. His writings on leadership and management helped to frame how we understand business and the changing global social context. The impetus to start my own business came from reading his Innovation and Entrepreneurship in the mid-1980's. To get a good idea of the range and power of Peter Drucker's mind, download his 1994 The Atlantic Montly article, The Age of Social Transformation.  So, I'm indebted to Peter Drucker as one of my intellectual mentors. It was such a breath of fresh air to go back and read much of these books over the past couple days.

The two books I pulled off the shelf were The New Realities (1989) and The Post-Capitalist Society (1993). I want to quote from these books and then comment.  

Keynes, the post-Keynesians, and the neoclassicists alike cast the economy in a model in which a few constants drive the entire machinery. The model we now need would have to see the economy as "ecology," "environment," "configuration, " and as composed of several interacting spheres: a "microeconomy of individuals and firms, especially transnational ones; a "macroeconomy" of national governments; and a world economy.  Every earlier economic theory postulated that one such economy totally controls; all others are dependent and "functions."  In the marginal-utility world of the neoclassicists, the microeconomy of individuals and firms controls the macroeconomy of government.  In the Keynesian and post-Keynesian worlds, the macroeconomy of national money and credit controls the microeconomy of individuals and firms.  But economic reality now is one of three such economies. And soon the economic region (as in the European Economic Community), may become a fourth semi-dependent economy.  Each, to use a  mathematician's term, is a partially dependent variable.   None totally controls the other three; none is totally controlled by the others . Yet none is fully independent from the others, either.  Such complexity can barely be described.  It cannot be analyzed since it allows of no prediction.

To give us a functioning economic theory, we thus need a new synthesis that simplifies - but so far there is no sign of it. And if no such synthesis emerges, we may be at the end of economic theory. There may then be only economic theorems, that is formulae and formulations that describe or explain this or that phenomenon and solve this or that problem rather than presenting economics as a coherent system.  But there also then would be no "economic policy" as the term is now understood, that is, no foundation for governmental action to manage the business cycle and economic conditions altogether.

Economic policy requires that lay people such as politicians understand the key concepts of economic theory, but economic reality is much too complex for that.  It is already difficult, if not impossible, to give answers understandable to a lay person to the simplest economic question.  If there is not again a simple economic theory - or at least one capable of simplification - then there can be only "economic policies" aimed at a specific problem, such as an inadequate savings rate.  There can be only what might be called "economic hygiene" or "preventive economics." These would aim at strengthening the basic health of an economy so that it could resist even severe bouts of economic crisis rather than at curing a crisis or managing it.  (The New Realities, 156-158.)

Those words were written during 1986-87, over twenty years ago, and well describe the economic situation that we now find ourselves in today. A complex global economic environment that does not yield to simple, completely integrated theories. And yet, these different spheres of economic activity - the individual, the firm, the nation-state, the transnational or global corporation and the economic region - are integrated in such a way that a failed bank in the US or a natural disaster in eastern Europe can impact an Indian entrepreneur or a Japanese merchant.

A half decade later, Drucker wrote the following.
 Only a few short decades ago, everybody "knew" that a post-capitalist society would surely be a Marxist one.  Now we all know that a Marxist society is the one thing that the next society is not going to be.  But most us also know - or at least sense - that developed countries are moving out of anything that could be called "capitalism." The market will surely remain the effective integrator of economic activity. But as a society, the developed countries have also already moved into post-capitalism. It is fast becoming a society of new "classes," with a new central resource at its core. ... the real, controlling resource and the absolutely decisive "factor of production" is now neither capital nor land nor labor.  It is knowledge.  Instead of capitalists and proletarians, the classes of the post-capitalist society are knowledge workers and service workers. (Post-Capitalist Society, 5-6.)

Political and social theory, since Plato and Aristotle, has focused on power.  But responsibility must be the principle which informs and organizes the post-capitalist society. The society of organizations, the knowledge society, demands a responsibility-based organization.
Organizations must take responsibility for the limit of their power, that is for the point at which exercising their function ceases to be legitimate.
Organizations have to "social responsibility."  There is no one else around in the society of organizations to take care of society itself.  Yet they must do so responsibly, within the limits of their competence, and without endangering their performance capacity.
Organizations, in order to function, have to have considerable power. What is legitimate power? What are its limits? What should they be?
Finally, organizations themselves must be on responsibility from within, rather than on power or on command and control. (Post-Capitalist Society, 97.)


As I have tried to understand the political and economic developments of the past two months, I've talked with many people about what they think and are experiencing.  The one constant is a sense of having no power or control over their circumstances. They feel at the mercy of forces beyond their reach. This certainly means that we have fully arrived at the world Peter Drucker saw forming twenty plus years ago.

What are we to do?  I believe we need a shift in perspective about who we are individually, about the nature and responsibility of the leadership of organizations, and what is within our power to achieve in a realistic sense.

First, we need to think of ourselves as personally responsible for our lives, even if we feel that we've lost control of the environment of our lives. Only by accepting responsibility for our lives will we make the necessary changes to create the climate in which we can succeed. A decade ago, Daniel Pink wrote a provocative article in FastCompany magazine, followed by a book, called Free Agent Nation. His singular idea is that regardless of what we do, who we work for or with, that we must think of ourselves as "free agents" responsible for our vocational lives.  We must take charge of our life situation, and not transfer authority and responsibility for it over to some other person or organization. Only by taking personal responsibility will we find solutions to our immediate problems. This requires that we must become more open to new possibilities, new relationships, new directions and new challenges to meet.

More than ever this means that each of us must become learners. If you are bored by reading, try one of the books that offers short selections by Drucker. Stimulate your mind to think about ideas and their application. Begin to write down your thoughts in response to what you read. Think of reading as a conversation with an author. Find someone to share you thoughts, or better, share them on a weblog. It is not enough to read widely, but to think widely by learning to express what we feel in our hearts about what we read and see.

To prepare ourselves to lead in this new world that Drucker describes, we must discipline ourselves to begin to ask questions that lead us to people who can help us learn. If you need help, go to your local community college, sign up for continuing education courses, work on a new degree, learn a whole new field of knowledge, before you need it.  No one is going to come invite you to read and expand your education,even though I am doing that very thing at this moment. We must take responsibility to do it for ourselves. As President Eisenhower said, "Not all readers are leaders, but all leaders are readers." Learn to be an effective reader. If you need advice, just ask.

Ultimately this leads to the conclusion that I've been writing about for many years, that leadership begins with personal initiative. It is the initiative of taking personal responsibility for the environment you are in. Whether you are a CEO, a manager, a sales person,or a line worker, leadership emerges from the initiative of the individual to do what is needed to make a difference right now for the right reasons and in the right way. You can use the conversational tools on the sidebar to the right to begin to talk about this with people in your office or at home with your spouse, children or friends.

Second, I suggest that each of us begin to think of ourselves as knowledge workers. Again, here's Peter Drucker.

Post-Capitalist Society deals with the environment in which human beings live and work and learn.  It does not deal with the person.  But in the knowledge society into which we are moving, individuals are central.  Knowledge is not impersonal, like money.  Knowledge does not reside in a book, a database, a software program; they contain only information. Knowledge is always embodied in a person; applied by a person; taught and passed on by a person; used or misused by a person. The shift to the knowledge society there puts the person in the center.  In so doing it raises new challenges, new issues, new and quite unprecedented questions about the knowledge society representative, the educated person. (Post-Capitalist Society, 210.)

This means that we have to understand what we know and its value in the context of where we live and work.  These are the assets that each of us can develop and use to great effect in organizations and our communities.

Lastly, we need to think of economics as not only the complex set of interconnected spheres, but also as a bottom-up phenomenon driven by entrepreneurs who create new enterprises that form the economic foundation of communities.
Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced. Entrepreneurs need to search purposefully for the sources of innovation, the changes and their symptoms that indicated opportunities for successful innovation. And they need to know and to apply the principles of successful innovation.

But everyone who can face up to decision making can learn to be an entrepreneur and to behave entrepreneurially. Entrepreneurship, then, is  behavior rather than personality trait. And its foundation lies in concept and theory rather than in intuition.

Every practice rests on theory, even if the practitioners themselves are unaware of it. Entrepreneurship rests on a theory of economy and society. The theory sees change as normal and indeed as healthy. And it sees the major task in society – and especially in the economy – as doing something different rather than doing better what is already being done.

Entrepreneurs see change as the norm and as healthy. Usually, they do not bring about the change themselves. But – and this defines entrepreneur and entrepreneurship – the entrepreneur always searches for change, responds to it, and exploits it as an opportunity.

Entrepreneurs innovate. Innovation is the specific instrument of entrepreneurship. It is the act that endows resources with a new capacity to create wealth. Innovation, indeed, creates a resource. There is not such thing as a “resource” until man finds a use for something in nature and thus endows it with economic value.

Entrepreneurs will have to learn to practice systematic innovation. Successful entrepreneurs do not wait until “the Muse kisses them” and gives them a “bright idea”; they go to work. Altogether, they do not look for the “biggie,” the innovation that will “revolutionize the industry, “ create a “billion–dollar business,” or “make one rich overnight.” Those entrepreneurs who start out with the idea that they’ll make it big – and in a hurry – can be guaranteed failure. They are almost bound to do the wrong things. An innovation that looks very big may turn out to be nothing but technical virtuosity; and innovations with a modest intellectual pretensions ... may turn into gigantic, highly
profitable businesses. The same applies to nonbusiness, public–service innovations.

Systematic innovation therefore consists in the purposeful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic or social innovation. (Innovation and Entrepreneurship, 19, 26, 27,30, 34-35.)


At the heart of my own perspective of leadership is this notion of the entrepreneur. Most of us are "leading from the middle" and are caught in the vise of expectations that are all around us. The only way to "escape" and thrive in an environment like this is to take responsibility for our own development, know our value in the marketplace of organizations, and develop the disciplines of innovation and entrepreneurship that enable us to be effective, impactful people in any and every situation.

If you have thoughts to share, please do so. Others will benefit from your expression of insight.


Quick Takes: Taleb on the Crisis

If you've read me for a while, you'll know that I am a fan of Nassim Nicholas Taleb, the former derivatives trader and author of Fooled By Randomness and The Black Swan.  He's written about the current financial crisis here and there is an excellent interview with him in Time. If you are not familiar with Taleb's worldview, start with the Time interview.

According to Taleb, black swans are ocurrences that are unforeseen yet happened. In the Time interview he points to the rise of the internet as one positive one, and the 9/11 attacks as another. At his website, Taleb has extracted a set of quotes from The Black Swan that describes one of the contributing factors to the global financial crisis that we are facing. Here's the quote.

Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall.  The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought.

Banks hire dull people and train them to be even more dull. If they look conservative, it's only because their loans go bust on rare, very rare occasions. But (...)bankers are not conservative at all. They are just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug.

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events "unlikely".

There is no way to gauge the effectiveness of their lending activity by observing it over a day, a week, a month, or . . . even a century!

(...)  the real- estate collapse of the early 1990s in which the now defunct savings and loan industry required a taxpayer-funded bailout of more than half a trillion dollars. The Federal Reserve bank protected them at our expense: when "conservative" bankers make profits, they get the benefits; when they are hurt, we pay the costs.

Once again, recall the story of banks hiding explosive risks in their portfolios. It is not a good idea to trust corporations with matters such as rare events because the performance of these executives is not observable on a short-term basis, and they will game the system by showing good performance so they can get their yearly bonus. The Achilles’ heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most fit for survival.

As if we did not have enough problems, banks are now more vulnerable to the Black Swan and the ludic fallacy than ever before with “scientists” among their staff taking care of exposures. The giant firm J. P. Morgan put the entire world at risk by introducing in the nineties RiskMetrics, a phony method aiming at managing people’s risks, causing the generalized use of the ludic fallacy, and bringing Dr. Johns into power in place of the skeptical Fat Tonys. (A related method called “Value-at-Risk,” which relies on the quantitative measurement of risk, has been spreading.)

Please, don’t drive a school bus blindfolded.

Owing to [...] misunderstanding of the causal chains between policy and actions, we can easily trigger Black Swans thanks to aggressive ignorance—like a child playing with a chemistry kit.

My conclusion is that as a society we are practicing cognitive dissonance on a global scale. We are doing what Paul Simon penned his his classic '60s hit The Boxer, "People believe what they want to believe and disregard the rest."  People believe what they want to believe about the financial crisis, about presidential candidates, about whether whatever it is that they don't want to actually address in reality.

In my previous post on Michael Malone's rant about the decline of journalism, the same holds true there. The Black Swan of this election is not what we don't know about these candidates that will wreck havoc upon the country, but what we do know and what we choose to ignore.

The financial crisis we are in isn't a classic Black Swan. The signs were there for all to see if they only chose to do so. The problem isn't that we are not a smart people, but we are indifferent and ignorant of the consequenses of our opinions and choices. And no more amply seen in this year's presidential election.

Addendum: David Brooks, in today's NY Times, writes about Taleb and the growing influence of behavioral economists like Danny Kahneman, whom Taleb credits highly for his understanding of the perception of risk. It is an excellent look at what I'm calling cognitive dissonance. Brooks writes about Taleb.


His writing is idiosyncratic, but he does touch on many of the perceptual biases that distort our thinking: our tendency to see data that confirm our prejudices more vividly than data that contradict them; our tendency to overvalue recent events when anticipating future possibilities; our tendency to spin concurring facts into a single causal narrative; our tendency to applaud our own supposed skill in circumstances when we’ve actually benefited from dumb luck. And looking at the financial crisis, it is easy to see dozens of errors of perception. Traders misperceived the possibility of rare events. They got caught in social contagions and reinforced each other’s risk assessments. They failed to perceive how tightly linked global networks can transform small events into big disasters.

Edge.org, who published a Taleb piece linked to above, also has a lot of material on Kahneman. This is pretty heavy stuff, but ultimately worthwhile. The simple idea that emerges is that we are much less rational, as intelligent beings, than we want to think of ourselves being. In reality, we are emotional beings who use our rationality to rationalize our choices. Hence, the person who is either emotionally conflicted or immature, could well make really bad decisions by practicing a high level game of self-deception.

The best treatment of self-deception is the Arbinger Institute book, Leadership and Self-Deception.  I highly recommend this book. It will be a revelation to you about how we fool ourselves into self-justifying rationalization that is intended to help avoid accountability for our bad decisions. It is the very thing which I see played out in the news over the past few weeks. Everyone is rushing to fix blame on someone else. As a result, we get a bail out plan that has not worked, and a market that is continuing to lose value.  What this tells me is that the people (wisdom of crowds?) is not yet emotionally comfortable with what the federal government is doing.

The same self-delusion that leads to looking for scape goats in our relationships, is at work in how this financial mess gets cleared up, and how we are selecting a president. You may not like George Bush's performance as president, but that is no basis for deciding who the next president will be. They should be selected on their own terms. As I told some friends yesterday, it feels like the 1970's all over again, now as then, the self-deception is at the heart of our decision making processes is alive and well.

And be sure to watch this PBS NewsHour interview with Taleb and his mentor Benoit Mandelbrot.


The Ethic at the Heart of the Real Financial Crisis

It has been apparent to me that at the heart of our financial crisis is the issue of trust.  In an very interesting Wall Street Journal interview, Anna Schwartz, a 92 year old historian of monetary policy, states,

To understand why, one first has to understand the nature of the current "credit market disturbance," as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads -- the difference between what it costs the government to borrow and what private-sector borrowers must pay -- are at historic highs.

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."

It is an issue of trust. This isn't the kind of trust where I ask you to keep a secret. It is rather the kind of trust that determines whether I'm willing to accept a certain level of risk in doing business with you. If I am unsure whether you will be in business in a year, I may not look to loan you money.  However, if I trust your leadership then I may begin to do so. It isn't just what's on the books that matter. It is also the behavior of the people who make decisions regarding risk.

It is one thing for one bank to trust another bank or business and lend it money. It is a wholly different thing when the bank doesn't trust the banking system. At the heart of this mistrust is a complicated set of conditions established by exotic financial instruments that are virtually impossible to value, and are sitting on the books of banks that bought them thinking that, in particular, they housing market would continue to rise in value, and these mortgage back securities would too. Now we know that was a highly risky venture that sucked banks, mortgage lenders, politicians and homeowners into the middle of a huge financial mess. Those of us who didn't play this game of financial chicken look upon this situation with both fear and anger at the recklessness of all these players.  It is this reality that Anna Schwartz speaks to.

Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."

Instead, we've been hearing for most of the past year about "systemic risk" -- the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.

Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them, just as it didn't save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on."

It takes real guts to let a large, powerful institution go down. But the alternative -- the current credit freeze -- is worse, Ms. Schwartz argues.

"I think if you have some principles and know what you're doing, the market responds. They see that you have some structure to your actions, that it isn't just ad hoc -- you'll do this today but you'll do something different tomorrow. And the market respects people in supervisory positions who seem to be on top of what's going on. So I think if you're tough about firms that have invested unwisely, the market won't blame you. They'll say, 'Well, yeah, it's your fault. You did this. Nobody else told you to do it. Why should we be saving you at this point if you're stuck with assets you can't sell and liabilities you can't pay off?'" But when the authorities finally got around to letting Lehman Brothers fail, it had saved so many others already that the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant.

At the heart of our financial crisis is a lack of accountability.  This is an ethic that will insure that this financial crisis will be repeated because people are learning that the federal government will bail them out of their bad decisions. This lack of accountability is troublesome.  I'm not for widespread bank failures, nor for people to lose their homes. The panic that comes with these failures can be just as bad as the failures themselves.

The ethic that we need is one of personal accountability. It is a belief that I am responsible for my decisions, and that risky behavior should not be passed off onto the federal government. Trust in our financial system will return when investors believe that there is a sound basis for trust.

As for accountability, I don't believe we'll ever see genuine accountability again. What form of retribution is great enough to match the loss of trillions of dollars globally. How can one person or a class of person's be held accountable for such a great effect?  In this sense, our freedom that is born in individual decision and collective action has now become the possession of the federal government. Maybe all we can hope for is consistency based on some clear set of principles so investors known whom to trust and who not to.

A friend remarked to me this afternoon, "If you are a holder of a small mortgage, the bank owns you; but if you are the holder of a larger one, then you own the bank, because they can't afford for you to fail." That is where we are today. Most of us are just not too big to fail, and if we do, who will be there to bail us out.  So, what I expect to see emerge from this crisis is a renewed, yet quiet, return to a greater individual self-reliance.  All because the issues of trust and accountability have yet to be resolved.

Make sure you read the whole article. It is revealing of the kind of thinking that takes place at the highest levels of our country. Also read Tyler Cowen's take on Anna Schwatz' perspective.

HT: E. Barandiaran's comment and Virginia Postrel