All About Business

ON MOTIVATION

I was never given a reason to excel in the jobs I held in both small and large corporations. I did the best I could just to keep my job, but I never discovered what I could do if I were rewarded for doing more or doing it better.

So when the CEO of a company I worked for spoke about the need to dedicate ourselves to our jobs—“I want you to think of the company even when you’re in the john,” he said—I just stared at him with incredulity.

Artists are driven to create, and scientists to discover, but no one may be more driven to succeed than a CEO, entrepreneurs. Their survival depends on their ability to excel. And their success and their very egos are measured by their business’s bottom line. If they are not motivated by the challenge of the system, they are doomed to fail.

As an employee, though I yearned for the challenge of a specific measurable goal, I found none in the many companies I worked for. Even during the early years in my own company, I offered nothing more to my employees than a secure job at a competitive wage with some fringe benefits. I was too busy worrying about the bottom line to concern myself with motivating my people to produce above and beyond.

Only after hard times struck and the company was struggling to break even did I wonder whether the company could produce more with fewer employees. But showing them our dismal figures to goad them to increase their effort, if only to save their jobs, made them feel more insecure. Not until someone mentioned an incentive system did I imagine that this could be the key to increased productivity. How could I have been so blind as not to see that what motivated me now—a specific measurable goal (the bottom line) and a monetary reward (the company’s increase in net worth)—would also motivate everyone in the company. And those who weren’t so motivated would soon be known and culled out.

We devised a team incentive system for our production people that led within a year to a phenomenal drop in labor costs: from 15 percent to 5 percent of sales. Although there were fewer workers due to the attrition of those who couldn’t keep up, each worker was earning substantially more than he or she had earned before. All we did was provide a proven historical standard for each team to beat, and a meaningful reward (equivalent to a month’s rent) for the incremental increases in productivity above the standard. Although the team concept was nothing new, having been used by Japanese companies for years, tying it to a monetary incentive put an American twist on it. At the same time, true to American values, we imposed a penalty for poor quality: the cost of repairing or replacing returned goods was deducted from the incentive bonus.

Eventually the entire company was on an incentive system. We found a way to measure the productivity of every individual, either as a member of a team or separately, by determining his or her performance norm and how and where it could be surpassed. The reward was based on a percentage of the savings generated. The effectiveness of top management was measured by the company’s comparative return on investment. The beauty of it for the employee was that he or she was a free agent; for management, no supervision was required.

Prior to the sale of the company, during the five years in which the incentive system operated, the company’s profits steadily mounted. We realized we had discovered a simple but generally unrecognized technique for increasing the productivity of people. Although incentive systems weren’t unusual, the way we designed ours was. Realizing that we would lose our advantage in the marketplace were our competitors to do the same thing, we swore our employees to secrecy.

After the company was sold, I spoke before several business groups and corporate managements. I know of none who adopted the concept of direct and frequent monetary reward for improved performance. At one meeting, I was challenged by the CEO of a multinational corporation to prove that praise and a symbolic reward, such as a prize, would not have produced similar results. After the meeting, several of the executives’ wives visited my table and unanimously declared, “It’s the money that matters.”

American management finds it anathema to reward employees unless it is contingent upon the bottom line. Such a reward system works to some extent as long as the bottom line keeps increasing—not a dependable event. It’s also too broad a measure. It doesn’t address an employee’s specific responsibility. In actuality, the bottom line depends far more on management’s skill and behavior than it does on that of the workers or the staff. By inviting our employees to surpass their usual performance, and rewarding them for that achievement regardless of the bottom line, we motivated them to excel. Performance came first, then black ink. Until American management recognizes this simple psychological principle and economic fact our national productivity will never approach its upper limit.

Civil service, with all its notorious waste and inefficiencies, is a ripe field for motivating employees to surpass norms. Without a bottom line, without the discipline of a marketplace, what motivation does any government employee, including the head of a department, have to reduce costs? Indeed, there may well be more of an incentive to expand unnecessarily, and employ more people rather than fewer, to enhance an agency’s influence. Size is power. But if a monetary reward were granted—say a portion of the savings engendered—for increased efficiency, productivity would replace expansion and become the standard by which an agency is judged.

It’s perhaps too much to expect government to introduce incentive techniques when private enterprise is so reluctant. Of course, should a company in a particular field decide to do so, it would quickly have an advantage over its staid competitors. And were I still in business, you can bet I wouldn’t reveal what I’ve written here.

A few months after starting my own business, I discovered that an entrepreneur’s life is radically different from that of an ordinary mortal. Every act, every decision I made as an entrepreneur was rational, even when rational solutions weren’t called for—when dealing with people, for example. For another thing, I was keenly aware that the consequences of every decision would eventually be revealed with stunning clarity in a single composite figure: the bottom line. Third, I was fanatical about trying to direct the course of events toward specific business goals—an activity that was often fruitless.

These entrepreneurial characteristics—the rationality, the profit figure as the measure of performance, and the relentless dedication to a single purpose—had profound effects on my physical and mental state and my relationship with my family. They ranged from stomach problems to anxiety attacks to divorce. Clearly, the entrepreneur’s life is an intense form of existence.

As a novice businessman, I became convinced that mindless, entropic forces prevailed; their sole purpose was to undermine my attempts to keep the business in the black. Too many prospective customers refused to cooperate and do business with us. Those who did contested our prices. The competitors refused to steer clear of my customers. The vendors refused to budge on price and insisted on impossible thirty-day terms. Employees didn’t show up to service that emergency order or they quit just at the long-awaited moment of achieving peak job performance.

It seemed like a conspiracy devised by the cruel, hostile world of free enterprise. The business was like a child that, left to its own devices, would damage itself. To survive, it had to be nurtured and guided by a doting parent: me. Until I took this point of view—that of the parent to the child—I was in constant turmoil, outraged by the people and events that weakened my company’s health. But like any neurotic parent, I too did things that had a deleterious effect on the enterprise. As with any parent-child relationship, the business mirrors the CEO’s personality: a neurotic parent is bound to spawn a neurotic child.

One example of my inept parenting is typical. When the business was in its infancy, I was overprotective. Why not? Wasn’t it totally dependent on me? When it became an adolescent and acquired a number of employees, it began asserting itself and taking off in directions that weren’t always in its own best interests. For example, our receivables might be allowed to languish too long and cause a cash flow problem, or our equipment would continually break due to insufficient maintenance. Yet I refused to let go, to acknowledge that others could bring the operation under control. I was slow to delegate and let the employees do the day-to-day directing.

My pride was another example of parental incompetence. As the “child” achieved a measure of success, I ignored caution and egged it on to expand as if there were no limits, as if the thriving economy would endure forever. Then a virus struck: a deep recession. After an operation, and the removal of some parts—without which death would have been certain—the child slowly regained its health and I found humility.

Though the child grew into a confident adult, I reserved one aspect of control for myself: keeping it on track. Even in one’s personal life, staying on track is a lifelong pursuit. (Genius is the result of doing so better than anyone else.) In my pre-entrepreneurial days, I was easily distracted from whatever path I was on. But without a bottom line to reckon with, as in a business, staying on track was never a life-or-death matter. Every instance in which the business digressed, such as pursuing markets in which our expertise was limited or entering into unrelated fields, such as equipment that would enable our customers to dispense our plastic coloring products, the results never justified the time, energy, and money invested.

Staying on track involved more than keeping an enterprise headed in a consistent direction. As in raising a child, a business must follow certain rules and procedures. Because people tend to break rules and abjure procedures, I soon became a law and order fanatic. But under this yoke, initiative and daring declined and we seemed to stagnate. Against my nature, I loosened up and allowed a little chaos. Clearly, staying on track was a balancing act. I told myself it was okay, even beneficial, to veer a little off center to make things exciting and keep everyone alert.

The child/adult metaphor breaks down at a certain point in the life cycle of a business. An enterprise may grow old—even inefficient and senile—but the right doctor can restore it. I guided my business through infancy to comfortable old age, in which it could take life easy as it reaped the benefits of its twenty-year struggle. But I knew that it couldn’t rest for long. I knew that, unlike myself—in whom the aging process was irreversible—the business had the capacity to recapture the innovative surge of its middle years. So I sold my aged child and gave it an opportunity for renewal. A few years later, I learned that the business had given birth to a few satellites. Now in my mid-sixties, I’m a proud grandfather. I wouldn’t have wanted it any other way.

                  Due to the past deep recession and the large number of currently unemployed we are obsessed with the “unfair” distribution of wealth in our society. It’s not that the unemployed or even the poor are expecting the comfortable middle class to give up a portion of their assets or income. They have faith in the possibility that they too can participate in becoming a member of the middle class, or even the wealthy. We are raised to believe in the American Dream while the rest of the world brands our nation  the “land of opportunity?” But today’s circumstances have caused us and the world to doubt the validity of our faith, and we, especially the young and middle aged, are rebelling.

                  Today’s circumstances are hardly new. Most societies have had their rich and their poor, some in which the maldistribution of wealth is just as extreme, or more so, than today’s. Take the robber barons of the late 19th and early 20th centuries whose wealth was just as outrageous as that of our billionaires. Back then Thorsten Veblen called it “conspicuous consumption” and wrote that it should be stopped. Recently, I stayed at a ten room mansion built in the 1830s with servants’ quarters, by a wealthy ship building family, and now converted into a B & B. The family lived like royalty in this magnificent home. Such homes abound in most American cities bearing testimony to the wide differential of wealth between a small minority and the majority. We would expect such grandiosity in England with its landed gentry, but we also had similar differences in wealth in our own country although not based on birth.

                  I was old enough to be aware of the toll the Great Depression took on our population with its long breadlines, a 25% unemployment rate, our great Midwest farms turning to dust, and people tearing up roots and on the move seeking work. My parents had to move from a centrally heated apartment to one heated by an oil burner in the kitchen which soon caused a fire one terrifying night that forced us to abandon our belongings and all we owned. My father hated the big corporation for which he had worked because it kept cutting his wages to the poverty level. Yet he never flinched from believing in the American Dream which encouraged him to start his own upholstering business that allowed him to make a decent, but not affluent living for the rest of his life.

                  What would the future hold for his two sons? The war intervened and they survived. Once I returned home the federal government paid for my education at one of our great universities, hopefully preparing me for a successful career. But on graduation, there were no jobs to be had, especially for one without any prior employment or job experience. Ashamed, I was forced to resort to collecting an unemployment stipend to survive. Yet, like my father, perhaps because he was my model, I believed in the American Dream, the possibility of being successful, but not necessarily rich. Over the next fifteen years I worked for a number of companies, both large and small, making a modest living. However, I was consistently unhappy with my job, partly because I witnessed gross mismanagement, unfairness in dealing with employees, and believing that I could and should do better. I believed that, like my father, I must have my own business in order to make a decent living and be happy. In other words, I alone can shape my destiny. Isn’t this the American way, the individual dependent strictly on his own abilities to be a success, in an environment that does not stand in his way? But, of course it was only a dream; I had hardly a spare penny to my name.

                  Forgive me if I pass over all the vicissitudes that allowed me to go into my own business. Eventually I found a partner willing to assist me in a startup in a trade I learned when I had worked for someone else. The federal government through the Small Business Administration that guaranteed a bank loan provided me the much needed early operating capital. As a result, in appreciation I pay taxes willingly and honestly. At the beginning, supporting a family, living on cheap food, for the first five years I only lost money and was ready to quit. But miraculously just before I might have actually given up, sales improved and in a few months the company went into the black. For the next twenty years the company grew and grew to over one hundred employees and became the most profitable in its industry. My personal earnings exceeded anything that I had imagined at the outset which was to just make a decent living. I eventually realized that what I had created put a number of people to work, enriched the communities in which I had established facilities, and added substantially to the governments’ take in taxes. Indeed, rather than my employees resenting my good fortune, they insisted that I drive a Mercedes rather than my ordinary Toyota. They felt that as the company’s top dog I should appear successful.
 
                  Even when I seemed to face failure after failure I still believed that I could do better. Although I have lived the American Dream I have no illusions that I might have failed, that luck, being at the right place at the right time, knowing people who could help me, played as important a role as my ability. Indeed, I made many mistakes, even coming close to abject failure on two occasions. I do not see myself, my past success, as harming anyone, of depriving anyone of their opportunity to succeed. In fact, I feel proud that I was able to help so many, to give them jobs and security. Were anyone to resent my so-called wealth, I would consider them unfair, unjust, bound to fail themselves.

                  However, I don’t believe that people like me that have made good are the true target of resentment by those who are less well-off. It’s the super rich, the billionaires who display their wealth shamefully. Still, even such people, either through luck, or ability or both, have become super wealthy because of the way life is, not just or unjust, deserved or undeserved. All life is unequal. Of course, our task is to equalize things as best we can. No billionaire needs all his or her billions to live well and be happy. Conspicuous consumption, the yachts, the private jets, the multiple mansions are not essential to being happy. I cannot envy such individuals their wealth and power. I believe, however, that they owe it to their nation, to society, to share their wealth, and the best way to achieve that is to be taxed, at least by fifty percent of their income, or even more. The challenge is in being creative, in contributing to the common good, not in accumulating wealth for its own sake. Many executives, some fired for failing, have made multi-millions undeservedly. The reward system desperately needs an overhaul .

                  So let us keep the American Dream alive and kicking, because the current crisis will pass, and opportunity will return. Having lived it, I know what it is being down and out, but I also know that if we stop believing in the future, we are really doomed.

You will find additional business essays in BUSINESS NOT AS USUAL-VOLUMES 1 & 2 via the SPP website.

Six Characteristics of a Successful CEO

“You’ve been lucky.” This is the sentiment that some people have expressed concerning my twenty-year career as CEO. I can’t disagree. Though the company came close to failing twice, a bitter partnership battle transpired, and our biggest customer deserted us, we survived and eventually prospered. Luck helped.

When I originally assumed ownership of our factory building, I had no idea that it would become a collateral vehicle for buying out a recalcitrant partner. Nor did I realize when I hired a particular manager that he had the creative ability to invent a new, patentable product that would help stanch declining sales. And I could never have dreamed that the company I worked for thirty years before would covet our product line and expertise and acquire us. Luck, good fortune, and fortuitous events undeniably played a major role in all this.

But what about the bad luck: the multiple machine breakdowns, the fires, the costly failure of our process cooling system, the 21 percent interest rate, and the surprise departure of three key employees who, armed with our secret formulas and prices, set up their own business in competition with us? At one point things got so bad that when good things happened, we assumed they were aberrations. What about the false rumors that our company was near bankruptcy? What about the impossible payoffs demanded by certain corporate purchasing agents, the ethnic prejudice directed against us by certain prospective customers, and the destruction wrought by the dishonesty of some of our own managers? I find it difficult to attribute the cause of these bad events to myself.

In spite of ill fortune, we succeeded. It would seem that luck played only a partial role in determining our destiny. After all, luck cuts both ways. A person can win a fortune in the lottery, but for most of us, luck—good and bad—usually occurs in fits and starts.

If luck wasn’t the only player during my twenty years as CEO, did I make more right decisions than wrong ones? In retrospect I can identify which key decisions proved to be good and which were bad, though at the time I couldn’t be sure how they would turn out. Still, I deliberately made things happen—more often for better than worse, even if accidentally.

What makes a CEO’s decisions the right ones?
• The successful CEO possesses the courage to be wrong. This is what is implied in the old saw: better a wrong decision than none at all. At least a wrong decision is certain, whereas no decision leaves matters to chaos, which is the blight of rationality. Business aspires above all else to be rational in order to minimize risk.

• The successful CEO has the acumen to recognize an opportunity and take advantage of it. It’s likely that even the most competent CEOs miss more opportunities than they will ever know, but it takes only a few opportunities—often only one—on which to build success.

• To successful CEOs, every problem is solvable (whether it is or not) and a challenge to their creative imagination. Business school students learn the rational approach to managing and to the tools at their disposal. This information and these techniques are highly useful. But they neither substitute nor compensate for the creative imagination, which one either has or doesn’t have and can’t be learned. In the late 1940s, no school taught Taiichi Ohno of Toyota the concept of lean production; it came from within him. It is the freedom to apply one’s creative imagination to problems or advantages generated by luck that can be the most rewarding aspect of being at the top.

• Some CEOs have the uncanny ability to forecast the future. From knowledge of human behavior and an analysis of past and current events, such people can intuitively predict what is likely to happen under various circumstances. It is this capacity, which CEOs usually know they have, and others soon come to acknowledge, that gives them the edge in making correct decisions. Many failed business people, having no such capacity, habitually plunge blindly into a miasma of uncertainty.

• Although successful CEOs may have special abilities that are crucial to success, they probably lack others that are just as crucial. CEOs’ recognition of their limitations is fundamental, but this alone isn’t enough. Effective CEOs surround themselves with people possessing the strengths they lack. I hired strong salespeople because I was weak in that role. Being a somewhat compulsively ordered administrator, I chose executives who were more laid back than I.

• As important as the above imperatives are to business success, they pale beside that of a CEO’s single-mindedness of purpose. Successful CEOs, at least during a phase of their reign, are virtual fanatics, dedicated to the company’s survival—often at high personal cost. The successful CEO knows no limitations regarding hours, responsibilities, and functions that might lead to a desired goal. Such a CEO is driven, needing autonomy, compelled to control subordinates and events. Though the CEO may be hard on others, even impossible to some, such a person is still an effective leader.

Not all CEOs have these characteristics in equal measure. In many instances, employees compensate for their absence. No matter, it is the presence of these characteristics, regardless in whom they reside, that counts.

Can aspiring business people not possessing the six characteristics I have described depend on luck to effect their success? I submit that such people would be doomed to failure. Upon reviewing my twenty-year experience as CEO, and weighting the role that luck played versus executive ability in our company’s modest success, I would give the former a ten and the latter a ninety.

One might say that these characteristics apply only in my case. But I believe that our company’s struggle, regardless of the specifics, is typical. In most businesses the failures and triumphs attributable to luck and ability generally occur in the same proportion as ours. Companies with good managers usually succeed; companies with bad managers rarely do.

BUSINESS NOT AS USUAL
Lesson 1: Don’t write a book which follows the current popular trend in publishing.

I must be a lousy writer because ever since I was eighteen years old I’ve written seventy-three short stories in two collections. All of them have been rejected by several professional publishers.

Let me begin at the beginning when I was a contributor to the now defunct Manager’s Journal column in The Wall Street Journal. You see, in order to make a living I ran a small manufacturing company while still writing in the evenings. Our special management methods made the company exceptionally profitable. After reading in the MJ column about the entrepreneurs seeking to sell their companies for absurdly high prices, I wrote a rebuttal letter to the paper about the ridiculous offers made by entrepreneurs trying to steal my company. This led to eighteen published essays in The WSJ. My editor, suggested that since I was beginning to dominate the column that I should put my additional essays in a book.

I did, calling the essay collection BUSINESS NOT AS USUAL, which I submitted to major business book publishers. The editor of one publisher phoned to tell me that she loved the essays, but that first the promotion department would have to approve the collection. The department’s response: “put each essay into a “how to” format rather than in story form since How-to books were popular then”. But, I countered, everyone prefers reading a story to being instructed. Having seen how enthusiastic the editor was, and as a result, how hopeful I was, I was shocked when they stuck by their demand. I refused to succumb to their preference. Strike 1.

I learned a lesson at Harvard’s Smaller Company Management Program that profoundly affected my business outlook.

Early one morning, a hundred top company executives gathered in an amphitheater for a class in marketing. The professor asked several of us what we sold in our respective businesses. One president said he sold hot air balloons; another, advertising; another, newspapers; another (myself), plastic coloring materials.

“Baloney!” boomed the professor. We were startled to hear him accuse us—the heads of our companies—of not knowing what a sale consisted of. What we sold, the professor continued, were relationships, and we’d better not forget it. I haven’t.

I returned to my company fired up with this simple concept. First, we did little things. From then on, no customer who called would be told that the party he or she wished to talk to was at a meeting. Customers’ calls would be returned within two hours, if not by the desired person, then by someone else from the company who would explain the delay and convey a message.

We did big things too. Complaints received top priority, attended to within hours and settled promptly. We viewed a complaint as an opportunity to prove our dependability and our concern for the customer’s welfare.

Placing the idea of selling a relationship before the traditional one of selling a product made us humanize our approach. The cornerstone of building any relationship is familiarity. How does one achieve that? With frequent calls. We mandated that each of our salesmen visit every customer a minimum of once every two weeks, unless the customer objected—a rare instance.

We instructed our salesmen to never discuss other customers (or competitors), and we encouraged them to give the customer the impression that our company had only one customer—them—and that our entire organization was dedicated to their cause. How did we back up this impression? At least once a year, our CEO had lunch with their CEO or purchasing agent or whoever called the shots.

When despite our best efforts we lost a customer, we would ask why. Whatever mistake we’d made, we didn’t want to make again.

Whenever our company had a bad year, I remained cool and took remedial action. But when our sales declined from the previous year, I went into a panic and thrashed about irrationally. Lack of growth was more threatening to me than showing a loss. I was hooked on growth.

Growth is a thoroughly American syndrome. We were the first to pursue it on a grand scale. Now it has spread worldwide. Indeed it is the driving force behind our rampant materialism: buy more, build more, own more.

The need for growth pervades our economy, our businesses, our very mind-set. I’m no exception. Over the years I built bigger houses, eventually owning two simultaneously, and bought more cars, bigger boats, more appliances, stereos, and TVs. The physical quality of my life was rich, lacking nothing that modern technology had to offer.

Whether this condition contributed to the emotional quality of my life is doubtful. Though I observed the decline in the overall environment, I chose to ignore it in my own life. That the streets were becoming crowded with traffic, that open space was disappearing, that the air was often fouled with smog, that the streams no longer ran clear seemed unrelated to my acquisition of an ever increasing quantity of material goods or the activity and growth of my business.

And why should I have forced the connection? I enjoyed owning things. The more, the bigger, the greater the pleasure. I loved the excitement of building a business from zero to infinity. Why deprive myself when the entire world was hooked on the same joys.

But one aspect of growth did trouble me: the birthrate. I saw a connection between the degradation of our environment and the increase in population. More people, which meant more consumers, needed living space and desired things as much as I did. Yet wasn’t this to the good, because ultimately my company would benefit? Yeah, keep the babies coming: future customers, future workers, future growth for industry. But how long could I ignore the cost so evident around me?

Malthus claimed that the world’s population tends to increase at a faster rate than does its means of subsistence, resulting in widespread poverty and death. The experts of our time disparage this doctrine, pointing out that civilization’s technological advances have rendered the point moot.

Certainly much of the poverty that exists in the world today can easily be remedied by intelligent human intervention. Though Malthus envisioned Earth’s capacity to produce as the limiting factor on population growth, he could not have known that the population’s assault on the environment would strike first. Used indiscriminately, the very technology that was designed to expand our capacity to grow has become the prevalent spoiler of that growth.

My company contributed to the degradation of the environment. We polluted the air with toxic particles, added large quantities of non-degradable materials to a landfill, created noise, wasted fuel, and generated dangerous liquid wastes. And throughout our company’s history of violating the planet, we kept growing, acquiring more customers, manufacturing more product to satisfy a growing market, constantly adding to the pollution. Many who would let population expand untrammeled still choose to ignore the consequences from firms such as mine. It’s a sure-fire prescription for disaster—sooner or later.

What if a lid on growth were mandatory—not only population growth but also economic growth as we know it? The crucial words are “as we know it.” Growth need not mean more or bigger. That is the current world’s way of viewing progress. Growth can be defined qualitatively: better, cheaper, repairable, recyclable, longer lasting, rewarding, enriching.

Were the population to remain stable, or gradually revert to the number of people on Earth right after World War II when the world seemed relatively uncrowded, how would the economy fare? Would business after business fail for want of customers? Certainly the housing construction industry and its associated industries—furniture, appliances, carpets, et cetera—would suffer. But not the entire industry, for existing houses and their contents would need repair and replacement. Homeowners might also wish to modify them to incorporate new ideas and materials that business would devise in order to create a market and grow and provide the opportunity for the associated industries to thrive. Yes, those businesses that survived could still grow. But they would grow qualitatively by developing useful new ways and products that their bankrupt competitors failed to do.

Our free enterprise system under a qualitative growth scenario would demand more creativity and resourcefulness from business than it does under today’s quantitative growth orientation. There would be far fewer businesses serving the truncated market. There would also be a greater turnover of businesses as new ones came on the scene with fresh ideas that would make existing products or services obsolete. A quantitative growth economy is forgiving. A qualitative growth economy is harsh. But it may be the only way to deal economically with a stable population and avoid making our planet uninhabitable.

Examples of qualitative growth abound today, notably in the automotive, electronics, and microchip industries. Japanese firms have outproduced and outsold our homegrown businesses strictly on quality. As a consequence, Japanese firms have grown in size because of their superior, cheaper products while our American quantitatively oriented firms have had to shrink, combine with competitors, or sink. In a stable population growth environment, the process in which producers of quality thrive, causing producers of mediocre goods and services to go under, would be even more intense. But our individual lives would be far more satisfying. Instead of seeking personal wealth in terms of how much we have and how big something is, we’d measure it by our acquisition of things that worked well, were beautiful and well crafted, and proved reliable.

On our company’s letterheads and business cards were the words: “The Innovative Company.” For years we had developed new and better products, new ways of producing them, and fresh approaches to improving our efficiency and keeping our people motivated. But during the last few years before selling the business, having lost the spark that would relight the fires of our collective imagination, I coasted. Though we kept growing quantitatively, I knew we weren’t advancing. Our products remained smugly ensconced in the status quo. Despite a growing population, our company was bound to stagnate and then decline. It would require every scintilla of our ingenuity—more than I could give—to stay ahead of the crowd. Qualitative growth is tough; it never stops demanding.

To most businessmen, what I’m suggesting is heresy. Restrict the size of our population. Don’t go for bigness and large numbers; go instead for better, fewer, and cheaper? All this for the sake of environmental sanity and quality of life?
Do we have a choice?

When the economic downturn hit, we tried the logical thing: counter it with an austerity plan. Such an attempt, however, was more easily wished for than achieved. I called a company-wide meeting to inform our employees there would be no more overtime, no more quarterly bonuses, and no purchases of new machinery. Wage increases would be delayed or, if conditions worsened, eliminated. While I expected no one to be pleased, I hoped for understanding. Instead I got suspicion, resentment and innuendo.

It was the traditional American labor versus management syndrome. When I mentioned that I, too, was sacrificing by taking a wage cut, the hearsay was: yeah, from an outrageous $200,000 to $199,000. After explaining the company’s most recent quarter ended in a loss, I heard snickers of doubt.

If, despite what I would say, my people didn’t believe bad things were happening to the company, one alternative would be to show them. This, I learned, required an act of courage. And I was a reluctant hero. Possessive of my business, having built it through personal sacrifice and risk – from a money losing operation into a prosperous credit-worthy enterprise – I found sharing its innermost secrets anathema, akin to revealing one’s sex life.

Our accountant and all my business friends were appalled at the concept, saying it was bizarre and highly dangerous. One business acquaintance warned that under such circumstances I’d have to give up my Mercedes, sail boat and country club membership. But the company didn’t own a boat or belong to a country club, and I drove only a company Buick.

But I reasoned that the benefits would outweigh the risk, that if I shared the bottom line, and the details of our expenses, I would also be sharing the burden of having to take action. The firm would change from a typically American autocratic enterprise into a uniquely democratic one. As in any democracy, openness elicits responsibility. Was I in for a few surprises!

At the end of the quarter we shut down the plant for an hour and held an all-employee meeting in the cafeteria. There on a blackboard was displayed a replica of the profit-and-loss statement. Based on questions such as “What is meant by gross profit?” and “What is the difference between fixed and variable expenses?” our executives realized that showing wasn’t enough. We’d have to educate our people.

One of our managers volunteered to hold daily sessions teaching small groups of employees how to interpret a P & L statement. I appointed him to present the statement at each company-wide quarterly meeting. It was a continuation of his enjoyable instructive role.

From that first session on I relished that I was no longer a lone worrier. Now my employees could worry along with me. They would learn as insiders that being in business isn’t the “picnic” they thought it was from outside. And they would have no choice but to believe what they see. Right?

Just as I began to think we had succeeded in allaying all suspicions of management’s motives, I was stunned with the accusation that we kept two sets of books and we had ulterior motives in showing the one we did. I could only marvel at the deep-seated distrust between worker and management. Knowing that my assurances would count for little, I invited the company’s outside accountant (and auditor) to attend the next session to explain his role, and to validate the genuineness of the figures.

As the employees became more enlightened the liveliness of the sessions increased. More intelligent questions were asked. The openness promoted understanding, trust, and cooperation that far exceeded my expectations. Another surprise.

Take, for example, a simple expense item of $4,000 that appeared on the quarterly P&L: the workers’ rented uniforms. They had no idea that what they wore and tossed into the laundry every day was so costly. They came forward with the remarkably simple suggestion that the company purchase the uniforms and invest in a commercial washing machine and dryer. They could then wash their own uniforms at the end of each working day before going home. The estimated savings was $12,000 a year – an office worker’s annual wage.

The employees bottom-line thinking didn’t end there. When they learned that we spent several thousand dollars each year on a Christmas party, they asked that we do without one. Instead, they suggested that the accumulated earnings of our vending machines be set aside and raffled off during the holidays (a possibly illegal practice to which we all agreed).

While everyone was invited to comment on policy decisions, each employee had a direct responsibility in making the final one affecting him or her. Our janitor, knowing why we had to cut our advertising budget, for example, chose the broom he, not we, preferred.

Of course, nothing goes smoothly for long in human affairs. Some individuals, unable to see beyond their own narrow interest or to identify with a larger entity, refused to sacrifice for the good of the organization. Most disappointing, some of those people were in the upper echelon. Uncomfortable with our open style – or choosing to ignore it – they would be better off in a traditional closed company where they would be told nothing, their responsibility would be restricted, and where they would be free only to suspect everything. That’s where I suggested they go.

Picture an organization, whether a business, a nation or an army, as a ship. All the participants are its crew, and the leader is the helmsman. He or she – the CEO, the President, the Dictator, the General, the Captain – determines the direction of the vessel, the destination, and the strategy for getting there.

It’s obvious that without this helmsman it would be virtually impossible – unless luck intervened – to get anywhere. Rarely does anything go according to plan. The ship sails on an ocean of entropy. So the necessity of having a helmsman, a CEO, is clear.

But more important is the necessity of having a competent CEO. Under his or her leadership the destination – shall we call it the bottom line? – will be reached. An incompetent CEO is no better than having none at all, or maybe worse. Such a leader will allow the ship to founder on shoals, in business parlance: bankruptcy.

It’s not difficult to determine who in practice is competent or not. It shows up in the bottom line, an honest bottom line, not a manipulated one. Sooner or later, a manipulated bottom line will ultimately reveal the incompetence of the CEO regardless of how much he or she is revered. Manipulation doesn’t necessarily imply dishonesty, but merely a desperate attempt to prevent the business from declining or going under until some method of rescue is devised – a new strategy perhaps, a loan, an angel, or a replacement CEO.

While working for other companies, I was never clear about what their CEOs did. They had elegant offices, earned enormous salaries, drove fancy autos, and commanded respect. I could only assume all this was deserved. But there were times when I had doubts, especially when strikes occurred, or I witnessed waste, or the failure of management to recognize talent, or employee morale was low. So I can only refer to my own experience as CEO of a small, successful – some years more successful than others – manufacturing company to explain what we do.

As CEO, I am a number maniac. I study figures from daily reports prepared by department heads on what had transpired in the business during the previous twenty-four hours. They tell me how much we produced and shipped, how much we sold and how much money we made or lost that day, and if the latter where did we lose it and why?

I am a listener. I listen to the responsible department heads suggest some remedial action – perhaps change a procedure, increase a price, or fire an employee.

I am a decision maker. I decide whether to act on the suggestions.

I am a confidant. Anyone can enter my office and talk about anything they wish – a problem in the company, personality conflicts, even personal problems, all held in confidence.

I am a communicator. At the end of each month, and each quarter, I pore over the profit and loss statement, compare it with projections. I huddle over it with my key people, and review it at a meeting with all the employees. So my job as CEO is, first, to understand what is going on within the company, daily, monthly, and quarterly, to see whether it’s operating as planned, and if not, to make the changes, which would bring us to our destination.

And second, I communicate this to all interested parties: not only the employees, but the board, the stockholders, and the bank. Any CEO who does not understand what is happening in his or her company is by definition incompetent. It is the CEO’s job to know and to let others know.

I am a goodwill ambassador. I AM the vendor company personified. Either with a salesperson, or alone, I visit key accounts, have lunch with its CEO or the purchasing agent, listen to complaints, make deals, lend the entire weight of my position to support our salesperson and gain the confidence of the customer. This occurs at least once a year with all key accounts.

I symbolize the company. I speak to every employee as frequently as possible. This is crucial. I speak to the community, the bank, the government, and our vendors, on behalf of the company. I speak to the board of directors. They must not be a rubber stamp. They question me, and although I can ignore their advice without fear of reprisal, it behooves me to take it, else why do they exist?

A CEO is worth many times more than any other employee. No argument there. But he or she is subject to the same conditions as any employee: perform or leave. It’s no secret when a CEO hasn’t performed. It shows up in advance of the bottom line. It shows up in low employee morale, in the CEO playing rather than working, in the absence of innovation, and of growth, in not adapting early on to the economic situation, in the lack of conservative financial policies, and in the failure to minimize risk. How many CEOs in our time have brought their companies to ruin by being foolhardy?

How many CEOs have bought companies whose cultures are incompatible with theirs, incurring debt that ignores a worst case economic downturn?

So what makes a CEO go? According to the dictates of our free enterprise system, it’s money. In large companies boards will reward the CEO with a salary and perks hundreds of times more than a company’s average employee receives and in so doing reduces the earnings of the company’s stakeholders. Such a reward, when tied to stock options, may even be unintentional should the company’s stock value skyrocket and become overvalued. This is what happened in the most recent stock market bubble.

Does any CEO in good conscience really believe that he or she is worth, say, five hundred times more than the company’s typical employee? Would he or she be willing to work for half that much, a quarter that much? Is money the CEO’s sole motivation to succeed? What about the inherent satisfaction derived from the challenge, the prestige, from the job itself?

The CEO owes the company for being appointed, not the other way around. Outstanding business leaders often sacrifice income to serve the nation. Ask, why is the office of the President, the CEO of our country, so poorly paid yet so sought after? A CEO should have enough dedication to his or her company to sacrifice when it’s in trouble. A company is bigger than any individual within it, including the CEO. Yet the rationale behind the reward given to many CEOs today is that they are more important than the company and its employees.

Conventional wisdom has it that talented CEOs are at a premium, that the only way a company can attract a first class CEO is to offer a bundle of money and perks. Perhaps, but the proof of the opposite is in the practice. Too many CEOs heralded for past successes have ultimately failed, yet they departed richer than ever. Every CEO knows luck plays a major role in his or her success navigating the capitalist system. And most critical of all is the company’s employees without whose dedication, creativity, and talents no CEO can succeed. Too often it is forgotten that leaders do not perform by themselves, that from their followers they get their best ideas and avoid making their worst mistakes.

In one devastating stroke, our company lost its best key people—the top salesman, the production vice president, and the creative technical director. They resigned. But that wasn’t all: The defectors virtually cloned our company in direct competition with us.

Perhaps they did this more for self-preservation than enmity or maybe to better themselves. As employees, all were well compensated and had brilliant futures. But for almost two years my partner and I had been locked in a war of attrition. Like children of parents on the verge of divorce, the key people, and most of the employees for that matter, felt insecure. Moreover, even if they knew that the company would survive the struggle, these individuals couldn’t have chosen among the remaining partners. They chose instead to combine their talents and take a chance on their own.

They possessed qualifications that gave them an advantage over most competitors. They were privy to our special production methods and quality control techniques that, until the partnership war began, had placed us on a 25 to 50 percent growth curve during the previous five years. They were also familiar with our manufacturing equipment, which had been modified to make our process more efficient.

Not until years later did we learn that they had contacted our capital equipment suppliers to purchase machinery identical to ours. Nor did we know that after working hours they had secretly copied our company’s customer list, our quotations (as a manufacturer of custom products, we had no price lists or standard prices), and our confidential formulations—the very core of our expertise.

This was worse than having to deal with a recession, where every competitor is generally harmed alike. Knowing in part what information our new competitors had, we estimated we might lose 20 percent to 30 percent of our sales. Fearful of their advantage, we waited for the blows that had to come.

And indeed they did.

We received our first clue of their presence when we began losing orders on price: in case after case we were slightly underbid. After a string of disappointments, we dropped our prices—sometimes to below cost—to maintain our position. But we knew this would be counterproductive in the long run. We wondered where it would end.

Then our field salesmen reported that customers were troubled by rumors of our company being consumed with a mighty partnership struggle and being close to bankruptcy. Actually, the company was amply financed. And, in fact, shortly after the defection, my partner and I settled our differences and I agreed to buy him out.

But the damage didn’t end there. As our new competitors began expanding, they turned to raiding us of our most talented workers and wooing away our second-string managers whom we had promoted to replace those who had left. They were the most resourceful of enemies, knowing our precise strengths and how to drain us step by step. We were like a battlefield casualty slowly bleeding to death.
We were morally outraged. After six months of taking blow after blow and uncertain how best to cope, we struck back.

• As CEO I personally visited every account to explain what had transpired between my partner and myself. I stated unequivocally that as majority stockholder, I would be directing the business from then on.

• To those customers and vendors who had serious doubts about our staying power, we revealed our audited balance sheet.

• Our lawyer filed for an injunction against our new competitor to prohibit them from spreading false rumors about us, and a judge shut them down for a month until they agreed to comply.

• I sent a notice to the trade through publications and mailings that our company had adopted an Employee Stock Ownership Plan (ESOP). Our motto became, “When you’re talking to one of our employees, you’re talking to the owner.”

• We installed a sophisticated computer, a major technological advance, that enabled our lab to gradually reformulate our products into a more economical configuration, thus giving us a new price advantage.

Then we waited to see what effect our strategy of truth and candor would have on our seemingly precarious future. Over the next year, sales continued to slowly sink but at a declining rate, finally leveling off 25 percent below the previous year. Then a remarkable series of events occurred.

Satisfied that we were not in the dire shape rumor claimed, customers returned to us with renewed fervor. In fact, a few ensured that we got their business by allowing us the opportunity to meet our new competitor’s prices.

Several of our best former employees who had been seduced by higher wages asked to be hired back. They found the new competitor’s benefits less generous than ours, and the cost of traveling to a more distant plant prohibitive.

Our former technical director, a stockholder in the competing company, was chagrined to learn that his minority rights there were of little value. Disenchanted, he offered to return to his old job. Reluctantly, we declined: a divorce is a divorce.

One of our former technicians, acquired by our new competitor with false promises of paid vacations in Greece, visited our office. Angry over the deception, he revealed the earlier theft of confidential information from our files. In a rancorous gesture, he had actually stripped their files of formulations and offered them to us. He asked us to join him in a suit against his employer. We declined. We were satisfied that justice had been done.

Within two years we had recovered 90 percent of the business that had been lost. Four years later, after our company had adopted a series of incentive plans, sales resumed their earlier growth curve. Ten years after the defection, we sold the company for more than two and a half times its book value, providing our long-term owner/employees—those who were patient and ultimately loyal—more cash than they’d ever had in their lives.

Meanwhile, our competitors remained in business. (Their competence was never in doubt.) But after a number of years, these partners, too, bloodied themselves in their own war of attrition.