Setting Board Priorities

by Jamie Flinchbaugh on July 6, 2010

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GE’s Board of Directors from a couple of years ago.

What should boards of directors be focused on? Strategy? People? Competition? There might be several choices that could receive votes that you could feel comfortable about. Would you feel comfortable knowing that the board’s top priority is keeping up with new regulation?

That’s exactly what is at the top of minds in boards today. This has been growing and growing ever since the emergence of Sarbanes-Oxley but continues getting more challenging and unpredictable every day. This week I was writing my Leading Lean column for Assembly Magazine on the topic of lean in the boardroom. This topic deserved attention but I had to cut it from my column because of space. However, it deserves more attention.

You could argue for or against the merits of any particular new regulation. SOX had merit, and flaws. The current financial reform bill, consuming 2,319 pages, has both merit and flaws. Some of you would come down entirely on one side of the debate or other, as would I. However, the net impact of regulation after regulation is the impact it has on businesses ability to do what it is built to do – serve customers, create returns for shareholders, build jobs, invest in infrastructure. Boards of directors have limited time and bandwidth to focus on key issues. The National Association of Corporate Directors (through which I am a certified Professional Director) has issued a list of what it considers top board priorities for 2010. These sound reasonable, and does include dealing with regulation:

  1. Adapt to a changing environment
  2. Demonstrate leadership
  3. Build your board
  4. Understand risk governance
  5. Pay for performance

But boards are so consumed with only the regulation aspect of priority #4 (there are many, many other forms of risk governance that should be managed) that they have no time to build a successful company. Surveys have demonstrated that boards are spending a lot of time on regulatory issues.

Boards have more topics to cover than ever. They require more detailed knowledge than ever. They requires more breadth than ever. We cannot burden company after company with a focus on regulatory compliance above the topics that really build companies and create jobs.

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Every year Americans celebrate the 4th of July, but that’s only a date. The real name is Independence Day. It celebrates a fight against tyranny. A fight for independence and freedom. Americans should celebrate not just by flying a flag and having a BBQ, but by reading the Declaration of Independence. I believe we should read this once a year. No excuses – here it is.

IN CONGRESS, JULY 4, 1776

The unanimous Declaration of the thirteen united States of America

hen in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. — Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

He has refused his Assent to Laws, the most wholesome and necessary for the public good.

He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.

He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.

He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their Public Records, for the sole purpose of fatiguing them into compliance with his measures.

He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.

He has refused for a long time, after such dissolutions, to cause others to be elected, whereby the Legislative Powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.

He has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands.

He has obstructed the Administration of Justice by refusing his Assent to Laws for establishing Judiciary Powers.

He has made Judges dependent on his Will alone for the tenure of their offices, and the amount and payment of their salaries.

He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance.

He has kept among us, in times of peace, Standing Armies without the Consent of our legislatures.

He has affected to render the Military independent of and superior to the Civil Power.

He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:

For quartering large bodies of armed troops among us:

For protecting them, by a mock Trial from punishment for any Murders which they should commit on the Inhabitants of these States:

For cutting off our Trade with all parts of the world:

For imposing Taxes on us without our Consent:

For depriving us in many cases, of the benefit of Trial by Jury:

For transporting us beyond Seas to be tried for pretended offences:

For abolishing the free System of English Laws in a neighbouring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies

For taking away our Charters, abolishing our most valuable Laws and altering fundamentally the Forms of our Governments:

For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.

He has abdicated Government here, by declaring us out of his Protection and waging War against us.

He has plundered our seas, ravaged our coasts, burnt our towns, and destroyed the lives of our people.

He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation, and tyranny, already begun with circumstances of Cruelty & Perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation.

He has constrained our fellow Citizens taken Captive on the high Seas to bear Arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.

He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions.

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince, whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.

Nor have We been wanting in attentions to our British brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these united Colonies are, and of Right ought to be Free and Independent States, that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. — And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.

— John Hancock

New Hampshire: Josiah Bartlett, William Whipple, Matthew Thornton

Massachusetts: John Hancock, Samuel Adams, John Adams, Robert Treat Paine, Elbridge Gerry

Rhode Island: Stephen Hopkins, William Ellery

Connecticut: Roger Sherman, Samuel Huntington, William Williams, Oliver Wolcott

New York: William Floyd, Philip Livingston, Francis Lewis, Lewis Morris

New Jersey: Richard Stockton, John Witherspoon, Francis Hopkinson, John Hart, Abraham Clark

Pennsylvania: Robert Morris, Benjamin Rush, Benjamin Franklin, John Morton, George Clymer, James Smith, George Taylor, James Wilson, George Ross

Delaware: Caesar Rodney, George Read, Thomas McKean

Maryland: Samuel Chase, William Paca, Thomas Stone, Charles Carroll of Carrollton

Virginia: George Wythe, Richard Henry Lee, Thomas Jefferson, Benjamin Harrison, Thomas Nelson, Jr., Francis Lightfoot Lee, Carter Braxton

North Carolina: William Hooper, Joseph Hewes, John Penn

South Carolina: Edward Rutledge, Thomas Heyward, Jr., Thomas Lynch, Jr., Arthur Middleton

Georgia: Button Gwinnett, Lyman Hall, George Walton

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Voluntary versus Directed Activity

by Jamie Flinchbaugh on July 1, 2010 · 1 comment

In our next video in the Cultural Transformation Series, we discuss a solid leading indicator of your cultural impact. You want to see people picking up the tools and methods and using them on their own. You want to see voluntary involvement. Directed involvement is also a part of lean, but the ratio between voluntary to direct activity should be very high.

Please let me know what you think.

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The Value of Rules

by Jamie Flinchbaugh on June 28, 2010 · 3 comments

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NCIS has been one of the most popular shows on television for years now. I generally don’t like TV crime dramas, but my wife has gotten me a bit into this one over time. The lead character is Leroy Jethro Gibbs, played by Mark Harmon. Gibbs has a number of rules. His team learns these rules as they go, usually after violating one of them unwittingly. Many of these would apply specifically to law enforcement. But some of my favorites that don’t include:

  • Rule #1: Never screw over your partner. You shouldn’t need a rule for this, but it is probably better to be sure.
  • Rule #3: Never believe what you’re told. Double check. This isn’t just about trust in law enforcement, but I believe also applies to problem solving and improvement. Dig deeper, and understand what is truly happening.
  • Rule #15: Always work as a team. Enough said.
  • Rule #45: Clean up your mess. Because, after all, who should be doing this for you.
  • and of course, Rule #13: Never, ever involve lawyers. Because after all, don’t we have enough of that.

Rules have value. They provide guidance. They provide empowerment. They provide memory and learning.

Guidance and empowerment is provided because rules create a corridor of what’s OK and not OK. They help people make their decisions consistently with others, but without hamstringing them by following a narrow script. Rules should not be rigid; they should be guiding. Rules should not be unbreakable; they should bend consciously.

I think the most significant value of rules is that they provide memory through learning. If you engage in reflection, it’s intention is to learn from the past (or recent past) in order to improve your action in the future. I was recently reminding of this while considering an investment opportunity. Based on experience, I’ve developed some of my own rules. A few of these rules involve what makes a good investment. Without getting into specifics (to protect the innocent), this opportunity would violate one of my rules. I could still go ahead. No one could force me to follow my own rules. And I considered the possibility. However, this rule was based on my experience of what contributes to success and to failure. It is based on my experience and my learning. The rule allowed my the opportunity to draw upon those experiences more effectively. I decided to pass. That doesn’t mean it is the right decision, but it the process of how the rules helped me connect my decision making to my experience.

Do you have rules? How do you use them?


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Eliminate Earnings Guidance

by Jamie Flinchbaugh on June 23, 2010 · 5 comments

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Show me the money! Or at least, show me your plans to have money in the future.

One of the most pervasive intrusions to sound strategic decision making and long-term leadership is a focus on quarterly earnings. “We must hit the number” drowns out more sensible criteria such as “what will deliver the most value to our customers?” This is equally applicable to private companies who release estimates to banks and shareholders; and the banks have only sharped their scrutiny on both estimates and actual numbers over the past 2 years.

We can’t change this culture, at least overnight, but what can we do?

Aggravating the situation is the quarterly earnings guidance that is offered regularly by most companies. Forget for a moment the waste generated by having to develop, agree on, and then communicate the guidance. The real problem is that on top of having to make each quarters’ numbers look as good as possible, the organization is focused on hitting specific numbers based on the “promises” we inherently made. Decisions are then filtered not on what they do for the business, but what they do for the number versus the promised number. That promise of the number changes everything. If you miss the number short, then your business must be headed in the wrong direction. If you exceed it by a good margin, then why did you give everyone such low-ball guidance. And worse, the market comes to expect you to beat it in the future. There really is no winning in this battle.

The best thing that can be done is simply eliminate quarterly earnings guidance. Just stop doing it. What’s the worse that can happen? Analysts and shareholders will grumble, complain, and perhaps even punish your stock a little in the short term. You will also have to get pretty skilled at dodging the questions as people continue looking for an inside angle on numbers that haven’t been released. A U.S. Chamber of Commerce independent commission even recommended the elimination of quarterly earnings guidance.

Should earnings guidance affect strategy and decision making? No, it shouldn’t. Leaders in companies should have the guts and perspective towards what is right long-term. But for those of us who have seen the behavior time and time again, eliminating this practice can improve your organizational health.

I would very much like to hear your opinion.

[Disclosure: I do not have any holdings in the stock of individual publicly-held companies.]

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How to read a book in an hour

by Jamie Flinchbaugh on June 16, 2010 · 2 comments

For those of you who have taken our Lean Experience, you know we have a very structured multi-step process to kick things off in which approximately 40 people read books, distill them to key points, share them with other, build common themes and ideas and prepare a presentation. A part of that is reading a book in an hour. This is not the exact instructions we give people, but it is a rough idea of how you can do this for yourself. Of course, it won’t work well for fiction, or a biography, or your algebra textbook. But for many business books, it will work just fine.

There are four basic questions that active readers ask:

  1. What is the book about as a whole?

Discover the leading them of the book, and how the author develops this theme in an orderly way by subdividing it into its essential subordinate themes or topics.

  1. What is being said in detail, and how?

Discover the main ideas, assertions and arguments that constitute the author’s particular message.

Read the first and / or the last chapters of the book. List the author’s main points and conclusions. (No, really, make a list). For each one of the main points list key words that relate to these points.

Return to the table of contents of the Index at the back of the book and use your main points and key words to find out where the author discusses his or her central points in detail. Read these sections and take notes.

  1. Is the book true, in whole or part?

You cannot answer this questions until you have answered the first two. You have to understand what is being said before you can decide whether it is true or not. Once you understand a book, however, you are obligated, if you are reading seriously, to make up your own mind. Knowing the author’s mind is not enough.

Review your list of the author’s main points. How would you argue for or against them? How convincing are the author’s arguments?

  1. So what?

What is the significance of the information presented? Why does the author think it is important to know these things? Is it important for you to know them? Answer the “so what” question for yourself … what is the real significance of what you have just read?

Did the author simply supply information or were you also enlightened? Is anything further implied? Action? Further reading?

Look to the list of reference and bibliography to identify books and articles to explore those topics which seem especially interesting or important to you.

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A Call to Action

by Jamie Flinchbaugh on June 14, 2010 · 3 comments

Don’t generate news; do something newsworthy.

Don’t just post on facebook your distaste of political decisions; get involved, go vote, or run for office.

Don’t complain at the water cooler; have the courage to have difficult conversations with the right people.

Don’t sulk or carry guilt; go apologize.

Don’t just wish you were somewhere else; start moving.

Don’t just sit there; act.

Words can change the world, but only when they lead us to action. Take action. Get up and do something. The world belongs to those who act.

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Role of Lean Thinking in Private Equity

by Jamie Flinchbaugh on June 9, 2010 · 2 comments

Private equity and lean don’t often go together. Private equity has been blamed for a lot of evils and problems, as this Boston.com cartoon lampoons:

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But when they do, there are some great synergies. We have worked with many private equity firms, and private equity-held companies. The biggest synergy is that despite the pursuit of an exit, many private equity firms are longer-term thinkers than publicly-held companies. They don’t exactly hold a 30 year vision, but they aren’t focused on a quarterly number either.

Pete Abilla of Shmula blog wrote about it last week in the Role of Lean Thinking in Private Equity. In it he writes about the 3 primary roles:


  1. Lean and Pre Acquisition Due Diligence
  2. Lean and Post Acquisition Short Term Improvements
  3. Lean and Enterprise Broad Organizational Improvements

He suggests that there are three primary questions to be answered in the due diligence phase from a lean thinking investor.

  1. What are the opportunities for improvement in the company?
  2. What degree of waste is present in the company?
  3. If acquired, how much waste could be eliminated and by when?

Having done this many times, these are often the primary areas of focus from a lean thinking investor. Danaher, a famously lean-thinking company that has done many acquisitions as an industrial conglomerate, has stated that they are sometimes willing and able to outbid competitor investors because they see financial opportunities that the others do not see. With their lean lens on during the due diligence phase, they understand how to capture some hidden dollars and roll that into the value of the entity. Some private equity firms even employ their own lean resources to help go after some of the waste, although often those resources are limited to the lens of waste.

But lean is not just about waste elimination. I’ve written about that before, as has Kevin Meyer on Evolving Excellence in Lean is not just about waste. It is also about, or primarily about, adding value. A lean lens will help the investor understand how well the company is delivering on its promise of value, and what opportunities exist to improve that. This can in term lead to improved market share or improved margin, which often can have much larger financial impact that just waste elimination. For example, we were looking at acquiring a company and the prevailing attitude was that quality did not matter much. Literally, the thought was “why should our customers buy one product when they could buy two” implying they would need two to make sure one was always working. Once making the acquisition, this was fixed. Parts sales dropped like a rock, but overall sales increased 400 percent in 3 years. Due diligence should surface these opportunities.

But how do you become an organization? Through the skills, behaviors, and mindset of the people. Due diligence should also surface cultural problems, underutilized or non-existent skills, behavior gaps where they are shooting themselves in the foot, and so on. So much inspection is put into understanding the state and quantity of assets, including technology, software, and inventory. But human capital and intellectual capital is often just as valuable.

Private equity must be able to appreciate that HOW a company operates has a big impact on how well they perform. It’s not enough just to replace the CEO (we saw one private equity firm rotate in 4 CEOs in 5 years). If they appreciate this, then lean can be a great partner for them in building a more valuable, sustainable, and profitable company. And as Pete suggests in his post, that lens must start before the acquisition.

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Long Term Success of the Family-Held Business

by Jamie Flinchbaugh on June 8, 2010

Last week I spotlighted some success and failures in family-held businesses in Zildjian versus Viacom. When done poorly, the family can destroy the business, or the business can destroy the family. How can you avoid some of the bad outcomes? I think two major factors must be considered: influence and succession.

Influence

Influence must help the family and the business maintain the long-term vision. Family businesses must think multi-generational, not just multi-quarter. Having the right influence at the right time can make all the difference.

The key to influence in a family-business is someone, or ones, who can provide honest feedback. The is just as important on personnel matters as business decisions.

First, consider at least a board of advisors if not board of directors. The provides a forum, a process, and a body of continuous feedback. It not just in a crisis, but something that the management and the family can learn to trust over time. I prefer a board of directors, because it cannot be ignored. The directors must actually make decisions, not just give input, and that provides a much greater conduit to earning trust.

Second, consider one layer of professional management to help transition from one generation to the next generation. The most successful model I have seen work consistently is the strong COO. This is someone that reports to the CEO, often a family member, but the next generation as they rise through the ranks reports to the COO. The COO knows they will never become CEO because that is not how it is set up. Because of this they can focus on what’s important – helping maintain a constancy of purpose from one generation to the next. This is more like a consiglieri than an operational COO.

Third, a key aspect of influence is not just at the top but as other managers influence the next generation as they come up through the ranks. Too many family members pick assignments based on the assignment itself. Instead, these assignments should be selected based on who the individual reports to. That manager can have, if they have the ability to be honest with that individual.

Succession

There is no longer-term impacting decision than how generation after generation is selected and developed.

The first mistake made is putting people into power too early, and not giving them the time to develop. Sometimes, this occurs unintentionally due to death or other causes. But when planned, it is helpful to plan a transitionary period with a professional, but trusted, executive.

Outside leadership experience, and not just work experience, is important. It is important to learn to lead when your name isn’t on the door. I would rather have a successor work in the company when young, then leave to manage elsewhere, and then return, than only take outside experience in the early years.

I also recommend that each family member that may be in a succession path have an outside mentor. This shouldn’t be a family member, or someone with any other stake in the business, including being close friends with the parents. The mentor must be trusted with the individuals inner thoughts, and not worry about who that might get back to.

And finally, succession planning and learning must not be limited to just being a good manager. Whether a role in management is wanted or not, there are two other roles that require learning – family member and shareholder. Representing the family either inside the business or outside is something that can and should be learned. And being a shareholder, while a legal right, is not just a matter of inheriting or buying shares. Learning their role, what to get involved with and what not to, how to select board members, how to understand the business – all of this requires education as well.

Family-held businesses are unique, and represent a much greater portion of the economy that most people realize. Their challenges are unique, and must be managed as such. Running a business for long-term success is hard enough; injecting the complexities of family into the middle of that can make it harder, but also, more rewarding.

I congratulate the families who had the vision and courage to start their business, and those who has the wisdom to see it sustain across generations.

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RIP: John Wooden

by Jamie Flinchbaugh on June 7, 2010 · 1 comment

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It was sad to hear of the passing of the legend John Wooden. Of course this can never be validated, but he may be the best coach, of any sport, ever. I don’t really follow basketball, and if I did I would be a Big 10 fan, so this is by no means a biased opinion. I using my bias, I would vote for Joe Paterno, but that’s another topic.

As with anyone such as this, the provide us with numerous quotes to learn and live by, and Mr. Wooden was no different. There are several, but this is one of my favorites:

“Do not let what you cannot do interfere with what you can do.”

It is easy to focus on the negative, instead of the positive. It is easy to focus on limits, without focusing on the vision. Every vision has a path forward. Some paths may wind and twist a little more than others, but closer to your vision is closer to your vision.

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