To win the game, we have to change the game

I can’t imagine the pressure on a CEOs when their organization misses the targets t120918053535-out24-shareholder-value-gallery-horizontalhey set for themselves.  How can they not take the failure personally?  More importantly, how do they turn the fail into opportunity?  Frequently, they publicly declare to the world renewed commitment to their strategy, reassure everyone that  management  knows what it’s doing and asks stakeholders to have a little faith.

A glorious future beats a glorious past.

This past week, Warren Buffet of Berkshire Hathaway released his annual shareholder letter and so did another hedge fund billionaire, Edward Lampert, the Chairman and now Chief executive of Sears Holdings comments.  2012 was tough on both companies.

Buffett reminded shareholders of his long-term management contribution:

“Over the last 48 years (that is, since present management took over), book value has grown from $19 to $114,214, a rate of 19.7% compounded annually.”

Lampert acknowledged his pride in the company associates for their resiliency in 2012 and then expressed the following:

“After reporting poor results for 2011, culminating in a very poor fourth quarter, we declared that we would take significant actions in 2012 to restore confidence in and financial stability to the company, while, at the same time, remaining focused on transforming Sears Holdings and creating long-term value for our shareholders.”

The vast differences between the diverse portfolio holdings of one  make comparisons to a single narrow industry portfolio holding company difficult, but it’s the philosophy of these two successful financiers that caught my attention.  Buffet’s reputation and success remains untarnished as he acknowledges sub par performance, meaning below the returns of the S&P 500.  Likewise, Lampert’s nod from his board to take the CEO reigns indicates their great faith in his judgment.

Both of these leaders inspire others to believe but how much do they expect shareholders to understand?  Rereading both of their letters, a wonderful clarity of mission and dedication to longstanding strategies can’t be missed.

Buffett draws readers attention to three elements that unlock the portfolio’s Intrinsic business value: one qualitative and two quantitative measures–per-share investments and per-share pre-tax earnings from businesses other than insurance and investment.

Lampert talks about creating long-term business value with an interesting description of EBITDA.  He shares an analysis of  value added by closing non-performing stores that reduced investment in non-performing stores but provided upside when the real estate sold.

An initial read shows just how similarly these two financial wizards think.  But who needs inspiration? How will sharing beliefs in these fundamental principles help hold the relative  position?

Which rubber and which road matter

Theory doesn’t always make for good practice and now matter what plans you make, until put into motion it’s impossible to know the results. The best predictors can’t incorporate every possible condition and inevitably some expectations go unrealized.

That’s where belief really counts. Funny, ever wonder why people believe what they believe?  It turns out that believing doesn’t require understanding; but it does color our interpretation.  Make believe, the imaginary is anything but real. Our beliefs and the way we interpret or make meaning of our reality is largely but not exclusively determined by the most recent experience and current context. This is the Halo effect at work which predisposes us to favor what we believe and what we first hear or see.  No experience? Ambiguity gets resolved unconsciously, consistent with context.

The more diverse  and numerous our experiences, the greater the number of differences or nuances in our understanding which results in unpredictable results.

Change the frame or limit the context of shareholder value to  financial expressions like EBITDA will reduce the variance in meaning. Formulas and standard accounting practices assure investors of an equivalence which makes EBITDA meaningful regardless of their depth of understanding, while also increasing the power of their belief in the financial measure to provide great meaning.

But accepting an idea doesn’t mean we believe it. Ever take a test that resulted in a wrong answer?  Perhaps, you asked why your answer was wrong, convinced you had it right.  Maybe your answer didn’t match the expected answer and so the first evaluation was incomplete.  Your answer didn’t make sense to the grader though it was still correct. An equilateral is both a square and a rectangle. Since different experiences lead to different beliefs both generate even greater diversity of understanding.

Big ambiguous ideas like shareholder value may be easy to believe but harder to understand and harder still to set clear, consistent actions into motion.Easy to measure share holder value at a point in time, but CEOs tasked to deliver it going forward need to provide greater clarity, less ambiguous and more specific associations and not risk letting recent experiences or context prove its meaning. What actions does the CEO wish to inspire, what associations does their message need to imply or offer guarantee?

Shares imply ownership and the value suggest material wealth.  For Berkshire Hathaway, a shareholder owns parts of lots of different companies with an assurance based on Buffets statements and reputation that their wealth will grow.  For Sears Holdings? Shareholders own a portion of physical tangible business components that are much harder to guarantee growth.

Align beliefs with understanding

If I yell Fire, everyone reacts almost immediately and reaches the same conclusion–flight.  There’s no visible delay between the declared message and the actions it produces.  The brain wastes no time finding the best match and cues our nervous system and muscles to respond.  No conscious awareness of decision or choice seems at play, move first,  think later. The instantaneous assessment of the environment places Fire in context, and fits a pattern in our memory, and a complete script presents itself making our next moves clear.  We are off following it without questioning its veracity, or applicability. We pay attention to what the script tells us not the ambient information surrounding us, unless of course that information boldly interferes with the expectation found in the script.

Simple question, which scenario came to mind for you?

1. I yell fire when the tinder in the hearth finally catches, and you left the fire pit at the campground to go find matches or more kindling nearby.

2. I’m cooking over a grill and yell Fire when the grease from the chicken has dripped off the foil, landing on the hot coals.

3. I yell fire when I smell something burning and see smoke in great quantities billow around the curtain on the stage in front of us.

I’m betting that your imagination took you to scenario three, the one that represents a scary, fearful situation. Especially since the idea was raised in a wider discussion of shareholder value or returns, a topic that triggers a similar set of automatic reactions depending on the experience or understanding of the listener.

The financial media pundits provide language that makes sense to their readers without appealing to the experience or context of employees or customers.  Our word choices even with the best of intentions don’t guarantee translation of similar expectations and in the case of shareholder value don’t make it easy to make a move without understanding more.

Leaders use of language creates expectations across a diverse set of audiences with vastly different understanding.  To get the people in your organization to produce the necessary EBITDA should the burden of understanding be drilled down to the lowest level of the organization?  Telling them about the challenge or demanding the performance may set the expectation, but leadership needs to do more.  They need to engage in the language and experiences that will trigger the scripts and make it possible for employees to believe their doings and their actions help. I have faith that Lampert is on the task.  It was his words that inspired this post.  His articulation of the convergence of new behaviors made possible by technology supported knowledge, a  complex transformation experience currently shared by many businesses.

Lampert isn’t the only one with an offensive strategy attempting to get out ahead of the curve.  JCPenney, Best Buy and now Barnes & Noble are all experiencing the loss of faith by shareholders that parallels the lost faith of their customers and employees.  As Buffet remarked in his letter, this is not a time for waiting.

“The risks of being out of the game are huge compared to the risks of being in it.”

Lampert’s plans?

“…we will use technology and training to encourage and embrace feedback to improve and make it much more transparent to everyone, thereby increasing accountability at the store and associate level.”

Both of these successful men know what can happen when you yell Fire.  Let’s just hope that the script that gets activated keeps their stakeholders on the same page.  Challenging but not impossible.

 

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