Magnus Penker

Social Innovation and sustainable thinking is emerging, business leaders shifting focus using social and sustainable thinking sharpening their competitive advantages. Interested reading more? Have a look at our new trend watch at http://www.dfkompetens.se/trendspaning/veckans-entreprenorskap/2011-08-01_social/index.xml

For some time now have Area Of Excellence, where I have the privilege of being Chairman of the Board, developed a certified training program in Talent Management. The training program has been developed, and delivered in collaboration with the Swedish Computer Association. We collected a number of really sharp trainers (Swedish and international) as well as the latest scientific developments in Talent Management. Personally, I hold in the initial block … Will be really fun and challenging.

At its core, talent management is about following;

1. Reduce the aquistion cost of human capital, i.e. strong employer branding and offer to the talent market as well as onboarding programs
2. Increase the return on human capital, i.e. get the most from development, career coaching, performance management, coaching, etc.
3. Extend period of depreciation of human capital, i.e. reduce staff turnover to healthy levels where people come to work and give the iron
4. Optimizing human capital cost structure, i.e. optimize the tax and labor costs by national and international sourcing/allocation

We want to strengthen Sweden’s competitiveness and be better able to attract, retain and develop our talents and you are welcome to help and spread the word by sending the link below through to HR executives, CEOs, directors, business development and perhaps a consultant managers who you think will benefit of this

http://www.dfkompetens.se/ledarskap/kurser/2111058/index.xml

At the moment many Swedish manufacture plants are bought by BRIC players which are an interesting phenomenon as the interest is increasing meaning that there are reasons beyond low interest here. Historically European countries like Sweden has had a low interest which has lead to investments in automated manufacturing plants competitive with labor intensive manufacturer in the BRIC area, we can find examples like Flextronics. However, in recently bought manufacturing plants it is different. Indian Bahra Forge bought Kilsta plants in Karlskoga, Sweden to manufacture crankshafts, Suzuki Metal bought wire manufacturer Garphyttan and Indian Kemwell bought two pharmaceutical factories in Uppsala. Why?

It seems like access to raw material, skilled operators, localizations as well as sustainability and environmental issues play a role here. Taking a financially point of view it seems like the interest gap between west European countries and the BRIC region plays a important part in the managerial decision making process as high tech plants cannot be replaced with low cost labors in BRIC, nether access to raw material, leading to comparative advantages in relative lower interest (even if it is increasing in absolute terms), skilled operators, knowledge workers as well as local and secured access  to raw material in a stable region.

How can we use the comparative advantage as a west European nation? First of all, we can compete on the global market with high tech production, skilled operators and industrial knowledge workers. Internally within the EU market there is an opportunity for entrepreneurs here; Supply and development of global talents, training, R&D, as well as building and developing infrastructure.

Came across this interesting book the other day, one of the few comprehensive books in the field of talent management, recommended reading for all entrepreneurs and executives.

The book covers:

• Attract new talent and keep the ”Superkeepers”
• Design career plans that boost employee morale and support organization needs
• Improve performance through a personal value exchange
• Coach, develop, and inspire raw talent and prepare the CEOs of the future
• See positive results with smarter performance reviews
• Create a culture of innovation and sustainability

Michael E. Porter Harvard University professor, explains in an new video post, why business leaders must focus on shared value – creating products and services that benefit not only the company but also society. Or as like to put it, make the pie bigger… Responsible and smart entrepreneurs understand to create value through actions beneficial for all, without a working society and environment there is not much business to do. It is time for a new definition of CSR who has been focused on the wrong ideas instead of seeing the real rational behind a sustainable world the focus has been doing good without understanding why – a lose cannon without a captain. No good out of that… See the movie and enter a new dimension of why to do good, how to do it, and what it will lead to.Click on the picture to see the video post cast from Harvard  Business Review…

Today I will share a recent happening but before that some words about trust. Trust can be one-dimensional, two-dimensional or transformational meaning that ether you have trust or not in your business partners (one-dimensional) or you can have both trust and distrust at the same time (two-dimensional) and an evolving trust, the transformational trust theory, meaning that trust is build up in three steps:

1. Calculating whether do to business or not with a person or an organization
2. Developing knowledge about your business associate
3. Developing mutual identification

Recently I used odesk.com (the world’s leading network for freelancers, very competitive pricing) to find skilled people for a project. We applied game theory by asking +20 people giving them a chance to do a micro-delivery before selecting three of them going further with the larger project. The same project, the same task. This way we mitigated the risks, reduced the costs (even if three person did the same job) and finally increased the capacity being able to scale up with higher speed. At the first thoughts  it seemed crazy to ask three people to do the exactly same task. However, this way we

1. could in a secure way select the right people (without knowing them, taking references or even being sure who they were)
2. do it faster (quicker to find and start up than other free lancers) with less risk of delays or bad quality (=game theory applied on development)
3. deliver cheaper than if it was made locally in-house or by sub contractors or freelancers

Basically what we did was to add game theory to the existing trust theories – meaning:

1. Instead of only play with safe cards, take a chance of finding new possibilities on the global arena. Skilled and motivated people in other parts of the world, ready to take chance.
2. Make it in small portions with redundancies (three persons doing the same task) to mitigate the risks (= give the same small task to several people in the same time. Still cheaper since the fees are approx 10% of equivalent local services)
3. Evaluate, motivate, build trust and relationship
4. Build common a ground and eventually identity

By the way, ODesk freelancers actually get better paid that if you go through offshoring companies paying less salary (classical offshoring companies cut approx 70-80% of the fee, while ODesk take 10%). Moreover the freelancers constantly get ranked by their clients building the freelancers reputation and brand towards better assignments and finally increased compensations still profitable for all involved.

Having a board might by some be motivated with the legal reasons, by others to control or be able to offer tabouret seats to important people. By many entrepreneurs also motivated by having people buying and reselling their products and services. However, there are many and important reasons having a board and non of them is about power, buying or reselling products and services.

Every time I get the honor to be asked for a board assignment I always ask why and what I can do for the shareholders. If the answer is helping them selling or open up my network for selling the answer is always no. I will explain why by first I will provide some theoretical foundation:

Agency Theory: This is about aliening the interest of the CEO (in a public company with an employed CEO, not founder or owner) with the shareholders. By making sure the CEO has the same interest he or she will act in the interest of the shareholders and not in other personal interest. The trouble is of cause in large corporations where the CEO has a second layer in order to control, whereas personal interest might influence. However, by appying modern corporate governance rules and regulations the second layer can easily be controlled. This theory does not reduce the board to a control function rather explaining the importance of aligning the interest of the CEO with the shareholders. However, the question is then raised; what role does the CEO play in the board and shall the CEO be in the board at all?

Stakeholders Theory (my interpretation of Freeman’s theories): It is a theory practiced in Japan, continental Europe and Germany where all large interest groups get a seat on the board, e.g. employee groups and large shareholders. The idea is that all stakeholders shall be considered, however regardless of small entrepreneurial companies or large public companies this only work for easy decisions rather then complicated and hard-to-make decisions where interest groups only will focuses their interest instead of  long term wins. An alternative is having a committee of board election presenting a board to the annual meeting for voting. This give a possibility form a strong and balanced board securing all interest as well as competencies, relations, reputation as well as network and integrity. This can be lead by the chairman or by an external part appointed by the major shareholders.

Stewardship Theory: It is based on the assumption that decisions shall be motivated by something greater than the personal interest, a theory based on utilitarianism (the greatest good for the greatest number of people). I a board this means always acting in the greater good for the society and world as a whole, typical what you migh expect from a non-executive director.The criticism to this approach is that there is a fuzzy interlinkage between end and means, and that everything is a goal and then nothing becomes a goal.

Shareholder value Theory. This theory is utilitarianism but for the one with the greatest number of shares, i.e. the greatest good for the greatest number of shares. However, it is not an easy task to decide what is best for the shareholders as this might rapidly change over time and in accordance with number of shares and financial power. Just think of a entrepreneurial company owned by the founders, used to decide by them self. One day they run into an opportunity, and grab that but need a capital injection. The project does not pay off early enough and the company desperately needs money, they get it but diluted to minority owners. Now the new majority owners decide what best for them at that are to sell out the profitable parts of the business then close it down. The era is ended, people lost their jobs and the entrepreneurs are out of business. How is right or how is wrong? If the entrepreneurs were allowed to act in their favor as majority owners, why should not the financiers have the same favor? The problem is the same as for the stewardess. Is everything allowed just because it is good for the greatest number of shares? This impact the way a board work and outline future options.

Other aspects of board work is that owners, founders and other stakeholders might want to strengthen the strategic work and view upon the board work in order to develop the business long term as well as short term. Short term discussions normally means balancing power, interest, point of views, as well as providing second thoughts and options. Long terms are more of strategic skills, knowledge and thinking. Other reasons might be expert knowledge in a certain area or a general expert in the company laws. It is also common to dress up the board with famous names or inviting business people with extensive networks.

My advice five to all of you that are running small and mid size privately held companies, especially entrepreneurial companies, when rethinking your board strategy:

1. Find a balance between executive directors (working in the company) and non-executive directors (from outside) to balance interest and power as well as helping you with long term planning as well as short term prioritizations. Blend experienced board professionals with experts in certain areas and if possible with different gender and backgrounds. Typically 1/3 executive directors and 2/3 non-executive directors. Make sure each board member knows what and how to supposed and contribute.
2. Appoint a strong external chairperson with integrity and ownership in the business. Make sure the dialogue between the Chairperson and the CEO works fine and is both demanding and developing.
3. Make sure that the CEO, if not the founder, is shareholder (preferably step by step, but with well defined criteria’s from day one) aligning the interest.
4. Define the owners instructions in written, containing risk level, expectation of return, exit potential strategies, social and environmental ambitions and goals, personal ambitions, governance and control function. Make sure to defined and enroll the board´s rules of procedure as well as the CEO Instructions.
5. Elect a committee of board election. Lead by someone one trust and integrity, preferable the chairperson or the majority owner.

Are we facing a boom, a double dip, or a potential break-down of the global environment? No one can know for sure? The degree of uncertainty is higher than for a long time. We probable has to go back as far as the industry revolution to experience the same degree of uncertainty. Can we learn from history? Yes, but there are also differences making the assumptions and risk mitigation harder and less likely to be based on past experience. A connected world, 3 billion people demanding same level of standard as the Triad regions in terms of consumptions, energy, and experience and education, have changed the fundamentals of our world system. It is faster, less predictable, scared resources except from brain power which has an increased supply.

What now? Should we believe in faith or actively taking control over our situation as entrepreneurs, investors or as employed?

A strong tool for handling uncertainty is scenarios planning – which is a way of painting possible future scenarios comparing and contrasting possible strategic decisions towards. Several of the world leading experts in scenario planning are working for Shell, who also publishing their results/scenarios in publicum. For inspiration, have a look at their work with Shell’s new world scenario recently published on their site.

A method for identifying, elaborating and describing scenarios (based on Wikipedia http://en.wikipedia.org/wiki/Scenario_planning) can be outlined in 13 steps:

1. Decide on the key question to be answered by the analysis
2. Set the time and scope of the analysis
3. Identify major stakeholders
4. Map basic trends and driving forces
5. Find key uncertainties
6. Check for the possibility to group the linked forces into two
7. Identify the extremes of the possible outcomes of the (two) driving forces and check the dimensions for consistency and plausibility.
8. Define the scenarios, plotting them on a grid if possible.
9. Describe the scenarios in text, choice powerful names
10. Assess the scenarios. Are they relevant for the goal? Are they internally consistent? Are they archetypical? Do they represent relatively stable outcome situations?
11. Identify research needs
12. Interate
13. Use scenarios ion your strategic decision making process

The world seems slowly to recover, we are back in black again. Even banks in the UK are back, Greece are progressing and maybe there is a light of hope. There will always be tuff times, good times and new challenges to deal with. As a leader you know that. But why is it so difficult to act on long term objectives? I think we can see the answer in what happening in the world in general. Let’s take Greece as an example, people go nuts about what has to be done just as we can see in the business society where owners and employees demand quick fixes and turn a deaf ear to. Long term perspective, strategic thinking, risk assessments, contingency plans (B,C and D) as well as living your values every single day is sometime considered as inefficient, fuzzy and uphill’s.

So is this it? Shall we give up? Of course not. The key lies in the agenda of the owners and the senior management. If you want to be a good leader delivering sustainable results building value over time you should openly take a debate about what value means, to whom and what’s important short term, midterm and long term. Also make sure you focus on, and win, the stakeholders with influence and power making sure they understand the layer of objectives and how they are interlinked as well as the imperative of sticking to one’s over all objectives. Its hard work constantly enrolling and building confidence among owners, employees, your management team, customers and the society in general. Or as cynical friend once said to me; as CEO, choice your owners carefully…

The tricky thing when selling is that you think you can sell on the right price or on value, but that´s not true at all. All people buy on value, the perceived value. However, if your offer s equal your competitors then the price will be the only discriminator but still the customer or client buy on value. If you can differentiate yourself then it is possible to adjust the price to a level close to the value for the buyer. But what is value? Last year I made a model defining value and at the core it is the difference between benefit and sacrifice for getting the benefit, the value might be of functional use, or symbolic use, an experience or strictly monetary. However, there are also different receivers of value, the market, the own organization and the shareholders of the company.  In my next blog post I will post the complete model linking the receivers to value and how value is created.