What Innovative Cultures Are Really Like

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Innovation is a must for both organizations and economies. At least, if one cares about the continued well-being of both. When it comes to creating an innovative organizational culture, several factors stand out. Gary P. Pisano at Harvard Business School lists some of the more popular ones:

  • Tolerance for failure: “Given that innovation involves the exploration of uncertain and unknown terrain, it is not surprising that a tolerance for failure is an important characteristic of innovative cultures. Some of the most highly touted innovators have had their share of failures.”
  • Willingness to experiment: “Organizations that embrace experimentation are comfortable with uncertainty and ambiguity. They do not pretend to know all the answers up front or to be able to analyze their way to insight. They experiment to learn rather than to produce an immediately marketable product or service.”
  • Psychological safety: “Psychological safety is an organizational climate in which individuals feel they can speak truthfully and openly about problems without fear of reprisal. Decades of research on this concept by Harvard Business School professor Amy Edmondson indicate that psychologically safe environments not only help organizations avoid catastrophic errors but also support learning and innovation. For instance, when Edmondson, health care expert Richard Bohmer, and I conducted research on the adoption of a novel minimally invasive surgical technology by cardiac surgical teams, we found that teams with nurses who felt safe speaking up about problems mastered the new technology faster. If people are afraid to criticize, openly challenge superiors’ views, debate the ideas of others, and raise counterperspectives, innovation can be crushed.”
  • Collaboration: “Well-functioning innovation systems need information, input, and significant integration of effort from a diverse array of contributors. People who work in a collaborative culture view seeking help from colleagues as natural, regardless of whether providing such help is within their colleagues’ formal job descriptions. They have a sense of collective responsibility.”
  • Flat hierarchy: “In culturally flat organizations, people are given wide latitude to take actions, make decisions, and voice their opinions. Deference is granted on the basis of competence, not title. Culturally flat organizations can typically respond more quickly to rapidly changing circumstances because decision making is decentralized and closer to the sources of relevant information. They tend to generate a richer diversity of ideas than hierarchical ones, because they tap the knowledge, expertise, and perspectives of a broader community of contributors.”

Much of this is appealing to the liberal mind. It touches on a number of Western democratic values: tolerance, openness to new experience, equality. One might even see echoes of social justice activism: “come as you are,” safe spaces, communalism, anti-establishment. However, Pisano couples these elements with others that may seem rather old school:

  • Intolerance for Incompetence: “[Innovative organizations] set exceptionally high performance standards for their people. They recruit the best talent they can. Exploring risky ideas that ultimately fail is fine, but mediocre technical skills, sloppy thinking, bad work habits, and poor management are not. People who don’t meet expectations are either let go or moved into roles that better fit their abilities…The truth is that a tolerance for failure requires having extremely competent people. Attempts to create novel technological or business models are fraught with uncertainty. You often don’t know what you don’t know, and you have to learn as you go. “Failures” under these circumstances provide valuable lessons about paths forward. But failure can also result from poorly thought-out designs, flawed analyses, lack of transparency, and bad management.”
  • Highly Disciplined: “A willingness to experiment…does not mean working like some third-rate abstract painter who randomly throws paint at a canvas. Without discipline, almost anything can be justified as an experiment. Discipline-oriented cultures select experiments carefully on the basis of their potential learning value, and they design them rigorously to yield as much information as possible relative to the costs. They establish clear criteria at the outset for deciding whether to move forward with, modify, or kill an idea. And they face the facts generated by experiments. This may mean admitting that an initial hypothesis was wrong and that a project that once seemed promising must be killed or significantly redirected. Being more disciplined about killing losing projects makes it less risky to try new things.”
  • Brutal Candidness: “We all love the freedom to speak our minds without fear—we all want to be heard—but psychological safety is a two-way street. If it is safe for me to criticize your ideas, it must also be safe for you to criticize mine—whether you’re higher or lower in the organization than I am. Unvarnished candor is critical to innovation because it is the means by which ideas evolve and improve. Having observed or participated in numerous R&D project team meetings, project review sessions, and board of directors meetings, I can attest that comfort with candor varies dramatically. In some organizations, people are very comfortable confronting one another about their ideas, methods, and results. Criticism is sharp. People are expected to be able to defend their proposals with data or logic…When it comes to innovation, the candid organization will outperform the nice one every time. The latter confuses politeness and niceness with respect. There is nothing inconsistent about being frank and respectful. In fact, I would argue that providing and accepting frank criticism is one of the hallmarks of respect. Accepting a devastating critique of your idea is possible only if you respect the opinion of the person providing that feedback.”
  • Individual Accountability: “[T]oo often, collaboration gets confused with consensus. And consensus is poison for rapid decision making and navigating the complex problems associated with transformational innovation. Ultimately, someone has to make a decision and be accountable for it. An accountability culture is one where individuals are expected to make decisions and own the consequences…Accountability and collaboration can be complementary, and accountability can drive collaboration. Consider an organization where you personally will be held accountable for specific decisions. There is no hiding. You own the decisions you make, for better or worse. The last thing you would do is shut yourself off from feedback or from enlisting the cooperation and collaboration of people inside and outside the organization who can help you.”
  • Strong Leadership: “Lack of hierarchy…does not mean lack of leadership. Paradoxically, flat organizations require stronger leadership than hierarchical ones. Flat organizations often devolve into chaos when leadership fails to set clear strategic priorities and directions. Amazon and Google are very flat organizations in which decision making and accountability are pushed down and employees at all levels enjoy a high degree of autonomy to pursue innovative ideas. Yet both companies have incredibly strong and visionary leaders who communicate goals and articulate key principles about how their respective organizations should operate.”

I remember making a point to my therapist–who uses a lot of Brene Brown’s work–that authenticity can be easily warped. “You are enough” is absolutely true if we are talking about the inherent dignity of people. However, when it used as license for “take me as I am” and “I don’t have to change,” it becomes a moral cancer. The same can be said of concepts like empathy or mindfulness. Similarly, focusing on only a few select traits of an innovative culture can be undermine the very innovation they are meant to promote.

Transformation is a balancing act. And a hard one at that.

Economic Growth and Corruption

In my latest paper in Economic Affairs, I wrote,

Drawing on the EFW Index, Brennan (2016a)…points to a strong positive correlation between a country’s degree of economic freedom and its lack of public sector corruption. Granted, a lack of corruption could very well give rise to market reforms and increased economic freedom instead of the other way around. However, recent research on China’s anti-corruption reforms (Ding et al. 2017; Li et al. 2017) suggests that markets may actually pave the way for anti-corruption reforms (pg. 425).

Furthermore,

Market liberalisation can also have indirect effects on war and violence. For example, Neudorfer and Theuerkauf (2014) explore the effects of public sector corruption on ethnic violence by analysing 81 to 121 countries between 1984 and 2007. They find that corruption has a robust positive effect…on the risk of ethnic civil war. When the evidence provided in the previous sections by Brennan (2016a) and Lin et al. (2017) is considered, we find that market liberalisation deters corruption and, consequently, ethnic violence (pg. 429).

Research suggests that economic growth may reduce corruption:

The traditional explanation for this relationship has been the theory articulated by Wolfenson above – corruption increases the cost and risk of business activity, thereby deterring investment and depressing growth that could have lifted citizens out of poverty (Mauro 1995, Wei 1999).

However, there is an alternative possibility that has received less attention among development practitioners and academics. The strong relationship between income and growth may result from exactly the opposite causal relationship – countries may be growing out of corruption (Tresiman 2002). Over time, economic growth reduces both the incentives for government officials to extract bribes and firms’ willingness to pay them. Some scholars of developed countries have discussed this possibility in terms of a ‘life cycle’ theory with corruption peaking at early stages of development and declining as countries industrialise (Huntington 1968, Theobald 1990, Ramirez 2013). However, there has been little work either testing for this empirical link from growth to corruption, or laying out the specific mechanisms that could generate the link.

The authors continue:

The key theoretical insight of our argument is that the share of bribes that officials will choose to extract as rents depends on a firm’s ability to move and set up business in a different location. Ask for too much, and firms that have the ability to do so, will simply pull up anchor and head to safer harbours. Because officials know this, they are likely to set a bribe amount that is just below the cost of moving.

Building on that insight, we show that as firms grow the cost of moving should decline relative to firm size. The fixed cost of moving becomes less expensive relative to revenue, and more and more firms have the opportunity to escape the bribe requests of officials in their locality. Corrupt officials faced with a sudden growth surge must lower their bribe rates, or face losing their key providers of employment and tax payers to competitors.

…The theory we propose has important policy implications. To the extent this theoretical mechanism is important, rather than focusing on politically difficult institutional changes to combat corruption, resources might be better spent on policies that facilitate capital mobility across subnational jurisdictions. Providing clear titles to business premises, for instance, enables entrepreneurs to sell and recoup the full market value of land. Such businesses are more mobile than renters or owners with insecure titles, who risk significant losses if they try to escape corruption by fleeing across the border.

Drawing on “an annual survey funded by USAID and administered by the Vietnamese Chamber of Commerce and Industry,” the researchers find “that the average bribe rate decreases as GDP per capita increases” and “that large firms actually pay lower bribe rates, which is what our theory predicts. Firms with higher revenues are more put out by a high bribe rate, since it increases the amount of bribes they must pay dramatically. To retain them then, officials must push their bribe rate lower.” 

Then, using “a census of firms conducted by Vietnam’s General Statistical Office (GSO) [to] calculate aggregate employment at the province-industry-year level,” the authors

show that exogenous industry-wide performance is indeed a strong predictor of a firm’s performance. A doubling of total employment in the industry is associated with a 1.6 percentage point reduction in the bribe rate, or about 42% of the mean level. Moreover, the effect is more pronounced for highly mobile firms. The magnitude of the effect of growth on bribe reductions is 17% larger for firms in possession of a Land Use Rights Certificate, which facilitates the sale of their business premises. Similarly, the effect is 20% greater for firms that already have branch operations in other provinces, and therefore possess knowledge and experience that could facilitate movement.

These effects survive a battery of robustness tests and alternative specifications, providing compelling evidence that growth can directly reduce corruption.

In short, economic growth can decrease corruption by undermining the power of officials to extract bribes. But this is likely part of a virtuous feedback loop. For example, a 2017 paper 

exploit[s] spatial variation in randomized anti-corruption audits related to government procurement contracts in Brazil to assess how corruption affects resource allocation, firm performance, and the local economy. After an anti-corruption crackdown, regions experience more entrepreneurship, improved access to finance, and higher levels of economic activity. Using firms involved in corrupt business with the municipality, we find that two channels explain these facts: allocation of resources to less efficient firms, and distortions in government dependent firms. The second channel dominates, as after the audits government dependent firms grow and reallocate resources within the organization (pg. 31). 

As I state in the beginning of my paper,

Of course, it is far easier to demonstrate correlation than causation, and while some studies do find markets playing a causal role in moral development, most simply establish a positive relationship. However, findings that ‘merely’ demonstrate positive correlations should be interpreted in light of the feedback loops: even if moral behaviours are foundational and give rise to market systems (instead of vice versa), market systems in turn reinforce these virtues by imbuing them with value. As Paul Zak (2011, p. 230) explains, ‘Markets are moral in two senses. Moral behavior is necessary for exchange in moderately regulated markets, for example, to reduce cheating without exorbitant transaction costs. In addition, market exchange itself can lead to greater expression of morals in nonmarket settings’ (pg. 423).

Violence Is Bad For Business

From my paper in Economic Affairs:

The…act of seeking out mutually beneficial exchanges with others expands what Michael Shermer (2015) calls the ‘moral sphere’. As this sphere diversifies, our attitudes regarding the vulnerable and disenfranchised tend to alter for the better. This moral expansion is likely why economic globalisation has been linked to fewer governmental violations of human rights, namely torture, extrajudicial killings, political imprisonment, and disappearances (De Soysa and Vadlammanati 2011). An analysis of 117 countries between 1981 and 2006 also found ‘positive effects of market-economic policy reforms on government respect for human rights’ (De Soysa and Vadlammanati 2013, p. 180) as defined above. While these studies seem to imply the market’s influence on human rights, there is also evidence that human rights boost market liberalisation. Utilising the CIRI Human Rights Data Project (which reports on extrajudicial killings, disappearances, torture, political imprisonment, freedom of speech and government censorship, freedom of religion, freedom of movement and migration, freedom of assembly and association, free and fair elections, workers’ rights, and women’s rights), a 2010 study finds that human rights abuses ‘actually reduce the pace of economic liberalization’ (Carden and Lawson 2010, p. 12). These studies seem to confirm that morals and markets create a positive feedback loop regarding human rights.

…[T]rade and business openness largely reduces the incentives of war and brutalisation. People become more valuable alive and able as potential partners, lenders, investors, and customers…After analysing data spanning from 1970 to 2005, De Soysa and Fjelde (2010) find that higher economic freedom lowers the risk of civil war, more so even than democracy and good governance. This remains true after variables such as income per capita, growth rates, total population, ethnic fractionalisation, and oil exportation are controlled for. Yet these results likely underestimate the total impact of economic freedom on civil war. ‘In reality’, write De Soysa and Fjelde (2010, p. 293), ‘the effect of economic freedom on peace is likely to be larger if we also take into account the indirect effect of economic freedom through its impact on income growth’. These findings correspond with a later study by De Soysa and Flaten (2012), which controls for the same variables and finds that higher levels of globalisation (particularly economic globalisation) reduce the risk of civil war as well as state violations of human rights. Other research finds that free-market conditions and economic liberalisation are associated with lower levels of various societal insecurities, including open armed conflict, violent crime, murder, societal militarisation and political instability (Stringham and Levendis 2010; De Soysa 2011, 2016; Bjornskov 2015). Various organisations from the World Economic Forum (2016) to the UN Global Compact (2014) are recognising the power commerce has to decrease conflict and establish peace (pg. 426-429).

A brand new study looks at the relationship between violence and business by examining Columbia’s reduction in violence between 1995 and 2010. 

The author explains,

To precisely measure the effects of violent crime on firm behaviour, I use the large reductions in violence caused by increased security expenditures of the Democratic Security programme under Uribe’s administration. According to the Uribe’splan published in 2003, the Democratic Security programme aimed at restoring police presence in all municipalities; dismantling terrorist organisations; reducing kidnappings, extortion, and homicides; preventing forced displacement; and fighting the illegal drug trade (Ministerio de Defensa 2003). Uribe’s government intended to achieve these goals by increasing spending on military infrastructure, personnel, and intelligence. High spending on security led to decreased violence in municipalities that voted for Uribe in the presidential elections of 2002 (when he was elected for the first time) as he was looking for re-election in 2006 (he was re-elected).

…I combine unique plant-level and rich consumer pricing data with homicide rates and electoral results in Colombia. Using these data, I compare the prices and market size of Colombian municipalities that showed higher and lower support for Alvaro Uribe in the presidential election of 2002. These correlations were subsequently reflected in larger or lower changes in homicide rates.

I find large effects due to changes in violent crime: 

– When violence decreases by 1%, firm aggregate production increases by approximately 0.4%. This is partly explained by higher production per firm but also explained by the entrance of new firms into the market.  

– Real income increases in areas with less violence. These changes are explained by higher nominal wages, which are larger in size than the documented increases in the general price levels. 

– Consequently, areas with lower violent crime have higher incomes. This condition may further reduce social unrest and violence.  

In conclusion, a “48% decline in homicide rates between 1995 and 2010 in Colombia increased aggregate production by 19.6%. My estimates, however, are a lower bound of the total social costs of violent crime, as they are do not include the costs of mortality or the long-run impacts of violent crime reductions. The benefits of reducing violence, consequently, are even higher. Investments in security improvements are thus an effective way to boost economic development.”

Violence, it seems, is antithetical to business. As I note in my paper, “findings that ‘merely’ demonstrate positive correlations [between markets and morality] should be interpreted in light of the feedback loops: even if moral behaviours are foundational and give rise to market systems (instead of vice versa), market systems in turn reinforce these virtues by imbuing them with value” (pg. 423).

Diversity Is A Strength

Earlier this year, I highlighted some research on diversity and its relation to the immigration question. The Washington Post had a recent piece on Fox News anchor Tucker Carlson’s less-than-subtle anti-diversity views. Within the article, the author highlighted several studies on how diversity contributes to organizational well-being. I thought I’d dive into these studies for your reading pleasure.

One study from Cloverpop, as reported in Forbes

analyzed approximately 600 business decisions made by 200 different business teams in a wide variety of companies over two years, using the Cloverpop decision-making database. The full research results on inclusive decision making are available for download if you’d like to dive in. To topline it, our research shows a direct link between inclusive decision making and better business performance:

• Inclusive teams make better business decisions up to 87% of the time.

• Teams that follow an inclusive process make decisions 2X faster with 1/2 the meetings.

• Decisions made and executed by diverse teams delivered 60% better results.

… According to the research, teams outperform individual decision makers 66% of the time, and decision making improves as team diversity increases. Compared to individual decision makers, all-male teams make better business decisions 58% of the time, while gender diverse teams do so 73% of the time. Teams that also include a wide range of ages and different geographic locations make better business decisions 87% of the time.

… We also found that diverse groups are more likely to encounter operational friction when executing business decisions. In short, less diverse teams make worse decisions, and then diverse teams struggle to put their decisions into action. The worst situation is to have an all-male team make a decision that is executed by a gender-diverse group. This worst-of-both-worlds combination underperformed by 15%. In contrast, our analysis found that the most inclusive decision-making and execution teams performed 60% better than average.

A 2014 study reviewed the relevant literature and found the following benefits of diversity (while admitting that managing diversity is difficult, but doable):

Diversity stimulates innovation and productivity and creates a world class culture that can outperform the competition.

A multicultural organization is better suited to serve a diverse external clientele in a more increasingly global market. Such organizations have a better understanding of the requirements of the legal, political, social, economic and cultural environments of foreign nations (Adler, 1991).

In research-oriented and hi-tech industries, the broad base of talents generated by a gender-and ethnicdiverse organization becomes a priceless advantage. “Creativity thrives on diversity” (Morgan, 1989).

Multicultural organizations are found to be better at problem solving, possess better ability to extract expanded meanings, and are more likely to display multiple perspectives and interpretations in dealing with complex issues.

Organizations employing a diverse workforce can supply a greater variety of solutions to problems in service, sourcing, and allocation of resources.

Employees from diverse backgrounds bring individual talents and experiences in suggesting ideas that are flexible in adapting to fluctuating markets and customer demands.

A diverse collection of skills and experiences (e.g. languages, cultural understanding) allows a company to provide service to customers on a global basis.

A diverse workforce that feels comfortable communicating varying poitns of view provides a larger pool of ideas and experiences (pg. 83).

Finally, a 2016 Harvard Business Review article provides a nice rundown of several important studies on diversity:

A 2015 McKinsey report on 366 public companies found that those in the top quartile for ethnic and racial diversity in management were 35% more likely to have financial returns above their industry mean, and those in the top quartile for gender diversity were 15% more likely to have returns above the industry mean.

In a global analysis of 2,400 companies conducted by Credit Suisse, organizations with at least one female board member yielded higher return on equity and higher net income growth than those that did not have any women on the board.

… People from diverse backgrounds might actually alter the behavior of a group’s social majority in ways that lead to improved and more accurate group thinking. In a study published in the Journal of Personality and Social Psychology, scientists assigned 200 people to six-person mock jury panels whose members were either all white or included four white and two black participants. The people were shown a video of a trial of a black defendant and white victims. They then had to decide whether the defendant was guilty. 

It turned out that the diverse panels raised more facts related to the case than homogenous panels and made fewer factual errors while discussing available evidence. If errors did occur, they were more likely to be corrected during deliberation. One possible reason for this difference was that white jurors on diverse panels recalled evidence more accurately.

Other studies have yielded similar results. In a series of experiments conducted in Texas and Singapore, scientists put financially literate people in simulated markets and asked them to price stocks. The participants were placed in either ethnically diverse or homogenous teams. The researchers found that individuals who were part of the diverse teams were 58% more likely to price stocks correctly, whereas those in homogenous groups were more prone to pricing errors, according to the study, published in the journal PNAS. Diverse teams are more likely to constantly reexamine facts and remain objective. They may also encourage greater scrutiny of each member’s actions, keeping their joint cognitive resources sharp and vigilant.

… Greater diversity may also change the way that entire teams digest information needed to make the best decisions. In a study published in the Personality and Social Psychology Bulletin, Katherine Phillips of Northwestern University and her team divided sorority or fraternity members into four-member groups, each of which had to read interviews conducted by a detective investigating a murder. Three people in every group, referred to as “oldtimers” in the study, came from the same sorority or fraternity, whereas the fourth, the so-called “newcomer,” was either a member of the same sorority or fraternity or a different one. The three oldtimers in each group gathered to decide who was the most likely murder suspect. Five minutes into their discussion, the newcomer joined the deliberation and expressed their opinion as to who the suspect was. It turned out that although groups with out-group newcomers felt less confident about the accuracy of their joint decisions, they were more likely to guess who the correct suspect was than those with newcomers who belonged to the same group.

…In a study published in Innovation: Management, Policy & Practice, the authors analyzed levels of gender diversity in research and development teams from 4,277 companies in Spain. Using statistical models, they found that companies with more women were more likely to introduce radical new innovations into the market over a two-year period.

In another study, published in Economic Geography, the authors concluded that increased cultural diversity is a boon to innovativeness. They pooled data on 7,615 firms that participated in the London Annual Business Survey, a questionnaire conducted with the UK capital’s executives that asks a number of questions about their companies’ performance. The results revealed that businesses run by culturally diverse leadership teams were more likely to develop new products than those with homogenous leadership.

Though you may feel more at ease working with people who share your background, don’t be fooled by your comfort. Hiring individuals who do not look, talk, or think like you can allow you to dodge the costly pitfalls of conformity, which discourages innovative thinking.

“How, precisely, is diversity our strength,” you ask, Tucker? See above. And see here, here, and here.

Career, Community, Cause

That’s what most employees want out of their place of work, according to a recent Harvard Business Review blog post. The authors write,

If [Abraham] Maslow were designing his pyramid from scratch today to explain what motivates people at work, beyond the basics, what would it look like? That’s a question we set out to answer at Facebook, in collaboration with our people analytics team.

We survey our workforce twice a year, asking what employees value most. After examining hundreds of thousands of answers over and over again, we identified three big buckets of motivators: career, community, and cause.

Career is about work: having a job that provides autonomy, allows you to use your strengths, and promotes your learning and development. It’s at the heart of intrinsic motivation.

Community is about people: feeling respected, cared about, and recognized by others. It drives our sense of connection and belongingness.

Cause is about purpose: feeling that you make a meaningful impact, identifying with the organization’s mission, and believing that it does some good in the world. It’s a source of pride.

These three buckets make up what’s called the psychological contract — the unwritten expectations and obligations between employees and employers. When that contract is fulfilled, people bring their whole selves to work. But when it’s breached, people become less satisfied and committed. They contribute less. They perform worse.

Here are a few interesting bits from their survey:

  • “Contrary to the belief that Millennials are more concerned with meaning and purpose, we found that younger people cared slightly less about cause — and slightly more about career — than older people. In fact, people ages 55 and above are the only group at Facebook who care significantly more about cause than about career and community. This tracks with evidence that around mid-life, people become more concerned about contributing to society and less focused on individual career enhancement.”
  • “Our engineers care a lot about community, giving it an average rating of 4.18 on a 1-5 scale. And just as we saw with age and location, across functions people rated career, community, and cause as similarly important.”
  • Career ekes out ahead in virtually every group, except among Latin Americans (just barely), Western Europeans (career and community are almost identical), and those 55 and above.

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The DR Book Collection: Catch-Up #5

This is part of the DR Book Collection.

I’m once again behind on my book reviews, so here’s a list of the books I’ve read recently, their descriptions, and accompanying videos.

Image result for a universe from nothingLawrence M. Krauss, A Universe From Nothing: Why There Is Something Rather Than Nothing (Free Press, 2012): “Bestselling author and acclaimed physicist Lawrence Krauss offers a paradigm-shifting view of how everything that exists came to be in the first place. “Where did the universe come from? What was there before it? What will the future bring? And finally, why is there something rather than nothing?” One of the few prominent scientists today to have crossed the chasm between science and popular culture, Krauss describes the staggeringly beautiful experimental observations and mind-bending new theories that demonstrate not only can something arise from nothing, something will always arise from nothing. With a new preface about the significance of the discovery of the Higgs particle, A Universe from Nothing uses Krauss’s characteristic wry humor and wonderfully clear explanations to take us back to the beginning of the beginning, presenting the most recent evidence for how our universe evolved—and the implications for how it’s going to end. Provocative, challenging, and delightfully readable, this is a game-changing look at the most basic underpinning of existence and a powerful antidote to outmoded philosophical, religious, and scientific thinking” (Amazon).

Image result for alive at workDaniel M. Cable, Alive at Work: The Neuroscience of Helping Your People Love What They Do (Harvard Business Review Press, 2018): “In this bold, enlightening book, social psychologist and professor Daniel M. Cable takes leaders into the minds of workers and reveals the surprising secret to restoring their zest for work. Disengagement isn’t a motivational problem, it’s a biological one. Humans aren’t built for routine and repetition. We’re designed to crave exploration, experimentation, and learning–in fact, there’s a part of our brains, which scientists have coined “the seeking system,” that rewards us for taking part in these activities. But the way organizations are run prevents many of us from following our innate impulses. As a result, we shut down. Things need to change. More than ever before, employee creativity and engagement are needed to win. Fortunately, it won’t take an extensive overhaul of your organizational culture to get started. With small nudges, you can personally help people reach their fullest potential. Alive at Work reveals:

  • How to encourage people to bring their best selves to work and use their greatest strengths to help your organization flourish
  • How to build creative environments that motivate people to share ideas, work smarter, and embrace change
  • How to enhance people’s connection to their work and your customers
  • How to create personalized experiences that help people feel a deeper sense of purpose

Filled with fascinating stories from the author’s extensive research, Alive at Work is the inspirational guide that you need to tap into the passion, creativity, and purpose fizzing beneath the surface of every person who falls under your leadership” (Amazon).

Image result for saints slaves and blacksNewell G. Bringhurst, Saints, Slaves, & Blacks: The Changing Place of Black People Within Mormonism, 2nd ed. (Greg Kofford Books, 2018): “Originally published shortly after the LDS Church lifted its priesthood and temple restriction on black Latter-day Saints, Newell G. Bringhurst’s landmark work remains ever-relevant as both the first comprehensive study on race within the Mormon religion and the basis by which contemporary discussions on race and Mormonism have since been framed. Approaching the topic from a social history perspective, with a keen understanding of antebellum and post-bellum religious shifts, Saints, Slaves, and Blacks examines both early Mormonism in the context of early American attitudes towards slavery and race, and the inherited racial traditions it maintained for over a century. While Mormons may have drawn from a distinct theology to support and defend racial views, their attitudes towards blacks were deeply-embedded in the national contestation over slavery and anticipation of the last days. This second edition of Saints, Slaves, and Blacks offers an updated edit, as well as an additional foreword and postscripts by Edward J. Blum, W. Paul Reeve, and Darron T. Smith. Bringhurst further adds a new preface and appendix detailing his experience publishing Saints, Slaves, and Blacks at a time when many Mormons felt the rescinded ban was best left ignored, and reflecting on the wealth of research done on this topic since its publication” (Greg Kofford).

Image result for out of poverty powellBenjamin Powell, Out of Poverty: Sweatshops in the Global Economy (Cambridge University Press, 2014): “This book provides a comprehensive defense of third-world sweatshops. It explains how these sweatshops provide the best available opportunity to workers and how they play an important role in the process of development that eventually leads to better wages and working conditions. Using economic theory, the author argues that much of what the anti-sweatshop movement has agitated for would actually harm the very workers they intend to help by creating less desirable alternatives and undermining the process of development. Nowhere does this book put ‘profits’ or ‘economic efficiency’ above people. Improving the welfare of poorer citizens of third world countries is the goal, and the book explores which methods best achieve that goal. Out of Poverty will help readers understand how activists and policy makers can help third world workers” (Amazon).

Goals Gone Wild…Again

Image result for gooooaaaallllA few years ago, researchers from Harvard, Wharton, Kellogg, and the University of Arizona argued that goal setting was “overprescribed” and featured “powerful and predictable side effects” (pg. 6). While acknowledging past research demonstrates that “specific goals provide clear, unambiguous, and objective means for evaluating…performance” and thus “motivate performance far better than “do your best” exhortations” (pg. 7), the researchers found that this intensity of focus on goals can lead to tunnel vision and poor, often unethical decisions. Examples include Sears in the early 1990s, whose sales goals for its auto repair staff led to overcharging and unnecessary repairs. Revenue-based rather than profit-based goals at Enron helped lead to the company’s destruction. A challenging goal (a car “under 2,000 pounds and under $2,000”) coupled with a tight deadline at Ford in the late 1960s brought about the easily-combustible Pinto, many deaths and injuries, and expensive lawsuits. These narrow goals crowded out not only ethical behavior, but the broader purpose of the goals themselves. Quality, in essence, is often sacrificed for the quantifiable. Short-term gains are pursued rather than long-term health and growth. Furthermore, such narrow goals create “a focus on ends rather than means…[The researchers] postulate that aggressive goal setting within an organization increases the likelihood of creating an organizational climate ripe for unethical behavior (pg. 10). Narrow goals decrease satisfaction, even with high-quality outcomes, which have negative effects on future behavior. They can also inhibit learning and experimentation with alternative methods, undermine cooperation, and harm intrinsic motivation.

Further research supports these findings, including an October 2017 paper. As reported over at Ethical Systems,

Goal setting is often a subject of discussion about behavioral ethics and internal programs.  We’ve seen in recent cases such as at Wells Fargo and Volkswagen how cheating and lying become the norm when performance goals are not reasonably achievable.  Recent evidence in a paper by Niki den Nieuwenboer, João da Cunha, and ES collaborator Linda Treviño shows the internal dynamics and processes that lead directly to cheating behaviors.  

The researchers, one of which was embedded inside the company, observed managers and sales staff over 15 months at a large (10,000 employees) telecommunications company.  The company had established goals for its desk sales teams designed to motivate productivity, including a target for sales as well as sales-related work, such as making cold calls to customers, and gathering information about potential customers, among other planning activities.

For the senior leaders at the company, these targets were part of a broader– and cost-lowering — strategy of shifting sales staff from the field towards desk jobs.  The field staff cost the company $225 more per customer contact than the sales teams working at desks.  The aim was thus to incentivize desk people to improve efficiency and reduce costs in the long-run.

However, because the desk sales team cheated the internal systems, the company didn’t actually gain the cost savings that it thought it had.  The apparent success of the desk sales team (based on false information) led to upper management reducing the number of field staff sales numbers, which undermined an important sales channel at the firm.

The misconduct was uncovered inadvertently. Originally, one of the researchers was embedded inside the company to observe the implementation of a sales-related IT system.  As he observed and interviewed employees about their use of the system, the scope of the research was soon expanded to include unethical behaviors. He observed that both middle managers and frontline sales staff were aware that the sales goals were unreachable, and that sometimes sales staff tried to push back on pressure from their managers.  When sales targets didn’t budge, the managers got creative to solve their goals, devising strategies to induce the sales staff to cheat the internal systems.  Manager pay was directly tied to whether their direct reports met performance goals hence the need to game the system to safeguard their income.

The managers took advantage of “structural vulnerabilities” in the system. For example, they changed rules such as expanding the definition of “sales calls” so that more types of calls counted towards that goal – case in point, they counted internal calls and emails as “external” sales calls. Some also just logged fictitious information for calls that never occurred.  Other manipulations involved devising IT and administrative schemes that allowed the desk sales teams to take credit for work done by the field sales teams. Additionally, to satisfy the requirement that sales plans be developed for customers, some simply were told to copy and paste plans across various customers, because they knew that very few of them would actually be verified.

Manipulating strategies to meet targets became the norm at the organization.  While employees in the unit were aware of these practices, the managers worked to ensure that word of the deceptive practices didn’t get out to senior leaders or to other units.

To tweak the Keynes/Hayek rap battle a tad, quotas are a means, not the ends in themselves.

The Peter Principle: Is There a Managerial Mismatch?

From a new NBER working paper:

Image result for peter principleBecause managers and workers apply different skills, the best workers may not be the best candidates for managers. When this is the case, do firms promote someone who excels in her current position, or someone who is likely to excel as a manager? If firms promote based on current performance, then firms may end up with worse managers. Yet if firms promote based on traits that predict managerial potential, then firms may pass over higher performing workers, weakening the power of promotions to encourage workers to perform well in their current roles. Such promotion policies could also lead to perceptions of favoritism, unfairness, or that succeeding in one’s job goes unrewarded.

Using detailed microdata on sales workers in US firms, we provide the first large scale empirical evidence suggesting that firms prioritize current performance in promotion decisions at the expense of promoting the best potential managers. Our findings are consistent with the “Peter Principle,” which, in its extreme form, states that firms promote competent workers until they become incompetent managers (Peter and Hull 1969).

…Overall, our empirical findings are consistent with the Peter Principle: firms promote based on current job performance even though pre-promotion sales negatively predicts managerial performance and other observable characteristics positively predict managerial performance. We caution that our results do not imply that firms use suboptimal promotion policies or have mistaken beliefs. Promotion policies that favor strong sales performance may provide a variety of incentive benefits that justify the costs of managerial mismatch. For example, promoting based on current job performance may help preserve tournament incentives (Lazear and Rosen 1981). Prioritizing objective performance measures in promotions may also improve incentives by avoiding favoritism (Prendergast 1998) and maintaining fairness norms. Promotion policies based on verifiable performance metrics such as sales may also discourage the manipulation of other, more fungible performance metrics such as credit sharing and collaboration experience (DeVaro and Gurtler 2015). What our results do show is that the costs of not promoting the best potential managers are high: our estimates suggest that firms are willing to forgo up to a 30% improvement in subordinate performance to achieve better incentives or to avoid costly politicking.

…This study offers the first empirical tests of the Peter Principle using data on promotions across a large number of firms. Although theoretical work and reviews have hypothesized that promotions based upon current job performance may yield managerial mismatch (Fairburn and Malcomson 2001; Waldman 2003; Lazear 2004), scant empirical research has tested the Peter Principle directly. Our work is most closely related to Grabner and Moers (2013), which shows that a bank places less weight on current job performance when a promotion would be to a job performing dissimilar tasks. However, Grabner and Moers uses data from a single firm and does not attempt to estimate the cost of the Peter Principle. Understanding the costs associated with the Peter Principle is important because it helps explain a variety of organizational practices, such as the use of parallel job ladders for individual contributors and managers, or the use of separate evaluation criteria for performance (which are often tied to bonuses) and potential (which are often tied to promotions) (pgs. 1-5).

Being a good worker does not mean one will be a good manager.

Doing Business 2018

The World Bank’s latest Doing Business report is out (check out last year’s). The report “measures regulations affecting 11 areas of the life of a business. Ten of these areas are included in this year’s ranking on the ease of doing business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. Doing Business also measures labor market regulation, which is not included in this year’s ranking.”

Its main findings:

  • Brunei Darussalam, Thailand, Malawi, Kosovo, India, Uzbekistan, Zambia, NigeriaDjibouti and El Salvador were the most improved economies in 2016/17 in areas tracked by Doing Business. Together, these 10 top improvers implemented 53 regulatory reforms making it easier to do business.
  • Economies in all regions are implementing reforms easing the process of doing business, but Europe and Central Asia continues to be the region with the highest share of economies implementing at least one reform—79% of economies in the region have implemented at least one business regulatory reform, followed by South Asia and Sub-Saharan Africa.
  • The report features four case studies in the areas of starting a business, dealing with construction permits, registering property and resolving insolvency, as well as an annex on labor market regulation. See all case studies.

The report finds that

one of the mechanisms through which business regulation can impact employment directly is the simplification of business start-up regulations. Across economies there is a significant positive association between employment growth and the distance to frontier score (figure 1.5).While this result shows an association, and cannot be interpreted in a causal fashion, it is reassuring to see that economies with better business regulation, as measured by Doing Business, also tend to be the economies that are creating more job opportunities. When it comes to unemployment, the expected opposite result is evident. Economies with less streamlined business regulation are those with higher levels of unemployment on average. In fact, a one-point improvement in the distance to frontier score is associated with a 0.02 percentage point decline in unemployment growth rate.

…The data support this interpretation as there is a strong association between inequality, poverty and business regulation. In fact, economies with better business regulation have lower levels of poverty on average. Indeed, a 10 percentage point improvement in the distance to frontier is associated with a 2 percentage point reduction in the poverty rate, measured as the percentage of people earning less than $1.90 a day. Fragility is also a factor linked to poverty. However, even fragile economies can improve in areas that ultimately reduce poverty levels (pg. 7-8).

Check out the full report.