Every media outlet has been struggling to assign blame for current financial crisis. Obviously there was greed. There was incompetence. There was dishonesty. There was arrogance. And many other human failures. Politicians have been attacking “greed” by corporate executives. Once again we have discovered that people in high places are mortal souls, mere humans with all of their failings. But, can that be fixed? A good public hanging or two may be helpful, but it is not the cure.

I am once again reminded of W. Edwards Demings’ comment that 95% of quality problems are in the nature of the system and 95% of the time we blame the person and leave the system unchanged. The problem is in the nature of the system, not whether you are a democrat or a republican, spiritual or materialistic. If people don’t start to objectively and seriously analyze and change the system it is only a matter of time before the pattern repeats itself. You can be the most honest person in the world and still incompetent to change the system in a way that will produce better results.

I am disappointed that the presidential candidates have not helped the public understand the problem more clearly. It is simple. The free enterprise system is like sports. You have competitors on the playing field and they are free to compete. But, every sport has referees, lines on the field, a rule book, and the whistle blows immediately with violations of the rules. Take the referees off the field and you will soon have chaos, broken bones, and a demoralizing contest. A good system of rules does not destroy competition, it enhances competition.

The cause of the current crisis is first, a failure to enforce rules. Second, the current rule book was written to maintain orderly play on a landscape that has changed dramatically. The landscape of competition is now an electronic global playing field in which corporations morph from investment banks to banks, from hedge funds to who knows what, and invent new products with great sounding names and no warning labels as quickly as they can see an advantage in the rules.

So, without attempting to rewrite the rule book, how does the system need to change?

• All of our regulations governing the financial system are based on the nation state, and all financial institutions operate on a multi-national or global landscape. There are now serious proposals and serious discussion about global financial regulation. The recent coordinated global interest rate reduction is one more step in the emergence of the global economy and global governance. These steps would never be taken without a global economic crisis. The debate about “bailing out foreign banks”, which is being mischaracterized by some politicians to incite public anger, points to the problem of existing regulations and the reality of the global economy. Nationalism is an impediment to progress and dealing with the reality of the world as it is. National borders have become virtually meaningless when it comes to economic activity. There is no way that nation states, any of them, can regulate the global banking-economic system. There must be uniform global banking regulation that is transparent and provides no advantage to any one country.

• Complexity leads to error. The more complex a system or task the more likely that it will lead to errors. In manufacturing, the more you can simplify the production process, reducing steps in the process, quality is increased. Similarly, in the financial system, the process and instruments created were so complex that virtually no one understood what they were buying or selling. The financial markets should be regulated so that products that are properly labeled.

• Investment banks and hedge funds migrated their business models to do essentially what banks and mutual funds do but free of oversight and transparency. The root of the financial problem is neither in traditional banks, nor in mutual funds. Investment banking and hedge funds need to be regulated in exactly the same way as traditional banks and mutual funds.

• Virtually everyone today recognizes that our political system is corrupt. Both democrats and republicans were very heavily lobbied by Fannie Mae and Freddie Mac and that resulted in an expansion of their mandates. The intention of these institutions was good. The intention of the expansion was good - to provide more access to credit by less credit worthy individuals (poor and minorities). But, their activity was increasingly unsupervised and objectivity was lost. The system of lobbying by institutions that are regulated by our government has to change.

The success of the next president and congress will not be determined by their ability to recognize personal failings, but rather to redesign the system of rule governed behavior.

The purpose of corporations is to create wealth… not only financial wealth for stockholders, but total wealth for society. When corporations build competence in their employees they are creating wealth. When they innovate they are creating wealth. When they build relationships across groups of people and countries they are creating wealth.

Wealth is not only money. In my New Capitalism book I define total wealth as including not only financial capital, but also social, spiritual, human and process or technology capital. These five forms of capital represent an holistic understanding of value. On an individual level, when you educate yourself, when you improve your physical health, when you develop a strong social network, you are creating personal wealth. You don’t create personal wealth by focusing your energies on money. You are more likely to create financial wealth by investing in your competencies, your values, your social relationships. Then, in an organic, or natural manner, these result in higher income and financial wealth.

The same is true in corporations. Corporations that just focus on money are likely to be bureaucratic, uncreative, lack strong values and the loyalty of their people. The money focused company is less likely to make money in the long term than the company that focuses on the whole value creation stream.

Every process can be defined as input-work process-output. The value creation stream follows this same flow. The stuff you need to start or build a company are all five forms of capital. The work processes, the things you do to transform input into higher value output include the core work process of the organization, the HR development systems, the information systems, etc. These are the nuts and bolts that get the work done. The outcomes of the value stream are an increase in all five forms of capital.

Strategic planning is most often focused on finances, increasing revenue and reducing costs, and then focusing on enhancing competitive market position. Nothing wrong with this. But, market position and financial success are the end of the line, the final result of enhancing human competence, improving brand equity and internal social capital, and innovations in technology or process. The new strategic planning must now focus on the entire value stream from input to output and all forms of capital.

Shamu, husbands, children, inmates, managers and employees… all respond to reinforcement.

For the past couple of weeks the most emailed article on the New York Times has been Amy Sutherland’s “What Shamu Taught Me About a Happy Marriage” in which she shares her application of animal training, learned from watching Shamu’s trainers, to training of her husband to fetch and heal.

No one has reported how her husband feels about all the attention. We don’t know if he is barking wildly or just whimpering in the corner while he awaits a treat or tummy rub.

My daughter emailed me this article and it made me wonder whether she is aware of the degree to which she is a product of “Shamuism.”

Of course, this is all about elementary learning theory or behavior modification, positive reinforcement, behavior shaping, extinction, etc., all studied and promoted by B. F. Skinner and his followers. I began my career working in prisons and established the first token economy in a prison, a checking account system in which inmates “learned to earn”, paid for everything with prison money (points), including rent in one of four dormitories, a luxury, quality, standard, or efficiency dorm.

My wife and I used behavioral principles in raising our children, usually avoiding punishment and relying on positive reinforcement for desired behavior. It works.

After prison I went to work for Fran Tarkenton’s company, one of the pioneers in applying positive reinforcement, what we called “Behavior Management” to the work place.

As Amy Sutherland has discovered (I guess old lessons have to be relearned in new packaging every few years) the power of positive reinforcement has not been diminished as new theories have been promoted in recent years.

If you examin the world’s best companies, including Toyota and Honda, Dell and Intel, you will find that they have integrated behavior shaping, ing, and other techniques of positive reinforcement into their system. They don’t have “Behavior Management” programs that stand out as temporary and hyped efforts. Rather, they simply do a good job of recognizing and rewarding the behavior that leads to competitive success. That includes quality improvement, innovation, cost control, etc.

If you were going to design the ideal organizational system (my favorite frame of reference), part of that design, integrated with the other pieces of the whole-system, would be well thought out system of positive reinforcement. The ideal system would include a few basics of effective behavior modification:

1. It would not rely on one “schedule of reinforcement” but would include multiple schedules. It would include variable, as well as fixed interval schedules. Variable schedules result in stronger behavior that is more resistent to extinction.

2. It would include both tangible (money, for example) as well as social schedules of reinforcement.

3. It would not assume the ability to defer gratification over long periods and would, therefore provide immediate reinforcement, such as the awarding of points that could later be exchanged for a tangible reward.

4. It would be administrated consistently so all employees felt an opportunity for reinforcement.

5. It would follow the principle of “shaping” that calls for reinforcing successive approximations to a desired performance, and not hold out the reward for performance that many found impossible to reach.
“important” to the success of the organization.

But, perhaps most importantly, any system of positive reinforcement, or Shamuism, should not be a stand alone program that comes and goes. It should be part of the architecture of the whole-system of the organization.

(A commercial note: In my new book there is a chapter titled “When You Make Performance Matter - the Currency of Appreciation” in which I discuss this topic in more depth. )

The preparations for and the handling of hurrican Katrina will be the subject of case studies in management workshops and courses for years to come. For anyone who was unconcerned about the quality of leadership and management in our government, this should cure their oblivious stupor. Folks died, children suffered trauma, and we all suffered through nights of the most hellish reality show ever aired on television as we watched in complete frustration as our officials didn’t “get it” and the stranded begged for help.

So, what is to be learned from this mismanagement crisis? Here are some random thoughts:

1. Process matters over structure. It is perfectly obvious that the current structure inhibits the process of responding to a crisis and delivering aid, security and medical resources rapidly to those in need. The primary reason for this is that there is no well defined process that cuts through all of the irrelevant structures (walls between agencies, city, state and federal government, etc.) and the aid can’t climb over the bureaucratic walls. When I help companies with my whole-system design process we begin by designing the actual work process, then we address structure with the question “what structure will optimize the ability of people to perform within the process?” Just as in a corporation, the customers don’t care about your structure, bureaucratic procedures, levels of management, blah, blah, blah! They only care that the process delivers the goods!

Someone, please, design the ideal process of responding to a crisis and then put a structure in place to facilitate that process.

2. Competence matters. Sounds silly. But, lets face it - every well functioning corporation knows that the job of manufacturing manager requires certain skills and the job of marketing manager requires others. It is the primary job of an executive to to put the right people in the right job. That is half the battle. The American people are responsible for the competence of our government, for voting for those, who demonstrate little awareness or concern that our agencies are led by people of both technical and managerial competence. Next time I vote, I want to vote for an executive who has demonstrated his or her ability to manage a large organization and that means appointing and attracting competent managers, developing strategy and holding people accountable for executing.

Or, is Mark Kleiman right in his posting that… “One of the most charming characters in Huckleberry Finn is the con artist pretending to the the lost Dauphin. At one point, he remarks: ‘Hain’t we got all the fools in town on our side? And ain’t that a big enough majority in any town?’ I’ve always considered that remark a depressing but fundamentally accurate insight into practical politics. But it turns out that His Majesty Looey the Seventeen wasn’t infallible, after all.”

3. When you need to make a change, do it quickly! The good news - the President did remove Michael Brown from command once it became clear that he was the wrong man for the job. Maybe a good lawyer, maybe a nice guy, maybe loyal - but a commander in crisis - NOT! Thankfully, he replaced him with someone, a Coast Guard Vice Admiral, who knows how to command.

4. Division kills, united energy and effort saves lives! I have just finished writing another book (yes, one more book!) and the title (my third title change) is One Force - The Essential Law of Leadership that Cuts Across Differences to Create the Irresistable Force of United Energy and Effort. All organizations, teams, business and governments succeed to the degree that they are able to create unity of energy and effort. Without giving a sales pitch on my book (which isn’t available anyway!) this whole case study is a good one to examine how united energy and effort wins and how divisions, fragmentation of effort, is destructive.

5. How about preventive maintenance? Anyone who has worked in a good manufacturing operation knows that every dollar spent in preventive maintenance pays dividends in less downtime, fewer defects and less waste. Neither the Congress nor the President were interested in the obvious preventive maintenance that was required to prevent flooding in New Orleans. The bill presented to Congress for improving the levees and restoring the wetlands that act as a barrier, was fourteen billion. No interest. This week Congress approved the Presidents fifty-one billion dollar emergency reconstruction request. No problem. Let’s get with it folks. It is a sign of intelligence to anticipate, to foresee consequences and act accordingly. We need a bit more intelligence in our decision making process.

6. Government matters. I am a business guy. I am an investor. I don’t like paying taxes either and I would love to have a small, yet effective government. But, over the recent past there has been an almost child like abhorence of government, an almost anarchist desire to “starve the beast” to destroy our very own government. I am for leaving in the hands of private industry and private initiative everything that can reasonably be accomplished by private hands. However, we need a strong and effective government. Anyone who is still living in the fantasy of anarchy or minimalist government should be condemned to the hell of watching the scenes from New Orleans on last weeks cable news shows over and and over and over again. Lets accept a sane level of government, impose budgetary discipline, and make government effective! It will save money and lives in the long run.That is neither liberal nor conservative - it is just common sense.

7. Empathy Matters. If you want folks to follow you, you must be able to convey genuine empathy for those same folks. In other words, if you don’t care about me, why should I follow you. We have all seen the Saturday Night Live parodies of Bill Clinton saying “I can feel your pain.” It gets a laugh. But consider the alternative… “I can’t feel and don’t really care about your pain.” That’s not funny! Whatever President Clinton’s other failures, he did have empathy and that empathy was appreciated by the people. The key to George Bush’s problem at the moment is that people feel, rightly or wrongly, that he doesn’t feel empathy for them. A good dissertation topic - How Presidents Convey Empathy.

8. And finally… this is not a political commentary. The lessons from Katrina cut across both political parties, local, state and Federal governments. The problems exposed by Katrina are ones that all of our politicians have contributed to. Now, it is up to the people to be sure that they get their priorities right. Of the people, by the people, and for the people… remember that?

Creating high performing cultures requires a new way of thinking that in many ways is very different from how we have pursued quality management or continuous improvement.

Most management problem-solving and improvement has focused on problems and the root-causes of those problems, analyzing the causes, and developing highly specific solutions. It is a view that begins with big things and narrows the focus to smaller and more specific things. This is the well established Newtonian thought process of reducing problems to ever more narrow explanations, the “atomization” of the problem to its root cause. We have learned to derive satisfaction from this reductionism, finding specific causes, measuring them, making specific changes, and watching the data improve. This has served us well. As a result we drive more reliable cars and every other manufactured product is delivered at both lower cost and greater reliability.

But, this approach, as essential as it is, has significant limits when it comes to changing the culture of an organization. Some solutions will not be found by atomizing the problem, but rather by looking upward and outward to the larger laws of the corporate comsos.

Whole-system thinking looks up and out to understand the macro-system and to dream about major system breakthroughs. It asks questions about the big systems and their nature. It looks at all the interrelationships of a complex system and seeks strategic changes in that system. Focused problem-solving can never address the complexity of a whole system. It requires a complete paradigm shift from traditional problem solving. In short, if you engaged in quality improvement problem-solving within a dictatorship, you might improve the efficiency of the police, administration, etc. However, you would still have a dictatorship because the transformation to democracy cannot be found in the detailed causes of specific problems. That transformation requires looking upward and outward to primary principles and the nature of the system. This upward and outward view is whole-system thinking and it is required to put the slices of bread back together. You can’t create a whole loaf by dissecting each slice.

Many corporations are examining the role of the corporate center - why are functions centralized or decentralized? The answer to this has a dramatic impact on the culture of an organization and the answer will not be found in the details of specific problems. Rather, it requires examining core principles and assumptions. It requires evaluating the strategic ideas behind the role of corporate or central staff groups. In short, it requires deep thinking about the nature of the system, the interrelationship of the parts of the corporation.

Learning this skill is one of the new frontiers of managing the culture.

Authentic happiness conributes to business success

One of the best books of the past year is Authentic Happiness by Martin E.P. Seligman. Read it and be happy. In fact, it wouldn’t be a bad idea for every manager to buy it for his or her employees. It will pay off in performance.

When I first began consulting in manufacturing plants in the 1970’s management was dominated by, not just men, but by genuinely tough men – men’s men. To rise through the management ranks from the shop floor to senior management at J.P Stevens & Company, Cannon Mills or Millikan & Company, no wimps need apply.

When I was consulting with Continental Can Company, at which long battles between the company and the Steelworkers and Machinists Union had hardened everyone, to the point that managers glared at each other. Someone pointed out to me that the CCC managers had “gunslinger eyes” and they would sit around a table at lunch with their hands under the table, out of site, and then suddenly draw and point, getting someone by attacking what they had said. This may sound absurd now, but it was the norm of American manufacturing culture and it is one of the reasons for the decline of manufacturing in this country.

These were not happy places to work. I once interviewed a Vice President, the only woman member of a twelve person senior management team, and I asked her about the “glass ceiling” that might prevent women from rising to senior management. She immediately responded, much to my surprise, that there was no glass ceiling. She said women were promoted. But, when they got there, the environment was so anti-social, so unfriendly, that they couldn’t understand why anyone would want to be there, and they left.

In the past, the idea that we had any burden to create “happiness” at work would have been viewed as some socialistic absurdity. But now there is very good evidence, hard data, that suggests that people who are “authentically happy” perform better than those who are not. Authentic happiness is not simple pleasure. Eating ice cream brings pleasure, but sitting around all day eating ice cream does not make you authentically happy. It will soon make you miserable. Similarly, the data shows that an increase in income from $20,000 a year to $40,000 a year will make you happy because you may be able to afford a better home, care for your children, etc. But, does an increase in salary from one million to two million, or ten million, make you any happier? Very unlikely.

Martin Seligman is the founder of what is now called “Positive Psychology”, essentially the study of mental and emotional wellness. He says that there are three domains of happiness, each of which can be measured.

The first is The Pleasant Life: which he says is “Having as much positive emotion as possible and learning the skills to amplify the intensity and duration of your pleasures. But the capacity for positive emotion turns out to have a genetic set range that is hard to push around: lottery winners and paraplegics revert to their usual level of good cheer or grumpiness within a year following the event that changed their lives.” In other words, there isn’t much you can do about your capacity for this type of positive emotion.

The second type is The Engaged Life: “Being “one with the music,” absorbed and immersed in your work, love, friendship and leisure. The central skill to have more engagement is to identify your signature strengths and virtues and re-craft your life to use them more often. By deploying your highest strengths and talents, you can have more intense absorption in more areas of your life.”

Over the years, and this may sound a bit silly, I have believed that the work we have done in setting top-to-bottom systems of team management in which every employee takes ownership of his or her work processes, communicates with customers, plots data, and is empowered to make decisions, has made employees and managers happier. It just felt this way. And, this always went along with improvements in performance. Seligman’s work helps understand this connection between management systems, psychological engagement, and productive workplaces.

And the third is The Meaningful Life: Seligman says that this “Adds one more element, transcending the self, to the engaged life: The central skill is to identify your signature strengths and virtues and using them to belong to and to serve something that you believe is larger than you are.”

There is good data suggesting that people who are religious, who have a strong set of values and beliefs, are happier than those who do not. Meaning matters. Purpose matters. Serving something that you believe is larger than yourself is the essence of all religion and is a cornerstone of the spiritual enterprise.

One of the most useful areas of research (if I were advising you management or psychology students) is how the processes, systems, and culture of organization can be structured to reinforce these three attributes of authentic happiness.

Visit Seligman’s website and take his happiness test. You will find it interesting.