Be an Ethical Entrepreneur, Marketer, and Business Builder

Why WhatsApp is NOT everything that’s wrong with the economy

By WhatsApp Inc. (http://media.whatsapp.com/) [Public Domain], via Wikimedia CommonsFacebook recently purchased a startup with no profits for $19 billion dollars in the largest tech acquisition in history.

The venture capital-backed, tech startup world is rife with problems as I’ve blogged about before.

However, Robert Reich has brought up one of the more popularly alleged economic problems.

He claims the problem is that tech companies like WhatsApp are hurting the economy by not creating enough jobs.

In Reich’s words:

Productivity keeps growing, as do corporate profits. But jobs and wages are not growing. Unless we figure out how to bring all of them back into line – or spread the gains more widely – our economy cannot generate enough demand to sustain itself, and our society cannot maintain enough cohesion to keep us together.

In other words, Mr. Reich is saying, “55 employees were able to make a business worth $19 billion dollars serving 450 million people and that’s not fair. Why do such a small group of people deserve so much?”

Of course, he offers no solutions other than to mention income inequality implying that it’s the fault of successful companies like WhatsApp for being successful.

Venture backed start-ups with insanely high valuations, minimal revenue and no profit have all sorts of issues.

But not creating enough jobs is not one of them.

Remember the Luddites rioting to destroy new machines that made the textile industry more efficient back in the 18th century?

Richard Arkwright invented his cotton-spinning machine in 1760 which became one of the main instigators of the Luddite riots.

After all, the cotton-spinning machine would displace the jobs of all of the seamstresses who used to make the clothes by hand, right?

In 1760, there were about 7,900 persons in England engaged in production in the textile industry. In 1787, 27 years after Arkwright’s invention and only 8 years after Ed Ludd destroyed 2 stocking frames allowing his name to become synonymous with all the machine destroyers, there were 320,000 people employed in textile production in England.

Why did more efficiency results in a 4400% increase in jobs?

Because with increased efficiency came lower prices so, instead of having 2 sets of clothes, people could afford to have dozens.

The same complaints have been lodged against every major technological advancement.

Every time we progress, the Luddites come out claiming this time the new increase in efficiency is going to hurt the public by reducing jobs.

The exact opposite is true.

About two centuries ago, the majority of America was an agrarian (i.e. farming) society.

However, the invention of farm machinery didn’t result in the majority of Americans starving because they were no longer needed on the farm. In contrast, less people on the farm meant more people inventing, building, and creating other things.

At its core, economics is very simple.

If something increases efficiency it’s good for the economy. If it decreases efficiency it’s bad.

WhatsApp figured out how to connect 450 million people with only 55 employees. That sounds hyper-efficient to me.

Our knowledge-based economy has seen the fastest and greatest improvements in efficiency and leverage the world has ever known.

The end result of that increased efficiency is always an improvement for society.

Massive fortunes were made by Rockefeller, Ford and Carnegie when we transitioned from an agrarian to an industrial economy.

More recently, Gates, Zuckerberg, Page and Brin have been richly rewarded in our transition from an industrial to a knowledge economy.

Would we all be better off if none of them were allowed to reap the rewards of their creations?

You have 2 options

Become a Luddite, slow down technological innovation, and reduce the reward for being an innovator by asking the government to intervene.

OR

Learn what it takes to excel in the knowledge-based economy and join the successful companies that are improving our lives.

Time will prove, once again, that Robert Reich, despite all of his experience, power, and prestige, is no different than Ned Ludd whose name became synonymous with the machine destroyers’ failed attempt to halt progress.

The problem is education

The problem is not our exponential increases in efficiency.

The problem is an education system that was built at the beginning of the industrial revolution and is still designed to teach students to be good “workers” instead of great thinkers.

As the owner of a marketing tech company who has been almost steadily hiring for 2 years, I can assure you that the education or degree of people who succeed on my team is irrelevant.

A particular degree, or college education at all, cannot predict job success as well as cognitive reasoning abilities, emergent leadership, the ability to learn quickly, a passion for your expertise and a willingness to make mistakes while admitting when you are wrong.

Google recently revealed their top 5 hiring attributes and indicated that the number of people at Google without degrees is increasing.

So whether it’s Twitter, Google, Facebook, WhatsApp or my company, Optimized Marketing, fast growing companies that understand how to leverage technology are coming to realize that relying on someone’s particular degree or level of education is not a good predictor of future job performance.

In other words, our education system isn’t reliably producing people with the skills we need.

The problem isn’t successful companies.

The problem is we haven’t yet learned how to educate students for the knowledge economy.
Don’t blame successful entrepreneurs for not making more jobs.

Celebrate their success and start teaching more people how to do the same thing.

There’s a reason Ken Robinson’s below TED talk explaining how schools kill creativity is the most popular TED video ever with over 25 million views.

Mr. Robinson’s talk is popular because he’s right.

Whether creativity comes in the form of becoming the dance choreographer who wrote Cats or the founders of a successful startup company that sells for billions, creativity is the solution.

Taking away the rewards of creativity, as Mr. Reich seems to be implying, would further hinder creative pursuits and not help anyone.

Imagine what the next 100 years will look like if we are all allowed to “come up with original ideas that present value”, as Mr. Robinson defines creativity.

To your passionate, creative success,
Bryan

P.S. For more examples of technology increasing employment in various industries, check out Henry Hazlitt’s Economics in One Lesson.

All Great Businesses are Inherently Moral

This fact has been proven time and time again by modern business and human psychology experts.

No business that exists exclusively for profit, without the advantages of corporatism or cronyism, will ever be very successful and certainly not over the long-term.

This is not my opinion. This law of business is as well established as the laws of gravity.

By a great business I very simply mean a profitable enterprise that lasts for an extended period of time. An unethical business can fool people for a short time however it cannot fool them for very long, particularly in the age of social media.

Business experts from a few decades ago called this vision and mission. Brad Sugars in Instant Team Building insists on vision, mission, and culture points. Tony Hseih in Delivering Happiness calls on vision and culture statements. Mike Michalowicz in The Pumpkin Plan has his immutable laws. Sam Carpenter references his Rules of the Game in Work the System.

Jim Collins in Good to Great discusses the requirement of all great businesses to have a “Hedgehog concept.”

One of the primary findings in, Built to Last, that contradicted the teachings of many MBA programs, is that businesses that have survived and excelled over time were often the ones that were centered around a core business concept, not a great product.

Let me summarize a major portion of all of those books very succinctly…

The compass for lasting business success always points you in the same direction.

The compass for long-term business success will always point you in the same direction.

Every great business expert knows that a business MUST be motivated by something more than profit to inspire your team, stay focused and even maximize profits.

If you’re still not convinced, pick up a copy of The Loyalty Effect by Frederick F. Reichheld and read about the numerous studies that have shown that companies who downsize in the interest of short-term profits rarely ever recover and often their stock prices suffer for a very long time. Obviously there are necessary times to downsize and appropriate ways to do so, but to simply improve next quarter’s earnings is not one of those times. As a general rule, downsizing is best treated as a last resort.

In The Millionaire Mind, Thomas Stanley discovered that the #1 thing millionaires attribute to their success is “being honest with all people.” (And 88% of the millionaires he surveyed achieved their wealth through entrepreneurship.)

Marcus Buckingham’s research in First, Break All the Rules: What the World’s Greatest Managers Do Differently demonstrated that pay is not even in the top 5 reasons people stay at or leave a job. Through 20 years of research with 20,000 managers and over 80,000 interviews, he has developed 12 questions that do show what motivates people and pay doesn’t even make the list.

In other words, money is not the primary motivator for people and all businesses are run by people.

Dan Pink takes it a step further in the below video. Through extensive research in the psychology of motivation he shows that for someone to truly excel they need Autonomy, Mastery and Purpose. If your boss, the corporation, or the government is dictating what you should do, there goes Autonomy. If your “hedgehog concept” is to maximize profit, then you’ve thrown Purpose out the window.

A non-crony entity that exists primarily for profit will never be a very successful business and every great business leader knows this. The idea that companies should be immoral is as old as Machiavelli and it was as wrong then as it is now.

If you work for someone who runs an immoral business, start educating them that there is a better, more prosperous way. As a matter of fact, help every business leader and employee you know appreciate the long-term business benefits of running an ethical, moral business.

It’s truly the only path a business can take to succeed over the long-term.

To your ethical business building success,
Bryan

P.S. My team’s number one culture point is Love and we try to live it as best we can. It’s not easy and we don’t always succeed but it is our most core value. I highly recommend you infuse it into your culture.

Wealth is created, NOT taken

For reasons that I can not fully understand, some people believe that if I have accumulated $100 dollars someone else somewhere else has lost $100. To make the story worse, if I’ve accumulated $1,000,000 then a lot of people have lost money so that I could get it. This is simply not true! If you believe this and are afraid, ashamed or embarrassed to learn how to become wealthy because of it, please read on and comment at the end.

In America, and throughout the world, the way money is created is a rather complex process that, after reading and studying for hours, I still have yet to fully comprehend. But that’s not at all important right now. You just need to understand a few key concepts and examples about money and it will become clear to you that not only is the money supply not fixed, it’s ever increasing and that’s a good thing.

  1. Money has been around for several thousand years. If you read the Bible, Jesus references various coins including a denarius when he declares, “Give to Caesar what is Caesars.” Between 300-400 AD it’s estimated that 55 million people lived in the Roman empire. Our population is now approaching 7 billion. If each person 1700 years ago had $1000 than the entire wealth in the world was $55 billion. Out of almost 7 billion people today, the 2 richest have amassed more wealth than that and at one point, with the economy booming, the richest man in the world was worth nearly $50 billion alone. So what does this tell us? Money is a byproduct of economic  activity and increases because of it. In other words, if everyone has a job, everyone has money and somehow the banks and governments figure out how to keep printing money to keep up with it. Again, how they do that is complex and secondary to this discussion. Just grasp that there’s more money today than before and at the same time our standard of living is higher (though not everywhere as unfortunately not everyone is taught this lesson).

    Creating economic activity by contemplating my book as I enjoy a distant rain storm at the Grand Canyon.

  2. Money does grow on trees and can be dug out of the ground and can be created on a computer. Think about it. What does it cost to buy a 2×4 at the local hardware store? What does it cost to buy a tree that you can then cut down, process and make a 2×4? If you look at the cost of the raw wood while it’s still in the tree, it’s pretty cheap, maybe worth a few pennies. If you then figure out what the treated 2×4 costs after it’s been cut, cleaned, shipped, and displayed at your local lumber yard it’s still pretty cheap. Maybe $5 for that piece of wood. Now take the cost of a completed frame of a house and divide that by the number of 2×4’s and you’re looking at closer to $20-$40 per 2×4 depending on location, complexity, labor costs, local taxes etc. So why the constant increase in cost? Because more economic activity is being added at each level. And guess what? The whole time those are being processed and houses are being built, new trees are being planted and grown to sell all over again. Now consider all of the resources all over the world from our food supplies that are being farmed and grown every year, to new oil reserves that are being found because of new technology, to drinking water that’s constantly being recycled, and you realize quite literally money does grow on trees and so can never be a fixed amount. Now consider that sitting in front of a computer using virtually no resources I can create a software program that has value even though the raw cost of goods is nothing more than my own energy or, in other words, the only cost is my own economic activity. Sitting here with my computer I created value out of nearly thin air. To take our tree analogy further, what is the cost of that wood when it’s converted into paper and a book is published on it? The added value for the book was partially due to refining and colors and other raw goods and the rest was created out of thin air or more precisely out of someone’s mind. That being said, in my opinion books are by far the greatest value in the world since you can learn from a person’s lifetime of experiences and lessons for $15 or less.
  3. It’s the Federal Reserve’s and International banks’ job to keep the supply of money on par with the economic activity of the world. Whether you agree with their policies is irrelevant. I’m just pointing out that, that’s currently the system we have in place. They print money and provide money to the member banks and attempt to keep inflation in check throughout that process. And they print more money every year because more economic activity is added to our economies every year.
  4. To finally tie all of this together, if you figure out a way to extract oil out of the ground more efficiently and I concurrently figure out a way to cut and process trees into lumber more cheaply we both have added value to the economy at the same time and neither of us stole money from anyone else to do it. This happens every day. Again, just consider technology companies and authors who create value out of thin air and it should be obvious to you that the only thing they stole from anyone else was their own time and thought.

In conclusion, there’s enough wealth and abundance quite literally for everyone, not just in the US, but in the world. Rich people don’t make poor people by making more money and poor people aren’t poor because there are too many rich people. As I pointed out above, that’s just not how money works. So don’t feel jealous or greedy because you want to provide a comfortable lifestyle for you or your family. More importantly, be sure to help as many people along the way achieve that same level of success.

To your abundant success, Bryan

A few more ways to get tax-free money from your business…

As I’ve pointed out before, when dealing with customers, team members, suppliers and even the tax man I’m not at all a fan of doing anything “under-the-table” or unethical. So keeping that in mind, here are a few ways to get tax free money from your business.

  1. Credit Card Rebates – This would be the ever popular cashback, rewards, points, and travel credit cards. The IRS currently has no provisions for rebates of any kind so this can easily add hundreds (if not thousands) of dollars in cash, gifts, or travel expenses into your pocket tax-free. I personally have 3 rebate cards. One from American Express, one CapitalOne visa, and a Discover card. The rebates range from 1-5% and in about 8 months of random purchases (both personal and corporate) I accumulated over $500 in rebates. My personal preference is to receive cash rebates so I can spend the money wherever I want however I’m looking into travel rebates since I tend to travel a lot.
  2. Purchase Rebates – These are the rebates you find at large retailers where you buy a fax machine and can receive a $50 mail-in-rebate. Guess what? The total expense is deductible and when the rebate comes in the money is yours. Check with your accountant (cause I’m definitely not one).
  3. Marketing – This is one of my favorites. A few weeks ago I sat down with my accountant and asked about my business sponsoring a race car at the local track. Turns out it’s 100% deductible. The racecar (or motorcycle), repairs, gas to get there, parts, etc. etc. can all be written-off as marketing expenses. If you are always racing something like me, then you really shouldn’t let this tax-free racing budget pass you by. Of course your race vehicle needs to advertise your business.
  4. Personal Development/Training – My accountant just educated me on this one recently. Currently I have 2 businesses that are about 4 hours apart with a total territory that would take me about 12 hours to circle by driving. Add to that the possibility of another business about 4 hours away in a different direction and the benefits of flying become quite obvious. So I’m working on getting my personal pilot’s license so I can fly myself around for business and also a bit just for fun. Just like with a company car, you need to figure out how much of your time is truly business and how much is personal and allocate the proper amount of your flight instruction and flying lessons through your business. Of course that would be a direct, pre-tax, business expense.
  5. Gifts – Not sure if this varies by state or is just for federal however my accountant informed me that a performance based incentive of up to $400 can be awarded to all employees without claiming it as taxable income each year. This can be in the form of a gift or simply cash. Hopefully you’ve performed well enough in your business to earn such an award. 🙂

It seems like I’m learning new, creative, legitimate ways to benefit from owning a business on a weekly basis so as I learn more I’ll post them. If you have any great ways to lessen your tax burden legally please let me know!

To your success, Bryan

P.S. I’m not an accountant and everyone’s situation is different, so make sure you check with your accountant before starting any of this. 🙂

Should I take on a business partner?

No. I mean, Yes. Well sometimes…

Here’s the rule of thumb – You only take on a business partner if ABSOLUTELY necessary. Here are the only reasons it would be necessary:

  1. They have the money you need. – This is self-explanatory and if you’re young, have educated yourself, and willing to work hard is the number 1 reason to have a partner. You need cash to get started. Obviously “young” is relative, however if this is the point where you are in your life and you just need some cash don’t let that stop you from taking on the partner. Below I’ll get into a few ways to ensure this partnership will work.
  2. They have the experience you need. This one isn’t actually too different than the one above. Maybe you have money, maybe you just have the right opportunity. The best example of this would be if I have great leadership talent yet can’t cook and I have a great opportunity for a profitable restaurant. If I’m going to recruit a top-notch, dedicated chef chances are they’re going to need a piece of the action (I’d recommend offering them profit sharing instead of ownership, though). Notice I did not say “you want to have a restaurant”. Never forget that you don’t buy a business “for fun”. You buy it for its profit potential. Once you’re rich you can then start having fun with all of your money on “risky” businesses.
  3. They have the connections you need. The best example of this would be the entertainment industry. You can be the most talented singer, comedian, actor, or artist on the planet but if you don’t know the right people chances are you aren’t going anywhere. Granted, with the advent of the internet, Myspace, Facebook, Youtube, etc. etc. etc. you have a lot more avenues for people with those connections to find you. After all, if you put a video on Youtube that gets 10 million hits, you can make a pretty good argument that your talent is truly entertaining.

Again, you need to evaluate your situation and determine if you REALLY need their cash, experience, or connections (or all of the above – but if you need all of that, then what do they need you for?).

You’ve determined that you do need a business partner so here are a few things you should setup BEFORE getting into business together. Do not wait until 2 months, weeks, or days down the road when issues arise. The easiest way to avoid conflict is to work it out ahead of time. Here are the 5 things that are crucial to a strong business partnership.

  1. Have an exit plan up front. This is something I reviewed with my business partner as soon as I knew it. My plan was to sell the business within 2 years or at least step away from the business and train someone else to replace me. In other words, if I can make money without working all day every day then I’ll keep the business.
  2. Have a Growth Plan in place so you know where money will be reinvested. – When the business starts doing well, you may think the best investment of all the money is back into the business whereas you partner might think we’d be better off having more company perks or taking additional distributions. If you clarify that up-front, it makes things a lot easier when the time comes.
  3. Have a “cashflow crunch” plan in place. – This is the one I forgot. Some business owners, such as Brad Sugars, say “Always pay yourself first” however most business owners, myself included, have difficulty with that. I can live on next to nothing and I always have savings so I’m more comfortable paying all of the bills first and then paying myself. If you’re business partner isn’t on the same page then you need to know that up front.
  4. Document each person’s responsibilities. – If you have a partner both of you can’t be doing the same thing. If your partner is just injecting cash but is going to have no say on the operation of the business then you need to spell that out up front. Keep in mind the 3 leaders every business needs since most partnerships based on experience fall along those lines. Make sure you indicate what happens if one or the other person doesn’t keep to their responsibilities. You may want to include working hours, benefits, paid vacation time etc. in this area as well.
  5. Bring issues up as soon as reasonable. – If there is something you didn’t discuss up front that you think is going to be a problem, do your research on the problem so you have all the facts, and then bring it up. Don’t wait months for it to fester or wait until your partner finds out from someone else. If you’re not comfortable discussing difficult topics with him or her, he or she shouldn’t be your partner in the first place. In my opinion this is the MOST important aspect of finding a partnership. You cannot possibly plan out or think of every problem that may arise. However, if you can reasonably trust and discuss things with each other then you are much more likely to make it work.

Brad Sugar’s once told me that “if you want a partner, get married.” Though when he was getting started he had to take on partners to get the cash he needed and he’s done alright for himself since then. So don’t avoid partners at all costs – especially if the cost of not taking on a partner is not getting that business – However, educate yourself properly on the person and the synergies you have together. And you better make sure you do the five things listed above to keep everything positive for the term of the partnership.

To your partnering success, Bryan

Why being ethical is always more profitable…

It’s amazing when you consult for businesses throughout North America – particularly when you’re intimately involved with their billing software – how many “questionable” things you learn.

I’ve seen:

  1. Paying people under the table.
  2. Canceling cash transactions in the computer and pocketing the money.
  3. Trade deals to avoid sales and other taxes.
  4. Running the expenses to remodel a home through the business.
  5. Paying salaries to family members who don’t even work in the business.
  6. Buying a company motorcycle.
  7. Paying country club memberships directly from the business.
  8. Writing off business trips and meals where business was never discussed.

And if your accountant approves of one or more of the above, get a new accountant because they’re not liable – you are. Those write-offs are only gonna be legit for as long as you can avoid an audit.

So why the overwhelming pressure to “cook-the-books”? The simple answer is, of course, taxes. When someone in America makes more than $100,000 per year about half of his income goes to the government so I can understand how people can get a bit bitter… However, there are a few reasons why not doing things “by the book” or why sneaking unethical transactions through your small business is a bad idea.

  1. It devalues the business when you go to sell. If you’re ever buying a business NEVER include cash deals that aren’t on the books as part of the value of the business no matter how well documented they are. I can create a fake spreadsheet in about an hour “documenting” the 3 years of over-the-counter cash transactions. If the business hasn’t paid taxes on it, then don’t include it. You have no way to verify. Additionally, when valuing a business based on Seller’s Discretionary Earnings or Cashflow you can only add back so many “owner perks” before the buyer is going to wonder if maybe a great deal of those perks might just be necessary for your type of business. You bet I would certainly use that to negotiate the purchase price down.
  2. It will catch up with you. And maybe the only way it’ll ever catch up with you is by you not being 100% comfortable every night knowing that the IRS will never find anything out of line. Business is a means to an end. That end being more freedom – particularly of your time.  But if that free time is haunted in the back of your mind with, “How do I conceal X if I get audited” then how can you completely enjoy it? CFO magazine from July/August 2008 had an article titled Don’t Mess With the IRS – Tougher Enforcement has Companies Rethinking Tax Strategies. It makes the point that the IRS is better funded, has better legal talent, and for the first time ever, actually wants to take people to court because they’re so confident in their new abilities to win. And they’re making waves. CFO points out that in 2002 corporate tax penalties amounted to $335 million while in 2007 they totaled $939 million. Nearly a three-fold increase in 5 years. Don’t be naive and think “well those big sheister corporations deserve to pay all that money but they’ll never worry about my small business.” You don’t have a full staffed legal team for them to even fight. It’s just a matter of time before small and medium business’ start feeling the repercussions of the “New IRS”.
  3. There are legit ways to minimize taxes. However they can be a bit challenging and finding a good accountant is even more work…

Don’t get me wrong. It makes me physically ill to think of how many thousands of my dollars are going to wasteful government spending and redistribution of the wealth programs…  If it gets bad enough, then I’ll move to another country that’s more tax friendly (more on that later) however for now, the possibility at the American Dream and making millions in America is still alive and well so I’m going to pay my fair taxes and make sure my business’ are legit. With that in mind, here are a few legal tax minimization ideas you may want to consider:

  1. Rental Real Estate – You can deduct up to $25,000 in losses from passive income against active income if you’re an “active participant” in that real estate and you don’t make more than $100,000 per year. It gets more complicated from there…
  2. Equipment Leasing – Leasing equipment from one business to another business, or from your person to your business is a great way to get money to your pocket with minimal taxes. More importantly it’s a great way to shield your business from the liability that having employees driving vehicles would present. In other words, if company A owns your trucks and leases them to your primary company B and someone sues the company that owns the trucks because they were in an accident, all they could take would be the trucks… Not the rest of your business. Admittedly its a bit more complicated then that, but you get the idea.
  3. Multiple Business Entities – If you have a pass-thru entity such as an S-Corp or LLC, you don’t pay any Self-Employment tax or FICA. In essence, any distributions that you take out of those businesses saves you 15.3% on FICA taxes right off the top. You must, however, pay yourself a reasonable salary. You can’t take all of your income in distributions. Also, all corporate expenses (i.e. forming your business entity) plus the formalities necessary to keep it up and running are deductible expenses. Depending on your type of business you could also incorporate in a state without state income taxes such as Nevada, Wyoming, Texas, or Tennessee.
  4. Personal Loans – Loaning your business money and then taking a reasonable interest rate against that loan is a form of passive income. It’s not taxed the same way as active income (no FICA, I believe).
  5. Like-kind-exchanges – If you buy and then sell a business, you can defer your tax indefinitely by buying another business with your capital gains. The same is true for similar real estate transactions. Obviously if you can’t completely and legitimately eliminate the tax, your next best option is to defer it for as long as possible.

The list can go on-and-on. Granted, as in all my business dealings, I err on the side of creativity which is why I would never setup any of these programs without my accountant’s and lawyer’s blessing.

Simply put, according to The Millionaire Mind, “Being honest with all people” is the number one trait millionaire’s attribute to success – dealing with the IRS requires that same level of honesty.

For a few more resources on legitimate ways to minimize your exposure while improving your marginal tax rate, check out How to Pay Zero Taxes 2009 (How to Pay Zero Taxes) and The Corporation Manual.

Oh yeah, and don’t forget the purchase of those books can be deductible. 😉

To your success, Bryan

The difference between good and bad is in how it's communicated

As I’m thinking of lessons that are extremely important for all of the members of our teams to understand, communication jumps to mind. Behind ethics and more specifically “being honest with all people”, effective communication is probably the most important part of the culture of any organization.

In my experience visiting businesses I’ve seen plenty of examples of why great communication is so important to an organization. However, 3 great business leaders who I’ve had the pleasure of meeting and learning from taught me a few simple lessons that drive home the point a bit easier.

Behind my father, Steve Dickerson and Bob Reiss are probably the most influential businessmen I have met. Mr. Dickerson has an amazing knack for story-telling and an even more uncanny ability to solve problems. He was one of the people I interviewed and referenced in my very first blog and he’s the one who taught me that the difference between a positive and a negative action almost always lies in the way its communicated.

So lets consider this for a moment. You’re in charge of a manufacturing facility that employs a few thousand people (over 2,000). You’re notified 2 years ahead of time that the facility is going to be closed. When do you let your employees know? If you give them 1-2 months then they may just leave in spite. If you give them 4-6 months you’ll probably have most people leaving before you even shutdown and then you’ll have to start hiring people for just a few months. If you give them any more notice then for sure people will leave which makes your job a whole lot tougher. It’s not like you can prevent the plant closure, so its not your fault. Take a few minutes and think through what you could do in this situation to best help all of the company stakeholders. Obviously the way you handle this situation can certainly dictate what will happen to you after the end of those 2 years.

Mr. Dickerson looks at the world a whole lot differently than most people. I have never personally met someone so confident that he could overcome any obstacle and solve any problem. He elected to tell all of his team members right away. Now read this carefully because the way he communicated the plant closing is what turned this situation into a “positive.” Before he told the entire team, he called in upper management and let them know and informed them that they have 2 years to find jobs for everyone in the plant. That’s right, his management team including himself took the personal responsibility to find employment for everyone who was going to be laid off. So they did some research and found a new manufacturing plant was being built not too far away and some other businesses were expanding. The day the plant closed 2 years later, every single one of the “laid-off” employees were now employed somewhere else or had made appropriate plans for retirement.

So the first question that comes to mind is, why isn’t that story taught in every business ethics class in every school and MBA program in the country? Doing the right thing and COMMUNICATING effectively can turn even the most negative situations positive.

Now many of us may not be responsible for the livelihoods of thousands of people so that story may seem to be a bit beyond our capabilities. So let’s take a look at a lesson that Jamie Hresko taught me.

Mr. Hresko was the plant manager for the Pontiac G6 plant in MI. To get an idea of his capabilities, when he took over responsibility for that plant there were over 3,000 grievances outstanding from the union. Amazingly, as I understand it, that’s only slightly higher than the average for a GM facility. However, within 3 years, Mr. Hresko had managed to drop that number to around 30. The lowest of any union facility under GM’s ownership. One of his 5 keys to doing that was Communication and he told this story to illustrate.

He said one day the union rep came to him and said we need another water fountain out on the floor. Jaime considered for a split second that they cut the workers’ hours, the labor force, and their wages (if I recall correctly) and the grievances were still unrealistically low so the least he could do is give them a water fountain. He said “no problem we’ll get it ordered right away” and then asked someone on his staff to make sure they had their water fountain. Two weeks go by and still no water fountain so the rep comes back to Mr. Hresko and asks where the fountain is. Mr. Hresko tells him the truth, “you know what, I’m not sure. I asked someone to take care of that for me and we’re definitely getting it for you so can you give me a chance to find out what’s going on?” So he went and found out the fountain had been ordered, everything had been taken care of, and it would be installed the next day. Low and behold the fountain shows up the next day and all the union members thank Mr. Hresko and start saying “man that guy is good. We don’t have a water fountain for 2 weeks and soon as we mention it to him he takes care of us. If you want anything done around here you have to go to Mr. Hresko.” The reality of the situation was he did absolutely nothing. The person he had asked to take care of the fountain did exactly that. Except one thing. He failed to communicate with the union what was going on and how long it would take. That simple act of communication would have instilled more faith from the union in the rest of management, would have saved Mr. Hresko the time of researching what was going on, and would have prevented the union from getting upset because no one took care of the water fountain for 2 weeks.

Now in the interest of full disclosure, it has been over 3 years since I’ve heard either of these stories so they are paraphrased, however I’m certain my numbers are very close. Even if they were off a bit and Mr. Dickerson helped 3,000 or 1,800 people find new jobs – or if Mr. Hresko only reduced the grievances to 50 or 60 would the stories be any less compelling?

The point is, in every situation, be it a conversation with your sister, husband, colleague, boss, or team member, you should ALWAYS be looking for the most positive way to communicate. Often times being positive simply means calling people back when you say you will, or keeping people up-to-date on the progress of a project. Dale Carnegie in his classic, How to Win Friends & Influence People, suggests in instances where you must critique someone you start out with a positive statement about the person first, so as not to put them on the defensive.

Bob Reiss made a point of assuring his employees that ethics were a high priority. For example, he always kept a copy of the 10 commandments on his desk to reference when a situation with an employee warranted it. From several sources familiar with his companies I was told it was nearly impossible to get a job there. No one ever left. Once you had a job there you stayed for life because you loved working there so much. In one instance, an employee of Mr. Reiss’ approached him with a difficult situation that she was very concerned about sharing with him. Her boss had apparently done something inappropriate or unethical (I was never told what he did) and from experiences she’s had at previous jobs, going above the head of your boss was never a good idea. Mr. Reiss thanked her for bringing the situation to his attention and took care of the problem (I believe by getting rid of that manager). Had Mr. Reiss not been known as an owner with high ethical standards and who strongly valued honesty, there’s a good chance that lady would have never felt comfortable enough to approach him. So if you’re going to be an ethical business builder, make sure you communicate that with your team members. After all, if your team doesn’t know that, are you really an ethical business builder or leader?

The best way to communicate those ethics is through actions and a good way to hold yourself and your team accountable is by setting very specific guidelines for the “culture” you expect at your business. We’ll get more into the importance of defining your business’ culture in another blog.

To your success, Bryan

What 8 CEOs/Presidents have to say about Leadership and Ethics

The inspiration for this site was a research paper I wrote in December 2004 for Professor Redekop’s Senior Seminar “Business Ethics” class at Kettering University. I was going to break up the paper into 2 separate sections but decided it flows better as a single piece and you can easily jump to the bold headers in the sections that most interest you. I make no claims of perfect grammar or APA approved references. 🙂

All of the books that are referenced in the paper can be found at the bottom of the blog.

Introduction

Kettering/GMI has a long history of successful alumni. Kettering claims that 1 in 6 Kettering/GMI graduates are CEO’s or President’s and that Kettering sends a higher percentage of students to the University of Harvard’s MBA program than any other undergraduate school in the country. This essay analyzes the leadership and ethical underpinnings of several of these CEOs and corporate executives to get a better understanding of the skills employed by Kettering/GMI’s alumni to achieve such high levels of success.

Much of the research performed for this essay was centered on eight personal interviews with very successful leaders in corporate America who have graduated from GMI or the General Motors Institute. These individuals oversee hundreds of thousands of jobs and account for billions of dollars in sales around the world. They were presented with several questions on business ethics and leadership and their responses are compared with additional research to provide a more complete understanding of Kettering/GMI alumni. The questions are listed at the beginning of the sections where they will be addressed. They were purposely designed to be vague and broad-reaching. This vagueness was necessary to determine these leaders’ initial reactions and allow them to very subjectively state the items of most importance to them for each topic. The questions were also structured in a manner to allow for email interviews to be conducted where responses back and forth for clarification would not be necessary. The alumni’s answers to questions about leadership were extremely varied however all the questions dealing with ethics were met with similar responses. The reasons for the resounding successes of these individuals are excellent leadership qualities such as hard work, adroit communication skills, consistency, and the ability to command respect. A foundation based upon high ethical and moral standards is also essential to their success. Not surprisingly, this formula for success is also common for independently wealthy individuals in general, not simply within Kettering/GMI alumni.

Defining Leadership

Before embarking on an understanding of what makes a good leader, leadership must be defined. Bob Reiss, an entrepreneur and the first Bio-Medical Engineer, who sold his third privately owned company for $650 million, provides a definition that will be used in this essay to define leadership. He states, “Leadership is the ability to have a meaningful vision of what the future could be and concurrently being able to define a pathway to the fulfillment of that vision” (Reiss 2004). A leader should provide a very clear and vivid image for what an organization can accomplish and be a person everyone can rally around and understand (Coventry 2004). Unfortunately, this is one of the most elusive qualities found in corporate executives today and therefore is being adamantly pursued and even tested for when looking for people to fill executive positions (Coventry 2004). Baltasar Gracian, a 17th century Jesuit monk and philosopher, provides an even more eloquent definition of what he calls a “Natural Leader.”

Natural leadership. It is a secret force of superiority not to have to get by artful trickery but by an inborn power of rule. All submit to it without knowing why, recognizing the secret vigor of natural authority. Such magisterial spirits are kings by merit and lions by innate privilege. By the esteem that they inspire, they hold the hearts and minds of those around them. If their other qualities permit, such people are born to be the prime movers of the state. They perform more by a gesture than others by a long harangue. (Gracian 1653)

Gracian may attribute these unique traits of character to an “inborn power,” however it becomes quite apparent that, though leaders may possess certain natural abilities, they tend to follow a common formula. It is important to note, the alumni unanimously agree poor advice for leading was given by Machiavelli when stating, “It is essential, therefore, for a Prince who desires to maintain his position, to have learned how to be other than good, and to use or not to use his goodness as necessity requires” (Ciulla 2003: p 39). Therefore, the definition of leadership as described in this paper will focus on leading others in a healthy and moral manner.

Defining Business Ethics

Ethics can be interpreted and understood in a variety of ways and therefore needs clarification. Often when faced with the idea of business ethics, the classic John Mill interpretation of utilitarianism is brought to mind.

The creed which accepts as the foundation of morals, Utility, or the Greatest happiness Principle, holds that actions are right in proportion as they tend to promote happiness, wrong as the tend to produce the reverse of happiness. By happiness is intended pleasure, and the absence of pain; by unhappiness, pain and the privation of pleasure. (Ciulla 2003: p 143)

It is essential to note, in this definition Mill points out that unhappiness is not only pain, but “the privation of pleasure.” More succinctly, utilitarianism teaches one to take a course of action to promote the greater good of society and over one’s own personal benefits. Though this may be a great point often contemplated by corporate executives, it may be possible with this understanding to justify short-term behaviors to promote a greater good that would otherwise be unacceptable in the long-term. As Dr. James John, President of Kettering University for the past 14 years and the only person interviewed without a GMI/Kettering degree, points out, the utilitarian teaching leaves too much room for justification of poor actions for the greater good (John 2004). All of the respondents felt very strongly that one should only follow a course of action that would never violate their personal moral convictions.

Interestingly, the high moral principles of the alumni followed a distinct pattern. All three of the entrepreneurs interviewed, Mr. Barefoot, Mr. Reiss, and Mr. Schickler, felt very strongly that Judeo-Christian values were the necessary basis for moral actions. For instance, Mr. Reiss has always kept a copy of the Ten Commandments on his desk (Reiss 2004). John “Jack” Schickler, founder and CEO of Fleetcross, indicates that, “I’m firmly in the belief that [Christian] principles are the key to leading a balanced and wholesome existence while being surrounded by an array of unwholesome forces” (Schickler 2004). Don Barefoot who is currently the President of Covenant Partners Consultancy (Don Barefoot 2004), goes on to further explain this view of ethics,

Ethics need to be clearer and of a higher plane than just meeting the current prevailing legal standards of the land…these standards are too variable across the judicial/geographic landscape. Of course, you must also perform financially. But financial performance without trustworthy, sustainable practices is just fool’s gold. We are accountable before God, and His standards are clear for those who care to understand them (Barefoot 2004).

The other five alumni, who currently work in corporate America or academia, feel very strongly about adhering to the highest moral principles but they do not directly attribute this to Christian teachings. Religious views were never questioned during the interviews so it is difficult to determine if their ethical views were influenced by a particular religious persuasion or if the politically correct atmosphere of corporate America prevents these details from being relinquished. Steve Dickerson points out that he often tells people, “I have learned almost as much in Harvard’s MBA program as I did in Sunday school” (Dickerson 2004). Joe Spielman, who will be assuming the position of General Motors’ vice president and general manager of manufacturing for North America on January 1, 2005, offers several litmus tests for evaluating ethical decisions (GM to streamline… 2004). Before making a decision with ethical implications Mr. Spielman will consider what a lawyer trying to prosecute him could say about the situation, whether he would be proud to tell his father, assuming he was a minister of any faith, about his actions, and whether he can look at the man he’s shaving every morning and be happy with what he sees (Spielman 2004).

It appears the most simplistic understanding of ethics in life as well as business was taught by Jesus when informing his disciples that, “You shall love your neighbor as yourself” (New American Standard Bible Matt 22:39). Mr. Reiss points out, in reference to another religious teaching, “whether one chooses to view [the Ten] commandments as divine revelation or a statement of ancient wisdom is irrelevant” (Reiss 2004). So it is in this context, of ancient wisdom, upon which this essay will construct a reference foundation for ethics and ethical decisions. In other words, if a decision is made counter to the above teaching of Jesus, it can be interpreted as an unethical choice. The reason for this is because of its broad-reaching applications and the inclination of those interviewed to view ethics in a manner that is very simplistic and definitive.

Traits of a Leader

The following leadership questions were presented to the interviewees: What characterizes leadership for you? In other words, what are the most important or crucial aspects/traits/habits of a good leader?

It is first, important to understand that leadership is a very elusive subject because of changing business climates, individual styles, and a leader’s necessity to always be learning from those both above and below him (Coventry 2004). With that in mind, it’s of little surprise that no two people provided the same answer. Steve Dickerson, a Vice President at Metaldyne, a manufacturing supplier for the automotive industry with annual sales of approximately $2 billion (Leuliette 2004), believes proper motivation, character, integrity, high ethical standards, hard work, respecting individuals, facilitating communication and commanding respect are all traits found in good leaders (Dickerson 2004). Bob Reiss indicates that, “Some very important traits for a person who aspires to a leadership position include humility, trustworthiness, honesty, constancy, discernment, dependability, problem identification and problem solving skills and hard work” (Reiss 2004). Bruce Coventry presented a bit different approach. For him, these traits can all be summed up in a person who can provide a very clear and vivid image for what the organization is trying to accomplish and then articulate that image well enough to have people follow him or her with enthusiasm (Coventry 2004). Mr. Barefoot is also a proponent of visionary leadership and believes leadership involves:

Defining ‘reality’ for your organization by integrating/promoting/reinforcing a vision for the enterprise; building unity, transparency and teamwork around the pursuit of that vision; ensuring company-wide adoption of sound core values which build trust and predictability in relationships; developing a highly competitive sustainable enterprise; being an effective steward of the potential/opportunity/resources that the Lord has provided you; diligence (i.e. vision without execution is ‘just talk’); setting up sound metrics, delegation/authority/accountability, and compensation methods (with ‘pay for performance’ elements built-in); and serving others by modeling what you promote and equipping them to succeed (i.e. enabling committed ordinary
folks to achieve extraordinary results as a team) (Barefoot 2004).

Dr. John leads Kettering University with a definite vision and believes firmly that a leader needs confidence. People are resistant to change and a leader will be met with adversity, detractors, and other negative influences. Therefore, the leader must always have a plan and enough confidence in himself and the plan to follow it through to the end (John 2004). Mr. Reiss tempers this need for confidence:

A big ego, or a sense of over-inflated self importance, are the most common defects in people who never make good and effective leaders because nobody wants to follow them. In a large company people will tolerate these kinds of people just to have a job but nobody willingly joins their team and proclaims these types of people as their leaders, boss maybe but not leader (Reiss 2004).

Millionaires attribute some similar factors to their financial success. Their top ten factors, in order of importance, are:

  1. being honest with all people
  2. being well disciplined
  3. getting along with people
  4. having a supportive spouse
  5. working harder than most people
  6. loving [their] career/business
  7. having strong leadership qualities
  8. having a very competitive spirit/personality
  9. being very well organized
  10. having an ability to sell [their] ideas/products and making wise investments (tied for tenth) (Stanley 2000)

At first glance it appears that not only is leadership very elusive, it’s unique to each individual. Certainly leaders carry out and express there leadership styles through their own personalities and personal strengths, however several factors seem to permeate all of the alumni’s definitions. These traits are high ethical standards, hard work, consistency, superb communication skills, the ability to define a goal, the skills to confidently inspire others to achieve a common goal and the ability to command respect. More importantly, it has to be a life-long process where you are continually learning from those all around you. Larry Burns, a General Motors’ executive who leads the GM Research and Development Center, located in Warren, Michigan, and oversees GM’s global research programs, indicates, you should also do your best to surround yourself with excellent leaders from whom you can learn. Particularly as you are beginning your career it is extremely important to put yourself in a position to learn from great leaders (Burns 2004). Amazingly, all of these traits and characteristics can be learned and not one respondent claimed superior intellect or an excellent college education was a necessary requirement for leadership. This is not to imply that it is not beneficial, but it appears to be of little real importance. Two of the greatest businessmen in present day corporate America, Michael Dell and Bill Gates are both college drop-outs. It is also interesting to note that there is no significant statistical correlation between SAT scores, class rank in college, or GPA in college and net worth for individuals between 45 and 64 years of age (Stanley 2000: 120).

Importance of Ethics

The ethical questions posed to the interviewees are as follows: What role, if any, does business ethics play in your organization or for you personally? Have you witnessed poor ethical behavior in competitors, or in your industry? Do you think that proper ethical behavior pays off for businesses? Are the short or long-term effects of ethical choices different?

Every person in business will be confronted with ethical choices. According to my interviewees, these choices should be met with a single solution. Always choose the ethical solution. The ethical solution will ALWAYS be more profitable personally, for the company, for the employees of the company, for the customers and for the community. Everyone interviewed has certainly viewed unethical actions in their workplace or industry and yet their reactions were much the same. Bruce Coventry and Steve Dickerson firmly indicated that, as an employee, if asked to perform an unethical act, you address the issue with your superiors in as adroit a manner as possible and let them understand your feelings. If still asked to carry-out the unethical action, there is no other recourse but to leave the job (Coventry 2004; Dickerson 2004). Mr. Schickler also agrees and goes on to explain the benefits of such actions:

It has been my experience that unethical business practices always catch up with the offender in a very unpleasant manner and usually from a least expected direction. Sometimes it might be years later. I can say that all of the experiences I can remember wherein I was initially harmed by unethical practices ended up as wonderful blessings and opportunities for my business. It takes a lot of faith to believe that those results will be forthcoming, but it happens to work out that way (Schickler 2004).

Larry Burns feels, “Things that are not consistent with high integrity should never be done. When an ethical issue arises, you must step up to it, deal with it and stop it or it will spread like a cancer” (Burns 2004). He goes on to reference the tragedy at Enron that seems so unbelievable. Enron was, “Lead by a group of people who walked a pretty fine line between what’s right and wrong and you must have ethics that don’t allow you to even get close to the line” (Burns 2004). Mr. Reiss indicates that, “Proper ethical behavior not only pays big dividends in the business world it is the only path to enduring success. Short term and long term success is, in the end, the same thing” (Reiss 2004).For those truly pursuing God’s standards for living and leadership, there can be no difference between how short-term and long-term decisions are considered with regard to making ‘right’ decisions” (Barefoot 2004).

Often when considering business ethics, stories of Enron, Global-Crossing, Tyco or Conrad Black come to mind. Fortunately these stories come to mind more likely because of the media’s sensational view of them, and not because they are the accepted norm in corporate America. Every person interviewed was very adamant about pursuing, teaching and setting an example of high ethical standards and moral conduct. This view on ethics is certainly not the exception with millionaires stating the MOST important factor of success is “being honest with all people,” with 90% of millionaire respondents considering it either important or very important (Stanley 2000: 43).

Addressing Machiavelli

Machiavelli has proposed a rather unethical view of leadership and the following question was presented to better understand the applications of his ideas. Do you agree with Machiavelli that sometimes leaders need to do “bad” things for the good of the company?

As seemingly elusive as leadership may seem, the lessons purported by Machiavelli are almost unequivocally met with the same response. “There is no justification for ever doing bad things, the end never justifies the means. PERIOD!” (Reiss 2004). This sentiment was echoed by everyone interviewed and, though it is certainly not unanimous throughout the corporate world, it appears to be the prevailing wisdom. Mr. Coventry and Mr. Burns point out that it depends on how you define “bad”, but if you are doing something that is morally or ethically wrong you HAVE to change that situation (Coventry 2004; Burns 2004). Dickerson also feels very strongly about this issue and points out that:

Leaders should always do good things in the best long-term interests of the company and its stakeholders (not just shareholders). Sometimes these necessary things, such as reduction in work force due to loss of business or canceling the Christmas party because there is no money, are not popular. As a manager you must take thousands of actions, some easy and some difficult. I believe it’s the way that you communicate and execute difficult things that makes them either “good” or “bad” (Dickerson 2004).

Mr. Spielman doesn’t adhere to Machiavelli’s teaching at all. For him leading through ethical behavior encompasses the very essence of his leadership. Bill Reno, a union official, illustrates Mr. Spielman’s motivations in the following manner:

If you have an issue or problem about work or your personal life and you lay it out straight to Joe he will do everything he can do to help you. Now if you come back, on the other hand, and you are playing games and telling half-truths or lying, Joe will tear your heart right out from your body (Spielman 2004).

Mr. Spielman knows that ethics in a corporation are transparent and even the look of impropriety such as going to a baseball game with a supplier is not acceptable. He will help his employees, provide resources, give advice, talk with them, support them and protect those valuable employees who may once in a while stumble and make a mistake.

All good leaders seem to be in agreement on this subject. Machiavelli has no practical applications in the real world. Moreover, adherence to Machiavelli’s teachings is foolish, unproductive and unprofitable and a good way to ensure a very short-lived, if any, success.

Live It!

Summarizing all the bits and wisdom of some of the top businessmen in the world is certainly not an easy task. Over 2 hours of phone or personal interviews, 23 pages of notes and collectively hundreds of years of experience cannot be taught in a short research paper or in a lengthy book. The alumni and, in particular, the only person interviewed employed by an institute of higher learning, Dr. John, emphasizes the necessity of life-long learning. Learn from all of those around you and learn from life experiences. Dr. John points out that GMI has had a long history of ethical leadership and Albert Sobey, the first president of the General Motors Institute, was a major proponent for ethical teaching (John 2004).

The reasons for the success of Kettering/GMI alumni are many. Their abilities to lead, inspire others, and their incessant, almost relentless, pursuit of high ethical standards in their lives and businesses are major contributors to their long-term and continued success. Probably more important, is the willingness of these individuals to give back to their communities and the numerous benefits one can reap from this style of servant leadership. Many of them are on Boards of Trustees, involved in church activities and other voluntary work. Obviously all of them have taken time out of their extremely busy schedules to provide some invaluable bits of wisdom to help students through this paper. Giving up their time speaks volumes about the character, work-ethic and dedication these individuals have to both their businesses and livelihoods, but also to their communities. Enduring success appears not to be the ability to make money, but the ability to enjoy one’s job while being a productive part of a community and living a balanced life with God, family, and friends. All of these individuals possess that balance and have made an indelible mark on me. I have every belief that they will not only continue to succeed, but that they will inspire others to do the same.

In conclusion, Bob Reiss, who has spent much of his business life studying leadership and the best ways to motivate a work force, offers sage advice that should be learned by everyone hoping to achieve success:

You are advised never to forgo your principles for a short term gain while promising yourself that over the long haul you would not in fact give in to unprincipled behavior. Once you act unethically you have begun the long slide to infamy. When you are desperate you must know that these temptations will rise to the surface. That is the time to vow that you would rather go down to short term defeat than violate your principles. When you violate them they are lost forever! (Reiss 2004).

 

Referenced Books
The Millionaire Mindby Thomas Stanley
Gracian’s Manual: A Truth-Telling Manual & the Art of Worldly Wisdom by Baltasar Gracian, translated by Martin Fischer
The Ethics of Leadership by Joanne B. Ciulla