Executive Times

Volume 7, Issue 11

November 2005

ã 2005 Hopkins and Company, LLC

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Obligations

Executives rely on others to get the work of the organization done. The larger the organization and the more locations in which it operates, the more important the job of the executive is in articulating the values, culture and methods the organization will use or will avoid in carrying out its mission. The more complicated the business, the greater the reliance on experts to assist in understanding risks and in making effective decisions. Under pressure to reduce costs, many organizations have outsourced or subcontracted work activities to other entities. In this issue, we explore some recent stories of ways in which executives have been challenged by the activities of the expert advisors, the subcontractors and the outsourcers. As you reflect on how other executives are dealing with their situations, think about how you can learn from them in improving your executive performance.

Fifteen new books are rated in this issue, beginning on page 5. Five books are recommended with three stars; nine are mildly recommended with two-star ratings, and one book (reviewed highly elsewhere) eked out a single star rating. Our next issue will recap our best and worst books of 2005. Visit our 2005 bookshelf at http://www.hopkinsandcompany.com/2005books.html and see the rating table explained as well as explore links to all books we’re reading or considering this year. If there’s something missing from the bookshelf that you think we should be considering, or if there’s a book lingering on the Shelf of Possibility that you think we should read and review, let us know by sending a message to books@hopkinsandcompany.com.

Unreal

While most executives clearly consider their obligations to employees among the critical factors to consider in carrying out corporate strategies, executives at struggling companies are looking for creative ways to recast the relationship between employer and employee. We read in The Wall Street Journal (10/26) (http://online.wsj.com/article/SB113029189328179595.html) that Northwest Airlines, in addition to its well-publicized fights with the mechanics’ union, has petitioned the bankruptcy court to outsource pilot, flight attendant and ground worker jobs. According to the Journal, “It's another sign that Northwest, which filed for bankruptcy-court protection last month, wants to become a ‘virtual airline,’ with all sorts of jobs previously claimed by organized labor outsourced to cheaper workers, some overseas.” It’s almost impossible to avoid flying on an airline that’s not in bankruptcy, but we’re at a loss in anticipating what a virtual airline will be like, especially one committed to finding the lowest cost workers for every job. If “virtual” is the opposite of “real,” this strategy may turn out to be unreal. We’ve been amused on flights when an attendant or pilot forgets what the destination city is. We can anticipate announcements that end with, “Thank you for flying … what airline is this?”

How critical is the relationship between your organization and its employees? Have you drawn distinctions between those roles that can be outsourced and those that are critical to be performed by workers who feel that they are in a relationship with your organization? Can you anticipate the reaction of your customers to the use of the lowest cost workers for different roles?

Subversive

There may be no harder activity in the world today than finding civilian workers to come to Iraq and help rebuild the country. We’ve assumed that a financial premium has attracted those individuals willing to take high personal risks for high rewards. We were shocked to read an expose in The Chicago Tribune (10/9 and 10/10) (http://www.chicagotribune.com/news/nationworld/chi-0510090433oct09,1,5263530.story and http://www.chicagotribune.com/news/nationworld/chi-0510100110oct10,1,3957387.story) that an American company with a huge federal contract is using subcontractors and brokers to kidnap citizens of other countries and force them to work in Iraq. According to the Tribune, “Thousands of workers are needed to meet the demands of the unprecedented privatization of military support operations unfolding under the watch of the U.S. Army and KBR, … the Halliburton subsidiary that runs military support operations in Iraq. … The U.S. military has outsourced vital support operations in Iraq to KBR at an unprecedented scale, a deal that has cost U.S. taxpayers more than $12 billion. KBR, in turn, outsources much of that work to more than 200 subcontractors, many of them based in the Middle East. … The U.S. military and KBR assume no responsibility for the recruitment, transportation or protection of foreign workers brought to the country. KBR leaves every aspect of hiring and deployment in the hands of its subcontractors. Those subcontractors often turn to job brokers dealing in menial laborers. … Some U.S. subcontractors in Iraq--and the brokers feeding them--employ practices condemned by the U.S. elsewhere, including fraud, coercion and seizure of workers' passports. …To maintain the flow of low-paid workers key to military support and reconstruction in Iraq, the U.S. military has allowed KBR to partner with subcontractors that hire laborers from Nepal and other countries that prohibit citizens from being deployed in Iraq. That means brokers recruiting such workers operate illicitly. … In a written statement, Halliburton said it outlines the ‘legal and ethical behaviors that all employees and subcontractors are expected to follow in every aspect of their work.’” When brokers and subcontractors subvert the legal and ethical behaviors required by the prime contractor, what happens? Stay tuned.

Are you vulnerable to the behavior of subcontractors, brokers and other intermediaries? How clearly have you communicated the laws, rules, values, ethics and behaviors that these intermediaries must follow on your behalf? How are you sure that your expectations are being met? When your reputation is damaged by others, will the cost of repair be more or less than the cost you saved by using lower cost intermediaries?

Diligence

Some executives are adept at pushing relentlessly until they get their questions answered. Others are satisfied when they receive the counsel of experts, especially when it comes to detailed due diligence. While the fiasco and probable fraud at Refco continues to unfold daily, it appears that some savvy and smart people overlooked some clever accounting, and at least one hero sniffed on the right trail and discovered trouble. According to The New York Times (10/14) (http://www.nytimes.com/2005/10/24/business/24fund.html), “Peter F. James had been working at Refco less than two months when he noticed something this summer that teams of accountants had apparently missed for years. Mr. James, a recently hired employee in the controller's office, wondered why a larger-than-normal interest payment had been made to Refco on an outstanding loan made by the company. In August he started to ask questions, eventually taking his concerns to the chief financial officer, Gerald M. Sherer. The answers would lead to the departure of the chief executive and the rapid unraveling of the company that prompted its filing for bankruptcy protection last week. ‘He's the hero in discovering this,’ a person close to the investigation said of Mr. James. ‘He just kept pushing.’” James accomplished more than the $10 million worth of diligence Thomas H. Lee Partners paid for when they acquired a majority stake in Refco in 2004.

How relentless are you in getting your questions answered? How do you go about checking the work of the due diligence and other experts you rely on for answering critical questions? How do you bring a fresh perspective that might lead to insights that are overlooking currently?

Consequences

Injected into a flattering profile of Merrill Lynch Vice Chairman Bobby McCann in The New York Times (10/23) (http://www.nytimes.com/2005/10/23/business/yourmoney/23merrill.html) is a great example of executive leadership in communicating with employees. According to the Times, “In July, when an arbitration panel ruled that Merrill Lynch had to reinstate E. Hydie Sumner, a former employee who had successfully sued the firm for sexual discrimination, Mr. McCann drafted a letter to employees, which he rewrote many times. ‘While we have some questions regarding the legal foundations of the panel's ruling and are weighing our options, I want to be very clear: we have only ourselves to blame for this situation,’ he wrote in the final draft. ‘Ms. Sumner was subjected to conduct that was unacceptable and offensive. That is inexcusable. Management's response at the time failed to effectively punish those responsible.’ The language in the letter was far stronger than had been used by the firm, but he stands behind it. ‘If you are going to damage the reputation of this company, you must be held accountable,’ Mr. McCann said about the events. The obligation to ensure a safe workplace and to enforce codes of conduct seems alive under McCann at Merrill.

How well have you communicated the behaviors that are inexcusable at your organization? How do you hold individuals accountable for behavior?

Trust

We read in Fortune (http://www.fortune.com/fortune/articles/0,15114,1119285,00.html) that BP’s CEO John Browne started to rebrand the company as a friend of the earth in 1997 by pledging to reduce carbon-dioxide emissions. “Ads drew attention away from its core oil and gas operations. One read, ‘We believe in alternative energy, like solar power and cappuccino.’ BP's new slogan: Beyond Petroleum. The ads continue to feature a strongly green theme, and BP's image makeover is a hit, regularly featured in B-school case studies and corporate conferences. … The value in BP's rebranding, says Peter Sealy, a professor at the University of California at Berkeley's Haas School of Business, is in the goodwill that it buys. ‘It's like precrisis management,’ he says. ‘Once you have consumer trust, you have the wind at your back in case something bad does happen.’”

How well are you fulfilling your executive responsibilities to build trust and to create favorable impressions of your organization? Does your image and that of your organization put the wind at your back? Is the image backed up by action? What else can you do to build trust?

Follow-up

Here are selected updates on stories covered in prior issues of Executive Times:

Ø We pondered in the January 2003 issue of Executive Times whether or not the Archdiocese of Boston’s former leader Cardinal Bernard Law would be indicted or incarcerated for his egregious behavior in condoning or covering up priests molesting and abusing children. That hasn’t happened, and comprehensive reports about similar executive cover-up behavior appears in the personnel files released for Los Angeles (www.la-clergycases.com), a comprehensive report about Philadelphia (http://ncronline.org/NCR_Online/archives2/2005d/100705/100705a.php), and news reports about Ireland (http://www.chicagotribune.com/news/nationworld/chi-0510260170oct26,1,3887270.story). Sooner or later, one of the bishops who enabled the perpetrators, persecuted the victims, and condoned or covered up crimes will end up in jail.

Ø We speculated in the February 2005 issue of Executive Times, about whether John Henry and his performance management measurements for the Boston Red Sox would mean the beginning of a dynasty following their 86 year gap between World Series wins. No streak began, as hometown team Chicago White Sox won their first World Series in 88 years. Readers who appreciate fine writing will enjoy an article by Julia Keller in the Chicago Tribune about the glory of this win (http://www.chicagotribune.com/sports/baseball/whitesox/chi-0510270173oct27,1,2537517.story).

Ø Many prior issues of Executive Times have commented on the woes at Ford Motor Company. Two recent articles provided opposite views on whether or not CEO William Clay Ford, Jr. is a reluctant CEO or not. While The New York Times reports (http://www.nytimes.com/2005/10/19/business/19ford.html) that Ford is no longer reluctant to perform this role for the family, Fortune opines (http://www.fortune.com/fortune/ceo/articles/0,15114,1112528,00.html) that based on his overtures to executives at other car companies, there may be a new leader coming soon.

Legacy

Decisive

An effective executive often creates a legacy at an organization as a result of setting a strategy that survives his or her tenure. Sometimes a strategy is right for the time, and is later reversed by those who follow because what worked yesterday may not work tomorrow. Edward R. Telling made more strategic changes as chairman and CEO of Sears, Roebuck and Company in forty days in 1981 than any of his predecessors or successors. Telling decided to leverage the contact Sears had with consumers and offer financial services products alongside retail goods, creating the expectation that people would buy their stocks where they bought their socks. Telling expected that the customers of Sears had rising incomes that would be a perfect fit to an array of financial services. The change also reduced the company’s dependence on retailing. The sweeping moves of acquiring Coldwell Banker and Dean Witter changed Sears overnight. Telling led Sears from 1978 until he retired in 1985. His successors decided to divest these acquisitions and focus more intently on retailing. Meanwhile, Wal-Mart may be working to put a Wal-Mart bank in each of its stores. Thanks to Telling’s vision and decisiveness, consumers have more financial services alternatives than ever before, and the financial services components of many companies are consistent drivers of earnings growth. In late October, Telling died at age 86.

Latest Books Read and Reviewed:

(Note: readers of the web version of Executive Times can click on the book covers to order copies directly from amazon.com. When you order through these links, Hopkins & Company receives a small payment from amazon.com. Click on the title to read the review or visit our 2005 bookshelf at http://www.hopkinsandcompany.com/2005books.html).

Title (Link to Review)	Author	Rating	Review Summary	Purchase
The Mysterious Flame of Queen Loama	Eco, Umberto	•••	Fog. Novel with illustrations allows readers to travel with protagonist, Yambo, as he tries to recover his lost memories, through finding objects from his youth meant to clear the fog of his past.
Bait and Switch	Ehrenreich, Barbara	•	Tiresome. Disappointing sequel to highly recommended 2001 book, Nickel and Dimed. This time around, Ehrenreich half-heartedly pursues a mid-level corporate job, pays for expensive transition advice which she usually ignores.
The Chairman	Frey, Stephen	••	Preposterous. Chairman of Wall Street equity firm drowns in accident, and successor almost killed by car bomb. Plot intrigues abound, characters don’t develop, and most premises are preposterous in this first novel in a planned series.
The President’s Assassin	Haig, Brian	••	Smarts. Author reprises Army lawyer Sean Drummond who pairs up with an FBI agent to try to protect the President. Lots of gratuitous violence that smarts, brainy people with smarts, and exposition that drags.
Thomas Jefferson	Hitchens, Christopher	••	Enlightenment. Intelligent writer prunes Jefferson’s legacy to essential points, none of which will come to readers as a surprise.
The History of Love	Krauss, Nicole	•••	Connections. Complicated and finely written novel with multiple narrators, complex characters with recognizable deep emotions and relationships and connections that generate empathy from readers.
Blood From a Stone	Leon, Donna	••	Cold. Novel, set in Venice, reprises Commissario Guido Brunetti who solves a murder with warmth and calmness, amid the coldness of criminals and politicians.
The Trader Joe’s Adventure	Lewis, Len	••	Niche. Repetitive and lazy writing, with some lessons: stick to an effective niche, understand one’s value proposition, the importance of customer interactions, and a consistent competitive approach
Why Do Men Have Nipples?	Leyner, Mark and Billy Goldberg	••	Witty. Entertaining and serious Q&A on medical issues, subtitled, “Hundreds of Questions You'd Only Ask a Doctor After Your Third Martini.” Add olives and smile.
The Interruption of Everything	McMillan, Terry	••	Pause. Sixth novel featuring strong women. This time, protagonist Marilyn Grimes, a middle aged African American woman faces the challenges presented by care giving, a workaholic husband and changes to her body.
Where There’s A Will	Mortimer, John	•••	Testament. Thirty-two reflections as a conversation memoir, structured as the legacy the creator of Rumpole has left for his heirs, based on his 80 years of learning life’s lessons.
Eldest	Paolini, Christopher	•••	Family. Installment two of the Inheritance trilogy continues the fantasy adventure of Eragon and Saphira in the world of Alagaesia, this time revealing family connections and allegiances.
44 Scotland Street	Smith, Alexander McCall	••	Serial. Life in Edinburgh with interesting cast of characters. Originally presented in 110 installments in the Scotsman which leads to spotty plot and character development.
On Beauty	Smith, Zadie	••	Homage. Art admires art as Smith bows to E.M. Forester and Howard’s End, but presents annoying rather than deeply developed characters, and dialogue that often rings hollow.
The Secret Man	Woodward, Bob	•••	Motivation. The world now knows that the FBI’s second in command W. Mark Felt was Deep Throat. This book describes more details of what happened during that time, especially Woodward’s relationship with Felt, but reveals nothing clear about why Felt did what he did.

ã 2005 Hopkins and Company, LLC. Executive Times is published monthly by Hopkins and Company, LLC at the company’s office at 723 North Kenilworth Avenue, Oak Park, Illinois 60302. Subscription rate for first class mail delivery of the print version is $60.00 per year (12 issues). Web version subscriptions are $30.00 per year. Single issues: $10.00 print; $5.00 web. To subscribe, sign up at www.hopkinsandcompany.com/subscribe.html, send an e-mail to executivetimes@hopkinsandcompany.com, call (708) 466-4650, or fax to (708) 386-8687. For permission to photocopy or e-mail Executive Times, call (708) 466-4650 or e-mail to reprints@hopkinsandcompany.com. We will send sample copies if requested. The company’s website at http://www.hopkinsandcompany.com/archives.html contains the archives of back issues beginning in the month after the issue date.

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