Complexity seems to increase each year. Yet leadership is built on simple, timeless principles. Structure your leadership around the dynamic tension inherent in the Basic Accounting Equation: Assets=Liabilities + Owners Equity. The rest of this essay describes the implication of this simple framework for recruitment, having conversations, and evaluating opportunities.
In the early 1970’s, Arthur F. F. Snyder, former Vice Chairman of Boston’s US Trust, became a legend because he was willing to lend money to a new technology company called Prime Computer Company. Other bankers saw risk at Prime Computer. Snyder saw opportunity. When asked his philosophy behind a risky venture that scared other bankers away, Snyder took out a sheet of paper and wrote:
Assets=Liabilities Plus Owners Equity
Snyder said these two words were more than the fundamental building blocks of the Basic Accounting Equation. It also was a statement about human nature.
Some people gravitate towards asset enhancement as a way of providing value to organizations. Such people often see the world as full of opportunities. Their weakness is that they are prone to fall in love with their overly optimistic assessments. In terms of the Big Five Personality Dimensions, such people would be high on Openness and Extraversion.
But liabilities reduction is also a critical value in any enterprise. People who gravitate towards this side tend to see the world as full of threats. Their weakness is that they are tone deaf to value, lack vision, and place too much weight on threat. Using the Big Five, such people are low on Openness, high on Stability, and low on Extraversion.
Snyder’s philosophy about making credit decisions was to use the two concepts of Asset Enhancement and Liabilities Reduction as a framework to look at financial structure and power. At Prime Computer, Snyder saw a strong CFO and a strong Chief Legal Counsel monitoring the liability side. He saw strong VPs of Sales and Marketing as champions of asset enhancement side.
He saw the CEO as defining his role as being the final arbitrator between two powerful and conflicting forces. Snyder liked what he saw.
Assets=Liabilities Plus Owners' Equity is the Basic Accounting Equation
The Basic Accounting Equation of Asset Enhancement balancing Liability Reduction is a principle that values dynamic tension between competing positive values.
For job candidates and investors, it suggests that the best companies will staff each side with strong advocates. You want to hear words like “respect” and “powerful” when used to describe the VP Sales, the VP Finance, and the VP Legal. You do NOT want to hear words like “nice person” or “well liked….”
Yes, I know this framework sounds simplistic. Below are some implications for organizations:
“We Are All Aligned.”
Our simple model of leadership says conflict is natural and positive. But you do hear the word “alignment” these days. It means every employee should understand the corporate strategy and make contributions to it. In this alignment model, conflict is a flaw. Lehman Brothers was a classic alignment-driven company. It was aligned to increase assets and to beat Goldman Sachs:
Richard Fuld did not view himself as the impartial arbitrator between two powerful forces. He was the Chief Asset Enhancement Officer aided by an aggressive sales/marketing function. Did the Liabilities Reduction Team have equal stature and competence? On May 16, 2008 SVP Matthew Lee wrote a letter to the CFO and the Chief Risk Officer complaining of “unlawful and unethical” conduct in violation of the Firm’s Code of Ethics relative to its stated mandate of “full, fair, timely, accurate, and understandable” disclosure of financial information. This 14 year veteran of Lehman complained that “certain senior level internal audit personnel do not have the professional expertise to exercise the audit functions they are entrusted to manage.” (New York Times, 2010).
A less dramatic but common example of the fallacy of alignment is when a family-dominated company staffs the company Board of Directors or Board of Advisors with “outsiders” consisting of colleague chums, friends from the golf club, and the corporate attorney. I predict that Board members will describe meetings as “collegial and frank.” But “frank” means the subjects will range the gamut from A to C rather than A to Z.
In other words, conflict is healthy. One should seek it in the Board room. But channel the conflict through the lense of the Basic Accounting Equation.
“Think Like a Business Partner”
The Human Resource Function is one of areas that can contribute to Asset Enhancement AND to Liabilities Reduction. I often hear my colleagues in human resources extol subordinates to “think like business partners” and treat line managers like “clients.”
Is this a good idea?
It is a good idea if it means giving that client your unique perspective.
It is a dysfunctional idea if you view conflict as dangerous. HR is not in the “happy client business.” It has a unique voice at the decision making table. Sometimes the customer is not always right.
HR should have a unique, powerful, respected, and distinctive voice. The model I use is Counselor Troi’s role on Commander Picard’s team in “Star Trek Next Generation.” But by focusing on “alignment” and “thinking like a business partner” many HR professionals refuse to lock horns with powerful leaders. The result is that HR becomes the functional peers of Controllers. Both report to the Chief Financial Officer. And both focus on Liabilities Reduction.
"Be More Strategic"
This developmental advice is sometimes given to high potential executives as a “positive” suggestion for improvement. Telling an executive that the executive fails to think “strategically” can be perceived as insulting. As one of our executive clients said, “I am paid to think tactically. I am rewarded for acting tactically. And then I am told that I don’t think strategically! You paid me to think this way and then you fault me for thinking this way!“
A more precise way of getting at the same developmental issue is to tell executives that they have mastered being advocates for Asset Enhancement or Liabilities Reduction. Congratulations! Now, if they aspire to higher positions, they must also demonstrate an ability to look at the same issue from both perspectives at the same time.
We recommend the following prescription with our coaching clients: “first define the problem from asset enhancement side. And then define the problem from the liability reduction side. Make the case for both sides. And then state your position once you have proven you can look at one problem from two sides.
We also tell our coaching clients: if you cannot see value for the issue on the other side of the Basic Accounting Equation, perhaps you do not fully understand the issue.”
New York Times. “The Letter by Lehman Whistle Blower Matthew Lee. http://dealbook.blogs.nytimes.com/2010/03/19/the-letter-by-lehman-whistle-blower-matthew-lee/