This past week the United Nations Conference on Trade and Development (UNCTD) released its annual FDI report. One of the interesting things about the report is that all four BRIC countries are now solidly in the top 5 of FDI destinations. We are truly witnessing the rise of these powerful “emerging” economies, and the revolution is well under way. It is also interesting to note China now occupies both the top spot as the destination of FDI but also the #2 spot in outward FDI. Quite remarkable.

Related to this, yet another milestone of China's rise in economic power There are two issues I wanted to briefly write about here. 1) We dismiss the strong fundamentals of China's economic growth at our own peril; and 2) one of the fundamentals of China's growth as viewed through “the second-tier city phenomenon.”

First, China still has its doubters. Every year there seems to be a new group of writers and pundits predicting the collapse of this house of cards. This year it was James Chanos, the wealthy hedge fund investor who shorted Enron, who has been stumping his prediction of the “bust of the myth of the biggest conglomerate of all: China Inc.” His analyses of China's stability and structure could not be more facile. It's almost embarrassing. Then there are the jingoists like George Friedman. Recently, I had the joy of reading (airplane reading) of taking in his audacious “futurist” work, the NYT bestseller, The Next 100 Years: A Forecast for he 21st Century. Here again: embarrassingly simplistic. Friedman writes: “[China] is not only an Asian state that allocates money politically and manipulates economic data. It is also a state in which equity holders--demanding profits--are less important than bankers and government official, who demand cash... China has expanded extraordinarily for the last thirty years. The idea that such growth rates can be sustained indefinitely or permanently violates basic principles of economics. At some point the business cycle, culling weak business, must rear its ugly head--and it will. At some point a simple lack of skilled labor will halt continued growth. There are structural limits to growth, and China is reaching them.”

I don't even know where to begin with statements like these. It all sounds very erudite; maybe he even took an economics class or two. But seriously, does this guy understand anything about China at all? I have many acquaintances (and some friends) who are among the economic elite Friedman derides as the political allocators of money and the manipulators of economic data. Behind closed doors they relish the underestimation of their economic prowess. Their view: yes, yes, keep thinking of us as backwater, simplistic capitalists; we are going to continue taking you to the cleaners at the negotiating table and we are laughing all the way to the bank. Can we at least ask that our experts in international policy spend some time with the people they are writing about? If only so they don't sound foolish?

Second, I want to take a few minutes to write about Chinese economic development in its current state and why people like Chanos and Friedman get it so wrong. Chinese economic development is an incredibly decentralized process. There are many nuances to this (which I plan to write about in coming weeks), but suffice it to say that the process is a decentralized local state entrepreneurial process. The Central Government sets broad macroeconomic policies; meanwhile, local governments (provincial and municipal) take on their own initiatives to compete for economic development initiatives (the attraction of foreign capital being a big part of these initiatives). This has led, recently, to what I like to think of as the second-tier city phenomenon in China: Local municipal governments have been incredibly innovative in their institutional systems and also in their initiatives to attract foreign capital, to create niche markets for economic development, and yes, Mr. Friedman, to develop *skilled* labor in specific industries.

· The case of Suzhou: how did it happen that Suzhou suddenly supplanted Shanghai as the major destination of FDI in the mid-2000s? There is a long, winding story to this, but the basic issue is that, with the backing of the Jiangsu provincial government in coordination with the Singaporean government (and an investment of $BN), the Suzhou municipal govt built the China-Singapore Suzhou Industrial Park, which, for a brief time, became the #1 destination for FDI in China. It is an unbelievable place. If you have been to Shanghai, stood on the Bund and looked out over the urban development phenomenon that is Pudong, you were probably impressed. You should really get out to Suzhou, because, you ain't seen nothin' yet. And the foreign managers I have spent time with there, people who talk about institutional security, environmental regulations, skilled labor: they are amazed. Hearing these people and then reading the words of “experts” like Chanos and Friedman, who are bestselling authors and rockstar hedge fund manages, all I can think is: “we are in trouble; we have no clue what is going on behind the scenes in China and we buy books by and invest our money with people who have no clue either.”

· The case of Chengdu: how did Chengdu beat out Chongqing as the primary destination of FDI in the western part of China? Here again, the story is about an entrepreneurial second-tier city. Talk to the senior people of Intel in China... they will tell you a story about a flexible, entrepreneurial (and capitalist and opportunistic) government that believes in creating stable institutions, building a base of skilled labor, and winning in the global economic game. They are building the infrastructure of a dynamic, modern capitalist economy that is helping to position China for the future. And I am sure, if they took the time to read it, they would laugh at Friedman's characterization of China's economic weaknesses. They are probably saying, “Yes Mr. Friedman, keep beating that drum, keep underestimating us. Keep believing that we have no idea of what we are doing. We are just going to go about our business and become the most powerful economy in the world.”

Institutional Innovation and Careful Planning in China (Part I)

Recently, the Agricultural Bank of China announced that it completed the largest IPO in history, following in a line of several Chinese hybrid state-owned entities that have made such historic offerings. It is amazing that, after more than three decades of astonishing economic growth, many still dismiss feats like the AG Bank of China’s IPO as a cynical story of state-market manipulation. But the truth is much more sobering: China actually understands the nuances of how to build a successful and powerful economic juggernaut than we in the US do. The reality is that we have much to learn from China these days. The irony of our times is that the largest (nominally) communist society in the world is also the most dynamic (and intelligently run) capitalist economy in the world.

As I wrote in a recent article on this topic (Guthrie and Slocum, “Through the Looking Glass: Inefficient Deregulation in the United States and Efficient Regulation in China,” in Markets on Trial: The Economic Sociology of the US Financial Crisis, Michael Loundsbury and Paul Hirsch, eds): “Since the early 1980s, most of the capitalist world has converged around the consensus that state-owned enterprises are fundamentally inefficient. With the privatization of national energy conglomerates from Britain to Italy to the privatization of tobacco and salt corporations in Japan to Mexico, Turkey, Zaire, the general consensus is that state involvement is fundamentally antithetical to the type of efficiency that comes with private ownership. The assessment of the inefficiencies of state planned economies in the Soviet Bloc and China seemed to confirm this view. Dating from the scholarship of famous economists like Janos Kornai and Jeffrey Sachs, the basic position has been that state ownership simply could not provide the right incentives for efficient market behavior. This notion is a mainstay of US economic and political discussions—any state involvement must be less efficient than private ownership. The core concept of the efficiency of a deregulated market system is often contrasted to the notion of the fundamental inefficiency of state ownership.

“The success of China’s economy and many state-owned firms within it has caused us to revisit some of the key assumptions upon which those arguments are based. The reality that China has revealed is that the issue is not ownership per se (state versus private) but, instead, the ability to create the right incentive structures that lead to efficient market behavior. In reform-era China, there has been a tremendous amount of institutional innovation that has allowed for a reform of incentives—leading to greater efficiency—while at the same time allowing the state to continue to watch over and guide the economy.

“While we typically conceive of private ownership as leading to efficiency and innovation and state-ownership as leading to inefficiency and complacency, this caricature simply does not match reality. In some cases, private firms like General Motors and Citigroup can be woefully inefficient, while state-owned firms like PetroChina and the AG Bank can be extremely efficient. The issue is not public versus private ownership per se; rather it is how effectively incentives are aligned to create dynamism and innovation in the marketplace. Further, state ownership has the added role of forcing firms to think long term and align themselves with national interests.

“Our own policy makers should be less fearful of and think more innovatively about public-private partnerships. In China, the government is deeply engaged in the economy—not only as regulator but also as economic agent. And, contrary to the common portrayal of SOEs as inefficient and complacent organizations, China has been able to align the incentives of senior executives in the SOEs; the government has also done an effective job of aligning the incentives of local officials. The key policy lesson here is that government agencies can be quite effective in guiding economic organizations: they are in a position to consider national (or local) strategic policy issues and broader issues of systemic risk; and contrary to popular belief, they can also think about economic action in creative and institutionally innovative ways.”

In short, there are so many ways that the US economy is lagging behind today (innovation, education, systemic risk analysis), and if we are not careful, we are going to fall further behind. Today, we are locked into a simplistic debate about the efficiency of the private market and the inefficiency of state “meddling” in the economy. First, there is no clear argument that private ownership is better. General Motors and Chrysler have been every bit as lethargic and inward looking as the worst caricature of the classic State-Owned organization might be; yet PetroChina is by almost every statistic the most efficient oil company in the world. But innovation is better in the private economy you might say; perhaps in some cases. But China is killing us in the development of clean tech right now. Why? Because the state has deemed it important, and it invests in it. The best we can do is tax credits to stimulate private sector development. The bottom line is that we need to get out of our simplistic mindset of a laissez-fair market economy. And we need to wake up and learn from the careful way in which the Chinese economy is being planned.

Leadership and Being Wrong

The inspiration for this entry is a forthcoming book by Kathryn Schulz. The subject (and title) of the book is Being Wrong (http://www.amazon.com/Being-Wrong-Adventures-Margin-Error/dp/0061176044/ref=sr_1_3?ie=UTF8&s=books&qid=1259126217&sr=8-3 ) Recently, I had the chance to talk with the author, and she was nice enough to send me an advance copy of the book, which is both wonderfully written and brilliantly insightful. That conversation (and the book) led me to put this on my list of leadership-issues-that-we-don’t-discuss-enough.

Schulz begins with a general overview of the issue of Being Wrong. As a reader, you kind of have to ease into it: At first you think, “Sure, I know all about being wrong… I make mistakes all the time.” But then, as you are reading the anecdotes and analyses about the topic, you realize that the issue is not about being wrong, but rather about admitting to being wrong. And then you start to think, “How many times have I had trouble with admitting I was wrong? How many times did I fail to see that I was wrong because I was uncomfortable admitting it to myself? How many times have I known it myself but been embarrassed to admit it to my colleagues, friends, or loved ones? How many times have I continued to argue a point just because I was uncomfortable saying, 'Wait a second, I see your point now; let me revise everything I have been arguing for over the last hour'?” When you start to understand this aspect of the book—and start to see yourself in this light—it starts to get delightfully uncomfortable. And this is an issue that extends well beyond human psychology. It is an issue that is deeply embedded in our culture, as Schulz notes: “As a culture, we haven’t… mastered the basic skill of saying ‘I was wrong.’ This is a startling deficiency, given the simplicity of the phrase, the ubiquity of error, and the tremendous public service that acknowledging it could provide.”

The book does a wonderful job covering territory from research to anecdotes; from neuroscience and psychology to philosophy and religion; ontology; there are so many ways to think about wrongness in our lives. In this book you will find wonderful personal anecdotes about being wrong (and failing to see it) but also in-depth analyses of the research on the psychology of being wrong (and why it’s so difficult to see or admit it).

But what struck me most was the wonderful application for thinking about leadership and organizational effectiveness. Why is it so difficult to be wrong? What is it about the experience that makes it feel so uncomfortable? And how does being right and wrong relate to leadership? I am always stunned by the aversion to admitting folly in the business world. Some of the examples are obvious: Watching Hank Greenberg preen in the media (and blame his successors), it seems inconceivable that he would ever admit that anything that went wrong at AIG had anything to do with him. And following the travails of the New York Times, it seems more likely that Sultzburger would rather go down with the ship than admit to a mistaken vision. Or my favorite example: during one of the 2004 Presidential debates (one of the ones with a town hall format), an audience member stood up and asked John Kerry the following question: could you give us an example of some time when you have been wrong about something. I remember seeing with such clarity that the questioner was asking the question as a measure of character. In a campaign in which two candidates continually threw mud at each other for all the mistakes “their” side had made, the questioner seemed to be wondering was Kerry the type of man who could admit mistakes or was he, like Bush, the type of leader who would never back down, never admit that maybe he had made an error in judgment. The questioner was literally giving Kerry a chance to show that he could be a bigger and better leader than Bush could ever be just by showing right here and right now that he wasn’t afraid to admit he had been wrong about things. Kerry not only swung and missed; he didn’t even understand the question that was being pitched. He immediately launched into an answer about how “his side” had not been wrong about the war; that Bush’s team was the group that deserved blame; and he spent his 90 seconds recounting (once again) all of the ways that the Bush Administration had been wrong. I remember thinking right that that Kerry was going to lose the election. This person had been looking for some differentiating style, and Kerry had shown that he was actually not all that different from George W. Bush in his leadership style. I remember thinking: “what was he afraid of? Was he afraid of a media blitz the next day with headlines reading ‘Kerry admits he has been wrong!’”

More troubling are the less known examples I have encountered (more troubling, in part, because they are less public and thus, perhaps, less at stake in the admission of being wrong). Early in my career, I remember working with an individual who had great difficulty in admitting error. He was exceptionally intelligent, hard working, and quite charismatic (all qualities that make a person used to being able to convince people that s/he is right). But it was fascinating to watch him in the organizational context. He would consistently undercut the loyalty people had to him by always seeming just a little reluctant to shoulder the burden of his part of the blame in some circumstance or mishap. I remember thinking at the time, something that Keith Reinhart (the former CEO of DDB Worldwide and one of my favorite leaders) would say to me years later: “people respond to leaders who give credit to their team for success and take responsibility upon themselves for failures.” More recently, I remember one discussion with a managing partner of an organization I was working with that was struggling with growing pains in his organization. I had done a number of interviews with junior people in the firm and was set on having a candid conversation with this individual. He seemed up for it: he was one of the most thoughtful and insightful leaders of an organization I had ever met and he had asked for my advice on the issues. Yet, the defenses flew up at my first suggestion that some of the tension in the organization was of his own doing. I remember him saying, “Do you think you are telling me anything I don’t know? I know everything that is going on in this organization.” I remember thinking this was so interesting: if this guy can’t hear the truth and admit some fault of his own, I don’t know who is going to be able to.

I also see this all the time in Executive and MBA classes. There are a couple of cases that I often use to illustrate this point—to begin conversations on how leaders should handle situations in which they have clearly messed up. I am always amazed how many students (the majority) consistently argue for not openly admitting mistakes. The argument is usually something like: if you are too open with your mistakes, your employees (or team or whatever group you are leading) will respect you a little less, trust your vision and instincts a little less, believe in your leadership a little less. And this is just the analytical side of the conversation.

There is surely another layer here where people in leadership positions just have a difficult time admitting that they are wrong. Really it’s not that surprising from an individual perspective. The ego structure of people who rise to the top of organizations is such that, the more confident you are, the surer of yourself you are, the more successful you are likely to be. As I noted in my first example above (the early career example), people who have a high level of intelligence, a high self opinion, success in convincing people of their vision are not surprisingly predisposed to be reluctant to admit mistakes or failure. Conversely, if you are in constant doubt, you are probably less likely to aim high and thus probably less likely achieve at the highest levels.

While we are almost always taught, especially among leaders or aspiring leaders, that you should hide your weaknesses and hide your mistakes—lest you look week or inadequate in front of your minions—this view is mistaken. And even if we are taught this less than I think, most executives I have worked with over the years (at least among those with whom I have brought this up) will admit (after some prodding) that they do indeed have a difficult time admitting that they are wrong or that they made some mistake. This is problematic when it comes to leadership as it actually undercuts legitimacy in general and it fails to capitalize on the power that can come from being wrong. It is not only good to admit you are wrong when you are; but it can also be a powerful tool for leaders—actually increasing legitimacy and, when practiced regularly, can help to build a culture that actually increases solidarity, innovation, openness to change, and many other positive features of organizational life. Thus, while leaders often seem to think that admitting error is a sign of weakness and an open door for allegations of illegitimacy, so often the opposite is true. What is more powerful than an individual who is able to stand in front of his or her minions and admit that the failure was his? What better way to gain the respect and admiration of your team than to take the blame and responsibility on yourself rather than calling out someone on your team?

Schulz ends her treatise with a wonderful chapter on the beauty of wrongness. The chapter truly pushes the boundaries of how we think of this issue. Error is tied to individual identity: the important issue, as Schulz notes, isn't that "we must be wrong from time to time; it's that we can be wrong. Alone among the creatures of the world, we can hatch crazy ideas, pursue pipe dreams, speculate wildly, keep faith with even the most far-fetched fantasies. Sometimes these notions flourish and bear fruit, sometimes they collapse. But unlike androids, we humans do not normally self-destruct in the face of our mistakes. On the contrary: we self-create, and self-recreate." As Schulz convincingly argues by the end of the book, wrongness is tied to risk taking and innovation; it is tied to exploration; it is tied to belief and self-belief; and the courage to pursue all of these opportunities. One of the greatest lessons leaders and aspiring leaders of organizations might learn is the beauty and opportunity of being wrong.

Leadership and the Will to Face the Market: The Case of Newspapers

My apologies for being offline for a while...

Soon I will finish my "Forgotten Aspects of Leadership" segment with a discussion of Kathryn Schulz's forthcoming book "Being Wrong." Before that, however, I want to write something about capitalism...

Recently, there has been talk in the United States about a newspaper bailout. The “Newspaper Revitalization Act,” sponsored by US Senator Benjamin Cardin (D-MD) proposes to allow newspapers to become nonprofit organizations. (http://cardin.senate.gov/pdfs/newspaper.pdf) By shifting to 501(c)(3), newspapers would be able gain significant tax benefits that for-profit organizations do not have access to. Senator Cardin argues that this is an issue of democracy. In his words, “We are losing our newspaper industry… The economy has caused an immediate problem, but the business model for newspapers, based on circulation and advertising revenue, is broken, and that is a real tragedy for communities across the nation and for our democracy.” He may have a point, and some important scholars on this issue have pointed in a similar direction. For example, in Fighting for Air: The Battle to Control America’s Media, NYU Professor of Sociology, Eric Klinenberg (http://www.amazon.com/reader/080508729X?_encoding=UTF8&ref_=sib%5Fdp%5Fpt#noop) argues that local news is a core feature of democracy (which I agree with) and that the conglomeration of American media has led to news being driven by corporate interests rather than as a public good. So, from this perspective, Senator Cardin might be right: maybe newspapers do have something to do with democracy.

But his bill has little to do with democracy; and little to do with laissez-faire capitalism if the impetus for this bill is coming from the corporate lobby (which it most surely is). My big issue here is in the fact that we have such a confused understanding of capitalism in this country. I would like to raise two issues with respect to this topic. First, we love the idea of free markets and capitalism more generally in this country, but we don’t have the political will for it. Second, there actually *are* examples of newspapers that are being competitive out there. It is just that many of our flagship organizations are not among them, and that is largely because of bad leadership. Propping them up with just perpetuate the horrible leadership that exists in those venues.

On the first point: The last 30 years of US economic history is littered with examples of two dissonant themes: On the one hand, we have a corporate sector advocating deregulation, singing the praises of a laissez-faire market, and criticizing government interference as fundamentally inefficient. On the other hand, we have corporations—and the population—asking for bailouts when they can’t survive the realities of the free markets they have advocated. Although many love the idea of the unfettered free market, we simply do not have the political will for a free market in the US economy. Or perhaps we simply do not understand what a free market is. One of the key aspects of a well-functioning market is the ability of the market to discipline actors who make bad economic decisions. Just as markets can reward risky behavior, they must also be allowed to discipline risky behavior when the bet turns out to be wrong. The incentive system simply cannot work if we reward risky behavior but then bail out the economic actors when they end up on the wrong side of the risky outcome. The irony of our time is that corporations want it both ways: they want a deregulated system so that they can take on increasingly risky behavior in financial markets and then want a government handout when the same risky behavior that those deregulated markets allowed leads to potential bankruptcy.

The recent crises in the financial sector are clearly tied to this push and pull over deregulation and bailouts. The risky behavior that led to the S&L crisis of the late 1980s can clearly be traced to the Garn-St. Germain Depository Institutions Act of 1982, which gave Savings and Loans institutions many of the same opportunities as commercial banks but not the same amount of federal oversight. As a result of this deregulation, S&L’s were able to make very risky loans in real estate without Congress or the Federal Home Loan Banking Board (FHLBB) stepping in to shut them down for those risky loans or insolvency. Eventually the crisis grew to a level that Congress was forced to step in and bring forth an aid package that would cost the American tax payers somewhere between $125 and $160 Billion. What message does it send to the risk-taking actors—who lobbied for deregulation in the first place—if they can take risks and then count on being bailed out by the government?

In the current crisis, the relaxation of the Glass-Steagall Act over the course of the 1990s and the eventual repealing of the Act in 1999 with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act allowed commercial banks to operate in a number of areas (insurance, investment banking, securities) that Glass-Steagall had forbidden. As a result, commercial banks could begin to deal on both sides of the fence: they could lend mortgages to their commercial customers and they could turn these same loans around and securitize them in the form of mortgage-backed securities, selling and trading them on the fast-moving securities markets that were emerging during the 1990s. While everyone was making money, all seemed copacetic. However, banks were now removed from the main incentive to be vigilant about risky borrowing behavior—they now no longer held the note on the house of the individual they loaned to. As a result, there was no disincentive for them to compete for business in a riskier and riskier loan pool. What was the downside? As long as the real estate market continued to rise, everyone would come out ahead; and if it didn’t, they wouldn’t hold the note on the foreclosed home anyway, as that mortgage had long since been packaged with a larger group of mortgages, securitized, and sold off to some other institution (which likely sold it again). Some individuals working in the industry have estimated that, by the time these mortgages had reached the end of their securitization life cycle, they would have been repackaged as parts of new financial instruments as many as 20 times. All the while, the risk assessment agencies that typically assess the viability of these financial instruments had incentives to keep the market booming, and they continued to award AAA ratings without a second thought. This type of risky behavior generated a great deal of wealth; but it was risky behavior nonetheless, and just as these risks yield rewards, they should also be subject to the discipline of the market when the system unravels. By what logic should the individuals gambling at this table receive a bailout?

Many in the industry and in political realms made the case that we had to bail out the banks because (1) massive bankruptcies, like Bear Stearns (if it had been allowed to happen) and Lehman Brothers (which did), would disrupt the economy and even cause a disruption of global markets (for which the US would be blamed); and (2) foreclosures would hurt American consumers, many of whom stand to lose their homes. Which brings us to the second culprit in this crisis: politicians, who also want it both ways. In essence, the politicians want to appease the corporations—many of whom donate significantly to their campaigns—but when it comes time to deal with the results of the economic incentives they have created, they want to protect the American voter from these outcomes. The reality in both cases is that if we let the market work in a truly unfettered fashion, banks would have had the opportunity to record the record profits they have accrued over the last decade, but they would also have to be prepared to bear the consequences of the risky behavior that led to those profits. A painful S&L bankruptcy would have been a powerful lesson as to what can happen without federal oversight in the banking sector; and Bear Stearns’ bankruptcy would be a valuable lesson in the realm of corporate oversight the same way that the debacles of Enron and WorldCom have become important lessons in the realm of lax corporate oversight in other sectors. Individual consumers would certainly have a different attitude about the virtues of an unfettered market if they learned the difficult lesson that risky behavior can bring about foreclosures and even recession. Maybe they would even vote differently.

Now newspapers seem to want the same treatment. Whining over the fact that the changes in technology have put at risk many of our country’s flagship institutions, powerful and influential publicly traded corporations (for example, the New York Times Company) are surely behind Senator Cardin’s move. But this move obfuscates a simple fact that many in the industry know: Arthur Sulzberger has been a terrible leader for the New York Times; but because of his position as chairman of the board and his family’s significant stake in the company, he is protected from the harsh reading that any objective observer would give in assessing on his performance over the last decade. He is responsible for the downfall of the New York Times, and if he doesn’t want that responsibility, he should resign as Chairman of the Board.

There are two views that are often advanced to remove responsibility from the likes of Sulzberger. First, the Internet has destroyed the current model; newspapers cannot survive in the current climate of new technology. Second, conglomeration is destroying news delivery.

The first point is ridiculous. Technological advancement has change the model, but it has not destroyed newspapers. For that to be true, there would need to be no newspapers that are surviving in this climate. But this is completely false. Take for example the media giant Axel Springer (http://www.axelspringer.de/en/index.html): here is a company that is doing very well in the new economic climate. In 2008, under the leadership of Chief Executive Officer Dr. Mathias Döpfner, this media giant, which publishes several of Europe’s most important newspapers, achieved record profitability. They have done this through engaging their senior executive staff in figuring out the trajectory of the new technology and taking advantage of it. If they can do it, why can’t the New York Times Company? To bail out the New York Times at this point would be to destroy the market incentives that are ushering in a new model of news delivery.

On the second point (the Klinenberg point), conglomeration is surely a bad thing. It not only makes corporate interests first and foremost, but also diminishes competition of smaller innovators. But conglomeration and monopolies are part of the logic of capitalism. Even the most libertarian of economists would agree that the Sherman Anti-Trust Act of 1890 was a good thing because it placed competition as the most important aspect of capitalism. Professor Klinenberg is right. And perhaps Senator Cardin is right. But bailing out the newspapers is not the answer here. I would much rather see anti-trust legislation against conglomeration of the news. But to reward poor leadership with a bailout only destroys the incentives of a market economy. Good leaders will see their ways through this. Bad leaders will not. In the end, we will have better newspapers as a result. But if you bail out poor market behavior, no one wins.

As a final anecdote to close off this discussion: a couple of years ago Robert F. Kennedy Jr. came to talk to one of my classes (at NYU-Stern) about business and social responsibility. With decades of liberal activism under his belt and a strong line about advocating regluation and control, Kennedy comes across as a staunch liberal. However, when challenged by one of the students about his position on CAFE standards, Kennedy spoke eloquently about the corporate lobby and the distortions of the market. He said (I'm paraphrasing here), "I think I am probably at my core a more true capitalist than most in this room are. Let's do it. Let's set up a true laissez-faire market economy right now. But if we are going to have a free market, it needs to be truly free--no subsidies for anyone. Period. That means no subsidies for oil, no subsidies for developers building roads, no subsidies for any corporations at all. And if we did that, gas would have cost $12 a gallon a long time ago and we would have had an electric car decades ago, and we wouldn't even need to discuss CAFE standards. The problem is that the corporations are not willing to give up what they get from the government. The want more and more deregulation but they want to keep their subsidies and access to policy influence at the same time." At that moment, the room full of 400 budding neoliberals at Stern had no answer for him.

Next post: On Being Wrong

Overlooked Aspects of Leadership (Part II): Fear

As a second installment in the “Overlooked Aspects of Leadership” series, I turn once again to the Berlin School Executive MBA theses. Lucia Tarbajovska, Vice President of Marketing Communications at T-Mobile, researched and wrote about fear. Like Craig Markus’ work, this study was a truly original piece of research and writing; indeed, this thesis was awarded the Michael Conrad Award for Best Thesis in the Graduating Class.

Just like with Markus’ work on rage and grace, Tarbajovska’s work on fear delves into the psyche of leadership. Fear is an emotion we are all familiar with, but spend far too little time acknowledging and talking about. Fear of failure; fear of the unknown; fear of disappointing; for some, even fear of succeeding. We all know these experiences, and they shape the way we approach problems, work, relationships, life in fundamental ways. In Tarbajovska’s empirical survey on the topic, she found that nearly 90% of the creative leaders that participated in her survey acknowledged that fear is a critical factor influencing the ways they make decisions and ultimately influencing creativity.

And, for leaders of organizations, the stakes are high. Inasmuch as these experiences and emotions live deep inside of us, they also live deep inside of organizations, and ignored or left unaddressed, they will ultimately drive an organization or a brand toward mediocrity.

Tarbajovska plainly stakes her claim on the relationship between leadership and fear, saying: “Leadership is all about confronting fears and overcoming them. Furthermore, it is not only about overcoming their own fears but fears of people around them, all stakeholders - people they lead directly and the entire employee base, partners, suppliers, shareholders, public etc. And not only that, it is about overcoming the systems that we live in – the structures, the norms, the templates, the processes, the hierarchies, the rules, the guides etc… Most leaders are under a constant pressure of fear of failure that ultimately locks them in a routine and pushes them to comfort zones, to consensus, to mediocre decisions… [Yet] a business environment like [the current economic crisis] requires managers to be courageous. I suggest taking it a step further by adopting courage as a key value of your organization and injecting it into your organizational culture. The courage to listen, act, make mistakes, admit failure – or rather promote it as learning, and most importantly stay the courage is essential to survival in times like these – the times of economic crisis and separates successful businesses from the rest in more stable times.”

In my reading of Tarbajovska’s thesis, there are three key points that come out of the discussion. First, she argues that, with respect to organizations and brands, it is not just general fear that drives us. It is actually the fear to differentiate. If you were to boil down strategy guru Michael Porter’s views on what lies at the core of effective strategy, differentiation would be a central theme. But, according to Tarbajovska, we fear this more than anything else: We are much more comfortable staying within the norms of society and the norms of the competition because there are signals all around us that this is a right and appropriate thing to do. Differentiation is the most important thing, but it is also the thing we fear the most.

Second, for leaders, the challenge is not just overcoming their own fear, it is about creating a culture of courage in the organizations they lead; it is about leading a team or an organization in which all members of that system live the values of fighting fear.

Third, creating an anti-fear culture is as much about organizational design as it is about simply being a fearless leader yourself. Great leaders must think hard about how to design an organizational system that produces and nurtures such a culture. Now Tarbajovska has her own views on how to structure an organization like this—low hierarchy, few rules, forcing people to stretch and rewarding mistakes. But the main insight here is the creative leaders need to think hard about how to structure their organizations to produce a culture of fearlessness.

Creative leaders that can accomplish that are truly great leaders.

Look for the final installment of "Overlooked Aspects of Leadership (Part III): Being Wrong"... Coming soon.

Overlooked Aspects of Leadership (Part I): Rage and Grace

In one of my roles I have the pleasure of serving as the Academic Director of the Berlin School of Creative Leadership (http://www.berlin-school.com/ ), a business school for executives in the creative industries. It is a wonderful experience spending time teaching business skills and discussing leadership with senior creative directors in the advertising, publishing, media, and other creative industries.

One of the requirements of the program is a capstone project of a Master’s thesis. The school’s second graduating class completed the program in July, ending with the presentations of their theses, and they did not disappoint. There were many fabulous pieces of research presented there, and many new ideas floating around, some of which are truly original in the field of leadership.

Craig Markus, Executive Creative Director and Executive Vice President at McCann Erickson, gave a fabulous presentation on the relationship between rage and grace in leadership. Rage and grace: the perfect partners; both necessary; both central to creative energy.

Markus argued that all great leaders have a little rage. They need the emotional impetus that drives them to do something remarkable; they need to feel unsatisfied with the status quo and furious enough to do something about it; they need to have the emotional constitution that pushes them to strive for something more. Complacency is the enemy of greatness, and leaders that have some rage are never complacent.

But rage can be a dangerous thing. It cannot be an excuse for treating people badly or acting like an ego-maniacal buffoon. Indeed, rage must be balanced by an appropriate dose of grace. Rage, according to Markus is the reaction to an event or circumstance, driving the leader to strive aggressively for change; grace is his or her ability to moderate that rage, to channel it in appropriate directions, to treat people and the world around him/her in a civil and caring fashion.

Markus analyzes a number of figures through this prism--the exegesis on Martin Luther King Jr. and Malcolm X is particularly insightful, but let's stick to examples from the business world. Take, for example, the leader at the top of everyone’s list of great creative leaders: Steve Jobs. When Steve Jobs was young… wow. Now there’s some serious rage (think about the rage conveyed in the iconographic “1984” commercial (http://www.youtube.com/watch?v=BxShzoUjiAQ ), which debuted during the Superbowl that year). And it led him to create great things. But most people who name Jobs as one of the great creative leaders of our time often forget his destructive behavior at Apple in 1984-85. His legendary battle with Scully; his insistence on occupying two distinctly different levels in the organization (Chairman of the Board and GM of Mac—in effect, being the boss of his boss), which created great organizational confusion and significant cultural dysfunction in the organization; his resignation from the board. A lot of rage; not much grace. But when Jobs returned Apple in 1996, he had enough creative drive (and enough rage) to revive and save Apple (witness: the iPod), but he also had grown into considerably more grace. His grace would balance his rage, and he would be a considerably better leader for it. (Though still not without his detractors... http://www.youtube.com/watch?v=TUl1DFBKdv8 )

Markus’ insights on leadership are fresh and provocative. His ideas take us much deeper into vague concept of passion in leadership. It is really an analysis of what drives us and how we balance the emotions of those drivers. For someone who spends most of his time thinking about the analytical and design aspects of leadership, I found Markus’ ideas about the psyche of creative leaders to be truly insightful.

Putting the WTO Ruling Against China in Perspective

Wednesday’s World Trade Organization ruling against China’s restrictions on the distribution of media by American companies (actually the ruling will apply to all WTO nations) in China has implications for the creative industries specifically and US-China trade relations more generally. But it also has deeper implications for China’s role in the global economy, many of which are positive.

First, a little background: for the first 22 years of China’s opening to the world (1979 until 2001, the year of its accession to the WTO), the Chinese government directed foreign investment with a heavy hand. Foreign investors across industries were almost always required to set up joint ventures (JVs) with state-owned organizations if they wanted to have any chance at success in penetrating China’s markets.

That changed dramatically with China’s accession to the WTO. Today, across many industries, companies are much more likely to set up Wholly-Owned Foreign Enterprises (WOFEs) than they are to set up JVs as their position in the market. There are still a few controlled industries, those that the Chinese government sees as critical in one way or another: automobiles (because of its role as a “backbone” industry), energy/oil and gas (because of the strategic implications of this industry for national development, tobacco (a longstanding, lucrative monopoly with key economic implications for several provinces), telecommunications, and entertainment/media. The final two are actually very interesting to ponder because of their implications for democratization.

The decision is indeed good news for the creative industries. It is absolutely the case that this ruling will have an impact on how Chinese markets will eventually open up. It will not be a watershed moment, because, China will still drag its feet as any bureaucratic nation can do with approval processes and behind-the-scenes “guiding” of ventures. However, the good news, which China is often not given credit for, is that it is taking global processes seriously. The country moved steadily in the direction of a rational-legal system under Zhu Rongji and Jiang Zemin in the 1990s and it is continuing in that direction under Hu Jintao.

Some have argued that this ruling will have implications for the trade deficit. However, it is important to keep the trade deficit issue in perspective.

Despite claims that markets in China are closed to foreign producers—an allegation that is often raised in the face of the growing trade deficit with the United States and the rest of the world—there are several complexities and nuances to this claim.

First, one simple fact that is often lost in this debate is the shift in 1991 from measuring national economic growth as GNP to GDP. GNP measures the total value of goods and services produced by a given nation in a given year; GDP measures the total value of goods and services produced within a nation’s borders in a given year.

This is an important point because, of the top forty exporters from China, ten are U.S. companies. Multinational corporations like Dell, Motorola, and Wal-Mart benefit tremendously from producing in China and exporting to the rest of the world—benefits that include healthy profits, which boost stock prices and, thus, market capitalization. These exports, however, count on China’s side of the export ledger, because the goods are produced in China. Thus, although Wal-Mart is one of the largest importers to the United States from China, those imports count as Chinese exports in the balance of trade. The bottom line is that, while the trade deficit is clearly a problem for many U.S. policy makers, it is a complicated development that encapsulates many more commodity-chain relationships than the statistic itself reveals.

Second, as U.S. trade with China has grown, its trade with other East Asian economies has shrunk. This is not surprising, given that countries such as South Korea and Taiwan have moved production sites to China to take advantage of cheaper labor there. Under these circumstances, exports from China grow; however, this commodity-chain cooperation amounts to a reorganization of export flows across the region rather than a simple net growth of exports from China. In other words, in order to really think accurately about the trade imbalance with China, we need to also account for the fact that as production in Taiwan has declined, many of the Taiwanese businesses have moved their factories over the China’s eastern seaboard.

It is important to keep all of these issues in perspective, as the issues are often distorted in significant ways by the media and by anti-China (and anti-globalization) interest groups.

Finally, on the issue of democratization, if you care about democratization in the world’s largest nation, this ruling comes as a welcome sign. The flow of information (both cultural and news) is a cornerstone of democracy. China has been moving slowly (and quietly) on this front, but it HAS been moving and in significant way, and it often does not receive enough credit for how open the society has become. This ruling will not change much in the short run, but it will in the long run. As media companies have freer rein to operate in China’s markets with fewer and fewer restrictions, the information available to people in Chinese society will be greater and greater, a fact that follows the trends already in play over the course of the last 30 years.