Saturday, August 30, 2014

Real Leaders Shouldn't Need $63 Million in Tax Help From Their Company

One of the hottest topics in business schools and in business is leadership. Business schools are expected to provide a range of leadership development opportunities, and their graduates—after interviews that  invariably emphasize leadership potential or accomplishments—then enter corporate leadership development programs. Companies spend large sums on leadership training, and numerous consultants and organizations provide services for furthering developing corporate leaders.

It’s probably safe to say that these efforts are not aimed at creating command-and-control,  transactional leaders. Rather, something deeper is being sought, such as the widely-popular concept of transformational leadership that occurs when “one or more persons engage with each other in such a way that leaders and followers raise one another to higher levels of motivation and morality” (James MacGregor Burns, Leadership, Harper & Row, 1978). Or consider this description of purposeful leadership:

It is about having clear values and demonstrating a commitment to living those values. It is about modeling positive attitudes and behaviors that others wish to emulate. It is about building a sense of community where people feel that their work is important, that they are important, and, as a result, they are inspired to perform at the highest levels. (Training Magazine, October 16, 2013)

Medtronic, a leading medical devices company, says of its executives and leaders:

We are proud of our reputation for attracting and developing some of the brightest leaders in the medical technology industry. Strong leadership is vital to achieving our goals and fulfilling our Mission to alleviate pain, restore health, and extend life.

Our executive leadership team members serve as role models. Not only do they provide strategic oversight and motivation, they also contribute to the collective good of the company and the industry – by serving on Inclusion Councils, leading volunteer efforts in our communities, and collaborating with industry peers to improve healthcare policies.

Medtronic further describes its mission as follows:

Written in 1960, our mission dictates that our first and foremost priority is to contribute to human welfare. Over a half-century later, the Mission continues to serve as an ethical framework and an inspirational goal for our employees around the world. It guides our day-to-day work and reminds us that our efforts are transforming the lives of millions of people each year.

Sounds great. But actions speak louder than words. Medtronic has found itself in hot water over its recent decision to move its corporate headquarters from Minneapolis to Ireland to avoid billions in taxes on money it holds overseas. This move has upset long-term shareholders who will now have to pay immediate capital gains taxes. And then this week, Medtronic disclosed that  it will pay its top executives (pronounced “leaders”) $63 million to compensate them for special excise taxes they face.

A Medtronic spokesperson told the StarTribune, “The company believes these individuals should not be discouraged from taking action that they believe is in the best interest of Medtronic and its shareholders.” By making these payments, Medtronic’s top leaders will be able to “focus on what is in the best interests of the company, and not on their personal finances.”

But wait a minute. Read that again while thinking of the corporate emphasis on leadership (sometimes even ethical leadership). This hardly paints a picture of transformational, purposeful, role-model leaders, and even less so of ethical leaders. Worried about their personal finances? The CEO made over $8 million last year. Are these “brightest leaders” so easily led astray by their own paydays? Shouldn't transformational leaders be able to rise above their narrow self-interest? With or without an ethical duty to do so?
Or has the culture of executive pay become so obscene that it fuels its own fire? Indeed, research in behavioral economics has shown that financial incentives can crowd out intrinsic motivators. So maybe it’s true that personal finances trump deeper leadership qualities when executive pay is so high. But adding more fuel to the fire doesn’t seem like the answer. If companies truly believe their own rhetoric about leadership, it’s time to reign in executive compensation, open up corporate governance, share the wealth more fairly, and demand that corporate executives truly be leaders.

Happy Labor Day.

UPDATE
A column appeared in yesterday's StarTribune with the headline "Medtronic had no choice but to cover the excise tax." I disagree. If someone wants to argue that the payments are justfied because they serve some purpose, then that's fine. But Medtronic certainly has a choice. Now why does the column think that these payments are a good choice? An alternative way to avoid this extra tax is to allow the executives to exercise their options early. But according to Medtronic, “undercut Medtronic’s compensation philosophy of ensuring that executive officers hold long-term, performance based compensation." And the columnist then writes, "the next problem would have come the morning after closing, when the CEO and nine other executives came to work without any stock options." This brings me right back to the point of my initial post: Should we call someone a leader if they require millions in stock incentives to look beyond their own self-interest? Shouldn't a true leader be able to lead even in the absence of such strong (some might say, obscene) incentives? And what kind of culture have we created such that these incentives are not only acceptable, but are seen as essential?

Tuesday, July 15, 2014

The Goals of Conflict Management: Have We Lost the Forest for the Trees?

Earlier this month I attended the International Associationfor Conflict Management (IACM) annual conference outside of Leiden in the Netherlands (Hup Holland Hup!). The diversity of presentations was stimulating, including topics ranging from the very micro (e.g., individual interactions) to the very macro (e.g., international diplomacy and peacebuilding), with mid-range team, organizational, and industrial relations conflict topics, too. There was much to be learned about managing conflict, but I kept coming back to one concern—have we lost the forest for the trees? Specifically, have we lost sight of the fundamental goals of conflict management?

The goals of conflict management don’t get a lot of explicit attention, but when pushed I think many would say that a conflict management system should prevent conflict and settle disputes quickly. Sounds good at first, but this is hardly adequate. As a manager I could devise a system whereby anyone who comes to me with a conflict is fired. That would likely prevent conflict and settle disputes quickly. But it hardly seems like a desirable approach to conflict management. So we need to think more carefully about metrics and goals for conflict management systems.

In the Oxford Handbook of Conflict Management in Organizations, that should be in print very soon, Alex Colvin and I have authored the lead chapter titled “The Goals and Assumptions of Conflict Management in Organizations.” We use the trilogy of efficiency, equity, and voice as a framework for considering the goals of conflict management. Our focus is conflict management in organizations, which I will follow below, but I think this could be applied more widely.

Firstly, efficiency. The effective management of conflict is important so that conflict minimizes disruptions to the productive efficiency of an organization. Whether overt or quietly festering, clashes between supervisors and subordinates, co-workers, union leaders and managers, or other organizational actors can be disruptive and undermine individual and organizational performance. A conflict management system should be able resolve these conflicts so that they are removed as barriers to performance. Another aspect of efficiency as a goal of conflict management is that it is desirable to resolve conflicts in an efficient way. Specifically, an efficient conflict resolution system conserves scarce resources, especially time and money. But efficiency by itself is not enough.

So secondly, equity. Equitable conflict management systems reflect concerns with justice, fairness, and due process such that outcomes are linked to objective pieces of evidence and which include safeguards that prevent arbitrary or capricious decision-making. Moreover, an equitable conflict management system treats all participants with respect, sensitivity, and privacy while also generating appropriate and effective remedies when rights are violated. The equity dimension can also include the extent to which a conflict management system has widespread coverage independent of resources or expertise.

Thirdly, voice. This captures our assertion that conflict management systems should be participatory. A system that is unilaterally designed and administered by managers lacks voice. In contrast, a system shaped by the input of employees as well as employers scores higher on the voice dimension. Similarly, participation in the actual conflict management system is an important element of voice.

So it’s important that academics and practitioners continue to find better ways to resolving conflicts. But we shouldn’t lose sight of what “better” means. It’s more than just understanding interpersonal dynamics that prevent conflicts. It's more than finding ways to quickly resolve disputes. We think a better system is one that fulfills efficiency, equity, and voice. Others might prefer other goals and metrics—probably rooted in alternative frames of reference (another part of our chapter, and perhaps the subject of a future blog posting). Regardless of one’s specific goals, it’s important to carefully think about them, and articulate them explicitly. Otherwise, we’re likely to lose sight of what we are actually trying to achieve.

Thursday, June 19, 2014

What Do Unions in China Do?

After three decades of fast growth, China has become one of the world’s largest economies, and its labor movement is arguably the world’s largest. But we are still lacking systematic evidence on the effect of Chinese unions on wages, employment, and other important economic variables, such as labor productivity and economic growth. With my friends and colleagues Wei Chi, Yijiang Wang, and Qianyun Xie, I have just published a study in the Journal of Labor Research that uses provincial-level data to analyze such effects.

In a Western context, it’s common to think of unions as having two faces, a monopoly face and a voice face. In the monopoly face, labor unions use their power, derived from the threat of imposing costs on the organization through strikes and other means, to increase wages and benefits above what the nonunion labor market would provide. So unions are associated with higher wages. Moreover, if this higher compensation provides additional motivation or attracts higher-quality workers, then unions would also be associated with productivity gains, albeit suboptimally (if a firm wants to raise wages to boost productivity, it doesn’t need a union to do so!). Alternatively, unions might reduce productivity if their monopoly power allows them to extract more favorable working conditions. As such, unions in the monopoly face benefit union workers, but generally at the expense of others.

In contrast, the collective voice face of unions occurs when unions convey information preferences to managers who are then better able to shape terms and conditions of employment that fit employee preferences. Productivity can improve via improved employee satisfaction and also via a direct channel of employee voice that identifies process improvements and resolves problems. Unlike in the monopoly face, these dynamics do not distort competitive labor market outcomes, and therefore the collective voice face can be socially beneficial.

Unions might act the same way in China. Or not. Unions in China are generally not independent of the business. Indeed, Chinese union leaders have traditionally been appointed by the Communist Party rather than elected by union members and Chinese unions are partly funded by the company and the government. By law, the Chinese labor movement has a single hierarchical structure; all unions are affiliated with the All-China Federation of Trade Unions (ACFTU) and there is no inter-union competition between unions. And Chinese Union Law does not allow workers to strike nor does it protect strikers from discrimination or retaliation by their employer. So Chinese unions might lack real power, and might serve more as an extension of political and business interests than as a advocate for workers’ interests.

In our analyses, we use provincial-level data spanning 15 years from 1994 through 2008 to estimate the relationship between union density and various economic outcomes. As an aside, provincial-level analyses are somewhat old-fashioned because of the greater level of aggregation compared to enterprise- or individual-level studies. So it is hard to disentangle the reasons that underlie various the statistical results. But we think this is a useful exercise because the existing micro-level studies are all drawn from limited samples (for example, a notable recent study  uses data from a limited number of medium to large cities, excludes small establishments, and might be biased because the focus of the survey was corporate social responsibility practices). Our provincial approach therefore captures a much broader spectrum of the geography and economy of China than the previous studies. The use of provincial data also allows for a fuller identification of the overall effects of unions if there are externalities, spillovers, or aggregate-level effects that might be under-estimated by firm-level or individual-level data.

So what do we find? We find that Chinese unions have a positive and significant relationship with provincial GDP and productivity in the secondary sector (mining, manufacturing, utilities, and construction), no significant effect on average wage levels, and uncertain effects on employment. These results are consistent with a weak monopoly face and strong collective voice face of Chinese labor unions. However, under the unique institutional conditions faced by Chinese labor unions, these results are also consistent with an alternative explanation in which Chinese labor unions act as agents of the enterprise and the state in delivering productivity enhancements at the expense of, rather than through the cooperation of, workers. So our findings cannot indicate who actually benefits from a positive productivity effect of Chinese labor unions. There is still much to be learned about the roles of Chinese labor unions in influencing individual and macroeconomic outcomes.

Source: John W. Budd, Wei Chi, Yijiang Wang, and Qianyun Xie (2014) "What Do Unions in China Do? Provincial-Level Evidence on Wages, Employment, Productivity, and Economic Output," Journal of Labor Research, vol. 35, no. 2 (June), pp. 185-204. Here is the complete paper.