What do CEOs do? A CEO Job Description.

The Chief Executive Officer is one of the most coveted titles, and least understood jobs in a company. Everyone believes that CEOs can do whatever they want, are all powerful, and are magically competent. Nothing could be further from the truth. By its very nature, the job description of a CEO means meeting the needs of employees, customers, investors, communities, and the law. Some of a CEO’s job can be delegated. But several elements of the job must be done by the CEO. Read on for the details of what makes a CEO.

What is intrinsic to the CEO’s job?

This isn’t a traditional job description; it’s an examination of the actual roles that a CEO plays (legally or de facto) within a company. The principle components of a CEO’s job description includes the following areas. Any individual CEO may take on any tasks that they wish, but these are the things that can’t be delegated:

  1. Setting strategy and direction
  2. Modeling and setting the company’s culture, values, and behavior
  3. Building and leading the senior executive team
  4. Allocating capital to the company’s priorities

While a CEO may get input for some of those duties, it is the CEO’s—and only the CEO’s—responsibility to perform those well. Being the CEO, they can spend the rest of their time doing whatever they decide they want to spend their time on. But ultimately, everything else about a given CEO’s job is optional.

Success as a CEO requires more than just knowing the CEO’s job description. A CEO needs to know how to measure their success as a CEO, avoid the pitfalls that are unique to the CEO’s job, and conduct themselves to stay sane and skillful over time.

A CEO Job Description, Part 1

Admit it. We all feel a touch of awe when someone has it: the CEO title. The power, the salary, and the chance to Be The Boss. It’s worthy of awe!

Too bad so few CEOs are good at what they do. In fact, only 1 in 20 are in the top 5%[1]. Many don’t know what their job should be, and few of those can pull it off well. The job is simple—very simple. But it’s not easy at all. What is a CEO’s job?

More than with any other job, the responsibilities of a CEO diverge from the duties and the measurement.

A CEO’s responsibilities: everything, especially in a startup. The CEO is responsible for the success or failure of the company. Operations, marketing, strategy, financing, creation of company culture, human resources, hiring, firing, compliance with safety regulations, sales, PR, etc.—it all falls on the CEO’s shoulders. Being responsible means that the CEO is the one held accountable for the success of the company’s efforts, across the board. But of course, the CEO doesn’t actually do all that work.

The CEO’s duties are what she actually does, the responsibilities she doesn’t delegate. Some things can’t be delegated. Creating culture, modeling values, building the senior management team, financing road shows, ultimate approval of how money gets spent, and, indeed, the delegation itself can be done only by the CEO.

Many start-up CEOs think fund-raising is their most important duty. I disagree. Fund-raising is necessary, but the CEOs contribution is in building a superb business with the money raised.

Setting strategy and direction

What is the CEO’s main duty? Setting strategy and vision.The senior management team can help develop strategy. Investors can approve a business plan. The Board can approve, advise, or ask the CEO to revise a business strategy. But at the end of the day, it’s the CEO who ultimately sets the direction:

  • Which markets will the company enter? Against which competitors?
  • What will the company’s product lines be?
  • How will the company differentiate itself? Will it be low cost? High service? Convenient Locations? Flexible financing? High-touch? Mass produced?

The CEO decides, sets budgets, forms partnerships, sells off incompatible product lines, makes acquisitions, and hires a team to steer the company accordingly.

Modeling and setting the company’s culture, values, and behavior

The CEO’s second duty is building culture. Work gets done through people, and people are profoundly affected by culture. A lousy place to work can drive away high performers. After all, they have their pick of places to work. And a great place to work can attract and retain the very best.

Culture is built in dozens of ways, and the CEO sets the tone. Her every action—or inaction—sends cultural messages (see "Life Under a Magnifying Glass"). Clothes send signals about how formal the workplace is. Who she talks to signals who is and isn’t important. How she treats mistakes (feedback or failure?) sends signals about risk-taking. Who she fires, what she puts up with, and what she rewards shape the culture powerfully.

This can not be emphasized enough! People imitate a CEO’s behavior when deciding how to act. The book Pre-suasion by Robert Cialdini, documents at length the ways in which, for example, a dishonest CEO makes employees feel as if they can cut corners, steal from the company, and generally behave according to those same standards.

A project team worked weekends launching a multimedia web site on a tight deadline. Their CEO was on holiday when the site launched. She didn’t call to congratulate the team. To her, it was a matter of keeping her personal life sacred. To the team, it was a message that her personal life was more important than the weekends and evenings they had put in to meet the deadline. Next time, they may not work quite so hard. The emotion and effect on the culture was real, even if it wasn’t what the CEO intended. Congratulations from the CEO on a job well done can motivate a team like nothing else. Silence can demotivate just as quickly.

If vision is where the company is going, values tell how the company gets there. Values outline acceptable behavior. The CEO conveys values through actions and reactions to others. Slipping a ship schedule to meet quality levels sends a message of valuing quality. Not over-celebrating a team’s heroic recovery when they could have avoided a problem altogether sends a message about prevention versus damage control. People take their cues about interpersonal values—trust, honesty, openness—from CEO’s actions as well.

Building and leading the senior executive team

Team-building is the CEO’s #3 duty. The CEO hires, fires, and leads the senior management team. They, in turn, hire, fire, and lead the rest of the organization.

The CEO must be able to hire and fire non-performers. She must resolve differences between senior team members, and keep them working together in a common direction. She sets direction by communicating the strategy and vision of where the company is going. Strategy sets the direction for the senior team, who in turn set it for the rest of the company. With clear direction that everyone understands, the team can rally together and make it happen.

Don’t underestimate the power of setting direction. In 1991, at Intuit’s new employee orientation, CEO Scott Cook presented his vision of Intuit as the center of computerized personal finance. Intuit had just 120 employees and one product. Ten years later, it’s a billion-dollar company with thousands of employees and dozens of products. Worldwide, it is the winner in personal finance, bar none. The success is due in no small part to every Intuit employee knowing and sharing the company’s vision and strategy.

Allocating capital to the company’s priorities

Capital allocation is the CEO’s #4 duty. The CEO sets budgets within the firm. She funds projects which support the strategy, and ramps down projects which lose money or don’t support the strategy. She considers carefully the company’s major expenditures, and manages the firm’s capital. If the company can’t use each dollar raised from investors to produce at least $1 of shareholder value, she decides when to return money to the investors. Some CEOs don’t consider themselves financial people, but at the end of the day, it is their decisions that determine the company’s financial fate.

Footnotes for Part 1

[1] Pay no attention to the math background peeking from behind the curtain… back

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Measuring Success as a CEO.

Knowing the job description is a good first step for a CEO, but to know how she’s doing, she needs to design her own measurement system.

Unlike inconvenient lower-level jobs, no one tells the Chief Executive how she’s doing. Do managers let her know she’s undermining their authority, making poor decisions, or communicating poorly? Not likely. Even when a CEO asks for honest feedback, the fear is there: non-flattering feedback may stall a promising career[1]. Even when a company uses 360-degree feedback, no one penalizes the CEO if she doesn’t act on the feedback.

The Board of Directors supposedly oversees the CEO, but they are far removed from day-to-day actions. Over time, they can evaluate performance, but they look mainly at share price and company strategy. They are rarely interested in—(or qualified to comment on!)—the CEO’s daily behavior.

But the CEO’s daily behavior will make or break the company! The CEO’s duties don’t change because they are unmeasured. Indeed, lax measurement makes it easy for the CEO to feel confident, even when she shouldn’t. Good feedback is the only way to know what’s working, but share price simply doesn’t do it. External measures measure the company, not the link between the CEO’s actions. A low share price tells her something’s wrong, but it doesn’t help her figure out what.

By measuring her performance based on her duties, a CEO can learn to do her job better. As explained in part 1, the CEO’s job is setting strategy and vision, building culture, leading the senior team, and allocating capital. The last of these is easy to measure. The first three are more of a challenge.

How does a CEO know she’s doing the vision thing? It’s hard. Having vision isn’t enough—that just takes a handful of mushrooms and a vision quest. Communicating the vision is the key. When people “get it,” they know how their daily job supports the vision. If they can’t link their job to the vision, that tells a CEO that her communication is faulty, or she hasn’t helped her managers turn the vision into actual tasks. Either way, a CEO can monitor her success as a visionary by questioning and listening for employees to link their jobs with the company vision.

Culture building is subtle, the culture a CEO sees may be very different from the culture of the rank-and-file. One company had a facilities policy that all equipment within 450 feet of the senior management offices was kept in top working order. Senior managers saw a smoothly running company, while everyone else saw neglect and carelessness.

Surveys about openness, values, and morale can be used to develop a measure of culture. The questions to ask aren’t rocket science. The book First, Break all the Rules gives a great questionnaire for measuring overall culture. Also, check turnover. When 95% of your workforce says they can’t wait to get to work, something is going right. If people rarely leave, and if it’s easy to attract top talent at below-market prices, you can be sure the culture plays a large role. If people leave (especially your top performers), again—look to culture. And don’t underestimate the power of walking around and counting smiles. If people are having fun, it will show.

The CEO’s success at team-building can often be measured through the team. Teams usually know when they’re effective. They can also rate their team using assessments that measure specific behaviors. For example, “I can trust my teammates.” “My teammates deliver their part of the project on time.” “Every member knows what is expected of them.” Regular team self-assessments can help the CEO track the team’s progress and hone her abilities to keep the team running smoothly[2].

Easiest to measure is a CEO’s capital allocation skill. In fact, financial measures are the ones made public: earnings and share price. But how can a CEO link those to her actual decisions? Working with her CFO, a CEO can devise financial measures appropriate to her business. Sometimes traditional measures are most appropriate, such as economic value added or return on assets (for a capital-intensive company). Other times, the CEO may want to invent business-specific measures, such as return on training dollars, for a company which values state-of-the-art training for employees. By monitoring several such measures, a CEO learns to link her budget decisions with company outcomes. Ultimately, the CEO’s should be creating more than a dollar of value for every dollar invested in the company. Otherwise, her best bet is to return cash to the shareholders for them to invest in more productive vehicles.

In startups, earnings begin low to nonexistent, and share price is more about salesmanship and vision than earnings. So the CEO gets almost no useful feedback about her capital allocation wisdom. She doesn’t know whether a dollar spent on a slightly nicer-than-necessary copy machine is wasted or is a wise investment in a long-term. Careful attention to the design and tracking of financial measures can help her prepare for the transition to an earnings-driven company.

In his 1988 Annual Report, Berkshire Hathaway chairman Warren Buffett included an excellent essay on CEO accountability. Click here to read Mr. Buffett’s observations on CEO measurement.

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Footnotes for Part 2

[1] The CEOs don’t help the problem. Many of my CEO clients highlight the value of honest feedback from their coach. Yet they complain about employees who disagree with them, just don’t “get it” or don’t have enough information “to understand the real issues.” In a coaching call, they can hear feedback and consider it. At work, they treat disagreement as dissension, and then wonder why everyone’s a “Yes man.” back

[2] There are dozens of team effectiveness surveys. You can start by checking out http://www.cambriaconsulting.com, http://www.ccl.org, and http://www.pfeiffer.com. back

 

Pitfalls and Solutions for the CEO

A CEO can tank a company by not understanding their duties, or failing to set up good measurement systems. But it’s also true that the job itself can screw up the person, as well. It’s said that power corrupts, and few positions are more powerful than CEO. While the USA may be a democracy, our companies are legal dictatorships with the CEO calling the shots(1). While she may be having a great time playing Boss, the position may be taking a very human toll.

It’s all too easy for the CEO to become a …; jerk(2)  …; without realizing it. They can forget—if they ever knew—what it was like to have a boss. They are free to ignore feedback that they don’t want to hear, and no one will call them to task for it. They can bypass the chain of command when they want to meddle. They can give themselves raises and genuinely believe they deserve it. And most dreadfully, they can forget what it is like to be “one of the little people”:

worker I have to leave early today.
CEO Why?
worker To pick up my kids from daycare.
CEO Oh…; looks genuinely perplexed …; Why
don’t you have your nanny do that?
worker I don’t have a nanny.
CEO Oh…; wanders away with a mildly confused expression

The worker was an incredibly productive person. She worked harder than the CEO, got more done, yet couldn’t have afforded a nanny if her life depended on it. The CEO didn’t intend to be a jerk, but his lack of empathy didn’t win many supporters.

A CEO can become arrogant by externalizing blame

Having no day-to-day accountability for her actions can also turn a CEO sour. When things go wrong, she can blame everyone around her without facing her own shortcomings. “My employees just don’t get it,” proclaims the CEO, never thinking for a moment that she is the one who hired them. Did she hire incompetents? Or has she failed to communicate goals consistently and clearly? “Market conditions have changed.” she declares. A nice excuse, but isn’t it the CEO’s job to anticipate the market and position the company for success under a variety of scenarios? Without someone to keep her honest, she can gradually absolve herself of all responsibility.

Believing in a title can lead to overconfidence

Arrogance also threatens a CEO. “Because I am CEO, I must know the business better than anyone else.” It has been said, but it just isn’t true. No CEO can be an expert in all functional areas. A CEO who is doing her job is spending time with the big picture. If she knows the details better than her employees, she’s either hiring the wrong people or spending her time at the wrong levels of the organization. It’s appropriate for a CEO to manage operations if absolutely necessary, but she should quickly hire good operational managers and return to leading the whole business.

If she also comes to believe that the CEO title grants infallibility, watch out. Even the Pope is only infallible a couple of times each century. But CEOs can reinforce their delusions of grandeur by giving themselves higher salaries (surely she deserves it! After all, salary benchmarks show how underpaid she is) and more perks. Then when layoffs come, the CEO wants applause for having the moral strength to make “hard choices,” quietly overlooking how her own poor decision making led to the need for layoffs.

CEOs can stop learning well

Of course, once infallible, there’s no more to learn, and a CEO may quietly stop learning. Without daily oversight and high quality feedback on how she does her job, she can mistakenly believe her actions lead to success. In reality, she may be doing the wrong thing, but her staff may be working around the clock to cover for her.

Furthermore, sins of omission aren’t penalized. A CEO who does an adequate job, but far less than she could/should have done—goes unnoticed. In hindsight, XYZ Software(3) could have had a $1 billion market niche, and gone public with a valuation of tens of billions. Instead, it stuck to one product, had little understanding of its markets, and ignored competition. Yet it still went public in a $300-million IPO. Was management penalized for a lack of vision and market responsiveness? Hardly! The top managers walked off with $60 million apiece, reinforcing the notion that they had done a great job. Yet with a slightly grander vision, the company might have been 10 or 100 times its size.

Setting vision is the CEO’s job, but nothing tells her if her sights are too low. She isn’t penalized for missing the grander vision. Such sins of omissions are a CEO’s worst enemy. She can be lulled into mediocrity by not knowing what would have been possible. The four-minute mile was considered impossible…until Roger Bannister ran it. Now, it’s commonplace. Likewise, a CEO may limit herself by not realizing she can do her job better.

Though salary benchmarks are common, performance benchmarks are surprisingly rare. Quality learning demands a CEO benchmark herself against other superb CEO’s. Her central learning question is not “are you doing a good job?” but “are other CEOs doing a better job and if so, how can you learn to measure up?(4)

Footnotes for part 3

(1) Ok, ok. Technically the Board of Directors has hire/fire authority over the CEO, but the Board can’t control day-to-day operations. And while there are certainly boards that replace inept CEOs, it takes sustained incompetence over a long time to move a board to action. So for practical purposes, the buck stops with the CEO. back

(2) Her employees may use less diplomatic terms. back

(3) Names are changed to protect the innocent. back

(4) An excellent book on management best practices is “First, Break All the Rules” available by clicking here to go to the books page. back

 

Coaching tips to stay sane and skillful at the top of the heap.

These coaching assignments will help an executive avoid some of the pitfalls of the CEO job. They are simple, easy, and won’t take much time. They’ll help a CEO stay connected with workers, keep herself humble, and increase her learning while becoming more successful. The suggestions strive to be quick and easy to do, while still producing real results.

Make Space to Practice These Assignments

Set aside 5 to 10 minutes, daily, to developing as a leader and human being. This will be the time you think about the below topics and set your mind for the day. Schedule the time if necessary. Just make sure that you do what’s right for your growth.

Pace yourself. Life is long. Adopt these suggestions one or two at a time, and practice until you make them your own. Then move on. Forcing won’t help; this is about developing at your own natural rhythm. Do one assignment for a few weeks, then move on to another. Keep the ones that work for you and drop those that don’t.

Staying connected with “the little people”

Cultivate an attitude of respect—your respect for them. The “little people” are the ones turning your vision into reality. Meditate on this for a few minutes and ask yourself whether you can their jobs as well as they can. If you can, then you’re not hiring the right people—go change that! Otherwise, once a day, go talk to one of your low-level employees—someone more capable than you in their area of expertise—and learn from them. Choose a different person each day. Get as close to the front line workers as possible.

Listen with an open mind and learn. Learn about their job. Ask what works for them and what doesn’t. Above all, listen to their comments without judgment. Your goal is to connect with their experience of the world, not impose your own. Learn about their life. Find out what motivates them. Why did they come work for you instead of somewhere else? Simply by spending a few minutes understanding their life, you can greatly increase your appreciation of how they’re different (and similar!).

Share your vision and job with them, from a position of service. Pretend that your job is to make this person a success. Ask them how their job fits into the work the company does. If they don’t know, take on the responsibility of helping them understand how their job links to the vision. Clarify any confusion they may have about where the company is going. And ask them what you can do to help them succeed at doing their best. Then do it.

Staying humble

Acknowledge, often! Without your employees, your dreams and plans wouldn’t amount to much. Take every available opportunity to acknowledge the contribution of those around you and give them credit, especially in public. Feedback is rare in most companies, and positive feedback is rarest of all(1).

“Get” that it’s all your responsibility. When things don’t go the way you want, take responsibility—whether or not it’s your fault. The mindset of responsibility will put you in a much more powerful place than the mindset of blame. Regularly review circumstances asking, “What could I do differently (or stop doing) to make a positive difference?” Identify the action and then take it. You’ll be surprised how much more power you have over externalities, operating from responsibility rather than blame.

Gather honest advisors to hold you accountable for your behavior. Sometimes a Board of Directors will give honest feedback, but they are removed from your day-to-day behavior. Actively solicit feedback from third parties: friends, peers, associates. Share your issues and how you’re handling them, and ask for an honest assessment. Everyone in a company is accountable to someone for their behavior, except the CEO. Make yourself accountable as best you can.

Identify your limits. Ask, “can someone else in the world do my job better than I am currently doing it?” If the answer is Yes, seek out that person and ask for their guidance in getting better. If the answer is No, validate that answer by asking your advisors, competitors, suppliers, customers, and employees. Many companies have crashed and burn because they believe they were the best, for no good reason but pride and ego.

Create measurable performance criteria for your executive team, including yourself. Make sure people within the organization know your goals, and know what you can be counted on to do. Hold yourselves accountable. If you don’t meet your goals, withhold your bonus, take no raise, and treat yourself exactly as you would treat an employee who missed their targets. It sends a powerful message to the company that you’re serious about performance.

Ask your direct reports, your Board of Directors, and anyone else you work with for feedback a couple of times a year. You can use a 360-degree feedback process or simply ask in an e-mail. It’s a lot easier to hear feedback on your performance if you’ve explicitly asked for it.

Videotape yourself receiving bad news. Watch the videotape and decide whether or not you would want to work for that person. If the answer is No, learn to chill when you hear bad news.

Learning well

Study excellent CEOs. Call a CEO you admire and invite them to lunch. Exchange tips and adopt tactics that others have found useful. Read books like First, Break All the Rules, which are broad-based studies of habits of top-performers. Adopt at least one new habit a month.

Create systems for gathering feedback. Interview customers, competitors, analysts, and others in your industry to know how your company and products are perceived. Make sure you’re gathering feedback that will disconfirm your beliefs about the world, as much as confirms it. For example, if you think you’re #1 in your market, don’t just ask customers why they like your products. Ask what other products they use, and how your products fall short.

Spend time learning about the fundamentals of a CEO’s job:

  • Setting strategy. The strategy and vision for the company determine where everyone will focus their efforts. Find a vision and strategy and use it to align your entire company.
  • Creating the corporate culture. Your culture will determine what people do and don’t try, who will stay, who will leave, and how business will get done. Culture starts with you. Decide how you want people to act and start modeling the behavior publicly.
  • Capital allocation. Every dollar you raise and spend should produce more than $1 of return for the company, or it’s a waste of money. Learn how to make these judgements.
  • Hiring and Firing. The job of executives is primarily team and culture building. Hiring and firing are must-have skills. Read, take classes, and review past hiring successes and mistakes. Do whatever you can to hone your abilities.

Raise the Bar

Hold yourself to higher standards next year than you did this year. Challenge yourself to learn to get more done with fewer hours and fewer resources while creating a more balanced life for yourself.

These are just a few of the things you can do to increase your chances for success as a senior executive. I also believe in working with a coach to identify and overcome (or compensate for) blocks in your performance. Success can be had with many different skill sets. The more you learn about yourself and your capabilities, the better you will be able to shape a job that works for you. The more you learn about the capabilities of those around you, the better you will be able to build teams that produce spectacular results.

Do Great Things!

Footnotes for Part 4

(1) Social psychology has shown that rewarding desired behavior is far more effective than punishing bad behavior or non-performance. For reasons that aren’t entirely clear, our culture has evolved around using punishment as the main way of controlling behavior. Unfortunately, punishment doesn’t work very well. Interestingly, animal trainers have known this for years. For an excellent book on the subject, check out Don’t Shoot the Dog by Karen Pryor. back

 

Further Reading

You may also enjoy the article The Executive Mind-Set and my book on business leadership, It Takes a Lot More than Attitude…to Lead a Stellar Organization.

 

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Safety warning: if you use Skype, your contacts may now be exposed

A quick public service announcement for anyone who uses Skype. Executives, VCs, journalists, researchers, and anyone who cares about the privacy of their contact list should read this.

I don’t usually post about computer security, but in this case, it seemed quite serious. It’s also the kind of thing we’re used to from Facebook and LinkedIn, that could have very serious consequences given that people use Skype very differently from those social platforms. People use social media with an expectation of public transparency, while many use Skype with an expectation of privacy.

As of a couple of days ago, the new Skype tells other people how many contacts you have in common. It also offers your contacts as potential new contacts to everyone else in your contact book. This is a surprisingly serious privacy breach.

This means if you use Skype for anything where your contact list is sensitive (conference calls with clients, planning a protest over the skyrocketing price of kitty litter, coordinating your monthly meeting of people relax by knitting exciting underwear), your contacts can quite possibly deduce who other contacts are. Furthermore, if they know about this new “feature,” they can make some smart deductions.

For example, you’re a mergers & acquisitions consultant. You are in talks with MergeMe, Inc. A prospect from WeMergeToo calls you. Immediately after you accept their contact request, they start seeing suggestions that they might know the MergeMe Inc CEO. They don’t, but they know they just connected to you —> they can quickly figure out MergeMe Inc is talking with you also.

I also just discovered I can look up a profile of someone I don’t know (they’re neither a contact nor a friend), log out and back in, and Skype will start suggesting their contacts to me as potential contacts of my own. (I can tell because those contacts have the same last name, physical resemblance, etc.) So this can be used by stalkers, bullies, harassers, and people who wish to research someone and learn who they know.

(This feature can be used for much more targeted research. I won’t go into details here. Suffice to say that you can get pretty specific.)

Microsoft’s support page says they’re considering changing this behavior someday. Of course, by that time, much damage will have been done.

I went through and deleted some of my contacts by hand this morning (it takes forever… in a triumph of “good for Microsoft who cares if the user gets screwed” they make it super easy for you to give them your social graph, and super hard for you to take it back). Even deleted, Skype kept suggesting prior contacts to me. That suggests that they continue to keep that data — and probably call history and chat history as well — for use in “helpfully” building their social graph.

Important note: deleting your contact book isn’t enough. If your associates have you in their contact book, someone can still use the same mechanism to figure out the connection.

My reaction was to cancel my Skype account altogether. But because Microsoft cares SO MUCH about me, the best I can do is schedule it to be closed in 60 days. So for the next 60 days, like it or not, my contacts are going to continue to be exposed.

See: the Microsoft Skype support article

Also note Danida_U’s response from Microsoft: there’s no way to disable this short of opting out from being contactable at all, and there are not yet plans to remove the “feature.” They want to make it easier for friends and family to find you. My suggestion: if you want your friends and family want to find you, you tell them your Skype ID. Problem solved.

I recommend http://zoom.us or http://appear.in as alternatives that don’t “help” you by exposing your contacts to the world.

Millennials don’t save? Of course not. Neither would you.

Millennials don’t save? Of course not. Neither would you.

Why are millennials broke? Systems. Not choices.

I recently read an online discussion in which Baby Boomers and Gen Xers resoundingly chastised millennials who don’t save enough for retirement. It seems that instead, millennials are struggling with student debt. The crowd was quick to dismiss the problem as irresponsible millennials spending too much for college degrees that pay too little (e.g. Art History).

Really? Millennials (raised by Boomers and Gen Xers, by the way) are an entire generation of people who simply made bad college choices at historically unprecedented levels? Get real. Remember who chooses to attend college and decide on a major: An 18-year-old with no real world experience, who probably knows nothing about modeling lifetime financial implications of their decisions. Expecting them to be able to choose well is naive. Indeed, many Baby Boomers and Gen Xers made really bad choices. But when they were college age, the system was different. A bad choice, financially, wouldn’t—and didn’t—cripple you for life.

The fundamental economics of education and saving have changed.

That was Then

When Gen Xers were growing up, a college education cost a total of about a year and a half’s salary. MIT four-year tuition was $40,000 before books and expenses. A graduating student could get a job that paid a salary in the $30,000 range.

Furthermore, students could get jobs that paid enough to make a serious dent in student expenses. On-campus student jobs paid about $10, and a 1/4-time job would bring in $5,000 a year. That’s enough to pay half of the tuition bill. Today, student jobs still pay about $10. Needless to say, it won’t be covering half of the tuition bill.

To make up the difference, student loans fill the gap. Student loan interest rates were comparable to rates offered in savings accounts, so once a graduate started saving money, their asset base could compound at about the same rate as their student loans, so their net worth could be at least somewhat stable.

Starting salaries generally paid a living wage (enough for rent, food, utilities, a bit of entertainment, and savings), without the need for multiple jobs. And a college degree was a genuine ticket to a better-than-average job.

This is Now

Today, a college education costs closer to 4 years’ starting salary. MIT tuition is about $184,000.

Debt loads can’t be easily reduced by student jobs. No jobs available to students can make much of a dent in the $46,000/year tuition. Student jobs still pay in the $10-$12/hour range.

A starting salary of, say, $50,000 (higher than many are likely to get) isn’t actually enough to live in many cities while paying down student debt. While saying “move somewhere cheap” sounds attractive, the kind of jobs that make use of a college education are often located in big cities that aren’t that cheap.

Student loan interest rates are much higher than you can get in savings accounts, they aren’t dischargeable via bankruptcy. And the college degree that cost all this money is simply needed to get a job at all. Except from a certain class of top-tier schools, it isn’t a ticket to a comparatively higher salary.

Our Choices are as Bad as Millennials’

Everything I’ve read about Baby Boomers and Gen Xers is that we suck at saving money. We may have been living nice lifestyles, but we’re anything but role models when it comes to good lifetime financial decisions. But unlike millennials, we lived in a time where circumstances gave us decent lifestyles despite our bad choices. And our bad choices will, again, fall on the millennials. Our retirement years will make their middle-age a living hell, as they struggle to deal with an aging population that saved nothing and expects to be supported.

Millennials probably aren’t better at long-term financial planning than the rest of us, but they likely aren’t any worse. They were born into a set of circumstances, however, where the road to success that worked for us—a college education—had changed. That road, itself, costs more, benefits less, and creates circumstances that would be just as devastating for any Gen Xer or Baby Boomer.

Why business models matter: Understanding health insurance

When you’re making business decisions, one of your most powerful tools is to understand business models. A business model is, simply, how a company makes money. If you want an in-depth definition with examples, check out my article on business models that was written during the first internet bubble, back when PayPal was a startup, Amazon only sold books, and cameras still used film. Almost every example in the article has since captured its market or gone out of business. (Challenge goal: read the article and consider how the companies’ business models did or didn’t change, and how that led to success or doom. Hindsight is a powerful learning tool!)

Become a compulsive business model collector

Often, a company’s business model constrains what it can and can not do. That, in turn, gives it strengths and weaknesses. Learning to spot business models, and do quick back-of-the-envelope calculations on them, will help you become a ninja at spotting opportunity.

When you see a hot pretzel vendor at a ballgame, ask yourself: what’s that person’s business model? How do they make money? How much product or service do they need to sell to make that money? How much does it cost them to make it? Is it a good business? Hot pretzels being one of my favorite foods as a college student, I was astonished to learn that the hot pretzel vendor cleared a six-figure income.

When you pass the neighborhood bookstore, ask how they stay in business? What’s their business model? Why does it work for them, and not for the bookstore down the block that went out of business five years ago?

When you use Facebook, ask and consider: what’s their business model, and what does that imply about the actions they’ll take? Or eBay? Or Uber?

Business models give policy insights

In a recent Facebook flame war, we were discussing different kinds of health insurance systems. Understanding the business model of an insurance company might give you some insight into their incentives and potential actions:

Health insurance companies make money through underwriting profits (premiums minus payouts and expenses) and investment income on the premiums they collect.

Insurance must ALWAYS be priced higher than needed to pay out because all that administrative overhead, salaries and buildings, needs to be covered.

Furthermore, a for-profit insurance company wants to grow profits. That means raising revenues and/or cutting costs.

How can they cut costs? By streamlining operations and finding ways to avoid paying out on existing policies.

How can they raise revenues? By increasing premiums above what’s necessary to pay out on their pool of premiums.

(They can also find ways to increase their investment income, but that’s longer-term and much less under their control. They can even play in the the $1.2 quadrillion derivatives market, which no one really understands, and Warren Buffett considers a ‘Weapon of Mass Destruction’.)

Now, when we formulate our own opinions about healthcare policy (which we all do, rather than simply parroting our favorite pundit, right?), we can at least understand that the business model of insurance companies constrains their actions.

Your assignment:

Every time you interact with a business today, ask yourself:

  1. How do they make money? Where does their cash come from?
  2. In order to make that money, how much do they have to spend, and from where?
  3. What are the levers that their business models allows? What are the risks and benefits of their model?

Pretty soon, you’ll discover you can spot opportunities to bring business models to places they’ve never been used. Often, you’ll discover there’s a reason they weren’t used there. But other times, you’ll find that a shift in business model just might make you the next PayPal.

If you want to read more about [my thoughts on the insurance example implications, keep reading…

Health Insurance Business Models Drive Policy

IMPORTANT DISCLAIMER: This is intended as an example of how understanding a business model leads to confidence in predicting the behaviors of people who use that model. This post reflects my layman’s understanding of insurance business models. If anyone knows better, please please correct me.

For you gentle readers who also don’t know the inner workings of the industry, read this to understand how a business model leads to predictions of behavior. Do not read this for accurate information about the insurance industry.

For-profit health insurance companies must overcharge

I’m guessing that competition will not produce efficient health insurance. Health insurance companies make money only two ways: through underwriting profits (premiums minus payouts and expenses) and investment income on the generated float.

Insurance will always be priced higher than needed to pay out because all that administrative overhead, salaries and buildings, needs to be covered.

Furthermore, as long as we have a market that defines “healthy” profits as profits that grow yearly, there will be ever-increasing pressure to raise profits. That means raising revenues and cutting costs.

You can only cut costs so far on the admin side. But you can reduce your payouts by writing ever more complicated policies that in fact cover less and less. You can also challenge payouts, make the reimbursement process deliberately more cumbersome, lower the ceilings of what you will cover, etc.

And of course, regulation caps permitting, you can always raise revenue by raising premium prices.

Every year, due to the market expectation of continually growing profits, all these forces will come into play. (Premium prices will rise, and people will blame Obamacare or the lack of Obamacare or greed or whatever. It’s just the way growth-oriented markets work.)

Any for-profit insurance company will feel all those forces as a simple matter of doing business. So any for-profit insurance company in a competitive market will be pressured over time to do these things.

Even if their investment income is reliably positive, they can’t control that nearly as quickly, easily, and reliably as all these other forces. And if the company is heavily invested in derivatives (which Warren Buffett calls “Weapons of Mass Destruction”), well, at some point there may be a “correction.”

There are competitive pressures at play, as well. Price wars. When a competitor lowers premium prices below the actual rational value for a given policy, a company is pressured to match that pride and write unprofitable policies in order to compete … resulting in pressure to make up profits from one of the other sources1.

That’s why private mutual insurance companies are a good thing. They still have these pressures, but at least the policyholders own the company so the company’s goals are more aligned with the goals of its members.


  1. This is one source of Warren Buffett’s wealth. When he acquire an insurance company, he gives them permission to stop pricing policies below expected payout values, even if there’s a competitive price war going on. ↩︎

Want effective communication? Drive with their agenda!

Persuasion, influence, or even simple education about a topic is central to most of the communication we send out. But readers today have too much to read and very little attention to spare. If you want to be heard, you need to hook them immediately with something they care about.

This arrived in my LinkedIn inbox today:

Hi! I don’t know you. We’ve never met. But I have a product or service I’d really like you to buy it. So let’s schedule a meeting in your busy schedule where I can convince you to buy my thing. Signed, your new LinkedIn contact.

Wow. Really? I’m impressed. I’m just falling all over myself to cancel the coaching meeting I have scheduled with the CEO of a Fortune 500 company so we can chat about the product you want to sell me. … NOT!

Drive a cold contact from their perspective

If you have a real area of expertise, and you’re attempting to foist it on, er, I mean, share it with someone, temper your sales eagerness by approaching the sale from your customers’ vantage point.

Make an impression on a sales prospect by learning a little about them: Take 2 minutes: visit their website so you know what they do. Read their LinkedIn profile and check out their interests and expertise, so you know where they put their time and attention. Then imagine what problem they might have. If you see someone is interested in “high performing organizations” and has expertise in “leading others,” the problem they might have is in influencing people in parts of the organization where they don’t work.

When you want to pitch them, start from their point of view: from the problem you believe they have. “Hi! You don’t know me, but you may be having trouble leading people beyond your immediate sphere. I’ve helped a lot of people lead from a distance using a variety of technological and in-person solutions. If you’d like a free consultation, let’s talk. Otherwise may I check back in six months?”

If you are selling a high-ticket item, you might even want ask them what problems they’re dealing with. “Hi! You don’t know me, but I work with leaders who are building high-performing organizations and need to lead people at a distance. If you have problems with that, would you mind taking 15 minutes to tell me about it, and I’ll offer any insight into solutions that might work for you?”

This approach is absolutely, utterly, completely not guaranteed to work. But it’s a lot better than reaching out one-on-one to someone with a message that’s all about your needs, rather than theirs.

 

Mind Reading for Fun and Profit!

Want followers? Want to get more from a negotiation than you go in expecting? Want more loyal relationships with your employees? Want people to be committed to your cause? Want deeper friendships and romantic relationships?

Empathy is the key. It’s the ability to understand what another person is feeling, even if their situation is unlike yours. Empathy is the foundation for relationships, for anticipating others’ needs, for anticipating hot buttons, and for being able to help others. It’s even where great inventions and innovations come from—understanding someone else’s world so thoroughly that you solve problems they didn’t even realize were solvable.

Empathy is a skill, and it can be learned. It’s usually learned face-to-face, but in the wonderful world of technology, we don’t get nearly as much facetime as we once did. But it’s still possible to learn and exercise your empathy skills, explicitly.

We’ll use gender and race as examples, because we can all find someone of different gender and race, and this exercise will help us glimpse into their very different worlds.

In day-to-day empathy, you can even use this with very similar people. Because even people from very similar circumstances can have dramatically different experiences.

Their reality may not be directly knowable

My female friend Vinda told me she never walks home alone after 11 pm. I scoffed. I’d lived in that neighborhood for over ten years. We’d even walked home together. It was perfectly safe… no catcalling, harassment, or anything. Ten years.

I began casually asking women who lived in that neighborhood if they walked home alone. My friend Lauren is a black belt. I asked her, and she looked at me as if I was nuts. “Of course. I’ve always had to do that. All women do that. Why do you ask?”

That’s when I realized that my life as a man is fundamentally different from my friends’ lives as women. When I’m with them, the world is one way. When they’re alone, it’s different. And it isn’t knowable by me, because my very presence changes it.

Find out about their life

Ask them about their life. Let them tell you, and trust the answers. This exercise isn’t about deciding whether you agree with them; this is about learning how they experience their life, from their perspective. Ask them to tell you about what it’s like to be at home, at work. What do they worry about? What do they take for granted? Where do they feel safe? Unsafe? Loved? Ignored? Noticed?

If you have an opportunity to learn about and observe their life directly, take it.

Imagine their life from outside

Once you have an idea of their life, make a mental movie of what their life is, as reported by them or as you’ve seen it first-hand. Things to consider:

  • What is it like to live in their neighborhood? Their apartment? Work in their office? What is their commute like?
  • Who are their friends? What do they do together? What clothes do they wear? What do they do for fun?
  • How do other people treat them on a daily basis?
  • What do they worry about? What are they confident about?

For a short time, I was a “Big Brother” in the Big Brothers / Big Sisters program. My “Little Brother” was an African-American boy. When we would walk down the street together, people would turn and stare. Pretty much everywhere. It was a freaky experience for me, as I’d never experienced that. As a black boy, he experiences that every single time he walks through a predominantly white neighborhood.

I imagined what it’s like to live his life. Where he’s never experienced walking through a group of white people without having them look at you with curiosity or suspicion. Where the only people he can relax with are people of color, with cultural norms, language, hopes, and fears that aren’t the same as white people.

Now, take their perspective, literally

Now that you’ve got the movie of their life, rewind it, and mentally step into it, so you’re looking through their eyes. Roll the movie, and notice what their experience is like. The notice the feelings that you/they have as they live that experience.

In one of my more dramatic examples, I was talking with a friend who had said “Yes” when they meant “No,” and ended up doing drugs they really didn’t want to do. My friend explained how important it was to be liked by the group. And in that situation, from their perspective, they thought saying “No” would make them look scared and foolish in front of their friends.

Succumbing to peer pressure is really not a big issue for me. So I decided to empathize.

I imagined the scene from the outside: a group of friends sitting around in a circle, passing around drug paraphernalia. Everyone’s laughing and joking, and saying, “C’mon, just give it a try. We’re all doing it; it’s fine.” I imagine my friend cringing back, but nevertheless accepting and taking the drug.

Stepping into the movie. I suddenly felt a clenching in my chest. A thought came to mind: “I really don’t want to do this, but if I don’t, I’ll be an outsider. They’ll stop inviting me places. I’ll be all alone.” My friend’s fear, longing, and conflict; it all became real to me in that moment.

Your results will vary; that’s a good thing!

Empathy is individual. My Little Brother’s experience may not apply to all black people. Maybe just black men. Or maybe just him. And maybe my imagination of what it’s like to have all eyes watching distrustfully is nothing like the way he experiences it. You can always describe your experience and ask. With practice, you’ll get better at it. We all have the ability to feel empathy Your brain is built to make this work.

Give it a shot

There are a lot of chances to practice this empathy technique. Start with friends and family members, people you already know well. Then branch out. Try someone of a different race or religion. Try someone of a different race or gender. Try someone on the opposite side of a political issue. Try someone of a very different socioeconomic class.

This will be a stretch. You’ll need to learn something about the other person’s situation in order to gain the insight. While you can still get a surprising amount of benefit by simply constructing your own idea of what their life is like, you’ll get the most by seeking out the other person, asking questions, and listening. You won’t be listening to engage or react, however, but to learn. And to trust that, at least during this exercise, they’re reporting their real experience to you.

Empathy is the foundation for human relationships. It’s what lets us build bridges to people who aren’t like us, and even to people who are. Take the time to build your empathy muscles explicitly.

The Fourth Circle of Focus: Scaleability

In my article on focusing your life around what you’re good at, what’s needed, what you love, and what’s scaleable, the “what’s scaleable” is a piece that’s new to me, and may be new to you. It’s worth talking about, though.

Four intersecting circles

The Myth of Hard Work says that if you work hard, you’ll get ahead. And if you work harder, you’ll get aheader. If you work super-hard, you’ll be Bill Gates. (And if you work hardest of them all, you’ll be Batman.) Sadly, that’s wrong.

The Industrial Revolution enabled fortunes to be made because it allowed scale. A lone blacksmith could only make a single horseshoe an hour. In a horseshoe factory, however, a lone machine operator can make dozens of horseshoes an hour. What makes the riches possible is that machines and technology allow us to scale.

Scaleability matters to whatever you do

When I’m working with a coaching client around any project that involves a lot of people (generally it’s a business), we often spend some time honing in on scaleability. The business buzzword “leverage” comes into play here. We look for ways they can scale their results without scaling the work and cost to the same degree.

Some businesses don’t scale well at all. To add one more diner’s worth of revenue, a restaurant needs more kitchen capacity, more food, more server capacity, and time to cook that diner’s meal. Some of those elements can be squeezed out. By offering a limited meal, cooking in advance, and dispensing with servers, fast food restaurants can serve more customers with fewer resources. But even so, scaling still requires a lot of effort and systems.

The internet allows unprecedented scale

The internet’s joys and woes come from the fact that it makes new kinds of scale possible. Craigslist, a single website, can handle all the classified ads. All of them.

How does your business scale? In non-information company, growing a business requires resources up front. If Ben and Jerry’s wants to add a new product like Oreo Ice Cream cake, they have to buy honkin’ truckloads of Oreos, then find customers for all that delicious Oreo goodness.

But in information businesses, growth happens by reaching more people.

How the internet enables scale

Before the internet, some people who sold information sold it in physical form, books and reports. Scaling required more physical resources. Other people sold it electronically, but charged for the access points. Bloomberg made his billions by renting out Bloomberg terminals, over which he was able to cheaply send his real product, the information.

The internet provides a common access point that anyone can use: the web. And everyone already has the physical stuff they need to read the information, monitors and computers. So internet businesses don’t require hard, upfront investment to scale.

That’s why, when revising our company strategy, we shifted from a coaching-driven model to an online course driven model. It fulfills that fourth circle. It scales better.

A 20-minute video about online businesses and scale

I’m helping my mentor Danny Iny achieve scale by introducing him and his products to my list. I happen to believe very strongly in him and what he has to say, so we’ve become affiliates. We introduce each others’ products and services to our audiences, allowing us to reach more people without the kind of investment that would be needed for a traditional business to scale. (WalMart, for instance, grows by having to buy or rent a new store location. Then they have to sweep it. And then hang curtains. And get the utilities connected… Who wants to work that much?)

Danny has a video that lays out the fundamentals of why online businesses are a good thing from a business perspective. Danny grew a seven figure business in just a couple of years, and I’ve found his grasp of business to be superb.

Danny’s video explains the fundamentals of online business. You can check it out here:

Entrepreneurs aren’t primarily risk-takers; their main mindset is something else entirely

Entrepreneurship isn’t about taking risks

Entrepreneurship is all the rage these days, and I’ve had a lot of people ask me if they have “the right personality type” to be entrepreneurs. They think entrepreneurship is about risk-taking. Entrepreneurs must love risk, right? Since obviously, corporate employees love safety, and they’re the opposite of entrepreneurs. This sounds like a great story and a great rationale. It’s just wrong.

Entrepreneurs generally are not huge risk takers. Indeed, non-monetary considerations are often more important. In fact, many entrepreneurs try to minimize risk. What makes them different from corporate employees is that entrepreneurs maximize experimentation.

A business starts with an idea for a product or service that benefits some market: pink widgets. The business launches the widgets, trying to sell them to football players. No one buys. So they make some blue widgets. Some football players buy, but unexpectedly, many teenage goth girls buy. The next year, the company tries selling blue widgets to teenage goth girls in a different country. They sell tons. They’ve found their product (blue widgets) and their market (teenage goth girls). Now they expand into more and more countries, creating billions of the same products to sell to the same market.

In the early lifecycle, the startup is rapidly experimenting and testing the product idea and the market. Once they’ve found the combination that works, the mindset shifts from rapidly-experiment to scale-the-business. Scaling requires getting good at doing the same things over and over and over. Suddenly, it’s all about doing the same thing over and over, getting better as it goes.

This is a profound shift. Experimentation needs quick decision-making, creative thinking, and a willingness to cut corners as long as you get the learning you need. Scale requires rigor, process improvement, and a willingness to have single-minded focus, and tweak the details so you can be as efficient at mass-production as possible.

That is what you need to assess when deciding whether to pursue something entrepreneurial. Yeah, it’s risky if you don’t control your costs. But that’s only part of the equation. Think less about taking risks, and more about doing experiments. Because at the end of the day, entrepreneurship is about minimizing your risk while maximizing the learning you get from rapid experiments with your product and market.

President Trump, viewed as a CEO, part 4

President Trump CEO, part 4: Allocating Capital

 

This is part 4 in a series on President Trump viewed through the lens of being a CEO. Part of President Trump’s great appeal is that he’s perceived as a successful businessperson. He’s even been talked about as being a President with CEO experience.

My article on the duties, responsibilities, and job description of a CEO, lays out four inherent parts of a CEO’s job. These are the parts of the job that, by definition, make a CEO a CEO. The CEO can delegate some things, but others simply can’t be delegated. Capital allocation is the CEO’s fourth main duty.

Allocating capital is the ultimate expression of strategic priorities.

Trump manages money

So far Trump has shown that he takes money very seriously. His position on many international bodies and on America’s role in the world is that all countries should help foot the bill for international costs. His stance so far has, indeed, prompted some countries to step up and contribute more to the U.N.

Domestically, Trump has instituted a hiring freeze on the Government and is presumably going to look at spending within the government.

Like everything else, this is more complicated than it seems. Government spending is a huge driver of the economy, and the government is the largest employer in the country. A business certainly wants to lay off as many employees as it possible can and still keep functioning. That’s how we boost profits.

A government, however, is walking a trickier line. A business is generally not affected by the employees it lays off, or by any reduction in its own spending. But not so, a government. Stop spending too quickly and lay too many people off and it simply drives up unemployment and slows down the economy.

Will spending cuts be done wisely?

In companies, spending cuts can be done by declaration: “cut 30% costs across the board.” This is an attractive way to do things. It’s easy to understand and easy to calculate. But it’s a bad way.

This kind of cutting assumes that there’s 30% waste across the board, and it assumes that all cuts are equal. All cuts are not equal. If you consider a company like Microsoft, cutting 30% of their administrative expenses might be a reasonable goal. But cutting 30% of their programming staff would boost their quarterly earnings while probably destroying their ability to fix bugs and develop products to stay competitive.

Spending cuts + process improvement = win?

The fundamental way to reduce costs in an ongoing business is through process improvement, finding ways to do existing things better.

While the stereotype of the Government is that it is extremely wasteful, that is an oversimplification. Some Government programs (e.g. Medicare) are extremely efficient, much moreso than their private counterparts. Other Government programs (e.g. famously, the Defense Department) have huge amounts of waste.

What matters isn’t whether or not the Government runs a program. What matters is whether there are incentives and structures in place that encourage people to work smarter, work better, and improve continuously.

What gets measured gets … measured

George W. Bush was a Harvard MBA who famously was going to bring business principles to the Government. It’s not clear he did much of that. No Child Left Behind introduced measurement into the educational system, but did so in a way that many teachers view as hindering education, not helping it. The Total Quality movement of the 1970s and 1980s showed that simply setting numeric goals without adding process improvements to reach those goals isn’t, in practice, particularly effective.

The business practices that might help the government use its money more efficiently are those of aligning incentives, re-engineering processes, tying employee pay and promotions to customer feedback, and so on. If Trump implements this kind of thinking in the government, it could, indeed, signal a major shift in how efficiently we use our money.

Big allocations reveal priorities

The capital allocation I was referring to in the CEO job duties article weren’t just cost efficiency. The most important capital allocation decisions are the ones that decide which strategic initiatives stay, and which go.

Whether Trump’s spending will be thoughtful or abrupt remains to be seen. He has already declared his intent to increase military spending, while freezing other budgets. He has given directions for us to build a wall between the U.S. and Mexico. He has stated we will increase infrastructure spending, while possibly withdrawing from international bodies (such as the U.N.) to which we pay dues.

The President doesn’t control the budget

Though Trump can control how capital is allocated within the Executive branch, it’s Congress that sets the overall budget (or often doesn’t, in the cases where we’ve had a Democratic President and a Republican-controlled legislature). Trump can fund or defund the efforts to implement programs created by Congress, but there are limits to how much control he has over the national budget.

Summary

At this point, it’s too early to tell how Trump will allocate capital. If his skills match his claims as a successful businessman, he may well find ways to steamline the government and put it on a path to being more efficient. His larger capital allocation decisions remain to be seen, however.

 

Return to Part 1 of President Trump CEO