Investor’s Business Daily

Issue date: Nov. 14, 2008

Column: IBD’s 10 Secrets To Success

Be Honest And Dependable; Take Responsibility

Follow A Solid Purpose

By Steve Watkins

Be clear about your company’s purpose in order to reach the next level of success. Sure, everyone is in it to make money. But finding something deeper helps your firm stand above others in the long run.

Keys to developing a purpose:

* Find your base. Nikos Mourkogiannis, a leadership consultant and author of the book “Purpose,” starts by asking company leaders why they’re in business and how they’d like to be remembered. Put why before how. “Without the discipline of purpose, you can talk about the hows forever,” he told IBD. “Purpose creates something that stands the test of time.”

* Look at the goal. If you make airplane engines, do you want to innovate or do you want to make them safer? “You’re going to the underlying purpose,” Mourkogiannis said. “Purpose is a game of champions, of good companies that want to be great companies.”

* Get buy-in. You can’t dictate the purpose to staffers. They have to believe it. Get employees involved by gauging their moral ideas and what’s important to them.

* Locate your niche. You don’t have to operate in a world-saving field to develop a purpose that people can embrace. Link the work — no matter how simple it seems — to improving lives of customers or employees, says Rob Galford, managing partner at the Center for Leading Organizations, a Boston-based consulting firm. Even Procter & Gamble can say its toilet paper has a larger purpose. “Soft toilet paper makes people’s lives literally more comfortable,” Galford said.

* Put it in action. Whole Foods Market aims to find the best natural and organic foods, support sustainable farming and pave the way to nurture the body, community and planet. An analyst recently asked Chief Executive John Mackey if the company would cut the quality of some products to reduce prices during the economy’s slump. “We are a mission-driven company and we think our business model is very successful,” Mackey said. “I don’t think we’re going to lower our quality.”

* Find the right talent. You have to get everyone on board. Some people aren’t a good fit for a mission and should go. “I have never done this exercise without seeing some people feel they’re not in the right place,” Mourkogiannis said.

* Personalize it. Put up pictures of people using your products. “That gives people a linkage to purpose,” Galford said. “It’s critically important, in times of crisis, to have something deeply embedded as a value so you know it’s about the customer.”

* Show the impact. Demonstrate that 7,000 people use the product each day, and the value of what employees do hits home.

“It’s not just Mrs. Jones ripping open the package,” Galford said. “It’s tying together the qualitative and the quantitative.”

* Don’t stray. Many lenders slammed by the current financial crisis lost their way. Banks went beyond making standard loans to lending to those who couldn’t afford to borrow. “That’s a loss of purpose in a most dramatic way,” Mourkogiannis said. “At the moment the banks couldn’t make money, there was a complete loss of trust.”

: INVESTMENT BANKS: LOSS OF PURPOSE
“Some US Bankers stuck to Strategies consistent with their Purpose; they were just not living in New York”

Within the week that started on September 14 Lehman Brothers imploded, Merrill Lynch sought refuge with Bank of America and Goldman Sachs and Morgan Stanley relinquished their exalted status as the only stand alone Investment Banks. They petitioned the Fed to henceforth treat them as commoners: they would accept a lot more regulations in exchange for government insurance, as all commercial Banks do.
These are not the largest of the Banks. Unlike City and others in that cohort, Goldman and Morgan were not carrying the heroic Purpose of making Main Street work or operating under pressure to innovate constantly to attract clients. Nor were they supposed to be just servants to their clients as the Credit Unions. Instead, clients were supposed to flock to them; they were the temples of Banking, pursuing excellence and thus setting the standards for the rest of the industry and often for Washington. These were not mere businesses expected to manage themselves well; they were Industry Leaders with the clout and responsibility to also tell others what was to be done and why. And within a week they were no more.

Some called this the death of Investment Banking, which excelled in the US after it built both whole Industries and Countries in Old Europe. In reality it was just the burial of Purpose previously pursued by these venerable institutions. They were the ones who lost the high ground of operating at the interface of competitiveness and morality, of doing well while doing good. They did not fail as managers. Goldman has not missed a single quarter of profitability. They did not perform as Leaders. The question is why?
In 1999, Morgan Stanley really ceased to be a standalone Investment Bank when it merged with Dean Witter, a finance company. Two years later Goldman ceased to be a partnership and went public. The Partners cashed out handsomely and the shareholders did even better- as the new Goldman aggressively expanded its trading and principal investing activities. Within years, investment banking accounted for only 15% of the profits of the financial conglomerate that Goldman had transformed itself into.
Many noticed the transformation but not Goldman itself or the regulator. Goldman continued to be allowed to extend credit up to 30 times its capital while commercial Banks, like The Bank of America, had to manage with leveraging their capital 11 times- as they were subject to a stricter regulatory regime.
In 2003, it seemed that the time of looking at Investment Banking had come. As some might remember, long before we experienced the credit bubble we experienced the dotcom bubble. Investment Banks had pushed the very good idea of connecting through the internet too far, as the idea of securitizing mortgages was to be pushed later. They marketed and then they sold for the worst possible reason: because they could collect upfront fees or could use leverage afforded to them by their privileged regulatory position
President George W. Bush threatened to end their days of “shading the truth”, but nothing happened. As a matter of fact, nobody enjoyed the long party of easy credit launched by Dr. Greenspan more than the Investment Banks.
So these particular Investment Banks that we all knew as the keepers of standards of “Haute Finance” have long gone. I will not write about greed as the cause of their demise. Writing about greed is always an attribution, unless one has evidence relating to actions of individuals. Instead, I will focus on questions of strategy and organization and leadership not exercised.

For some time now there has been disconnect of Purpose and Strategies pursued. Neither growth nor innovation for their own shake was strategic objectives that fitted with the pursuit of excellence.
Looking at it from the organizational perspective, it turned out that the standards of Excellence that Partnerships could pursue were too lofty for these companies, once they became publicly traded and operated under the pressure of having to show quarterly results. Even worse, pursuing what was good for the shareholders and at the same time what was good for clients and their shareholders created more complexity than their leaders wanted to deal with. Freddie and Fannie had a similar – and in their case mortal problem- dealing with complexity when they deviated from their Purpose. Except one would expect better from the two Banks that were seen in a position to advise what is right and what is wrong in the world of Finance.
However, for years now these banks have abandoned Excellence as their Purpose without confronting the consequences. Change or abandonment of Purpose amounts to Transformation. And leading a conscious Transformation is not an easy business. Suffice it to say Transformation will not be achieved overnight now, just because the Fed agreed that Goldman Sachs and Morgan Stanley are no longer Investment Banks. To paraphrase Walter Bagehot: “Honor sunk, but the Commercial Bank has not surfaced as yet.”
As for Investment Banking, it is alive and well. In recent years there has been a convergence of financial services involving Private Equity Firms, Hedge Funds, Asset Management Firms and Investment Banks. What happened last week will just give other institutions the opportunity of moving even more aggressively into Investment Banking.
Morgan Stanley and Goldman Sachs will need some time to readjust, perhaps transform themselves for good by discovering a new Purpose and sticking to it. Their respective tie ups with Mitsubishi and Warren Buffet is a first good step and sets a good example for other Banks to seek to raise capital in the private markets instead of waiting for the Government bailout.
As for Merrill Lynch it has already managed to gain a seat in the future by making a virtue out of necessity. Its acquisition produced the “You Tube” moment of the month by showing that some US Bankers stuck to Strategies consistent with their Purpose. They were just not living in New York.

CAN GEORGIA TRANSFORM OUR WORLD?

The Russians were clear after Kosovo was allowed by the international community to declare its independence: allowing a self governing territory to decide to become a sovereign country would have far reaching consequences. It is the Kosovo precedent that the Russians now invoke to support Abkhazia and Ossetia on their road to become sovereign countries.
The US is arguing that the territorial integrity of an existing country, such as Georgia, should be respected. The Russians seem to have recently perfected the argument that the West used to support the independence of Kosovo: The purpose of the international community should be to advance freedom and self determination. Respecting the territorial integrity of existing countries cannot be the overriding purpose of the international community. Territorial integrity has to be shelved when it does not serve the purpose of self determination and is unenforceable, for example when dealing with territories that have been self governed for a long time. Espousing self determination over respect for territorial integrity is a major brake with the past for Moscow. With the exception of the Austro-Hungarian Empire nobody advocated the respect of territorial integrity as the purpose of the international community more loudly than the USSR.
This brake with the past can indeed transform our world as only questions about what is purpose and what are only means for its achievement can. There are several other regions of what the Russians call their “near abroad” where this argument can transform self governed territories to sovereign countries. Next to Georgia is Azerbaijan, where ethnic and energy tensions can easily lead to the redrawing of the map. Naghorno- Karabakh, an Armenian enclave has been enjoying Russian support and self government for years. Across the pond from Georgia is Moldova, with part of its territory administered by the self proclaimed Dnieper Republic which is inhabited by a Russian speaking population. If territorial integrity has to yield to self determination and to facts created on the ground, Georgia is the first of mini crises that will balkanize the Caucuses. These mini crises will delay the development of the region and they will refuse the West pipelines to the Caspian oil free of potential Russian interference. However, they are unlikely to produce a Russian confrontation with the West. For one the West has no power in the region. The only NATO country with borders to Georgia is Turkey, an archenemy for centuries.
Our world will be transformed for ever if the arguments advanced on Georgia are applied in the Ukraine, which, unlike the Caucuses and the Caspian Region, is in the center of what some would call New Europe. Ukraine is a large country- the size of France. Ukrainians are deeply divided on their aspirations. The West of the Country wants to join the EU and NATO. The East is more loyal to Moscow than to Kiev (Ukraine `s capital). As a matter of fact, 17% of Ukraine`s population of 46 million are ethnic Russians. The Russian fleet is allowed to be anchored in Sevastopol, which is a Ukrainian city. This is allowed by treaty which comes up for renewal in 2017. Many in Kiev want the Russian fleet out and NATO in as soon as possible. This infuriates Russia. The anchorage of the fleet and the surrounding Crimean peninsula were handed to Ukraine only in 1954 by Nikita Khrushchev, the Ukrainian born leader of the Soviet Leader without any regard to the feelings of its Russian population. Similarly the Russians blame the Soviets for the set up in the Caucuses. For one, Georgian suzerainty over Ossetia and Abkhazia would not have existed, they argue, absent the machinations of Georgian born Stalin.
To return to current affairs, both Ukraine and Georgia were assured only a couple of months ago in a Heads of States` meeting in Bucharest that they would eventually be admitted to NATO. If both countries had been admitted, on August 7, the Georgians would most likely have invoked Article V of the NATO Charter for the Alliance to come to their aid with military force. Events did not allow for this to happen. It arguably could have saved Georgia`s territorial integrity. There is now no conceivable scenario, diplomatic niceties aside, stopping Abkhazia and Ossetia from eventually exercising self determination. The Russian campaign has transformed the Caucuses. The real question is the future of Ukraine, with talks for ascension to NATO due to start January 1.
Georgia`s entry into NATO, assuming it renounces the use of force for reestablishing its sovereignty over Abkhazia and Ossetia without explicitly resigning from its national aspirations, could be “ yes able”. NATO and Russia have a good record of keeping frontiers quiet. The pipeline from Azerbaijan would be free of Russian interference. Russia will not be seen as threatening Georgian Democracy, without really giving much up. After all, Russia has no vote on who joins NATO.
Ukraine is another matter. Would “Old Europe” commit to defend the territorial integrity of a country with a large part of its population loyal to Moscow and wishing the reintegration of Russia and Ukraine? A positive decision by NATO would corner Russia. China would silently applaud it, because it would reaffirm the importance of territorial integrity, thus strengthening its hand on Taiwan, not to mention Tibet. India would also be happy thinking of Kashmir. But can “Old Europe” afford such a return back into the future in the name of territorial integrity, a principle that it abandoned in Kosovo?
The new US Administration will have NATO `s enlargement on top of its agenda next January. Senator McCain has absolute clarity of purpose. He always saw the need to contain Putin`s Russia before it could become again a superpower. Enlarging NATO and inviting both Georgia and Ukraine to join it would fit that purpose. An Obama Administration would not take a very different position. The two people opening competing for the job of Secretary of State in a Democratic Administration (Ambassador Holbrooke and General Clark) could not have been stronger in their condemnation of Russia. In his speech in Berlin Senator Obama exposed us to his thinking: Europeans have to step up to their NATO obligations and NATO has to face up to its responsibilities in new theaters, like Afghanistan. But if the Obama Doctrine of collective but global NATO responsibility is applicable on Afghanistan, why is it not on Ukraine, a country at the center of the “ New Europe “ that emerged after the collapse of the Soviet Union?
For almost all Republicans and Democrats with policy experience what happened in Georgia represents nothing new but rather the resurface of Russian imperialism that needs to be contained. Only the Neoconservatives agree with the premise of this article that the arguments voiced by Russia over Georgia can transform the world. They believe, as Richard Pearle stated, that Russia is using the arguments of self determination as a theme of a campaign similar to that launched by the Nazis to annex Sudetenland. The neoconservative recipe is the expeditious entry of both Georgia and Ukraine into NATO.
Russian behavior on the ground of Georgia proper will test the validity of the theory of resurgent Russian imperialism. The neoconservative argument is correct in its analysis of the war of ideas that we are experiencing. The policy recommendations, however, represent thinking by analogy, which is often both appealing and flawed. For one, Georgia is a small country, of unquestionable western orientation, with a democratically elected government which has received a disproportionately high amount of western investment and attention and has oil pipelines traversing its territory. Ukraine could not be more different. And the West cannot afford a new split over it, especially while the largest US, UK and French armada since World War Two is amassed in the Gulf of Iran.