Bob MacDonald on Business

Sage Advice on Insurance and Financial Services from the Perennial Maverick

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Phil Mickelson and Ethical Leadership

February 8th, 2010 · Blog, Business Ethics, Business Management

For over 20 years the governing bodies of golf in America – USGA and PGA – have known that what are called “square grooves” on the face of golf irons – as opposed to the traditional V groove – create significantly higher spin rates and make it eminently easier to control the flight of a golf ball out of the rough. Prior to the advent of square grooves, it was difficult for golfers to anticipate the reaction of a ball hit out of deep rough. Sometimes the ball would “fly” and go further than expected; other times it would fall short. In essence, the inability to control the ball out of the rough was considered to be the “penalty” for lack of driving accuracy and keeping the ball in the fairway.

The introduction of square grooves in the 1980s virtually eliminated this “penalty” and ushered in the era of “grip it and rip it!” Those golfers with the ability to hit the drive with the vengeance of a cheated wife could do so with no concern for accuracy, since the square grooves would allow them to hit the ball out of the rough with as much accuracy as those hitting from the fairway. (The introduction of square grooves coincided with the introduction of urethane-covered balls, designed to respond even better to the new grooves.)

Both the USGA and the PGA felt this change “tilted the field of play” unfairly in favor of the player who could hit it long as opposed to those who specialized in accuracy. The governing bodies of golf felt that prior to the introduction of square grooves the game was fairly balanced between a combination of distance and accuracy. Thus, virtually all players are given a fair opportunity to win.

Leveling the Playing Field

In an effort to redress this “unbalancing” of the professional golf game, the PGA announced that starting in 1990, square grooves would be banned. This led to three years of contentious litigation with Ping golf company. The case was settled out of court and Ping wedges with square grooves produced prior to 1990 were “grandfathered” in and continued to be legal on the pro tour.

Then, in 2007 the USGA – which sets the rules for all non-professional golfers as opposed to the PGA that sets rules for the pro-golf tour – announced that as of January 1, 2010 all square groove clubs would be banned. Considering there are millions of recreational golfers using clubs with square grooves (with, as we know, little real impact on our game) the USGA had a phase-in period for their rule – banning new clubs but exempting existing clubs. Wanting all of golf to be governed under consistent rules, the PGA followed suit by also banning the grooves on the same date. Unlike the USGA, the PGA instituted an immediate change for all clubs. Of course, the PGA was still restricted by its legal settlement with Ping, so for technical reasons had to “exempt” Ping clubs made prior to 1990.

And, this leads us to our problem.

It is clear that the specific intent of the PGA rule is to correct the unfair advantage the square grooves offers to the long hitters on the tour and bring back the desired competitive balance of distance and accuracy. However, there is the 1990 loophole in the rule. Golf is renowned for and prides itself on being a game of integrity. With that in mind, the PGA operated under the assumption (always a bad thing to do) that the golfers would understand and comply with the intent of the new rules. They were wrong!

During the first full-field tournament of the year it became public that John Daly was consciously circumventing the intent of the rule by using irons that had been manufactured prior to 1990. He was attempting to use the loop-hole in the rule in order to give himself an advantage over the other golfers. The general reaction to Daly’s action was bemusement. It was John Daly being John Daly. After all, Daly had not been competitive in the game since he played fat and drunk. No matter what clubs Daly used, no longer did anyone view him as a threat to play well.

However, at the next tournament in San Diego, the pot began to roil. It was the first tournament of the year for Phil Mickelson. Certainly Mickelson is one of the leaders and marquis players on the PGA Tour. With the absence of Tiger Woods it could be claimed that Michelson is the Tour’s number one draw. Well, in San Diego, Mickelson (renowned for being long and wild off the tee) let it be known that he was taking advantage of the loophole in the “square grooves rule” by using irons manufactured prior to 1990.

There was an immediate and heated reaction to his decision. It was one thing for John Daly to thumb his nose at the rule, but quite another for Phil Mickelson, an acknowledged leader on the tour. At best, other golfers said Mickelson was “unethical” and at worse one golfer called him a “cheater.” Being called a cheater on the PGA tour is the without doubt the most severe rebuke a player can receive and stains him for life. (Just ask V. J. Singh.)

Let’s be clear here. By his actions Phil Mickelson was not unethical and he certainly was not cheating. Mickelson did what is done in business every day. He complied with the letter of the law, if not the intent. He was ethical in the sense that he did the right thing that was required to be done. Using square grooved clubs manufactured prior to 1990 was not cheating; it complied with the rule. However, what Phil Mickelson failed to do was to live up to his status not only as a leader on the PGA tour, but to his place as a role model for thousands of young golfers.

Phil Mickelson was presented with and passed on the opportunity to elevate himself to the level of being a true ethical leader. (The most disappointing element of this is that he did so in order earn a few extra dollars!) The ethical leader is one who does the right things that are not required to be done.

Mickelson could have reaffirmed the ethics of golf and his position as a leader and role model (45 professional wins) if he had stood up and said, “Look, we all know what the intent of the rule is and we all know there is a loophole, but the right thing to do – even though it is not technically required – is to comply with the rule.” That would have been ethical leadership – doing the right thing that is not required to be done. But Mickelson failed to do so and in so doing he failed himself, golf and those who view him as a role model.

And the Moral of the Story …

Mickelson is certainly not alone in his failure to show ethical leadership. He is unfortunately more the norm than the exception. He acted the way most other leaders are schooled and act. The accepted philosophy of leadership is that so long as it is not illegal; it is okay to do anything possible – even if it is not really the right thing to do – to achieve your objective. This storm around Mickelson will pass (he may even be goaded into not using the wedges), but the opportunity for Mickelson to rise above the rest to achieve status and recognition as a true ethical leader has also passed.

That is unfortunate because our young people need role models to teach them that being an ethical leader means doing the right thing, even if it is not required to be done, and that is far better than attempting to game the rules.

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Obama’s Failed Leadership in Health Care Reform

February 1st, 2010 · Blog, Business Ethics, Business Management

A  New York Times front page article – “Democrats Put Lower Priority On Health Bill” – (Jan. 27, 2010) declared, “With no clear path forward on major health care legislation, Democratic leaders in Congress effectively slammed the breaks on President Obama’s top domestic priority … saying they no longer felt pressure to move quickly on a heath bill . . .”

Despite President Obama’s protestations in last week’s “State of the Union” address, any meaningful reform of the American health care system is, in all likelihood, dead. The cause of death was lack of effective leadership, care and attention. There may be some type of face-saving, watered-down health care legislation, but even that is now doubtful.

There are any number of villains in this story, but the real blame for the failure of health care reform can be placed at the feet of those who most favored reform. At the head of the line is President Obama who, while passionately well-intended in his efforts for reform, exhibited poor leadership strategies that constantly left the legislation on the critical list.

Obama is not the first to wear the horns of failed leadership at the highest levels of our government. Despite the efforts of many political leaders, no piece of significant social legislation has passed Congress since the Civil Rights Act, almost half a century ago. But Obama may be in line for a higher level of criticism, because he entered the fray riding a rousing mandate for action, bestowed upon him by an electorate fiercely passionate for transformation of failed systems. The stars in his populist universe were aligned for him to succeed—and yet he failed.

It is not my intention to be a “Monday morning quarterback” where hindsight is always perfect (Why did Farve throw that final pass?), but the fact remains that President Obama either did not understand or did not exhibit the ability to provide some of the most basic elements of effective leadership. Sometimes the best lessons of leadership can come from failure. It is not the intent of this blog to savage Obama, but to study his mistakes in leadership so that all of us – and hopefully President Obama – can learn from them.

Lessons in Leadership – Define the Vision and Make it Simple

One measure of an effective leader is the ability to take a complex subject (and certainly health care reform is complex) and express it in simple terms that everyone can understand. Obama failed in this area of leadership, because of his inability to simplify his vision for health care reform in terms that everyone could understand and few could rebut.

Obama passionately called for health care reform, but the concept was too broad and that made it too difficult for his supporters to coalesce on a single vision. Obama’s initial mistake was his failure to clearly and simply define what he meant by the term – health care reform. This is like a business leader who calls the troops together and announces that his vision is, “To build a successful company.” That is all well and good, but no one really knows for sure what that means; leaving the vision susceptible to multiple interpretations and, in all likelihood, failure. Obama’s failure to succinctly define the terms of the health care debate opened the door for those opposed to reform to offer their own negative definitions of health care reform.

As a result, healthcare reform supporters were constantly struggling to find a single, coordinated message and opponents were able to confuse the debate by offering a MIRV-like attack, with multiple warheads of specious dissents lobbed from a single missile spelled “N-O.” Because the target was not specific, opponents were able to define the issues to their liking, and throw up multiple, independently targeted attacks that made it difficult for those supporting reform to respond to effectively. The failure of a leader to effectively define his vision for the future immediately puts his followers on the defensive and opens an avenue for opponents to go on the offensive.

President Obama would have had a better chance for success if he had expressed his vision as, “What America needs is a system that recognizes the right of every American citizen to receive basic health care and those with the resources to purchase heath care should have competitive options available.”

If Obama had taken this approach, the debate would have focused on two issues: Does every American citizen have a right to receive basic healthcare? Should there be real competition among private heath care providers?

This approach to the health care issue would have immediately put the opponents on the defensive; forcing them to either go on record as opposed to healthcare for all citizens or as against competition in the health care market. (What tried-and-true politician would want to do that?) Forcing the debate to focus on these issues would have created an implied assumption that reform is needed and forced opponents to debate the solution, not the problem. This approach will always give the proponents of action the upper-hand.

Lessons in Leadership – Outline a Plan for Success

There is a fine line that divides strong leadership with empowerment and micro-management. The leader is obligated to effectively state the vision and set the tone, but in most cases success the objective will be achieved only if others are empowered to achieve the vision and when they are not hindered by micro-management that prevents the exploration of multiple solutions.

However, when a leader is passionate about an objective and when he is faced with what he knows will be strong opposition to his ideas, the best chance for success is to specifically lay out the parameters of his expectations. Under these conditions he will empower others to determine the way to implement the solutions, not the specific solutions themselves.

President Obama compounded his failure to concisely focus his vision with a serious tactical error when he delegated the development of the plan for health care reform to others. (This tactical error was made worse by delegating the design of the plan to 535 maniacally-egotistical, self-serving politicians in Congress!)

When a leader faces a challenging, controversial issue it is his right – really his duty – to lay out not only a clear vision of his objectives, but to offer potential solutions that others can develop and implement.

What Obama should have done was to be specific as to what he saw as the way to guarantee the right of every citizen to obtain basic health care, i.e. expanding Medicaid to the poor and offering everyone an option for competitive health care, i.e. ultimately making Medicare available to anyone who could pay for it. I am not saying these are the right answers to health care reform, but if Obama had focused the debate it this way, it would have marshaled his supporters and put those opposed on the defensive. Instead, Obama put himself in the position of having to constantly respond to multiple schemes offered by his supporters and a plethora of fear-mongering rumors spread by the opposition. This diluted Obama’s focus and strength as a leader and lead directly to the failure of his vision.

Lessons in Leadership – Know the Environment in which You Lead

Leadership is about motivating and inspiring your followers to accomplish the possible, not the impossible. It is the responsibility of the leader to understand what can be accomplished and what needs to be done to do so. The leader must understand that achieving the possible is never guaranteed, but that in attempting to do the impossible, failure is always guaranteed. This means that it is incumbent upon the leader to fully understand the environment – both in terms of opportunity and challenges – in which he seeks to lead.

President Obama clearly demonstrated that he did not understand the environment of Washington politics when he regularly set deadlines for passage of health care reform; only to have to constantly retreat from those deadlines. Each time he did, his power of leadership eroded. Of course, he was not helped at all by the erratic, arrogant and ineffectual leadership of Majority Leader Harry Reid and House Speaker Nancy Pelosi. Nevertheless, Obama did not have a plan to compensate for poor leadership in his own party and that is, in and of itself, a failure of his leadership.

What Obama as a leader failed to understand about Beltway politics is that often success is achieved by shifting focus away from what you actually want to achieve.

If, in 1961, when President Kennedy proposed that America spend billions of dollars to put a man on the moon by then end of the decade, he had positioned it as simply putting a man on the moon, he would have received vociferous criticism and opposition to the plan. Critics would have argued the money could be spent better on earth. However, Kennedy positioned the effort as a “race to beat the Russians to the moon to stop them from putting missiles there and as a way to defeat communism.” With this as the focus, the opposition never gained traction.

If, in 1964, President Johnson had promoted the Civil Rights Act as civil rights legislation, it most certainly – like all other previous attempts – would have failed. Believe it or not, Johnson did not push the civil rights legislation as a way to guarantee rights for Blacks, but as a way for Americans to “pay tribute to our martyred President.” The opposition stood no chance against this approach.

If, in 2002, when President Bush proposed the Homeland Security Act, he had positioned the legislation as a way for the government to tap phones, intercept e-mails and other ways to legalize the invasion of the private lives of all Americans, it is highly unlikely the bill would have passed. Instead, Bush positioned the legislation as the “Patriot Act,” a way to “protect Americans and stop terrorism.” With that positioning, Americans willingly gave up previously constitutionally- guaranteed rights to privacy, without so much as a whimper.

And now here is President Obama who proposes legislation designed to improve the lives of all Americans and it goes down to resounding defeat. It is a clear failure of leadership on the part of Obama for not understanding the environment in which he was leading. If he had really understood his environment, he would have diverted the focus in such a way as to appeal to the best instincts of Americans. For starters, perhaps, “The Right to Health Care for All Americans Act.”

And the Moral of the Story …

Leadership is not easy, but it is simple. Leadership is about understanding and applying fundamental principles of action that give the leader and his followers the best opportunity to succeed. Sometimes leaders fail to comprehend this and make things too complicated, both for themselves and their followers.

President Obama is a very honest, bright, articulate and passionate individual who, I believe, wants to do the right thing. Unfortunately, sometimes these positive attributes can get in the way of real leadership. Sometimes leaders are too confident in their ability and fall in love with their grand schemes and popularity ratings. Sometimes – in their mind – achieving an objective is so obviously the right thing to do (reforming health care) that they assume everyone understands and accepts it as they do. A leader cannot fall into this trap. It is one thing to inspire people – as Obama surely does – but it is another thing to know how lead them to action.

Obama’s failure of leadership in the health care debate demonstrates that he had not learned this lesson. Hopefully, as we can, he will learn from this failure. It is fair to repeat – Leadership is not easy, but it is simple. Leaders make things simple so people can simply do them.

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Ernst & Young Dumbs-Down to Life Insurance Industry

January 25th, 2010 · Blog, Business Ethics, Business Management, Financial Services, Insurance Marketing

Earlier this month Ernst & Young, the international accounting and consulting firm, issued a report titled, “US Life Insurance Industry Outlook.” Reading the report causes one to wonder: Are the people of E&Y really that simple-minded (and would go prove my long-held beliefs about consultants) or were they making an effort to get down to a level of discussion that the life insurance executives could understand?

The report starts with an Enquirer-like expose that, “The year 2010 will be difficult for life insurers …” Da! Can you just imagine the shock and surprise that some life insurance executives felt upon reading that statement? Some probably accepted the announcement with glee, knowing that they will have an excuse if their company does not do well this year. Thinking, “Hey, if the year will be difficult for the whole industry, how can the board blame me, if my company does not do well?”

Thank goodness E&Y does not leave the insurance executives just hanging there with imponderable challenges. No, exposing the level of sophistication they assign to life insurance executives, E&Y outlines five easy steps to take in confronting this “difficult year.”

The action steps proposed by E&Y were:

Optimize capital in response to ongoing pressure.

Wow! Let’s see, so this means if there is pressure on the surplus and capital levels of the company, then the executives should hoard what capital they have and try to get more. Can’t you just see some insurance executives slapping their foreheads and saying, “God, why didn’t I think of this?”

Build more robust risk management capacity with stronger governance and transparency

Insurance companies stumbled into a deep pool of unmanageable risk due to lack of effective risk management, governance and transparency – at both the executive and board levels – so what they should do now is gain a better idea of the risks they are taking by increasing governance and transparency in their operations. Could anything be more insightful? This can’t be the type of information that E&Y actually believes they can charge companies for. It must just be a free teaser to get them into the really good stuff.

Focus on core business and readdress product and distribution strategies.

So that means if you did not do well doing things you don’t do well, then you should get back to what you do well. That’s fine, but is a little like saying, “In difficult times, get back to the basics.” Good advice – unless the basics have changed. Maybe the reason companies got into trouble was because they did not recognize that their core business has become outmoded.

Operate successfully in a continually changing regulatory environment.

Shazam! Give E&Y credit here for going so far out on the edge to discover this strategy for operating in difficult times. In this section of the E&Y report the life insurance executives are told, “…insurers need to evaluate the combined impact of a more intense regulatory environment … capital requirements and government structures.” I can’t figure out from reading this section whether E&Y likes to state the obvious to hear themselves talk or if this is another example of the level of understanding and intelligence they assign to insurance executives.

Improve the effectiveness of company infrastructure.

Thank God that E&Y saved the most insightful revelation for last. It may have been too overwhelming for insurance executives if E&Y had opened with this challenge. In this section of the report that E&Y reveals to all that in the insurance industry, “Expense levels, compared to business volumes are rising.” It may be a little harsh and difficult for some insurance executives to comprehend, but E&Y goes out on a limb by suggesting to insurance executives that in cases where expenses are rising faster than revenues, that there may be a need to reduce expenses, “as a matter of survival.” (In fairness to E&Y, this is one section where they offer a solution – difficult as it may be – by suggesting that a fundamental change in the operating structure of a company may be the only way they will be able to compete and survive.)

And the Moral of the story …

It is difficult to decide which is more irritating: that consultants offer and expect to get paid for such mundane and obvious observations or the insurance executives who hire these consultants to tell them what they should already know.

The suggested actions offered by E&Y are trite, insipid, and simplistic. They offer no more cerebral muscle than the herd-mentality thinking on how to deal with “difficult times.” Even worse, they are wrong. The general theme of the E&Y suggestions to insurance companies in the face of difficult times is that they should “hunker down” and play defense. History has proven that, in times of change, defending the past is never a winning strategy.

And that’s the problem with the life insurance industry:  almost any change is viewed as a threat. It is this fear-of-change philosophy that makes insurance executives susceptible to approaches from consultants like E&Y, because they focus on strategies to resist or delay change, rather than capitalizing on it by aggressively developing a new approach to a new world.

So long as this attitude and approach holds sway, the insurance industry will continue to stumble along in the twilight of past successes, desperately paying consultants to reassure them by telling them what they already know. What a great waste of opportunity, but apparently not of talent, since there seems to be little to waste!

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