In her book The March of Folly (Knopf, 1984) historian Barbara Tuchman wrote, “A phenomenon noticeable throughout history regardless of place or period is the pursuit by governments of policies contrary to their own interests.” Tuchman might well have said the same thing about business managers .

A review of the actions taken by the management of The Hartford Financial Services Group, (Hartford) during the past few years would lead one to scratch their head and ask, “What were they thinking?” It seems that virtually all the policies (pun intended) and actions taken by the board and the management of Hartford have been contrary to the company’s own interests. (Not the least of which was the hiring of a failed ex-banker as CEO of the company.)

Ms. Tuchman continued, “Wooden-headedness, the source of self-deception, is a factor that plays a remarkably large role in government. It consists in assessing a situation in terms of preconceived fixed notions while ignoring or rejecting any contrary signs. It is acting according to wish while not allowing oneself to be deflected by the facts. It is epitomized in an historian’s statement about Philip II of Spain, “No experience of the failure of his policy could shake his belief in its essential excellence.”

If Barbara Tuchman were alive today and wanted to write about a contemporary “march of folly” in the corporate world, then surely Hartford and its “wooden-headedness” leaders would be the modern Philip II.

It’s Déjà-Vu all over Again

In the past few years, the board and management of Hartford attempted to – and almost succeeded – in undoing all the success the company had achieved during the past 200 years. Their actions drove Hartford – one of the icons of the insurance industry – to the very brink of bankruptcy. Only a bailout by the government, an investment of $2.5 billion by Allianz SE and some friendly changes in regulatory requirements saved Hartford. The management of Hartford pushed the company into this ignominy by proving they were effectively incapable, incompetent and inept managers. Their only success was in taking actions that were contrary to the best interests of Hartford.

In a long litany of incongruous actions, what management did in search of short-term results and larger bonuses was to lose sight of the very pillars of insurance management. Hartford management took risks they did not understand, assumed risks they could not manage and put the company in a position to be anti-selected against by outside forces.

These actions manifested themselves in the investments made by the company and in the design of variable annuity policies. In short-hand, what the management did was to offer an investment product – variable annuity – with the guaranteed benefits of a fixed insurance product. To believe that such an approach to product design is possible is the epitome of self-deception. To compound the problem, management made risky investment decisions designed to support the irrational promises in the products. History shows us that both of these approaches were contrary to the best interests of the company. Yet, management made them with gusto.

Still, give Hartford management a modicum of credit. In an effort to guard against committing the same management mistakes in the future, the company withdrew the sale of these risky products and introduced new variable annuities designed to be more in line with the investment type product they are. Gone are the irrational benefits that “guaranteed” the investment return. Also, the company has tightened up its investment controls.

This is all well and good, but now the management of Hartford has taken an action that demonstrates clearly that they are still more than capable of taking actions that are not in the best interests of the company.

According to InvestmentNews.com (9/1/10 & 9/3/10) Hartford on August 23 sent a letter to customers who had purchased the older variable annuities – the ones with the high guarantees. The letter offered the policyholder a “Personal Retirement Manager Exchange Program Opportunity” (some bureaucrat won bonus points for that title) that would “allow” them to trade their old contracts for the newly priced variable annuity.

Obviously Hartford management has good reason to try to get out from under these older policies that clearly benefited the customer rather than the company. But clearly they are being (to be nice) less than transparent with the customers. While the letter says the new products offer “new features,” it is silent as to what those features might be. And, there is no warning to the policyholders as to the benefits and guarantees they will be forfeiting. This is akin to a bank offering you a new credit card with “new features” which turn out to be higher interest and fees for the bank. To say that this approach taken by Hartford management designed to rid themselves of these customer friendly policies is patently unethical is clearly understatement.

To compound their wooden-headedness, this letter was sent to policyholders without informing the agents who sold the policies, until after it had been sent. The objective was obvious: management wanted to circumvent the distribution system and go directly to the policyholder with this “offer.” The Hartford was rightly concerned that the agents would explain to their clients that the “offer” being made by Hartford was not in their best interests and encourage them to ignore it.

What makes the action of Hartford management so dim-witted was their apparent belief that they could accomplish this clumsy sleight-of-hand without the policyholders or the agents getting wind of it and react negatively toward the company. It was another of Hartford’s clumsy actions clearly counterproductive to its own interests. Or to use Tuchman’s poetry: “acting according to wish . . . not facts.”

Now, not only will the policyholders be upset by the efforts of the company to hoodwink them, but also the distribution system will become painfully inflamed.

Compare this thoughtless blunder with one of the first statements uttered by Liam McGee after being named Hartford CEO. One of the core strengths of Hartford said he, was the “enduring relationships with the distribution partners.” Obviously, there was little iron in the words of McGee. By attempting to exclude the distribution system from this process, he clearly speaks with forked tongue and sends a clear message that the “enduring relationships” are really unimportant. (While the letter did suggest the customer go to the agent regarding the offer, it is clear that the intent was to put the idea of change in the mind of the customer.) Of course, it may not be fair to blame CEO McGee in this situation, since he is just exhibiting the disingenuous attitude toward customers and distribution that he learned as a banker.

In fact, a firestorm of protest has already flared from the Hartford distribution system and from consumer advocates. The distribution system is not only frustrated by the actions of Hartford management, but more important they are beginning to question whether they can trust the company with future sales. And no doubt, once consumers come to understand what Hartford is attempting to pull over on them, they will not be too pleased with the company either.

And the Moral of the Story …

It is obvious that despite all that has happened to the success and good name of Hartford over the past few years, the management of the company is still highly capable of consistently making decisions that are not in the best interests of the company. Clearly the CEO, who has no insurance experience, has demonstrated his inability to change the environment of self-destruction at Hartford.

Knowing the past actions of Hartford management and its current arrogant attitude toward customers and the distribution system, one could rightfully question ever buying or selling a product of the Hartford.

It seems – as I have suggested previously – the only way to save Hartford from itself is for the company to be acquired by another insurance organization that can clean house and return Hartford to the great company it once was.

Of course, history being history and Hartford being Hartford there is every likelihood that Hartford management will continue to cut off its nose to spite a (wooden) face.

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I have been reticent to write about this whole New York “hallowed ground” mosque issue, because it is such phony issue. My belief has been that it would succumb to the weight of its own dimwitted stupidity, but I guess I was wrong.

In reality, the issue is not anti-Muslim, it is anti-American. The idea of blocking the development of a mosque (actually, it isn’t even a mosque, but a Muslim cultural center) in the area of the 911 attacks is the very antithesis of what America has been and should be about. It is the wrong message to send to our friends, let alone our enemies.

However, the way some of the “leaders” in this country have taken up the mosque issue deserves some examination because it provides a good learning lesson about life and business. Those boneheaded, moronic leaders who claim a Muslim center should not be allowed in the general area of ground-zero “out of respect for those killed in the 911 attacks” are making a cynical appeal to the dark side of fear and bigotry.

Fear is the weapon of last resort used by weak, unimaginative leaders. In fact, using fear as a leadership technique is the debasement of leadership itself. Fear is what you invoke in your  enemies (and competitors), not those you seek to lead. Anyone who seeks to use fear to establish credibility as a leader is deserving of only one thought – loathing! Leadership based on fear is a folly that always ends in failure.

Strong leaders, on the other hand, thoughtfully work to alleviate the apprehensions of followers since they realize that fear brings paralysis to performance. Fear confuses, it does not clarify. Fear narrows the vision of those affected and that inhibits solutions to broader issues. As Franklin Roosevelt, one of the great leaders of the 20th century noted in his first inaugural address to a panicked nation in the grips of a great depression, “The only thing we have to fear is fear itself – nameless, unreasoning, unjustified, terror which paralyzes needed efforts to convert retreat into advance.”

I don’t want to dwell on the mosque issue, except to point out that those moronic, political leaders who incite fear and paranoia for personal political gain make a mockery of America’s Constitutional (and First Amendment) promises of religious freedom and tolerance:

“We hold these truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the Pursuit of Happiness….”

Certainly, we must respect the feelings and emotions of those who lost loved ones in the 911 attacks, but we should not do so by sinking to the mindless inhumanity of the attackers. Let’s not forget that not only were Christians killed in the attacks, but so too were Jews, Hindus and yes, Muslims. For political leaders to focus fear on one faith not only violates the principles upon which America was founded, but gives credibility to those in the world who seek to paint America as anti-Muslim.

Wordsworth wrote, “What is fear but voices empty? Whispering harm where harm is not. And deluding the unwary, till the fatal bolt is shot!”

It is discouraging to see that rather than seizing upon the opportunity to show the world that America is safe, secure and strong in its belief of tolerance for diversity of belief, many of our political leaders stoop to fear mongering; only to satisfy their own self-serving, cynical ambitions. So, what else is new?

And the Moral of the Story …

It is bad enough that we have to deal with this type of shallow and superficial leadership from our politicians, but it’s even more devastating because it has direct parallels in business; maybe even your business where you have to deal with it directly in your career.

There are far too many business leaders who believe that fear and intimidation are effective tools of management. They rely on these primordial instincts in an attempt to bully their employees into following their dictates, rather than building compassion and parallel interests to earn their loyalty. These leaders think of fear as motivation. But what they fail to realize is that employees can be led to a destination, but they can’t be sent. Worse yet, fear is contagious; it spreads like wildfire through businesses. Soon, fearful employees become unhappy employees who do only what has to be done, not what needs to be done. This is the path to ultimate disaster and business failure.

If you work for one of these fearful and intimidating leaders, it is important to recognize that such a philosophy is the refuge of the insecure and weak. There is no reason for you to fear such weakness. The reality is that those who use fear as a tool do so because they are manifesting their own insecurities. As Frank Herbert, the critically acclaimed American author has written, “I must not fear. Fear is a mind-killer. Fear is the little death that brings total obliteration. Where fear has gone there will be nothing. Only I will remain.” That’s not a bad philosophy for all of us.

From those political leaders who have shown their insecurity and lack of any real character, we should take a lesson of what not to be. As a strong leader the only fear we should fear is that we fall into the trap of feeling the need to use fear to lead.  And, that would be a moronic thing to do!

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Have you ever been out on the town and had way too much to drink? So much so that when (if) you wake up the next morning you feel so bad that no matter what you do, it seems the only way you will ever get better is to die? Well, that is what happened to our economy. The reality is that there is nothing wrong with the economy. It is simply temporarily reacting to the overindulgent abuses we’ve heaped upon it through our irrational misbehavior.

Don’t get me wrong, drinking alcohol is not a bad thing. Doctors even suggest that moderate consumption of alcohol (especially red wine) can be good for one’s health. But drinking too much can often be a problem. That is the reason why regulators require alcohol companies to put “drink responsibly” in all their ads. If we were to follow that rule and drink responsibly (we may not have as much short-term fun), we would never have to deal with the pain of the dreaded hangover.

If those who impact our economy – business, government and consumers – had been constantly warned to “act responsibly,” our economy would not be suffering the painful hangover it is now. But unfortunately the hedonistic message was to “party”—not to be responsible.

In the aftermath of acting irresponsibly — both fiscally and drinking immoderately — we are tempted to speed the return to normalcy by a shot of the “hair of the dog.” In a drinker’s parlance, that means consuming alcohol (typically a Bloody Mary) to reduce the pain of a hangover. For politicians, the superstition is to pump money into the economy to make things feel better. In either case, however, the result is more wishful thinking than established fact.

Economics 101

The cardinal rule among economists is that availability of capital is essential to the growth of an economy, and in difficult times, some reasonable amount of capital infused into the economy can jump-start and stimulate a recovery. Politicians, who need a strong economy to maintain they place and power, are only too happy to follow this rule. The problem is that in perilous times, such as the current recession, politicians often become drunk with power, and they can infuse to excess.

For most of our economic history the vehicle used to infuse capital for growth or to withdraw capital from an overheated economy has been the tax system. The theory was that reducing taxes would leave capital in the private sector that would be used to stimulate the economy. The belief was that, even with lower tax rates, the new growth would create revenues sufficient for government to cover the cost of the tax cuts. By the same token, it was believed that when the economy was overheated to an extent that caused damaging inflation, the solution was to withdraw capital – through higher taxes or increased interest rates – from the economy.

The first actions of Presidents Kennedy and Reagan – a Democrat and a Republican – both of whom entered office with the economy in the doldrums was to push for tax cuts. When Richard Nixon was in office he sought to control an unstable economy by raising taxes. President Carter attempted to control runaway inflation by allowing interest rates to rise to over 18 percent. To some extent, each of these actions achieved its objectives.

Then came the 1990s and the new millennium when the politicians came to believe that if a little capital infused into the economy stimulates growth, then a lot of cheap capital could produce boom times forever. This worked for awhile, but the “dot-com” crash of 2000 should have been the canary in the coal mine. It was, but we didn’t listen.

In an attempt to continue the party time attitude, the Bush administration, with the complicity of Congress, pushed through the largest tax cut in our history and reduced the cost of capital to virtually zero. (Worse, at the same time huge amounts of capital were being artificially pumped into the economy by the costs of two wars.) For a while these actions certainly created party time for the economy. But just as too much booze turns party time into pain time, so too the actions of government to make too much cheap capital available turned good times into bad times.

The actions of government allowed – indeed encouraged – businesses and consumers to take irrational actions that could not be supported by the reality of the core economy. In essence, the good times were on borrowed time, because they were supported by borrowed money. Companies and consumers went into hyper growth and consumption, not because of capital they had earned or saved, but on borrowed money. Banks made irrational loans because the government continued to dump virtually free money into the system and in many cases even guaranteed the loans. Companies made irrational investments because they lost respect for the value and cost of real capital. Consumers made irrational purchases because of the assumption that their investments (401K) and the “equity” in what they buy (homes) will multiply ad infinitum. The party had to and did end. And just as binge drinking leads to a painful aftermath, we now know that binge borrowing does the same.

The Politicians Continue to Chugalug

Companies and consumers seemed to have learned their lesson, but unfortunately the government has not and that is the real reason we continue to be mired in a sluggish economy.

A hangover is debilitating and painful, but in time our body will recover. That is, unless we continue to indulge in the same things that made us sick in the first place. When the party came to an end, the reaction was not to let the economy heal itself, but to bail out the most egregious offenders and to pump more capital (aka, stimulus) into the system. This action dulled the pain of the hangover, but is a short-term solution that does not repair the core of the economy.

People are worried about the value of homes. They are wishing and waiting for them to return to what they were before. The have a long wait. Today’s values are real. The “values” of yesterday were artificial. The fact is the value of today’s homes are substantially higher than they were 15 yrs ago. If the economy had been allowed to naturally support itself and grow organically, we would be more than satisfied with today’s values. It is like the old story of the guy or gal we met in a bar who seemed so attractive when viewed through beer-goggles, but are what they are in the bright light of reality.

The same story is true for all elements of our economy. Instead of the business and government stimulating real growth through innovation and creativity, i.e. alternative sources of energy, government, business and consumers took the easy path to short term fun and now we are all paying the price.

And the Moral of the Story …

We’re not all are paying the same price. The important moral to learn in this economic calamity is not the price paid by those companies and consumers who have failed, but rather those who have survived and even thrived. The bulk of the companies and consumers who are suffering now are getting what they deserve. (The sad story should be reserved for those who have been harmed through no fault of their own.)

It you look at companies and consumers who have survived – even done well – in this economy they are those who did not fall prey to the excesses of the times. They did not take risks that could not be managed. For the most part, they financed their operations and growth with retained earning and reasonable leverage. They did not make loans to consumers with questionable credit. They did not buy a home they did not need or could not afford, simply because they could. They did not drain the equity in their home to buy things they did not need. They did not borrow money to make money.

In short, they didn’t over indulge. They acted responsibly. It is a good lesson for us to learn. There is nothing wrong with our economy that a little “rational exuberance” won’t cure.

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The most deleterious inhibitor of consistent achievement by an organization is an entrenched bureaucratic culture. Like a creeping malaise that builds and strengthens over time, bureaucratic management, with its insincere, insecure, incompetent and incoherent actions, creates an unhealthy and unhappy work environment that consistently destroys corporate value and disrespects the worth of the individual.

It is unfortunate – but true – that bureaucracy starts small but once it has tainted the culture of an organization, it begins to erode and decline into the depths of failure.  There is little likelihood it will stop until the very soul and success of the company has been destroyed.

The ruinous results permeate every fabric of the business. Bureaucracy suffocates innovation, challenge and change, but perhaps surprisingly, that is its purpose. Whereas the entrepreneurial culture is designed to seek out and challenge the future, the bureaucracy is meant to preserve and protect the past. And, it does so with a malignant vengeance.

In the Beginning . . .

When a company has achieved success, it is natural to want to preserve that success. But the problem is that success, like fame, can be fleeting. The fallacy of bureaucracy is its belief that the environment in which success was achieved can be bottled and frozen in time. But, of course, that is not the case. Success is maintained by responding to constantly shifting conditions and facing new challenges. That’s where bureaucracy loses it way. Its objective is to maintain the status quo, a feat akin to stopping the march of time.

For a young organization, the desire to achieve success is so all encompassing that when it is achieved, the desire to protect it is difficult to resist and this may unwittingly plant the seeds of bureaucracy. Once they are sown, they grow like a smothering buckthorn, producing results that are the opposite of what was intended. Protecting the past imperils the future.

The ability to maintain the success of an organization is more challenging than achieving success in the first place, but it is possible. To do so, the leaders of an organization must take a different approach to the future. To do this the leaders must re-define the definition of “success.” The mentality of the leaders must be that the real objective of the organization is constant and consistent achievement. Success should not be viewed as the objective, but simply the score card for what has been achieved.

Focusing on constant achievement forces the organization to be responsive to change and, in fact, seek it out. There is no room for bureaucracy in such an organization because it is designed to preserve what has been already been achieved, not support new milestones yet to be accomplished. Seeking constant and consistent achievement recognizes that if you are not making history, you are history.

The Entrepreneurial Culture is Everything

It has always been my belief that the success of an organization is ultimately determined by the type of culture and environment in which employees work. Companies that remain vibrant over time create a culture that stimulates, recognizes and rewards employee effort and permeates the entire organization. But here’s the sticky wicket: the culture of an organization is itself, defined and determined by the beliefs and actions of executives at the top of the organization. Success is from the bottom up, but culture is established from the top down.

If the objective of management is to preserve success achieved, this often means an environment that is negative and resistant to any change. Employees working in such an organization often become downtrodden and unmotivated.

As Daniel Boorstin wrote in his book The Discoverers (Random House, 1983) “The great obstacle to discovering the shape of the earth, the continents, and the ocean was not ignorance, but the illusion of knowledge.” Bureaucratic managers who create and preside over a negative corporate culture fail to discover the value of a positive entrepreneurial culture, because of the illusion that what they are doing is the way it should be done.

Examine any company with a negative corporate culture and you will find a bureaucratic management style based on systems and procedures, not performance and progress. The difference between a healthy work environment and a bureaucratic one comes down to the “mindset” of those charged with managing the company. The bureaucratic manager has a “fixed mindset,” believing there is only one way to achieve results. Their aim is to make any alternative or creative thinking as unrequited as an Orwellian “thoughtcrime.”

Bureaucratic managers feel safe and secure with system and procedure. They believe it is easier to preserve success by following a rigid system or set procedure than it is to deal with the vicissitudes of seeking performance and progress. They may be right, but history shows that a fixed mindset in business as to the way things are and should be is a sure path to decline and failure. It was Leon Tolstoy who said (1856), “The people who bind themselves to systems are those who are unable to encompass the whole truth and try to catch it by the tail; a system is like the tail of truth, but truth is like a lizard; it leaves its tail in your fingers and runs away knowing full well that it will grow a new one in a twinkling.”

And the Moral of the Story …

When the success of an organization is defined by what has been accomplished, instead of what can be accomplished, the door is open for bureaucracy to take hold. The only way to defend against bureaucracy and its crippling impact on the performance of an organization is to re-define success.

Success should not be viewed as a place in time or a fixed target, that once achieved is to be defended to the death. Success should be defined as a constant and consistent effort to achieve. Success must be something to build on, not rest on. If such is the attitude and approach of leaders then a culture of achievement will be built and maintained. Bureaucracy will be banished and ultimate and lasting success achieved.

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The nature of a human is to be curious. No living being exhibits more curiosity than a young child. The most often used word in the vocabulary of the young is “why.” Without curiosity there is no way to learn and no way to make things better. America is in trouble today because we have lost our love of curiosity. A society that succeeded based on the celebration of curiosity seems to have become impatient with it and is structured to smother this crucial desire to know and learn.

It starts early. The most often heard answer to a child’s desire to know why something is, is “because.” In school, attention is given to those who have “problems,” but the one who exhibits curiosity is considered a problem. The structure of schooling is “rote and repeat” not “question and challenge.”

Once out of school and into the job market the effort to suppress curiosity is accelerated. There are rules and regulations for all activities. Those who have the temerity to ask “why” are told, “Because that’s the way we have always done it.” The attitude is that lumps are much more easily managed than bumps. The way to get by (even to advance) is to show compliance and complicity with “the way it is.

Those who question and challenge – and become bumps in the road – are viewed as a threat to the status quo and maintaining the status quo is the ultimate objective. The greatest detriment to getting better is the belief that what is, is already the best. Change is feared more than innovation is valued and since curiosity stimulates change, it must be eradicated. Too often the curious worker is told, “Don’t rock the boat.” Sameness is celebrated, while different is despised.

It has not always been this way. America was built on the benefits of curiosity. We always wondered, “What was over the next hill?” America came about because of our desire to escape the “old world” and create a “new world.” With this attitude – in a time shorter than any country – America grew to become a world leader.

The bitter truth is that America no longer leads the way with new ideas, innovation and creativity. America no longer makes the best, we simply buy the best. This transposition of American leadership in all areas – political, economic and cultural – is a direct result of an American society that no longer views curiosity as a virtue.

And look what we’re missing. According to the experts at the website Stepcase Lifehack:

Curiosity makes your mind active instead of passive. And since the mind is like a muscle it becomes stronger through continual exercise, but atrophies with disuse.

Curiosity makes you mind open and observant of new ideas. When you are curious about something, your mind is like a signal-seeking missile that expects, anticipates, and welcomes new ideas related to it. That’s how good ideas grow and blossom.

Curiosity produces excitement into the lives of the curious, as well as those who associate with them.

Best of all, curiosity opens new worlds of possibilities for everyone. Newer, faster, stronger, smarter, cheaper, and more efficiently are just of few of the keywords in the lexicon of the curious. All they all, of course, lead to creating even more new ideas.

And the Moral of the Story . . .

We bemoan our problems and challenges, but are increasingly deaf to the  value of curiosity. Sure, curiosity can be troublesome – even a pain – because it demands validation of what is being done or forces a change to do things better. But only by being curious can we determine what needs to be done to be better.

And this starts with all of us. If we allow others to suppress our natural curiosity, we are as much at fault as they. Our success as individuals – and ultimately our society – will be determined by our ability to question and challenge what is and seek what may be. It may not be easy, but it is ultimately the best way to achieve leadership and personal success.

As Albert Einstein once said, “The important thing is not to stop questioning . . .  Never lose a holy curiosity.” America will move forward again once we understand the value of asking “why?” Tomorrow, start asking that question more often yourself. You’ll be amazed at what this subtle shift of thinking can produce.

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Last month,  Harvey Golub resigned his position as chairman of the board of the besmirched insurance giant AIG. His action brought an end to an ongoing dispute with Chief Executive Robert Benmosche. The crux of the clash between the two men revolved around a fundamental issue faced by corporate management and boards of directors: Who has the power, responsibility and authority – the management or the board – to determine and implement the mission, values and vision of the organization?

It appears that for some time Golub (at right) and Benmosche had been in a power struggle to determine who would set the vision and future direction of AIG. This dispute came to a head over AIG’s need to sell assets to raise cash to repay billions of dollars of government bailout funds. The board approved Benmosche’s plan to sell an AIG unit to UK insurer Prudential PLC for more than $35 billion. However, when the shareholders of Prudential reacted negatively to the transaction, CEO Benmosche pushed to complete the deal at a lower price. The board did not approve the lower price and instead recommended an IPO for the unit to raise cash.

The Golub–Benmosche dust-up is an example of a new type of corporate power struggle. There have always been power struggles among the management of corporations, but seldom have there been such struggles between the board and the management of a company. This type of conflict has been rare, because traditionally the board of directors was made up of friends and associates of the CEO. Indeed, it was accepted practice for the head of the company to be both CEO and chairman of the board. Pampered with status, prestige and healthy pay packages, the board became little more than a cadre of yes-men armed with a rubber stamp for the CEO and his plans.

If we should have learned anything in the past 15 years of exposed corporate fraud, greed and mismanagement, it is that this type of cozy arrangement between the board of directors and management can lead to nothing but problems. Can you imagine the potential for problems and abuse if the President had the power to appoint every member of Congress and they were beholden to him for their job? In essence this is the way the board/CEO relationship operated in the past.

After the abuses caused by the collusive nature of the relationship between the boards and management became obvious, Congress passed the Sarbanes-Oxley bill. The essence of the legislation was to clearly define the responsibilities of the board as representatives of the stakeholders of the company. (Not just shareholders, but everyone who can be affected by the actions of the company.) The legislation made it clear that the CEO and management worked for the board, not vice-versa. Not only were the responsibilities of a director clearly defined, but those directors who shirked their duties were exposed to civil and even criminal repercussions. Directors became legally liable and responsible for the actions of management.

The recent power struggle between the board and the CEO of AIG shows that old habits die hard and that both company managements and boards are struggling to come to grips with the new environment.

CEO Benmosche was obviously chaffing under the concept that he worked for the board and not the other way around. As Paul Hodgson, senior research associate at the Corporate Library, was quoted as saying in a Market Watch (July 18, 2010) report, “The relationship between an independent chairman and a CEO is supposed to be cooperative. But the point of having an independent chairman is that they can stand up to and change the mind of the CEO if they need to. I am not sure U.S. CEOs, particularly CEOs like Benmosche, have got that piece of the theory yet.”

Unfortunately, Chairman Golub and the other AIG directors did not live up to their responsibilities either. Golub offered the lame excuse for abdicating his duty as an independent chairman of the board by writing, “…it is easier to replace a chairman than a CEO.” The remainder of the board also demonstrated their lack of understanding or courage to exercise their rights and responsibilities as directors. It is believed that Benmosche (at left) went behind the chairman’s back and told the board that he could not work with Golub. It was a pure, old-fashioned power play. And as Hodgson noted, “The next thing we hear is that the chairman is stepping down. It is strange that the board would ask the chairman to step down rather than backing him up. The chairman is in charge of the board.”

It is important for the board and management to have a collaborative and cooperative relationship, but the AIG’s board abdication of their specific responsibility to “advise and consent” on the actions of management is a step back to the old ways and sets a bad precedent. As Gary Wolfer, senior vice president and chief economist at Univest Wealth Management, was quoted by Bloomberg (July 14, 2010) as saying, “Having a clearer field, it’s going to be the Benmosche Show going forward.” That is not the way it should be and could lead us back to the problems of the past.

So, what is the best relationship between a board and management?

One could list all the organization obligations of the board, i.e. select management, ensure effective planning, determine and monitor company progress, etc, but, there is a more subtle function of the board. The board should lead the way in fostering an environment of interaction, cooperation, support and parallel interests between the board and management. But that said, the directors should never lose sight of that fact that management works for the board, not the other way around.

Of course it is not the duty of the board to manage the company, but it is the duty of the board to manage the managers of the company. The board hires management and should give them the power to manage. Management’s duty is to develop the mission and vision of the company and the plan to achieve such. The board should use the combined experiences of board members to review, advise and approve the vision and plans of management. Once the board has approved the vision and plans, then management must be fully empowered to implement them without interference from the board.

The board’s responsibility then switches to monitoring, measuring and holding management accountable for the plans they themselves developed. If the environment in which the plans were developed and approved changes or if management wants to make fundamental adjustments to the plans, then these should be taken back to the board for advice and approval.

Using this type of structure, general board meetings should be a fairly simple exercise. The management reports on actions taken and results achieved to date. In addition, management lists those activities planned prior to the next board meeting.

Taking this approach to the board responsibility will create a positive, cooperative attitude that will enable both management and the board to be on the same page. Something that AIG management and the board were not able to achieve.

And the Moral of the Story is …

It is a new world of corporate governance for both the management and directors of a company. Serving as a corporate director has, for the past decades, been not much more than a cap on a career and good times with good buddies, but that has changed.

After what has been a century of little more than lip service to the obligation of the board of directors to represent the interests of stakeholders, Congress has codified the responsibilities of the board of directors. Not only are the responsibilities of the board clearly defined, but they are backed up with specific liabilities and penalties (some even criminal) for board members who fail to fulfill their obligations.

The corporate governance legislation brings reality (or should) to what has been theory, but not practice—that the board of directors is in charge of the company. The management works for the board, not the other way around. It is now clear – backed up by law – that the board’s duty is retain qualified management and then to approve, review and oversee the plans and activities developed by management. The board does not (and should not) manage the company, but in the new world the CEO is appointed by and beholden to the board.

This is a better way to protect the interests of stakeholders, but it is a lesson that apparently the board and CEO of AIG have not yet learned. Shame on both!

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Charles Rangel was indicted by the House Committee on Standards of Official Conduct (seems like an oxymoron if I’ve ever heard one) on a wide variety of ethics charges and will face trial by his peers in Congress. No matter what the outcome of the ethics trial, Rangel will exit a long Congressional career of power and prominence in disgrace. Daniel Schorr passed away at 93, recognized as a person who kept his principle intact in the face of overwhelming political power and the mandates of his employers.

Which one of these men do you think is most comfortable with the life they have lived?

Many readers may be too young to know of Daniel Schorr or to have seen much of his work on television, but his career is a wonderful example and model for those who will face the conflict of personal principles and the power of authority in their careers. It often comes down to a simple paradox. Will our success be defined by our adherence to principle or will our principles be sacrificed on the altar of success?

Charles Rangel represents the many (most) who are willing to trade principle for power. Daniel Schorr represents the few who are willing to forgo power and success in order to maintain personal principle. The irony (and good news) is that as these two men exit the stage, one is disgraced and one is lauded. It is Schorr who is recognized as the most powerful and successful.

A brief review of Schorr’s career will provide good lessons for anyone who will ever be faced with the pressures to conform and avoid rocking the corporate boat at the expense of personal principles.

As Patricia Sullivan reported in the Washington Post (July 24, 2010) “Schorr was as fearless in exposing government misdeeds as he was in taking on his employers.”

Schorr’s national career began in 1953 when he was hired by Edward R. Morrow of CBS, to be an international correspondent for the network. But Schorr made his mark by exposing the abuses of the most powerful. So much so that Richard Nixon had him added to his notorious “enemies list.” The New York Times (July 24, 2010) reported, “Nixon was so angered by Mr. Schorr’s reporting that he was said to have ordered the FBI to investigate him.” When, in 1976, Schorr became aware of and began to expose the abuses of the CIA and FBI he was confronted with death threats and investigations by the FBI and Congress. Not willing to reveal his sources, Schorr was threatened with and almost convicted of “contempt of Congress.” (That’s Schorr on the right testifying in 1976 before a meeting of the House Ethics Committee in Washington.)

And it was not just the powerful in government that Schorr challenged. He held his employers to the same high level of principles that he lived by. Fearful of a negative reaction from its affiliates and regulators CBS decided not to publish the information on the abuses of the FBI and CIA unless Schorr would expose his source. Instead, he gave the information to The Village Voice. For this CBS relieved him of his reporting duties and his 23- year career with the network was over. His defense was, “To betray a source would be to betray myself, my career and my life. I cannot do it.”

According to The Times, when Schorr was later hired by Ted Turner to be the first reporter for CNN, he demanded a clause in his contract making clear “no demand will be made upon him that would compromise his professional ethics and responsibilities.” When Schorr refused to take an assignment that he felt violated the agreement, CNN took him off the air and allowed his contract to expire.

And yet as time went by, Daniel Schorr came to be sought out, recognized and respected for his unwavering adherence to principle. Despite his success and power in Congress, it is doubtful anyone will ever say the same about Charles Rangel.

And the Moral of the Story …

The ultimate question for all of us is this: If we are ever confronted with a conflict between our principles – what we feel is the right thing to do – and what those with power over us want us to do, how will we react?

Daniel Schorr had a clear answer. Advising a group of young journalists he once said, “At least once in your lifetime take a risk for a principle you believe in, even if it brings you up against your bosses.”

If you follow the path of Daniel Schorr and do the right thing at the right time, you will not only feel better about yourself, but others will think better of you as well and you will achieve a success that is real and lasting.

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As I observed all the folderol surrounding the passing of George Steinbrenner, what struck me the most was that many of those asked to comment about him obviously did not like the man and were courteously struggling to find something, anything, nice to say.

There is no doubt that George Steinbrenner was a talented man who achieved much success during his life. (Although a closer examination of his success would show that it was not as great as his PR machine would have us believe and had as much to do with circumstance as talent.) Nevertheless I do not really question his success, but I do challenge his methods.

Steinbrenner was the personification of the idea that, “the end justifies the means.” It says a lot about Steinbrenner that he took pride in (and self-promoted) the nickname of “The Boss,” even though for most it was a form of derision, not an affectionate compliment. In reality, his nickname should have been “The Bully.”

Steinbrenner’s management style was based upon fear, intimidation, greed and the bribery of “buying” (as opposed to earning) loyalty. These are management techniques that I find to be the antithesis of ethical leadership. The objective of this approach is to make “the boss” look good at the expense of the feelings of others in the organization and its future.

Whenever someone’s management theme makes it clear to all that they are “the boss” and the center of all attention, we are viewing someone who is either weak, insecure or an egotistical psychopath. Steinbrenner was probably a bit of all three.

Cartoonist Bill Gallo of the New York Daily News best characterized Steinbrenner’s style by depicting him in a Prussian military uniform, complete with spiked helmet, gold epaulettes and medals, calling him “General von Steingrabber.” (A Teutonic style of management with which I am all too familiar.) Sport Illustrated viewed Steinbrenner as a Napoleonic despot. George Will, the modern historian of baseball, once described Steinbrenner as a “baseball dumb-o-meter.”

Steinbrenner’s leadership strategy was to buy people by paying them more than they could receive from others and then browbeat and intimidate them like they were little more than indentured servants.

A tell-tale example of Steinbrenner’s management style and the-ends- justifies-the-means philosophy was his interaction with one of his top employees (players) Dave Winfield. After signing Winfield to the then largest contract in baseball, Steinbrenner constantly and publicly derided Winfield’s performance. Eventually Winfield was forced to sue Steinbrenner for failing to pay Winfield’s foundation the $300,000 that was guaranteed in his contract. Steinbrenner’s reaction was to pay a shady gambler $40,000 to “dig up dirt” on Winfield. (For this arrogant act, Steinbrenner received a “lifetime” ban from baseball. This followed an earlier “suspension” from baseball when Steinbrenner pleaded guilty to illegal contributions to Richard Nixon and felony obstruction of justice.)

The examples of Steinbrenner’s abusive, intimidating and micro-management style are almost too numerous to mention. Many note that during the first 23 years of his Yankee ownership Steinbrenner made 20 managerial changes. How can someone perform to their potential when they know that with one mistake (even if only perceived) they will lose their job? Steinbrenner was such a micro-manager that he even dictated the type of hair cut his players could have. This polluted work environment caused a number of top players such as Ken Griffey Jr. to list the Yankees as the one team they would never play for; no matter how much money was offered. Others were bribed by Steinbrenner with such large contracts they ignored the situation. And, they paid the price.

In fairness, Steinbrenner is lauded for his financial contributions to charity and community, but this also has its dark side. Heavy publicity was given to his actions and most of the contributions came with the requirement that the facilities bear Steinbrenner’s name. These contributions seem to be the actions of a man with a guilty conscious. It is as if the sinner builds a beautiful church, then God will forgive him.

Steinbrenner was not the only manager to believe that fear, intimidation and the entrapment of high pay is the most effective form of management leadership. He was simply the public face for thousands of corporate managers who believe such an approach is the path to success.

For some, the success of the Yankees is validation that this type of leadership is the best way, but they are wrong. There is no question that under Steinbrenner the Yankees have become the dominant franchise in baseball, but a closer look at history will reveal that in the past the Yankees were even more dominant. The Yankees have been successful because the revenues that could be generated in New York allowed Steinbrenner to buy the most talented players available. This unique situation allowed success to be achieved despite his management style—not because of it. One must wonder if his style would have worked in Cleveland. (A team he attempted to buy before the Yankees.)

As I watched the memorial service for Steinbrenner at Yankee Stadium, I could not help wondering if what we saw were crocodile tears, and the true feelings were of relief, not sadness.

And the Moral of the Story . . .

The truth is that a manager who uses fear, intimidation and bribery to dominate and control others does so out of weakness and insecurity, not from strength of his leadership. In business intimidation makes cowards of the brave and the result of this management failure is wasted time, talent and opportunity.

There should be a new term in management that would immortalize Steinbrenner and his leadership style. When a manager makes it all about “the boss,” seeks greatness for himself at the expense of others, always recruits outside talent rather than developing from within, and all the while seeks to intimidate all around him, then such behavior should be called a “Steinbrenner.” And for my money, the meaning of “Steinbrenner Management” is as clear as a Charles “Ponzi Scheme” or a “Queen of Mean” hotel manager Leona Helmsley.

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LeBron James is being made out to be the villain in all this, but the real scoundrel here is the “system” of management control that LeBron James and many of us are forced to work under.

The system is designed for management to remain in control the employee and nothing upsets or intimidates management more than when an employee uses the system for their own benefit. The real reason that management is so angry with LeBron – as expressed in a vitriolic public relations campaign – is because he used the system that was designed to control him to beat the system. Cleveland Cavalier owner Dan Gilbert has acted like a pre-Civil War Southern slave owner who has had one of his chattels leave the plantation. If LeBron James is “selfish” for exercising his rights under the system, then Gilbert is nothing more than a selfish, ignorant buffoon for acting as he has. Do you think he is concerned for the future of LeBron James or the money he will lose without him?

The Playing Field has Never been Level

From the very start of the game, the system in both business and sports has been designed to allow management to control the actions and future of employees and the athlete. The system is more obvious in sports and may be more subtle in the corporate world, but it is there just the same. The system has been used to take advantage of and exploit both the corporate employee and the athlete.

For example, for over a century, baseball (and every major sport) employed what was called a “reserve clause” in every player contract. The reserve clause had the effect of making the athlete the “property” of the team for which he signed his initial contract. (No wonder Gilbert acts like a jilted slave owner!) The athlete was prohibited from signing and playing with another team – even after the contract expired – unless he was traded or released. As a result, with lack of flexibility and freedom, the players were exploited by the management of the teams. There was no way for the player to protect his future in the event of injury (since management would still control the player at the end of the contract only one-year contracts were offered) and with no competition for the services of the player, management could pay whatever they deemed fit—not what the player might deserve had there been a free-market. (Amazingly, in 1922 the Supreme Court validated the ownership of the players by the team on the basis that sport was an “amusement” and not a business, so teams were exempt from anti-trust or constitutional issues.)

Fortunately, this system was broken 35 years ago, but only by the courageous actions of a few baseball players who were willing to stand up and sacrifice their careers for the benefit of all future players. And, ironically for the benefit of all sports, which flourished after the rules changed.

Let’s look at the system under which LeBron James was forced to work and how he worked the system. At the start of his career James (like all athletes) had no free choice as to where to ply his talents. He was “drafted” by the Cleveland Cavaliers. (One might question the credibility of a “lottery” under which the lowly Cavaliers were able to “win” the rights to draft the already local sports hero LeBron James.)

James signed the (non-negotiated) rookie contract and later even signed an extension so that he spent a total of seven seasons with the Cavaliers. During that time he rose to become the dominant “King” of basketball and Cleveland. (Of course being King of Cleveland is a little like being King of Moldova – there is not much competition). Twice named the league’s Most Valuable Player, James lifted what had been a downtrodden team to title contention every year. Who could ever forget how he personally dismantled the Detroit Pistons in an NBA East Finals. He led a team that, without him, would probably not have even reached the playoffs.

In short, LeBron James did everything and more that would be expected of any employee working for a company. Of course, for his efforts he was well paid. But clearly James also had his own interests and future in mind as he worked under the system.

Like Tiger Woods, Michael Jordan, Alex Rodriguez, Kevin Garnett, and other elite athletes who seek to define their legacy by the number of “majors” they win, LeBron James wanted – more than anything – to win NBA titles. (It is not only the players, but the media and sports fans who define the legacy of an athlete by the number of championships they win, i.e. despite his immense talents and record as a winner, Peyton Manning was never really considered a “great” quarterback until he had won a Super Bowl. Kevin Garnett led the Minnesota Timberwolves to eight-consecutive playoff appearances, but he wanted to play for a winning team. It’s not about money. It’s about personal achievement, something we all seek and treasure. Minnesotans were disappointed when he left, but in his very first year with the Boston Celtics, he finally earned that elusive crown while leading the Celts to their first NBA championship since 1986 and the Celtics’ seventeenth title.

In reality, this is no different than it is in business, where individuals seek to define their legacy by becoming CEO of a large company or by building their own successful company; even if it means leaving their initial or current employer to do so.

In any event, right or wrong, James made the personal decision that the potential for him to win “majors” at Cleveland was not all that high. (Not many top athletes want to move to Cleveland, even if it is to be a teammate of LeBron James. And, can you blame them? Living in Cleveland is like a real-life “Locked Up Abroad” scenario.) James played by the system and when the system allowed him to become a free agent, he used the system to do so. And for that he is vilified as selfish, self-centered, disloyal and a money grabber. (Of course, few noted that he took about $30 million less than he could have earned in Cleveland.)

You have to ask yourself what more does James owe to the owners of the Cavaliers and the sports fans of Cleveland that he has not already given them? Why should James be disparaged as a villain for not being willing to sublimate his personal goals and desires to those of the owner of the Cavaliers and the fans in Cleveland. (How much money has Gilbert made off the efforts of James during the past seven years?) Come on, we are talking basketball here, not a cure for cancer or world peace!

And the Moral of the Story …

Many business executives and corporations operate on the basis that the employee is no more than a “human resource” who should play the rules of the system, dedicate themselves to the success of the company, be loyal, accept what management decides for them and sublimate their personal happiness and future to what management thinks they should be. There are all types of threats – real and implied – used by management to keep the employee in the system. Often there are even efforts to “lock up” an employee within the system.

My advice to those (and I have been there) trapped in such a system is to honestly meet your obligations and requirements, but to ultimately be concerned with your own vision of happiness and success. To do less is to cheat yourself and reduce yourself to nothing more than an employee working under the ultimate “reserve clause.” It takes a certain amount of courage to use the system to beat the system, but the reward for doing so far outweighs the slings and arrows sent your way by those who lack the courage to act and those who simply want to control your future for their benefit.

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The life and annuity insurance industry is stumbling and bumbling along as opportunity passes it by. The industry is devoid of real options, competition, innovation and creativity. This has led to a stagnation of ideas, opportunity and growth. It is as if the industry is on a treadmill; running hard just to stay in one place. The existing companies have shown that they lack the talent, culture and drive to step forward and lead by innovation.

While this situation is bad, it is also good, because it creates an opportunity for new ideas and concepts to appear on the scene to leverage and lead what has become a moribund industry. The only question is whether this will happen. More on that in a minute.

The current state of affairs in the insurance industry harkens back to the image of the industry for most of the 20th century. A handful of large companies dominated the industry with mirror-like products and innovation defined as rehashing the same old products. This was great for the big companies, but severely limited opportunities and options for employees, agents and consumers.

Then in the late 1980s things began to change. The “me-too-ism” of the industry opened the door to new companies that offered fresh ideas and new approaches to product. This created real options for company employees, agents and consumers. During the 1990s real competition was introduced.  New ideas abounded and a whole array of new products was created – and the industry flourished. But, with the turn of the century, this began to change as the industry again looked inward and began to become defensive rather than aggressive.

Those who cannot remember the past . . .

If you think about it, the last truly new product concept to be introduced into the industry was the Equity Indexed Annuity, in the late 1990s. Every “new” product introduced since then has simply been a rehash of existing products. This was accomplished by either re-jiggering the product or adding cumbersome and confusing bells and whistles.

Passing time has produced only greater product uniformity rather than diversity. In an environment where all companies are selling basically the same product, the big companies – those backed by heavy resources – will always come out the winner. The losers will be the small- and mid-sized companies, the agents and the consumer who have few options.

The real loser, however, will ultimately be the industry itself.

Any industry asks for trouble when it turns inward and becomes defensive, rather than seeking out new opportunity and moving forward. That’s precisely what the insurance industry has done. One example of this in-the-box mentality is the insurance industry’s reaction when its best-selling product – Equity Indexed Annuity – came under attack. The response of the industry was to become paranoid and defensive, rather than confident and aggressive.

Some of the more cowardly larger companies wilted under the attacks on the product. They willingly deserted the agents who had been selling it by getting in bed with the very competition that had attacked the product. Some of the smaller companies – having fewer other options – expended valuable time, effort and resources to fight the attacks. For this, these companies deserve credit. Still, the attack on the Equity Indexed Annuity became a serious threat to the industry because the flow of new ideas and products had dried up, causing the industry to become dependent on a single product.

In another area, the industry has been presented with perhaps it greatest opportunity – the retirement income market – yet its inability or unwillingness to innovate means that it is selling income annuity products there were invented 80 years ago and intended mainly for widows and orphans. It is an opportunity that will be wasted unless new ideas can be presented to the market. Alas, new ideas have become an anathema for the insurance industry.

The Bitter Pill has Arrived

As the industry’s interest in and ability to innovate has waned, many companies have been forced to withdraw from the market and leave it to only the very largest. It is like bigger is better, not better is best. This situation may be what the largest companies want, but those who pay the price are agents and consumers who are left with a Hobson’s choice: do business with these few insurance behemoths or do no business at all. This is not a good choice at all — especially for the health of the insurance industry.

The good news in all this, and it’s there if you really look for it, is that by seeking sameness rather than diversity, the companies have forfeited the future and opened up an opportunity for those who have the creativity, innovation and desire to offer new concepts to support those selling the products and the real needs of the consumer.

And the Moral of the Story …

There has been no new blood in the insurance industry for almost 30 years and there have been few new ideas for the past decade. This has allowed the industry to retreat to the old ways where bigness and sameness were valued over creativity and innovation. The options and power are in favor of the big companies and that’s the way they like it. However, it is the very same attitude that caused the old industry to lose it credibility with the distribution system and the consumer. And, it can happen again.

What is needed in the industry is a fresh set of concepts and ideas that will create products and services the agents can sell and the consumer will want to buy. This calls for innovative thinkers who can zig and zag as the rest of the industry lags.

The opportunity is there and the only question is if it will be taken . . .

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