In one of the most intriguing articles I’ve read in a long time, The Economist’s Capitalism’s unlikely heroes suggests a different perspective on the rise of activist hedge-fund investors. These brash and vocal billionaires take small positions in public companies and act to fix mismanagement by trying to convince other shareholders to support cost-cutting, spin-offs, and returning cash to shareholders.

Unlike buy-out private equity, the activist hedge funds buy only a small amount of shares, and so they neither burden the target with loads of debt nor strip companies of their assets (that’s so 1980s). Unlike Wall Street investors, activists get actively involved in management decisions. Naturally, companies’ chiefs abhor them. Critics call them vultures. Boards try to poison-pill them.

More interesting than the acrimony between companies’ top executives and tormentors like Bill Ackerman and Dan Loeb is the phenomenal rise in the level of activity of these activists’ funds. According to The Economist, they’ve got $100 billion in their war chests (about 20% of all hedge-fund capital inflows in 2014). Last year they launched 344 campaigns against public companies including P&G, Apple, Microsoft, Pepsi, and even Netflix. As shocking as it may sound, one out of two companies on the S&P 500 index has shown an activist shareholder on its stock registry in the past five years.

Why is there such an increase in activists’ funds? Have companies gotten worse and caused an immune response?

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No one adopts a strategy expecting it to fail, yet strategies fail. That doesn’t happen on purpose but it also doesn’t happen by accident.

Christele Canard, founder of Switched On Leadership, interviewed Competing.com co-founder Mark Chussil for the cover-story subject why strategies fail. You can read and download their wide-ranging discussion here.

Christele and Mark talk about:

  • Why smart strategists believe their strategy will work and what happens when they find out in business war games that it won’t.
  • What happened when Mark built a strategy decision test technology (patent pending) and his own strategies didn’t work so well. (Hint: first, he looked for a bug in the software. There was no bug.)
  • Why people are so comfortable thinking inside the box and what it takes to get them to go outside.
  • What’s wrong with “I did this and the result was that” reasoning.
  • How people can expand their strategic thinking with a simple question.
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The cult of celebrity is not only present in entertainment, sports, and politics, it’s in business as well. CEOs that get the most attention aren’t necessarily competing better than the rest. In the news doesn’t mean in the know.
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Here’s a true story. A friend of mine, Bruce Hamilton, won the Professional Bowlers Association (PBA) championship some years ago. He laments that his skill is in bowling and not in golf. His prize was nice but the Professional Golf Association (PGA) championship paid seven times as much in that year. Would we say the PGA champ was seven times as skillful as my friend?

In 2013, the PGA champ was paid 28.9 times as much as the PBA champ, up from seven times. Would we say that skill at golfing is growing faster than skill at bowling?

How many top golfers can you name? How many top bowlers? (I can name one.)

We have, in business, a cult of celebrity rather than a cult of strategy. Try this: who’s the CEO of Facebook and who’s the CEO of DuPont?

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“The Sound of Competing” Episode 2: Harmony Versus Confrontation

Facing reality is more important than being nice.

Aversion to confrontation is embedded in many national and corporate cultures. Unfortunately, that niceness feature can turn into a nasty bug when it enables bad strategy and bad management.

Coca-Cola recently decided to issue stock that will dilute ownership of existing stockholders in order to pay huge compensation to top management. How huge? $24 billion. Twenty-six states in the USA spend less than that each year. That seems excessive, to put it mildly, even if you assume Coca-Cola’s top executives are the most talented people in the world.

Warren Buffett, Coca-Cola’s largest stockholder, abstained when the Board voted even though he thought it excessive too. He didn’t want to create a rift with management. That’s the downside of nice. Too much harmony, too little confrontation, too bad for shareholders. Shareholders at other companies, too. “Well, Coca-Cola did it for their executives…”

Then there’s confronting reality. The culture of the large automobile companies in Detroit has long been notorious as good old boys who don’t rock the boat. Look at what happened to GM when it chose to keep product defects tightly under wrap rather than face the issue head-on. This year it will probably recall more cars in the USA than it will sell.

If you don’t create a safe forum to say, aloud and in time, that the king has no clothes, the rest of the world will do it for you, and not so nicely. It is not a mere business school cliché, as so many companies discover too late.

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“The Sound of Competing” is a new podcast from Competing.com. It’s conversations from Ben and Mark, plus the occasional reckless guest. It’s remarkable. It mixes serious concepts with humor. It’s edgy without sacrificing critical thinking. It’s the antidote to the silly and shallow. Also, there are titanic battles between good and evil. A ping pong match between two strategy giants resulting in commentary smart enough to listen to.

Subscribe by RSS feed

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Fair notice: this essay has a trick title.

Mark Zuckerberg, Facebook’s Co-Founder, Chairman, and CEO, recently spent up to $19 billion to buy WhatsApp. You might have heard.

Whether Mr. Zuckerberg overpaid is a subject of frenzied speculation for those who must have an opinion. We do know that no one else thought it was worth more; rather, that no one else with a spare $19 billion thought it was worth more. We know that because Mr. Zuckerberg was 1) willing to pay 2) more than anyone else. Otherwise the media would be all aflutter about what someone else was uniquely willing to pay.

Of course no one knows what WhatsApp is worth. To know what it’s worth implies full know­ledge of the future, including a host of related matters such as the skill Mr. Zuckerberg and his team will bring to bear, how much it’s worth to Facebook to prevent someone else from ac­quiring WhatsApp, what Mr. Zuckerberg could have hit had he aimed his $19 billion else­where, and much more. (In other words, otherwise.) Google, another potential acquirer, had its own calculus.

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We often ascribe magical powers to individual executives, seeing them as the embodiment of progress. If they just put their mind to it, they can wake up complacent companies, rejuvenate aging innovators, recapture market dominance, and cure baldness.

Sometime they can. Often they can’t. No matter how hard Paul Ottelini tried, he could not revive Intel, or break through its PC mentality. Steve Ballmer was not able to change Microsoft from a dominant player in desktops and laptops to a dominant player in mobile. Carly Fiona did not rescue HP from decline. Eddie Lampert did nothing for Sears/Kmart. We like to believe in heroes and heroines. Disney has this effect on us. But in reality they often work within environments, internal and external, that shape outcomes more than the heroes and heroines themselves.

General Motors has a new chief, Mary Barra.

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“You don’t have to be a psychopath to work here, but it helps.”

Have you suspected your CEO is a psychopath? How about the president? How about the gover­nor of a state that borders Delaware, New York, Pennsylvania, and the Atlantic? (Hint: it rhymes with “Boo Jersey.”)

It won’t do you any good to go partisan on me; they probably are psychopaths. Don’t blame me. Blame science. Arthur Fallon, a neuroscientist and author of The Psychopath Inside, recently appeared on Anderson Cooper’s show on CNN with the amazing discovery that most successful, famous people, in politics and business, score relatively high on a psychopathy spectrum.

When you think of psychopaths you probably think of serial killers, but only some psychopaths are criminals. Psychopathy is a lack of activity, visible on scans, in the areas in the brain responsible for emotional empathy.  It shows up as a cluster of traits including ruthlessness, fearlessness, narcissism, charm, charisma, impulsivity, persuasiveness, manipulation, and a lack of conscience. Fallon describes those traits as “part of leadership skills.” Now can you start seeing your CEO and it’s-all-about-me politicians (but I am redundant) fitting that profile?

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