Richard Hunt and Mat Hayward fom the University of Colorado were interested in employees who asked their employer for a loan, because they had no money but, for instance, had to buy a car, pay for their daughter’s wedding, medical bills, buy food and utilities, or faced home eviction. Therefore, they undertook to survey and interview small and medium-sized building contractors in Colorado. No fewer than 67 percent of companies lent at least one of their employees money, with an average of about $1,100. Hunt and Hayward looked at 83 of them in more depth.
The first thing they found out was that, of the 459 loans that these 83 companies in combination handed out to one of their employees, no fewer than 57 percent were completely informal; meaning without any contract or any other formal enforcement mechanism. Why would firms do this? Even if they wanted to lend them money, why not give them a contract for the loan? This was puzzling because making it an informal, instead of formal loan with a contract, left the employer vulnerable to cheating by the employee. Because the employee simply could not pay back, or eventually even somehow inform the tax authorities (since informal loans are illegal). Why would employers voluntarily and unnecessarily take that risk?
Hunt and Hayward theorised that employers granting the loan sometimes deliberately make themselves vulnerable towards the employee – by choosing an informal arrangement rather than a contract – to solicit trust and commitment from the employee. Granting a loan to a valuable employee in his time of need and do that in a way which explicitly makes the employer itself vulnerable could create substantial commitment and reciprocity from the employee, grateful for the loan and honoured by the trust placed upon him.
In conformity with this theoretical perspective, Hunt and Hayward found that informal loans were indeed more often extended when the employee needed the money for something personal and emotional, such as a wedding, a graduation, or to pay medical bills. When the loan concerned buying stuff (e.g. a car), paying off a credit card debt or rent, employers more often resorted to a formal contractual loan.
Moreover, Hunt and Hayward conjectured that employers would be more likely to make such an informal loan (rather than a formal, contract-based one) to employees who they were more eager to keep. And indeed they found that the informal loans were more often extended to better performing employees; those that were neither very young nor old (but just the right age to be both experienced and still have many productive years ahead of them), and at a time when the firm was most dependent on them, because it was still relatively new and small, and did not yet have a big backlog in terms of outstanding work assignments.
The question is: Did it work? Does extending an informal loan – at thus putting yourself at risk of being cheated on – result in improved (financial) performance? Hunt and Hayward showed that the answer is a resounding yes: their findings indicated that employers were better able to retain employees to whom they had extended such a loan. Furthermore, their calculations showed that it resulted in enhanced employer profit. Hence, making yourself vulnerable (by not asking for a formal contract) eventually paid off in financial terms.
Paper presented at the “Sumantra Ghoshal Conference for Managerially Relevant Research” at the London Business School
Our vulnerability is my gain: Linking exchange parties’ vulnerability to informal transactions and firm performance. Richard Hunt & Mathew Hayward (University of Colorado at Boulder)
Paper summary published with permission from the authors.
One of the most noteworthy initiatives that I came across to date …
Here is an unusual blog – it is about something that is not happening; the absence of a phenomenon, rather than its presence. So please bear with me.
One of my pet fascinations is management fads – those ideas about how to rethink or improve companies that become brands and movements in their own right. Over the last 20 years, and probably longer, we have seen wave after wave of management fad. In the late 1980s we had Total Quality Management and Benchmarking; in the early 1990s it was Business Process Reengineering and the Balanced Scorecard; in the late 1990s fads included Six Sigma, Economic Value Added, Knowledge Management, and E-Business. These fads were accompanied by lots of buzz in the business press and specialist conferences, they often became branded practice areas for consultancies, and they became things for companies to invest in because everyone else was doing them. Needless to say, these fads also flamed out – some companies saw benefits from their efforts, many did not, and in some cases (Reengineering for example) the concept became almost entirely discredited.
Interestingly, this obsession with management fads also spawned a whole genre of business books – Beyond the Quick Fix, Fad Surfing in the Boardroom, What’s the Big Idea – to help managers keep track of all these fads and hopefully make better decisions about how and when to use them.
So what has happened over the last decade? Well, I have been watching out for the next big management fad for a while now, and I am baffled because it doesn’t seem to have come along. Of course there have been plenty of ideas and issues kicked around in the management press – I am not suggesting for an instant that we have reached “the end of history” when it comes to management thought. Trendy ideas today include Web 2.0/Management 2.0, Big Data, Corporate Sustainability, Authentic Leadership, and Crowdsourcing/Crowdfunding. But these don’t qualify as management fads in my book, at least not yet – they just haven’t attracted the same level of hype or mass-market adoption that we saw back in the 1990s with Six Sigma, EVA or BPR.
Not convinced? Well, here is some data collected by Daryl Rigby at Bain. He diligently surveys CEOs every year to ask them what management tools (aka fads) they are using. His 2013 data, which just came out, shows that companies are using fewer and fewer tools – in fact usage has been on a steady downward curve, from an average of 17 in 2006 to 9 in 2012 for large companies. And the most popular tools last year were Strategic Planning, Customer Relationship Management, Employee Engagement Surveys, Benchmarking and Balanced Scorecard – nothing remotely new, in other words. The new tools he added in –like Big Data Analytics and Open Innovation – were way down the list in terms of usage.
So there really is something happening here – management fads haven’t disappeared entirely, but they are on the wane, and they have been for a decade. So what’s going on?
Has the supply side dried up? Have we run out of ideas? This doesn’t seem very plausible. The management writing industry continues to grow, and there is no shortage of stuff happening that academics, gurus and consultancies can write about. And while many of these “new ideas” are recycled versions of older ideas, the same can be said about the “new ideas” in previous eras. BPR, EVA, the Balanced Scorecard and so forth – all of these were old wine in new bottles.
Perhaps the demand side has changed? This seems more likely. Some companies still have bad memories of previous fads that cost a lot of money and provided few tangible benefits. And it is possible, as a result, that companies have become more sophisticated in what they buy from consultants and gurus. This is certainly what executives tell me is going on – they say they bring in the consultants to solve a specific problem, rather than to roll out an off-the-shelf solution. Of course they would say that, but there actually seems to be some evidence –this time- that it is true.
But I think there is something else happening as well. I wonder if we should think of management fads as a luxury good. Since the new millennium, the economy has been mostly in pretty bad shape. In these austere times, companies have been focusing on what has to be done – sometimes its cost-cutting, sometimes it’s a focused growth effort around one technology or market region.
Compare this to what was happening the 1990s, an uninterrupted decade of growth. During that period, the “rising tide” of technological change and low interest rates was raising all the boats. Profits were plentiful, so there was plenty of scope for spending on luxury goods that weren’t really needed. And maybe there was a bit more insularity in executive thinking as well – a tendency to copy what the competitors were up to, rather than ploughing your own furrow.
But whatever exactly was going on then, it proved to be fertile ground for the gurus and consultants with their ready solutions. Management fads were a perfect way for executives to convey the impression that they were progressive and modern in their thinking, but with very little risk that the outcomes could be objectively assessed as successful or failed. For the people leading these projects, they were also highly engaging activities – an enjoyable distraction from the day-to-day realities of business.
Management fads, in other words, are a cyclical phenomenon – they rise and fall according to business confidence. This is weirder than it sounds, because many of these fads have historically been about cost-cutting and quality improvement, which should be more prevalent in a down-market, but turn out to be more popular when times are good.
If there is any truth to this hypothesis, it is actually good news – companies have become more focused on doing what’s necessary, and less susceptible to the crazy ideas hatched by academics, gurus and consultants.
But its not all good news. Companies may be relying less on consultants to tell them the solutions to their problems, but they aren’t showing many signs of original thinking of their own either. I believe there is enormous scope for innovation in how companies get their work done – how they make decisions, coordinate activities, motivate their people and so on. But if they aren’t going to ask the consultants to innovate the practice of management for them, companies need to take that task on themselves. That is where the real opportunity lies.
Management thinking is inherently faddish, but there are some perennial favourites that never fall out of favour. Innovation is one those evergreen themes: it is a rare CEO who doesn’t list innovation as one her top four or five priorities.
But innovation is an elusive beast. Setting aside a few well-known exceptions, the vast majority of established firms feel there is a big gap between their efforts and their achievements. R&D investments have been made, stage/gate processes have been built, creativity training courses have been run, and yet the outputs –exciting new products and services—don’t seem to be falling into place.
So what to do? We can look to those old favourites –Apple and Google—and try to learn from them. But it is a flawed approach. Apple and Google have innovation in their DNA; they have many years of success to build on; and they have earned the license to take some risks. So we have to be very careful in applying our learning from these two to our own companies.
I think a more useful approach is start from the principles of innovation – the underlying ideas and themes that have been identified over the years – and to see if we can find ordinary companies that are putting those principles into practice. And when I say ordinary companies, I mean established players that are trying to reinvent themselves, and also mid-sized firms that are away from the spotlight, looking for new and better ways of working. If these companies are successful, then they are likely to be much more effective role models than Apple or Google are.
So what are these principles, and who is experimenting with them? Here are three that I think are really important, with a couple of company examples for each one.
Time Out. It’s a well-established principle that people need slack time to work through their ideas. 3M and Google, among others, have given “innovation time off” to their scientists and engineers. But most companies struggle to justify that level of slack, and aren’t confident it would be well used anyway. So a more focused approach may be more worthwhile. Consider, for example, the UK software company, Red Gate. They first experimented with a “coding by the sea” initiative, where they got a bunch of volunteers to take over a beach house for a few days to see if they could make progress on a software product. This then expanded to “down tools week” which is a company-wide initiative, once a year, where everyone puts their normal routine work on hold and commits to doing something new, something a bit risky, or something that has been bugging them. There is also a “sweat the small stuff” day, once a quarter, for getting on top of the creeping bureaucracy and niggling problems that accumulate over time. These activities provide the necessary time out for employees, but with a reasonable degree of focus at the same time.
Loosely defined roles. One of the biggest obstacles to innovation is the notion of a job description – it is a sure-fire way of narrowing an employee’s focus around someone else’s view of what is important, and of not making full use of his latent skill-set. Truly innovative companies avoid giving people job descriptions, or they find creative ways of encouraging them to join multiple projects. For example, the UK consumer products company Innocent (famous for its healthy smoothies) asks all its employees to help deliver its vision, “to make natural, delicious food and drink that helps people live well and die old.” Over the last few years, its big new product lines – including a healthy Veg Pot and its This Water line – have both come from ideas conceived and developed by mid-level employees.
Tolerance of Failure. It is axiomatic that successful innovation requires tolerance of failure. Some pharmaceutical scientists will spend an entire career working on drug development without a single one of their products reaching the market. Strange, then, that so many of our management processes, the ones that support innovation, are designed to avoid failure and to ignore it when it does happen. We can try to breed tolerance for failure through our skills as leaders of others, but we also need to find ways of institutionalising this approach. Here are a few examples. Tata Group’s annual innovation awards include a category, Dare to Try, for the best failed attempt at innovation. Advertising agency Grey has a Heroic Failure award in similar vein. HCL Technologies has a prestigious leadership development programme which executives have to apply for by putting together, among other things, a failure CV listing their biggest mistakes and what they learnt from them.
Have you noticed a key theme that links these three principles? None of them involve idea-generation schemes. Rather, they are all about translating ideas into action. In my view, many companies get distracted by the allure of new ideas, and they forget that the hard part is taking those ideas and putting them work. That is where the real progress is to be made.
Keynote speaker: Prof. David Teece (Haas School of Business, University of California, Berkeley)
Dinner time Debate: We need more/less managerially relevant research
For: Prof. Ramon Casadesus-Masanell, Harvard Business School
Against: Prof. Costas Markides, London Business School
It is well-documented in the literature on labour markets that personal connections, friendships, and other types of networks matter a lot for finding a job. For example, applicants with friends in the recruiting organisation are more likely to get a job offer.
This may be perfectly rational for the recruiting firm; the friends of the candidate in the organization can be a great source of information about the applicant. As a result, the firm can be more assured of the job qualities of the person. Put differently, the candidate will pose less of a risk – in terms of potentially turning out to be a hiring mistake – if he or she has friends in the firm who have provided inside information. Therefore, employers may be more eager to hire new people who already have friends in the firm.
But professor Adina Sterling from Washington University suspected there might be another reason why job applicants with friends in the firm might be more attractive to an employer than those without. For quite a few jobs – especially if it concerns newly recruited MBA students – applicants will simultaneously apply for multiple jobs and then pick the most attractive offer they receive. And this can be very costly for a firm: the recruitment procedure can be very expensive, with multiple rounds of interviews and tests, but the time the candidate “sits on an offer” before eventually rejecting it may also precisely be the time that the numbers 2 and 3 on the list also secure and accept offers elsewhere. Therefore, understandably, firms are eager to limit the number of rejections they receive from candidates to whom they offered the job, and if they get rejected they want it to happen asap.
And Adina, who did a lot of interviews among employers, theorized that prospective employers would figure that candidates who already have friends in the firm might be more likely to accept an offer or, if they do reject it, do so soon. That is because the internal friendships might make them more attractive as an employee but also because the candidate has a reputation to protect with his or her friends, and feel an obligation towards them and the firm.
But that’s a nice theory and thought, but how on earth can you examine that? Because how could you statistically separate the two effects of 1) employers gain information about a candidate from his or her friends, and 2) the friends might make the candidate more likely to accept an offer?
To solve this problem, Adina chose a clever research setting. She looked at a 158 MBA and law students who had just completed an internship with a company, and then examined whether having friends in that company made them more likely to receive an offer from that firm. This was a clever setting because reason number 1 (gaining information about the candidate through his friends) no longer plays a role here; the employer already knows the candidate very well due to his recently completed internship! Hence, whatever effect is left could be attributed to reason number 2.
Adina indeed found that having friends in the company made it more likely that the applicant received an offer. Overall, her findings indicate that reason number 2 (friends make it more likely that the candidate will accept) is also an important consideration for prospective employers.
Paper to be presented at the “Sumantra Ghoshal Conference for Managerially Relevant Research” at the London Business School
Friendships and Strategic Behavior in Labor Markets, Adina Sterling (Washington University)
Paper summary published with the author’s permission.
Ample research has shown that informal connections between people have a substantial influence on economic life, in terms who deals with whom and how well they perform. We call this “social embeddedness”, meaning that we are all embedded to different degrees in various networks of people, which influences our behaviour and success. One dimension which in a business context has received a lot of research is whether people have a joint educational background, particularly whether they are alumni from the same academic institution.
Professors Guoli Chen, Ravee Chittoor and Bala Vissa thought that this embeddedness research that is focused on educational background could perhaps be especially valid in a Western context (where most of the research has taken place) but that in a different context, such as India, different types of affiliations might also play an important role. Specifically, they wanted to focus on the role of caste (i.e. people being of the same or different castes) and language (in terms of people sharing the same regional dialect).
Research setting: Equity analysts in India
To examine these different dimensions of inter-personal networks, they focused on a particular set of people and relationships, namely equity analysts. Firms listed on the stock exchange will often be followed and evaluated by analysts, as employed by banks, who make buy and sell recommendations to the public regarding the company’s stock.
Perhaps the most important task of such an equity analyst is to forecast – as accurately as possible – the future earnings of the firm. However, to make an accurate forecast, an analyst often has to at least partly rely on information received directly from the company; not seldom in the form of personal conversations with the Chief Executive. And Guoli, Ravee and Bala suspected that when the analyst happened to share the same background with the company’s CEO it would be much easier for him or her to get access to the CEO and his company information; making his earnings forecasts more accurate.
Findings
They tested this suspicion on a sample of 141 Indian firms, followed by a total of 296 equity analysts, between 2001-2010. First of all, they found clear evidence that equity analysts that are alumni of the same academic institution as the company’s CEO were indeed able to make much more accurate forecasts. But, in addition, the same was true for analysts who shared the same background in terms of caste, and in terms of regional language. In fact, the effects were roughly the same size, meaning that these old historical patterns (around caste and language) were just as important in India as the more contemporary ones (i.e. university affiliation).
They then examined the conditions under which these different types of informal ties mattered more or less or whether such ties were indeed always beneficial. They found that older CEOs – who could be expected to be influenced more heavily by traditional patterns – were more susceptible to issues of caste and language than younger CEOs. They were less influenced by joint academic affiliation. Hence, although these old historical patterns matter a lot in India; they matter less for younger people, who are relatively more susceptible to joint academic affiliation.
In addition, they found evidence that these informal relationships were particularly beneficial if it concerned a truly Indian firm (part of a traditional business group). In contrast, such informal ties hurted more than they helped, when the firm in question was an Indian subsidiary of a Western multinational corporation.
Overall, what Guoli, Ravee and Bala’s research shows is that, in a country like India, old historical social structures still matter a lot in the world of business, especially when it concerns firms that are part of a traditional business group. The effect of language (which is analogous to ethnicity) was particularly potent. These effects may begin to matter a bit less for younger people (i.e. since they were especially strong for older CEOs) but they still wield considerable influence on economic life.
Paper to be presented at the “Sumantra Ghoshal Conference for Managerially Relevant Research” at the London Business School.
Which old boy network matters? Basis of social affiliation and the accuracy of equity analysts’ earnings forecast of Indian firms. Guoli Chen (INSEAD), Ravee Chittoor (Indian School of Business), Bala Vissa (INSEAD)
This paper summary is published with permission from the authors.
I am often asked about how sustainability is embedded at LBS and what’s the level of interest amongst our students. I would say that there is both strong interest as well as excitement at LBS in this broader sustainability and social responsibility agenda. And this is evidenced by the multiple initiatives, commitments and engagements that the school has undertaken in recent years. Allow me to mention here only a few of them:
a. LBS is one of the three Hub Universities for the Schmidt-MacArthur Fellowship; a prestigious international post-graduate fellowship that aims to cultivate creative and innovative thinking on the Circular Economy by exceptional students from all over the world.
b. LBS is a partner institution for Deloitte’s Social Innovation Pioneers; a programme that supports socially innovative businesses, providing them with a package of support to help them grow to scale and become investment-ready.
c. Moreover, our Dean in collaboration with Accenture (in the past) and Deloitte (at present), regularly hosts breakfast events in the form of roundtable discussions in order to engage with a high level corporate audience on issues of common interest and for which research is taking place at the school. Some recent topics include “Sustainability as a lens for growth”, “Building Stakeholder Trust”, and “The Drivers of Corporate Social Innovation” among others.
d. My own research agenda in the sustainability domain has been generously supported not only by the school itself, in the form of readily available research funds, but also through additional funds for specific projects made available by the Deloitte Institute of Innovation and Entrepreneurship; a long-term collaboration between LBS and Deloitte.
e. Finally, sustainability is an issue that often features as part of the school’s flagship conference, the Global Leadership Summit. This year, for example, Prof. Lynda Gratton is leading our keynote conversation on “what role should business leaders play in driving positive social, economic and environmental change” joined by two esteemed guests: Unilever’s Paul Polman, and Deloitte’s UK CEO, David Sproul. At the same summit, I am personally participating as a panellist in a Big Idea Session to discuss “the role of capital markets in creating a sustainable economy”, joined by UN PRI’s James Gifford, Alexis Cheang, Director, Governance & Sustainable Investment, F&C and Giles Keating, Head of Research for Private Banking and Wealth Management, Credit Suisse.
Since I joined LBS in 2009, I have witnessed a rapidly growing interest from the MBA and other degree programme students but also a growing interest across cohorts, backgrounds and nationalities. This is apparent not just through the daily interactions with our students in the classroom, but also through the numerous student-led activities that are being organized.
In fact, the Responsible Business Club – that will become a Net Impact club next year – has been one of the fastest growing student clubs in recent years. At the same time, LBS students engage with issues of sustainability and social responsibility through other student-led clubs and initiatives such as the Energy Club, which organises very successful annual events including the Global Energy Summit, and the Clean Tech Challenge. Moreover, LBS students participate every year, and also LBS is a partner university of the Global Social Venture Competition.
Importantly, this year, the Responsible Business Club in collaboration with the Industry Club have organized the first ever LBS Corporate Sustainability Conference, due to take place on May 22nd, with the participation of leading executives from the sustainability space, such as Mike Berry of Marks & Spencer.
I expect in the next couple of years that this interest will keep growing, and indeed, that such activities and initiatives will proliferate on campus and across our degree programmes.
More broadly, embedding sustainability and social responsibility in b-school education is a domain where change is more evolutionary rather than revolutionary. And it is a change that requires motivation, co-ordination, and engagement of multiple stakeholders, including students, faculty, institutions as well as the broader academic system (in terms of publications, conferences and summits).
What I have also seen is that this evolutionary change is already well under way. For example, this year, the biggest global academic conference for business and management – the Academy of Management – has as a theme the issue of Capitalism in Question. Moreover, the major Strategy conference this year, organized by the Strategic Management Society (SMS) has as a theme of Strategy and Sustainability.
Relatedly, in recent years we see more and more specialised conferences around sustainability taking place with perhaps the most prominent one being the annual academic (and practitioner) conference organized by the Alliance for Research on Corporate Sustainability.
There is no doubt that the attention being paid by these major (as well as other specialized) conferences on issues of sustainability and social responsibility is reflective of a shifting mind-set in terms of such issues becoming part of mainstream research, and indeed becoming core to the study of organisations. Another strong indication is the establishment of EABIS (of which LBS is a member); a network of global companies and leading business schools committed to “mainstreaming sustainable enterprise in business and policy research, executive learning and management education.”
Furthermore, we see other excellent initiatives that aim to co-ordinate multiple stakeholders, both companies and business schools, to conduct rigorous and relevant research and share insights on sustainability issues. Indicatively, I mention the Network for Business Sustainability (NBS), the GOLDEN for Sustainability network and the Centre for Responsible Business, among many others across the world!
I strongly believe that as we witness more and more rigorous and relevant academic research taking place across business schools and the gradual mainstreaming of sustainability in the journals, that we will concurrently witness the proliferation of more courses as well as a higher level of integration of issues of sustainability and social responsibility in business school curricula.
We hear more and more talk about how the traditional model of business schools will be annihilated by the disruptive innovation of on-line education. An increasing number of voices can be heard to proclaim that business schools with their lectures and study groups are doomed, antiquated, overpriced, and that people who doubt that are just in denial and one day will wake up finding themselves obsolete and plain wrong.
And, arguably, case studies on the effects of disruptive innovation conducted in industries ranging from airlines and newspapers to photography and steel mills, have shown that often the established players in the market are initially in denial, slow to react, suffering from hubris and, eventually, face crisis and extinction.
Yet, when it comes to on-line education, and its potentially disruptive influence on higher education, including business schools, I doubt that on-line education will replace face-to-face lectures and study groups.
The arguments that people use to proclaim that traditional business schools will be replaced by on-line education include the notions that it is much cheaper, can be more easily accessed by a much wider audience, and customers (students) can access the materials wherever and whenever they want.
And this just reminds me of the printing press.
Oral lectures have been around since the times of Socrates and Plato. I am sure when the printing press was invented and became more widespread and accessible, an increasing number of voices could be heard to proclaim that such lectures and schools were going to be replaced by books. That is because books are much cheaper, can be more easily accessed by a much wider audience, and students can access them wherever and whenever they want. But they did not replace face-to-face lectures and study groups.
And that is because books and on-line educational resources offer something very different than the traditional lectures and school community. They are complements rather than substitutes. Of course the arrival of the printing press quite substantially changed schools and education; business schools without books would be very different than they are today. Hence, it would be naïve to think that on-line resources are not going to alter traditional business school education; they will and they should. Business schools better think hard how they are going to integrate on-line education into their courses and curricula.
But this means that it offers opportunities rather than a threat. And reseach on the effects of disrputive innovation – for example in newspapers – has also shown that established players who treat the arrival of a new technology as an opportunity, rather than as direct substitute, are the ones that are most likely to survive and prosper.
Freek Vermeulen is an Associate Professor of Strategy and Entrepreneurship at the London Business School. In 2012, BestOnlineUniversities elected him number 1 in their global list of “top 100 web-savvy professors”. You can find him on-line at http://www.freekvermeulen.comand at @Freek_Vermeulen. He regularly blogs for Forbes, the Harvard Business Review and - of course – The Ghoshal Blog.
