Dow 10,000 and 10% Unemployment: A Dangerous Reciprocity That Signals Need for Change

Recently, both the Dow and the unemployment rate almost simultaneously broke historical milestones, one good (Dow 10,000) and one bad (unemployment 10%). The lock step ascent of these two metrics has continued since the beginning of the year:

 

Dow Jones Industrial Average

(Source: moneycentral.msn.com)

Unemployment Rate

(Source: BLS)

January, 2009

8,000

7.6

February, 2009

7,062

8.1

March, 2009

7,608

8.5

April, 2009

8,168

8.9

May, 2009

8,500

9.4

June, 2009

8,447

9.5

July, 2009

9,171

9.4

August, 2009

9,496

9.7

September, 2009

9,712

9.8

October, 2009

9,712

10.2

November, 2009

10,246

?

How long can this reciprocal advance go on before it unleashes an “un”virtuous cycle of fear, decreased consumption, arrested innovation, less revenue, more cuts, more fear? A genie that, once set free, will be very hard to put back in the bottle.

Are We Falling Back on Out-dated Short-Term Strategies that Could Undermine the Fragile Recovery?

We are in the middle of the worst employment crisis in decades. Some economist are predicting that jobs won’t recover until 2013 and could climb as high as 12%-13%, and even 15%. I agree with former Secretary of Labor, Robert Reich, that “in the end, this is a self-defeating strategy.”

Early in the crisis, I started advocating a more flexible approach to cost-cutting that, wherever possible, minimizes the level of job cuts by finding alternative ways to manage labor and operating costs. A year later, a number of companies have incorporated many forms of flexibility in how, when and where work is done into their downsizing strategy.

Now they face new challenges in the gray post-recession/ pre-recovery zone. For the past three weeks, I’ve blogged about these new issues and how they can be addressed (here, here and here), but this time it’s different. There isn’t the same sense of urgency I felt at the height of the crisis around the subject of finding ways to keep as many people employed as possible. This is unfortunate, because we are at a key point in the recovery where falling back on old, short-term ways of operating could undermine the fragile economic progress we’ve made.

But short-term thinking is deeply entrenched and rewarded by our system, so it’s not surprising that with the “crisis” over we’re falling back into old patterns. These patterns are reinforced by gatekeepers (e.g. leaders, analysts and investors) who favor quantitative metrics over qualitative “softer” levers like leadership, vision, employee engagement, discretionary effort, and innovation. Why? Drawing upon my years of experience as an analyst and as a graduate of a top MBA program, quantifiable outcomes are more easily understood, mastered and rewarded. The qualitative is tougher, and quite frankly, not well-understood or valued. Where’s the visible, predictable result? Where do “leadership” and “engagement” show up on the balance sheet or in the cash flow calculation?

It Began in Business School…

I was surprised to encounter this quant-primary focus first hand business school. After seven years of financial analysis as a banker, I went to business school to learn about the people-side of business. I naively assumed others shared my enthusiasm for the “harder” and “softer” aspects of management. I was thrilled when an Organizational Development/Leadership class was mixed in with the first year requirements of Finance, Marketing, and Cost Accounting. Let’s just say a number of my fellow classmates didn’t share my passion.

While I sat at the edge of my seat soaking in concepts of motivation, reward, and change management, others used the time to catch up on their work from other classes, read the newspaper, and good-naturedly rib me. They weren’t being disrespectful. They just didn’t think it was important. They were there to be brand managers, strategy consultants, stock analysts and investment bankers, and “HR will take care of the people stuff.”

I would politely push back, “Who do you think is going to help you execute your brand’s strategy, produce your stock analysis and close your deals? People. You have to understand how to lead and motivate them.” Response—smiles, shrugged shoulders, and a change of subject.

In fact, at one point during a case study about how to deal with striking workers, one of my classmates said at the beginning of the negotiation process, “We’re done negotiating. It’s a waste of time. Either go back to work or you’re fired.” I countered, “Okay, but how are you going to staff and train the replacement workers quickly enough to produce quality products to meet customer demand? What are you going to do to restore the lost goodwill and inspire the surviving employees to innovate, be creative, go the extra mile and dedicate themselves to making your company succeed?” Response—blank stare.

I don’t blame my classmates for their results-oriented, short-term focus. Employers weren’t looking for competencies in leadership, team development, employee engagement, vision creation, and motivation strategies. They wanted evidence of concrete results -- the mastery of the Black-Scholes model, the development of a creative marketing plan, or the identification of an untapped market niche. The “soft stuff” wasn’t a part of the equation, most likely because, again, it’s too hard to measure and it takes too long to quantify.

The Aspen Institute Takes the Lead in the Shift to Long-Term Value Creation

Turns out I am not alone in my observation that this entrenched short-term, profit-first, people-last bias is an outdated way of operating. It needs to change if we are to find new creative, flexible, long-term focused strategies that reduce the unemployment rate and promote innovation. In short, to avoid the “un” virtuous cycle. Although it’s gotten little attention in the mainstream media, The Aspen Institute has taken the lead in shifting the paradigm.

In a recent article in The Washington Post entitled, “Building Better Wall Street Leaders?” Aspen Institute Vice President, Mickey Edwards was quoted as saying:

“Along the way, however, the idea of doing a good (providing high-quality goods or services) in exchange for a return that will allow one to live well and provide for one's family gets transformed into the belief that one must not only make profit but also do all that's necessary to make that profit as large as possible -- or be deemed a failure at worst and a mediocre manager at best. Such things as fiduciary duty, moral constraint and moderation get lost.

So what's the answer? Change the business school curriculum. Have a little less Jack Welch and a little more Aristotle. Focus more on business as a component of a community, with all the obligations that entails. Study macro-, micro- and moral philosophy. Become educational institutions, not just trade schools. Encourage campus activities that honor entrepreneurs for their contributions to society, not merely the growth in their portfolios…”

The objectives of The Aspen Institute’s campaign to transform the system from short-term performance to long-term value creation can be found in Long-Term Value Creation: Guiding Principles for Corporations and Investors. The goal is as follows, “We believe the Aspen Principles, broadly adopted, can quite literally transform out capital markets—reinvigorating the ability of business to serve as the driver of long-term economic growth on a national scale, and to more fully serve the public good.” Equally remarkable are the organizations that have subscribed to the principles as of April, 2009, including businesses such as PepsiCo, Xerox, and Office Depot and large institutional investors such as TIAA-CREF and the New York State Common Retirement Fund.

The efforts of The Aspen Institute and other forward-thinking organizations and individuals give me hope. We can rethink our outdated, short-term responses in this fragile post-recession, pre-recovery period. We can embrace more creative, flexible, innovative strategies that minimize the rate of job losses and put us on a path of long-term growth and innovation. We can put the “un” virtuous cycle genie back in the bottle.

What do you think? Can we do it? Have you seen examples of business schools, leaders and/or investors avoiding the short-term trap and taking a longer-term approach? Let me know.

 

Related Posts:

“Jobless Claims Rise to Record Levels, 20 Reasons to Promote Flexible Alternatives to Layoffs”

“One Year Later—Flexible Downsizing and Hard Choices Post-Recession, Pre-Recovery”

One Company Decides When to Say “When” In Next Phase of Flexible Downsizing”

“Get Started Tips to Navigate Post-Recession, Pre-Recovery Flexible Downsizing”

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1 Comments

  • Jane Moore

    This is really a conundrum. You have Dow and unemployment rate positively correlated when they should be negatively correlated. Unemployment is real, so there must be a bubble in the Dow then or no one has a better asset class to invest in. Hot money chasing up the stock market is not a good thing for all of us - go2ui