The Secret Life of the CEO: Is the economy just built to flip?

A bit further along the continuum, we encounter the malleable masses. These were the people who, in the presence of an opportunity to behave differently, got drawn into it, one step after another. If you told them 10 years ahead of time, "Hey, let's cook the books and all get rich," they would never go along with it. But that's rarely how most people get drawn into activities that they later regret. When you are at step A, it feels inconceivable to jump all the way to step Z, if step Z involves something that is a total breach of your values. But if you go from step A to step B, then step B to step C, then step C to step D . . . then someday, you wake up and discover that you are at step Y, and the move to step Z comes about that much easier.

Social psychologists call this process "commitment and consistency." In Milton Mayer's essay, "They Thought They Were Free," he explains the process this way: A farmer never notices the corn growing minute by minute. But if he stays in the field long enough, he wakes up one day to discover that it has grown over his head. The people who make up the malleable masses weren't bad at the outset. But through a series of gradual steps, they ended up in bad situations -- in over their heads.

The third category consists of the conscious opportunists. An ex-student of mine told me, "I knew it was a momentary gold rush that would someday come to an end and that I had one chance to get in and out before the whole thing crashed." But here's the litmus test: If it weren't for all of the spectacular opportunity, how many people would have been drawn into doing what they were doing? It might be accurate to call something a "once-in-a-lifetime opportunity," but that does not make it a reason to participate. Creative, passionate people who invent work of real value will have many once-in-a-lifetime opportunities.

At the far end of the continuum were the architects of evil. Just as there are heroic leaders who elevate others to a higher level, there are also evil leaders who take people into darkness. They understand the power of A to B, B to C, C to D, and Y to Z, and they use that psychological mechanism to create situations where otherwise-good people participate in awful things. Those people are frequently charismatic characters whom people want to believe. And that only serves to make them more dangerous.

The group that grew disproportionately in the 1990s was not the architects of evil, but rather the conscious opportunists. The architects of evil have always existed in our economic system, and -- given the right circumstances -- they will emerge again. We cannot legislate them out of the system; we can only throw them in jail when they emerge. (And they should certainly go to jail for an amount of time that is proportionate to the scale of their damage to society.) But we shouldn't design our economic system in lurching reaction to the architects of evil.

One change that would certainly help would be to index stock options to the market and to prohibit stock options from being cashed out for at least 10 years after they are issued. That one change would get many of the problem executives off the bus -- the flippers would choose to leave, the builders would stay -- and help alleviate the destructive confusion between the concepts of share price and share value. It would also help eliminate the destructive sense of entitlement that infected our economic system: Too many people got the idea that they "deserved" entrepreneurial rewards without taking entrepreneurial risks.

The way out: creators vs. reactors
Here's the essential truth of our current situation: The real problem has stayed the same, regardless of the direction of the market. First we went through a spiraling-up phase, and people lost their bearings as they got caught up in the great melee of opportunity. Now we're in a downward spiral, and people have lost their bearings in a scramble of uncertainty. It's the exact same pattern in reverse: people merely reacting to circumstances, rather than doing anything fundamentally creative.

The distinction isn't between a market that's going up and a market that's going down. It's between people who are fundamentally creators and people who are only reactors, who take their cues from the outside world.

If you did a word search across my research materials on the greatest company builders of the past 100 years, you would find almost no mention of "competitive strategy." Not that those builders had no strategy; they clearly did. But they did not craft their strategies principally in reaction to the competitive landscape or in response to external conditions and shocks. Without question, they kept a wary eye on the brutal facts.The fundamental drive to transform and build their companies was internal and creative. It didn't matter whether they faced a crisis (as did Thomas J. Watson Sr. at IBM, who never resorted to layoffs in the Great Depression) or whether they faced calm (as did Walt Disney when he conceived of Disneyland). The leaders who built enduring great companies showed a creative inside-out approach rather than a reactive outside-in approach. In contrast, the mediocre company leaders displayed a pattern of lurching and thrashing, running about in frantic reaction to threats and opportunities.