Where Financial Reporting Still Falls Short

Where Financial Reporting Still Falls Short

HBR, July-August 2016, p77

By H. David Sherman and S. David Young

It is apparent from this examination of the perils of financial reporting that said reports are marvelous instruments for executives to use in deceiving the investors of this world, and this despite the advances made, with great effort by many, to reduce financial reporting’s value at deception and increase its value at helping investors fairly judge the worth of their investments. This article really is quite a remarkable look at what financial reports can and cannot do.

There are three primary ways in which financial statements can be inaccurate and thus less useful for investors. “First, corporate financial statements necessarily depend on estimates and judgement calls that can be wildly off the mark, even when made with good faith. . . . Second, standard financial metrics intended to enable comparisons between companies may not be the most accurate way to judge the value of any particular company. . . . Finally, managers and executives routinely encounter strong incentives to deliberately inject error into financial statements.” I love how the first two conditions enable the third. Are you taking notes here about what you will need to avoid doing on your next financial statement?

As the authors see it, there are five problems with the current status of financial statements. The first is that there are no universal reporting standards. There is GAAP and IFRS and they do not agree although they are slowly moving closer to each other. There are also a variety of spices added to the recipe depending on in which country the company is based. Second, is the revenue recognition timing issue in which there are different rules about when to recognize the money coming in the door, which is dependent on the first problem. Third, unofficial earnings measures are often used because the official measures (GAAP and IFRS) are simply not going to present a fair picture of what the company is earning and these are often impossible to compare with the results from other companies. Fourth is fair value accounting because in many instances who really knows what the fair value of an asset is if you didn’t buy it last year?

Finally, while cooking the books is universally frowned upon, cooking the decisions is fair game. The authors note that this is a pernicious problem. Did management cut discretionary spending to boost short term profit and bonuses? Did they offer incentives to customers at interesting times of the year? Did production in March fall, or increase, precipitously for reasons not fully enumerated? These are not violations of GAAP or IFRS. I do hope you have taken good notes as there is much here that can be quite useful information. As the article says, the timing of operating decisions is a practice that is hard to detect and regulate.

We Just Can’t Handle Diversity

We Just Can’t Handle Diversity

HBR, July-August 2016, p70

By Lisa Burrell

This is a well written summary piece, by one of the HBR editors, covering research on diversity in business. There is nothing conclusive or earth shattering here, just an overview of diversity issues in organizations and each part is selected to bring us to awareness of the issues involved. I would be surprised if it did not contain its own biases but I have not the expertise in diversity to detect them. Herewith are some of my favorite passages in the article.

“The abundant social science findings suggest . . . that good fortune accounts for a great deal of success, and that we’re hell-bent on believing otherwise.”

“Hindsight bias causes us to believe that random events are predictable and to manufacture explanations for the inevitability of our achievements.”

“The idea is to deliberately structure how you present information and options: You don’t take away individuals’ right to decide or tell them what they should do. You just make it easier for them to reach more-rational decisions.”

Designing a Bias-Free Organization

Designing a Bias-Free Organization: It’s easier to change you processes than your people.

HBR July-August 2016, p62

An interview with Iris Bohnet by Gardiner Morse

I like interviews because we get to see a more authentic view of the person and their thinking. This is an interesting interview and the theme is generally about developing and growing people. It does not go so far as to deal with Deliberately Developmental Organizations and is not aware of the stage of adult development that managers are assumed to be at but Bohnet has some interesting ideas. One significant idea is that through structured interview design we can neutralize a lot of bias in hiring. Another idea is that HR departments should be measuring what works and what doesn’t.

Here are a few of my favorite quotes from Bohnet:

“What we generally find is for beliefs to change, people’s experiences have to change first.”

“Fathers of daughters are some of the strongest proponents of gender equality.”

 

Why Diversity Programs Fail

Why Diversity Programs Fail: and what works better.

HBR July-August 2016, p57

By Frank Dobbin and Alexandra Kalev

Diversity programs are not increasing diversity and a big reason is that the same approaches that did not work in the 1960’s are being used now. Their whole purpose seems to be simply to preempt lawsuits. In fact, these programs often decrease diversity. Sounds like a pretty bleak article, doesn’t it? The saving grace is the “what works better” part and that makes it a worthwhile article.

The article says, “Executives favor a classic command-and-control approach to diversity” which is, perhaps a damning comment on the general status of corporate upper management. The things that work, which are not part of a command and control management system, are things like, “targeted college recruitment, mentoring programs, self-managed teams, and task forces.”

Techniques that work don’t focus on control. “Engage managers in solving the problem, expose them to people from different groups, and encourage social accountability for change.” The article dives deep into why these non-controlling techniques work. “When someone’s beliefs and behaviors are out of sync that person experiences what psychologists call ‘cognitive dissonance.’” People resolve the dissonance “by changing either the beliefs or behavior.”

Contact, as equals, between different races and minorities eases tensions around diversity. Cross-training rotations and diverse, self-managed teams are ways of generating contact as equals across diverse situations. Another technique is the use of social accountability, such as public displays of averaged data about diversity or the use of diversity task forces.

Some companies are simply not open to making diversity a priority and they will not go beyond what is required to prevent lawsuits. Such companies are locked down and run by fear, especially at the executive level. What that fear gets you is punishing command and control management that results in minimum compliance to minimal standards and it requires constant policing to maintain minimum productivity. There are better ways and they are much more productive and profitable.

 

Beyond the Holacracy Hype

Beyond the Holacracy Hype

HBR, July-August 2016, p38

By Ethan Bernstein, John Bunch, Nico Canner, and Michael Lee

Adam Smith sang the praises of the division of labor in 1776 and the world has not been the same since. Holacracy attempts to reverse that trend through self-managed work circles. Holacracy is surrounded by a lot of hype, much of it coming from founder Brian Robertson, and this article, authored by people who implement holacracy, is also not without hype but it does present enough of the dark side to be useful.

Holacracy is a complicated solution to what might have been a simple problem. It seems that people need to have a say in what they do and how they do it in order to feel good about what they do and to be productive. They don’t want to be told to do what they were going to do anyway. They don’t want critical managers breathing down their necks. They want to be treated with respect and valued for what they contribute to the organization. Is this so difficult? Does this require that Adam Smith and the division of labor be upended so that everyone becomes a generalist, or at least a management specialist in addition to their other roles? Does this require a complex solution that requires a computer program to keep it straight and that forces managers to get out of the way and let people do their work or that requires workers be trained in management procedures for six or more weeks in order to be successful? Perhaps so when you consider that most corporations spend much less time and effort (think very close to zero) training their managers.

Both hierarchy and holacracy can function as the organizing principle of an organization. Making either one work well requires people who are at later stages of adult development. This is what holacracy was trying to get around by creating a system that is highly structured and therefore should not need such people. The article states that there are three goals of a self-managed organizational structure such as holacracy: 1) Designing roles that match individual capabilities with organizational goals, 2) making decisions closer to the work, and 3) responding to emergent market needs. The article recognizes that, “One of the greatest challenges of implementing the[se three] goals at scale is insufficient leadership”, which perhaps makes holacracy an oxymoron. Insufficient leadership is ever the problem with organizations and neither holacracy nor hierarchy, each with different strengths, is likely to solve that issue.

 

How to Preempt Team Conflict

How to Preempt Team Conflict
HBR, June 2016, p79
By Ginka Toegel and Jean-Louis Barsoux

This is one of the few articles I have seen in HBR that does not assume that the reader has an advanced form of mind or is at a later stage of leadership development. The article is well written and covers all of the relevant material, what to do and what to watch out for. It lays out the information is a way that should be accessible to almost everyone.

Differences between people on a team are inevitable and addressing them at the beginning of the project or when there is a change to the operating environment, such as a new manager, will go a long way toward preventing difficult conflicts later. The article focuses on five sets of broad differences between team members; how people look, act, think, speak, and feel. Each set of differences gets its own conversation and several sample questions are given for each topic so that the team leader can facilitate the discussion.