All companies, says Andrew Kakab­adse, professor of international management development at Cranfield School of Management, have done localisation “badly at some point”. The key to making it work is “clarity of strategy”, which is formed “when a company interrogates itself about what it’s really good at”, he says.

and

Prof Kakabadse says this is a reversal of the old strategy of “think global, act local”. Now, it is “think local, then act global”. So, rather than companies customising products to a local market, the focus should be to start with the local products and then try to leverage them globally.

You can read the full article here.

So yes, the trade unions are now giving management the chance to reposition their cost structure and try to put the airline on a much sounder footing. Though I think that many have underestimated the brand damage that is occurring to BA from these strikes. I suspect that the trust in the marketplace for British Airways is low, and I also suspect that for many European, regional or international travelers, British Airways must now be on the bottom of their lists. Seat for seat, ticket for ticket, BA is expensive. You’re likely to find that the Eastern airlines (Thai, Cathay Pacific) and Gulf regional airlines (Emirates, Etihad) have a much better service, have nicer flight attendants, more up-to-date seats and beds in business class and first class, all at a much cheaper price.

So yes, Willie Walsh at BA is now being given an opportunity to restructure. Whether he can reclaim the same brand position that BA had in the mid-to-late 90s and early 2000s, I doubt. The ongoing issues with volcanic ash from Iceland don’t help matters. How have all the canceled flights affected airlines? Well, they’ve lost a lot of money in terms of passenger receipts (though presumably they would have had some savings on fuel). The volcano hasn’t led to British Airways’s union or management loosening their position. I can’t see how the union will in any way give up, because should they do so, there is no way back for them, and British Airways will cut costs. I actually think that cost cutting will be inevitable, and the union is trying to do the best it can to preserve jobs.

The shame of all this is that there isn’t a partnership arrangement between the management of British Airways and the trade union, because that’s the only way that things are going to move forward. The airlines, like many other businesses, are in a mature market. Under those circumstances, costs constantly have to be under review. The more partnership arrangements we have, the more forward-looking both management and the trade union can be. Neither the strike nor the ash cloud have done anything to improve the relationship.

Another question to ponder is why flights were grounded for so long. I think there are two answers — one is that there wasn’t the body of knowledge to understand how planes would perform and behave while flying through volcanic ash. The only case studies that existed before were when aircrafts flew over a volcano but not through dispersed ash. I suspect now that the various authorities have learned quite a bit.

However, that doesn’t explain why that learning couldn’t have taken place in less than six days. There were airlines trying to experiment with what it means to fly through volcanic ash, but European authorities wouldn’t allow passenger flights for six long days.

I’m left with an interesting question–what did we learn as a nation about people being stranded and about how people move should there be some sort of crisis when planes can’t fly? On Sky News, there was constant repetition of the prime intelligence committee of the UK, COBRA, meeting periodically during the day. I have to ask the question whether this was just safety concerns for aircraft and their passengers, or was there another concern that if there was a war in the future, we have now learned something else about how to move masses of people in one direction, how to hold masses of people in a particular location, and how to use the armed forces for social purposes. I don’t think that’s the way it started, but I do feel that there was learning about trauma conditions that have nothing to do with this ash cloud.

Download audio file (sunandrbs.mp3)

An expensive taxi ride is only part of the real story. As I’ve mentioned on this blog before, for years the BBC had internal chauffeur service available to BBC staff for only a certain amount of time per day. Because the internal service wasn’t always convenient, staff used external drivers probably more than the internal service. The expense of individual trips is nothing in comparison to the intuitional cost of holding such services and not using them. So the question is, how do you change old-fashioned cultures?

There’s only one of two ways. You either have a top-down change programme initiated by the board, whereby trying to establish a new leadership style and approach, and a culture that is more conducive to the business of the organisation predominates. Or you take out costs, often through redundancies. If neither takes place, then this £639 taxi ride does capture one element of any legacy organisation — that is that they are well able to criticise everyone else, but when they get scrutinzed, they become highly defensive.

So nothing new. Is the BBC really going to change? I don’t really know. I haven’t seen any initiative to want to change internally and have a more developmental approach to change, but it may be happening. I don’t see any desire to change the structure and the infrastructure of the BBC in order to break down that culture. So I suspect that we’ll see more stories like this, and they’ll continue well into the future.

Download audio file (charitycompensation.mp3)

The interview didn’t quite capture the issue of confusion between structures and culture. We cannot escape the fact that we are in mature markets. Few companies and few industries are not within the tail end of the cycle of maturity, and I would have thought an organisation like SunGard would be no exception. Mature companies tend to have ‘taller structures’ in which tasks, roles, responsibilities, accountabilities, and even governance are made very clear. You need that–you need to know what people are doing and why they are doing it because you’re going to make as much money from the products you sell and their quality as the costs that you control. So tall structures have two functions: clarity of roles and objectives, and cost control mechanisms, both of which are necessary. Badly handled, taller structures are authoritarian and unpleasant. Well handled, they are a discipline that liberates. Once people know what their job is, they can really go ahead and not worry about the politics of going over to someone else’s territory, etc. So there is something to be said for taller structures — it’s not a very popular comment, but it’s a necessary comment.

The next question is: can you have a taller structure with a flatter structure? You possibly could if you are at the beginning end of the life cycle, where an individuals may have a number of reporting relationships which cut across a number of teams or they may have dotted-line relationships that cut across various parts of the organisation. That should not be confused with flatter culture in which you have the same clarity of role relationships. You have well-formed and well-focused teams, clear accountabilities, you know who your boss is, but you also have a mindset of flexibility, cooperating, working across boundaries, sharing problems–at times putting your own financial targets and budgets secondary to the broader corporate concern, well aware that ironically someone might get advantage from your contribution which you do not financial realize for your own budget.

I think that is what really was behind this particular article. We need mindsets of cooperative cultures, we need to help our people understand how to get better engagement and alignment across the structure. we need to get clarity of communication; it’s very important to live the values: just imagine if the CEO is talking about flatter structures, cooperating and so on, but comes to meetings and is acting in a very dictatorial manner, and everybody senses that within that person’s top team, what you have is a team that essentially doesn’t bring up the uncomfortable hypocrisy, doesn’t challenge their boss, and yet the boss is telling everybody else to challenge the bosses down the structure. Nobody’s going to do it.

The biggest issue about flatter cultures is living the values that you promote, and the people that need to promote those most are the board members and the top team members, and that’s where a lot of the flatter culture ways of operating really do fall apart. Probably only 30-35% of organisations that genuinely want this flatter, more innovative way of operating, being flexible about whose team you’re working on and why, are actually able to achieve it.

When you genuinely have flatly structured organisations, there is almost always a business reason. You have an innovation in your product array that requires specialists to go right across the structure, possibly have two or three reporting relationships for very good reasons, each of them have a clarity of target, they each have to allocate their time to different teams or different departments, and those departmental heads have to behave and in a sense account for that person, or judge that person’s performance either for the bits they do, or one of the heads will be developing that individual on behalf of the other bosses.

So a flatter structure is actually as much a business lever as the taller structure, but in relatively few organisations do actually you have these truly flat structures. Where you have them, it’s often an expression to go right through the supply chain, so a number of skills get outsourced; it makes sense that those specialists are running their own organisations and they contract back some of those skills to the parent company. And there in a sense you almost have the Japanese concept of keiretsu, the flatter structure going through the supply chain. But the number of companies that really do have such flat structures (not counting very small companies that need to be flat) is relatively small. The word structure has to be substituted by the word culture, and that is more about living values rather than a structural form.

The first is brand—a strong brand reputation makes people believe that a Mercedes is better than a Ford, and can help a company even if this belief proves not to be true (e.g. if Mercedes outsourced some faulty components and their quality did decline below the perceived quality of Ford).

The other differentiating factor is people. Better led teams will be more motivated; when there’s a single company mentality, especially among middle and senior management, decisions can be made more quickly, and better products can make it to market more quickly and efficiently.

These two critical differentiators, brand and people, can have a huge impact on a company’s bottom line. Because an organisation’s personnel can be controlled more directly than its brand, human resources has become increasingly important in mature markets, particularly during our current recession. In fact I believe that HR has become the most important function in the corporate hierarchy.

There’s a tremendous need for the HR function to influence leadership and the board. They need to decide what sort of philosophy a corporation should have, and how to create a company strategy that solves problems and gets the most out of its people.

Thus it’s quite disappointing that many companies do not consider the HR function to be important, and the HR function’s contraction has accelerated during the recession. Why is HR not rising to the challenge? In many companies, HR became (or always was) too transactional. HR became too focused on getting HR systems (like payroll) and procedures (like training programmes) right, instead of getting involved in a company’s strategic debate and influencing that debate.

It wasn’t a lack of respect for the HR position that lead to its diminished standing, it was more that executives were questioning of real value that HR can provide. They didn’t understand how HR improves the way an organisation can function, and how much the right people are critical to a company’s success.

So what can be done? For one thing, HR professional bodies don’t understand markets well enough, and don’t have confidence to state to top executives that HR is important. The HR profession needs to take a step back and analyze itself, and make sure it fully understands the business it’s a part of, and then it’s up to HR directors to lead the HR function into a more prominent place in the corporation. This won’t be easy. HR people need to be trained as strategic analysts who hold the HR function as their job, not just personnel managers. This has to change.

The question is: has Harvard Business School identified what that greater good is, or is the pledge just window dressing? The pledge, whether spearheaded by students or faculty, will only work if the school’s syllabus is adjusted to place greater emphasis on CSR and sustainability. Harvard would need to teach that responsibility has to be embedded in the balance sheet, and that open, transparent and continuous reporting will translate into long-term profitability.

In addition to teaching greater responsibility, Harvard would also have to extend the level of critical theory thinking in its curriculum, teaching students how to critique an organisation, so that once they are employed they can critically analyse and bring a level of sharp dialogue to the organisation that hires them. Changing the syllabus would show meaningful commitment to the pledge and to pushing the greater good into organisations. If Harvard formally supported the pledge but did not change its syllabus, leaving it up to individuals to pledge on their own, the pledge’s meaning and gravitas would be lost.

When people have become embroiled in bribery and corruption scandals or strategic misunderstandings, they often believe that they are inherently good but have had to operate in difficult or complicated circumstances. Harvard and other business schools need to change their emphasis from training independent individuals in leadership to preparing them to be able to create sustainable organisations.

However, I believe that Harvard won’t change its curriculum to support the pledge, because it might make businesses less interested in people with Harvard MBAs. Businesses don’t want employees to challenge the status quo; this new Harvard training would make employees more critical of the organisations they work for and more focused on sustainability and CSR (and therefore less focused on the immediate bottom line). Most businesses are still reticent to commit fully to such programmes.

And so the question is: will Harvard take the risk and change its syllabus to prepare better leaders in the long run even though in the short term it could put their ‘business’ on the line? If they do, then this ‘Hippocratic Oath’ for business would mean something. But I don’t think they will any time soon.

Most compensation and nomination committees do take their jobs very seriously, and try to emerge with compensation packages that make sense. But the challenge they have faced and the challenge society continues to face is that of peer comparison. Fisman concludes that the solution is to link CEO pay with the success of the company. The biggest problem with this is the question of what we mean by ‘success’.

I see two challenges. The first challenge with peer comparison is that in a mature market, where short-term success is the most important factor, it can be a daunting task for a CEO to achieve financial success. Therefore, the few who were successful became the benchmark, and then the benchmark became the median, and on this basis CEO pay was driven up by an inflated peer comparison.

The second challenge: how do we value success? That’s the real problem. In the past, executive success was determined by a turn of the (twentieth) century American formula, linking to the financial performance of a company. The rapid growth of markets at the time made this valuation formula make sense, though it no longer works in our mature markets (though the old formula still makes sense for China given its rapid growth).

So we had a shareholder philosophy at a time of rapid market growth being the fundamental philosophical determinant of executive compensation. A century later, how can you do that?

Since western markets began to mature after World War II, I believe many CEOs (whether intentionally or not) have been ensuring their boards are filled with directors or friends who come from the network, people who do not challenge the fundamental assumptions that the CEO brings concerning success.

In a time of mature markets, shareholder success can only be driven by a few short-term tactics: primarily the sale and acquisition of assets and the artificial repositioning of shares to increase share price.

So we have had an unfortunate situation spring up since the 1970s: increasing CEO pay, decreasing investment in communities and research, and decreasing long-term employment sustainability in the name of increasing short-term shareholder value.

And then all that blew up with the financial crisis. So with all this in mind, how does society move forward? Fisman basically states that we should not do away with peer comparison, which I believe is true, but he then doesn’t define what success should mean for the future.

Climbing out of the current financial crisis will not inherently stimulate growth. Growth will require a far longer-term outlook, with a lot more sustainability criteria built in. We are beginning to witness this in the US through several of Obama’s measures, including green policy incentives, the closing of tax havens, and investment in people.

A more nuanced understanding of corporate success will become increasingly important in establishing fair executive compensation. Nomination committees will need to ensure that the CEO they hire doesn’t just have a track record of business success; he or she will also need to be aware of critical global issues. Nomination committees will need to ensure that the CEO understands the full reach and depth of the corporation’s responsibilities, and will need to know how green any potential CEO will be.

To give an example of the direction I think we’re going: the most green hotel in the world is the Proximity Hotel (http://www.proximityhotel.com/) in Greensboro, North Carolina, USA. The hotel doesn’t just look after its own energy needs; it also feeds back into the regional energy grid. If its owner, Dennis Quaintance (http://www.nicholas.duke.edu/thegreengrok/dennisquaintance), should retire, and the hotel group (which also includes the luxurious O.Henry Hotel (http://www.ohenryhotel.com/)) needed to find a new CEO, it would undoubtedly need to include green awareness as an essential criterion for selection.

Another sustainability issue that CEOs will need to understand is pensions. People have different needs as they get older. The CEO and board will need to decide whether an employee’s pension pack should include not just healthcare but also education and training, so an individual can be prepared for a new career in his/her 50s or 60s.

These sorts of sustainability criteria are unclear at the moment and will need to be sorted out in the future, but it won’t be easy. Increasing shareholder value is still a company’s most important task—is there room for sustainability criteria to be integrated such that it is a key component of shareholder value success?

I believe there is, but it will be important for companies to be truly fair, equitable and conscious of community concerns. In a stakeholder-orientated society, perception is as important as reality, and it’s easy for companies to only seem to be conscious of community concerns.

Understanding the hard and soft quantitative and qualitative, financial and non-financial criteria for corporate success will be critical to determining proper CEO compensation. Peer comparison for CEO compensation will have to remain, however compensation committees should be much more rigorous in their deliberations concerning the criteria for CEO compensation and also the reality of how a particular CEO has performed. I believe that we’re likely to see compensation committees increasingly coming up with packages unique to a CEO and the organisation itself. This is a major shift, and it will involve being far more open, firm, and critical of a CEO. This traditionally has not been the case in the US, and has only partly been the case in the UK.

If you consider that the compensation and nomination committees are subcommittees of the board, and often the board isn’t challenging the CEO, one can’t expect the compensation committee to do so. The reality of boardroom behaviour needs to change and enter new territory, where a great deal more will depend on the independent, transparent nature of boards.