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Leadership: leaving a positive legacy in the boardroom

To reach their full potential, Business School boards and executive teams should follow a five-point action plan, conducting a review that is based on the seven levers of effective boards, writes Sabine Dembkowski

Regulatory pressures, investor demands, innovative competitors and the array of internal and external disruptors challenge the traditional working styles of boards and top executive teams. The social and traditional media is better equipped than ever before to expose the failures and shortcomings of any business board.

In fact, a 2016 study by London Business School’s Leadership Institute concluded that ‘there are some pockets of good practice in the boardroom but, largely, boards have some way to go to reach their fullest potential’.

Another recent study, cited in an article for Harvard Business Review by McKinsey’s Global Managing Director, Dominic Barton, and Mark Wiseman, President and CEO of Canada’s largest pension fund, found that a mere 22% of directors believe their boards are ‘completely aware’ of how their firms create value. Only a sobering 16% claimed that their boards have a strong understanding of the dynamics of their firms’ industries.

These findings are in line with what we, as board advisers, see almost every day in our assignments and interactions with boards. 

Clearly all the tick-box exercises created around governance, and the reports about good practice, have had little positive impact. It is surprising that pension funds and investors have not rung the alarm bells and demanded systematic development programmes for every board and top executive team. 

The new normal

The context within which boards and top executive teams have to operate has changed. Board members are faced with enormous complexities, competing priorities and pressures. Simple one-dimensional mechanisms and responses do not do justice to the new-normal environment. It is easier to describe what an effective board and executive team looks like than to follow the path to get there. 

Academics, governance experts and business consultants are quick to state that an effective board and top executive team needs to be flexible, high-performing and outward focused, and a fresh term for a governance theory is emerging in the academic literature: engagement theory (see box).

According to Naomi Chambers, Professor of Healthcare Management at Manchester Business School, University of Manchester, the emerging proposition is that boards need to embody a culture of high trust across the executive and non-executive divide, together with robust challenge and a tight grip on delivering results.

Since a one-size-fits-all blueprint for an effective board does not exist, any spreading of ‘best practice’ and box-ticking exercises can only be part of the answer. 

For the creation of effective boards, plus executive teams that thrive in the ‘new-normal environment’, there needs to be a system that, on the one hand provides an evidence-based approach to ensure that boards are clear about levers that are known to make a board more effective, but also has the ability to unlock the potential of each individual, as well as the collective. 

This system should combine a digital solution with fine human interaction, since time-consuming interview processes will hardly enthuse board members. 

Five-point action plan for boards

The following five points form a framework for developing an effective board strategy: 

1.Ensure that any board audit / board development is an integral part of the value-creation process. Anyone engaged in conducting a board audit and/or board development programmes must have an in-depth understanding of the value-creation plan of the organisation and integrate the insight into the audit / programme.

2.Provide for an evidence-based approach. A lot of data can be collected but it is only useful if it is the right data. In our analysis, we found that more often than not, board audits touch on issues/themes where there is no evidence whatsoever that could have an impact on effectiveness and value creation.

3.Ensure you provide management with real data. The members of executive boards are achievers and clever people in their own right. They want to succeed and develop, look good and develop their own careers. In our experience, they do engage if they see real hard data that provides them with genuine insight that is really relevant to their role.

4.Provide the management with a safe, neutral and confidential environment to reflect on the data collected and explore which actions would help them to strengthen their own position and that of the collective board, in relation to the value creation plan.

5. Establish a mechanism so that data can be collected on a continuous basis and the executive board can monitor progress. 

Once you have ensured that this action plan is in place you need to identify the crucial levers of effective boards. Standard assessments of leadership competencies and psychometric tests may provide some useful insights, but all are insufficient for the creation of more effective boards and executive teams, and for understanding how you can have a greater impact in the boardroom and leave a positive legacy.

Our research shows that there are seven levers you can pull to create more effective boards and executive teams. 

1. The composition of the board

It is crucial to understand how different areas of expertise and preferred role behaviours in a group setting complement each other and fit into the development cycle of the organisation, the strategic challenges of the organisation and the value creation plan.

2. The ability of the board to use the strength of its members

It is important that the individual members of the executive board understand their own strengths, how they are perceived, the collective strengths of the group and how all can be leveraged to implement and execute the value creation plan.

3. Clarity about roles and responsibilities

Ill-defined roles and grey areas of responsibility are the norm rather than the exception. Clarity and transparency of roles and responsibilities need to be in place.

4. Joint vision

A clear and common vision and orientation is pivotal. Transparency at the outset is vital.

5. Ability to resolve conflicts between the board and management

Effective executive boards and their members understand how to resolve conflicts between the board and the next management level.

6. The structure and organisation of the board’s work

The organisation of the executive board’s work depends critically on the board secretaries and the interplay of the chairman and CEO. Effective boards understand how to organise and structure their work.

7. Regular reviews and reflections about the board’s work

Regular time-outs, where board members can connect, leave the daily work behind and reflect on their work are crucial to success.

To conclude, if you are an executive who would like to make a mark and leave a strong positive legacy, you are well advised to follow the outlined five-point action plan, conducting a board and top executive team review that is based on the seven levers of effective boards. If you wish to establish a process for continuous improvement, apply the same audit questions and remember the real value does not lie in the data alone but the interaction with the data. 

Dr Sabine Dembkowski is a Partner at Better Boards Limited. 

Sabine is a management consultant and top executive coach working for and with DAX/FTSE10-listed companies, global corporate groups, private equity firms, leading consulting firms and mid-sized German businesses.

After studying business management in Cologne and completing a PhD in Bristol, Sabine worked as a management consultant in various leadership positions for AT Kearney and Monitor Company in London. Driven by a passion to get down to the ‘nuts and bolts’ and create real, long-lasting change in organisations, she set up two businesses: The Coaching Centre and Better Boards.

Further reading 

Petersen, R. and Rollings, V. (2016): “Beyond Governance – How boards are changing in a diverse, digital world”, Leadership Institute, London Business School.

Barton, D. and Wiseman, M. (2015): “Where boards fall short”, Harvard Business Review, January – February.

Chambers, N. (2012): “Viewpoint – healthcare board governance”, Journal of Health Organisation and Management”, Vol. 26, No. 1, pp. 6-14. 

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Why the tortoise can beat the hare in investment strategy

The benefits of low-volatility investing outweigh those of high-risk stocks, argues Pim van Vliet, in an interview with David Woods-Hale

For generations, investors have believed that risk and return are inseparable. Just ask the huge banks who invested billions in sub-prime mortgages prior to 2008. But is it time we accepted the truth: this just isn’t the case anymore? Pim van Vliet, the founder and fund manager of the multi-billion-dollar Conservative Equity funds at Robeco, has set out to rewrite the rule book on investment strategy. 

In his book, High Returns from Low Risk: A Remarkable Stock Market Paradox, van Vliet combines the latest research with stock market data going back to 1929 to prove that investing in low-risk stocks gives surprisingly high returns – significantly better than those generated by high-risk stocks.

The low-risk funds, in which van Vliet specialises, are based on academic research and provide investors with a stable source of income from the stock market. 

He is a guest lecturer at several universities, the author of numerous financial publications and travels the world advocating low-volatility investing. Together with investment specialist Jan de Koning, van Vliet has presented his counter-intuitive story as a modern upbeat stock market equivalent of ‘the tortoise and the hare’. And he explains why investing in low-risk stocks works and will continue to work, even once more people become aware of the paradox. 

But this theory flies in the face of traditional and accepted thought regarding classic investment theory – so how did he build a theory that goes against the grain?

‘High risk does not bring more return,’ he explains. ‘It’s a paradox and I want to get the message out there. Unfortunately, this is an inconvenient truth for the finance community and it’s puzzled me for half my life.

‘It’s because we define risk in the wrong way, but when I was able to reconcile the paradox and started to research and apply the knowledge I was accumulating, by managing low-risk funds for investors, we were able to generate high risk-adjusted returns by investing in low-risk stocks, which attracted billions of dollars

The concept of investing in low-risk stocks for high returns is a compelling argument, but at odds with the views of some economists. Van Vliet, outlines his own hypothesis as follows, explaining: ‘My investment hypothesis is evidence-based: any idea on investing should be validated by empirical data. Although this approach is common in the field of medicine, it’s not in the world of finance.’   

He pauses, then adds: ‘In general – at a high level – the truth still holds: more risk will equate to more return. In the long run, stocks will earn higher returns than bonds for example. But if you dig a level deeper down, this idea fails within the stock market and also within the bond market. Lower-risk stocks provide higher returns than higher-risk stocks. The slow stock beats the fast stock. I explore this at length in my book. 

‘Benchmarking provides an important explanation for this effect. If you have stocks with lower risk factors, you will be less affected by the stock market. Imagine a stock posting a fixed return of 10% per year. That stock has – in absolute terms – 0% risk. However, when adopting a relative perspective this low-risk stock would lag behind if the market is delivering a return of 40% in a year, or be well ahead of the market during a market loss of -20%. This 30% return gap – whether positive or negative – is perceived as relative risk. It is the misalignment of interest here that poses a problem, because the role of an investor is different to that of a money manager. A professional investor is paid to take risks with people’s money to generate return and if they are not taking these risks, they could be shunned. In other words: due to benchmarking low-risk stocks become unattractive.’

Van Vliet compares his investment hypothesis similar in idea to the fable of the tortoise and the hare in that ‘slow and steady’ often wins the race but there is a human nature lesson here as well as advice for financial strategy. 

‘Most people want to bet on hares,’ he says. ‘In psychology, finance and literature it’s the moves in the market that generate the most attention and they drive up prices in stocks, which in turn makes the news. Tortoises are never in the news. Volatility makes headlines – this exacerbates a culture of short-termism and people who are bullish and want a quick buck.’

Van Vliet is quick to point there is fine line between ‘bullish’ and ‘reckless’ when it comes to investment and he worries that investors in general are too quick to ‘shun’ more defensive equity funds. 

He elaborates: ‘For this reason, society is experiencing a collective sense of over-confidence [in that they want to invest in high-risk funds]. This is really good for people’s mental wellbeing but it’s bad for financial health.’ 

Tortoises, according to van Vliet, are stable companies and defensive funds that ‘never seem to go up’ in stock market terms. But, as the saying goes, at least, fortune favours the brave – and in van Vliet’s analysis, it’s those that invest in risky funds that view themselves as brave. He counters this assumption. 

Re-defining bravery

‘Low-risk investors are brave,’ he asserts. ‘They are seen as conservative, but in reality they are not following the crowd. It’s like the character in The Pilgrim’s Progress, following a tough long road, but leading to a good end result.’

To capitalise on the low-risk anomaly, a long-term investment vision is required. The advantage of a low-volatility strategy is that the stocks involved will fall less than other stocks in a declining market. Once the market recovers, low-volatility stocks have less ground to make up to recover and start yielding positive returns again. 

Citing the experiences of the world’s second-richest man as an example, van Vliet explains that Warren Buffett is inclined to take a long-term view when it comes to his investments. Instead of following the crowd, Buffett has built his career and success on seeking out undervalued investments. Although Buffett’s portfolio has lagged behind the market several times during his career, he has beaten the market average decisively over time. 

For Buffett, average is doing what everybody else is doing; to rise above the average, you need to measure yourself by what he terms the ‘inner scorecard’ – judging yourself by your own standards and rather than the world’s.

A sustainable approach

 But where do ethics fit into a low-risk investment strategy? Does van Vliet agree that a values-led, sustainable approach to investing is becoming more important in the current financial climate?

He explains: ‘Low-risk portfolios make for sustainable, long-term investments, but in terms of ethics, the key consideration is how we, as investors, take care of our clients’ money – perhaps by investing in green companies or more sustainable funds for that reason.

‘High-risk and low-risk investments have the same mechanisms. And low-risk investments drive up risky projects. I’m not saying that a degree of risk is not a good thing – but prudent decision making is more important.’ 

Does van Vliet therefore believe that would-be investors have to be finance experts to understand the intricacies of the market?

‘You can over-train for a marathon,’ he explains. ‘You need information about the markets and I’ve outlined this in my own work – but the secret to successful investment is wisdom [rather than market knowledge only]. For example, the latest “hare” in the market place is FinTech and investors are keen to invest here. The truth is that some of these FinTech organisations will win, but most will lose.’

 He sums up by adding: ‘I think a good philosophy for investment is “some risk”. Putting this into the context of diet, a moderate amount of vitamins and salt is a good thing – but not taken to the extreme. There is no such thing as “no risk” as the risk spectrum is not linear. You have to create a bit of risk to generate value. If there is no risk, your investments will be negative. I believe the ideal investment choice, is what I call the “conservative middle”, which is a situation between very high and very low risk. 

‘We often are attracted to the extremes, but ancient philosophers wisely pointed to the virtue in the middle. Too much risk hurts long-term wealth creation, but a moderate amount of stock market risk is good. There are more and more companies that live and work according to this prudent investment principle, from private equity firms to family businesses. This is the secret to sustainable investing.’

Dr Pim van Vliet is a Senior Portfolio Manager within the Quantitative Equities team of Robeco, an international asset manager with
a strong belief in sustainable investing, quantitative techniques and constant innovation. His primary responsibility is Robeco’s conservative equity strategies.

Van Vliet has published articles in the Journal of Banking and Finance, Management Science, the Journal of Portfolio Management and other academic journals, plus a book on the topic of low-volatility investing. He is a guest lecturer at several universities, advocating low-volatility investing at international seminars, and holds a PhD and
MSc (cum laude) in Financial and Business Economics from Erasmus University, Rotterdam.

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Exploring the digital marketing revolution

To create and communicate superior customer value, marketers must now combine traditional advertising with social and digital tools, argues American marketing guru Philip Kotler, in an interview with David Woods-Hale

You’ve written Marketing 4.0? What has changed since Marketing 3.0 was published in 2010?

Marketing is undergoing a digital revolution. We published Marketing 3.0 seven years ago to help companies broaden their view of how computers and the internet impact marketing theory and practice. We stressed the importance of meeting the needs of women, young people, and ‘netizens’ in carrying out company marketing activities. 

Today there is a need to pay attention to the growing role of social and digital media. Social media – such as Facebook, Instagram, Pinterest and Snapchat – create an increasingly connected world and they stimulate greater communications and sales to a wider world. Digital media is enabling artificial intelligence (AI) and the ‘internet of things’ (I0T) and increasing the rate at which robotisation and automation is penetrating business. Our aim in Marketing 4.0 is to illustrate the growing role and impact of digital marketing. I’ve also described this ‘new marketing’ in my 15th edition of Marketing Management. 

How can Marketing 4.0 help in bringing marketers up to date with the current skills required – from traditional to digital?

In the past, consumers made purchase decisions largely in retail outlets, whether in an auto dealership or in a large department store. Some consumers also used the telephone or mail order catalogues. Today, a growing number of consumers are making more of their purchases online via online retailers. In-store retailing is facing a major decline: witness, in the US, the news of Macy’s closing many stores, clothing store The Limited going out of business and shopping centres in deep trouble. 

Consumers still go into stores to sample and touch the product and then use their smartphone to see if they can a better deal elsewhere. Many retail shops are evolving into ‘showrooms’, partly charged by the company to its advertising budget. Business-to-business transactions are being increasingly conducted with digital media. Most companies list their product catalogues on the internet. Purchasing agents are happy to compare prices on the internet and are less interested in accepting sales calls. All this points to the need for companies to acquire social and digital skills before they are outclassed by more sophisticated digital competitors.

You describe ‘shifting power dynamics’ in the market. Can you explain this in more detail? 

Power has been shifting from the advertising giants who used 30-second commercials to inform and persuade consumers, to savvy consumers – who rely on their friends and acquaintances, plus online product ratings, to make their brand choices. Power has moved from companies to consumers. Companies must now develop fresh pictures of how consumers journey toward making their final purchases. It’s no longer a journey from a 30-second commercial to a purchase but from a stimulus on the internet, or from a friend, to a search for further information, to a purchase. Marketing 4.0 discusses the key steps in consumer journeys and the various touch points that will have an impact on the final purchase decision.

You explain how the rules of marketing regularly change, but this time the very customers have changed – and this is revolutionary – can you talk a bit more about this?

The basic maxim of marketing hasn’t changed. Decide on the consumer need your company wants to meet and the individuals who strongly have this need. Create a solution that meets this consumer need better than any competitor can meet it. See your job as one of creating superior customer value and communicating this value in a superior way.

What is revolutionary is the need for the company to incorporate social and digital tools to carry out this work. Companies need to collect ‘big data’ about individual consumers who have specific needs and apply sophisticated marketing analytics to arrive at consumer insights that can be converted into compelling consumer value propositions.

How do cyclical trends in the economy affect marketers? More specifically, if demand-led growth is on the decline, what single marketing effort is the most important to avoiding a loyal consumer defecting to a competitor?

Buyer behaviour obviously changes in times of market growth versus market decline. When a recession, or a fear of recession, occurs, consumers will intelligently reduce their expenditure and move towards lower-cost products. Every competitor will have a choice: increase the value of the offer, or cut the price of the offer. Normally it makes sense for the company to retain the price and better document and confirm the offer’s superior customer value. If superior value doesn’t exist, the company either has to add more value (for example, free shipment) or cut its price.

Do you think the original elements of the traditional marketing mix will still be relevant in 10 years’ time? 

The marketer’s main toolkit remains the 4Ps (product, price, place, and promotion) and STP (segmentation, targeting, positioning). Each of these elements undergoes modernisation all the time. Product includes packaging, as well as service products. Place is being redefined into omni-channel marketing but it is still place. Promotion is including digital and social communication alongside print and broadcast media. I would welcome a new marketing framework if it promised to address marketing decision problems in a more decisive way. Until then, most companies will use the traditional framework in preparing their marketing plans.

How will creative and media agencies need to evolve over the next five years to keep up with the pace of technology? 

The agency of the future will develop skills in both traditional and digital advertising. This would be better than hiring separate traditional and digital agencies because companies must connect traditional and digital advertising. A 30-second commercial may need to include a digital address showing where viewers can go for more information. The job of the ‘full-service agency’ is to find synergies between the two types of communication, so that 2 + 2 = 5, not 4.

Do you think that the chief marketing officer (CMO) role will be replaced by a combination of chief tech officer and chief analyst, or is this still a viable career path?

I’d like the CMO position to continue to manage the integration of all the elements that will impact on customer demand. The CMO should spend at least 50% of their time working with the other ‘chiefs’ in the company. The real value of the CMO will be realised when he or she is included in all the strategy planning. It would be unwise to confine marketing to designing tactical moves. The CMO is in the best position to foresee where the particular market is going economically and technologically. The CMO’s staff must include an excellent digital person and technology person. 

Do you think marketing and HR may evolve into one business function, as people leadership and organisational branding become increasingly connected, with shared goals and purposes?

I would prefer the heads of marketing and HR to work very closely together but remain separate functions. The CMO is highly interested in seeing that HR hires very service-minded people. In the hotel business, Marriott says that the first job is to hire the right employees and then the customers will come. The CMO should support the HR person to gain a sufficient budget to hire excellent employees, not just average employees. The evidence is strong that excellent employees have a productivity impact that is several times that of average employees.  

Do you think that zero-based budgeting for marketing, based on the Unilever example, will be widely adopted, to make marketing entirely accountable? How can value be measured throughout all channels since tracking is harder offline? 

Zero-based budgeting for marketing means starting each year with no budget allocated to marketing, until marketers propose specific marketing spend – along with the evidence that results will exceed costs. This is in contrast to normal budget setting where the budgets of the past year are the starting point, raised or lowered slightly. We acknowledge that some past marketing expenditures were not productive, and that from time to time, it is worth reviewing each major budget item to decide whether it should be eliminated, decreased or increased. 

The problem with zero-based budgeting for marketing is two-fold. Many campaigns need continuity and they shouldn’t be cut off before they have achieved their full impact. 

Also, it is increasingly difficult to assess the financial impact of a particular digital tool or a particular marketing channel in an increasingly complex and interactive world. 

Zero-based budgeting is a highly impractical tool for yearly budgeting. However, I grant that it could raise marketing efficiency by being introduced every few years.

Do you believe leaders across all disciplines and functions need to change their mindsets to succeed in a volatile world? 

Today’s world is increasingly characterised by volatility, uncertainty, complexity, and ambiguity (VUCA). Donald Trump’s election as US President has greatly contributed to VUCA. If Hillary Clinton had been elected (she won the popular vote by 3 million votes), we would arguably not be in a VUCA world. Events would have taken their normal course and businesses would carry normal expectations. 

But Trump sends out tweets in the middle of the night, many of which attack companies, journalists, judges, pollsters, or the voters themselves. These attacks are a sign of paranoia. Many business leaders have to think twice about any move for fear that the president will call them. Consumers are worried about their health benefits and they are no longer certain about social security and Medicare. They, and businesses, are spending their money more carefully, which slows down economic growth.

My answer to that? Business leaders must change their mindsets, in light of Trump’s erratic behaviour; he issues executive orders almost daily. His behaviour has been copied by populist leaders abroad with the effect of introducing even more instability into the world economy. 

Are there marketing skills that all MBA students and graduates need to thrive in a VUCA business world?

Most Business programmes are training their students in social and digital skills. They are also making students more aware of the effects of climate change. Professors are increasingly criticising shareholder value as the measure of business success and replacing it with stakeholder value as a more comprehensive measure of business performance. Marketing students graduate with a broader view of the factors that affect corporate image and reputation than previous Business School graduates. 

And finally, do you feel optimistic about business adaptability as the
world becomes more uncertain but also more connected? 

Business literature increasingly emphasises company agility and responsiveness to rapidly changing conditions. Companies need to monitor technological trends, political debates, and economic issues. Companies such as Unilever, Starbucks and Amazon show incredible business adaptability. But many companies are still coasting and need a few more shocks to wake up. My hope is that an increasing number of companies recognise that growing income inequality will hurt, not help them, and that they need to take a more expansive customer benefit and welfare view of what makes an economy strong.

Philip Kotler is the SC Johnson & Son Professor of International Marketing at the Kellogg School of Management, Northwestern University, Evanston, Illinois

Professor Kotler received his Master’s Degree at the University of Chicago and his PhD Degree at MIT, both in economics, conducting post-doctoral work in mathematics at Harvard University and in behavioural science at the University of Chicago.

He is the author of 57 books and has published more than 150 articles in leading journals. He was the first recipient of the American Marketing Association’s ‘Distinguished Marketing Educator Award’ (1985) and has received a host of other accolades, being inducted into the Management Hall of Fame in 2013. 

Kotler has consulted for such companies as IBM, General Electric, AT&T, Honeywell, Bank of America, and Merck in marketing strategy and planning, marketing organisation and international marketing. He has travelled throughout Europe, Asia and South America advising companies on applying economic and marketing science principles to increase competitiveness, and governments on developing the skill sets and resources of their companies for global competition.

He has been Chairman of the College of Marketing of the Institute of Management Sciences, Director of the American Marketing Association, is a member of the Board of Governors of the School of the Art Institute of Chicago and of the Advisory Board of the Drucker Foundation. 

He has received a number of honorary doctoral degrees from several international organisations.  

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What is the blockchain?

Blockchains are part of the evolving history of internet technology, so we must grasp their potential, writes William Mougayar

If you cannot understand it without an explanation, you cannot understand it with an explanation’ – Haruki Murakami

Understanding blockchains, the technology underlying cryptocurrencies, in the form of a shared digital ledger, is tricky. You need to understand their message before you can appreciate their potential. In addition to their technological capabilities, blockchains carry with them philosophical, cultural, and ideological underpinnings that must also be understood. 

In terms of defining blockchains, they are essentially digital ledgers, in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly, but unless you’re a software developer, blockchains will not be products you just turn on and use. Blockchains will enable other products that you use, though you may not know there is a blockchain behind them.

It is my belief that the knowledge transfer behind understanding the blockchain is easier than the knowledge about knowing where they will fit. It’s like learning how to drive a car. I could teach you how to drive one, but cannot predict where you will take it. Only you know your particular business or situation, and only you will be able to figure out where blockchains fit – after you have learned what they can do. Of course, we will first go together on road tests and racing tracks to give you some ideas.

Visiting Satoshi’s paper

When Tim Berners-Lee created the first World Wide Web page in 1990, he wrote: ‘When we link information in the web, we enable ourselves to discover facts, create ideas, buy and sell things, and forge new relationships at a speed and scale that was unimaginable in the analogue era.’

In that short statement, Berners-Lee predicted search, publishing, e-commerce, email, and social media – all at once, in a single stroke. The Bitcoin equivalent to that type of prescience by someone who just created something spectacular can be found in Satoshi Nakamato’s 2008 paper, Bitcoin: A Peer-to-Peer Electronic Cash System, arguably the root of modern blockchain-based cryptocurrency innovation.

The paper’s abstract depicts Bitcoin’s foundation and explains its first principles:

•
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. 

•
A trusted third party is not required to prevent double-spending.

•
We propose a solution to the double-spending problem using a peer-to-
peer network.

•
The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.

•
The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of central processing unit (CPU) power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. 

•
The network itself requires minimal structure. Messages are broadcast on a best-effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone. 

If you are a non-technical reader, and you focus on the italicised parts, you will start to get the gist of it. Please re-read the above points, until you have got to grips with Nakamoto’s sequential logic. 

Seriously. You will need to believe and accept that validating peer-to-peer transactions is entirely possible just by letting the network perform a trust duty, without central interference or hand-holding. 

Paraphrasing Nakamoto’s paper, we should be left with these points:

•
peer-to-peer electronic transactions and interactions 

•
without financial institutions 

•
cryptographic proof instead of central trust 

•
put trust in the network instead of in a
central institution. 

As it turns out, the blockchain is that technology invention behind Bitcoin, and what makes this possible. With Satoshi’s abstract still in your mind, let us delve deeper with three different, but complementary, definitions of the blockchain: a technical, business, and legal one. 

•
Technically, the blockchain is a back-end database that maintains a distributed ledger that can be inspected openly.

•
Business-wise, the blockchain is an exchange network for moving transactions, value, assets between peers, without the assistance
of intermediaries.

•
Legally speaking, the blockchain validates transactions, replacing
previously trusted entities.

TECHNICAL: back-end database that maintains a distributed ledger, openly

BUSINESS: exchange network for moving value between peers

LEGAL: a transaction-validation mechanism, not requiring intermediary assistance.

Blockchain capabilities = technical + business + legal.

The web, all over again

The past is not an accurate compass to the future, but understanding where we came from helps us gain an enlightened perspective and a better context for where we are going. The blockchain is simply part of the continuation of the history of Internet technology, represented by the web, as it carries on its journey to infiltrate our world, businesses, society, and government, and across the several cycles and phases that often become visible only in the rear-view mirror. 

The internet was first rolled out in 1983, but was the World Wide Web that gave us its watershed evolutionary moment, because it made information and information-based services openly and instantly available to anyone on earth who had access to the web.

In the same way that billions of people around the world are currently connected to the web, millions (and then billions) of people will be connected to blockchains. We should not be surprised if the velocity of blockchain usage propagation surpasses the historical web users growth. 

By mid-2016, 47% of the world’s 7.4 billion population had an internet connection. In 1995, that number was less than 1%. It took until 2005 to reach 1 billion web users. By contrast, cellular phone usage galloped faster, passing the number of landlines in 2002, and surpassing the world’s population in 2013. As for websites, in 2016, their total number hovered at around one billion. Quite possibly, blockchains will evolve into several flavours, and will become as easily configurable as launching a website on WordPress or Squarespace. 

The blockchain’s usage growth has an advantage on the web’s trajectory, because its starting point is amplified along four segments: web users, cellular phone users, website owners, and any ‘thing’ that benefits from being connected, becoming a ‘smart thing’. This means that blockchain usage will ride on these four categories, instead of purely seeking new users – and the possibilities are endless. 

Once you start to imagine blockchains’ possibilities on your own, without continuously thinking about trying to understand them at the same time, you will be able to move forward in terms of how you can exploit them. 

Further reading

Bitcoin: A Peer-to-Peer Electronic Cash System, https://bitcoin .org/en/bitcoin-paper.

This is an edited extract from The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology by William Mougayar (Wiley, 2016). 

WILLIAM MOUGAYAR is general partner at Virtual Capital Ventures, an early stage tech fund. He is on the board of directors of OB1, the OpenBazaar open source protocol that is pioneering decentralised peer-to-peer commerce; a special advisor to the Ethereum Foundation; a member of OMERS Ventures board of advisors; an advisory board member to the Coin Center; and founder of Startup Management.

He has been described as the most sophisticated blockchain business thinker. He is a blockchain industry insider whose work has already shaped and influenced the understanding of blockchain for people around the world, via his generous blogging and rigorous research insights.

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Creativity as an import-export business: network your way to innovation

Good, innovative ideas have social origins, so become a bridge between different groups to broker breakthroughs, advises Judith Perle

Networks are vital to innovation. True or false? 

I make my living by teaching people about networking – what it is, why it’s helpful and, crucially, how to do it better. So perhaps you won’t be surprised if my answer to the question above is, unequivocally ‘true’. 

I’m not alone in my view; in fact, a plethora of academic research – and practical business experience – supports my stance and, over these two pages, I will take a look at some of the evidence.

First out of the hat is the work of Ronald Burt, Professor of Sociology and Strategy at the University of Chicago. In a 2014 study, ‘Structural Holes and Good Ideas’ published in  the American Journal of Sociology, he reported on the findings of a survey of 673 managers who ran the supply chain of a large US electronics corporation. 

Burt looked at the shape and size of their professional networks, and how they interacted with colleagues within their business units, as well as elsewhere within and outside the company. Second, he measured two things: the likelihood of their expressing a new idea, and the likelihood that senior management would engage with that idea and judge it to be valuable.

Burt’s results show that innovation isn’t necessarily born out of individual genius or, to use a well-worn cliché, ‘blue-sky thinking’. Instead he demonstrates that the individuals who build diverse networks, so that they themselves become bridges (or brokers) between different social or professional groups, are at greater ‘risk of having a good idea’. 

Judith Perle

Why? As Burt puts it: ‘An idea mundane in one group can be a valuable insight in another.’

Not rocket science, perhaps. But the idea that good, innovative ideas have ‘social origins’ is powerful nevertheless. To quote Burt’s own succinct phrase in the same report: ‘This is not creativity born of genius; it is creativity as an import-export business’. 

Innovators aren’t necessarily exceptionally smart people with exceptionally creative minds – bright sparks who think differently. They can be people just like you and me, who do two very important things differently: they mix with a wide variety of individuals – not just their close friends – and they listen as well as talk.

But not all networks are the same. 

In 2010, Louise Mors, Professor of Strategic Management and Globalisation at Copenhagen Business School, conducted a study of a global consulting firm and her findings were published in Strategic Management Journal under the title ‘Innovation in a global consulting firm: When the problem is too much diversity’. Mors set out to understand more clearly ‘how network structure affects the ability of individual managers to innovate’.

To innovate successfully, partners and senior managers in knowledge-based businesses actually have to deal with two challenges. First, they have to find novel information and ideas. And second, they need to be able to evaluate them, spread the word and, finally, implement them. Successful innovation isn’t just about having good ideas. Putting these ideas into practice and getting buy-in from colleagues is equally important.

Mors found that managers deal with both of these challenges by nurturing and tapping into different sorts of personal networks, both within and outside the organisation. She reported that finding innovative ideas is best achieved through an open network, in which relatively few people are connected to each other. Interacting with a very wide variety of people, from different backgrounds and with different mindsets, exposes managers to more and more varied ideas. 

On the other hand, if an innovator wants to implement a new idea or persuade others to do so, it’s easier if his or her network is denser, with more overlapping connections. In her study, Mors doesn’t explain why, but it is safe to assume that the people in these denser networks talk to and respect one another. 

You don’t necessarily need to convince each and every member of your network separately; by talking to each other they will help spread the word, and do some of the work for you.

In a very different study among open source software developers, Karim Lakhani, Professor of Business Administration at Harvard Business School, came up with similar findings: often, he says, it was ‘outsiders – those with expertise at the periphery of a problem’s field – who were most likely to find answers and do so quickly’.

Open innovation

Many organisations recognise that networks and networking are critical to innovation. That’s why they are realising the need to encourage their staff to mingle and talk to each other, both internally and with colleagues in the wider business network, on a social, as well as a purely instrumental, level. Water coolers, canteens and social activities all have an important role to play – as do more formal contexts such as conferences, seminars and other professional gatherings.

It’s also why so many mega-corporations are turning to open innovation in order to maintain their competitive advantage. Instead of confining innovation within a fortress-like, internal research and development lab, corporates such as Procter and Gamble and GlaxoSmithKline are demolishing those walls and asking the network to provide new ideas and new solutions. 

Everyone benefits

Returning to Burt, it’s interesting to note his data revealed that active networkers, who act as brokers between groups, reap personal benefits too in the form of ‘more positive performance evaluations, faster promotions, higher compensation and more successful teams’. Put simply, there’s plenty of evidence to show that by nurturing a wide-ranging network, individuals are much more likely to be successful in their careers. 

So what’s good for your employer in terms of successful innovation, turns out to be good for you too.

The benefits of socially generated innovation aren’t confined to individuals, or even ‘joined together’ as companies, though. Cities and societies can benefit from this too. 

Richard Florida, Director of the Martin Prosperity Institute and Professor of Business and Creativity at the Rotman School of Management, University of Toronto, has developed what he calls the Gay Concentration Index, which he describes in his book The Rise Of The Creative Class. He writes that the tolerance a city shows for lesbian, gay, bisexual and transgender (LGBT) people correlates rather well with how successful that city is in today’s fast-moving world. 

That’s not because people who are homosexual are more creative or intelligent.

It is simply because diversity leads to innovation and innovation leads to prosperity. The Gay Concentration Index is just a shorthand technique for measuring diversity. To quote Florida: ‘Cities with thriving arts and cultural climates and openness to diversity of all sorts… enjoy higher rates of innovation and high-wage economic growth.’

A case in point: Eureka

Reading about academic studies which show that networks can be the key to innovation is all well and good, but sometimes it’s easier to be motivated when you hear an engaging case study – so here’s a real story that Shell transformed into a short film for an advertising campaign a couple of years
back. (You can watch the film online).

The film shows Jaap van Ballegoolien, an engineer with Shell, who is struggling to find a way of tapping thousands of small pockets of oil in an oil field in south-east Asia. The only viable way of reaching the oil would be to drill thousands of wells – a solution which is both uneconomic and environmentally unacceptable.

On a visit home, Jaap takes his teenage son Max out for a hamburger and milkshake. As they talk, Max turns his straw upside down, bends the top and uses it to suck every last bit of gloopy milkshake from the bottom of the glass. Jaap is mesmerised – and an innovative solution to his technical problem in south-east Asia is born.

At the end of the film, we see Jaap proudly presenting his ‘bendy straw drill’ to colleagues. This innovative technology, born of an observant mind and a chance encounter, allows a single bendy pipeline to reach numerous pockets of oil.

In brief

If constant and continuous innovation is at least one of the keys to success in today’s fast-changing world, then it’s important to have more – and better – good ideas yourself, and to empower your teams to do the same. The answer isn’t simply to hire creative types, to ‘try harder’ or ‘be more focused’. In fact, sometimes, trying a little bit less and chatting a little bit more just might reap more benefits. 

Networking is about people. Talking to people, helping people and getting involved in their lives. Those who don’t mingle only with colleagues in the same company, the same department or the same sector, are more likely to be exposed to different ways of doing things. And so long as they are open enough to listen, creative enough to envisage possibilities, and perhaps humble enough to ask, they’ll be better able to transfer and adapt ideas from one context to another. Networking alone probably won’t give rise to a flood of innovation. But networking actively, and encouraging it among colleagues and staff, will certainly shorten the odds in favour of creating an innovative culture.

Judith Perle became involved in management training after completing the Sloan Fellowship at London Business School (LBS). While at LBS, she and her colleague Tony Newton realised that although many leaders pride themselves on having the hard skills to get the job done, these technical skills often only ‘get you through the door’.Success often depends on the ‘softer’ interpersonal skills that are too often overlooked or under-valued. Judith brings to her training work experience in business communication gained over a
career in publishing, branding and new business development. 

Email:  jperle@ManAdvan.com

Further Reading

Ronald S Burt, ‘Structural Holes and Good Ideas’ in American Journal of Sociology, Vol 110 No 2 (2004)

Richard Florida, The Rise of The Creative
Class Basic Books (2003)

Karim Lakhani, ‘Open Source Science: A New Model for Innovation’ in Working Knowledge: Harvard Business School newsletter (2006)

Marie Louise Mors, ‘Innovation in a global consulting firm: When the problem is too much diversity’ in Strategic Management Journal (2010)

The Network Effect
If you’d like to learn more about how to network, read Judith Perle and Tony Newton’s book The Network Effect. Written as an extension of their interactive workshops, the book walks you through everything you need to know about connecting with other people. It’s available from good bookshops, Amazon or directly from the publisher via
www.TheNetworkEffect.co.uk.

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Unpicking the strengths myth

The current emphasis on strengths has fundamentally discouraged people from challenging themselves to become better leaders, argue James M Kouzes and Parry Z Posner, authors of Learning Leadership: The Five Fundamentals of Becoming an Exemplary Leader

For millennia, people have been searching for a magic formula or elixir that explains leadership success: from ancient literature on leadership that searched for the individual kissed by the gods (Charisma) to historical ‘great man approaches’ (already limited by gender bias). However, the current fascination is with the concept of ‘strengths’.

Now, there’s nothing inherently wrong with the notion that there are certain skills, knowledge, and attitudes that produce higher levels of performance in a task, whether it’s sales, engineering, nursing, or hospitality. Leadership is required of all professions, and it has its own set of skills and abilities. So far, so good. But the strengths approach has been misapplied to mean that you should only undertake tasks in which you are strong, and avoid wasting your time attending to your weaknesses; in areas where you don’t have natural talent, you or your organisation should assign tasks to other people.

The emphasis on strengths has fundamentally discouraged people from challenging themselves to become better leaders. That’s not to say that people shouldn’t attend to their strengths, nor that they are not happier and more successful when using their strengths at work and in other aspects of their lives. But as it stands, they can just throw up their hands and say ‘well, envisioning the future just isn’t a strength of mine, so I’m not going to become very good at it’ or ‘I’m not very comfortable letting people know how much I appreciate their accomplishments, so I won’t bother’. 

First, ignoring feedback about things you’re not good at is inconsistent with a lot of research on learning. Second, it’s not very motivating to tell people to give up before they even start, or when things don’t go as well as expected the first time they try them. Finally, this thinking is impractical: organisations can’t bring in a new person every time someone makes a mistake or there’s a new challenge that someone initially doesn’t have the skills and abilities to handle.

Over all the years we’ve been researching leadership, we’ve consistently found that adversity and uncertainty characterise every personal-best leadership experience. Typically, they’re challenges people have never previously faced. When confronting things they haven’t done before, people often have to develop new skills and overcome existing weaknesses and limitations. They make mistakes and may even feel incompetent. If people built only on strengths, they would likely not challenge themselves or their organisations. You simply cannot do your best without searching for new experiences, doing things you’ve never done, making mistakes, and learning from them. Challenge is an important stimulus for leadership and for learning.

Learning is the master skill

We have a question for you: ‘Have you ever learned a new game or a new sport?’ Undoubtedly, your answer is ‘yes’. We get that response every time we ask the question in our classes or leadership development programmes. Invariably every hand in the room goes up. 

We then ask ‘and how many of you got it perfect the first day you played it?’ People chuckle. No hands go up. No one ever gets it right the first time.

There was one occasion, however, when Urban Hilger, Jr raised his hand and said that on the very first day he went skiing he got it perfect. Naturally we were surprised and curious, so we asked Urban to tell us about the experience. Here’s what he said:

‘It was the first day of skiing classes. I skied all day long, and I didn’t fall down once. I was so elated. I felt so good. So I skied up to the instructor and I told him of my great day. You know what the ski instructor said? He told me, “personally, Urban, I think you had a lousy day”. I was stunned. “What do you mean lousy day? I thought the objective was to stand up on these boards, not fall down.” The ski instructor looked me straight in the eyes and replied, “Urban, if you’re not falling, you’re not learning”.’ 

Urban’s ski instructor understood that if you can stand up on your skis all day long the first time out, you’re only doing what you already know how to do and are not pushing yourself to try anything new and difficult. By definition, learning is about something you don’t already know. Those who do what they already know how to do may have lots of experience, but after a while they don’t get any better because they’re not learning anything new. 

Research has shown that teachers, for example, improve during their first five years in the field, as measured by student learning, according to University of Virginia psychology professor Daniel Willingham. He goes on to report that after five years their performance curve goes flat, and a teacher with 20 years of experience, on average, is no better or worse than a teacher with 10. ‘It appears that most teachers work on their teaching until it is above some threshold and they are satisfied with their proficiency,’ concludes Willington. The same might be said about many leaders. 

So ask yourself: ‘Are you pushing yourself to learn something new when it comes to leadership every day? Or, are you just doing what you already know how to do? Are you stretching yourself to go beyond your comfort zone — beyond what you do well enough — and engaging in activities that test you and build new skills?

‘Are you learning?’

This is an exclusive edited extract from Learning Leadership:  The Five Fundamentals of Becoming an Exemplary Leader, for Business Impact by James M Kouzes and Parry Z Posner (published by The Leadership Challenge, a Wiley Brand, 2016)

Further Reading

Daniel T Willingham, Why Don’t Students Like School? A Cognitive Scientist Answers Questions About How the Mind Works and What it Means for the Classroom (San Francisco: Jossey-Bass, 2009)

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How to get the best out of artificial intelligence

Artificial intelligence-driven technology will be transformational in many industries, but how it shapes organisations will depend on their leaders, writes Jonathan Knight

Much has been written – not all of it true – about the impact that artificial intelligence (AI) will have on the workplace. 

AI is already transforming automated industries, including production, e-commerce, advertising, finance and logistics. It will soon impact more analytical and advisory occupations such as law, consultancy and medicine. But media reports about AI sometimes paint an unrealistic picture of its powers and fail to allow for obstacles in its application. 

There has been less discussion of the practical impact AI will have, or how its application may be slowed due to poor public acceptance. Nevertheless, despite uncertainty about the breadth and pace of its impact, it is certain that AI will create significant challenges for leaders. 

AI – how far will it go?

A fascinating five minutes can be spent taking the BBC’s test to ascertain how likely robots are to take over your job in the next two decades. With the ability to analyse enormous quantities of data, perform intricate operations and recognise instructions, the direction of travel is clear: AI-driven technology will be transformational in many industries. 

Needless to say, however, AI is not magic. Virtually all recent progress in machine learning has been made through ‘supervised learning’, in which input data (A) generates a straightforward response (B). Human intelligence is capable of much more than A to B; we make choices based on complex data gathered over the course of our lifetimes, through learning, memory, experience and genetics. And, given the limitations of present-day AI, robots are a lot less likely to assimilate certain skills in the near term; those, for example, that require an understanding of history and culture, or context and reason. 

It is difficult to imagine robots developing the empathy of humans, which is why we are more likely to be comfortable with a robot carrying out a complicated medical procedure on us, than with a robot checking up on us post-surgery to see how we’re doing and to offer us a cup of tea. 

In other words, while tasks that require complex technical skills and knowledge may be carried out by robots, there are some that we would rather were done by other human beings, with whom we can have genuine, human emotional interaction.The ability to exercise effective judgement, creativity and discretion, combined with the capacity to improvise – as opposed to simply moving from A to B – will therefore be key skills for leaders of the future. Navigating a route through the kind of complex change that AI will bring isn’t necessarily anything new for leaders. However, the scale and pace of the change that AI brings will be, and this means that weaknesses at the top are more likely to be exposed than ever before.

Challenge one: strategy – and structure

As decision makers, leaders will need not only to recognise and understand how their market context is changing but how to adapt and respond to that change. Only by doing so can leaders ensure their organisations stay ahead of (or at least keep up with) the curve, and remain relevant to those they serve. It is not surprising that boards are scurrying to ensure they include a top-notch chief technology officer, bringing digital understanding to strategic decision making – although technology executives are still poorly represented on public boards. 

A few companies have gone further. Back in 2014, a Hong Kong-based venture capital firm, Deep Knowledge Ventures, became one of the first companies in the world to appoint an algorithm, named VITAL, to its board of directors. VITAL supports fellow board members by providing information on potential investment decisions, scanning vast quantities of financial figures and other data on its potential future clients, as well as trends in the market. 

However, as the philosopher Voltaire was wise enough to suggest several centuries ago, it’s important to judge people ‘by their questions, not their answers’. Or, in the context of AI, the data currently produced is only as useful as the humans who feed in the data sets and analyse and interpret the results. 

Leaders must therefore ensure they not only have the right board make-up to respond to technology-led change, but that they have the right structures throughout their organisations, effectively surrounding AI with the human intelligence. This brings us to challenge two.

Challenge two: skills and motivation

In responding to change and staying ahead of the curve, a second absolutely critical element to success or failure for leaders will be whether or not they bring their workforce with them; both in terms of equipping their employees with the right skills to complement AI and motivating them to remain effective throughout a potentially long period of upheaval.

We are often warned about a lack of STEM skills that will needed to navigate the future. In a recent UK study by the Confederation of British Industry and Pearson, more than half of respondent companies were concerned that their future growth would be held back by
skills shortages. 

However, as AI-powered robots become easier for users to interact with, companies will need to focus on developing those skills that are distinctly human; for example, intuition, creativity, empathy, resilience and the ability to scan horizons and context in a way that adds value to the business. Getting this level, and mix, of skills right will be an important part of leaders’ future-proofing strategies, no doubt influenced by access to global talent, as well as home-grown training programmes.

 In terms of motivation, as with any disruption, change needs to be driven from the top with clarity, vision and consideration for those affected. And in doing so, leaders themselves will increasingly have to focus on their soft leadership skills, rather than proving their authority through knowledge and technical expertise. The latter skills may soon become augmented or replaced entirely by AI.

Fortunately, when it comes to helping both leaders and employees get to grips with rapid change, AI is not only the problem but part of the solution. For example, at my own organisation, Ososim, we have experienced the power of AI in helping to create training simulations that are so carefully modelled on the responses of the human brain, participants find them very persuasive and effective. These simulations are already being used by some of the largest companies around the world to help improve skills and capabilities in areas such as emotional intelligence, mental resilience and persuasion.

Challenge three: vision and purpose

old robot toy

Finally, while all this upheaval can sound deeply intimidating, we must remember that technology has been improving the capabilities we have as humans for decades. Until now, the focus has been more on what we are physically capable of doing. Technology has helped us to achieve things that our bodies were simply not capable of doing before – from flying thousands of miles through the air to communicating with one another across continents.

With the help of AI, technology is now enhancing our mental capabilities as well as our physical ones: crunching huge quantities of information in milliseconds, and using algorithms that flawlessly remember every correction ever made.

What technology cannot yet master is understand what it is actually doing and why; nor does it care. A robot kitted out with AI has no sense of ethics or purpose, equity or fairness, beyond what we humans tell it. 

And therein lies the third hugely significant challenge for today’s leaders and those of tomorrow: AI will be as ‘good’ or as ‘bad’ as humans make it. It was with this challenge in mind that, in 2014, AI research firm DeepMind insisted that if it were to sell its AI programme to Google, an ethics committee must be appointed to oversee its use.

It is imperative that human leaders, across public and private sectors, remain closely involved with the development of AI, challenging the data, putting it in context, and remembering that human creativity, vision and purpose may need to override whatever AI is or isn’t saying. AI may bring incredible progress, but it is our human leaders who must remain in charge of the moral compass.

Organisations such as the World Economic Forum have played a strong role in leading this kind of global discussion. They have set the challenge squarely at the door of leaders across the private, public and third sectors, in terms of how the fourth industrial revolution can be balanced with responsible governance and global goals, from the elimination of extreme poverty to gender equality. 

Business Schools, such as INSEAD, are putting the development of thoughtful, responsible leaders, at the heart of their missions. As the populist, negative emotions expressed by once-dominant groups, threatened by technological change, increasingly distract political leaders, so business leaders will need to provide the positive vision to guide inevitable technological advances.The human race has been through change before; our greatest strength as a species has been our ability to evolve and survive. But in each and every transition, leadership is key. Smart machines can make us smarter, and continue to drive our progress forward. But we must take nothing for granted. 

Strategy, motivation and vision will all be essential to how well we humans ride this next wave.

Jonathan Knight is CEO of global learning and technology company Ososim. He was part of the leadership team that established Accenture Learning and a founding member of the EU’s eLearning Industry Group. Jonathan has an MBA from INSEAD. His clients include BNP Paribas, Cisco, Deloitte, London Business School and the World Economic Forum.