Can’t see the above video? Click this link to watch.

In this video interview, David M. Smith, PhD, Associate Dean of Academic Affairs and Associate Professor of Economics at the Graziadio School of Business and Management discusses the impact the proposed Employee Free Choice Act (EFCA) would have on employers, unions, and the workforce.

The Employee Free Choice Act (H.R. 1409, S. 560) is a pending piece of federal legislation that aims to “amend the National Labor Relations Act to establish an easier system to enable employees to form, join, or assist labor organizations, to provide for mandatory injunctions for unfair labor practices during organizing efforts, and for other purposes.” It seeks to make collective bargaining easier for employees, guarantee them contracts, and also reform the existing authorization forms process, or “card-check,” by taking away the right of employers to decide whether to use a card-check or a secret-ballot election and instead placing that decision in the hands of employees.

Questions for Dr. Smith:

1. Why is the proposed Employee Free Choice Act is a bad idea?
2. What improvements would you suggest to the Act?
3. What role should workers play in improving California’s economy?
4. How should managers respond to the EFCA?
5. What can we expect if the Act is passed?

Related in the GBR

The Cost of Lost Data by David M. Smith, PhD

What You Need to Know About the Future by Linnea B. McCord, JD, MBA

Bring Happiness to Work! by Charles D. Kerns, PhD

• Half of participants think we’ll be back on track by 2010
• 20% think we’re already on the road to recovery
• 30% think all the initiatives to stabilize and grow the economy so far are only making things worse

The GBR Blog asked Peggy Crawford, PhD, Professor of Finance, and Terry W. Young, PhD, Professor of Economics at the Graziadio School of Business and Management, to comment on the results and offer some practical advice on how to take advantage of the current economy. They wrote:

Peggy Crawford, PhD

Peggy Crawford, PhD

Federal Reserve Chairman Ben Bernanke coined the phrase green shoots” of recovery and we agree that some indicators suggest signs of economic improvement. Stocks have rebounded off their lows—at least for the time being—but job markets, a lagging indicator, are still weak.

Consumers—the major driver of economic growth—remain on the sideline. Households are saving—at a healthy rate of 5 percent versus the disastrous negative rates prior to 2008—rather than spending. This to due partly to the decrease in the value of their homes and stock portfolios, partly to deleveraging as they reduce their high levels of debt, and partly to uncertainty caused by high unemployment rates.

U.S. businesses are reluctant to jump on the recovery train until they see “real” growth.

Instead companies continue to aggressively cut costs and lay off workers. Unemployment has increased to 9.4 percent, a 25-year high. However, there is a “green shoot” here as the rate of job losses has declined significantly over the last few months.

U.S. exports have been hammered as the global recession decreased demand. The recent depreciation of the dollar may boost exports, but also puts upward pressure on oil prices, which could increase the trade deficit. Oil prices recently hit 2009 highs, raising the specter of inflation and putting upward pressure on long-term interest rates. It is difficult to find a “green shoot” in this data.

The recession began with the housing sector and true recovery will start there.

We need to see stabilization in the housing markets—in the supply of unsold houses and in the prices of homes. We observe a hint of a “green shoot” here as housing prices are beginning to stabilize and housing sales are beginning to increase in some areas of the U.S. The stock of unsold homes dropped to less than a 10-month supply by the end of March.

So, how do we thrive in this uncertain environment?  Why not…

1. Look at this as an opportunity. Firms can hire from a pool of more highly talented individuals than ever before; the opportunity cost for education is way down and individuals can increase their marketability by going back to school; and investors can find some real bargains.

2. Recognize the stressful environment and be emphatic. Some companies have successfully reached out to skittish consumers by offering support if they lose their jobs.

3. Emphasize your value add. Take the time to show what you bring to the table, whether you’re a firm noting the value add of your goods or services, or an individual pointing out the increased productivity of your labor.

So, don’t go out and buy a lawn mover yet. While we do believe there is light at the end of the tunnel, those “green shoots” have not yet blossomed into a luxurious lawn!

Related in the GBR

Investing for Income in a Down Economy by Steven R. Ferraro, PhD, CFA

Owner-Occupied Commercial Real Estate for the Entrepreneur by Alphonse Lordo, MBA, and Michael Kinsman, CPA, PhD

Leveraging Opportunities in the Current Economic Climate-Audio Interview with ICE Chairman and Founder Jeff Sprecher by Danielle L. Scott

Viewing this from a reader? Click this link to watch the video.

In this video interview, David M. Smith, PhD, Associate Dean of Academic Affairs and Associate Professor of Economics at the Graziadio School of Business and Management discusses the takeaways from his recent paper, “Data Loss and Hard Drive Failure: Understanding the Causes and Costs.” Hard drive failure is an inescapable reality, Smith writes, and most firms will face data loss unless they put preventive measures in place.

Questions for Dr. Smith:

1. In  case of hardware failure, what precautions do you recommend to to prevent data loss?
2. Do you see Macs and alternative OS computers that employ seamless backup changing the data loss landscape?
3. Any advice on training employees on data loss preventive measures?
4. What are network data loss prevention (DLP) systems?

Related in the GBR

The Cost of Lost Data by David M. Smith, PhD

Will Your Company’s Electronic Records Storage Withstand Legal Scrutiny? by Charla Griffy-Brown, PhD, Stepheni Bodo, and Linnea McCord, JD

Connecting Enterprise Information and People in a Web World by Donald M. Atwater, PhD, Michael Williams, PhD, and Dawn Guy

Viewing this in a reader? Click here to watch the video.

Marshall Nickles, EdD

Ray Valadez, EdD

In this video interview, Marshall D. Nickles, EdD, and Ray M. Valadez, EdD, both professors of economics at the Graziadio School of Business and Management, discuss the findings from their paper, “Enhancing Returns in a Volatile Global Stock Market: A Time Limited Approach to Risk and Reward,” which won the Best Paper in Finance Award at the 11th Annual Conference of the Global Business Development Institute in March.

The recent shocks in the financial markets and declines of the stock markets around the world have caused many traditional investors to question the wisdom of a traditional buy-and–hold strategy. While it is an approach that many investment advisors promote, Nickles and Valadez believe that by investing only during certain months of the year (that is, the seasonality approach), risk exposure can be minimized while at the same time, returns may be enhanced.

Questions for Marshall Nickles and Ray Valadez

Why is it not a good idea to stick with the traditional buy-and-hold strategy of investing in this economic climate?

Why can’t we rely on portfolio diversification to get you through this bear market?

What is the seasonality approach?

Do you expect the seasonality approach to work as well in the future?

How can investors benefit from the results of your research?

Related in the GBR

Seasonality and the Stock Market by Marshall D. Nickles, EdD

Does Market Efficiency Trump Behavioral Bias in Finance Decisions? by L. Wayne Gertmenian, PhD, and Nikolai Chuvakhin

Presidential Elections and Stock Market Cycles by Marshall D. Nickles, EdD

Developing a Barometer for Workplace Attitude by Ray Valadez, EdD

Davide Accomazzo, MBA

In the ongoing social debate on what kind of an economic system we should build on top of the rubble of the present financial mess, we as investors should focus less on the philosophical nuances and more on how to adjust our investment framework, expectations, and tactics.

As the work of free-market proponents Milton Friedman and Margaret Thatcher falls to pieces under the weight of human greed and hubris, it is important to acknowledge that greed and hubris were also the culprits in past socio-economic collapses: communism, failed monarchies, etc. It seems safe to say that whatever policy will be implemented next will carry within its DNA the same self-destructing gene.

History may not repeat itself but it certainly rhymes, as Mark Twain once said.

The strongest elements of a highly productive society are still rooted in free market and entrepreneurial ideologies. The European model—so much in vogue today as a potential replacement of our own socio-economic system—has for years created much higher unemployment, lower GDP growth, and less original scientific research than the US. In addition, it did not prevent the system from falling under economic dislocations. In fact, the European Union is currently in a much more precarious position in terms of its banking system and public deficits than even the US. (And by the way, I am from Europe (and still proud of my ancient historical heritage) so I should know…)

If the U.S. ends up moving toward a more European type of economic system, the result could be much lower rates of return for the foreseeable future in most asset classes. From a beta perspective, the driver of passive returns, which is an indicator of the long-term rate of growth of an economic system, may be inexorably muted for years, perhaps decades.

So if equities are going to underperform as a passive asset class, in absolute terms, will they at least outperform  bonds or commodities (in relative terms)?

While bonds should outperform in a deflationary environment, they will underperform in a highly inflationary environment (a situation when pretty much everyone loses).  In other words the beta of bonds does not seem to be assured either.

But what about commodities?

My business partner and I have produced research that indicated there is no beta in commodities, only contingency-driven opportunistic returns.

And real estate?

The hangover of the last few years would seem to make this asset class a flat bet at best.

Silver Lining

Before you start reaching for the Prozac, I would like to stress that there is a silver lining in this analysis. The absence of  predetermined beta-type rates of return means that superior analytical work will uncover possibilities for excess absolute returns, for example, alpha or investors’ edge or value process. In other words, a regime of muted expected returns for most asset classes will enhance the ability of the superior analyst to work out an edge.

From a statistical point of view—and based on current valuations—the risk-reward ratio of owning equities for the next 10 years is more favorable than 10 or even 20 years ago.

However, the lesson to be learned is that valuations, market timing, leverage, and risk management are the essence of investing–not beta exposure. Whether you use a micro-economic valuation model or a macro–based, asset-allocation paradigm, pricing and risk filters are key. Even within the context of my beloved core-satellite(s) strategies, the core still has to be managed somewhat and altered by virtue of superior analysis.

The laissez-faire society with all of its misplaced entitlements and outsized rewards may have ended, but its gift to us may well have been the rediscovery of our own worth and the belief in our own unique contribution to a better personal and social future—that is, unless populism and ideologies of mere redistribution win over.

Related reading:

Bill Gross, “The Future of Investing: Evolution or Revolution?” Investment Outlook, Pimco, April 2009.

Related Articles in the GBR

An Alternative Way to Manage Equity Portfolios by Davide Accomazzo, MBA and Rosario Rivadeneyra

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Owner-Occupied Commercial Real Estate for the Entrepreneur by Alphonse Lordo, MBA, and Michael Kinsman, CPA, PhD

• All participants said they have changed their personal financial approach due to the current economic instability
• 60% say they are working harder to pay down all their debt.

The GBR Blog asked Davide Accomazzo, Adjunct Professor of Finance at the Graziadio School of Business and Management, to comment on the results and offer some practical advice on riding out the economic turbulence. He wrote:

Davide Accomazzo

The poll, albeit not statistically significant, does seem to empirically and anecdotally confirm my macroeconomic view: the great deleveraging is alive and well. The aftermath of the bubble years seems to have not only forced financial institutions into deleveraging, but the unstoppable American consumer as well.

The shift from a leveraged consumerist approach to a saving-prone one is of vast significance because it marks a psychological and material change in the way Americans view their financial positions and their lives overall.

The economic repercussions should last a very long time and deeply affect fiscal, industrial and trade expectations in the short and in the long run. Influential Brisitsh economist John Maynard Keynes once referred to the “paradox of thrift” as that situation during a recession when economic agents will become individually more financially cautious—a personal positive—but in so doing, create a fall in the aggregate demand—a collective negative. Based on this simple observation, we should expect large fiscal deficits and a continued economic malaise; during a deleveraging process, the cost of money will become a secondary concern and the higher priority will continue to be to reduce risk (at the corporate and at the individual level).

The basics of a balanced personal financial strategy are relatively simple:

• Spend in accordance to a wise budget
• Invest for the long term with discipline and common sense
• Insure yourself properly
• Use credit cards as a money management tool NOT as a leverage tool

Related Articles in the GBR

Debt Tied to Lower Firm Performance by Michael D. Kinsman, PhD, CPA, and Joseph A. Newman, PhD

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An Alternative Way to Manage Equity Portfolios Davide Accomazzo, MBA and Rosario Rivadeneyra

The GBR Blog wants to know:

Do you have a different opinion about where the economy is headed? Tell us in the comments.

UPDATE: This poll was closed on June 22, 2009. Read our analysis of the poll and get “Tips on Surviving and Thriving in the New U.S. Economy,” by Peggy Crawford, PhD, Professor of Finance, and Terry W. Young, PhD, Professor of Economics.

(Left to Right: Roberta Romero (Drucker), Jenny Sheng, Tanya Stevens, Candace Olfati (all CGU/Keck Graduate Institute), Joyce Zhang, Sirish Upadhyay (both Graziadio), Henry Du (Drucker), Jaya Soedradjat (Graziadio), Me)

On May 2nd, the world gathered in Omaha, Nebraska to listen to Warren Buffet at the 2009 Berkshire Hathaway Shareholder Meeting. We tried to parse the future from his words, and wondered if this was the most optimistic that Charlie (Vice Chairman of Berkshire Hathaway Corporation) has ever been. Some hailed the new format as much more focused, giving the audience a better chance to understand the genius of Warren Buffet.

Two days later, the market reacted with the Dow posting a 200+ point advance. And since Warren doesn’t really care about the market, let’s just say that the reviews have been uniformly—cautiously—optimistic.

This year, I attended the meeting with 7 students and recent graduates from the Peter F. Drucker and Masatoshi Ito Graduate School of Management, the Keck Graduate Institute, and Pepperdine’s Graziadio School of Management. I teach as an adjunct professor at Drucker and the Graziadio School and it was a delight to be joined by a group of delightful, energetic, and bright leaders of our future.

I’ll try to avoid the usual reporting (you can read several media reports on what was said during the meeting), but here are some of the my takeaways:

On Corporate Governance

As always, Warren was tough on the corporate board and arcane regulations…

• Executive Compensation: Compensation committees are often useless, simply getting consultants to provide market data and always looking at the top quadrant for comparison. Does anybody not know that half the population has to fall in the bottom 50%? (I agree—you can buy data to prove any point you want)
• Independence: Those whose livelihoods depend on their director compensations can never be independent because they don’t want to get fired; how can they rat out their CEO friends? (I don’t buy really buy this, since this will only leave the Buffets of the world to be directors)
• From Charlie Munger (Vice-Chairman of Berkshire Hathaway Corporation): [In reference to the run-up of financial institution profits through bogus transactions involving derivatives] the accounting profession and rule-setters should be ashamed of themselves for creating accounting rules that incentivize executives to post sham profits, rather than operate responsibly. (I was disappointed that the two of them were not asked more questions about the role of public accountants and the future role of the Big 4 accountants)

On the Economy

• The Federal Government: All people make mistakes when there is so much to do, and we cannot expect perfection during these times. However, the general approach that the administration was taking is good, but that also includes the previous administration’s bail-out last October, which saved the country from a monumental collapse. We will need to worry about inflation at some point, but not now. (I don’t think Buffet was as supportive of the Obama Administration as the media reported. I sense he was trying not to sound like a cheerleader, but since most people believe his ideas somehow end up being heard by the Obama administration, he tried to stay in his own non-political world.)
• Tax-Payer Bailout of AIG and Automotive Industry: We really aren’t using taxpayer money. You and I haven’t had a decent tax increase in years. Instead the money to bailout all these companies comes from borrowing, and the only people who really should complain about the auto bailouts and the AIG bonuses are the Chinese. They’re the ones paying for a large share through their acquisition of US Treasury notes. (Another question about the value of the dollar came up. There’s no getting around it; as long as China keeps exporting to the US and getting paid in dollars, the purchasing power of their dollar holdings will diminish over the years)
• Housing Market: There are an estimated 1.5 million unsold homes in the market. Household creation in the US is about 1.3 million per year. In the past, housing starts exceeded 2 million for the 1.3 million new households, so that will create a glut. Now, the construction pace is down to 500,000 a year. So the only way to get rid of the oversupply is either to blow up the houses, make fewer, or increase household generation But with the reduced pace, the current supply will be reduced, and there will be peace in the housing market. (remember my post about Why Real Estate Matters? Maybe he read that).

On Financial Literacy and Education

One of the first questions was about financial literacy of the future generations. Buffet said that it’s a problem with the current generation. He also ripped financial engineering programs of the MBA schools for churning out people with higher math skills that couldn’t be used. He said that if you have 150 IQ, you should sell 30 of that. The problem with smart people is that they try to use it, and business doesn’t require all that much smarts. (I agree and disagree—Warren can say whatever he wants because he probably has a 150+ IQ. )

• MBA schools: All they need to teach is that a bird in one hand is worth two in a bush, but that’ll only take 5 minutes and MBA programs can’t charge tuition for that, so they teach all sorts of stuff that has nothing to do with business. (He’s got a point, but he seems to go against his better advice—don’t try to show up other people. )
• False Precision: If we need a spread sheet to calculate the value, we won’t invest, because it’s not that complicated to get the value of a business. (Buffet and Monger used the term “false precision” to describe financial models that are used to price derivatives and securities. He is famous for not using accountants or consultants to help him value companies—he needs to see that much margin of error in his valuation to go forward with the deal.)
• Modern Finance: How stupid a logic is it that the price of a security is always correct, that it always incorporates all the information (this is the foundation of modern finance)? As a big value investing proponent, students really only need to know 2 things—how to value a business and a good understanding of the market. (I wasn’t sure if he meant the capital market or the market in which the business competes. In general, this is a further attack on the financial theorists from the Efficient Market Hypothesis school (University of Chicago—my alma mater). It’s a bit harder to take for people who’ve studied finance all their lives. I’m waiting for University of Chicago—or Booth, as it likes to call itself these days—to craft a response. )

On Management

• In reference to a comment that Berkshire Hathaway can’t possibly have the simple business model that Buffet so ardently advocates: The model is simple—we’re a collection of private businesses. CEOs need to make decisions as if they own 100% of the company. Operate the business like you own it. (I have a feeling that Warren may be a better investor than a manager. He’s a great leader, but not in the sense that people can emulate his management style. His style may work because he’s one of the richest guys in the world, and because he’s a genius. He is such a great teacher, though. His ability to take complex issues and make the average Joe understand them is pretty amazing. He’s the Bill Clinton of business.)
• Executive Compensation: Everyone else doing it is not an acceptable business strategy. (He may have been referring to how executive compensation is based on benchmark studies of other firms. This reminds me of some of the stuff we do in consulting. Benchmarking and Best Practices end up being exercises in justifying to yourself and your boss that you can copy others, but better. This is another indictment of the consulting industry and managers who follow, and not lead. It is the “I chose IBM for the IT project, so even if they screw up, don’t fire me” argument.)

On Berkshire Hathaway

• Succession: I don’t think watching me read the NY Times is a good way to train my successor. ( He offered the same story about 3 inside candidates for the CEO job and 4 inside and outside candidates for the Chief Investment Officer Job. I’m not sure he shed new light on the topic. He and Charlie are still enjoying their duties, so unless the swine flu turns deadly and toward Omaha, we should figure they’ll be around for a bit. No matter what assurance he gives, Berkshire Hathaway is always going to be deemed Warren Buffet & Co—much more so than GE was Jack Welch & Co. And as talented as GE successor Jeff Immelt was and is, look what kind of challenges he faced. He did not want to announce the new CEO and go through a transition because he thought the best way to prepare was to run a business, like all the current internal candidates are currently doing—running successful BRK businesses.)
• BYD: Although the investment in BYD, a Chinese manufacturer of rechargeable batteries, mobile handset components, and cars surprised some as speculative,this was Charlie [Munger's] deal, and he is very excited about this company. In fact, Charlie is in love with not only the company, but also the Chinese. (Munger is known to run the business like an engineer—always having a margin of safety. Thus, it’s not surprising that he loves BYD, which hires 17,000 of the brightest engineers in China.) Never bet against the best 17,000 engineers in China.
• Derivatives and Insurance: Don’t worry, we’re covered, and we’re in better shape than we are a few months ago. ( Somehow, I believe him.)

After the event, I met up with my students at the Nebraska Furniture Mart for the Western Cookout. It was a gorgeous day, the food and Coke (in a metal bottle!) were cheap, and we stayed for a few hours. It was the first time many of the Pepperdine and Drucker students had met and they immediately connected. They were all uniformly impressed with Warren and Charlie. A few mentioned this was the best event they’d ever attended in terms of the learning and the people that they’d met. It was a celebration of American capitalism, good old fashioned fun, and unparalleled business knowledge and wisdom. It was a gathering of people from around the world who would take away unforgettable memories of friends, old and new, and of the man they all love to call “The Oracle of Omaha.”

Joseph Lee is an adjunct professor at the Graziadio School of Business and Management, where he teaches a course on management consulting. Read his blog at joe-lee.com/blog.html

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Davide Accomazzo, MBA

The financial turmoil of the last eighteen months has brought to everyone’s attention the problems and dichotomy of our present monetary and financial systems. While we are now dealing with the consequences of too much credit, it is also important to note that a system without credit (and—much to the delight of the populists—without bankers) would be a much poorer and less innovative social system.

So far, the attempted solutions suggested have varied from more leveraged credit to the substitution of the fiat currency system and the central bank with a gold-linked scheme.

The problem with most of these suggestions is a massive confusion about how the U.S. system really works, how it should work, and how we would like it to work (and here it gets really problematic as every individual interest invariably jockeys for a better position).

The issue with a fiat currency system is that it is backed by the credibility of the government and the central bank, which should be acting independently as a guardian of the currency. Governments have inherent conflicts of interest and may feel pressured to regularly weaken the currency as a means of veiled taxation; other sectors of the population will also look favorably on consistent inflation to reduce the burden of borrowing. The central bank is supposed to act independently to counterbalance these inherent social and political dynamics. Unfortunately, in the case of the U.S. and many other countries, the central bank, is hardly independent or focused on one true objective of financial stability. In reality, a central bank’s independence is very limited; true independence would require practically no accountability and a large degree of secrecy, which comes, of course, with its own problems.

The fine balance between a government’s and a society’s pull toward credit excesses and the countervailing force of the central bank is the key to successful economies.

One way for the U.S. to begin heading back in that direction would be to simplify the objectives of the central bank (i.e., the Federal Reserve) and eradicate its current internal conflicts between credit management, currency management, growth management, price stability and banking supervision. In other forums, I have advocated that system supervision and price stability (including currency) should be the only focus of any central bank.

The Federal Reserve’s obsession with uninterrupted growth and constant business cycle management is a political objective completely inconsistent with its true existential mandate.

Recent populist calls for the dismantling of central banks around the world as a solution to this problem are very disingenuous and they miss the level of complexity our system has reached over decades. A potential return to some sort of gold standard and the eradication of the central bank will accomplish nothing positive. A financial system built on credit is far superior to no credit at all, but because of the system’s inherent instability, there is a great need for fiscal management and strict regulatory supervision.

The answer is a better, more functional and less sclerotic central bank—not a system left to its own devices.

The unfortunate truth (and yes I do believe in free markets and in maximum rational levels of freedom in every aspects of society) is that full free markets have never existed and cannot exist for two reasons: the natural tendency of humans to jockey for personal (or group) interests and the reflexivity of market action, which distorts self-adjusting dynamics.

As far as having a gold-linked currency goes, the shiny metal has had its chances over history and has invariably failed to function in the best interest of society at large.

The fact is that gold is subject to the same credibility issues of governments and central banks (that is, the idea of its value is still based on collective faith). Gold failed during the times of the Spanish empire, which drowned in a sea of inflation, during the California gold rush, and during the Great Depression. Gold is certainly not the answer at a systemic level, but it is an accepted temporary hedge, and until better checks and balances are found in our present system, it is an asset that deserves a small place in most portfolios.

Socialism (and certainly communism) in classic terms were concerned with gaining control of the means of production; nowadays that is a trivial issue and quite impossible to accomplish when most means of production are held offshore and a larger percentage of the economy is represented by services. The key to today’s socialism is control of capital creation—the unholy union of governments and central banks. Gov-centralbank-ism?

The future of capitalism will depend on our ability to clarify the objectives of central banks as well as America’s ability to create modern institutional checks and balances.

Note: The current fiat monetary system is based on a currency that is backed simply by faith and trust in the government. In other words, the currency is not at the present time convertible into anything—it is just a piece of paper that tracks relative interest rates and rates of growth among countries. Ultimately, currency value rests on the faith investors have in the government that the real value will not be debased. In the past, currencies have been linked to commodities (usually gold or silver) with a conversion ratio—this served to limit government actions to inflate the money supply and debase real purchasing power. During this economic mess there have been many voices that have invoked a return to some sort of gold standard. And as the everyday business of economic life is being thrown into question, calls for a move to some kind of socialism and away from the supposedly free markets are being made.

Sources

• George Cooper, The Origin of Financial Crises, Vintage Books, New York, 2008

• Niall Ferguson, The Ascent of Money, Penguin Press, New York, 2008

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Joseph Lee

Times are tough. The demand has never been greater for regulatory oversight. Public outcry to punish those who failed us has reached the ears of our leaders and politicians.

The dismissal of GM’s chief by the Obama Administration was a shock and a signal to the automotive sector: This is a time in which risk taking will no longer be tolerated. We must learn to play it safe.

Or not.

The Honda Story

Soichiro Honda, was never a man who shied away from taking risks. He said that if it took 99 failures to achieve a result, then those really weren’t failures. Soichiro Honda, of course, was the founder of Honda, a car company that has always found a way to weather the storm.

In the 1970s, Honda wasn’t considered a major player in the auto market, even in Japan. Running out of space to manufacture in its home turf, it took the gamble and became the first Japanese automaker to localize in the U.S.—it built a plant in Ohio. Cited by critics as a company that lacked critical mass, and that could globalize successfully only by adding scale, Honda stayed true to its origins by refusing to add models or lines and focusing on the small and fun cars that made it what it is today. And, by the way, which is the only company that makes cars and also lawn mowers, not to mention airplanes?

Honda’s corporate culture is reflected in its name. We all know it as Honda Motor Company, Ltd., but if you read Japanese, you know that the company’s real name is Honda Giken. Giken is short for Gijutsu Kenkyuu, or Technical Research. In short, Honda is an engineering company. The company’s culture is engineering and the employees love to tinker with engines.

Honda is a company that knows nothing about failure. Everything is about experimentation… trial and error.

Ten years ago, I ran a corporate training event at Honda and its subsidiaries. One of the exercises involved breaking down communication barriers through process improvement. What did we do? We made paper airplanes to see which team could create the one that flew the farthest. In a typical U.S. or Japanese corporate environment, we would expect to see people arguing about design, costs (we made them buy the paper), testing, who would throw the plane, etc. But at Honda, the engineering mind prevailed. They organized themselves and meticulously went through the process of putting together designs that would work, discussing who had skills in relevant areas (interestingly, one gentleman in a team happened to be paper airplane champion in his town when he was a kid).

One of the great things I learn in corporate training is that we really don’t teach people anything as much as we create an environment in which failure is acceptable and acknowledged as part of the learning process.

Honda has produced a wonderful 8-minute short film titled “Failure,” and posted it on their website. I first learned of Honda’s website while sitting in a movie theater waiting for the trailers to start. I watched as Indy racer, Danica Patrick replayed her own experience: “If you’re driving a car, you feel frightened a bit. We bump against that feeling as much as we can, to try and push that limit further, and then get comfortable there… and then push it again, and then you’re constantly on the verge of crashing… because that’s the fastest.”

It is only at “the verge of crashing” that we attain breakthrough performance.

As much as this is a time for restraint and risk management, it is easy to forget how failure has always led to success, and that without the 10,000 light bulbs that didn’t work, Thomas Edison would never have found the one that did.

Joseph Lee is an adjunct professor at the Graziadio School of Business and Management, where he teaches a course on management consulting. Read his blog at joe-lee.com/blog.html

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