The Science of the Effects of Leadership

This is a recent research paper I wrote with the names changed for anonymity. I apologize for any awkward sentences this causes as I had to make substantial changes to my original paper and my cats would not leave me alone while I did so.

"When I reduce headcount I expect that numbers remain the same, if not improve."

One day, you will be in charge. It may be over a factory, a battalion, a piece of equipment, progeny, or maybe your pet. Whatever the object or person, you will have a huge amount of responsibility over something if you have not already. It is critical to have the skill to gather the facts, analyze the facts, and make a decision based off of what is available to you. Failure to do so frequently can sometimes leave you unscathed. However, there will come times when it will be disastrous to be so negligent.

When it comes to running a business, this type of negligence runs the risk of turning good employees bitter. It can cost an organization millions of dollars in risk avoidance just so a   supervisors to quit over what they know is mismanagement of company resources, especially when there is a culture that threatens supervisors monetarily.

Bad bosses drive lost productivity costs upwards of $360 billion annually

This paper is a compelling, first hand account from one of the highest performing managers in their capacity at one of the worlds 30 biggest companies and on how management’s failure to pursue the facts can cost the company more than you would think. Bad managers cause 60% of Americans to say their productivity would improve with a better boss and 65% of Americans would be happier with their boss getting replaced then with a raise (Lazear & Shaw, 2005). In the United States, bad bosses drive lost productivity costs upwards of $360 billion annually (Lazear & Shaw, 2005). The insights gained from these experiences demonstrate how good leadership can prevent these problems.

Keywords: Philosophy, Ethics, Utilitarianism, Business, Leadership, Compliance, Values, Deontology, Relativism, Duty, Trust, Responsibility, Accountability, Sarbanes-Oxley, Segregation of Duties, Company Culture, Toxic Culture, Ethical Egoism, Capitalism, Cognitive Dissonance, The Ethics Incompleteness Principle, Incentives, Fraud

The Science of the Effects of Management

Education is critical when making management decisions (Bertrand & Schoar, 2003). Understanding the facts is also a key component. This is critical in inventory based industries like distribution management. For example, raising the education of distribution managers in Portugal to U.S. equivalents could raise productivity by about 20% (Hsieh & Klenow, 2012). In a larger view, the overall difference in education is responsible for 33% of the per capita output gap between Portugal and the U.S. (Hsieh & Klenow, 2012). This readily demonstrates the need for managers to be knowledgeable enough to make decisions (Bertrand & Schoar 2003). 

As a manager, this includes having the educational skills to fact find, gather information, and properly analyze the situation. Which, let's face it, is the real reason degrees are a thing. A degree tells the world that at least you know how to research and analyze data to draw an educated conclusion.  Leaders who do not have the education necessary to manage what they are in charge of have a demonstrable weakness that is shown by the analysis between Portugal and the U.S. Additionally, managers are more effective if they have a diverse skill set and knowledge base (Lazear & Shaw, 2005). As a manager grows and widens their skill set, they can more properly gather and analyze the results and increase productivity. 

For example, in analyzing a broken metal plate, someone without experience would probably just say that the metal sheet broke. Someone with a better fact finding skill set can look at the metal, see that it has plastic deformation at the tear as well as evidence of impact damage. Then, because they understand the facts, the can determine that the metal plate was hit by a strong, concentrated force that caused the metal plate to slowly rip due to fatigue and the force overcoming the plates ability to resist the damage being done. In a leadership sense, a manager who does not know what an employee’s job is can put undue pressure on an employee. 

For example, Corporate may wish to see a warehouse manager fired because of a stock out on a critical material. However, the reality is there is a 99% service level and having all the parts in that category available at a moment’s notice may cost the company $10-15 million (It's this reason that Amazon and Walmart don't stock everything, it just seems like they do, follow me for a future article on Amazons clever inventory model). Additionally, the employee knows that the part is no longer made because the factory shuttered its doors years ago, so the employee is trying to find alternates for something that doesn’t exist. This scenario is not uncommon, and it would probably lead to severe employee resentment at corporate for threatening their job instead of doing some fact finding. This also readily demonstrates that there is a toxic culture. It also can permanently damage an employee's relation with upper management or the company. Once you mix dog poo in the cookie batter, you can't un-mix it (shout out to all of you who had that Sunday school lesson!).

Toxic culture is prevalent and it has many sources. It can develop for many reasons, a bad bonus structure, mismanagement, abuse, fraud, and sometimes, people are just mean. Whatever the reason, employees are 30% more likely to develop coronary disease when their relationships are poor with their bosses (Lazear & Shaw, 2005). Additionally 30% of those with bad bosses make mistakes on purpose, 33% stop working as hard, and it takes an employee about 22 months to recover from mismanagement (Lazear & Shaw, 2005). Now, these statistics are not very clear at face value until you take into account that 75% of employees say that their boss is the worst part of working. 

22.5% of employees in the American workforce purposefully make mistakes because they do not like their boss

To put that in scope, it means that 22.5% of employees in the American workforce purposefully make mistakes because they do not like their boss. This is an expensive waste of talent that translates into a $360 billion loss in productivity (Lazear & Shaw, 2005). 

For example, in a colleague of mines area of responsibility, the treatment the upper management has given them has led to $220,000 in sunk costs. Management has told them to “shut up” and “do you want to get fired?” My favorite is “I’m warning you that you are on your last leg, they are looking to fire you if your metrics don’t improve.” Mind you, the metrics are in the 99% range. These abusive words towards my college started after a 23% reduction in their workforce and began with the first memorable quote of many: "When I reduce headcount I expect that numbers remain the same, if not improve." Which can only be done when there is technological investment, more on that in a future article. 

When conversations like that start happening, well, there goes the company money because of fear and an effort to keep their job. So money that didn't need to be spent was being dumped on trying to fix perception problems (their KPI's went down a little bit, but performance was still rated in the top 3 compared to other facilities of it's class). Thus, within a year of getting a bad boss, my colleague joined the 50% of employees who feel un-valued that are looking for a new job (Lazear & Shaw, 2005). Additionally, turnover costs companies money. For example, the estimated replacement cost for my colleague would be about $98,000-$117,000 (Boushey & Glynn, 2012).

50% of employees who feel un-valued that are looking for a new job

Bad management undeniably costs, and it can be quantified (Bertrand & Schoar, 2003). As a leader myself, I have found the following tools to be very useful in improving my management style: Forward Energy Map, critical thinking, business analysis, and the “Follow Me” principle.

Basic Trust Building

One of the biggest threads in these is an ethical one, fact finding. This is best demonstrated in the Forward Energy Map. Effective use of the Forward Energy Map is to ask forward leading questions. These questions seek to find facts, stick to facts, and then develop solutions based on facts. This process severely discourages complaining, back-biting, and comments that have negative effects on critical thinking.

Critical thinking can relies on having applicable and accurate facts to analyze and draw conclusions. This often requires a good education in areas that nurture critical thinking. Especially when it comes to making business decisions. Many things must be taken into consideration, and relying on feelings can produce bad assumptions that damage employee morale. Which in turn, damages the trust an employee has in a manager, especially if an employee is an expert and understands his input into the business more than the manager does which is why business analytics is important.

Business analytics seems like a broad field, but in simple terms, it’s using math to analyze what your business is looking at. It is critical as a manager to have this skill, especially if your industry relies on mathematical systems like Key Performance Indicators. If a highly skilled employee is presenting their KPI’s, and it becomes apparent that their manager does not understand how the KPI’s work and lacks the desire to learn, it can create a bad relationship with the employee. Especially when the employee is trying to fix a problem. This is why it is important to lead from the front.

Leading from the front is critical when there are problems. This was bravely demonstrated by Colonel Aubrey S. Newman on 20 October 1944. The 3rd of the 34th was pinned down by heavy fire. When the Colonel arrived, he assesses the situation and led his men forward yelling “Follow Me.” Usually, when there is a problem, real and especially when it’s perceived, it is critical that a leader goes to where the problem is happening. Upon arrival, the leader needs to assess the situation after taking in all the facts. This does several things including: building a personal connection, building trust, removes the white noise from the facts, and it prevents a manager from crushing an employee due to rumors.

These approaches help develop a facts based approach as well as demonstrate the consideration that bad managers lack. Utilizing these type of leadership tools shows employees you care and that you are capable.

References

Bertrand, M., & Schoar, A. (2003). Managing With Style: The Effect of Managers on Firm Policies. SSRN Electronic Journal. doi:10.2139/ssrn.376880

Boushey, H., & Glynn, S. J. (2012). There Are Significant Business Costs to Replacing Employees. Center for American Progress.

Hsieh, C., & Klenow, P. (2012). The Life Cycle of Plants in India and Mexico.

           doi:10.3386/w18133

Lazear, E. P., Shaw, K. L., & Stanton, C. T. (2015). The Value of Bosses. Journal of Labor Economics, 33(4), 823-861. doi:10.1086/681097