Of course, there are exceptions –  ”community companies” that operate efficiently, but they are almost always small, frequently family-run organizations that have made the choice for a variety of different reasons.  A high performance company must operate like a company.

In a community, everyone has their say.  Decisions are made by consensus, and the community leaders are dependent on the community members to maintain their status, so they are careful to be inclusive and not offend anyone.  Community members are typically only ejected from the community for really heinous behaviour.  Community leaders will often choose not to make the tough choices for fear of alienating the community. 

A successful business almost never operates this way.  Decisions in a business are made by Warriors or teams of Warriors and trusted advisors, and are based on what is best for the business, not what would make them the most popular with the employees.  Managing by consensus or by popularity contest does not work in a business.  Certainly a successful business should have an industry-appropriate culture that fosters talent, and encourages success and innovation, but maintaining that kind of culture also requires tough standards. Good managers understand that they can’t be friends with everyone in their department, and holding people to standards (and firing those that can’t perform) is their duty as the manager.  Otherwise they foster mediocrity, which threatens the entire company.

Communities are great places to live, but I would not want to work there.

But Ray is also a very good businessman experienced in assessing talent, and his approach towards this election makes a lot of sense.

Electing a President is like hiring a CEO

By Ray Link

What is the election of the President of the United States similar too?  To me it is simple: we are hiring the CEO of our country with a guaranteed four year package with lots of perks.  Since we cannot fire him for four years, we must do our best to make an informed choice.   If you look at it as hiring a CEO of a very large international corporation the process is easier to understand and judge.  It also eliminates a lot of the “political garbage” associated with the existing process and forces one to look at what really matters.

Years ago I was fortunate to have been a chief financial officer at different times under two very strong and very smart CEO’s.  Both hired me as their CFO yet I did not have the ideal experience to be the CFO of their company.  Both said that they valued talent and chemistry over experience and that many people who have 20 or more years of experience have in fact 1 year of experience replicated 20 times.  They both believed that if you hire smart, energetic people they will “figure it out” and do well over time.  These CEO’s looked at the total package which includes academic credentials, communication skills, decision making skills, ability to cope with change, demonstrated leadership and relevant experience.

Let’s take that view of the presidential election where we have John McCain, age 72,  with 21 years of Senate experience, a war veteran, and a graduate of the Naval academy versus Barack Obama, age 47, with 4 years Senate experience, no military experience and a graduate of Columbia University and Harvard Law School.  Which person would be hired to run a major international corporation? 

Let’s probe educational background first.  McCain graduated 894 out of 899 in his class at the Naval Academy. Obama was the president of Harvard Law Review and graduated in the top 5% of his class.  Both went to excellent schools but only Obama excelled.  Edge: Obama.

Next let’s look at decision-making ability.  So far both candidates have made only one important decision to date as a candidate – their selection of a VP running mate. McCain chose a 44 year old who has been the Governor of Alaska for 18 months and before that was a mayor of a town of 7,000.  She has a bachelor degree in communications from Idaho, a tier 3 rated school. Obama chose a 30 year veteran of the Senate who has a law degree from Delaware and an undergraduate degree from Syracuse, both top notch programs.  I found it interesting that no one grumbled over Biden’s selection or his qualifications, yet there was a huge out cry over the selection of Palin.  Edge: Obama.

Next let’s look at communication skills.  Both men are Senators and have extensive public speaking experience and both have authored a book (1 for McCain, 2 for Obama).  Obama has drawn huge crowds worldwide to hear him speak and both of his books were a huge success earning him millions in royalties.  McCain on the other hand is soft spoken and at best a marginal orator and his book earned him just a fraction of the sales compared with Obama’s books.  Edge: Obama.

Now let’s turn to how the candidates adapt to new technologies which is one way to see how they can handle a changing environment deal with issues of the 21st century.  In one corner is John McCain who does not know how to log onto a computer or use email.  This would be a non-starter for any corporate executive.  In the other corner is Obama who is text messaging his supporters daily and a frequent user of the internet.  Edge: Obama.

Leadership skills are clearly another area of extreme importance and one that is hard to quantify and subject to great debate.  McCain has the benefit of rigorous military training, acting as a leader during war time and showing bravery under extreme duress as a prisoner of war.  Obama has demonstrated leadership as a community organizer and in speeches addressing issues ranging from race relations to the war in Iraq.  McCain has shown leadership at times in the Senate by crossing the aisle for important legislation but at other times has acted as a maverick thwarting his own party.  Edge to McCain.

Lastly let’s address experience. More is usually better, but our history is marked with some of our best presidents entering the White House as either young men (Kennedy, Theodore Roosevelt, and Clinton) or with limited experience (Lincoln – served only one term as a US Congressman) and some of our worst leaders had textbook resumes (such as Nixon and Grant).   The edge clearly goes to McCain as his 25 more years on the planet plus the military and long tenure in Washington dwarfs Obama’s experience.  If experience were the sole criteria we should nominate Dick Cheney, but luckily we haven’t as we looked to other factors.

A lingering question is do we really want to elect someone who would be 80 by the end of their second term?  Looking again to the corporate world, virtually all major U.S. international companies have an age limit for their CEOs and most are 70 or less.  There are exceptions to every rule such as the Warren Buffets and Sumner Redstones of the world, but companies such as General Electric, IBM, Goldman Sachs, and Exxon Mobil all have mandatory age limits for the CEO.

As a 30 plus year registered Republican this is an easy call for me.  I would hire Obama in a nanosecond over McCain.  He is smarter, more articulate, inspirational, has exceptional academic credentials, has demonstrated leadership and good decision-making, and has enough relevant experience for the job. I am betting he is smart enough to “figure it out” pretty quickly once elected.

Ray Link has an MBA from the Wharton School and is CFO of FEI Company, the world’s leader in electron microscopes.  He is a former city councilman from Florida and a 30 year member of the Republican Party.

Today I heard an interesting philosophy that I tend to agree with. “Be ruthless about your business, and gracious about your delivery”.

There are pros and cons and risks to each approach.  But the one path that seldom works is straddling the two approaches.  You can’t bring in talented employees with the promise that they will be integral in growing the company, and then not allow them the freedom to do their jobs.

The entrepreneur that makes this jump successfully is self-confident enough to let talented individuals move the company to new heights, but also smart enough to recognize when they have made a bad hire that ultimately threatens the organization.

In any case, it is bad for the organization, and ultimately bad for the manager.  A great manager does not fear hiring someone more talented than they are.  They realize it will make their life easier, improve performance for the organization, reflect well on them with upper management (unless they are so completely incompetent that they need to go anyway), and ultimately will allow them to move up in the company.

Great managers always hire with an eye towards finding a candidate that can replace them – so they can elevate to new heights in the company, knowing they have a hand-picked talented team to support them.

Ray’s Analysis of The S&P versus a Money Market Account

The other day I was taken aback when I read that the compound return for the S&P 500 for the last ten years was a paltry 2.8%. After all, isn’t inflation running at that rate or greater? We are not talking about the return of the tech-laced NASDAQ which is still well below its bubble high, but the S&P 500 which is the barometer of the entire stock market, constituting about 60% of the total value of all American listed stock. This is big stuff. It made me wonder how that translates for the average Joe who started contributing to a 401(K) back in 1998. Surely “dollar-cost-averaging”, which is investing on a regular basis regardless of market conditions, would yield significant positive results overshadowing the peaks and valleys of the market. Using the following simple assumptions I crunched some data to see for myself:

· Assume a person invests $250 each quarter starting June 30, 1998 in both the Vanguard S&P 500 fund and Vanguard Prime Money Market fund. Both funds are well known no-load, low-fee funds. Thus, a total of $10,000 was invested in each fund over the 10-year period.

· The returns are computed net of fees with dividends and interest re-invested.

To my amazement the total value would be equal to only $11,733 if invested in the S&P 500 index fund. What is more amazing is if invested in the Prime Money Market fund it would value $11,916 or $183 more than the stock fund! In fact, if that same person invested the entire $10,000 on June 30, 1998 in both funds, the money market fund would make $1,089 more. The person who invested in the money market fund not only has more money but probably slept a lot better as that fund had positive returns in 40 of 40 quarters compared to the S&P fund which posted positive returns in just 24 of 40 quarters or only 60% of the time. Indeed these past 10 years have been very disappointing for the average investor and well below the often projected returns of 12% to 15%.

I am a big fan of the Vanguard group as they have brought low cost index fund investing to the average American so don’t view this as a criticism of Vanguard. It should also be noted that the S&P 500 over a much longer period has substantially outperformed cash, bonds, treasury bills, housing and inflation. The question is how long is long and unfortunately the past 10 years is not long enough. What should one do?

· Diversification into different assets such as international stock, bonds and money market funds.

· Continue consistent investing, especially in a 401(K) that has a company match.

· Reduce equity exposure well in advance of retirement so you have an account balance you can count on.

· Avoid misleading data such as “total returns” in marketing material. For example the Vanguard S&P 500 touts a 10 year total return of 31.9% which sounds great. Except it is a compound return of only 2.8% and lost money 40% of the time over the past 10 years and is in fact nearly 11% points lower than their money market fund. Remember if you lose 50% in one period you need to earn 100% in subsequent periods to break even.

Volatility and consistency may be far more important to you than yielding the maximum possible return, especially us aging baby boomers as we get ever closer to retirement. So look at the returns year by year to determine how the fund has performed and ask yourself if you can tolerate the rocky road which may lie ahead.

About the Author: Ray Link is a CPA and holds an MBA from Wharton. He is EVP/CFO of FEI Company (NASDAQ: FEIC), a world leader in tools for nanotechnology including the Titan, the world’s most powerful electron microscope. He is on the Portland State University Business Advisory Council and on the Board of Directors and Audit Committee for Cascade Microtech (NASDAQ: CSCD).

Common Mental Mistakes

1. Overconfidence
2. Projecting the immediate past into the distant future
3. Herd-like behavior (social proof), driven by a desire to be part of the crowd or an assumption that the crowd is omniscient
4. Misunderstanding randomness; seeing patterns that don’t exist
5. Commitment and consistency bias
6. Fear of change, resulting in a strong bias for the status quo
7. “Anchoring” or irrelevant data
8. Excessive aversion to loss
9. Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus) differently than money
10. Allowing emotional connections to over-ride reason
11. Fear of uncertainty
12. Embracing certainty (however irrelevant)
13. Overestimating the likelihood of certain events based on very memorable data or experiences (vividness bias)
14. Becoming paralyzed by information overload
15. Failing to act due to an abundance of attractive options
16. Fear of making an incorrect decision and feeling stupid (regret aversion)
17. Ignoring important data points and focusing excessively on less important ones; drawing conclusions from a limited sample size
18. Reluctance to admit mistakes
19. After finding out whether or not an event occurred, overestimating the degree to which one would have predicted the correct outcome (hindsight bias)
20. Believing that one’s investment success is due to wisdom rather than a rising market, but failures are not one’s fault
21. Failing to accurately assess one’s investment time horizon
22. A tendency to seek only information that confirms one’s opinions or decisions
23. Failing to recognize the large cumulative impact of small amounts over time
24. Forgetting the powerful tendency of regression to the mean
25. Confusing familiarity with knowledge

1. Over-rate yourself. On our reviews we utilize a 1 to 5 ranking system (5 being the best) for an employee to rank their performance over the previous year. The employee does their self-ranking first – turns the review in to their manager – and the manager puts in their ranking. Occasionally I will have an employee give themselves a perfect score – all fives. I would not rate myself with all fives – and I have never had an employee perfect in every facet of their job. I would love to have someone like this working for me – and pray for the day that I get a solid fiver – but I suspect it may never happen. The employee that gives themselves all fives is almost always a “soft three or four” on my ranking, and of course their inflated self-opinion always gives me great concern. If they are deluded about their job performance it usually indicates even bigger issues. We all have areas we can improve in – and identifying those areas with a plan for improvement will usually impress your boss and make the review go much better.

2. Whine without a solution. Often there are organizational barriers preventing an employee from doing the best job possible, and if this is the case I want to hear about it and hopefully correct the problem. But often in a review the employee will point out problems that the company has nothing to do with and I can’t impact. Being late for work frequently because “you are just not a morning person” is not a valid excuse – unless your point is to acknowledge it as a past problem and present the solution you have developed so it never happens again. And “problems without solutions” in most cases are just whines. If you see an issue that is negatively impacting your performance, it is much better to come to the review with a suggested solution rather than just the complaint. Also, gossip, and general negativity against co-workers never helps you get a raise.

3. Ask for an unreasonable raise and/or promotion. I like self-assured, aggressive people – Warriors – and asking for a well-justified raise or promotion is fine. But if you ask for a 20% raise “just because you think you deserve it” without any real justification or “attention to the bottom line”, you are doing yourself a disservice. Research and document your request – make a good financial case for your raise. And don’t base it on “I’ve been here a long time”. While job tenure is important and certainly plays a role in the decision to grant a raise – performance is much more important. Tenure gets you cost of living raises – great performance gets you the big money and promotions.

I first began to follow Cesar when I was seeking help in training my own dog. And as I learned more about his philosophy, I realized how it paralleled my own beliefs about people and business. Cesar often speaks about the pack leader. He explains that dogs need and crave a pack leader, and to have a satisfying and fulfilling relationship with your dog you need to be in control. Once I understood this I began to see Cesar’s teachings in action. An ill-behaved and wild dog is almost always accompanied by a meek owner that is unwilling to “lead his pack”, thereby allowing the dog to take them both into a relationship they can’t enjoy.

And I see this same scenario often played out in business. Successful companies require a Warrior to set the standards and guide the company. While a good business leader carefully plans and analyzes, and consults the essential people around them, they don’t manage by consensus or let the organization lead them. They take responsibility for the decisions they make – good or bad.

Great dogs have great pack leaders. Great companies do too – Warriors that often do the sometimes difficult job to lead the organization.

However, when checking in at the Delta counter at JFK on my last trip I encountered a prime example of a either a Worker making a quick transition into Whiner world – and/or someone missing a prime opportunity to shine.  When my wife and I arrived at the Delta counter it was pure pandemonium.  There were no signs telling people what to do, and some misguided Delta employee was apparently sending people to the wrong counter.  Passengers were confused, milling around, looking for direction.  Instead of helping their valued customers, one of the Delta employees behind the counter began rudely screaming at people, “this is first class only, you need to go to another counter if you are not first class”.  She started to admonish me when I approached her – until I explained I was in first class and at the right counter. “Why don’t you either post a sign right there so people know what to do, or better yet post someone there to help people.  It would be a lot nice than just screaming at people”, I suggested. “Hey, I don’t run this place.  I have no power around here.  Why don’t you take it up with the manager”, she rudely replied.

Which is actually something I would have done if I wasn’t in a hurry, but since I was running for a flight I suggested she should perhaps take it up with her manager.  “Your customers would really appreciate it”, I commented.  “You can see the problem.  Make some suggestions as to how to fix it.”

“Nobody listens to me around here”, she complained.  “I don’t have any power here.  They could care less what I say.”

Now, perhaps the JFK Delta first class counter is run by the worst manager in the aviation world, but I doubt it.  People that blame their managers for their own poor work performance are deluded Whiners, and they miss the potential opportunity to advance. A company may not give you the tools, or manage the operation in a way that allows you to do the best job possible, but companies don’t force you to be rude to customers or act with personal incompetence.  That is your choice.  If your workplace is so awful that it turns you into an angry screaming maniac, then perhaps it is either time to find a new job, or take the Warrior’s mentality and try to improve the workplace by taking over.  Having a bad manager is frustrating, but it also might signal opportunity for you.  After managing people for twenty five years, I can tell you that I appreciate well-thought out solutions to business problems, and I notice employees that take the time and effort to think through how the company might be improved.  And when I promote people – those are the first employees I look at.