Motley Fool Hidden Gems Investing - Flawed Models Driving Back-to-Office Plans

Episode Date: June 5, 2022

Do you own your models or do your models own you? That’s one of the driving questions in Roger Martin’s new book, “A New Way To Think: Your Guide To Superior Management Effectiveness.” The former Dean of the Rotman School of Management at the University of Toronto, Martin has also been a strategic advisor to Procter & Gamble, Ford Motor, and Lego. Motley Fool contributor Rachel Warren talked with him about: - The flawed models driving back-to-office plans - Why stock-based compensation doesn’t necessarily help outside investors - When corporate mergers can succeed and why they often destroy value Stocks discussed: T, ZM, CSCO, AAPL Host: Rachel Warren Guest: Roger Martin Producer: Ricky Mulvey Engineers: Dan Boyd, Michael Schweitzer Learn more about your ad choices. Visit megaphone.fm/adchoices

So, it's the model of they're loyal and an ignoring of the model that says habit drives behavior that is getting all these companies in trouble. And the great resignation is real. I think we haven't seen the worst of it yet. It's going to ripple through the economy and it's because the companies are now getting more strident about you must come back to work. And that's all based on a flawed model of human behavior. I'm Chris Hill, and that's Roger Martin, author of the new book, A New Way to Think, Your Guide to Superior Management Effectiveness.

Martin has served as the dean of the Rotman School of Management at the University of Toronto. He's also worked as a strategic advisor for Procter & Gamble, Ford Motor, and Lego. Motley Fool contributor Rachel Warren talked with him about key takeaways from his book and how to reframe the flawed models which can hurt businesses and shareholders. First off, let's just dive right in and talk about your new book, A New Way to Think, your guide to superior management effectiveness. Tell our audience what's the book about, what was the journey to writing this book and what are some of the dominant themes of the book? Sure. Well, the book is about our use of models. So when we make any kind of management decision,

we have some way of thinking about it. I'll call it a model, you know, Oh, I should be nicer to this employee in this conversation. And so that's your model for the conversation, or we should pay our, our CEO lots in stock-based compensation. Those are a model that guides how we do things. And what I've noticed is that the business world kind of gets models kind of in mind as, as what it thinks is a good way of, of helping you think through a problem that don't work and stay that way for a long period of time. So the attempt of the book is to, is to dive into some models that don't produce what the user of the model would like to have happen and to provide them with an alternative. So it's not saying, I'd like you to change what you're trying to

accomplish, right? I'm not saying, oh, you should care more about other stakeholders than shareholders necessarily, or the like. I'm just saying, whatever you're trying to do, don't use a model that doesn't get you that thing. Use a better model. You owe it to yourself and your organization to have the most powerful models that guide your thinking to make decisions that'll get what you're trying to accomplish. And you've written a series of acclaimed books, some of which I mentioned earlier, covering strategy, integrative thinking, design of business incentives and governance, social innovation, democratic capitalism, the list goes on. How does this latest book on new ways of thinking fit into your overall body of work? Well, it turns out that

that when I look back on all of my books, they do have this similar quality. So you say integrative thinking, the opposable mind, one of my earliest books, my first sort of best-selling book, it said, as an executive, when you're facing a tough choice, Rachel, you're facing a choice that says, I should invest in this or this, and I can't invest in both. Which should I do? When you're facing that tough choice, the model in our head is, well, you know, you're the CEO, Rachel, tough job, just make the choice, right? So that's the model. And that's the model we're taught at business school. And what I discovered is that the most successful leaders out in the world don't do that in that situation. When they have that tough choice, they say, no, no, no,

that's a dumb idea to make a choice between two options, neither of which I like. You should take that as a cue to invent a third better way. And they invest in doing that, even take time to do that. So it turns out that my various books all had this characteristic to them. So this in some sense is a compilation of a whole lot of chapters, each of which is a, is a, is a model as opposed to the opposable mind was all about one model and how to, how to change that model. So it's sort of, it's sort of the thing I do. I observe models being used that aren't effective and try to provide a model that's as easy to use and more effective. Well, and speaking of models or frameworks, ways of thinking. In your book, you pose a question to readers, which is,

do you own your models or do your models own you? And I'd love it if you could dive a bit into what you mean by this and why is this distinction so important looking at the business landscape now? Well, what it means is if you are taught a model or just come to start using a model and it doesn't produce the outcomes that you intend when you use that model and you keep using it, then I say you're owned by your model. It's almost like, you know, it's almost like the mafia has got something on you and you, and you, you have to keep doing what you're doing, uh, even though it's, it's, it's not, not what you want. Um, it's that sort a sense of it owns you. It's so important you can't change. I would like managers to own their

models. And by owning their models, it would be you've got a model, you put it in use. If it doesn't provide the outcomes that it promised that you thought it was going to provide, then you put it on probation. Maybe you try it one more time. And if it doesn't work again, you say rather than I didn't do it well enough. You say, you know, I need to have a different model. And just to give you an example, right back in the, in the, in the mid seventies influential article kind of written by Mike Jensen and Bill Mack that said, Oh, there's this, there's this agency problem and we need to solve it where, where management doesn't necessarily do what's in the interest of shareholders, the way we should do that is to align their interests. And we said, align your

interests with stock-based compensation, and that will produce better returns for shareholders. That's now almost a half a century ago. That model has been in effect. CEO compensation has skyrocketed. But guess what's happened to shareholder returns? They haven't gotten any better. So you have to, and, and what, what, when I have conversations about, uh, about this with, with, uh, with people, uh, the, they say to the, they say to me, well, it must be that we didn't do it right. We gave too much in options and not enough and deferred stock units, or we didn't have them tiered the right way or everything. There's all this, these excuses that say it's, it's about the way I use the model. That's why I said, it sort of owns you. It's sort of like it screws up,

but you blame yourself for it anyway. And I'd rather have them step back and say, does it actually align the interests of management and shareholders? And the answer is, in my view, it doesn't. And then therefore, what are other ways, other models we could use to produce better shareholder returns? Well, and, you know, speaking of business leaders having to recalibrate their ways of thinking. We're obviously in a time of great turbulence in the labor market as a whole. You know, the world of work has changed significantly over the last few years in the wake of the pandemic. We're still deep within, you know, the great resignation as the movement has been turned. You know, how should leaders think differently about the

future of work, particularly around return to office plans? Sure. There's a chapter in the book on this very question, which is our model that pertains to this would be that what's really important is loyalty. And so I think that a lot of these companies are saying, well, we've got loyal employees. All we have to do is tell them that they need to come back to the office and they will. Then a whole bunch of them are quitting and it's baffling to people. I thought they were really with us. And we're kind of, we're loyal to the company and they're just quitting on mass or threatening to like 69% of Apple employees do not want to come back to the offices of the thing I read the last week. Um, but that's because the model should be a better model

is that we, we are driven as human beings more by habit than loyalty. So loyalty is a conscious concept, right? It's, uh, it's, uh, I don't know you, uh, you bought Tide detergent or Colgate toothpaste the last 50 times, and you liked the results it gave you. So you say to yourself, I'm loyal to, to Tide, uh, let's say Tide, Tide detergent. What really is going on is your subconscious, which now though all the brain science tells us unequivocally likes comfort and familiarity more than anything else has become comfortable with a tide. It's done the job for 50 times. You're now completely comfortable. You're familiar with exactly what it is and what it is, is not. And so when you're walking down the aisle in the, in the grocery store, you are not

thinking I'm loyal to tide. I'll buy another tub of tide pods. Your subconscious is actually saying to you, Rachel, Rachel, the thing that you're most comfortable with, what we hear underneath the surface are most comfortable with is that, that orange one, dump that in your cart. And if you were going to reach for something else, literally your subconscious would be screaming at you. Don't do that. Don't do that. We don't know that one. We did. We're not comfortable with that one, et cetera. Okay. So it turns out that habit is much more powerful driver than, uh, than loyalty. How does that apply to the great resignation? Well, a couple of years ago, there was sort of force majeure, uh, workplaces were being, uh, were being locked down and people

needed to work remotely, right. And remotely ended up being whatever their, their porch, their basement, their guest guest room. Um, and, and what was established was a new habit, The old habit, which was broken was, you know, you get up, get in your car, get on the subway or get on the bus or the train, work your way into work, sit at your office, hang out and do the things you normally do in the office, get in your car, drive back home. Totally interrupted, gone. New one is roll out of bed, make yourself a coffee, get dressed, go to your home office and proceed.

what happens is that becomes habit and your subconscious says no i'm totally familiar with this i'm comfortable with this this is awesome this is terrific what happens then one day your your place of work phones up and says you need to stop working remotely you need to return to the office consciously you can take that in but your subconscious is saying they want me to work remotely, right? So your, your office in Manhattan is now remotely, uh, and your office is at home to your subconscious. And so the subconscious is, is, is saying, Whoa, wait, wait, wait a minute. This is interrupting everything that I feel comfortable with and familiar with. And is it basically saying to your, your conscious, you should feel, yeah, you should feel weird about

this and it turns out that habit in any endeavor of our lives habit has a huge advantage over all the other alternatives you should think about about what you habitually use right and are used to or a way of doing things is in a hundred yard dash and it gets to start at the 80 yard line and all the alternatives get to start at the starting line and the gun goes off and who's going to win habit. That's why we keep doing the things we're doing. So by, by breaking the habit of how work is done, right. Which is at home at your desk and saying, I want you to do this new thing. These companies are taking their employees who they think of as loyal employees and putting them back to the starting line with alternatives. Like I'm going to get a job here in Greenwich.

I'm going to go gig economy. I'm going to take some time off before I think about what I'm going to do next. So it's the model of they're loyal and ignoring of the model that says habit drives behavior that is getting all these companies in trouble. And the great resignation is real. I think we haven't seen the worst of it yet. It's going to ripple through the economy and it's because the companies are now getting more strident about you must come back to work and that's all based on a flawed model of human behavior i'm not saying you shouldn't want them back at work at their traditional place of work i'm saying the model you're using is going about it fiat in a way that that's going to that's going to be extremely unsuccessful in accomplishing what

you want to accomplish. You'll end up with half your employees that you had before that you've invested enormous amounts in training up and getting to work or two thirds. I mean, even that would be terrible or 75%. That would be a terrible outcome, losing all those good people. And instead, you should be thinking about it as another habit change challenge. You can get people to change their habits, but can you get them to change their habits like that? No, no, you can't. You get them to change their habits slowly, get them comfortable with the new habit. And that's what these companies need to do if they want to maintain their workforce. Well, and digging a little bit more into that as well, we have seen this real tug of war between

what companies are willing to provide, whether it be changing or adjusting their model, as you mentioned, and also what workers want. And workers have a lot of leverage in the current labor market. And as we see the great resignation continuing, and I know you just mentioned your viewpoint is perhaps the worst is yet to come. What do you think the most important thing is that leaders need to know to recruit and retain, you know, top talent right now to keep those employees after they hire them? What's the answer here? The answer is that they should be thinking about the key criteria is making the person feel special as opposed to the key criteria being how much you pay them. There's a chapter in the book on, on that too. And I use, I use Aaron Rogers

as, as my as an example of, of this, right. He was the highest paid quarterback in, in the NFL when he signed his last two contracts prior to the one he just signed, but that didn't stop him last summer from being, being extremely upset, getting his contract reduced by a year, threatening to retire or leave despite being paid at the, you know, a ridiculously high level. And the reason was he was being treated generically. And he said it in very clear terms. He said, you'd think after being around for all these years, winning MVPs, super super bowls, that they would at least take into account what I'm interested in terms of the players around me. But they said to him, you're a player, we're management, you go sling the football and we will take care of these

decisions. So they were dismissing his point of view out of hand and treating him as if he was any other player. All he wanted to be treated is special to the extent he was special, right? That he'd been with the Packers for a long time had proven track record of success they finally they finally started listening to him and you know bringing back one of his favorite receivers saying they will they will actually talk to him about these moves and then he was satisfied to come back and and and play dropping sort of the I'm going to go I want to be traded I want to go elsewhere I'm going to I'm going to retire so he that's just a story of this but it's it's consistent with top talent. Top talent is top talent because they've invested like crazy in

themselves being special. And then if you treat them generically, right, if you dismiss their ideas, they're going to go regardless of how much you pay them. So it is not about compensation. It's about making sure their ideas are not dismissed and they're considered. Make sure their path forward isn't blocked right they've invested in talent so that they can keep enhancing that you block it and and they uh they go you tell eric wan you can't uh you can't rewrite the software the the uh the cisco software uh for webex for mobile platform and he says well i gotta go and found a company that will be be mobile first and and you know is zoom right that's a classic. You've blocked their path. And the last one is a little counterintuitive,

which is they need pats on the back, just like everybody else, right? Often managers think that their best employees are going to get paid the most, they're going to get the biggest bonus. And so they don't need to be taken aside and said, you know, that new account you brought in or that thing, that was awesome. You know, that was awesome. Awesome performance for the company. thank you for your work. If you don't do that, they'll go to some place that makes them feel special. And that is the secret to talent. Do you have to do everything they want and everything they say? No, not at all. But you can't dismiss them and treat them like they're just another employee. I want to also turn to another very interesting topic that you dedicated a chapter

to in your book, which is basically the current state of, you know, mergers and acquisitions, the SPAC boom. We saw quite the market in that space last year. It's certainly been a slower year for M&A activity and SPACs thus far in 2022. One of the things you mentioned in your book was that there's evidence that most of these actions fail, you know, and I wonder if maybe you could dive a little bit into that. Is there a better way to be thinking about M&A? And what are some of the most dominant trends that you see shaping this landscape as we're now headed into the second half of 2022? This gets back to the retail versus wholesale kind of thing. In some sense, doing a merger, buying, acquiring a company is getting a sales increase wholesale. You get a

whole bunch at a time rather than getting more sales one customer at a time. And so it's popular because it feels easy and it's popular because it enables you to get into new spaces, right? But the problem with it is, is the theory tends to be, what will this acquisition do for us? It'll pump up our size. It will get us into this new space like AT&T. I mean, I talked about that in book and in part, because at the time, the time that acquisition was made, I made a prediction to a fortune reporter who was calling me about his exciting acquisition that said, it's going to be an absolute failure. This is like the day it was not. This will be an absolute failure. This will cost Randall Stevenson his job, and it will be sold for half its cost within

five years. Made those three predictions, which thankfully he came back in three years later when they sold it for exactly half the price and Randall Stevenson retired and maybe he retired, who knows, but it's interesting how it happened at the same time. And, and there was, we'll get into content, right? That's what we'll get from this. So the better theory in my view is here's what we will be able to give to that acquisition it's more about what you give than what you get because if you is all get you're going to pay a ridiculous top dollar for it and not have any thing that you do to add value uh once you've gotten it and that's exactly the AT&T story it's exciting we're getting the content now content we're going to have owner economics all these

all these crazy arguments. It wasn't like the things we have at AT&T can really help Time Warner be much more effective. Did you ever hear around the time? I mean, just think back to it. Did you ever hear an argument of that? No, it'll make us a integrated content delivery platform, blah, blah, blah, blah, blah. That's all the things it'll do for us. You know, unlike, unlike you know i i think the you know acquisition of android by google you know that made a lot of sense google's fantastic software people and programmers can can help make android even better and more more effective and then we can back it and get it out on all these all these devices you know that's that's at least a give get equivalence or maybe more give than than get

And that's what I would be thinking about in acquisitions. I wouldn't make an acquisition where I couldn't demonstrate that I'm giving that acquisition more in terms of its competitive position. I mean, after you've acquired it, it'll be a division or something, but that will be so much better off competitively being part of us because we can give it the capital it needs to expand. And we can give it the products into distribution faster, better, more thoroughly. Give, think in acquisition, think first, give, and then get.

And if you do that, you can get some things that are really helpful to you, but only if you give. Fools, check out Roger's new book, A New Way to Think, your guide to superior management effectiveness out for sale now. Roger, thank you so much for joining me on the show today. It has been a delight to speak with you. Oh, well, thanks for having me. This is fun. It's fun to be back on Motley. Great to have you back.

As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. Thank you.