When the Going Gets Tough, the Tough Don't Skimp on Their Ad Budgets

With corporate managers under enormous pressure to control costs and maintain liquidity in the current credit crisis, advertising budgets often appear to be a dispensable luxury in the struggle to survive. Executives who succumb to that temptation, however, put the long-term future of their companies at risk, according to Wharton faculty and advertising experts.

"The first reaction is to cut, cut, cut, and advertising is one of the first things to go," As companies slash advertising in a downturn, they leave empty space in consumers' minds for aggressive marketers to make strong inroads. Today's economy "provides an unusual opportunity to differentiate yourself and stand out from the crowd," says Fader, "but it takes a lot of courage and convincing to get senior management on board with that."

emand slack for advertising services, the cost of these services goes down, making advertising expenditures all the more defensible in a bad business climate. "If your company has something to say that is relevant in this environment, it's going to be more efficient to say it now than to say it in better times," says Lodish.

Research shows that companies that consistently advertise even during recessions perform better in the long run. A McGraw-Hill Research study looking at 600 companies from 1980 to 1985 found that those businesses which chose to maintain or raise their level of advertising expenditures during the 1981 and 1982 recession had significantly higher sales after the economy recovered. Specifically, companies that advertised aggressively during the recession had sales 256% higher than those that did not continue to advertise.

For companies that do stay the course and continue to advertise into a recession or increase their promotional activities, the key is to craft messages that reflect the times and describe how their product or service benefits the consumer. For example, companies might be tempted to emphasize price in a recession, but that only works for companies like Costco and Walmart that are built around a core strategy of providing low prices year after year, says Lodish. He points to the current Walmart campaign, "Save Money. Live Better," as a successful approach to the recession.

Dean Jarrett, senior vice president of marketing at The Martin Agency in Richmond, Va., which developed the Walmart ads, acknowledges the campaign began in 2007 before it was clear a harsh recession was building. "We can't claim we knew a recession was coming, but "Save Money. Live Better" is dead on-point with who they are and what they want to be."

Eileen Campbell, chief executive of the Millward Brown Group advertising firm in New York City, says that while companies should probably not dwell on the recession and scare consumers into hoarding their pennies under a mattress, certain products require a straight-up approach -- such as financial services. "If you are in the financial services category, to behave as you did a year ago is silly." At the same time, however, many consumers are weary of negativity generated by the recession and would be receptive to a more upbeat message, she adds. "If you can put a positive spin on how you can genuinely help without invoking doom and gloom, I think that's going to be more compelling."

In Control of Your Pushups

Wharton marketing professor cites Gold's Gym -- the Texas-based gym chain -- as an example of a company that has found a way to navigate the economic slump while promoting a product that might seem discretionary or self-indulgent in hard times. One television spot shows legs working a stair climber as words pop up across the screen changing from "First floor" to "12th floor" to "Kilimanjaro" to "Olympus." Finally the words, "The Corporate Ladder," appear.

"This is about being goal-oriented as opposed to a general fitness or vanity play," she says. "It links to the economy because people are less likely to be spending on flashy things and more likely to be thinking practically and pragmatically. Certainly people are going to be spending less in this downturn, but they will spend something."

Williams agrees that advertisers should approach the 'R-word' (recession) with extreme caution. "Along with this economic downturn comes a lot of emotional response, such as anxiety. It is characterized by a sense that you lack control, that you don't know what's coming and you are at the whim of circumstance. To the extent that advertisers feel their clients or consumers are experiencing anxiety, ads should try to empower consumers and help them think of ways to be in control in a world where they feel out of control."

The Gold's Gym spots address this concern, she suggests. "'You can't control the economy but you can control how many pushups you do, and take control where you can, and we can help you.' That's a powerful message."

Value is another important message to build into marketing campaigns during a downturn, according to Williams. Many marketers design communications aimed at justifying the price they charge for goods and services, either by emphasizing a low price or touting the benefits the company can provide to buyers. "Advertisers will do both," she says. "Some are in a better position to talk about lower costs while others will have to focus on what you get for your money."

Luxury businesses should take a completely different approach, appealing more to emotion, Williams notes, emphasizing the need for some emotional release or comfort in difficult times. High-end advertisers will also attempt to emphasize long-term value -- such as suggesting that a watch is not just a purchase for today, but for years to come. "You can try to remind people that this is, hopefully, a temporary state of things and we should not be focusing on the immediate future but also longer-term."

David Sable, chief operating officer of Wunderman, a brand-building agency that is part of the global marketing firm, The WPP Group, advises advertisers in a downturn to rally to protect and preserve brand equity that has been nurtured for years, with continued investment in and support of branded products. "The worst thing you can do is cheap-out on products -- put less coffee in the cappuccino -- as many have in the past."

According to Sable, while price is important in a recession, the majority of price-driven consumers still factor in the importance of branding. Companies must maintain "good housekeeping" during a recession, such as product quality and good distribution systems, but he suggests that clear brand association and leadership comes through communication. "If you cut the communication, you have a major problem."

He urges marketers to make sure they understand the "elasticity" of their brand, which would be a gauge of how much -- or how little -- advertising is necessary to sustain sales. "It's not a science. There's a lot of art there," he acknowledges, "but you must be supporting your product."

He also warns that in today's networked, digital marketplace, consumer buzz about disappointments with a product can metastasize quickly and widely. "You must give people good things to talk about by continuing to have good products and communication." The biggest lesson is that recessions come and go, but "hopefully your brand is for life. It's forever. So you have to be careful how you react because the downturn is not going to be forever."

If companies cut deeply into advertising and communications in a down period, the cost to regain share of voice in the market once the economy turns around may cost four or five times as much as the cuts saved, he adds. "You must really keep a balance in times like this. Don't go dark when customers and consumers need you because they need you as much as you need them."

Matt Williams, a partner at The Martin Agency, says a downturn is a natural time to focus on core strategy. A recession, he says, can be an "opportunity disguised as a problem.... You can position the brand as an ally to consumers in tough times with product development or sponsorship programs so the consumer can say 'I see by its actions that this brand is on my side.' That will pay dividends not only during the recession but beyond."

When Life's (Not So) Good

Advertisers in all categories must be in tune with consumers in the current climate. For example, he notes that LG Electronics is backing off its "Life's Good" slogan. "That's not the mood people are in. If you do that, it will generate resentment. You need to fine-tune your message to be sensitive." In challenging times, marketers must also work harder to segment consumers with specific messages. "If, in the past, you used mass media, you probably want to be more targeted now to make sure the message gets to the right people."

Research indicates that combative advertising which targets competitors escalates during an economic downturn. "When the marketplace is shrinking, you tend to become a little more competitive in your tone," says Zhang, who cautions that this approach can backfire. "If you say your competitor is bad and your competitor says you are bad, ultimately the customer thinks both are probably good and bad. They tend to be indifferent. Even in a downturn, if you want to create loyal customers, you don't want to be overly competitive. You want to highlight what you do best and be sensitive to the needs of your customers rather than bashing the competition."

An economic slump may be a time to reconfigure the advertising mix between traditional media and digital or other outlets, depending on the product, brand positioning and overall corporate strategy, Zhang continues. "You don't have to put a huge amount of money in the marketplace," he says, adding that lower-cost marketing techniques -- such as banners, street signs or direct mailing -- might merit new attention. When times are flush, it is easy to pay a premium for more expensive established media.

The Ever-elusive Gold Standard

All forms of media can be successful even in a recession, although the impact of digital marketing might be easier to quantify and therefore able to withstand the close scrutiny of senior executives demanding justification for any spending while their operations are under recessionary pressures, says Lodish.

Fader points out that direct marketing and other kinds of interactive communications might be valuable but do not yet deliver easily quantifiable results. "Unfortunately, the industry is still in its early infancy. A lot of people talk about what we are capable of doing in measurability, but no one has established the gold standard yet. Maybe this forthcoming recession will be the chance to catalyze that and make it happen."

The current recession will offer an opportunity for marketers to provide integrated campaigns meshing traditional and digital media. Fader says that in the last downturn, in 2001, digital marketers were operating out of separate agencies, but today marketers are able to construct fully integrated campaigns. "We have been talking about integration for years, but it's been a much slower process" than expected. "I'm not sure the recession will accelerate that integration, but those who are well-integrated will start to see some of the benefits."

Job Cuts vs. Pay Cuts: In a Slowing Economy, What's Better for India?

One day after Diwali -- the Indian festival of lights -- the Associated Chambers of Commerce and Industry (Assocham), an industry association, published a report on the job market. Titled, "Jobs Scenario Post-Diwali," the end-October survey said that seven key industrial sectors would see nearly 25% layoffs in the next two weeks.

Predictably, there was a huge outcry. Other chambers said the situation was not so dire. "We do not believe any immediate threat exists," noted FICCI (Federation of Indian Chambers of Commerce and Industry) president Rajeev Chandrasekhar. "We should not panic."

The government was not amused either. "[We] have taken serious exception to the Assocham report," said finance minister P. Chidambaram. "The pace of job creation may slow down, but that doesn't mean that jobs are being destroyed." Eventually, Assocham withdrew the report, claiming that the sample size may not have been adequate.

The government was taking no chances, however. On November 3, it called a meeting of senior industrialists in New Delhi. They went there expecting a hearing for their woes in the wake of the global financial meltdown and, possibly, some initiatives to help them get back on track. Instead, they had to settle for the formation of a special crisis panel to consider future action. What the industrial barons -- including Mukesh Ambani, Anand Mahindra, K.V. Kamath, Sunil Bharti Mittal, Deepak Parikh, Shashi Ruia, K.P. Singh and Rajkumar Dhoot -- had to give in exchange was a promise that they would not resort to layoffs.

Yet, according to some, time may be running out for the workers on Main Street as it already has for some on Dalal Street, the Indian equivalent of Wall Street. Says M.K. Pandhe, general secretary of the Center of Indian Trade Unions (CITU): "Layoffs, closures and terminations have begun in a big way."

Trade unions, particularly Left-leaning ones like CITU, see the world through their own prism. But it is true that pink slips are more visible in India these days. The multinationals are leading the charge. U.S. mobile handset maker Motorola is shedding jobs in India as part of its global pruning operation to reduce workforce by 5%. American Express has laid off some 100 employees. IBM has shown several workers the door. For the record, most of these companies deny that there is an orchestrated layoff because of the slowdown; their explanation is that poor performers are being weeded out.

IT Slowdown

Indian information technology (IT) companies, which have been amongst the hardest hit because of the slowdown in tech spending in the U.S., have also brought out the shears. Earlier this year, Tata Consultancy Services (TCS), India's largest software consultancy, let go some 500 people. But a company spokesperson notes that this is not unusual. "Last year, too, we had to dispense with the services of 500 employees," he says. "It is part of our annual performance appraisal."

Others point out that they are still hiring as they were in the past. "This year (2008-09), Wipro has made offers to 14,000 fresh graduates and is likely to take in 5,000 to 6,000 lateral hires," says Pratik Kumar, executive vice-president of human resources at Wipro, a major software firm. Adds Nandita Gurjar, senior vice-president and group head of human resources at Infosys Technologies, the other member of India's IT triumvirate: "For next year (2009-10), we have already made 20,000 offers, the same as we did for this year." The National Association of Software and Service Companies (Nasscom) has ruled out layoffs in the IT arena. It has, however, lowered its 2008-09 job addition target from 270,000 to 200,000. Pay hikes are expected to be moderate the next two years, says Nasscom.

The IT sector is known for its high attrition rates and a certain amount of churn is taken for granted. What made headlines in the newspapers and cover stories of business magazines was aviation joining the pink slip bandwagon. In an unexpected announcement in mid-October, Jet Airways, India's largest carrier, said it was letting go 850 cabin crew. It followed that up with a statement that another 1,000 would have to go. (Jet's total workforce is around 13,000.)

Job losses are not exactly unknown at Jet; when the airline acquired Air Sahara last year, it had pruned some 1,200 jobs. The difference this time was in the way it was done. Employees waiting at home for office transport found that the vehicles never came. When some of them reached the airport on their own, they discovered that their jobs were in jeopardy. "You cannot do such a thing," said Union petroleum minister Murli Deora. "This is not the right time to retrench people, particularly before Diwali."

Other political parties got into the act. There were demonstrations and strikes and tearful airline workers crowding prime time on TV. There were threats that no Jet Airways aircraft would be allowed to operate anywhere in India. The next day, Jet chairman Naresh Goyal announced that all the staff would be taken back. "The employees are like family members," said Goyal. "I was mentally disturbed when I saw tears in their eyes." Jet later announced an across-the-board pay cut, which was quietly accepted because the employees had already been given a preview of the alternative.

Jet Airways and Goyal had no supporters for their move. But Manish Sabharwal, chairman of Bangalore-based staffing solutions firm TeamLease, offers a different perspective. "There is no question in my mind that Jet Airways executed what was a right decision the wrong way," he says. "There is also no question in my mind that most of the sacked employees of Jet who have been taken back will not be around a year from now because the company handled them without dignity, respect or listening [to them]."

Moral Obligations

An alternate view is that the layoffs at Jet Airways were "un-Indian." According to Vasanthi Srinivasan, a professor of organizational behavior and human resource management at the Indian Institute of Management, Bangalore (IIMB), "There is this paternalistic culture in our organizations, and therefore a sense of a moral obligation on the part of most managers to care for their employees. Organizations in India prefer to hold on to their people as much as possible. The feeling is that the employees have been with us in good times and contributed to the growth of the organization, so how can we let them go in tough times?"

"Indian organizations have traditionally not had a culture of retrenching employees," says Hema Ravichandar, an HR professional currently offering strategic HR advisory services. She was formerly the global head of HR at Infosys. Adds Sudhakar Balakrishnan, CEO of Adecco India, an HR solutions company: "There is a certain level of obligation that employers in India tend to have towards their workforce. This is more so in the case of family-run firms and the public sector."

The public sector National Aviation Company of India Ltd (Nacil) -- the product of the merger between Air India and Indian Airlines -- has been hit hard by the double whammy of the slowdown and high fuel prices. But the management is handling things in its own fashion. The company has announced that up to 15,000 employees will be offered three-to-five years' leave without pay. Their seniority will be protected. "It is absolutely voluntary," says Nacil executive director of communications, Jitendra Bhargava.

Aviation has flown into an air pocket. So have some other sectors that are driven by bank loans -- real estate and commercial vehicles, for instance. At Jamshedpur, the Tata Motors plant was closed for three days in early November "to match production with demand of vehicles produced [and] avoid build-up of inventory." Explains a company spokesperson: "About 95% of commercial vehicles are purchased through financing.... Unavailability of finance, coupled with high interest rates, is forcing customers to postpone purchases." Consider a headline in the Hindustan Times: "Tata Motors forces unpaid leave on workers."

But things seem to be different abroad, though the company concerned is the same. At the UK plants of Jaguar Land Rover (JLR), meanwhile, there is quite another corporate culture. JLR is now part of Tata Motors after a US$2.3 billion takeover earlier this year. In October, the JLR management had asked for 198 volunteers for a redundancy plan. That has now been increased by another 400. "While regrettable, these are necessary actions to manage our business through a very challenging period," JLR CEO David Smith told the media.

East vs. West

Studies underline the fact that Western and Indian companies have different approaches to managing the crisis. According to a survey by global HR and financial consultancy service Watson Wyatt, 26% of US employers expect to make layoffs in the next 12 months. Some of the other options in this mid-October 2008 survey of 248 companies are: hiring freeze 25%, company-wide restructuring 23%, salary freeze 12%, and salary reduction 4%.

Writing in business daily The Economic Times, Pothen Jacob, head of the human capital group, Watson Wyatt India, points out that the numbers are very different for India. "Watson Wyatt's Strategic Rewards Survey reveals that the most common approach in India is a combination of restructuring (67%), slower rates of salary increase (51%) and a hiring freeze (62%). Only a small percentage of companies have considered options like reduced work week (10%), broad-based base pay reduction (3%) and early retirement (15%)." Pay cuts are limited in India; job cuts are not even on the radar in most places. "In the absence of a structured social net, the implications of a workforce reduction are both economic and emotional," writes Jacob. "Companies should first consider approaches that avoid layoffs."

"In industries like the IT and business process outsourcing (BPO) sectors, where there is close interaction with Western companies, some of the thinking around job cuts has changed," says Srinivasan of IIMB. "But, by and large, job cuts as the way to manage during a slowdown is still a very Western world view. Globalization has not really brought about a change in thinking in Indian organizations. While many multinationals have tried to get this mindset into their employees and there is much greater awareness that that jobs can be terminated at any time, the employees don't really believe it can happen to them. It is still seen as just a clause in their appointment letters. This is true even from the management side. Wherever terminations do take place, there is tremendous discomfort among the managers. We must also recognize that a large percentage of our population is first generation in the workforce from agriculture. There is, therefore, an underlying expectation of loyalty."

Ravichandar, however, believes that change is in the air. "Organizations or employees are no longer subscribers to the covenant of lifetime employment," she says. "The new mantra is really career resilience -- where organizations and individuals work together to ensure that the employee remains relevant and current with the role and organizational requirements.

"One of the biggest challenges organizations face in a downturn is managing employee morale," she continues. "Anxiety and discontent are bound to exist at such times. Strong employee-engagement initiatives including robust communication mechanisms, open channels between managers, their teams and HR, and training programs to keep employees relevant are some of the measures organizations can take to address this. Textbooks don't provide easy answers to managing in these difficult times. A lot depends on experience, prudence and management maturity."

The other big issue in India is the social stigma attached to losing a job. "In India, losing a job has more than just financial implications," says Srinivasan. "Because people work long hours at the workplace and are paid very well, their families tend to believe that they play a crucial role within the organization. If they were to suddenly lose their jobs it is perceived as a reflection on their competence. The social environment does not understand that one can be asked to leave a job because there is an economic downturn."

"Tightening belts is certainly a preferable option to cutting jobs," says Balakrishnan. "Cutting jobs leaves a bitter taste in the mouth. In India, the majority of the households have a single breadwinner, so jobs cuts hit them very hard. Also, in India, a job is not only about money. There is a lot of status attached to it. Unlike in the West, here there is still a stigma attached to losing a job. Indians as a whole are very emotional when it comes to their jobs." Another critical difference is that a laid-off employee in the U.S., even if she or he is the sole breadwinner, can obtain unemployment benefits -- which offers moderate financial assistance at least for a short period. In India, the absence of a social safety net forces jobless workers to fend for themselves, increasing the distress that they and their families face.

So should Indian firms always choose pay cuts over job cuts? "Where you stand on this issue depends on where you sit," notes Sabharwal. "If you are a competent performer, you prefer job cuts. If you are an incompetent performer, you prefer pay cuts. The danger is in believing that everybody thinks about this issue the same way."

The Role of Organizational Culture

Srinivasan sees a certain virtue in cutting salaries rather than jobs. "Wherever there have been across-the-board salary cuts, one finds that the commitment to the organization actually increases," she says. "The fact that the leadership is willing to take a pay cut sends a very positive message to the team."

"If the organizational culture is good, employees will understand that these are difficult times and will be willing to take these cuts," adds Balakrishnan. "There is willingness to fight out the bad times together. Companies will look at rationalizing salaries, lower wage increases and perks like travel and hotel privileges, and try to cut expenses wherever possible."

"The conversation currently is on tightening belts -- be it switching off the lights, closing the facilities when not required or economizing on travel," says Srinivasan. "I am convinced that the way for Indian organizations to manage the slowdown is a combination of different measures: bring down labor costs, relocate different groups of people across the organization [from where they are overstaffed to where they are understaffed] and improve productivity and efficiency."

Srinivasan believes the angst over potential job losses is just a passing phase. "Almost everyone I meet is reasonably confident that things will turn around by mid-2009," she says. But Sabharwal sees a larger problem. "Over the past few years many managers confused luck with skill as the rising tide lifted even the leaky boats," he says. "But the huge inflation in employee numbers and cost over the past few years were accompanied by substantially lower hiring standards and lower productivity expectations. Whether managers like it or not, some cleansing is overdue, necessary and inevitable." He is optimistic, however. "India is going through a classic cycle where five years of high tide should and will be followed by a year or so of low tide. But people should realize that all that is happening in the world makes India much more attractive in an 18-month timeframe."

Some sectors of business are more vulnerable to job losses than others. "Some segments in India like real estate, retail and banking have made strategic errors by way of grossly over-hiring and these will get impacted," says Balakrishnan. The Assocham survey mentions seven sectors -- steel, cement, IT enabled services/BPO, financial and brokerage services, construction, real estate and aviation -- as areas where employers "have no choice." Everyone agrees there will be some impact there.

Winter of Discontent

The numbers being discussed are, however, much larger. In a Cover Story titled Pink Slip Winter, New Delhi-based magazine BusinessWorld talks of "3 million jobs lost in export-oriented and labor-intensive industries such as textiles, leather, gems and handicrafts." When it comes to specific companies, however, at the top of the list is Nacil (where the cut is voluntary and temporary) and Jet (where the employees have been taken back). The next four are IT companies -- Satyam, Wipro, TCS and Patni -- where the numbers laid off are not much higher than in the previous years.

The reality is that the big firms -- in whatever sector -- should be able to ride out the storm. The real damage will be in the unorganized sector, where numbers are hard to come by. It is estimated that small and medium enterprises (SMEs) employ about 150 million people. These SMEs are mainly suppliers to large companies. When the latter catch a cold, the SMEs need hospitalization.

Another vulnerable group -- for which little data is available -- is India's 14 million migrant workers (out of a total of 98 million migrants), according to the 2001 census. The number is estimated to have doubled since then. These workers are employed as casual labor on large projects for large companies. (Almost half of them are in construction.) They get paid on an hourly basis. They can be told when they turn up for work that they are not required any more. They are always the first to be affected.

"Losing a job is a tragedy anywhere," says Sabharwal. "But we must keep things in perspective. All this talk about pink slips only affects 7% of India's labor force; 93% of India's labor force works in the unorganized sector where issues such as job security, workplace safety and social security have no relevance. So, at one level, most Indian workers face the most flexible and unfair labor regime in the world."

My Job Is My Life: The Connection Between Meaningful Work and Personal Identity

Business researchers have long proposed that when employees find their work meaningful and fulfilling, they are more likely to do that work well, and, as a result, help their companies succeed.

Few have disputed this simple equation. Corley, an assistant professor of management at the W. P. Carey School of Business, does not dispute that meaningful work plays a large role in how well an employee performs. Rather, he believes there's something more that drives an employee to endure an awful commute and put in an honest day's work at the office.

"One of the things that's very important to me is trying to get a better sense of how employees attach themselves to organizations," explains Coley. "What is it, I want to know, that leads an employee to not only get up every morning for that organization, but also be committed enough to do a really good job and really apply their skills and experiences?"

In a recent study, Corley attempted to find an answer.

The resulting paper, "Video Didn't Kill the Radio Star: Exploring the Role of Identity in Meaningful Work through Identification," breaks new ground. It helps establish the connection between an individual's identity and the meaningfulness of his work.

Identification in this context is the extent to which an individual connects his personal identity to his work or employer. Meaningfulness refers to the sense of purpose and significance or value and worth that employees find in their work. Corley's study establishes that identity is a core element in meaningful work, and is one of the first to attempt to bridge the long-standing theoretical gap between meaning of work and personal identity, which until now had only been theorized.

"These two areas -- meaning of work and organizational identification -- are key aspects of how employees attach or do not attach themselves to an organization, but their relationship is not well understood," Corley says. Meaningfulness and identity have been examined independently, he said, and studies about one typically mention the other. But until now researchers have not looked deeply at the dynamic between the two. Corley wanted to know more about the connection.

For his study Corley chose what might appear to be an unlikely place: a college radio station.

Radio days

"We were very interested in an organizational setting that was not molded after your typical Fortune 500 company," Corley explains. "We didn't want a place where employees would be saying, 'I am going to work for this company forever.' We really wanted to capture more of the temporal nature of work that's going on in today's business world -- we wanted a place that relied more on seasonal people, or part-time workers, a place where people come and go."

An attorney at a large law firm may be committed to the firm long-term based on tenure or financial reward, Corley explained, but the workers at this college station would have a much different relationship to their organization. Many of the station's workers would be around for only a short time. Several of them didn't even draw a paycheck.

"In the setting we were looking at, we were talking about mostly students who were always coming and going," Corley said. "It was a much more transient situation. Any sense of 'identity' we found was going to be based in connection to the organization. These folks were there for the excitement of being in radio. It was about having an opportunity to provide something and do something they really wanted to do."

Run almost entirely by students, the station that Corley investigated had just five full-time employees: four sales managers and one operations manager. The 50-year-old station had been a "rock" station since the late 1960s, but during Corley's study it transitioned from a traditional rock format to "college rock."

What Corley sought to do was find out just why these student workers committed themselves to the station. Why get up at 5 a.m., he wondered, to work for such little pay -- or no pay at all?

To find out, Corley and his colleague conducted a series of interviews with 20 employees at the station, observed the organizational dynamics by sitting in on staff meetings and sorted through the station's internal records and other documents.

During the interviews, which lasted up to an a hour each, Corley asked fundamental questions such as, "What makes you get up every day and come to work?" and "What is meaningful to you in your job?"

Corley discovered that the employees found meaningfulness in their work from eight specific sources: self-expression, autonomy, career experience, learning, compensation, internal contribution, external contribution, and social relationships. Going a step further, Corley pulled out those sources of meaningfulness that played directly into professional identification -- self-expression, autonomy, career experience and learning.

The results of the study bore out almost precisely what Corley had expected. The four sources of meaningfulness related to identity, combined with an opportunity to contribute to an organization's success, helped employees develop a sense of professional identification and a deeper connection with the organization.

What does it all mean? Better, happier employees

Corley writes that when employees "find meaningfulness in contributing to their organization and in interacting with people external to the organization, they were more likely to identify with the organization." In other words, employees who are given important jobs within an organization are more likely to identify themselves with that organization, and therefore want to perform well.

"The more that workers find their jobs meaningful, the more satisfied they'll be in their jobs, and the more likely they'll be able to provide good customer service," Corley says.

But there's more. Corley adds that employees who find meaning in their work actually live happier and more balanced lives.

"One of the things that we didn't get very much into in this paper was the fact that the more meaningful you find your job, the better able you are to handle work/life stress," he said. "People who don't find their jobs meaningful, or those who are just focused on the money or because the job will get them where they want to be, tend to have more turnover, more absences."

Though more work must be done to fully explore the connections between meaningful work, identity and workplace performance, Corley says this study does lay valuable theoretical groundwork.

It also provides some guidance for managers.

"Every employee is different, of course, but providing opportunities for employees [to contribute] -- there's a lot of value in that," Corley says. "If managers can provide the opportunity for employees to fulfill those desires, it can go a long way toward helping them find meaningfulness in their work."

Bottom Line:

• Business researchers have long proposed that when employees find meaning in their work, they are more likely to perform better. They also believe that when employees identify with their employer, they will do well.
• In a new study, management Professor Kevin Corley and his colleague take this one step further -- exploring the role that an employee's identification with an organization plays in meaning of work.
• Studying a college radio station, Corley learned that employees who have autonomy at work, who have opportunities to express themselves and learn on the job, and who gain career experience during the day find meaning in their work and identify with their profession.
• Corley also found employees are more likely to identify with their organization when they feel as though they are contributing to its success.

Quitters Can Win: Avoiding the Pitfalls of 'The Dip'

Your phone doesn't ring after your fifth, sixth or tenth job interview.

You're halfway through the marathon, your calves are burning and there's a stitch in your side -- and the finish line is a distant dream.

You've been given steady promotions at a job you've enjoyed for seven years, but your last three have been unchallenging "sideways" moves and you have the distinct feeling your hard work is being taken for granted.

You might be in a Dip -- a temporary setback that you will overcome if you keep pushing. But maybe it's really a Cul-de-Sac, which will never get better no matter how hard you try.

Seth Godin, best-selling author of books and a popular marketing blog, discusses a sticky topic in his small but power-packed "The Dip: A Little Book That Teaches You When to Quit (and When to Stick)."

Vince Lombardi was wrong

The saying "Winners never quit and quitters never win" is a fallacy, according to Godin. In fact, there are times when quitting is the smartest tactic you can employ, as long as your long-term goal remains foremost in your mind. Knowing the difference depends on understanding, and recognizing, what Godin calls the "Dip."

"Almost everything in life worth doing is controlled by the Dip, Godin writes. When you embark on a project, hobby or learning experience, it's usually fun, interesting, and rewarding. Over the first few days, weeks or months, your interest in the endeavor keeps you engaged.

And then you encounter a Dip.

"The Dip is the long slog between starting and mastery. A long slog that's actually a shortcut, because it gets you where you want to go faster than any other path," says the author. Examples:

• The combination of bureaucracy and busywork you must deal with before you graduate from college, become certified in scuba diving, or get through a transition period at work.
• The difference between the easy "beginner" technique and the more useful "expert" approach in art or athletics.
• The long stretch between beginner's luck and real accomplishment

Successful people don't just ride out the Dip, Godin advises. They lean into it, pushing harder and changing the rules as they go." The book illustrates these ideas with graphs and even cartoons. It's an easy read, but don't be fooled. This diminutive book is definitely a case where size doesn't matter. It does not tell the reader what to do. It defines and illustrates case histories, but how you apply them in your own life will depend on how well you absorb the lessons. Godin's message goes down easily enough; however, the best bet is to read the book once, then after catching on to what the author is saying and reflecting on your own life, go back and read it again.

The father of "permission marketing"

Godin's first book to achieve mainstream success was "Permission Marketing: Turning Strangers in to Friends and Friends into Customers." Distinct from "interruption marketing" (TV or radio advertising), permission marketing provides something of value to the consumer then obtains their permission to communicate it. Never employ deceit or spam, Godin wrote, and always keep your promises to the consumer. Generate buzz by being remarkable.

Godin's concept created buzz for itself in the marketing community. Marketing ideas spread as "idea viruses," he preached, and those who employ them are "sneezers."

A graduate of Tufts University with a degree in computer science and philosophy, Godin holds an MBA from Stanford Business School. He founded and worked at successful companies including Yahoo! and Fast Company. In 2005 Godin founded the "recommendation network" Web site Squidoo, and he is the author of a hugely popular marketing blog.

To quit, or not to quit?

All of us have grown up with the idea that quitting is the fast track to Loserville, but recent bestsellers written by successful CEOs have proved otherwise. Failing at an endeavor doesn't have to indicate a failing in character; failing could lead to valuable life lessons and might eventually clear the way along the road to long-term success.

Sadly for many who arrive at middle or old age filled with bitterness and regret, it's possible that societal taboo against quitting led to a lifetime of unhappy, dead-end jobs. Godin prefers to think of quitting (or not quitting) as a "go-up" opportunity, rather than a humiliating experience.

"You can realize that quitting the stuff you don't care about or the stuff you're mediocre at or better yet, quitting the Cul-de-Sacs, frees up your resources to obsess about the Dips that matter," he writes.

Godin spends considerable time describing the ultimate goal as becoming "the best in the world" at what you do. And that may be important to many in the business world. However, for those who are not so driven to perfection, the lesson of the Dip can apply in different ways. An artist, for example, may not care about being "the best"; rather, his or her goal may be simply to pursue art for its own sake, in the face of long years of obscurity and a subsistence income.

Bottom Line:

Here is what Seth Godin has to say about quitting in the chapter "If You're Not Going to Get to #1, You Might as Well Quit Now." Three Questions to Ask Before Quitting:

1. Am I panicking? Quitting when you're panicked is dangerous and expensive. The best quitters are the ones who decide in advance when they're going to quit. When the pressure is greatest to compromise, to drop out, or to settle, your desire to quit should be at its lowest. The decision to quit is often made in the moment. But that's exactly the wrong time to make such a critical decision.

2. Who am I trying to influence? Influencing one person is like scaling a wall. If you get over the wall the first few tries, you're in. If you don't, often you'll find the wall gets higher with each attempt. Influencing a market, on the other hand, is more of a hill than a wall. You can make progress, one step at a time, and as you get higher, it actually gets easier. Every step of progress you make is amplified over the last.

3. What sort of measurable progress am I making? Measurable progress doesn't necessarily have to be a raise or a promotion. It can be more subtle than that. The challenge is to create or recognize new milestones in areas where you have previously expected to find none.

Water Cooler Talk Keeps Organizational Culture Real

It is a ritual in offices around the country: the morning meet-up. Although employees may have already clocked in and should theoretically be hard at work, they meander over to the coffee pot, fill up a cup and kibitz. Although they may have arrived at 8:30, they don't boot up their computers until 9:00. In many managers' eyes, such behavior is often filed under the heading of wasted time on the company's dime. "You're here to work. If you want to socialize, do it on your own time!" they might say.

Yet, the irony of the situation, says W. P. Carey management Professor Blake Ashforth, is that these social butterflies may very well be adding value to the company. Rather than being grumbled about, such office klatches should be nurtured and encouraged.

The tribe goes to work

It is an idea that Ashforth advances under the banner of "tribalism" in a chapter he authored for the forthcoming SAGE "Handbook of New Approaches in Management and Organization."

After all, says Ashforth, a pack of paralegals or a covey of consultants drinking java or hanging about the proverbial water cooler is not so different from a tribe of Neolithic hunters sitting around a campfire. We as a species have come a long way since the days when the morning commute meant braving saber-tooth tigers but, at our core, people are still very much the same social animals we've always been. We want to feel like we belong and we value our closest connections beyond people we don't know.

In a very real sense, organizations big and small would benefit by seeing themselves framed by a variation of Former U.S. House Speaker Thomas (Tip) O'Neill Jr.'s maxim, "All politics is local." People care about the big issues, but place a very large importance on whether the potholes on their street are fixed and if there are jobs to be had in their town. So it is with organizational culture: The big issues matter but employees are most likely to judge an organization by their most local contacts -- their boss and immediate coworkers.

Ashforth says an organization's success is largely linked to its smallest social units, the tribes who congregate around the coffee maker

"Our argument is that all of that higher order stuff [strategy, mission, etc.] gets translated, made real, by what happens at the local level, so the organization is a distal influence; it's out there, it's important but it is distal," says Ashforth. "It gets the train engine going, but once that engine is in motion, it's what happens in your particular car that makes it real."

Ashforth gives the not-uncommon example of an employee who loves the larger corporate culture and mission of his employer but hates his job because of his tribe (i.e. his manager and/or coworkers) or the employee who loves her job because of those immediately around her despite the organization as a whole being miserable. In these cases, the facets of company health that one might assume would keep people in their jobs -- financial fundamentals and the company's resultant share price, product offerings, sales pipeline and overall mission -- are secondary concerns that don't necessarily trump how employees feel about their situations.

"People construe the organization through how they're treated at the tribal level so if your tribe isn't functioning well, the rest doesn't matter," says Ashforth.

The value of a shared fire

Back in primordial times, a hunter would be more likely to risk his life to save someone from a rampaging mastodon if that imperiled soul were a fellow tribesman and not a stranger. So it is today: People work better together when they know one another on a personal level. It might not be tusks and spears but rather lending an extra hour or two to a coworker who is overwhelmed by home and work pressures.

Of course, to lend that helping hand, one would have to know that a coworker was indeed stretched too thin. Although Ashforth notes that work and home increasingly blend together in an always-on business climate, he notes that there is still organizational pressure to keep one's home life from interfering with one's work life. Yet, knowing coworkers' hobbies and passions, what sports their kids play and if they're caring for a sick parent is precisely what Ashforth says builds bonds that strengthen corporate groups.

"When you come to know people on a personal level, you're far more likely to give them the benefit of the doubt and to have goodwill in your dealings. And that's a tremendous buffer against the itches and pains of everyday life in organizations," he says.

Further, with flextime, telecommuting, extensive business travel and virtual teams, organizations' employees can easily lose their sense of belonging to a small group (and consequently the larger company) because they are not in regular contact with their coworkers. In these cases, managers must work extra hard to make up for the loss in face-time (or coffee breaks) that don't occur because employees are separated by miles if not continents. Ashforth says that some professions in which it is difficult for coworkers to bond during work hours (such as police officers, who often spend the whole day in the company of a single partner) have bridged the tribal gap by building community after-hours -- perhaps at the local watering hole.

Although it is not necessarily a silver bullet, Ashforth says that technology can bolster all-important personal relationships with dispersed teams. A recent survey by Challenger, Gray & Christmas found that nearly one in four companies blocks employees' access to web sites like Facebook and MySpace, believing them to be a productivity killer. However, Ashforth says that social networking sites that transmit personal information and nurture casual and candid rapport can be an important ingredient in building links between coworkers. This is especially true for employees who do not work down the hall from each other.

Becoming a tribal leader

Of course, employees who care about their organization are better for the organization. They are more likely to work harder, be more invested in a company, resolve issues and not look for a new job, taking their skills and know-how elsewhere. Getting managers to be better at the "people part" of the job is easier said than done, but it's not rocket science, says Ashforth.

The recipe for building a tribal culture girded by small-scale social ties is at once easy and difficult. The easy part is adhering to acknowledged managerial practices such as: Setting aside time to encourage personal connections and not focusing entirely on selling more product or making more widgets; Checking in frequently with subordinates rather than just doing an annual retreat or review; Being honest and candid in building a people-centric culture rather than forcing awkward gimmicks on employees. What's difficult is taking a long-term view, which shows that taking time to socialize today may ultimately produce more dollars.

Companies should also put managers in managerial positions as opposed to employees who are particularly skilled in some more specific task. Just because someone is an excellent computer programmer doesn't necessarily mean that he or she will be an excellent manager of other computer programmers. In many cases, employees who are promoted to front-line managerial levels know they are not good managers of people and then once they've been promoted, do not get adequate training to make them good managers. As a result, the project they oversee may be technically sound and completed on time, but the fallout from focusing on the process rather than the people can be so extensive that many of the tribe subsequently leave the company.

"Organizations tend to reward short-term results, so there's always a tendency when times are tough to put the screws to employees to get those short-term numbers up. But, of course, that has terrible long-term consequences," says Ashforth.

As a result, HR training dollars should be used to develop lower-level managers, giving them tools to build rapport, instead of spending those funds exclusively on bigger picture training. Even allocating a few dollars to allow managers to take their subordinates out to lunch can pay dividends in the tribal workplace.

But Ashforth cautions that while departmental lunches are a great venue to build relationships between individuals or the group, a good manager also lets the rest of the tribe operate on its own. It's important to give employees a chance to bond without the boss looking over their shoulder.

Taking a tribal focus places a large burden on lower-level managers versus C-level executives. Figuring out when it's appropriate to go to lunch and when it's best to let the tribe feast on its own can be a challenge, but it is these small moves among small groups that ultimately shape a large organization, says Ashforth.

"If we recognize the importance that these relationships have and the importance the job has at the local level, then a lot of the so-called important macro stuff tends to fall by the wayside. The macro stuff still matters but only in a more distal sense," says Ashforth. "In the day-to-day, everyday sense, what really matters is what you can see, what you can smell, what you can taste, what you can feel, what you're doing."

Bottom Line:

* People are social animals and want to feel a sense of belonging with other people. How they feel about their employer is largely dependent on how they feel about their tribe -- their boss and immediate coworkers -- rather than the organization's larger culture and objectives as dictated by upper management.
* If an organization recognizes the importance of its smallest local groups, or tribes, it places a burden on lower-level managers to make those groups meaningful to their members and to connect the groups to the wider organization.
* Small groups of employees function better if their members feel like they truly know one another. Therefore, it is in the best interest of the organization to encourage employees to develop personal rapport.
* When workgroups do not have the opportunity to socialize they can feel disconnected from their own tribe and thus the larger organization.
* Although it is not a panacea, social networking technologies that encourage personal connections can help connect employees to their coworkers.

. That's because an organization's chances of achieving its big goals and initiatives depends on how these goals are perceived through the lens of the tribe, and how that tribe interprets and acts on them.

As Layoffs Spread, Innovative Alternatives May Soften the Blow

Just how bad will the economy get? For employers facing tough decisions about layoffs, the question is far from rhetorical. If the current economic turmoil is contained sooner than expected, premature layoffs could be a disaster. If not enough employees are laid off and the recession continues, the company's bottom line could suffer. And in any scenario involving layoffs, morale among those employees remaining at the company is sure to plummet.

Some companies consider alternatives to layoffs, such as voluntary retirements or salary cuts, hiring freezes, reductions in hours, or the cancellation of business trips and/or costly perquisites. Even standard benefit packages and matching contributions to 401(k) plans might come under the microscope.

Executives came to a general consensus that if salaries were cut by 10%, or hours were shaved from the workweek, the company's best people would disappear. The thinking was that the "most mobile" employees would be hired by competitors,.

But that prediction, he adds, doesn't hold up. "It is driven by the executives' view of the way things work, and the executives, frankly, think that everyone thinks like them. They see themselves as the kind of talent that is mobile." They also don't believe that employees would buy into the idea of doing something good on behalf of their colleagues [by accepting reduced wages or hours] because "they themselves wouldn't buy it." Once again, Cappelli adds, that perception "is probably wrong." The act of making sacrifices for fellow employees "might actually build some morale and knit the company together."

Besides, Cappelli says, if the economy stays the way it is or worsens, the concern that a company's top employees will leave is irrelevant, since no one else is hiring either. "If you have a choice between a 10% wage cut and laying off 10% of the work force, why on earth would you choose the latter?" he asks.

Cappelli suggests that it's worth thinking about what kind of problem a company is trying to solve. If there is a concern about what happens when business activity picks back up, for example, companies that hold on to their workers would be in much better shape than companies that have undergone large-scale layoffs.

Spreading the Pain

The costs of layoffs go beyond the morale problems they cause -- both for those laid off and those who keep their jobs. Unemployment insurance premiums spike. Depending on the company, there are severance packages to consider and outplacement services (costly in these days of bigger demand for them). Litigation is a not insignificant risk. Cappelli suggests that if a company can cut back without instituting layoffs, it should do so. "Then you don't have those start-up costs" once things are back on track.

On the other hand, there's nothing like a good economic downturn to get rid of dead wood. A sagging economy can be an opportune time for management to deal with performance problems by using the bluntest instrument possible, Cappelli says. Firing people is often difficult to execute, but an over-arching justification tends to lessen complications.

The subject of alternatives to layoffs is almost always seen from the point of view of the employer, he adds. It would be a rare employee who suggests his or her hours be cut. But executives can share the decision by asking for voluntary pay cuts in exchange for some sort of deferred compensation, such as shares of stock or extra vacation. Some U.S. cities coping with recession-driven budget crises have already opted to reduce salaries and hours. Atlanta Mayor Shirley Franklin recently said 4,600 city employees would see their hours cut by 10% because of a $60 million budget gap.

n the private sector, the conventional wisdom is that the smaller the company, the more apt owners are to work things out personally with workers. "We recently reduced hours in our department," says Ben Atkinson, director of risk management for Edison, N.J.-based Peoplelink Staffing, a provider of staffing, software training, consulting, development and support. "My team proposed the idea, and each [of us] volunteered to reduce [his or her] number of work days. I have asked other managers across our enterprise to consider this approach."

Atkinson says the move has prevented major disruptions to projects, and retains the investment the company has made in training its employees. "This is not to say we won't consider layoffs," he adds. "But it depends on your economic prognosis. If we anticipate a recovery sooner, we are more likely to consider reduced hours. If we expect a long slog, layoffs may seem more appropriate."

"The really small companies are probably more willing to find alternatives," Cappelli suggests. "Relationships are much more personal. It's one thing for the CEO to call the HR person and say, 'Lay off 10% of the staff.' It's another thing for the person at the top to look the [laid-off employee] in the eye" and say he or she no longer has a job.

Small, privately held companies also do not have as much pressure to cut costs if the owner believes it is possible to ride out the storm. Conversely, in a publicly held company, even if a CEO is inclined to seek alternatives to layoffs, pressure from shareholders and Wall Street analysts to cut staff might be too great. "With bigger companies, there is a certain skill to laying people off," notes Cappelli. "It will be interesting to see in this recession how companies do it, because a lot of them have lost that skill."

In the past 20 years, staff cutbacks have more frequently included attractive incentives, according to Daniel O'Meara, a senior fellow at Wharton's Human Resources Center and an employment law attorney with Montgomery, McCracken, Walker & Rhoads in Philadelphia. In the 1990s, O'Meara saw more opportunities for voluntary retirement incentives. "It was more feasible with a defined benefit plan, and very feasible with over-funded pension plans. If [employers] could afford it now, it might be that anyone with 20 years of service and at least 55 [years old] would be treated as [if they have] 30 years [of service] and ... are 65."

These days, such options are less generous, he says, citing a particular hospital where buyout offers are more typical: one or two weeks of pay for each year of service. "No one who is happy in their job and doesn't have something lined up would leave for four or eight weeks of pay. But you might have people who were going to leave anyway, and see it as a great opportunity."

The other side of that coin is that some companies make such offers "only to show employees that they are basically good people, just before the involuntary layoffs come. Since the Depression, all these alternatives have been discussed -- to lay people off or share the pain," O'Meara says, recalling personal experiences as a young man growing up in western Pennsylvania, where he worked summers in a steel mill. "There, when things got slow, we all worked four days a week. That's [a case] where the union had the effect of making sure people held on to their jobs. A lot of this stuff has been around for a long time. These decisions have huge impacts on people and there are no easy solutions."

O'Meara has mixed emotions about unions in general, mentioning "pay compression," where an unskilled broom-sweeper makes perhaps 60% of what a skilled steelworker makes. But that "socialist preference" clearly had a positive impact when the situation went beyond cuts in hours and moved into layoffs. "I have seen people retire and [accept] these fairly modest offers. [They figure] that they are older and their kids are out of college, and they think, 'When I was younger and needed the job, I would have appreciated someone doing that for me,'" O'Meara recalls. "It doesn't happen often, but I saw it in the steel mill."

A new factor on the playing field of labor negotiations is pending legislation called the Employee Free Choice Act, pushed by the AFL-CIO and backed by many Democrats in Congress, including the President-elect. Passed by the U.S. House of Representatives in 2007 and eventually filibustered in the Senate, the act would require a union's certification by the National Labor Relations Board (NLRB) when a majority of employees has signed a card designating a union as its bargaining representative.

"The bill would make it much easier to organize employees," O'Meara says, which might make the case for alternatives to layoffs more pressing. At the same time it could possibly restrict options for employers. "You don't want to lower morale when [Congress] is about to pass a law making it easier to organize. [But] it would make anything innovative a little more difficult."

Avoiding Layoffs 'At All Costs'

"The economy has got us all watching very closely. Like anyone, we are trying to figure out where the bottom is," says Tim Roth, president of Megavolt, an agricultural machine re-manufacturer based in Springfield, Mo. "Agriculture has been relatively strong compared to other industries, but in June, we saw that in future months we would have some problems. We tried to figure out how to keep people and avoid layoffs at all costs."

Megavolt has two advantages over many other private companies. First, it is a joint venture with two other firms descended from International Harvester after a buyout 25 years ago. In some cases, this allows employees who get additional training and certification to temporarily move to other work places, as needed.

Second, the company moved in October to a "shared work program" of three 10-hour days a week as a way to cope with the downturn. While workers keep their jobs, the lost 10 hours each week is nonetheless enough for them to be eligible for state unemployment benefits in Missouri, where Megavolt is located. The Missouri program also does not restrict unemployment benefits for people who take on part-time jobs, Roth says. And within the shared work program, companies can soften the blow to people who are laid off. In that situation, the state stipulates that the employer give the volunteers a specific recall date -- generally, anywhere from one to six months out, according to Roth. The company also maintains health benefits for employees and defers their contribution to the premiums.

"It's one thing to have lost a job completely, but it's quite another to be able to look for work and know you have got something else behind you," Roth says. "It's a good program."

Cappelli says Missouri's program sounds promising as a model for other states. But it might be a moot point in the short term. Indiana officials just announced that they are running out of unemployment dollars and might have to increase the state tax that generates those funds. Currently, the first $7,000 of earned income is taxed for unemployment insurance, something Indiana may need to increase to offset its own residents' needs.

Other states, such as New York, have shared work programs similar to Missouri's, but the gap in flexibility from one state to another can be wide. At the moment, most state unemployment offices are passing on the news to out-of-work residents who have exhausted their benefits that recently passed legislation provides up to seven additional weeks of compensation, funded by the federal government.

In the end, companies need to balance what's best for their employees while making sure the company remains viable in tough times. Small companies might be able to maneuver more nimbly, Cappelli says, but innovation will suit the times and circumstances no matter what the size of the firm, public or private.

He cites Cisco Systems in 2001, after the tech bubble and before 9/11, as an example. Cisco allowed employees to take sabbaticals while they were paid one-third their salary. "The reason was that at one-third pay, you couldn't survive forever, but it was enough money that you wouldn't necessarily be looking for another job" in the meantime. Cisco saved both money and talent.

Roth maintains that solutions like the ones his company have come up with work well only if state and federal agencies leave the innovation to the companies. "We can have the greatest idea to do something, and if the state doesn't support us, we can't do it," Roth says. "We have to save jobs. We cannot let this country lose more jobs."

CEOs and Market Woes: Is Poor Corporate Governance to Blame?

From Wall Street to Detroit, chief executives are losing their bonuses, agreeing to work for a dollar a year and in many cases losing their jobs. Congress is invading the executive suite, demanding veto power over management decisions as a price for tax-funded rescues.

And, of course, stock prices have plummeted.

It all looks like a sweeping vote of no confidence, as if the world thinks America's executives and boards of directors are beset with an epidemic of incompetence, self-dealing or both. Many shareholder advocates see the financial collapse and economic woes as stunning proof of their long-held claim that too often the wrong people are in charge -- and that attacking this problem demands an overhaul in corporate governance regulations.

They propose a range of measures to encourage chief executives to focus on the long term rather than the next quarter, to give shareholders a "say on pay" and to make it easier for them to field their own candidates for directorships.

"The recent volatility we have seen shows that the need for better corporate governance has never been clearer or more pressing," writes Nell Minow, editor and co-founder of The Corporate Library, a research firm that presses for better governance practices. She adds that "this latest mess is so pervasive and so -- apparently -- legal that it has called into question the most fundamental notions of trust in Wall Street and in the American economy."

Not everyone sees governance as the culprit, and some warn that a kneejerk attack on established corporate practices could backfire. But many experts expect that regulators, Congress and the incoming Obama administration will take a hard look at whether rule changes could improve the management of public companies.

"The failure of so many firms can partly be attributed to structural factors beyond anyone's control, but not entirely," says Wharton management professor Michael Useem. "One has to infer that we also have a combination of leadership and governance problems that can explain why so many companies went south so quickly." With hindsight, he notes, it is clear that many corporate directors and executives failed to appreciate the "risks lurking in what they were doing, and the risks lurking in the economy at large."

The main exhibits for reform advocates: First, the near collapse of the three U.S. automakers, while foreign competitors thrived in the same market conditions; and, second, the extraordinary level of borrowing and risk-taking that sank major investment banks.

The Madness of Crowds

For many experts, the common thread was a focus on short-term results that endangered firms' long-term health. The car makers promoted profitable SUVs and trucks, failing to develop enough fuel-efficient vehicles or upgrade plants so they could swiftly produce different vehicles as consumer demand changed. Investment banks and mortgage lenders soaked up profits on high-risk loans and securities tied to mortgages, ignoring the damage that must eventually come when the home-price bubble burst.

General Motors executives and directors, for example, can be faulted for misunderstanding the implications of a gasoline-starved and environmentally threatened world, Useem says, while Wall Street is "dominated and driven by investors and equity analysts" with a short-term outlook. Wharton management professor Thomas P. Gerrity describes the run up to the collapse as "a classic delusion, a madness of crowds. We've lived through it over and over again."

Washington is already addressing governance issues, and most experts think more will come. Banks that take federal rescue money have to agree to executive-pay restrictions, such as a loss of tax deduction on pay exceeding $500,000 a year and a ban on big paydays for departing executives, called "golden parachutes."

For the moment, pay restrictions may be necessary to get support for rescue measures from an angry public and Congress who resent big pay for those who presided over disaster, says Wayne R. Guay, a Wharton accounting professor. But he questions whether making such restrictions permanent would be wise, arguing that big firms "are not going to survive long-term by paying their executives $500,000. They're just not going to attract the talent."

Even severance payments can make sense, he says, citing cases of CEOs faced with losing their jobs by selling their firms, which is often the best move for shareholders. "A severance package is going to provide that CEO with some incentive to say, 'I am willing to sell out the firm and get fired, because there is a golden parachute that I will get,'" he suggests.

To critics, however, this reasoning underscores the corporate culture's hazardous fixation on self-interest. A top executive who is already wealthy by any ordinary standard should not need to be paid extra to do right by his shareholders, according to this view.

Minow says Corporate Library studies show that executives receive outsized pay because they exert excessive influence over their boards of directors -- influence that also can help a poor-performing executive hold on to his job. She says her organization's proprietary studies, which are sold to subscribers, show a correlation between excessive pay and poor shareholder returns.

While Minow argues that the widespread failures among financial firms show how pervasive bad management has become, others say the breadth of the problems shows the crisis was unpredictable, noting that not many regulators or academics saw it coming either. "This was not something that was missed by a bunch of dummies. They just didn't get it," says Gerrity. "The few voices that were expressing skepticism were drowned out by the fact that the market was booming." Executives felt compelled to jump into the subprime mortgage and other risky markets to compete. "Everyone was playing the roulette wheel."

Guay, too, feels it is too easy to blame corporate governance for the whole mess. "It is just hard to tell a story about why these firms would choose executives who weren't trying to maximize shareholder value," he says. Hence, executives striving to match competitors' use of lucrative mortgage securities were doing what their shareholders wanted -- and shareholders were not complaining at the time. "Most of these executives held a vast majority of their own wealth in their companies' stock or stock options, so they had the greatest possible incentives to maximize profits," he says, noting that many Wall Street executives not only lost their jobs after the business soured but much of their fortunes as well. "It's hard to say that all the banks hired bad executives."

Some critics argue that stock and stock options give top executives an incentive to manipulate results or take excessive risks to boost stock prices over the short term, and they suggest that executive performance should be judged according to different gauges, such as revenue growth, earnings measures or other data calculated by corporate accountants. But Guay notes that many types of data produced in-house are more easily manipulated than share price, which is governed by the market's judgment.

Shareholder groups have been pushing "say on pay" initiatives that would require companies to put executive-pay issues to shareholder votes. While such votes probably would be non-binding, the idea is that the prospect of an embarrassing "no" vote would prod directors out of paying too much and compel them to justify pay packages publicly. But Guay and Gerrity question whether many shareholders are equipped to make such decisions. "These [decisions] are complex," Guay says. "They require a lot of detailed information.... If we move the decision-making that has traditionally been in the hands of the boards back to shareholders, we sort of move away from the reason we have boards of directors in the first place."

That begs another question raised by the crisis: If directors are there to make tough decisions and oversee executives, why did they allow so much risk taking?

Minow and other critics say directors are too cozy with the executives to oversee them adequately. In many cases, the CEO is the chairman of the board, giving him significant say over who is offered a board seat, which can be worth hundreds of thousands of dollars a year at a major corporation. Although directors must be elected by shareholders, critics note that traditionally a candidate needs only a plurality of votes to win an election. Reformers want to require that candidates receive at least 50% of votes cast to win. Indeed, this requirement has been adopted fairly widely in the past few years. "More and more firms are starting to move in that direction and I don't think it's a bad idea," Guay says.

Back in the USSR

The effect of such "majority voting" is dampened, however, by the fact that there typically is only one candidate on the ballot for each board opening -- a candidate nominated by the board itself. Critics liken this to elections in the Soviet Union, complaining it is just too hard for challengers to get board approval to be placed on ballots, and they seek regulatory reform to open up the process. Most proposals would require candidates to be listed if they produce petitions representing a significant portion of shareholders, such as 3% or 5%. Business groups oppose the idea, arguing it would allow unions, environmentalists or minority shareholders to foment destructive turmoil.

But Lucian A. Bebchuck, a law professor at Harvard who specializes in governance, says such reforms would strengthen U.S. corporations, arguing they would serve shareholders better if they adopted some of the United Kingdom's governance rules. In addition to opening the ballots to challengers and shareholder-sponsored issues, reform should include requiring all directors to face election every year, he says. In the "staggered" system common in the U.S., only a fraction of directors face election in any given year. Advocates say this promotes stability, while critics say it helps entrench weak directors and managers. Bebchuk's studies have concluded that staggered boards weaken corporate performance. He says the range of reforms he advocates could be swiftly enacted by amending the Delaware General Corporation Law, since most U.S. companies are incorporated in that state.

Obama has supported say on pay and other governance reforms, and most experts expect the Democratic-controlled Congress to push these issues next year.

Eric. W. Orts, professor of legal studies and business ethics at Wharton, warns against putting too much emphasis on governance reform, believing other regulatory changes are more promising, including improved public disclosures about new securities such as credit default swaps. Firms were not ignoring risks; they did not have the data needed to see how risk was spreading through the system. Consolidating regulatory functions now scattered among different agencies would help, he says. "This is the ideal moment."

Useem, too, cautions against a quick resort to a handful of politically popular remedies. "The great danger is [you] screw up free enterprise," he says, arguing that Obama should establish a blue chip task force to consider governance issues in depth. "The way in which regulation is going to be effective here is if it [comes from] a lot of smart people [looking at] what happened at Lehman, Merrill and General Motors and saying, 'we can't let it ever happen again.'"

Any analysis of successful companies shows there is no single governance style that guarantees success, Useem says. Nonetheless, he believes that moves to make directors more responsive to shareholders and to open board elections to challengers could be helpful. It also can be useful to better tie executive compensation to long-term results by parceling out compensation over a number of years, with provisions for withholding portions if performance fades.

Having been so badly stung, many firms are already moving to address risk taking, Gerrity notes. "We have a healthy new thrust in corporate governance called enterprise risk management" to establish standing operations to take a more sophisticated and comprehensive look at a firm's risks. Depending on the business, that can entail everything from the risk of hurricane damage or terrorist attacks to the risk inherent in portfolios of mortgage securities, or factors that could threaten access to cash and credit.

Because these evaluations are so complex, they could be hampered if too much authority shifts from management and employees to shareholders, Gerrity adds. "You're not going to improve [risk management] from a thousand miles away, with no real knowledge of the needs of the firm. The only solution to this is more intensity and more courageous questioning. People didn't look at the systemic risk, which is more obvious now than it ever has been in our history, because markets are more interconnected."

More important than regulatory change is the need for a cultural shift to better emphasize long-term issues, Useem says. Ultimately, he notes, Americans may adopt a disdain for short-term risk taking similar to the disgust they have developed for smokers who light up in crowded rooms. A new risk-consciousness held by the public should work its way into the boardroom and executive suite, he says. "Rebuilding the national culture becomes absolutely vital."

Brain Drain

Emerging markets can win in the global war for talent by leveraging the talents of their expats.


"To study a banyan tree, you not only must know its main stem in its own soil, but also must trace the growth of its greatness in the further soil, for then you can know the true nature of its vitality".
—Rabindranath Tagore

Consider a few statistics. In the 1990s, roughly 650,000 people from emerging markets migrated to the United States on professional-employment visas. Over 40 percent of the foreign-born adults in the United States have at least some college education, thereby making that country the epicenter of the global talent drain (Exhibit 1). Foreign-born workers now make up 20 percent of all employees in the US information technology sector. About 30 percent of the 1998 graduating class of the famed Indian Institute of Technology—and a staggering 80 percent of the graduates in computer science—headed for graduate schools or jobs in the United States. Some 80 percent of foreign doctoral students in science and engineering plan to stay there after graduation—up from 50 percent in 1985 (Exhibit 2). Roughly a third of the R&D professionals of developing countries have left them to work in the United States, the members of the European
Union, or Japan.

View the pdf..........

China and India: The race to growth Part - 3

Sector by sector

The strength of the Chinese and Indian economies will actually be decided at the industry level.

The answer to the question, "Which is the better approach to economic development?" is not to be found at the national level. You have to look at what's going on in individual industries. And when you do, you find that supportive government policies that encourage competition drive good performance. Both China and India have some sluggish, inefficient industries that are heavily regulated and lack competitive dynamism. But both countries also have successful industries that thrive unfettered by poor regulation.

The McKinsey Global Institute has long argued that the key to high economic growth is productivity and that the main barrier to productivity gains is the raft of microlevel government regulations that hinder competition. This idea is well illustrated in the case of India.

At the high end of India's productivity spectrum is the information technology, software, and business-process-outsourcing sector. It's a big success story, having created hundreds of thousands of jobs and billions of dollars' worth of exports. As a new sector—and one whose potential the government, in my view, failed to recognize early on—it has avoided stifling regulation. IT, software, and outsourcing companies are exempt from the labor regulations that govern working hours and overtime in other sectors, and they have been allowed to receive foreign direct investment, which is prohibited in retailing, for example. Without this foreign money, it is debatable whether the sector could have taken off. By 2002 it already accounted for 15 percent of all foreign direct investment in India.

In the middle of the spectrum is the auto industry, which has seen dramatic change since the government began to liberalize it in the 1980s. By 1992 most of the barriers to foreign investment had been lifted, and this made it possible for output and labor productivity to soar. Prices have fallen and, even as the industry has consolidated, employment levels have held steady thanks to robust demand. Nonetheless, with tariffs on finished cars still relatively high, automakers remain sheltered from global competition and the sector is less efficient than it could be.

At the low end of the spectrum is the consumer electronics sector, which, despite the lifting of foreign-investment restrictions in the early 1990s, is still burdened by tariffs, taxes, and regulations. As a result, Indian consumer electronics goods can't compete internationally and prices for local consumers are unnecessarily high. The performance of India's food-retailing industry is even worse. Partly as a result of a total ban on foreign investment, labor productivity is just 6 percent of US levels.

Now look at China, which also has some reasonably liberalized and highly competitive industries, including consumer electronics, in which labor productivity is double that of its Indian counterpart. Over the past 20 years, the industry has become globally competitive through a combination of foreign direct investment and intense competition among domestic companies. It is also remarkable for the relatively liberal approach the government has taken to regulation—probably because of a failure to see its growth potential. Today China makes $60 billion worth of consumer electronics goods a year.

The performance of China's auto industry—which was considered a strategic one and remains tightly regulated because of the government's desire to bring in technology and investment—is less clear-cut. The market has been opened up to foreign automakers, consumer demand has grown enormously, and prices have dropped. Yet the sector shows how government intervention can thwart the potential of foreign direct investment. Foreign automakers can invest only in joint ventures, they have to buy components from local suppliers, and tariffs shield the market from imports. Competition is beginning to increase as private companies grow stronger. But for the time being, the productivity of foreign joint ventures in China is low compared with that of plants in Japan or the United States—astounding given China's low labor costs.

Since there are such big differences in the performance of different sectors within the same country, it makes sense to compare the performance of India and China at the sector rather than the national level. In IT and business-process outsourcing, India is so far ahead of the game that China can't do anything during the next 10 or 15 years that would bring it close to catching up. In consumer electronics, however, China dominates, and India won't provide serious competition during the next 10 years.

The auto sector is a toss-up. India's competitive forces have driven an enormous amount of innovation in the sector. Low-cost labor has been used instead of expensive automation, and local engineering talent has developed innovative new products such as the Scorpio—a sport utility vehicle that sells for a fraction of the price of an equivalent car in the United States. In China, large amounts of foreign direct investment have built a big industry, but regulation has so far limited its competitive potential.

It is far from clear which economy will emerge as the stronger one. The foundations of robust, sustainable economic growth must be built at the industry level, on the back of high productivity, which is achieved when governments ensure a level playing field through sound regulation and remove the barriers that stifle competition. Both China and India still have ample opportunity to help their industries and economies thrive.

China and India: The race to growth Part - 2

China: The best of all possible models

In an efficient market, the private sector is better than governments at allocating investment funds. But China isn't an efficient market, and India has relatively little investment funding.
Finding fault with China's approach to economic development is easy: cyclical overcapacity, state-influenced resource allocation, and growing social inequalities are just a few of its shortcomings. But it's hard to see how any other model could have given the economy such a powerful kick start.

The Chinese government manages the development of enterprises with a view to driving economic growth. You can be a small entrepreneur in China, but if you want to be big you will have to get money from a government-affiliated source at some point. Government officials essentially have the power to decide which companies grow.

In achieving the objective of growth, this policy has been tremendously successful. China has quickly built industries large enough to drive its economy. Take the auto industry, now an important contributor to the manufacturing sector. Only 20 years ago, China had no auto industry to speak of; there were a few manufacturers of trucks but none of passenger cars. To get started, the government decided that in a high-scale, high-tech industry, some foreign company—in this case, Volkswagen—had to come in and show local ones what to do. Because most local companies were state-owned 20 years ago, Volkswagen was hooked up with a state-owned company.

You might argue that this development model has thwarted entrepreneurship. But there weren't any entrepreneurs in the industry at the time. There were no private companies that could partner with Volkswagen, let alone compete with it. The government simply said, "We want China to modernize. We want the Chinese economy to grow. We don't have the companies we need to make that happen, so we're prepared to do what it takes to create them."

The capital-intensive auto plants built with foreign partners in China as a result of its development policy may have no particular productivity advantage over the plants they might have built at home. But all of the spending by the big car companies has paid off.
Moreover, local, privately owned automakers such as Chery Automotive and Geely Automotive are beginning to thrive. A generation of entrepreneurs has put to good advantage the skills and training that the foreigners provided, so that Chinese companies now put together cars of reasonable quality much more cheaply than foreign automakers can. At present, domestic players benefit from the price umbrella that the foreign ones provide. But these smaller fry are now making cars for $2,000, which means that any company that has high cost structures will eventually suffer. With lower tariffs on the way because of China's accession to the World Trade Organization, and with new competitors proliferating, the automotive industry is heading into a classic price war that only the fittest will survive. This is precisely what happened in the consumer electronics industry, where competition led to the emergence of successful Chinese companies that operate globally. I think that in five or ten years' time, at least a third of the Chinese auto industry will be completely private—nothing to do with the current state players. And this will all have started with the state saying, "We want to build a car industry."

Looking at industry more broadly, inefficiencies and cyclicality have resulted from the fact that many funding decisions are driven at the local-government level. Local officials have GDP growth as a political-performance target, so many of them look for the biggest investments they can make to push along the regional economy. Like stock market investors pursuing the latest speculative fad, they have created a lemming effect, with lots of unsound investments, whether in aluminum smelters, residential real estate, or TV factories. The outcome tends to be waves of overcapacity as investments are made right up to—and sometimes way beyond—the point where it is patently obvious that the economics cannot justify them.

But remember that the essential mechanism of economic reform in China has been the encouragement of competition among provinces and municipalities. Until the 1980s there was no such thing in China as a national company. Everything was local. There was no single legal entity that operated more than five kilometers (about 3.1 miles) from its headquarters. With the removal of internal trade barriers, local entrepreneurs and their government backers invested to build scale and attack neighboring markets. Yes, this does lead to overcapacity and price wars. But over time—and relatively short periods of time, too—all that cyclicality also leads to shakeouts that the most competitive enterprises survive. These enterprises, thanks to their national scale and real competitive advantages, no longer depend on local-government funding and can now start to compete for the long term, both domestically and internationally.

That has certainly been the story in consumer electronics, where the top three players in personal computers control 50 percent of the domestic market, and in beer, where the top ten own 30 percent. It is starting to be the story in heavy industries, where companies such as China Qianjiang own 40 percent of the motorcycle market and Wanxiang dominates its niche in automotive components . Interestingly, it is not the foreign companies but the locals that tend to be the winners of the consolidation wars. The beer industry is a case in point: most foreign brewers, unprepared for tough domestic competition and rapid consolidation, entered and exited in the 1990s.

The government is fixing the banks through tough higher reserve margins, branch-level changes, and more flexible risk-based pricing

Moreover, I don't believe that foreign direct investment is linked to the development of China's capital markets or to a reform of the banking system. Multinationals account for only 15 percent of fixed-asset investment, so they don't drive the economy to a very great extent. China must rely on its own domestic financial resources to finance growth. As a result, the country's capital markets are being developed. And the government is fixing the banks through tough higher reserve margins, branch-level changes in performance management and incentives, and more flexible risk-based pricing.

As for the oft-stated view that China is trying to create global state-owned champions, it is at least partly a myth. The government does want to develop strong Chinese companies, but it does not expect them to be state enterprises, which are inefficient by definition. Indeed, it is now telling them that if they want to grow, they will have to get listed on the stock market. The government's policy for the first 20 years of its reform program was, "Let's do what's needed to establish markets." Its policy for the next 20 years will be, "Let's get out of those markets." The global Chinese companies of tomorrow will be competitive, mostly listed, and entirely commercial in their aims and purposes.

Ultimately, you have to ask whether the inefficiencies of the Chinese approach outweigh what it has achieved for the economy overall. The answer, I think, is no. The government still controls most of the country's financial resources and has been reasonably good at allocating them—that's why the economy has grown so fast. Compared with the private sector in an efficient market, the government is no doubt worse at allocating funds. But China is not an efficient market, and the Indian model—essentially one with relatively little investment funding, whether by the government or the private sector—could not have achieved as much growth for the Chinese economy as the approach China's government actually took. The Indian model might not be adequate for India's economy either: the country's family-owned businesses and other private investors may be good at deciding what makes a sound investment for them, but they have not spent enough money to drive the kind of growth seen in China. It would not surprise me at all to see investment in India rise dramatically as foreign and domestic investors alike begin to recognize its potential going forward.