Leader Due Diligence – Psychometrics as Part of Financial Transparency?

With the Bernie Madoff being the latest in a series of massive financial frauds caused by leaders who misrepresented themselves, the time may have come to broaden the financial world’s definition of “transparency”.  I’d like to offer a broader view to include publicly reported reports on leadership knowledge, skills, abilities, traits, values and interests.  Would you have invested in Madoff’s Ponzie scheme if you had previously reviewed a report from a trusted authority on leadership assessment that noted he is low on conscientiousness and prudence?  How would a board view this same report on a founder-CEO?

How well do you know your leaders?

Poor leadership is common, but leaders rarely fail in such a public way.  In one study of nearly 400 Fortunte 1000 companies, 47% of executives and managers rated their company’s overall leadership as fair or poor; and only 8% rated it as excellent (Csoka, 1998).  Personality traits predict both performance and ineffective leadership.  For example, conscientiousness is one of the “Big 5” factors of normal personality that has been shown to consistently predict both job performance and dishonest behavior in the worklpace. Former professors of mine, Robert and Joyce Hogan have written extensively about this area, and have authored some of the better classical test theory instruments for normal personality, the “dark side” or disfunctional leadership, and leader motives, values and preferences.  None of these sorts of assesments are typically used systematically to plan CEO development in private by the board.  And it is entirely unheard of for these reports to be shared publicly with prospective customers, partners and shareholders.  Perhaps we should reconsider making these transparent, systematically, given the risk and lack of confidence in markets of late?   The free paper I drafted, “The Three Stooges of Operational Risk: Advances in Leadership Due Diligence and Rasch Measurement” proposes a way of improving our leadership assessments.  If desired, they could be used for this transparency purpose.   I welcome your feedback.

Special thanks to Alexei M for inspiring this idea.

References

Csoka, L. S. (1998).  Bridging the Leadership Gap.  New York: Conference Board.

Hogan, R., Curphy, G., & Hogan, J. (1994).  What We Know About Leadership: Effectiveness & Personality.  American Psychologist 49(6), 493-504.

Robie, C., Brown, D., & Bly, P. (2008, March).  Relationship Between Major Personality Traits and Managerial Performance: Moderating Effects of Derailing Traits.  International Journal of Management, 25(1), 131-139.

Madoff Destroys $50 Billion with “Giant Ponzie Scheme”

Bernie Madoff is the latest in the series of senior executives to destroy value, this time with an apparent $50 billion dollar fraud, according to the Financial Times.  Madoff, a former Chairman of the NASDAQ stock market, on thursday admitted to his employees including his two sons that his operations were “all just one big lie” and “basically, a giant Ponzi scheme”.  The alleged fraud is the largest ever investor fraud ever blamed on a single individual.

Previously, I had written about the “Three Stooges of Operational Risk“, where I detailed senior executive destruction from Key Lay of Enron, Bernie Evers of Worldcom and most recently, Dick Fuld‘s follies with Lehman Brothers.  In two of those three I noted the dishonesty and fraud that accounted for their downfall similar to Madoff.  But unlike Madoff, they were less candid about thair fraud.  After Madoff’s brazen alleged admission, is there any uncertainty that leadership due dilligence is a critical part of the selection process of hiring senior executives?  Could it be any more clear that the pre-hire assessment procedure is a non-trivial subset of Enterprise Risk Management?

In fairness, these Industrial Organizational Psychology methods have their limitations.  No forecast could ever be perfect, or and even the best assessment procedures only account for 30-60% of the variance in job performance.  But it’s relatively rare that factors such as conscientiousness are used to screen executives – and conscientiousness highly predicts dishonest, and imprudent behavior in the workplace like that of Madoff.  With new methods from Rasch Measurement, Computer-Adaptive Testing, and an innovation from the Scientific Leader, “Inverted Computer Adaptive Testing” using Virtual Realtity, it’s increasingly difficult for people to fake or misrepresent themselves on these assessments. 

How much risk are you accepting when you use standard interviews to hire your employees?

Madoff, Ponzie, Fraud, NASDAQ, Selection, Pre-hire, Assessment, Psychometrics, Rasch, Item Response Theory, IRT, personnel, HR, Due Diligence

Top Conference Salutes The Scientific Leader

The Scientific Leader is pleased to announce that three submissions to the 2009 Society for Industrial-Organizational Psychology (SIOP) conference have been accepted.

The Society for Industrial-Organizational Psychology (SIOP) is the premier professional association for scientists and practitioners of human behavior in the workplace.  Each year, they hold a popular conference with peer-reviewed articles and symposia.  The number of proposed sessions always far outstrips the number of available places, and so the standards for acceptance are relatively steep by the peer-review group who decides on placement.

Three submissions were accepted for presentation at the next conference, to be held in New Orleans

1.  Enhancing Utility Analysis: Introducing the Cue See Model

I’m particularly proud of this paper, as it represents a new approach to asset valuation, both tangible and intangible.  While traditional I/O Psychology has its’ own tradition to quantify the value of human performance called Utility Analysis, it largely does not include any of the other organizational sciences’ ideas.  My paper tries to synthesize finance, psychology, industrial/systems engineering, computational organizational theory, and computer science ideas into the “Cue See Model”.  The hope is that the approach can be useful to managers and theoreticians by helping to specificy how a company creates profit across levels.  Once understood, then the Cue See Model can be used to track it, objectively, without relying on subjective human ratings.  My hope is that future studies will empirically demonstrate the models’ efficacy, and help avoid the fields traditional problem of measuring and monetizing outcomes.

2.  Succession Planning: Beyond Manager Nomitations

Led by our parent company, Human Capital Growth’s Dr. Shreya Sarkar-Barney, this panel discussion will include experts on leadership discussing the use of psychometric assessment instruments and other science-based practice methods for succession.  Panelists include:

Shreya Sarkar-Barney, Human Capital Growth, Chair
Matt Barney, Infosys, Panelist
Eric Braverman, Merck, Panelist
Lori Homer, Microsoft, Paelist
Jennifer Irwin, Proctor & Gamble Company, Panelist
Kevin Veit, Gabbard and Co, Panelist

3. The Role of IO Psychology in Resolving the Healthcare Crisis

I was asked to be the discussant – a senior leader with expertise in the area to comment on all the papers in the session ,as I was the Chief Learning Officer & VP for Sutter Health previously.  It will focus on interventions
targeted at improving outcomes related to quality of patient care. The
interventions to be covered focus on selection, leadership and culture, team
training, safety, and others. The session will represent research on various
levels of the organization, including management, nurses, and frontline staff.

Kristin Charles, Kronos Talent Management, Co-Chair
David Scarborough, Kronos Talent Management/Black Hills State U., Co-Chair
Justin Rossini, DDI, Inc., Author
Sallie Weaver, Univsersity of Central Florida and MedAxiom, Author
David Hofmann, Univ of North Carolina at Chapel Hill, Author
Matt Barney, Infosys, Discussant

The papers I’ll be reviewing in this session include:
Defining quality of care: Behavioral competency models across nursing
departments: Kristin Charles, Autumn Krauss
Addressing Care Quality, Engagement, and Retention Likelihood: a Selection
Perspective: Justin Rossini
Can Team Training Improve Operating Room Quality of Care?: Sallie
Weaver, Michael Rosen, Deborah DiazGranados, Rebecca Lyons, Elizabeth Lazzara,
Andrea Barnhard, Eduardo Salas
Leadership Levers to Motivate Error Management: David Hofmann, Adam
Grant

I hope some of the readers of this blog are able to attend this excellent conference, and if you are, please comment below or send me a note (matt at scientificleader.com) so I’ll get to meet you.

Microfinance Human Capital Robust to Crisis

I was pleased to discover that the desperately poor people involved in the microfinance industry appear to be resistant to the current financial market turmoil.  Mary Ellen Iskenderian, CEO of Women’s World Banking, an expert, spoke with Time Magazine indicating that because it falls outside the mainstream economy, microfinance is resilient to the current crisis.  They succeed in repayment rates at 97% to 98%. 

Iskenderian credits good “old-fashioned” banking that forecasts a family’s ability to repay, unlike the wild speculation and government-sponsored irresponsibility in the US (e.g. Freddie Mac, Fannie Mae).  In 2007, commercial capital invested over $3 billion USD in microfinance.  Microfinance is also transforming into for-profit institutions, with the hope that this will service the finance needs of a billion people, espeially women.

Could the the developed world have its’ own form of microfinance for the middle class with similar results?

Human Capital, Microfinance, Poverty, Wealth, Profit, Crisis, Finance

Should Harvard Follow Peter Schiff?

Harvard expects it could loose as much as 30% of its’ almost $37 billion dollar endowment fund that finances over a third of its’ expenses annually, according to the New York Times. Harvard President Drew Faust’s note to his Deans indicates that their diversified portfolio has lost about $8 billion, or 22% of their value.  While Harvard appears to be diversified, with investments in everything from private equity to timber and real estate, it appears to have been hit by the current crisis like most other organizations and private citizens.  The Times reports that Harvard only had about 12% of their portfolio in foreign equities, and another 10% in emerging markets.  It didn’t mention whether or not Harvard held non-US currencies or hard assets such as gold.

Here’s a 10-year view of Gold’s value in dollars.  While it’s taken hits recently, overall it has dramatically outperformed the dollar.

Peter Schiff is the President of Euro Pacific Capital, and has called the US recession many years ago.  His clients are well diversified out of US currencies and equities, in favor of developed economies because his motto is “There’s a bull market somewhere”.  Uniquely, he sells gold held at the Perth Mint in Australia, and gold has done relatively well as an investment against the dollar.  Anyone else think Harvard could do better by following Peter’s guidance, and perhaps moving a massive amount of their assets outside the US?  As I noted previously, I’m moving my assets to Peter’s firm.  Should Harvard follow my lead?

Suffering from Human Capital Distortion?

As I watch the news of Detroit’s CEOs begging for billions more from Uncle Sam, I wondered how many people remember the automotive bailouts of yesteryear that failed.  I remember as a child watching Lee Iacocca beg bureaucrats successfully for $1.5B.  Apparently this original bail out didn’t work as they’re now asking for even more handouts.  Iacocca, now refusing most interviews is apparently somewhat embarrassed by the fact that his original hand-out turned into welfare for Germany’s Daimler-Benz, who purchased Chrysler, and then spun them off, now asking for more government dole.  I’m not terribly fond of conservative publications, but it turns out that in 1983, The Heritage Foundation seems to agree that the original Chrysler bailout failed.   It seems that only a rich country with attention-deficit-disorder (ADD) could proceed shamelessly to ignore the failed bailouts of the past and chase good money after bad.

I recently took a trip to India. Every trip to a developing country like India reminds me just how distorted are our US and European mental models of labor.  Low quality, poor design and high wages from Detroit are certainly a part of their woes.  For example, the UAW’s typical worker in 2006 earned $32/hour, artificially inflated by Unions backed by the Government’s Department of Labor.  We’ve grown up in government schools, and our careers shaped by companies in labor markets that are anything but free.  This is the case even where Unions aren’t involved.  The various US or EU barriers to skilled people traversing borders increases labor costs far above what they would otherwise be in a free market. 

The Indian example provides poignant lessons.  In just a few years, India will have more people available for work than any other country.  Thousands have become successful business people in Silicon Valley, both in San Jose (US) and Bangalore (India).  Let’s consider educated Indians in a different industry that is also hampered by US regulations and red tape.  Americans, so dissatisfied with the state of US education, are already outsourcing their tutoring to Indian teachers, like TutorVista, according to the New York Times.  Tutorvista charges $25/week for tutoring, or $800 for an entire year, with unlimited sessions with expert teachers. These Indian educators speak english, and the going wage rate for an entry-level High School teacher in India, according to the compensation website payscale.com, was 120,000 Rupees, which in US dollars is less than 3,000 per year, using yahoo’s currency converter.  Indian teachers of primary schools start at even less – 96,000 Rupees.  Indian teachers are mobile, and starting to migrate to the US, where they’re able to start making $27,000 to $35,000 US dollars (1.6 Million Ruppees).  Sure, the cost of living is higher in the US, but it begs the question – if it weren’t for government barriers to good teachers coming to the US, we could have a significantly larger supply of good teachers willing to work for less.  I’m sure not all Indian teachers are fully effective, but what if we could screen teachers like we do others, and hire the best at a wage premium to Indian labor rates?  In a frail economy, where US education is poor by global standards, increasing the supply of low-cost, high quality teachers seems like it should be a good thing – to increase investments in human capital that will pay off future dividends.  But I’m sure that’s not politically popular with the powerful Teachers Unions.

Let’s go back to the automotive industry.  India’s Tata motors famously is now producing a $2,000 car for global sales.  They did this without Indian government bailouts, but have had their own fair share of Union and political barriers to initially launching their operations in West Bengal, and now Gujarat. Do you think Tata could have done that with UAW’s wage rates, and restrictive work rules?  When will our governments, unions and other power-mongers get out of the way of free people who just want to make a better life for themselves, help children get better educations; and allow poor people to buy an affordable car?

Bailout, Human Capital, Labor, Wage, Union, Freedom, Liberty, Laissez Faire

American and European Human Capital Options

A derivative is a financial instrument that gets it’s value from something else.  One special type is an “option” that gives the owner a right, but not the obligation, to buy or sell an asset.  Human resource, or personnel, employment is a special case of Real Options applied to people. In our case, though, we own ourselves and our labor, but for the right price we’re willing to lease it out to employers and clients for a period of time. 

In the case of employment, hiring an employee amounts to buying (call option) the right to utilize labor for 8 hours a day.  In some cases, the terms of an employment contract are extremely limited, such as contracts for professional athletes and union members.  These amount to a European option, such as the case where the owner of a baseball team has the right to release an athlete, on but not before a certain date.  The more flexible type of employment arrangement is the American option variety.  With an American option, the owner can exercise their right (e.g. liquidate the asset, or fire the employee) without respect to a specific date.  In option terms, letting a person go, or not hiring a consultant for another project is called a “put option”.

But with human assets, there are numerous other options employers can choose to take – including redeploying people to work on new projects, in new departments and in different jobs.  The more flexible a person in having skills and motivation to work in areas that are profitable to the firm, the more valuable the person. 

When mixed with psychometrics such as The Scientific Leader’s Computer-Adaptive Measurement(TM) approach, human capital can be valued the same way as other uncertain financial assets – using Managerial Real Options.  Have you valued your human capital the same way as professional financiers?  Do you know where your human capital is best deployed in the portfolio of job tasks and projects in your firm?  How flexible and adaptable is your workforce – to be able to redeploy them to new work as customers, markets, and economic crises unfold?  Have you considered the option of investing in growing the skills of your employees to increase their value and reduce your risk, through training and development?

Real Option, Management, Business, Human Capital, Skills, Valuation, Risk, Enterprise Risk Management, Psychometrics, Computer Adaptive Testing, CAT, Computer Adaptive Measurement, Rasch, Training, Learning, Selection, European, American

$7.7 Trillion Increases Probability of Inflation: Skills Required for Enterprise Risk Management

In a move suggesting the U.S. Government is role modeling Zimbabwe, Bloomberg reports Fed Chairman Bernanke and Treasury Secretary Paulson are prepared to provide more than $7.76 trillion US Dollars – amounting to half the value of everything produced in the nation last year – to try to rescue the US financial system.  This includes the recent guaranteeing of $306B of Citigroup debt this week and $3.18 trillion already tapped by financial institutions.  The commitment eclipses the earlier $700 billion “Troubled Asset Relief Program”.  This inflation of the money supply – printing dollars out of thin air, and in large volumes – will likely devalue the currency and suggests future runaway inflation.

Human Capital & Risk Management
What skills are required by businesses and individuals to mitigate these risks?  While no one can know the future with certainty, The Scientific Leader speculates that for organizations, as part of Financial Risk Management, the management of money in different currencies becomes a crucial skill.  Financial Risk Management is a subset of the larger Enterprise Risk Management.  For larger firms, Financial Risk Management happens in the Treasury department.    As firms liquidate their dollars and switch to other currencies, and hard assets like gold, they will be more reliant on financial professionals with treasury expertise.  Similarly, the treasury department will likely be every more focused on hedging currency risk with financial futures and derivatives.  All of this sort of work could increase the demand for financiers with treasury expertise, and in the short run increase their salaries significantly if the demand outstrips the supply.  Firms that do not yet select financial professions with objective measures of prudence and conscientousness may also increase their use of pre-hire selection processes, such as our computer-adaptive Work Personality Inventory(TM).

What will be the consequence of this sort of runaway inflation on employees?  The lowest paid employees are likely to suffer the most.  An inflated dollar will purchase fewer goods and services, and the least skilled employees will likely suffer the most.  Employers that are still in business can attract and retain these sorts of employees by providing different sorts of benefits that help them survive the crisis, such as firm-subsidized food and housing. 

How severe do you expect the current recession to get?  What human capital risk mitigation practices are you employing now personally to weather a potential sequel to the great depression?  Confession – I’m moving my assets to Peter Schiff’s Euro Pacific Capital.  What are you doing?

Homeschooled Prodigy Wins Intel Award for Carbon Nanotubes

Discover magazine calls Philip Striech, 17, a “Teen Genius” for demonstrating that a key nanotechnology assumption is likely false.  His research with Dr. James Hamilton of the University of Wisconsin-Platteville, suggests that carbon nanotubes are thermodynamically soluble.  Not only did he Win Intel’s 2007 Young Scientist award, but his research has been published in Advanced Materials journal and discussed in the “Editor’s Choice” section of the journal Science.  At such a young age, he has also co-founded a company, Graphene Solutions to sell the instruments and solvents he’s discovered and is in the process of patenting.  His business plan for Graphene wan him an additional $50,000 victory at a Wisconsin business-lan competition.

I found it fascinating that, along with the various homeschooled national Spelling Bee champions, Streich says, “I really credit my parent’s support for allowing me to try homeschooling.  If I had been in the regular school system, I doubt any of this would have developed”. 

It begs the question – in the US government schoolsystem, one size fits all, and doesn’t allow children with deep aptitude to progress at a faster pace.   I’ve used both government and homeschool options, including K12.com, and clearly the self-paced computer and have found the self-paced portions better for my 5 year old.  What can we do to grow more like Streich?  Does it mean a free market approach and less government control? 

Human Capital, Nanotechnology, Homeschool, Prodigy, Young, Graphene, Carbon, Government, School, K12

Cultural Insensitivity as a Human Capital Liability

US Citizen Gary Khera

A North Carolina US Citizen, Gary Khera, was asked to “take your turban off.  This is the United States”, when he tried to make a donation to a local charity, reports local news source WRAL.  In prior years, he mailed in his donation, but this year he wanted to see where his money was going to help the less fortunate.  In a surprising display of insensitivity, the Christian charity refused to allow him to donate his money unless he remove his turban – which is not allowed in his religion.  A video interview with both the mission’s Director, a Reverent and Mr. Khera appears here.

It’s a good example that a closed mind and rigid set of rules can hurt your organization’s ability to serve different types of honest, hard working customers – or in this case, charitable donors.  Hiring and training employees to adjust these policies, and exercise good judgment represents an example of a Human Capital “real option” to invest a bit in selecting culturally sensitive people; and growing them internally with profits to follow.  Ethics aside, the business question is the probability of unique cultures walking through my door is uncertain, and in many cases might be a rare event.  What would it be worth for me to invest a little in selection and training now, for uncertain payoff later.  This is precisely the value of the Real Options method, taught by The Scientific Leader and others.  It is an approach that quantifies the value of choice, given situations of uncertainty.  In smaller locales, like the one Mr. Khera frequents, there may be little value in this sort of investment.  But in cities with massive amounts of diversity, it might be absolutely essential to ensure that a wide variety of customers and donors are happy to do business with your firm.  What losses is your firm likely to experience because you’re exposed to this sort of human capital risk?

Human Capital, Culture, Diversity, Management, Rascism, Loss, Profit, Real Options, Valuation, Uncertainty