Do you own your models, or do your models own you? That’s one of the driving questions in Roger Martin’s new book, A New Way to Think: Your Guide To Superior Management Effectiveness. The former dean of the Rotman School of Management at the University of Toronto, Martin has also been a strategic advisor to Procter & Gamble (NYSE: PG), Ford Motor (NYSE: F), and Lego.
In this podcast, Motley Fool contributor Rachel Warren talks with him about:
The flawed models driving back-to-office plans.
Why stock-based compensation doesn’t necessarily help outside investors.
When corporate mergers can succeed and why they often destroy value.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on June 5, 2022.
Roger Martin: It’s the model of they’re loyal, and ignoring of the model that says, habit drives behavior, that is getting all these companies in trouble. The “Great Resignation” is real. I think that we haven’t seen the worst of it yet, it’s going to ripple through the economy and it’s because the companies are now getting more strident about, “You must come back to work.” That’s all based on a flawed model of human behavior.
Chris Hill: I’m Chris Hill and that’s Roger Martin, author of the new book, A New Way to Think: Your Guide To Superior Management Effectiveness. Martin has served as the Dean of the Rotman School of Management at the University of Toronto, he’s also worked as a strategic advisor for Procter & Gamble, Ford Motor, and Lego. Motley Fool contributor Rachel Warren talked with him about key takeaways from his book, how to reframe the flawed models which can hurt businesses and shareholders.
Rachel Warren: First off, let’s just dive right in and talk about your new book, A New Way to Think: Your Guide To Superior Management Effectiveness. Now tell our audience what’s the book about? Or what was the journey to writing this book and what are some of the dominant themes of the book?
Roger Martin: Sure well, the book is about our use of models. When we make any management decision, we have some way of thinking about it. I’ll call it a model. I should be nicer to this employee in this conversation, and so that’s your model for the conversation, or we should pay our CEO lots and stock-based compensation. Those are a model that guides how we do things. What I’ve noticed is that the business world gets models in mind as, what it thinks is a good way of helping you think through a problem that don’t work and stay that way for a long period of time.
The attempt of the book is to dive into some models that don’t produce what the user of the model would like to have to happen and to provide them with an alternative. It’s not saying I’d like you to change what you’re trying to accomplish. I’m not saying, oh, you should care more about other stakeholders than shareholders necessarily or the like. I’m just saying, whatever you’re trying to do, don’t use the model that doesn’t get you that thing. Use a better model. You owe it to yourself and your organization to have the most powerful models that guide your thinking to make decisions that will get what you’re trying to accomplish.
Rachel Warren: You’ve written a series of acclaimed books, some of which I mentioned earlier, covering strategy, integrative thinking, design of business incentives and governance, social innovation, democratic capitalism, the list goes on. How does the latest book on new ways of thinking fit into your overall body of work?
Roger Martin: Well, it turns out that when I look back on all of my books, they do have a similar quality. You say integrative thinking, The Opposable Mind, one of my earliest books, first best-selling book said, as an executive, when you’re facing a tough choice, Rachel, you’re facing a choice, I should invest in this or this and I can’t invest in both. Which should I do. When you’re facing a tough choice, the model in our head is, well, you’re the CEO, Rachel, tough job, just make the choice, so that’s the model, and that’s the model we’ve taught in business school. What I discovered is that the most successful leaders out in the world, don’t do that in that situation.
When they have that tough choice, they say, no, that’s a dumb idea to make a choice between two options, neither of which I like. You should take that as a cue to invent a third better way and they invest in doing that, even take time to do that. It turns out, that my various books all had this characteristic to them. This is some sense is a compilation of a whole lot of chapters, each of which is a model as opposed to The Opposable Mind was all about one model and how to change that model. It’s the thing I do. I observe models being used that aren’t effective and try to provide a model that is easy to use and more effective.
Rachel Warren: Speaking of models or frameworks, ways of thinking. In your book, you pose a question to readers, which is, do you own your models, or do your models own you? I’d love if you could dive a bit into what you mean by this and why is this distinction is so important looking at business landscape now.
Roger Martin: Well, what it means is if you are taught a model or just come to start using a model, and it doesn’t produce the outcomes that you intend when you use that model, and you keep using it, then I say you’re owned by your model. It’s almost like the mafia has got something on you, and you have to keep doing what you’re doing, even though it’s not what you want. It’s that sense of it owns you. It’s so important you can’t change. I would like managers to own their models and by owning their models, it will be, you’ve got a model, you’ve put it in use. If it doesn’t provide the outcomes that it promised that you thought it was going to provide, then you put it on probation.
Maybe you try it one more time and if it doesn’t work again, you say rather than I didn’t do it well enough, you say, I need to have a different model. Just to give you an example, back in the mid-’70s, an influential article written by Mike Jensen and Bill Macy said there’s this agency problem and we need to solve it. Where management doesn’t necessarily do what’s in the interest of shareholders. The way we should do that is to align their interests. We said to align your interest, but stock-based compensation, and that will produce better returns for shareholders. That’s now almost a half a century ago. That model has been in effect. CEO compensation has skyrocketed.
But guess, what’s happened to shareholder returns, they haven’t gotten any better. When I have conversations about this with people, they say to me, well, it must be that we didn’t do it right. We gave too much in options and not enough and [UNCLEAR] stock units or we didn’t have them tiered the right way or everything. There are all these excuses that say it’s about the way I use the model. That’s why I said it owns you. It screws up, but you blame yourself for it anyway. I’d rather have a step back and say, does it actually align with the interest of management and shareholders? The answer is, in my view, it doesn’t. Then, therefore, what are other models we could use to produce better shareholder returns?
Rachel Warren: Well, and speaking of business leaders having to recalibrate their ways of thinking, we’re obviously in a time of great turbulence in the labor market as a whole. The world of work has changed significantly over the last few years in the wake of the pandemic, we’re still deep within the “Great Resignation” as the movement has been termed. How should leaders think differently about the future of work, particularly around return-to-office plans.
Roger Martin: Sure, there’s a chapter in the book on this very question, which is our model that pertains to this would be that what’s really important is loyalty. I think that a lot of these companies are saying, well, we’ve got loyal employees. All we have to do is tell them that they need to come back to the office and they will. Then a whole bunch of them are quitting and it’s baffling to people. I thought they were really with us and we’re more loyal to the company and they’re just quitting en masse or threatening to like 69% of Apple employees do not want to come back to the office is the thing I read last week. But that’s because a better model, is that we are driven as human beings more by habit than loyalty. Loyalty is a conscious concept.
You bought Tide detergent or Colgate toothpaste the last 50 times and you like the result it gave you, so you say to yourself, I’m loyal to Tide. Let’s say Tide detergent. What really is going on is your subconscious, which now all the brain science tells us one equivalently likes comfort and familiarity more than anything else, has become comfortable with Tide. It’s done the job for 50 times. You’re now completely comfortable. You’re familiar with exactly what it is and what it is not. When you’re walking down the aisle in the grocery store, you are not thinking, I’m loyal to Tide. I’ll buy another type of Tide pods. Your subconscious is actually saying to you, rate the thing that you’re most comfortable with, but we here underneath the surface are most comfortable with is that orange one. Dump that in your cart.
If you were going to reach for something else, literally your subconscious would be screaming at you. Don’t do that. We don’t know that one. We’re not comfortable with that one, etc. It turns out that habit is a much more powerful driver than loyalty. How does that apply to the “Great Resignation”? Well, a couple of years ago, there was force majeure. Workplaces were being locked down and people needed to work remotely. Remotely ended up being whatever, their porch, their basement, their guest room and what was established as a new habit. The old habit, which was broken was, get up, get in your car or get on the subway or get on the bus or the train, work your way into work, sit at your office, hang out and do the things you normally do in the office, get in your car, drive back home.
Totally interrupted, gone. New one is roll out of bed, make yourself a coffee, get dressed, go to your home office and proceed. What happens is that becomes habit. Your subconscious says, no, I’m totally familiar with this, I’m comfortable with this, this is awesome, this is terrific. What happens then, one day your place of work phones up and says, you need to stop working remotely. You need to return to the office. Consciously, you can take that in, but your subconscious is saying, they want me to work remotely. Your office in Manhattan is now remotely and your office is at home to your subconscious. The subconscious is saying, wait a minute. This is interrupting everything that I feel comfortable with and familiar with. It’s basically saying to your conscious, you should feel weird about this.
It turns out that habit in any endeavor of our lives, habit has a huge advantage over all the other alternatives. You should think about what you habitually use and are used to, a way of doing things is an 100-yard dash and it gets to start at the 80-yard line and all the alternatives get to start at the starting line and the gun goes off and who’s going to win? Habit. That’s why we keep doing the things we’re doing. By breaking the habit of how work is done, which is at home at your desk and saying, I want you to do this new thing, these companies are taking their employees who they think of as loyal employees and putting them back to the starting line with alternatives like, I am going to get a job here in Greenwich.
I’m going to go gig economy. I am going to take some time off before I think about what I’m going to do next. It’s the model of they’re loyal and ignoring the model that says, habit drives behavior. That is getting all these companies in trouble. The “Great Resignation” is real. I think we haven’t seen the worst of it yet that’s going to ripple through the economy and it’s because the companies are now getting more strident about, you must come back to work. That’s all based on a flawed model of human behavior. I’m not saying you shouldn’t want them back to work, at their traditional place of work.
I’m saying the model you’re using is going about it [UNCLEAR] in a way that’s going to be extremely unsuccessful in accomplishing what you want to accomplish. You’ll end up with half the employees that you had before that you’ve invested enormous amounts in some training app and getting to work are two-thirds, I mean, even that would be terrible or 75 percent, that would be a terrible outcome losing all those good people. Instead, you should be thinking about it as another habit change challenge. You can get people to change their habits. But can you get them to change their habits like that? No, you can’t. You get them to change their habits slowly. Get them comfortable with the new habit. That’s what these companies need to do if they want to maintain their workforce.
Rachel Warren: Well, and taking a little bit more into that as well, we have seen this real tug of war between what companies are willing to provide, whether it be changing or adjusting their model as you mentioned, and also what workers want and workers have a lot of leverage in the current labor market. As we see the “Great Resignation” continuing and I know you just mentioned your viewpoint is perhaps the worst is yet to come, what do you think the most important thing is that leaders need to know to recruit and retain top talent right now to keep those employees after they hire them? What’s the answer here?
Roger Martin: The answer is that they should be thinking about the key criteria is making the person feel special as opposed to the key criteria being how much you pay them. There’s a chapter in the book on that, too, and I use Aaron Rogers as my example of this. He was the highest-paid quarterback in the NFL when he signed his last two contracts prior to the one he just signed. But that didn’t stop him last summer from being extremely upset, getting his contract reduced by a year, threatening to retire or leave despite being paid at a ridiculously high level. The reason was he was being treated generically and he said it in very clear terms. He said, “You’d think after being around for all these years, winning MVPs, Super Bowls, that they would at least take into account what I’m interested in in terms of the players around me.”
But they said to him, “You’re a player, we’re management, you go sling the football, and we will take care of these decisions.” They were dismissing his point of view out of hand and treating him as if he was any other player. All he wanted to be treated is special to the extent he was special. That he’d been with the Packers for a long time, had proven track record of success. They finally started listening to him and bringing back one of his favorite receivers saying they will actually talk to him about these moves. Then he was satisfied to come back and play, dropping sort of the “I’m going to go, I want to be traded, I want to go elsewhere, I’m going to retire.” That’s just a story of this but it’s consistent with top talent.
Top talent is top talent because they’ve invested crazy in themselves being special. Then if you treat them generically, if you dismiss their ideas, they’re going to go regardless of how much you pay them. It is not about compensation. It’s about making sure their ideas are not dismissed and they’re considered. Make sure their path forward isn’t blocked. But they’ve invested in talent so that they can keep enhancing that, you block it and they go. You tell Eric Yuan you can’t rewrite the Cisco software for WebEx for mobile platform and he says, well, I’ve got to go, I’ve found a company that will be mobile first and it’s Zoom.
That’s a classic, you’ve blocked their path. The last one is a little counterintuitive which is they need pats on the back just like everybody else. Often managers think that their best employees they’re going to get paid the most, they’re going to get the biggest bonus, and so they don’t need to be taken aside and said, that new contract you brought in or that was an awesome performance for the company. Thank you for your work. If you don’t do that, they will go to someplace that makes them feel special, and that is the secret to talent. Do you have to do everything they want and everything they say? No, not at all. But you can’t dismiss them and treat them like they’re just another employee.
Rachel Warren: I want to also turn to another very interesting topic that you dedicated a chapter to in your book, which is basically the current state of mergers and acquisitions, the SPAC boom. We saw quite the market in that space last year. It’s certainly been a slower year for M&A activity and SPACs thus far in 2022. One of the things you mentioned in your book was that there’s evidence that most of these actions fail. I’m wondering if maybe you could dive a little bit into that. Is there a better way to be thinking about M&A, and what are some of the most dominant trends that you see shaping this landscape as we’re now headed into the second half of 2022?
Roger Martin: This just gets back to the retail versus wholesale thing. In some sense doing a merger by acquiring a company is getting sales to increase wholesale. You get a whole bunch at a the time rather than getting more sales or one customer at a time. It’s popular because it feels easy, and it’s popular because it enables you to get into new spaces. But the problem with it is the theory tends to be what will this acquisition do for us? It will pump up our size, it will get us into this new space. Like AT&T, I talk about that in the book and in part because of the time that acquisition was made. I made a prediction to a Fortune reporter who was calling me about, “This is an exciting acquisition.” I said it’s going to be an absolute failure. This will be an absolute failure. This will cost Randall Stephenson his job, and it will be sold for half its cost within five years. Those three predictions to which thankfully he came back and three years later when they sold it for exactly half the price, and Randall Stephenson retired.
Maybe he retired, who knows? But it’s interesting how it happened at the same time. [laughs] There was, “We’ll get into content. That’s what we’ll get from this.” The better theory in my view is here’s what we will be able to give to that acquisition. It’s more about what you give than what you get. Because if it’s all get, you’re going to pay a ridiculous top dollar for it and not have anything that you do to add value once you’ve gotten it. That’s exactly the AT&T story. It was exciting, but we’re getting into content now. Content we’re going to have owner economics all these crazy arguments, and it wasn’t like the things we have at AT&T can really help Time Warner be much more effective.
Did you ever hear around the time, let me just think back to it. Did you ever hear an argument of that? No, it will make us a, integrated content delivery platform blah, blah, blah, blah, blah. That’s all the things it will do for us. I think the acquisition of Android by Google, that made a lot of sense. Google’s fantastic software people and programmers can help make Android even better and more effective and then we can back it and get it out on all these devices. That’s at least a give-get equivalence or maybe more give than get. That’s what I would be thinking of in acquisitions. I wouldn’t make an acquisition where I couldn’t demonstrate that I’m giving that acquisition more in terms of its competitive position, after you’ve acquired it, it will be a division or something, but that will be so much better off competitively being part of us because we can give it the capital it needs to expand. We can give it the products into distribution faster, better, more thoroughly. Give, think, in acquisition, think first, give, and then get. If you do that you can get some things that are really helpful to you but only if you give.
Rachel Warren: Folks, check out Roger’s new book, A New Way to Think: Your Guide to Superior Management Effectiveness out for sale now. Roger, thank you so much for joining me on the show today. It has been a delight to speak with you.
Roger Martin: Oh well, thanks for having me, this is fun. It’s fun to be back on Motley.
Rachel Warren: Great to have you back.
Chris Hill: As always, people on the program may have interest in the stocks they talked about, and the Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Chris Hill has positions in Alphabet (A shares), Alphabet (C shares), and Apple. Rachel Warren has positions in Alphabet (A shares), Apple, and Zoom Video Communications. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Apple, Cisco Systems, and Zoom Video Communications. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.