Leaving 'Friendprints': How Online Social Networks Are Redefining Privacy and Personal Security

A generation is growing up with social networking web sites such as Facebook and MySpace, casually posting accounts of their lives for their friends -- and the world -- to see. Few of these users realize that the information they post, when combined with new technologies for gathering and compiling data, can create a fingerprint-like pattern of behavior. The information provides opportunities not only for legitimate business purposes, but also for the nefarious aims of identity thieves and other predators, according to faculty at Wharton and elsewhere.

"The way privacy has traditionally been defined is being challenged," according to Wharton legal studies professor Andrea Matwyshyn, who earlier this year organized the Information Security Best Practices Conference at Wharton. Among other topics, the conference addressed security and safety issues raised by the social networks.

Research on online social networking and how it may alter privacy norms is just beginning, according to technology observers. "Our kids today will give everything [in terms of personal information] away, but it's not at all clear how this will shake out in the long run," says Wharton marketing professor Peter S. Fader. "Privacy is a moving target.

Researchers say that privacy thresholds vary by individual and that those boundaries are being tested by social networking. It is hard, they say, to pinpoint the exact impact of social networking on the web. However, it is clear that individuals are increasingly using these sites to keep in touch with friends, find jobs and enhance their careers. Social networking sites drew 139.8 million visitors in April, a 12% increase from 124.4 million in March, according to comScore, a service that measures web traffic. The April survey found that MySpace led the category with 71 million visitors, while Facebook attracted 67.5 million, and Twitter drew 17 million -- an 83% increase.

Mining the Data

Lance Hoffman, a George Washington University computer science professor who spoke at the Wharton conference, noted that by giving up such information as their name, birth date, and a list of their network of friends, users are revealing far more than they know. Third-party applications, he argued, can take that data outside of the friendly confines of a social networking site and combine it with data from other sources to piece together enough information to steal a person's identity. Just a person's name and birth date -- routinely found on a Facebook profile -- can be a useful lever for an identity thief, said Hoffman.

"I've had students who used third-party applications that took friends of friends and used facial recognition to identify them," explains Hoffman. "They didn't know what to do with the information, but someone else might. What happens when the collecting of this information is automated?"

At the conference, Hoffman illustrated how social connections are made online and the ease with which a stranger can become part of a network. He noted that he is regularly added to mailing lists and invited to become a friend -- or "friended" in the social network parlance -- of businesses that use the sites as a marketing tool. Indeed, pages used by businesses on Facebook were recently redesigned to look more like those of individuals.

In addition, the line between professional networking on a site such as LinkedIn, and social networking on sites such as Facebook, "has become very thin," said Hoffman. Many Facebook users might create a more casual persona for themselves on that site than they would on LinkedIn, where they would include nothing but professional information. But both sites can be seen by potential employers and clients -- and complications can ensue. One such complication: When a business contact from the LinkedIn world wants to become your friend on Facebook, do you accept the invitation, giving them access to the photos on your Facebook profile from last summer's rowdy beach party?

And what about the person you don't really know who wants to be your friend because you have some friends in common? According to Hoffman, that new friend may just be mining your social circle for information. As networks grow and more friends of friends (and their friends) are accepted by users, it's unclear who can be trusted.

Ultimately, social networking security rests with each user of the service (those friend invitations can always be declined). Hoffman recommended that social network denizens know the privacy policies -- governing, among other things, how the information you provide can be used -- of the sites they frequent.

At the same time, Hoffman said, web site operators need to make privacy policies easier to understand. "Privacy policies differ in theory and practice. In theory, consumers know about a site's privacy policy and trust the network. The reality is that no one reads the policies. I don't read them myself." Hoffman cited Facebook's privacy policy -- which promises that users have control over their data and what information is shared -- as typically murky. (The most recent version is more than 3,700 words -- more than twice as long as this article.) Hoffman advocates new formats for privacy policies that act as simplified "nutrition labels," like those on food products.

Private Here, Not There

Research conducted by Alessandro Acquisti, a Carnegie Mellon University professor of public policy and management who also spoke at the conference, has found that individuals' notions of privacy are malleable depending on the context of an interaction. According to Acquisti, people are more likely to divulge key personal information -- their photo, birthday, hometown, address and phone number -- on social networking sites than they would on other web sites. His 2005 study highlighted privacy concerns such as online and physical stalking.

"People [say] privacy [is] important to them, yet they engage in behaviors that indicate a remarkable lack of concern," Acquisti told the conference participants. "Privacy decision making and valuations are malleable," but it's unclear what factors lead to more disclosure. One of those factors might be a "herding effect," he said. In one study, Acquisti found that that people will divulge information when they see others doing so. That tendency, he believes, may explain why so many people are willing to dish out personal information on the networks.

Information gleaned from such sites is useful not only to identity thieves, but to marketers and other legitimate business interests. Sometimes, the information can be used to find thieves, according to research co-authored by Shawndra Hill, a Wharton professor of operations and information management, and AT&T researchers Deepak K. Agarwal, Robert Bell and Chris Volinsky. Hill says a person's pattern of behavior on various networks can reveal tell-tale signatures, similar to fingerprints -- or perhaps "friendprints" -- that can be used to solve a wide range of business challenges, from targeted marketing and advertising to fraud detection.

The study, titled "Building an Effective Representation for Dynamic Networks," originated as an approach to fraud in the telecommunications industry. The authors were interested in the problem of identifying phone service subscribers who repeatedly default on their bills by signing up for service under an alias. The problem is not new. However, the focus of the paper was to show how to clearly identify a customer's social network signature and match it to signatures created by customers who had previously defaulted. "Repetitive defaulters may be identified despite their aliases over time by their 'social network signature,'" according to the paper.

"In other words, consumers are who they call, e-mail or IM," says Hill. "Though it is not difficult to sign up under an alias, it is extraordinarily difficult to change one's friends and family." Large telecommunications firms, Internet providers and social networking sites such as MySpace and Facebook may have rich sets of data in which social network signatures can be identified. Hill says the technique is still being perfected; its accuracy rate is currently about 95%.

Still, the security and privacy questions pose tricky issues for marketers, who have been looking for successful social network advertising models. According to research firm eMarketer, spending on such advertising will be about $1.29 billion this year, up from a projected $1.17 billion in 2008. MySpace garners half of the revenue pie. Social network advertising is only a small slice of the projected $25.7 billion that will be spent on online ads in 2009, according to eMarketer.

Wharton marketing professor Eric T. Bradlow says the Holy Grail for marketers is to track consumers and their friends -- and what they say about a product -- via social networks. "

People are more willing to divulge information for social purposes, and the lead users are 18 to 25 years old," Bradlow notes. "The social norms around privacy aren't going to be what they were before."But just as Acquisti noted, acceptable social norms will be subject to context. "Let's imagine that a credit card company had the information you put on Facebook," Bradlow says. "You'd be appalled. It's context. People want to say when and where data is shared."

Economic Recovery: Are Happy Days Here Again?

Wall Street has just seen a two-month rally that included a whopping 39% rise from the recent rock-bottom prices on the Standard & Poor's 500. In addition, during several consecutive weeks, new U.S. jobless claims have dropped. Even quarterly reports from the battered banking sector have given investors some optimism that the worst-case scenarios will not happen.

So does that mean the band can strike up "Happy Days Are Here Again" to herald the arrival of an economic recovery, and the end of America's longest recession -- now 18 months and counting -- since the Great Depression of the 1930s? Most financial experts at Wharton and elsewhere insist that the much-talked about recovery is not here yet, despite some of the first hopeful data in months -- and they remain concerned that the recovery will be weaker and take longer to gain momentum than past slowdowns.

Maybe there will be a rally today since the European markets are up?

Creating Advantage

Increasing complexity and change, volatile economic conditions and an ageing workforce are beginning to take a toll on organizations worldwide. Meanwhile some businesses and whole industry sectors are in crisis as they struggle to meet the rising demand for skilled people.

In this climate, people have become the new competitive advantage for business, according to a report by The Boston Consulting Group and the World Federation of Personnel Management Associations. The report, Creating People Advantage: How to address HR challenges worldwide through 2015, is based on a survey of 4741 human resources executives in more than 80 countries as well as interviews with senior executives in 19 countries.

Are you creating advantage with the new workforce dynamics and demographics?

Health Care Reform - Now or Never

Obama has noted that health care reform is a key priority for his administration. This is a long time coming since Clinton failed during his administration. There is a move in congress to change benefits and make it more affordable for all Americans. Further, the reform is focused on leveling benefits equal to what the congress receives now.

Senator Max Baucus (D-Mont.) said he is drafting the health reform measure, which he expects to unveil next week. He told reporters that taxing employer-provided benefits is "perhaps the best way to raise money for an overhaul of the health-care system" and offered details about the form that tax is likely to take.
Baucus said his proposal is likely to cap benefits at "a level higher than the actual benefit that members of Congress receive today." An employer-provided plan worth less than that level would remain tax-free, he said, while any benefit exceeding the cap would be taxed as ordinary income.

Such a tax, if adopted, would be phased in over "several years," Baucus said. And it would be likely to "grandfather" in health benefits set as part of a collective-bargaining agreement, he said, allowing union plans to remain tax-free until new contracts can be negotiated.

Baucus declined to say how much money the proposal would generate. The nonpartisan Joint Committee on Taxation estimates that taxing employer benefits above the value of the Federal Employees Health Benefit Plan, adjusted for inflation, would generate nearly $420 billion over the next 10 years -- a sizable chunk of the $1 trillion or more likely to be needed to expand coverage for the uninsured.

Is this the beginning and will it ever pass. there are 47 million Americans without health coverage and there is a large silent group that is currently under insured. Help may be on the way.

Weak Integrity Got Us Into This Jam - And Strong Integrity Can Get Us Out

The current economic crisis is a result of integrity failures: Many people did not live by their word. Financial executives, lobbying for deregulation, said they would self-police. They didn't.

They wrote mortgages and issued credit cards, assuring their customers that the payments were manageable. They weren't. I am no finance guy, but I knew that a variable rate, interest-only mortgage is a very, very bad idea. I gotta believe the professionals knew it too. Finance gurus created products that systematically understated risk and overstated earnings. They knew better. They were gaming the system. Looking for loopholes. Looking for the ridiculous twist of the rules that magically makes you a winner. According to their still flush bank accounts and high salaries, perhaps they were right.

But the rest of the world is noticing that perhaps they were not. We have had enough gaming. Time for a little straight talk and hard work.

There is nothing more fundamental in business than this question: "How good is your word?"
It is not just a few powerful villains; we have all slipped a little. We make distinctions between things we "promise" and things we merely say we will do. It should not make a difference. We think about fulfilling the letter of our contracts, rather than striving to fulfill the other party's understanding of our agreements. The first will keep us out of court...but the second is what makes relationships thrive.

The Integrity Dividend is the measurable bottom-line business payout of people seeing you as living by your word. Clients value your brand. Suppliers cut you deals. And employees stick around and work their hearts out for you. There are dollars to be made here. Competitive advantage.

Living by your word is hard work. Getting others to see you as living by your word, in this cynical time, is harder still. But it is the only game worth playing.

It is not all it takes to lead – but no leadership happens without it. It is not all it takes to be ethical or moral – but morality without it is hollow sanctimony. Integrity is essential.

Unexpected events, and even expected change, make the integrity task harder. It requires skill and focused effort. But it pays off. Consider it an investment in the essentials of doing business – essentials which we seem to have forgotten. When we practice integrity, we become more effective – as people, as companies, and as a society.

Weak integrity got us into this jam – and strong integrity can get us out.

Read the book: The Integrity Dividend: Leading by the Power of Your Word by Tony Simons. San Francisco: Jossey-Bass, 2008. Available everywhere.

The real question here is where would you place your integrity on a scale from 1-10. If it is not a 10 then you are in the wrong line of work. Not just you but anyone who works for you is scared by your reputation. It makes their work and job all the harder and a large hill to climb.

Big Ideas and Hard Times - Can the Possibility Go Together

We are currently in a period that we can reasonably call hard times - we're in a recession in fact.

"Some of the most powerful and lasting management methods were launched during tough times, when companies needed new ways to manage costs and grow.

Here is a look back at some of the biggest ideas over the past 100 years." Jena McGregor, Business Week.

What innovation or big idea are you working on to add to the list? Thanks Peter Roche for this.

When Workforce Planning Meets the Talent Shortage Myth

You don’t hear much about the “Talent Shortage Myth” anymore.

Just a year ago, you could hardly turn around without bumping into overhyped media coverage about how the baby-boom generation was going to be retiring en masse and how this was going to create a huge talent shortage for American business. I didn’t buy this notion then, and of course, that kind of BS is completely laughable now given what has happened to the economy.

In fact, a lot of baby boomers want to stay on the job longer these days given what the recession and economic downturn have done to their IRAs, 401(k)s and other retirement accounts. These are people are a lot like me—boomers who want to work as long as they can, or at least until age 70 so they can maximize their Social Security payout.

But in an odd twist, a lot of boomers are now retiring unexpectedly, and “Instead of seeing older workers staying on the job longer as the economy has worsened, the Social Security system is reporting a major surge in early retirement claims that could have implications for the financial security of millions of baby boomers,” according to a story in the Los Angeles Times.

“Since the current federal fiscal year began Oct. 1, [Social Security retirement] claims have been running 25 percent ahead of last year,” the Times story adds, and “that compares with the 15 percent increase that had been projected as the post-World War II generation reaches eligibility for early retirement, according to Stephen C. Goss, chief actuary for the Social Security Administration.”

This shows you just how hard it is getting a fix on where workers’ heads are and what they might do, and it makes long-range workforce planning extremely difficult. In fact, just last December, a CareerBuilder survey found that 60 percent of workers older than 60 said they planned to postpone retirement and stay on the job.

What has changed, of course, is the economy. While I believe the CareerBuilder survey accurately captured the mood of boomers wanting to continue working back in December, it clearly didn’t anticipate the huge plunge in the economy and job losses in the first quarter of 2009. Yes, a lot of older workers want to keep working, but what do you do if you lose your job, can’t find a new one, and have the Social Security retirement option available?

If you are in that kind of fix, you do what most people would do: You take the retirement money and run, even if that’s not what you planned or wanted to do.

Here’s what is going on, the Times story indicates: “Many of the additional retirements are probably laid-off workers who are claiming Social Security early, despite reduced benefits, because they are under immediate financial pressure, Goss and other analysts believe.” And, the story adds, “The ramifications of the trend are profound for the new retirees, their families, the government and other social institutions that may be called upon to help support them. On top of savings ravaged by the stock market decline and the loss of home equity, many retirees now must make do with Social Security benefits reduced by as much as 25 percent if they retire at age 62 instead of 66.”

This just goes to show you how ridiculous it is trying to make broad-brush assumptions—like baby boomers retiring in a huge wave—given how unpredictable the economy can be. And it just shows again that no matter what part you play in the workforce—employer, manager or down-in the-trenches employee—the smart thinking in this economy continues to be pretty simple: Always hope for the best, but make certain that you prepare for the worst.

So what talent drought? Are you one of those that still think this?

Taking the Pulse

When was the last time you as the senior HR person in your organization held a meeting with the rank and file in your organization? Taking the pulse of your organization is extremely important to make sure your HR strategy is working within the rank and file. 

As a senior leader, I held meetings with employees, no more than six(6) at a time to discuss what was going right in the organization and what was going wrong or missing the mark. Why six you ask, well, I only had six seats in my office. I lead every meeting with the following statement, "this is your meeting to vent, commend, criticize, or otherwise and that it was a safe harbor for them". I also told them that the success of these meetings depended on the confidentiality they entrusted with me. I can tell you that there were a lot of good solid suggestions on how the business was run, what could be fixed, enhanced, etc. 

As you may recall these meetings were much like the Skip Level Meetings that GE ran throughout their businesses. The best ideas and direction comes from the employees. 

I am sure if you are in touch with the business that you are running such meetings and if not then you are missing the mark on what your overall responsibility is as an HR leader. Email me 

wgstevens2@gmail.com on what you have done or doing in our organization and I will post it on my blog. 

Interesting Analytics on HR Changes

In the most recent Workforce issue it had some interesting statistics that relate to the economy and how businesses have reacted. The one statistic that troubles me is the number of companies that have pared their training budgets. I hope this statistic does not mean they are placing less emphasis on leadership development. So here are the statistics:

Hiring freeze - 72%

Layoffs/reductions in force - 72%

Organizational restructure - 49%

Mandatory shutdown or furlough - 41%

Reduced workweek - 22%

Salary freeze - 60%

Salary reductions - 21%

Reduced employer 401(k) match - 22%

Eliminate/reduced training - 42%

I am sure each HR leader has been deeply involved in these decisions but I can only hope that the training and development budgets were the last resort change. If you want to keep your people don't forgo training.

Recruiting in the 21st Century

Well how are you recruiting today verses last year or in the past. Job boards are down and declining from the big revolution in the 90's. Board traffic is declining rapidly, the percentage of hires from boards are declining, candidates looking for jobs are frustrated with the overload of non-related searches and that is declining. 

So what is increasing? Social networking blog traffic, and the real staple of all recruitment personal referrals. So if you are stuck in the 90's using Monster, Jobster, Hotjobs, etc then you better start maximizing your recruitment strategy by joining and advertising on social networks, blogs that are business specific and user groups. You also need to do deep web searches using boolean logic, X-ray, and flip searches and strings. 

There are lots of other ways so if you are not utilizing the 21st century techniques then you need to get with it pronto. Recruitment 2.0 and next generation 3.0(soon to come) better be in your recruitment strategy and budget. 

Stop Your Best People From Walking When the Economy Recovers

Today, enough cannot be said about retaining your employees. When the economy turns around you will see people leaving and most of the time it is your star performers. The Hay Group article below identifies this trident issue (economy, money, advancement)

Increasing engagement means making greater use of non-monetary rewards. Providing better support for success involves looking for ways to remove those organizational hurdles that hinder employees during their working day. But it's crucial that organizations focus on two key concerns to retain and motivate their talent: increasing employee engagement and developing systems that provide better support for the success of their employees. Doing one without the other will not lead to effective employees who are ready to go the extra mile for the organization.


Retention of top talent is an important concern in both good times and bad. While a soft labor market may have depressed turnover rates in many organizations today, retention issues can be expected to surface once labor markets strengthen. Even in the present environment, options are still available to top performers. Savvy organizational leaders recognize that their best people work for their organizations because they want to, not because they have to, and treat them like 'volunteers' regardless of market conditions.


While compensation is often a factor for employees when they consider new employment, it is seldom the precipitating factor. Nonetheless, retention strategies commonly focus on compensation, for example, retention bonuses and stock options.


The downturn has made it more difficult to rely on pay to keep key people committed, so how should companies react?

To foster high levels of engagement, companies must make greater use of non-monetary rewards such as career growth opportunities, meaningful job designs, training, and recognition programs. For these measures to be effective, there must be a clear link between performance and rewards in the minds of employees. The best way to do this is to make sure there is clear differentiation in performance ratings between employees. Those differences in performance should be reflected in meaningful differences in pay and advancement prospects.

Our employee opinion research shows that high employee engagement alone does not guarantee an organization's effectiveness. What's missing is real employee enablement to position motivated employees to succeed. In fact, our findings suggest that while organizations in the top quartile on engagement demonstrate revenue growth 2.5 times that of organizations in the bottom quartile, companies in the top quartile on both engagement and enablement achieve revenue growth 4.5 times greater. But how do you ensure that you're doing the best possible job of enabling your employees? The first step is to make sure you're putting the right people in the right jobs, as employees in the wrong role can quickly become disillusioned and unproductive.

In deploying talent, leaders must consider both the requirements of the job and the employee's ability to meet them. They also have to think about the extent to which the job will draw upon the employee's distinctive competencies and make the most of them. It's also crucial to root out bad business practices, such as unnecessary or duplicated work, to ensure that work environments are supportive of high levels of productivity.

Create the right climate

Finally, organizations have to understand and manage the work climate. The benefit of a positive work climate is often underestimated, but our research shows that business results can vary by as much as 30 percent purely due to differences in the work climate created by a manager. We will provide further insights into how organizations can create positive work climates in one of our upcoming ‘rethinking reward’ articles.

Six steps to better engagement and motivation

In order to succeed in engaging and motivating employees, organizations should:

• ensure that there is a clearly communicated link between performance and rewards within the organization
  
• ensure that there is proper differentiation in performance ratings between employees


• root out bad business practices, such as unnecessary work and duplication, that can adversely affect employee enablement


• put the right people in the right jobs by focusing on job sizing and the kind of person that best fits the role


• monitor and improve the work climate within the organization by ensuring that leaders have the right competencies and management styles to motivate employees


• focus on non-monetary rewards such as career growth opportunities, development, and recognition programs
  

If you look back on the posts regarding retention (4/2/09, 3/5/09, 2/23/09, 12/15/08) you will see how important I think this issue is. Check it out.

The Importance of Leaders

There was a great article in USA Today yesterday (May 18th, Money section) by George Buckley, CEO of 3M. It is a quick read and for all HR practitioners it is important to take note. During these tough economic times Buckley says your company should focus on leadership despite the recession. He provides tips that are noted below:

• Don't promote leaders too quickly Give them time to reflect on their failures;
• Leadership cannot be planted in someone;
• Poor performers build resentment. Weed out the workplace garden before you fertilize;
• Leaders, too, need praise and not to be berated, and,
• Choices that rise to the top are either dandelions or chickweed, not roses.

These are sage comments coming from a very hardworking and successful CEO. I believe that we do not do enough in business today to cultivate our leaders and weed out poor performers especially during downturns.

1 Year and Counting

Well, it has been 1 year since I started the InnovativeHRStrategy blog and I can say it has been so much fun. I have enjoyed imparting knowledge to people who view my blog and hope that my insights have helped them in their respective roles.

Thank you to all the thousands who have come to visit InnovativeHRStrategy, took part in the polls, and clicked on AdSense. I hope you will continue to hit the posts in the future. If you have any questions, issues you feel should be addressed please email me at wgstevens2@gmail.com or on Twitter at www.twitter.com .

Vision Brings Hope

Life is uncertain, unpredictable, and lately, just plain bizarre. Is it possible to find certainty in an uncertain world? Let me answer the question later in this article. Certainty can mean “a conclusion or outcome that is beyond doubt.” My experience has been that when we formulate visions in our minds we most times birth images and ideas of hope.

Is it contradictory to think that certainty can be found in the middle of uncertain times and social environments? Well, it depends on where you are looking for the indicators of certainty. Finding certainty in the midst of turbulent times is possible when one looks for it within, rather than without. My opinion is that this process begins calibrating your vision for the future. What is your compelling vision for your future? How would you like to see your future unfold?

What is a vision and why can it help bring some rest in the middle of unstable times? Vision actually means an image or concept in the imagination. In the science called parapsychology a vision is an image or series of images seen in a dream or trance, often interpreted as having religious, revelatory, or prophetic significance. When we take the purely positive viewpoint a vision is a beautiful or pleasing sight that we have constructed in our mind. Vision can further mean an idea, a mental picture or a vivid disclosure. The mind can achieve marvelous things, one of which is imagining a preferred future that consists of your most noble passions, dreams,
aspirations and images.

Try this. Imagine the happiest place, a time in personal history and the most peaceful scenario you can. It may be helpful to silence your mind, close your eyes and take a few deep breaths. Visualize a place, time and scene that make you feel peaceful, joyful and fulfilled. Write this visualization on a piece of paper nearby. This short description will serve later as a project for you in your mental health development.


Vision brings hope many times. How do I know this? Well, personally, each time a vision is forming in my mind, expectancy is emerging, as well. Vision and hope are word companions and work together to help us in overcoming certain negative thoughts and discouraging images in our minds. Look at some of the definitions of vision and hope:

Vision - Hope
A dream - Expect
An idea - Trust
A mental picture - Anticipate
An image - Wish
Visualization - Expectation
A revelation - Anticipation

To have a vision that brings about hope is not a magic formula. But much like optimism, vision and hope improve our mental health and our disposition. For instance, during the economic crisis of late, an idea came to my mind that probably would not have come under my normal work pace and multi-tasking lifestyle. Because there was a little free time and a little less action in my schedule, a great vision came to me, which formed into a great idea which caused me to anticipate how that could grow into implementation steps. This vision, then idea, brought me hope. Hopefulness makes a dreary day into a brighter day! Confidence and anticipation follow
closely behind vision and hope.

Hope is a powerful word and a more powerful thought. Nations and cultures with no hope have greater crime rates, lower economies and measurable unrest and underachievement. Conversely, nations and people with hope seem to overcome crisis after crisis, and change after change. Challenges seem to become incentives for accomplishment when people have hope. Hope never prospers when things are going well. It takes challenge, change and crisis for hope to flourish.

Vision and hope are actionable thoughts that need our attention to become energized. As a coach, I suggest that an on-going action plan helps you to clarify your visions and your hopes. These should be clear, achievable and time bound. Having visions and hopes to work towards brings the energy necessary to overcome the doldrums and the tendency to slide backwards in our development.

This week, attempt to write your vision and hope ideas in a journal or personal development plan. If you do not have a personal vision statement, then maybe start there. Include your long term, intermediate and short term goals that will get you to your vision. If you are not sure how to begin this, enlist an accountability partner or hire a coach.

This is a major excerpt from Dr. Rick Forbus's (Principle at TROVE) article on Vision & Hope.

My thoughts are if you have a vision you do not need a coach to execute it.

Executive Pay for Sustainable Performance

The recent financial crisis has exposed financial services companies that have not effectively managed risk. Bear Stearns, Merrill Lynch, and Lehman Brothers, three titans that had weathered the Great Depression, World War II, and September 11, could not survive the current economic turbulence. In the aftermath of 2008, survivors must redesign risk management and employee rewards to ensure sustainable performance. Investors will increasingly require that executive pay be tied to sustainable performance measured by economic profit to take account of both total capital deployed and risk.

Despite unprecedented fiscal and monetary interventions by governments and central banks, the global economy remains highly volatile. Uncertainty in markets persists because investor and creditor trust has been breached in a way that has not been experienced in generations. While governments, central banks, and regulators have taken aggressive actions to combat the painful symptoms of 'frozen credit' and 'toxic assets,' they are reactive, insufficient, and have long-term inflationary consequences. Resolution can only occur by addressing the root causes of the breach in trust.

A concentration of risk

Although the current financial crisis may be the broadest and most severe in many years, financial emergencies requiring government intervention have been a pattern in the sector. In the recent past we have seen Russian and Latin American sovereign debt defaults, the reinsurance spiral and Lloyds of London failure, the collapse of Long Term Capital Management (whose principals were supposedly the experts on risk!), and the US savings and loans debacle. The common factor in these crises was the concentration of risk in a few areas that appeared to be producing high returns, without providing adequately for the possibility of a disaster. The concentration of risk often has been disguised by the recycling of the same risks among industry players. Reward programs that pay out a substantial proportion of nominal profits (or even of revenues) have operated to encourage this process, as short-term revenues and nominal profits tend to be highest from the highest risk investments – for so long as the risks do not materialize. Even companies that recognized the risks were afraid to change their reward systems for fear of losing out in the war for talent.

The transparency challenge

Post 2008, investors are demanding from management greater transparency, accountability, and long-term performance sustainability than ever before. But transparency in financial services is a difficult goal to attain. Financial instruments are pioneered daily, and it is difficult to adequately describe the complexities of a single transaction, let alone a diverse global portfolio. The credit default swap market illustrates the problem, as it took the dramatic and sudden decline in the housing market to expose the riskiness of the assets. Timeliness is challenging (as we witnessed in 2008) because asset values change on a tick-by-tick basis. Determining the impact of a single change in the bid/ask spread of a highly leveraged asset can be misleading if not presented with great care. The continuing debate on marking to market centers on this issue, and is further complicated by the significant claims attached to any one asset at any point in time.

Finally, the issue of risk-adjusted performance in financial institutions is difficult since there are three categories of risk in financial institutions – credit, market, and operating risk. While Basel II has provided a useful standard for 'value at risk' and 'risk-adjusted return on risk-adjusted capital,' even the savviest investors can find these calculations difficult to interpret. Furthermore, transparency and timeliness are critical to these measures having any utility at all from an investor perspective. For example, highlighting in the 2009 Bear Stearns annual report that the company was overly leveraged by credit default swaps would not be of much use.

Keeping reward in context

Reward systems have certainly contributed to the problem and need to be radically overhauled. However, changing reward so that executives suffer if there is a financial crisis is not the whole solution. Financial crises are infrequent, so they only affect the executives in place at the time; they are also generally (almost by definition) not anticipated, so the possibility of a collapse tends not to affect executive behavior. Therefore, in addition to changing rewards:

• Financial services companies need to improve their risk assessment and to ensure that they are not betting the company on a single investment or on investments that are likely to be correlated in an economic or financial crisis. Given the long timescales, this has to be a governance and regulatory responsibility, not driven by reward - although part of top executive reward should be for doing this well.



• Companies also need to build up reserves against the inevitable losses from time to time, as insurance companies do. Arguably the excess of the risk-adjusted required return over the risk-free rate is an 'insurance premium' that should be reserved against future losses, not paid out in bonuses (or dividends).

Achieving risk-adjusted reward

Executive rewards must be based on measures of corporate performance that take account of the risks to shareholders' capital inherent in the business strategy. Notwithstanding complexity, investors will no longer be satisfied with the 'too complicated' excuse on risk-adjusted performance management.

Corporate performance must be assessed based on a broad framework of interrelated metrics that influence current expectations. To succeed, the framework must first and foremost be economically sound. The 'performance mathematics' must ensure that as levers are pressed, expected values are achieved and perceptions influenced accordingly. Second, it must be comprehensive and balanced. As Drucker reminded us, 'we manage what we measure.' History is replete with pay-for-performance issues stemming from improvement in 'measured' revenue growth offset by 'non-measured' expansion in assets or risk. And finally, it must be easy to implement. If it cannot be readily understood and tracked by all stakeholders, it will not work.

The two measures that should be used to tie executive pay to performance are total shareholder return (TSR) and economic profit (EP). TSR is the best de facto measure of long-term corporate performance, despite the difficulties of defining a peer group to measure relative performance and the potential impact of short-term price fluctuations.

EP is fundamentally the return on capital deployed net of its risk-adjusted cost. It is an essential measure because it ensures that return is calculated in the context of both the scale of capital deployed and its inherent riskiness. While this is a more complicated calculation for financial services companies since these companies are essentially 'spread' businesses, EP is superior to other metrics like earnings per share (EPS) and earnings before interest, tax, depreciation and amortization (EBITDA) since these do not consider risk and capital deployed.

However, TSR and EP must be managed through a performance framework. Exhibit I is an illustrative example of a performance management framework that connects TSR and EP with actionable enterprise operating metrics. From a board and investor point of view, the framework provides a holistic approach that enables effective assessment of 'performance' in the context of executive pay.

While this approach is not immune from the aforementioned issues of comparability and complexity, it is a useful paradigm for establishing a standardized approach to performance management. Investors made their voices clear in 2008 and a failure to tackle the problem will no longer be tolerated. The restoration of trust begins with executive pay for sustainable risk-adjusted performance.

Exhibit I. Performance management framework (illustrative above)

HR Friends After You Move Positions

I had a discussion with one of my former bosses the other day and it lead me to write this post on friendship.

We discussed each others current direction, he is a HR EVP for a discount retailer and I am now a full time blogger and Twitter fanatic. He was instrumental in my development from 1999 to 2006 and I can honestly say that I grew dramatically over that period of time due to his mentorship and guidance. Although we did not see eye-to-eye on every subject, policy, or strategy plan he listened and took in all that I was saying. Sometimes he would change his view and sometimes he would be steadfast in his direction. Though all of this we were close friends and each grew from our relationship, knowledge and insight.

What I can say is that there are many friends we establish during our working careers and those that are lasting are those that let a person grow at their own speed and have active listening in the process. Thanks Greg, you are the best.

Can you relate to this type of friendship and can you say that your former bosses are still good friends and still mentors even as you have moved on?

Leadership Skills & Emotional Intelligence

How is emotional intelligence related to the specific behaviors we associate with leadership effectiveness?

Findings: Higher levels of emotional intelligence are associated with better performance in the following areas:

􀂉 Participative Management
􀂉 Putting People at Ease
􀂉 Self-Awareness
􀂉 Balance Between Personal Life and Work
􀂉 Straightforwardness and Composure
􀂉 Building and Mending Relationships
􀂉 Doing Whatever it Takes
􀂉 Decisiveness
􀂉 Confronting Problem Employees
􀂉 Change Management

Participative Management reflects the importance of getting buy-in at the beginning of an initiative. It is an extremely important relationship-building skill in today’s management
climate in which organizations value interdependency within and between groups.

Putting People at Ease gets at the heart of making others relaxed and comfortable in your
presence. From the perspective of direct reports, putting people at ease was related to impulse
control, which is defined as the ability to resist or delay the impulse to act.

Self-Awareness describes those managers who have an accurate understanding of their strengths and weaknesses.

Balance Between Personal Life and Work measures the degree to which work and personal
life activities are prioritized so that neither is neglected. High ratings from bosses on these
behaviors were associated with the emotional intelligence measures of social responsibility,
impulse control, and empathy.

Straightforwardness and Composure, which refers to the skill of remaining calm in a crisis and
recovering from mistakes, is related to several emotional intelligence measures. Not
surprisingly, ratings from bosses, peers, and direct reports on this scale are related to impulse
control.

Building and Mending Relationships is the ability to develop and maintain working relationships with various internal and external parties. Ratings from bosses on this scale were
related to only one measure of emotional intelligence: impulse control.

Boss ratings on Doing Whatever It Takes, which has to do with persevering in the face of
obstacles as well as taking charge and standing alone when necessary were related to two of the
emotional intelligence scales: independence and assertiveness. People who are high on
independence tend to be self-reliant and autonomous.

Direct report ratings of Decisiveness are related to assessments of independence. Decisiveness
has to do with a preference for quick and approximate actions over slow and approximate
ones. Independence has to do with the ability to be self-directed and self-controlled in one’s
thinking.

Another interesting relationship has to do with peer ratings of Confronting Problem
Employees, the degree to which a manager acts decisively and fairly when dealing with problem
employees, and the emotional intelligence measure of assertiveness. Assertive people are
able to express their beliefs and feelings in a nondestructive manner.

Change Management is the final Benchmarks scale to be connected with emotional intelligence.
This skill has to do with the effectiveness of the strategies used to facilitate change initiatives.

Conclusions: Leadership abilities vary according to rater perspective and level of emotional
intelligence. In general, co-workers seem to appreciate managers’ abilities to control their
impulses and anger, to withstand adverse events and stressful situations, to be happy with life, and to be a cooperative member of the group. These leaders are more likely to be seen as participative, self-aware, composed, and balanced. Is the need to develop emotional
intelligence abilities related to derailment behaviors? Findings: In his 1998 book, Working With Emotional Intelligence, Donald Goleman suggests that some of the reasons why people derail stem from a lack of emotional intelligence. Our research indicates the absence of emotional
intelligence is related to career derailment. Low emotional intelligence scores are related to:

􀂉 Problems with Interpersonal Relationships
􀂉 Difficulty Changing or Adapting

Ratings on Problems with Interpersonal Relationships from all co-workers—bosses, peers,
and direct reports—were associated with low scores on impulse control.

So what are your thoughts on this provoking subject? Email me at wgstevens2@gmail.com

Innovation as a Weapon in Global Competition

To say the global economic environment is undergoing the most rapid change in the history of business is to state the obvious. Unless you have been living under a rock for the past year, you know all about the market blow following the September 11 terrorist attacks, the dot-bomb
phenomenon and the collapse of Enron. To make matters worse, many American companies are increasingly facing resistance -- internal and external -- as they try to expand globally.

These events, combined with an already declining global economy, have left corporate executives on edge. Yes, it’s bad news and it’s depressing. The good news? Everyone’s in the same boat.

But now as before, the fundamentals stand: If you create a business that can adapt quickly and flexibly to the changing economic and cultural landscape, you may have the silver bullet you’re looking for.

A key to achieving this kind of quick response is learning how to inject innovation into decision-making at all levels of the organization. It won’t happen by decree from the
CEO, and I’m afraid there is no shortcut. Real innovation requires broad cultural change based on values, guidelines, and outcome-based measurement systems that give flexibility to all employees while mitigating risk for the business as a whole. Done properly, a company can
stay ahead of the change curve and beat the competition while also easing its move into new markets.

If you aim to achieve and sustain a leadership position in a global marketplace that never sleeps, your company must be a hothouse of creative thinking, flexibility and agility –
twenty-four hours a day, seven days a week.

Thanks to Stephen Shapiro for this blog insert.

Leading with Integrity

Leadership is often defined as getting other people to do what you want. Using this definition it is no wonder that many people revert to using underhanded tactics to try to "trick" their followers into doing what they want. This is a shortcut to leadership and doesn't result in long term value.

It is this type of "leadership by trickery" that makes people automatically suspicious of their leaders. If you want to develop a long term foundation for leadership, these types of short cut tricks will only prevent you from achieving your goals. Once some of your followers realize that they have been tricked you will lose any credibility you started with.

If you want a solid leadership foundation you must take the long view and consider how every action will impact your ability to lead further down the road. To build trust with your followers you must act with integrity.

Leading with integrity means doing what you say you will do. Many leaders get themselves into trouble by making commitments off the cuff and then not following through on those commitments. If you are careful what you say, you will increase your integrity with your followers simply because you won't have to back out of commitments you made with out thinking. When you do make commitments make sure they are tied to realistic timeframes. If you tell someone you are going to give them a raise next year, you are making a commitment with many factors you can't control. Sometimes saying that you will give them a raise when sales reach $1,000,000 will be a better commitment because it is tied to a goal that will enable you to give the raise.

Sometimes leading with integrity means going through with something to keep your word even when you would rather not. Not keeping your word will often hurt you much more than any inconvenience that is caused by keeping your word. If you ever have to go back on a promise, don't hide it under the rug. Take the time to apologize to the people you made the promise to. Apologize and try to come up with some way to work things out even if you can't make the original commitment.

Another important part of leading with integrity is delegating responsibility. Many leaders fail by delegating responsibility and then taking back over when their delegate does something they don't want. When you delegate you need to be willing to part with the responsibility. If your delegate does something differently than you, you need to support their decision. That doesn't mean you can't steer them in a different direction, but always support their decision whenever possible. If you delegate responsibility and then pull it back, you will demotivate your followers and make it difficult to delegate other items in the future.

Leading with integrity is avoiding the shortcuts that many leaders take. By avoiding shortcuts you can build a strong foundation that will amplify your leadership skills as you develop trust with your team.

How would you rate your leadership style on a scale from 1-5.

Pandemic Review

Can you believe the latest news on MSN today " Swine Flu Has World on Alert".

Boy, I thought 5 years ago that when I began to put in place a Pandemic Plan that it would never be needed. Same goes with the Disaster Recovery Plan, which we updated each year. Looks like we may need to dust those plans off and begin practice runs on utilizing them.

As an HR leader, I am sure you have built a plan. If not you should take the lead now.

Job Hunting on Online Social Networks Like Twitter and LinkedIn

Think back: where were you in 2002? I was in Grade 11, working a sweet job in a video store, considering my options for post-secondary education and seeing a lot of (bad) live music in local shows.

In 2002, Jonathan Abrams launched Friendster, the first social networking website. In 2003, Myspace and LinkedIn (yes, it’s been around that long) arrived on the scene, followed by Facebook in 2004, and Twitter in 2006. Now there are nearly 150 popular sites available for you to join, many of which cater to specific interests and subcultures.

But have you ever seriously thought of using some of these sites to help you find a job?

LinkedIn can be beneficial if you’re keen to work for a particular company or in a specific industry. Searching quickly, I saw job positions available at many top Canadian companies.

Although LinkedIn is currently under-utilized by students and graduates, many academics have been using it for some time. If you’re interested in doing post-secondary studies, check out the number of professors that use LinkedIn – perhaps you can get introduced to someone through another contact and get a foot into graduate studies that way? Tech-savvy professionals are also starting to use LinkedIn to stay on top of their networks.

Admittedly, LinkedIn functions similarly to some of the larger job-searching sites like Monster and Workopolis. But have you ever considered using Twitter? Yes, you read that right, I said Twitter. You can tweet your way to a new job.

Twitter is an interactive network that can be used through text messaging on your cell phone, or updating through computer. Users are given 140 characters to update their friends on what they are doing, similar to the “Status” function on Facebook. This doesn’t seem like anything really important, except I am leaving out one small detail: users can choose who receives their tweets. Thus, you can target your tweets for a specific readership.

If you’re looking for work, what you do is strategically post so your tweets reflect the industry you are looking at. If you have followed (added someone as a friend) people who are in the job market you’re interested in, this makes everything much easier.

For example, if you tweet is something like, “Looking for a summer marketing internship in the GTA. Does anyone know any companies who are hiring?” You may get a series of responses from people in marketing – however, your network has to include people who might be able to answer your question or you’ll just end up spamming the few people who do follow you.

Times have certainly changed since we were in high school. Employers no longer rely completely on word of mouth or print ads to display the jobs they are posting, and you should not be relying on the same methods either. It is time to start spending some of your time setting up your profiles on these key social networks.

Are you in the 21st century yet?

How Finance Departments Are Changing: McKinsey Survey Results

Financial executives say they're more focused than ever on planning and cost cutting. What's surprising is a reluctance to adjust the finance function's structure.

All eyes are on corporate-finance departments as they are asked to cut costs, re-assess risks and cope with the deep uncertainty generated by the current economic crisis. In this survey, we asked finance and other senior executives how their finance departments have changed since the crisis began; what new challenges these departments are facing; which activities are taking up more, and less, of their time; whether their centralization or outsourcing plans are being modified; and how the CFO's focus has shifted.

The results suggest that, at least so far in the current economic crisis, not many companies have made the kinds of structural changes that could most help the finance organization boost its performance. Few respondents report that their companies have modified the organizational structure to give CFOs formal responsibility for more activities through solid-line reporting relationships. Fewer still report any increase in the degree or pace of centralization. Moreover, few respondents report plans to increase the outsourcing or offshoring of finance activities.

What does finance do?

We defined four possible roles for the finance function in a corporation. At one end of this spectrum, the function focuses primarily on reporting and compliance, with most of its time devoted to transaction management in financial accounting.

At the opposite extreme, finance serves as an integral part of the management team to support the creation of value by identifying opportunities and providing critical information and analysis to make superior operating and strategic decisions. The largest group of respondents report that in their organizations, the finance function falls into the latter category, though--not surprising--the function's role varies considerably across industries.

CFOs in manufacturing, for example, are significantly more likely to be value managers than those in the financial services industry, where the finance staff focuses more on transactions.

Respondents note a marked increase in the amount of time CFOs are spending in areas that are critically important during a crisis--particularly, financial planning and analysis, financial-risk management, strategic planning and credit decisions. These areas of responsibility are quite consistent with the most pressing challenges that respondents say finance staffs face: forecasting business results for upcoming periods (31%), implementing cost-saving measures (27%) and freeing up cash from working capital (18%). CFOs are spending less time on responsibilities more easily left to others.

The full article can be found on the link above. Here is a great opportunity for HR & Finance to really partner together in these very difficult times.

Simple Strategy Review

Every month my team and I would review our HR strategy to see if it was still in line with the company's. Tweak here and there and we all were back on track. One thing that I am sure is not on most HR executives strategy is walking around the business and getting to understand from a grass roots what the issues are with employees. This was a big issue with me and I can tell you those daily walks around the business were valuable to HR and to the employees.

There has always been a stigma since I got into HR 25 years ago that when people saw HR walking around they thought of only one thing...TROUBLE. That has always been a stigma I have tried to eradicate from their lexicon. Sometimes successful, sometimes not so but at least I tried and employees saw that and embraced the effort and connection.

I would emphasize to all who read this blog that one of the most important items in your strategy is to make sure you and the other executives of your company walk around and be visible to your employees. It pays off on the stigma issue and also you have the ability to correct issues that are brewing in the business (on the floor, in the cafeteria, in IT, etc) before they become the brush fires we all have become accustom to dealing with on a daily basis.

Do you walk around your business and get to know your employees. Let me know at wgstevens2@gmail.com

Advertising Yourself: Building a Personal Brand through Social Networks

In 2007, Jim MacMillan was at the top of his profession -- a photojournalist who had just shared a Pulitzer Prize for pictures from Iraq's deadliest combat zones -- but he also started to wonder what kind of future that profession had in store for him. His newsroom in Philadelphia was making steep job cuts in the face of plummeting revenues. Then MacMillan attended a BlogWorld conference and returned with a determination to re-invent himself though social networking.

MacMillan has since become highly skilled at using social networking to gain new fans of his photography, and he is hardly alone. Over the last few years, creative professionals -- including musicians, writers and artists -- have found they can reach an engaged audience by making songs available on a MySpace page or building a national readership by blogging. Now, with the economy mired in a recession, many individuals are wondering how to build a buzz about themselves and find new employment opportunities by adapting the same kind of branding techniques used by businesses.

"I saw that the real value of a new media profile, or a social media profile, is distribution [to an online audience]," MacMillan says. While still employed as a staff photographer at the Philadelphia Daily News, he had launched his own web site -- jimmacmillan.net -- for posting his photos and linking to related stories in the news. Like many professionals, he also created a profile on Facebook, Twitter and every social network he could learn about, roughly 40 in all.

Eventually, he took a severance package from the newspaper and threw everything into social networking. Today, he has close to 14,000 followers reading his posts on Twitter -- a number on a par with some celebrities -- and keeps in touch with about 475 friends on Facebook. He believes he reaches a larger and more engaged audience than when he was at the Daily News, but he also concedes his activity is only bringing in "lunch money," mainly through ads on his blog (which receives traffic referrals from his Twitter postings). But by expanding his network, Macmillan says he also has promising leads on better-paying job opportunities at companies, including some that want advice on social networking.

Indeed, social networking is that rare sector of the economy that seems to be booming in the midst of the recession. MediaPost reported that businesses spent $2.2 billion on social-networking in 2008, nearly twice as much as they did in 2007, primarily through advertising on popular sites like MySpace and Facebook.

LinkedIn is by far and away the most popular business-oriented social network -- with more than 35 million registered users scattered across more than 170 industries -- but it is just one of a growing number of sites. Others include Ning, which allows specific businesses to create their own social networks of clients, employees and interested parties; Ryze, which allows organizers to better organize contact lists and schedules; and Xing, which aims to connect business people with experts or potential customers.

It's equally important to be aware of the potential pitfalls of the different online networking sites. In particular, some experts voice concern over business networking on Facebook, because it allows friends and acquaintances to freely post material that will also appear on a person's profile page; the risk is that someone else might post an inappropriate comment or photo that could actually scare away potential business contacts.

Are you addressing the new media rage and exploiting yourself on social networking? I would like to hear your thoughts. Email me at wgstevens2@gmail.com

Where We Are Today?????

This is great, so who is at fault?

Innovation Thrives Among German Firms, Though Hurdles Persist

On the face of it, the idea that Germany could improve its capacity for innovation seems almost ludicrous. Germany is already the world's number-one exporter -- and few of those exports are anything but complex, high-value goods. The country already registers more patents per capita than any other nation. It spends as much on research per capita as anyone. In certain fields, particularly alternative energy, the country seems on track to gain global recognition as a center of innovation and excellence.

"It's absolutely certain that there is no other country with as many (global) market leaders as Germany," says Hermann Simon, chairman of Simon-Kucher & Partners, a global marketing and pricing consultancy headquartered in Bonn.

Christian Terwiesch, a Wharton professor of operations and information management who grew up in Germany, agrees. "If you think about the auto industry, if you think about the chemical industries, if you think about ERP software, and more recently, if you think about alternative energy ... in most of these, Germany is actually cutting edge," he says.

In a way, it's not surprising. Like Japan, Germany has no other way to excel but through innovation. As Manfred Perlitz, a professor of international management at the University of Manheim, puts it, Germany's only natural resource is rain. "At the end of the day, the German economy can only survive through innovation."

Yet, as global competition grows, Germany's tried-and-true formula of developing excellent products and then improving them relentlessly appears to be increasingly vulnerable. Critics point, first, to the fact that Germany largely missed the dawn of the digital age. With a few important exceptions, such as SAP, the information technology revolution was not a made-in-Germany boom, even as Taiwan and Korea grew into major technology powers. The Internet, too, was created largely abroad, not just through the work of such technology giants as the United States and Japan, but from places that were once economically obscure, such as Estonia (Skype) and Israel (Instant Messenger).

Knowledge@Wharton interviewed several German business innovation experts and professors at Wharton about the substantial promise of continued German innovation, and obstacles they perceive that stop it from becoming even better. The picture that emerges is of a country with many important advantages in terms of skills, geography and business culture. It is a tradition that remains strong and vibrant. Yet, there are areas of concern, particularly in how this rich inheritance fits with a changed world in which research and manufacturing are distributed all over the globe.

A Tradition of Excellence

Historically, perhaps the most important driver of German innovation is its high standard of technical expertise. Since the middle ages, Germans have developed high standards of craftsmanship in many fields, a tradition that continues today. "It's an outstanding history of craftsmanship that I think is very important for innovation," Terwiesch says.

In Germany, workers in a number of industries still study as apprentices for three-and-a-half years, during which time they work three days a week and earn a modest salary, and then go to school the other two days. The workers who come out of this system, says Simon, are highly qualified. Nor does the technical focus stay only on the shop floor. Unlike the U.S., where the most ambitious engineers are often drawn into business school and later sent into general management, in Germany, engineering excellence alone is still the best way to get ahead, according to Terwiesch. Simon, who has written a book titled, Hidden Champions of the 21st Century, about 500 of the "world's best unknown companies," notes that half the CEOs on his list are engineers.

"The way you establish leadership in a German company is through deep domain expertise," Terwiesch notes. "I have family members who are still working in Germany. If I look at the way they have built their careers and the level of product knowledge they have, it's absolutely amazing. But you need it. You become an executive primarily because you know what you're doing."

Even at the very top of the company, he says, domain experts are still likely to be in charge. "You could take any board member from BMW and they could, by hand, take a car apart and put it together again," he says.

Stability First 

Respect for expertise leads to a high degree of loyalty between workers and their companies. Longevity at a company is seen as a key competitive advantage -- both for the company and for the worker.

Many people stay with the same company their whole career -- and in some communities, families will have worked for two or three generations with the same firm. "It's an emotional advantage of German workers that they can be even relatively assured that they won't lose their job," says Bernhard Wendeln, president of WEGA Support, the family investment company of the entrepreneurial families Wendeln and Kläne.

Since German workers tend to spend more time at a particular job than those in the UK or the U.S., they learn a great deal about their products. As a result of long years of experience, they develop deep expertise and a long-term focus on trying to do the right thing for the company.

Recalling a stint at BMW, Terwiesch remembers meeting many extremely skilled workers and being amazed at the depth of their product insights in the prototyping laboratory. Although they had not been to college, he says, they had an incredible amount of tacit knowledge about the product. "These people were bright like I had not seen before."

This effect may be even more profound in the Mittelstand, Germany's fabled midsize companies, the kind of publicly unknown but highly profitable firms profiled by Simon in his book about hidden champions.

Terwiesch agrees. "People working there, even people without academic degrees, get really outstanding expertise in metallurgy or some very specific detail of a technology. That creates deep knowledge and an enormous competitive advantage that has, over the ages, made theMittelstand a very important part of the German economy and also a significant driver of innovation."

The roots lie deep in German culture, experts say. "It has to do with the German lifestyle and career patterns," suggests Terwiesch. "In the U.S., it's all about change. People change jobs all the time: They do a startup, it doesn't work, they do another start up, or they go work for a company. They're constantly moving. Germany, on the other hand, is a society that favors stability."

A Limiting Focus

Some critics see risks in this inward focus, and argue that the kind of technical perfectionism that a corporate culture can instill sometimes results in economically unproductive activities. This includes solving problems that don't matter to customers or creating an economically inefficient level of vertical integration.

For example, some of Simon's hidden champions insist on manufacturing virtually everything themselves. Enercon, a leading wind power technology firm, makes 80% of its equipment in-house while other wind power companies make only 20% of their own equipment. "It's very different from the typical strategies of large corporations," Simon says.

Enercon succeeded despite this degree of obsession, but some critics have argued that being overly focused on technical or product expertise can also blind a company to game-changing developments. One leading slide projector company noted by Simon in his book kept on making high-quality slide projectors even after digital projection began to take over the market. Eventually, customers slipped away, but the company did not evolve. It lost its market simply because it couldn't adapt to the digital era.

But that failure may be the exception, at least for small- and medium-sized German companies, which typically stay close to their customers and remain small and agile enough to respond to their changing demands. One reason for the outperformance of some Mittelstand companies is that they talk to their customers more often than do larger companies, where engineering sometimes goes on for its own sake, Perlitz says.

Although German executives are changing places more often now than in the past, the risk aversion of many talented German engineers and other professionals endures. Often, even the most promising young companies have difficulty recruiting capable engineers. Much of the country's best homegrown talent is locked inside the country's great corporations, leaving young companies hard-pressed to find qualified employees. This might not be the case in a different kind of business culture.

Demographics are also taking their toll, as more and more of the country's technologists retire. "Ifyou do a body count, the country is losing a lot of engineers and scientists," says Terwiesch. "There's a big demand for highly qualified engineers that is currently unfilled, and German immigration laws are not making it easy to bring in people from the outside. Over the last 10 years, there has been an enormous demand for good scientists and engineers, way more than the universities can produce."

Even when working permits are not an issue, it is difficult to attract talent to Germany. Many of the graduates of the German section of Wharton's Lauder program, for example, don't end up working in Germany. The barrier? "My impression is that, in most cases, it's salary. The students feel they earn more in an American company, and most of my students stay in the United States after they have the Wharton degree," says Susanne Shields, director of the German culture and language program for Wharton's Lauder Institute. Some also shy away because they hear rumors about long days in the German branches of the biggest consulting companies.

Without sufficient homegrown talent and with limits on immigration, perhaps the only other option is outsourcing. In his positioning of Tata Consulting Services, Ananthanarayan Padmanabhan, director of central European operations, is careful to speak of his company, not as a firm that outsources jobs, but as a firm that is importing innovation -- a good spin, certainly, and given the shortage of engineering talent within Germany, probably more accurate.

Yet in spite of the shortages, Germany's high-priced engineers seem to be competing well in this brave new world of low-cost talent. One case in point: Although trade is often seen as a zero-sum game as far as labor is concerned, Germany's engineering wunderkinder are finding ways to profit from the new world order without losing their own advantage. Already, China and India have both proven an important market for Germany. For example, 40% of Tata's Nano -- the revolutionary $2000 "people's car" -- is sourced from German parts, according to Simon. Nor do the contributions end with parts. Chinese factories may supply the world, he adds, but it's German companies that supply the Chinese factories.

Fear of Failure

The hierarchical nature of German companies may be another barrier to innovation, at least in some rapidly changing industries. Compared to America, the German company tends to be much more hierarchical, says Shields. "The organization is very structured, which can be a good thing. But on the other hand, Germans are not very flexible so it takes a long time for new ideas to come through. There is no open door policy. They cannot just walk in and talk to the boss and say, 'This is what I observe and what I suggest...'"

German education, too, tends to favor knowledge over creativity, says Dietmar Grichnik, a professor of entrepreneurship at the WHU Otto Beisheim School of Management. "This hinders entrepreneurial activities later on."

Ultimately, perhaps, it's a fear of failure that may limit innovation most. According to Grichnik, the legal obstacles to starting a business are not too high in Germany. It's the social norms, he notes, that stop them -- particularly the fear of failure. More than 50% of Germans polled say that fear of failure is a big reason they would not want to start their own company.

But slowly, things are changing, Grichnik adds. A few universities are now offering entrepreneurship courses. Some government agencies offer seed capital, which was once difficult to find. Students are also trying their luck at startups while they are still in the university, taking advantage of their school years as a low-risk time to start a business.

"It's a kind of chicken-and-egg problem," says Jurgen Hablicher, the head of venture capital fund Mountain Cleantech. "There haven't been enough successes that people can look to for inspiration, but without those examples, no one will try."

What are your thoughts on this article?

Most Ridiculous Excuses Why An Employee Missed Work - Can You Top Any Of These?

"Employee’s wife burned all his clothes and he had nothing to wear to work."

That takes the cake.