Building a great board is a most difficult task. It takes a great deal of time on the part of the board members and the CEO. But it is the key to a strong system of governance. Read my full article from Directors & Boards magazine on transitioning a board's makeup here. Your feedback is welcome.
The “activist hedge fund” is a new breed of shareholder that has emerged in the 21st century, leading to increased pressure on corporate executives and boards through the strategy of taking on more debt and paying out more to shareholders. Because these activist shareholders are generally seeing positive returns and institutional investors are following their lead, it’s clear hedge fund activism is here to stay. Rather than resist the activist shareholder, CEOs and boards must adapt to activist interventions and use them to improve their organizations.
In a new article for Harvard Business Review, Jay Lorsch and I explore the hedge fund activism trend and identify six ways to fend off activist challenges drawing from real examples of companies including PepsiCo, Target, Novartis, Whole Foods, and P&G:
- Have a clear strategic focus and stick to it.
- Analyze your business as an activist would.
- Have your external advisers lined up in advance and familiar with your company.
- Build board chemistry.
- Perform in the short run against declared goals.
- Don’t dismiss activist ideas out of hand.
Read the full blog here. Your feedback is welcome.
Put yourself in Mary Barra’s shoes: After 33 years with the company, you have been CEO of General Motors (GM) for just two weeks – the first operating executive in 30 years to be CEO and the first female. You are determined to transform the moribund GM culture that led the company into bankruptcy by focusing on superior vehicles that meet your customers’ needs with design, quality, and most of all, safety.
Then you learn that the company has a major safety problem with ignition switches on the Chevrolet Cobalt that has caused 12 deaths, and you must recall 1.6 million vehicles. Your investigation uncovers that GM employees have known about this for 12 years but the problem was never surfaced – all to save $1 per car.
You recognize immediately the potential consequences: angry customers, negative publicity, and an array of liability suits, Congressional investigations, and significant financial impact. You recall how Toyota’s quality problems impacted its reputation and cost the company more than $1 billion.
You know there is likely much more looming below the surface. Amid this uncertainty you are determined to be open and honest with your customers and the general public, yet you don’t have all the facts. How can you go public without complete answers and solutions?
The pre-bankruptcy GM often had similar problems but its leaders refused to face reality. Mary Barra is a very different kind of CEO: she is determined to lead GM into a new era that focuses on customers first and sets new standards of transparency in providing the safest, highest quality vehicles. I had the privilege of getting to know her last summer when she attended my Harvard Business School course, “Leading Global Businesses” while she was GM’s chief of worldwide product development.
Thus far, Barra has performed remarkably well under the mounting pressure. She has stepped forward and acknowledged the problems, and taken full responsibility for them. Unlike the old GM, she isn’t hiding behind lawyers and PR specialists. Rather, she has spoken directly to GM’s customers and apologized for what has happened, expressing empathy by admitting that “something went very wrong … and terrible things happened.”
When Congressional hearings begin on April 1, Barra isn’t sending a subordinate: she will testify herself. She has promised to release findings of an internal investigation examining the problem’s root causes and why no action was taken. “Our overriding goal is to be transparent,” Barra said.
Barra is using this crisis to transform the old GM culture. In early March, she wrote to employees: “Our company’s reputation won’t be determined by the recall itself, but by how we address the problem going forward … What is important is taking great care of our customers and showing that it really is a new day at GM.”
To signal her determination to change GM’s culture, she appointed a new chief of global vehicle safety. She has assigned 50 employees to GM’s technical center to handle customer inquiries about safety and is holding daily meetings to oversee the recall. Using decades of experience in designing GM’s vehicles, she is focusing on understanding how the defect occurred and why it took over a decade to bring it to the public’s attention.
With so many problems like GM’s surfacing in the past decade, the American public has lost trust and confidence in the integrity and transparency of corporate leaders. In the automobile industry alone, the public still has raw memories of Ford’s Jacques Nasser blaming Firestone tires for the rollovers of Ford Explorers that caused 273 deaths, and denials of Toyota and Audi about problems with their vehicles.
It takes a long time to regain consumer confidence. By being open and transparent about GM’s problems, Barra has aligned herself with her customers and ameliorated public outrage. Acknowledging there is no quick-fix for these problems, Barra said “We have apologized, but that is only one step in the journey to resolve this … We have much more work ahead of us.” To reinforce her commitment, she announced the recall of 1.7 million newer GM vehicles suspected of carrying faulty airbags.
Barra recognizes regaining the trust of GM’s customers is far more important than the billions of dollars in lawsuits and fines that GM may incur. She weathered decades of “financial engineers” in the CEO’s chair who focused on short-term profit instead of building great products. She has been at GM long enough to know how difficult it will be to change GM’s entrenched culture. To change GM’s culture from its inward-looking, short-term focus, she has to be the role model for all employees of how to treat customers, especially during a crisis.
Mary Barra recognizes that “a burning platform” like this one offers a golden opportunity to convert GM’s culture permanently into a passionate focus on vehicles that make customers’ transportation safer and more enjoyable. Demonstrating her visionary approach to leading GM, Barra says, “We will be better because of this tragic situation, if we seize the opportunity.”
She has the leadership, wisdom, and commitment to do just that.
By Bryce Hoffman for The Detroit News, March 27, 2014
While few CEOs have had to contend with major crises right out of the chute, there have been others.
In addition to Akio Toyoda, crisis-management expert Bill George points to Jeff Immelt, who had the misfortune of taking over another General — General Electric Co. — just four days before the terrorist attacks on New York and Washington on Sept. 11, 2001.
Those attacks cost GE’s insurance business $600 million and dealt a nearly fatal blow to its jet-engine business, as airlines around the world canceled orders for new planes.
“It had quite a devastating effect on their business,” said George, who teaches CEOs how to cope with crisis at Harvard Business School. “Jeff realized he had to do something about his consumer finance business and insurance business. Unfortunately, he was a little slow to do it. Mary Barra can’t be that slow. Mary has to face reality: How did this thing get hidden for 12 years?”
He gives Barra good marks to date.
“So far I like what I see. She’s being very forthright, very sincere and getting people around her to address the problem. But she’s got to get to the root core of how this happened and how it was allowed to go on for so long,” said the former CEO of Medtronic Inc.
“One rule I had at Medtronic was ‘You’ll never get fired for making a mistake, but you will get fired for covering one up,’ ” George said. “If I were advising her, I’d say that the most important thing is our customers. This company has to restore its trust with our customers. If we do that, we win. If we don’t do that, we lose. That’s the most important thing she has to do.”
From Harvard Business Review, Published March 10, 2014
Time Magazine recently put “The Mindfulness Revolution” on its cover, which could either be seen as hyping the latest business fad, or as signaling a major change in the thinking of executive leaders. I believe it’s the latter.
The use of mindful practices like meditation, introspection, and journaling are taking hold at such successful enterprises as Google, General Mills, Goldman Sachs, Apple, Medtronic, and Aetna, and contributing to the success of these remarkable organizations. Let’s look at a few examples:
- With support from CEO Larry Page, Google’s Chade-Meng Tan, known as Google’s Jolly Good Fellow, runs hundreds of classes on meditation and has written a best-selling book, Search Inside Yourself.
- General Mills, under the guidance of CEO Ken Powell, has made meditation a regular practice. Former executive Janice Marturano, who led the company’s internal classes, has left the company to launch the Institute for Mindful Leadership, which conducts executive courses in mindfulness meditation.
- Goldman Sachs, which moved up 48 places in Fortune Magazine’s Best Places to Work list, was recently featured in Fortune for its mindfulness classes and practices.
- At Apple, founder Steve Jobs — who was a regular meditator — used mindfulness to calm his negative energies, to focus on creating unique products, and to challenge his teams to achieve excellence.
- Thanks to the vision of founder Earl Bakken, Medtronic has a meditation room that dates back to 1974 which became a symbol of the company’s commitment to creativity.
- Under the leadership of CEO Mark Bertolini, Aetna has done rigorous studies of both meditation and yoga and their positive impact on employee healthcare costs.
These competitive companies understand the enormous pressure faced by their employees — from their top executives on down. They recognize the need to take more time to reflect on what’s most important in order to create ways to overcome difficult challenges. We all need to find ways to sort through myriad demands and distractions, but it’s especially important that leaders with great responsibilities gain focus and clarity in making their most important decisions, creativity in transforming their enterprises, compassion for their customers and employees, and the courage to go their own way.
Focus, clarity, creativity, compassion, and courage. These are the qualities of the mindful leaders I have worked with, taught, mentored, and interviewed. They are also the qualities that give today’s best leaders the resilience to cope with the many challenges coming their way and the resolve to sustain long-term success. The real point of leverage — which though it sounds simple, many executives never discover — is the ability to think clearly and to focus on the most important opportunities.
In his new book Focus, psychologist Dr. Daniel Goleman, the father of emotional intelligence (or EQ), provides data that supports the importance of mindfulness in focusing the mind’s cognitive abilities, linking them to qualities of the heart like compassion and courage. Dr. Goleman prescribes a framework for success that enables leaders to build clarity about where to direct their attention and that of their organizations by focusing on themselves, others, and the external world — in that order. Cultivating this type of focus requires establishing regular practices that allow your brain to fully relax and let go of the anxiousness, confusion, and pressures that can fill the day. (Editor’s note: here is Daniel Goleman’s related HBR article, The Focused Leader.)
I began meditating in 1975 after attending a Transcendental Meditation workshop with my wife Penny, and have continued the practice for the past 38 years. (In spite of this, I still do mindless things like leaving my laptop on an airplane, but I continue to work on staying in the present moment.) All of our family members meditate regularly. Our son Jeff, a successful executive in his own right, believes he would not be successful in his high-stress job were it not for daily meditation and jogging.
Meditation is not the only way to be a mindful leader. In the classes I teach at Harvard Business School, participating executives share a wide range of practices they use to calm their minds and gain clarity in their thinking. They report that the biggest derailer of their leadership is not lack of IQ or intensity, but the challenges they face in staying focused and healthy. To be equipped for the rapid-fire intensity of executive life, they cultivate daily practices that allow them to regularly renew their minds, bodies, and spirits. Among these are prayer, journaling, jogging and/or physical workouts, long walks, and in-depth discussions with their spouses and mentors.
The important thing is to have a regular introspective practice that takes you away from your daily routines and enables you to reflect on your work and your life — to really focus on what is truly important to you. By doing so, you will not only be more successful, you will be happier and more fulfilled in the long run.
Another well-done Wall Street Journal article by Rachel Feintzeig on Microsoft CEO, February 4, 2014:
So, you’re the new CEO of Microsoft: a sprawling tech company that critics say missed the mobile and social revolutions, losing crucial market share to Google and Apple. And your two predecessors—one of whom is Bill Gates—are hovering over your shoulder.
Where to start? Former executives and management gurus have a few ideas for incoming chief Satya Nadella.
Sydney Finkelstein, a management professor at Dartmouth College’s Tuck School of Business, said departing CEO Steve Ballmer, who will now sit on the board, represents Nadella’s greatest challenge.
“I think that’s the single biggest problem with respect to change. [Nadella’s] got to be able to manage a very, very strong personality who’s just stepped aside, who’s even on record [saying] he wish he could have been the one to make the changes,” Mr. Finkelstein said.
“Be aware that anything you’re going to do, it’s almost like there’s an implicit veto by Ballmer,” he said. “I think Ballmer is the third rail in any sort of change effort.”
Winning over Microsoft’s board members should be another priority for Nadella. “They’re beholden very much to Ballmer and Gates,” Mr. Finkelstein said.
He recommends Nadella focus his energy on gaining allies internally and demonstrating his own track record as CEO for a year or two before he makes any big changes.
“With things going in the right direction, you gain more power,” he said.
Michael Useem, a management professor at the University of Pennsylvania’s Wharton school, disagrees. As a Microsoft veteran, Nadella needs to move fast, he said. New executives typically have a honeymoon period of 90 to 100 days to get to know the organization and develop their approach. But Nadella should only take 50 days to get up to speed.
“He knows the personalities. He knows the issues. He knows where value’s being created and destroyed and he knows where are all the skeletons are,” he said. “He will not be allowed to have that luxury of a full year to take charge.”
“What’s going to happen in the next 90 days is people throughout the organization and the industry are going to come to him with their proverbial ball of problems and ask him to solve that problem,” she said. “He’s got to not buy into that framework, because his job is to figure out how to get other people to solve problems.”
“So instead of telling, controlling, directing, he’s got to…figure out how to get them to know how to solve the problems themselves,” she said. “It’s all about getting the team at Microsoft to understand what to do, not that he tells everyone what to do.”
And if Nadella wants to take cues from other tech companies, he should look to IBM, not HP, she said. The latter company’s chief, Meg Whitman, is intent on protecting core businesses, Ms. Merchant said, while IBM has devoted itself to reinvention every few years.
William George, the former chief executive of medical device company Medtronic Inc. and a professor at Harvard Business School, said Nadella’s first course of action must be to establish a team that’s his own. Veterans – including those who wanted the job Nadella won – have to make a choice, he said.
“They’re either going to be loyal and committed to Nadella or they should move on,” he said.
Nadella should promote his internal favorites or bring in outside talent to fill out his inner circle. Then he has to turn his sights to the board of directors.
“The next step is to work with John Thompson,” the new chairman, George said. “Nadella’s got to work with him to upgrade the board. They need a newer board, a fresher board. [They] need to bring in sitting CEOs, recently retired CEOs, to add wisdom and insight.”
After a lengthy and public search process, Nadella also has to set forth his vision for the business more quickly than most.
He should lay out his full strategic plan in about six months – or at longest, a year – George said. If Nadella wants to make dramatic changes, it will take five to seven years to make that transformation. And George, for one, hopes Nadella thinks big.
“They really have to go from becoming the fast follower to being a leader in innovation,” he said of Microsoft. “That’s where I think the vision should be.”
Great Wall Street Journal article by Rachel Feintzeig, February 4, 2014:
During the five month long search, the board was said to have courted candidates including Ford Motor Co. chief Alan Mulally and former Nokia Corp. leader Stephen Elop before tapping Nadella, a popular executive who started at Microsoft in 1992 and leads the division that makes technology to run corporate computer servers and other back-end technology.
When Nadella’s predecessor, Steve Ballmer, announced he was stepping down last year, he told The Wall Street Journal that the company needed profound changes, and he was not the executive to make them. Although companies often go outside for transformative leaders, by picking Nadella, board members are signaling that they believe an insider is up to the job.
More often than not, a company’s next CEO is already working there. In 2012, the last full year for which data is available, 73% of S&P 500 companies with outgoing CEOs selected an internal candidate as successor. This continued a slight downward trend – as recently as 2008, according to the research, 83% of companies chose to promote from within.
A high-profile search process is “not a very healthy time” for a company, said William George, a management professor at Harvard Business School and former chief executive of medical device company Medtronic Inc. Morale problems can spring up as workers grow uneasy about where their employer is headed; an internal pick, said George, may reassure staff.
Nonethless, the search process suggests that Microsoft failed to effectively plan for Ballmer’s successor, management experts said. The former CEO held his post for 14 years–plenty of time to have a replacement groomed and ready, George said.
Succession planning should start as soon as a chief executive starts his or her job, with three or four potential candidates on the board’s radar, according to Michael Useem, a management professor at the University of Pennsylvania’s Wharton school. The practice gives board members ample time to know the up-and comers, he said. Granted, Microsoft isn’t alone in having thin succession plans, and the company’s reorganization last year left it unclear who, exactly, was Ballmer’s number two.
And companies should move fast if they have internal favorites, George added.
“If you liked internal candidates, choose them. You know the internal candidates and you should step up to it,” he said.
Microsoft would not comment on the specifics of the search, but spokesman Peter Wootton said “it’s not uncommon for a search of this magnitude to require four to six months.”
For now, Microsoft must “build up the bona fides” of Nadella and clearly explain its choice, said Paul Argenti, a professor at Dartmouth University’s Tuck School of Business and a corporate communications expert who’s worked with companies like Novartis and Goldman Sachs Group Inc. Leaders should also note that the company needed to proceed carefully at a crucial time in the history of the business.
“Externally, it’s going to be a very tough sell. I think people are going, ‘This a very disappointing, boring, ho hum announcement,’” he said.
Target CEO Gregg Steinhafel and his leadership team are experiencing every company’s worst nightmare. This problem is as bad as it can get. As a retailer, the loss of private customer data hurts consumer trust. The timing of the crisis—the biggest shopping month of the year—was doubly unfortunate.
Yet, in response, Steinhafel and his team seem to be doing everything right. Steinhafel is wise enough to know that the most important thing here is Target’s ability to maintain the confidence of its customers. Every decision he has made since the crisis began is based on that clear objective. Steinhafel and his colleagues have been fully transparent with their “guests,” as they refer to customers. They have offered to reimburse them for any losses incurred. They have not only reissued their Target credit cards, but any other credit cards used in their stores, and paid for the cost of reissuing them.
The good news here, if there is any, is that the actual losses incurred by Target customers pale in comparison to the enormous number of accounts breeched. In part, this is because Target moved so quickly to cancel and reissue credit cards.
Steinhafel seems to be following the well-known playbook of the 1982 Tylenol crisis, when CEO Jim Burke distinguished himself with his openness, authenticity, and transparency. At the time, many so-called experts predicted that Tylenol could never recover. As a result of Burke’s aggressive actions to protect consumers, Tylenol quickly regained its leading position in the consumer market.
Some pundits have criticized Target for additional revelations that expanded the number of customers who may have been impacted. If you understand even a little about cyber-security, you know that you often don’t have all the information initially. Firms like British Petroleum have tried to buy time by withholding information until they knew the full story. This only made the situation worse and caused them to lose control over the public messages.
Target has gone in the opposite direction, providing all the information it had at its disposal as quickly as possible. The problem is that you don’t know what you don’t know. As its team of experts dug deeper into its computer files, Target learned additional information that it immediately shared with its customers and the media. Since the crisis broke, transparency has been the company’s motto.
In 2009 shortly after the peak of the global financial crisis, I wrote the book 7 Lessons for Leading in Crisis, which provides a framework for handling this type of urgent, important, highly visible situation. I’ll use it to check in against how Steinhafel’s actions follow it:
- Lesson #1: Face Reality: Steinhafel immediately recognized the potential impact of the data theft on its customers and did everything within its power to inform them and protect them from further harm. While this hurt Target’s pre-Christmas sales, it may have salvaged trust with its customers.
- Lesson #2: Use Your Teammates: Steinhafel has formed a strong working team of his top executives, his board, and external advisors—they are working actively and diligently together.
- Lesson #3: Dig Deep for the Root Cause: Supported by outside experts, Target’s information technology team has continued to dig deeper into its computer files, enabling it to get to the root cause of the problem. They still have not figured out who invaded their systems. (And they may not; the terrorist who laced Tylenol capsules with cyanide was never identified.)
- Lesson #4: Get Ready for the Long Haul: Target’s leadership has recognized that this crisis won’t go away easily, so it has focused on restoring the confidence of its shoppers as well as the general public.
- Lesson #5: Never Waste a Good Crisis: Steinhafel recognizes that he can use this crisis to strengthen his ties to Target’s guests by being open and offering to reimburse them, whatever the cost.
- Lesson #6: You’re in the Spotlight: Follow True North: Throughout the crisis Steinhafel has maintained his integrity and his openness. He has been visible to his customers, including his appearance on CNBC on Monday, January 13.
- Lesson #7: Go on Offense, Focus on Winning Now: It’s too soon in the crisis to think about winning in the marketplace, as Target is currently trying to hold its position with customers after the December shortfall. Looking ahead, I have no doubt that Target management will attempt to turn its handling of this crisis into expanding its business with its customers.
I have known Steinhafel for nearly twenty years. Between 1995 and 2005, I served on the Target board when he was Executive Vice President, Merchandising and later President. He has also been a participant in the courses we run at Harvard Business School for new CEOs. He is a person of absolute integrity. I have never seen him prevaricate or dissemble, even under extreme pressure. For him, everything revolves around satisfying his guests. He is a brilliant merchant, arguably the finest in the retail field. He can anticipate customer needs and fulfill them.
This isn’t the first crisis Steinhafel has faced as CEO. Shortly after taking over the reins from former CEO Bob Ulrich, he faced an aggressive attack from activist hedge fund manager Bill Ackman, who wanted to break up the actual company. Ackman’s plan proposed spinning off Target’s credit cards and its real estate holdings—destroying the company’s integrated strategy of retail merchandising, credit cards that offered customers the opportunity to contribute 1% of their Target expenditures to their favorite K-12 school, and real estate tailored to its merchandising strategy. Target management and its board rejected Ackman’s demands and won a proxy fight with 80% of shareholder votes cast.
As an executive, you would never wish for a major crisis, but as I have learned in crises at Medtronic, Goldman Sachs and Exxon, they can make your company more effective and your organization more unified and committed to its True North in the long-run. Ultimately, I predict the same thing will happen at Target.
As 2014 approaches, many of us are looking for ways to live more mindfully. Many of us want to be more mindful, but few of us know how. Below I have compiled a sampling of eight exceptional books on mindful living that will help you become a better leader and a more fulfilled human being.
Focus by Dan Goleman: The breakthrough book of 2013. Goleman writes from his vast experience and understanding of the mind about living more mindfully to focus your life and your work on what is truly important in your life. After a treatise on neuroscience discoveries of how the brain can be remodeled through meditation and other calming techniques, Goleman brings great clarity to the subject at hand: finding inner focus (focus on self), focus on others, and focus on the world around you. If you adopt his approaches, your life will not only be more productive, it will be more fulfilling. For $27.95 minus the amazon.com discount, that’s a bargain.
Why Meditate? by Matthieu Ricard: As a molecular geneticist turned Buddhist monk, Matthieu Ricard is one of the world’s leading experts on meditation. As the Dalai Lama’s scientific advisor, he has been a pioneer in demonstrating scientifically the benefits of meditation in calming and focusing the mind. A frequent lecturer and panelist on mindfulness, he has helped open up meditation to non-Buddhists. He not only demystifies meditation in this book, but he also gives the reader practical instructions on how to do succeed at it.
Lean In by Sheryl Sandburg: The best leadership book of 2013. Guys, don’t be fooled! This is not a book solely for women. Leaders of both genders can learn a great deal about how to be successful in the workplace from Facebook COO Sandburg’s wisdom, candor and experience. Sandburg’s advice to be deeply engaged, passionate, and committed applies to all of us. She has deep thoughts on how we can all contribute more in the workplace, inspire those around us, and thus be more effective as leaders. She shares many personal stories. In so doing, she comes across as a humble leader who has gained much from her mistakes and learned from her challenges.
Wonder Women by Deborah Spar: If you resonate with “Lean In,” then you’ll like “Wonder Women” even more. Spar, who is president of Barnard College, is a former HBS colleague of mine whom I with on the board of Goldman Sachs. She is a superb writer, whose writing is deeply authentic and candid. She is genuinely honest about the challenges she and many other women face in trying to juggle their careers, marriages, mothering, and roles in the community. She acknowledges the barriers but also the self-imposed limitations many women create. You will come away inspired to open the doors and bring more women into the upper echelons of all organizations.
Becoming a Genuine Leader by Marilyn Mason: Mason delves deeply into the impact of one’s family of origin to discover the secrets required to become a genuine leader. As author Gail Sheehy writes on the cover, “She takes you home again, to discover how you learned to negotiate in the first organization to which you belonged, your family. Her psychological insights are stunning. She illuminates the passage to authentic leadership.” (For the record, I consider that authentic leadership and genuine leadership are synonymous.) Mason has a deep understanding of family systems and how we carry the rules and the wounds from our families of origin into our families of choice and even find our families at work. In better understanding the families we grew up in, we can build better relations in our own families and in our chosen place of work.
Finding the Space to Lead, by Janice Marturano: Marturano is the former associate general counsel of General Mills. She began her work in mindfulness-based stress reduction (MBSR) by attending one of guru Jon Kabat-Zinn’s programs. Then she began teaching classes in MBSR at General Mills. Eventually, she morphed her work into mindful leadership and began running weekend seminars on that subject for executives. They were so popular that she had the courage to run these seminars as a full-time business. Her book provides a very practical guide to meditation (I prefer calling it by its real name rather than the “safe” euphemism MBSR) with numerous exercises that help the reader become more mindful and, thus, a better leader.
Daring Greatly, by Brene Brown: You may be acquainted with Brown from her exceptional TED talk, but her book takes you much deeper into how your willingness to be vulnerable can transform your leadership and your life. As she says, being vulnerable takes courage and the willingness to look deep inside yourself, confront your demons and your shame, and emerge a whole person. When you try to hide your vulnerabilities, others sense your weaknesses and they have the power. When you share them openly, then you have the power.
Conscious Capitalism by John Mackey and Raj Sisodia: Mackey, the founder and co-CEO of Whole Foods, teams with Sisodia to write the finest treatise of my adult lifetime on what genuine capitalism is all about. As I said in the Foreword that Mackey asked me to contribute, “This is the book that I wish I had written.” I said that because I believe that the authors have discovered how to build and sustain a successful enterprise. Their ideal company is driven by purpose and values, provides unique value for customers, inspires employees to peak performance, serves society and communities simultaneously, and ultimately creates lasting value for shareholders. They avoid the common trap of responding to short-term shareholders by staying focused on Whole Foods’ mission and greater purpose. Mackey’s idealism is truly inspiring – and he has backed it up by demonstrating conclusively that his approach creates superior results for the long term – not just for Whole Foods, but for many other companies as well.
The latest announcement from the White House on Thursday, December 19, seems to indicate that even President Obama is backing away from Obamacare.
At the very least, he is bobbing and weaving like an exhausted prize fighter trying to avoid a knockout punch. For the President, that punch would be a disastrous rollout of Obamacare that leaves Americans so angry that the Democrats lose their five-seat majority in the Senate in 2014. That could happen with the never-ending fallout from the new plans. Not surprisingly, the latest White House retreat just before the December 23rd enrollment deadline was triggered by pressure from moderate Senate Democrats like Mark Warner (D-VA) and Mary Landrieu (D-LA). Landrieu faces a tough 2014 election campaign.
Thursday’s announcement said that six million Americans who have had their insurance plans cancelled are eligible to buy catastrophic policies and are exempt from penalties if they go without insurance in 2014. Not that the new catastrophic plans are cheap. In California the pre-Obamacare median cost for a 25-year old non-smoking male was $92 per month on eHealthInsurance.com. This compares to $205 per month for a bronze plan and $184 per month for a catastrophic plan. Tacitly admitting that for many Americans the cost of buying insurance on the federal exchange exceeds their current insurance cost, Health and Human Services Secretary Katherine Sebelius offered them the opportunity to apply for a “hardship exemption.”
This is the fourth major pullback by the White House from the Affordable Care Act. In July the employer mandate to provide health care to all their employees was delayed one year until January 1, 2015. That followed the prior year’s scrapping of long-term insurance plans which were deemed too expensive. Then in November President Obama, facing massive criticism for not upholding his promise that all Americans could keep their insurance plans, told insurers to reinstate the cancelled plans, provided their state insurance commissioners agreed. (Several did not.) On November 27, the White House withdrew the opportunity for small businesses to buy insurance on federal exchanges in 2014.
All these changes are causing mass confusion and consternation for the insurers. Already, two of the four largest insurers – United Health and Cigna – have elected not to participate in the exchange, a decision that appears fortuitous. The remaining participants in the federal exchange are preparing for massive adverse selection that raises their costs far beyond the projections they used in bidding on these plans, especially the bronze plans. As the healthy young opt to go without insurance and pay the modest penalty or take the catastrophic plans, the insurers are left with the least healthy people in their plans. The latter comprise the vast majority of people enrolled to date.
All these changes are exposing the flawed premise on which Obamacare is based: that the healthy young are willing to pay much more for insurance in order to support the unhealthy elderly. This policy marks the first time in U.S. history that we are asking the young to pay for the old; historically, it has always been the other way around. Altruism would not have motivated the young to assume this new cost, so the Democrats used the mandate to force the young into the pools—subsidizing care of the elderly at much higher costs to themselves. The mandate eked through the U.S. Supreme Court on a 5-4 decision, thanks to the tortured logic of Chief Justice John Roberts who deemed it wasn’t mandate after all, but rather a tax. All this comes at a time when youth unemployment is still in double digits and many more young people are stuck in low-paying jobs that barely enable them to make ends meet.
To compound the problem, the law has a key provision that no one can be asked to pay more because they are in ill health. The converse of that clause is that insurers cannot offer incentives to people for remaining in good health through diet, exercise, stress reduction, and limiting consumption of cigarettes, alcohol and drugs. That forms a sharp contrast with self-insured employers who are racing to offer employees massive incentives for staying healthy. These employers understand the reality that Washington seems to deny: health care costs can only come down when people start taking responsibility to live healthier lives. Pragmatic employers who bear the cost of their employees’ health care, know that lifestyle accounts for more than 50% of total health care costs. Therefore, they offer incentives to improve employees’ lifestyles.
The impact of this provision will become highly visible in early 2014 when insurers announce increased prices for their 2015 plans. That will trigger another round of consumer reactions, and responses from the Obama administration shortly before the November 2014 mid-term elections. Will the administration extend opportunities for people to go without coverage or shift to catastrophic plans? Or will the administration try to offset the rising costs by further reducing reimbursement to hospitals and physicians for Medicare and Medicaid? If the latter, we are likely to see a stampede of providers that refuse to take new Medicare/Medicaid patients, even those within five years of becoming eligible.
Given this looming disaster, I support the Obama administration’s “go slow” approach, and offering the option of catastrophic plans for all Americans. This is something I argued for unsuccessfully back in 2009-2010 before the law was enacted. To make Obamacare viable, however, two further changes will be required: 1) reducing the minimum requirements in the plans to enable people to select plans tailored to their needs, and 2) permitting insurers to offer incentives to their enrollees for staying healthy. The consequence of these two actions will be that unhealthy Americans will have to pay more, regardless of their age, and the healthy will not be required by law to subsidize the unhealthy. These changes are certain to raise the hackles of liberal Democrats, but they are the only to avoid the looming disaster in rapidly rising health care costs that could bankrupt Medicare/Medicaid.
In early 2014 the President will be faced with a stark choice, as the shortfall of healthy Americans signing up through healthcare.gov becomes reality, and the consequences of adverse selection cause insurers to reprice their 2015 plans. He can cling to the original liberal provisions of Obamacare and face massive political fallout. Or he can take a more gradual approach to universal health care that provides people with incentives to stay healthy. For the sake of our country, I hope he chooses the latter option.