The Leader’s Two Internal Relationships

A business leader (and especially the owner or CEO) has to maintain two types of relationships inside the business — one is with the staff, and the other is with the business itself.

Today’s interview covered both of these relationship types. Our experts explain how you can better treat your company like a business, and how you can better treat your people like human beings.

My first expert, Walter Zweifler, is a professional appraiser of the value of companies. He agrees that the value of a company is directly proportional to the quality of its leadership. I consider it the number one variable in determining business results and thus business valuation.

Over the course of many decades, Zweifler has developed a set of 20 simple questions that he uses to assess the quality and professionalism of a firm’s leadership, and thus (combined with appropriate financial metrics) the value of the company.

A firm’s performance can be predicted by how well the leadership can answer Zweifler’s 20 Questions.

Owners of family businesses often view those firms as children, as members of the family. It can be very hard for such owners to view these businesses with objectivity.

Yet a good leader has to view the business — as an entity — both with affection and with a sense of professional detachment and objectivity.

For example, Zweifler will ask about business performance. Where a weaker leader will respond with adjectives and a subjective sense of “better than last year” or “pretty good,” a stronger, more professional leader will have the discipline to give a more objective answer — for example, that the firm expects to earn $X this month, based on accurate measures of current and past performance and a measurable sales pipeline.

Every firm should routinely — quarterly if not monthly — compare their own performance with that of their peers. Every industry has peer surveys. These can be obtained through trade organizations, as well as financial publishers like Robert Morris (now known as the Risk Management Association), Reuters, or Thompsons. These provide details of the condition and performance of others in the same industry. (And index of data sources is here.)

The peer information tells you how you are doing compared to your competitors. And you can ask your banker for this — and any competent appraiser can provide this. If you know your North American Industry Classification number, you should be able to find your peer survey.

Zweifler also points out that there are lots of sources of low-interest and even tax-deductible loans right now; he discusses these on the second Friday of each month on his free webinar at http://zweifler.eventbrite.com/.

Another differentiator is how the leader or business owner approaches a bank. The amateur goes in asking for however much money he can get. An ineffective leader goes to the bank only when he needs credit — “hat in hand” — which is a weak position.

The more professional, more effective leader goes in knowing the cash turnover cycle of his business — he knows how much credit he can get from suppliers, how quickly customers pay, and how long he holds inventory. This will tell him exactly how much money he needs from the bank. He should also already know what rates are being charged to others. This allows him to say to the banker: “My firm is a good risk and represents a good working asset for your bank, I want to borrow this much money, and I deserve this interest rate.” That’s a position of strength.

The effective leader is also regularly monitoring the banks to see whether he should switch his business to someone who will provide a better rate or better service.

Zweifler has extra insights into commercial banks, because his firm has valued banks in nearly every state in the US. Banks are either price leaders or price followers. Many set their rates based on what their neighbors charge.

Banks will sometimes play hardball. For example, when one member of a partnership unexpectedly dies, it automatically places that partnership in technical default of all its loans. Since everybody dies sometime, the wise leader sets up a cross-purchase agreement in advance. That’s often done with life insurance — upon the death of a partner, the insurance money goes to a trustee (not a surviving partner) who uses it to buy out the shares owned by the surviving family.

Another area where the superior business leader shows situational awareness, is in possibly selling the firm and possibly buying another firm. Most family business leaders don’t think about that much, and thus would not know where to go or what to do if an opportunity did arise.

In fact, there are always three places you can look for potential buyers — your largest customer, your largest supplier, and your largest competitor. Each of these players knows your business and each has an incentive to at least pay attention. Therefore, it makes perfect sense to occasionally look, informally, at whether a sale or purchase in one of those three areas would pay off. You can even discuss it informally with those other players. That means you are ready for the situation when you do want to make a deal.

Another area of interest is real estate. Often a firm is more valuable as an owner of real estate than as a going concern. There are some easy ways to find out what your real estate is worth. You can monitor local prices.

For example, you can call up a realtor and say you’re considering possibly listing the property, and you want to know what other properties in the area are going for. And you can call your property-and-casualty insurance carrier and ask how much coverage you should have. Both of these sources will give you lots of objective real estate pricing information for free.

Zweifler asks firms about retaining key employees. You want to make sure they don’t want to go, and give them incentives to stay. You also could use legal protections like non-compete agreements. And you can use strong patent, copyright and trademark protections. You can give key employees an ownership stake in the firm, which gives them a stronger reason to stay and build the firm.

Are you facing a single large supplier or customer? That can represent increased risk. You can address that by approaching the supplier to form a joint venture or be acquired, giving them a greater profit margin. There is a natural economic community of interest between a supplier and a customer, particularly if they have similar market shares.

Zweifler’s 20 Questions acts as a checklist for testing how well a leader really understands his own business. It’s one I plan to use regularly.

Leadership and Corporate Culture
Where Zweifler looks at the relationship between the leader and the business as a whole, my second guest, Susan Steinbrecher, looks at the relationship between the leader and the people who make up the business.

As a leader you cannot directly control the actions of your people. Instead, you create an environment — a culture — that effects the choices and working values of your people.

One definition of a leaders is “someone who gets results through people.” Not in a manipulative way, rather in a collaborative way.

You can multiply your effectiveness by creating a corporate culture that simultaneously is supportive of people and is demanding of performance. You want to inspire people to want to work with you.

Susan Steinbrecher has studyied the difference between Personal Power and Professional Power. The Professional Power is typically positional — it involves a title and formal powers. Personal Power has to do with you you present yourself and how you affect people.

Over the years Steinbrecher has asked hundreds of groups and thousands of individuals the same basic questions about leadership (I paraphrase):

Who was a favorite boss or leader that you worked?
What impact did that person have on you?

She always gets the same answers no matter what sort of group she asks — it could be a “C-Suite” group of senior executives, or a group of front line workers and supervisors. The answers are always that the favorite leader:

  • mentored me
  • coached me
  • believed in me
  • empowered me
  • trusted me
  • valued me
  • cared about me as a person

And because of that, this worker wanted to not let their boss down, wanted to go the extra mile, wanted to live up to the high expectations and high opinion of this boss. They were motivated to work their very best.

And it’s always this same list of values.

The list never includes things like

  • great strategic thinker
  • knew how to run a P&L
  • great at budgeting

Steinbrecher then will ask, “Was your boss good at those other things?” Yes, it turns out, they were good at those things too. So, why didn’t those other things make the list?

Because what leaves a legacy, what motivates, is how you touch people’s hearts.

How can I tell if I have a morale problem in my business?

  • The grape vine is more active
  • People call in sick more
  • The rumor mill takes on a life of its own
  • Absenteeism increases
  • Workers’ Comp claims go up

How do I raise morale, especially in this difficult economic environment?

You have to communicate frequently, deeply, and pro-actively:
Hold employee round-tables
Tell people what the problems are
Ask for help from the workers for solving the problems

Look for every possible avenue for communicating with folks. And leave space for people to vent, to express fear, and so forth. And acknowledge those feelings. (Never tell people to “just get over it” — that’s abdication.)

My own goal is to create a workplace that is an oasis, where people look forward to coming to work.

Steinbrecher reminds us that every leader lives in a sort of fish-bowl — everything the leader does is visible, and usually magnified and sometimes distorted.

Suppose a leader walks down the hall with her head down, looking unhappy, and goes into her office and closes the door and doesn’t come out. People will project onto that. They will read into it their own story, often a negative and fearful one.

Leaders are “on stage” all the time, and as leaders we need to be aware of it and deliberate about our actions and how we present ourselves. We need to project the meaning we intend to project.

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