Tag: Ken Iverson

The Power of Your Subconscious Mind

We think that we're in control. We believe that our conscious mind directs our thoughts and somehow controls our subconscious mind. We're wrong.

In Richard Restak's The Brain Has a Mind of Its Own:

At the moment of decision we all feel we are acting freely, selecting at will from an infinity of choices. Yet research suggests this sense of freedom may be merely an illusory by-product of the way the human brain operates.

Restak gives the example of reading this essay. You scan the title and a few sentences here and there and eventually make a decision to stop reading or read on. You might then go back to the beginning and start reading, or you might start reading wherever it was in the article when you decided to stop skimming.

“The internal sequence,” Restak writes, “was always thought to be: 1. you make a conscious decision to read; 2. that decision triggers your brain into action; 3. your brain then signals the hands to stop turning pages, focuses the eyes on the paragraph, and so on.”

But this isn't what happens at all. “An inexplicable but plainly measurable burst of activity occurs in your brain prior to your conscious desire to act.”

The subconscious mind controls a lot of what we think and the connections we make. And, of course, our thoughts influence what we do.

In The Thinker's Toolkit, Morgan Jones recalls the story found in David Kahn's The Codebreakers.

Breaking codes in World War II was perhaps the largest big data project ever to happen in the world up until that point. The conscious mind could only do so much. One German cryptanalyst recalled, “You must concentrate almost in a nervous trace when working on a code. It is not often done by conscious effort. The solution often seems to crop up from the subconscious.”

Believing that the conscious mind calls the shots prevents us from understanding ourselves, others, and how to make better decisions to name but a few things.

In Plain Talk, Ken Iverson offers some insight on how to turn these thoughts into practical utility.

“Every manager,” he writes “should be something of a psychologist—what makes people tick, what they want, what they need. And much of what people want and need resides in the subconscious. The job of a manager is to help the people accomplish extraordinary things. And that means shaping a work environment that stimulates people to explore their own potential.”

We place too much emphasis on the conscious mind and not enough on the subconscious one.

Unless you manage your environment, it will manage you. The old question ‘would you rather be the poorest in a wealthy neighborhood or the richest in a poor neighborhood?' is based on how the environment controls our subconscious and our subconscious controls our happiness.

Ken Iverson: The Cure for the Common MBA

We've written before about the legendary businessman Ken Iverson, the former CEO of Nucor Steel, who took it from a tiny steel operation to a true steel powerhouse in his own lifetime.

To recap, in Iverson's tenure, Nucor:

  • Compounded its per-share profits at 17% per annum for over 30 years, in a dying industry (steel production) even while foreign steelmakers competed hard and with lower per-hour labor costs, severely harming most U.S. steel producers.
  • Engineered the lowest per ton of steel labor cost despite paying the highest wages.
  • Did not lay off any employees or close any facilities in his long tenure. (In the steel business!)

And so on. He was incredible.

His short business memoir, Plain Talk, describes a much different kind of company than most; one where a culture of teamwork and group winning trumped personal fiefdom. He also got the incentives right. Boy did it ever work.

Turns out Iverson had some thoughts on business education as well.

What are we really missing?

In his recommended curriculum, Iverson highlights just how different his thoughts are: No classes on grand strategy (Henry Singleton would agree), or sales, or marketing, or financial structuring. (Not that those can't be useful. Just not enough.)

His idea? Teach aspiring managers how to truly interact with, understand, and lead the people who work for them by forcing young MBAs to take on an “internship” as a leader similar to the way doctors take up residence before being given the full leash. 

In the epilogue to Plain Talk, Iverson calls this the Cure for the Common MBA.

Here are some of the subjects that might form the core of first-year MBA curricula:

Earning Employees' Trust and Loyalty

Far too many managers have no clue how their employees feel or even what their people's work lives are like, day to day. Employees pick up on this lack of insight in a heartbeat, and that realization taints everything their managers say to them from that point forward. Conversely, employees clearly give the benefit of the doubt to managers whom they see as understanding “what's really going on” and “what we're really up against.” That's only natural.

I'd suggest, then, that every MBA candidate be required to spend at least a few weeks engaged in manual, clerical, and/or other forms of non-management labor.

Further, they should be required to keep a journal of their experiences—the kinds of problems they encounter, their frustrations, their successes, and so forth. They will find that what seems a small thing to them as managers often takes on great significance to them as employees.

Developing managers should also contemplate the implicit and explicit commitments they will make to the people who work for them. They should understand their obligations under those commitments as well as the limitations of those obligations. And they should grasp the consequences of failing to be consistently trustworthy.

Active Listening

Listening is among the scarcest of all human skills, in and out of management. Listening requires concentration, skill, patience, and a lot of practice. But such practice is a very sound investment of the developing manager's time.

Real listening enables managers not only to hear what people say to them, but to sense what may be behind what is said (i.e., employees' emotions, assumptions, biases).

Better still, their reputation for competent listening will encourage others to bring them information. Listening proficiency is an immense advantage to any manager. No MBA should be sent forth into the business world without it.

The Hazards of Hierarchical Power

Inexperienced managers tend to lean heavily on formal, hierarchical sources of authority. This is understandable. They have not yet had the opportunity to develop other forms of authority such as experience, expertise, and seniority.

The problem is, young managers don't often comprehend the hazards of hierarchical power. They do not understand that, by setting themselves above and apart from their employees, they may actually be digging themselves into a hole. I think it is only fair, then, that we warn inexperienced managers of the hazards of hierarchical power.

Principles of Equitable Treatment

Few managers receive much in the way of explicit instruction in the principles of equitable treatment of employees, either in business school or in the course of management development. All too often, managers fill that vacuum with their own self serving precepts of what is equitable. A few common- sense principles, clearly stated and strongly advocated in the business schools, could make the business world a better, more equitable place for employees and managers alike.

***

The notion of an internship for managers has a precedent in medical education, of course. Doctors intern for a number of years before they are turned loose on the world. There ought to be a comparable transitional step in completing the requirements for an MBA. Further, that transition should focus on providing the management candidate hands-on experience. Any MBA who ventures into business with the intent of managing people should first develop his or her skills under the watchful guidance of an experienced manager.

The fact is, few business school professors have ever managed anything, and their lack of hands-on experience shows in their students. Medical school faculties, in contrast, are comprised of the best and most respected practicing physicians.

MBA candidates should preferably complete their internships within relatively small, self-contained operations, so they can perceive the operation in its entirety and grasp the overall dynamics of a business.

People throughout the corporate world lament that other parts of their company don't understand them or what they do. They're usually right. It takes an extraordinary individual to understand aspects of a business to which he or she has never been exposed. We are expecting far too many managers to be extraordinary.

Still Interested? Check out Plain Talk, and our post on some of its main themes.

Creating Effective Incentive Systems: Ken Iverson on the Principles that Unleash Human Potential

The issue of setting compensation seems to be struggled with in every organization. Most are pretty lazy about it — hiring someone else to take care of it and failing to think through the incentives they're creating.

Some companies are different. Nucor, a steel company, under the leadership of Ken Iverson is one of them. Iverson details his thoughts in the masterful Plain Talk. (This isn't the first time we've covered Iverson's wisdom on running a company. His genius was exploiting unrecognized simplicities.)

Ken Iverson

Under Iverson, compensation at Nucor had two components: A small but meaningful base pay and a very simple weekly bonus based on production. Outside of benefits and a little profit sharing, that was it. Simple, straightforward, and powerful. No subjective criteria.

The real beauty of Nucor's compensation system, in my opinion, is that there is nothing to discuss. Daily output and corresponding bonus earnings are posted, so employees know exactly what their bonus will be before they tear open their pay envelopes. No judgment. No negotiation. No surprises.

There are three beautiful aspects to the design of this program.

The first is that it's eminently clear what you will be paid for: making more steel. It's so simple. Your compensation is never at the hands of someone who may or may not like you. You have no reason to say it's unfair: You signed up for it when you signed on. If you worked at Nucor under Iverson, the first thought you had every morning was how to make more steel.

Secondly, it offers immediate feedback. Human nature, and the nature of many other higher-thinking animals, is such that immediate rewards work better than delayed rewards. B.F. Skinner knew this, but some corporations haven't figured it out yet. A year-end bonus isn't nearly as effective as a weekly bonus. A year-end review isn't nearly as useful as immediate feedback. It's simple.

And lastly, this program gave Nucor's employees tremendous skin in the game. Everyone was working towards the same goal. Rowing in the same direction. And that makes a tremendous difference.

Nucor's great success in harnessing incentives reminds me of Charlie Munger's discussion on Federal Express:

From all business, my favorite case on incentives is Federal Express. The heart and soul of their system—which creates the integrity of the product—is having all their airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can’t deliver a product full of integrity to Federal Express customers.

And it was always screwed up. They could never get it done on time. They tried everything—moral suasion, threats, you name it. And nothing worked.

Finally, somebody got the idea to pay all these people not so much an hour, but so much a shift—and when it’s all done, they can all go home. Well, their problems cleared up overnight.

So getting the incentives right is a very, very important lesson. It was not obvious to Federal Express what the solution was. But maybe now, it will hereafter more often be obvious to you.

Does this mean every company should model their compensation program after a steel company? Hell no. But you want to think about it. It's easy to come up with a suboptimal incentive system — just look around corporate America. The difference between a suboptimal compensation system and an optimal one is huge.

The principles for an effective compensation system work at all companies. Let's invert — think about the common reasons that compensation systems likely fail. First, most of them are hard to explain. They are overly complicated and wordy. (At Nucor everyone from the CEO to the newest employee could explain it.) Second, the rewards are small and untimely. Yearly bonuses anyone? Third, the program has to be designed in a way that the people in it (and the people running it) can't game it. Finally, everyone is subject to the same plan.

Done poorly, compensation systems foster a culture of individualism and gaming. Done properly, however, they unleash the potential of all employees.

Culture Eats Strategy: Nucor’s Ken Iverson on Building a Different Kind of Company

Much can be learned about the world by studying business.

***

The problem with most management, leadership, and business books is that many of them harp on the same self-evident points, overconfident in the usefulness of their prescriptions for would-be imitators. They tend to vastly underestimate the role of circumstance, luck, the nature of completion, and the effects of scale, among other things; falling prey to the many delusions described by Phil Rosenzweig in his incredibly important book, The Halo Effect.

The main problem Rosenzweig describes in the book is that attributes we tend to think cause great performance (culture, leadership, etc.) are often just things that are attributed to companies we already know are high-performing. There's a Halo around everything they do. (Reminding one of the fundamental attribution error.)

How many current high-fliers would ever be described as having a bad culture, or bad leadership? It would be nonsense to say it. Thus, we run into a recursiveness problem. High performing companies have great culture, and great culture is defined as the attributes that cause high performance.

In other words, when you ask someone if Apple has a great corporate culture, they will tell you it does. (And it's an extremely successful company, so of course it does.)

But when we try to pinpoint which aspects of Apple's culture make it more successful than its peers, and which would be predictive of success at other companies, we run into a difficult problem.

The Halo Effect tells us that we will find a lot of false positives. The attributes we think are causal of success are the same ones we often deem causal of failure when company performance deteriorates. This is the strategy paradox.

***

Plain Talk, by Ken Iverson, is a memoir of his time running the steel company Nucor. Despite the warning, above this book deserves your attention for a few reasons:

  • Nucor was extremely successful, for a long period, in an industry that provided huge headwinds. There are no magic pills to being successful in steel. It's generally an awful business.
  • The company did some very unusual things that we see in few other companies, even successful ones.
  • The book was recommended by a very smart friend who runs a very successful business of his own, using similar principles.
  • The author/CEO, Iverson, seems honest about the fact that many of his prescriptions are not new or different. The book is not presented as a panacea.
  • It's generally good to study outlier success or failure.

A Peculiar Kind of Success

Ken Iverson

Under Iverson, Nucor was an unusual sort of steel company compared to the Carnegie-esque behemoths of the past.

Some of its attributes remind us of companies like Berkshire Hathaway, but Nucor did it very differently. There were few acquisitions. The company was totally focused on steel. Iverson describes some of the peculiarities in the opening of the book (this was written in 1998):

  • Our 7,000 employees are the best paid workers in the industry, yet Nucor has the lowest labor cost per ton of steel produced
  • Nucor is a Fortune 500 company with sales in excess of 3.6 billion, yet we have a total of just 22 people working at our corporate headquarters, and just four layers of management from the CEO to the front-line workers.
  • Nucor operates in a “rust belt” industry that lost one out of two jobs over a 25-year time span, yet Nucor has never laid off an employee or shut down a facility for lack of work, nor have we lost money in any business quarter for more than thirty consecutive years.

That is, of course, a very interesting outcome. Most steel companies were struggling mightily when Nucor came up. Bethlehem Steel almost went bankrupt in the late 70s. (They eventually did.) Foreign competition, rising input costs, rising labor costs, commoditization…steel is about as bad a business as you could invent. Yet in Iverson's 30+ year reign, Nucor compounded its per-share earnings at a rate of about 17% per annum. There must have been something going on here — he sounds like an outsider.

Let's focus on a few things that were particularly unusual.

Extreme Decentralization

Nucor believed (and to my knowledge, still believes) strongly in decentralization. The only parallel for 22 people at headquarters in a $4 billion business is probably Berkshire itself. Capital Cities, now part of ABC, might have been another parallel.

In order to achieve that leanness at the top, power must have been pushed down pretty far into the organization. And of course, it was:

Each division operates its one or two plants as an independent enterprise. They procure their own raw materials; craft their own marketing strategies, find their own customers; set their own production quotas; hire, train, and manage their own work force; create and administer their own safety programs…In short, all the important decisions are made right there at the division. And the general manager of the division is accountable for those divisions.

This is scary for most companies. They are not willing to allow local general mangers that kind of control and responsibility. The allure of synergy and the allure of top-down controls are too strong. And once it's in place, headquarters culture has a way of taking on a life of its own. Take a look at PepsiCo, or General Electric, or any number of corporate beasts in the United States. There is huge, expensive bureaucracy at the top. It is always thus. (Of course, that keeps firms like 3G Capital in business.)

But Iverson was willing to take the tradeoffs:

“We are honest-to-god autonomous,” says Hamilton Lott, general manager of our Vulcraft Division in Florence, South Carolina. “That means we duplicate efforts made in other parts of Nucor. The company might develop the same computer program six times. But, the advantages of local autonomy are so great, we think it's worth it.”

Any of you who have worked in a modern corporation know how unusual this mentality is. Who would allow the same company to develop the same software six times? Why not increase knowledge sharing and synergies?

Part of the problem is that the tremendous benefits of local autonomy are less immediately tangible than the costs. Berkshire has dealt with this for years. Every time one of Buffett's subordinates acts up, and it happens pretty darn infrequently by our count, people pipe up and ask why he isn't imposing more rigid oversight on them. It's very simple: the long-term benefits of trust-giving have far outweighed the occasional cost of non-compliance.

Call this an “unrecognized simplicity.” Nucor's corporate overhead expense was so small they didn't even bother allocating corporate expenses to the divisions. That is rare.

The other under-appreciated value of decentralized control is that great ideas tend to rise from the bottom rather than being dictated by the executives. Iverson claims that many or even most of Nucor's great innovations came from down in the divisions. The company merely had to be smart enough to harness them.

This has happened elsewhere in Corporate America. Look at McDonald's. Do you think Ray Kroc invented the Chicken McNugget, the Big Mac, and the Filet ‘o Fish? Do you think he figured out how to keep millions of pounds of potatoes fresh and get them to customers tasting exactly the same every time? No. But franchisees and suppliers did. He just had to be smart enough to help the ideas spread. (Hamburger U, anyone?)

Simple and Precise Strategy

In the book Good Strategy, Bad Strategy by Richard Rumelt (highly recommended, and we've written about it before), the author is clear that what makes a good strategy is that it's clear and that it's precise, a real call to a specific action:

The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action. The guiding policy specifies the approach to dealing with the obstacles called out in the diagnosis. It is like a signpost, marking the direction forward but not defining the details of the trip. Coherent actions are feasible coordinated policies, resource commitments, and actions designed to carry out the guiding policy.

This is precisely what Iverson did at Nucor:

We don't clutter the picture with lofty vision statements, ask employees to pursue vague, intermediate objectives like “excellence,” or burden them with complex business strategies. Our competitive strategy is to build manufacturing facilities economically, and to operate them efficiently. Period.

Simple but not easy.

Was the technology that went into developing and implementing this strategy simple? I'm not an expert in metallurgy, but I doubt it. The modern steel company is quite efficient and quite advanced. Nucor made major strides like the mini-mill and thin-slab casting of flat-rolled steel. Whether that kind of technology would have been given a chance to succeed in a different culture is hard to say.  We can't re-run history but Nucor's purposeful drive seems to have fostered the right environment.

 

Remove Unnecessary Hierarchy

Ultimately, it's hard to build a great, supportive, seamless web of deserved trust if the executives are consistently treated as “above the fray” – subject to a different level of treatment than the rank and file. This is the way it is in most organizations.

The results tend to be predictable. Envy, plus a violation of basic Kantian fairness tendency, will create a lot of hatred. You can't put the managers and the executives in first class and stick the associates in coach and expect anything but resentment. It's basic human nature, driven by biology. Nucor was smart enough to avoid this folly:

Our executives get the same group insurance, same holidays, and same vacations as everybody else. They eat lunch in the same cafeterias. They fly economy class on regular commercial flights (although we do allow the use of frequent flyer upgrades). We have no executive suites and no executive cars. At headquarters, our “corporate dining room” is the deli across the street.

Our executives wouldn't have it any other way. They see our egalitarian culture serving their interests as much as the interests of our employees. For one thing, our mangers don't have to waste time fretting over their chances to get the fancy corner office or arguing over who gets to use the company plane. We don't have those perks, and we imagine they would cause a lot more stress than fulfillment. What a bunch of nonsense! Chasing meaningless status symbols and tokens of power…

Nucor had essentially four promotions available: Supervisor, Department Manager, General Manger, and Chairman (Iverson himself). That's it. I can imagine that over all those years of growth, more than one consultant tried to get Iverson to create a whole lot of bureaucracy, but he wisely resisted. The costs (such as the mathematically unavoidable large spans of control due to fewer managers in the system) were once again greatly outweighed by the benefits. Another unrecognized simplicity.

And when it came time for pay cuts, everyone shared in the pain. What a simple, yet generally unused concept:

Why, then, would workers who had endured deep cuts in pay and who had every reason to fear for their futures reach out to share a laugh with a manager passing through a mill? Simple. No employee was being asked to carry more than his or her part of the burden.

You see, their department heads had taken pay cuts of up to 40 percent, and the general managers and other officers of the company were earning 50-60 percent less than we had made in preceding years. My own pay dropped that year to about $110,000, from about $450,000 the year before. We not only shared the pain, but doled out the lion's share to the people at the top.

Think about what an inversion that is of most organizations, where the CEO takes a minor cut in pay (or worse, no cut) and hundreds of low-level employees simply lose their jobs. Wouldn't most places work better with Nucor's ethos? The fact that they did this in the highly cyclical steel business gives some tailwind to the idea. It wasn't a story like Google, where constant success has allowed them to pamper employees financially and otherwise. Nucor managed to avoid layoffs and share in the pain in a business that, by necessity, is constantly offering pain to share.

A Postscript on the Post-Iverson Era; Implications for Investors 

In the final analysis, Nucor probably didn't have any core attributes that were unavailable to its competitors. It simply made better choices and was more fanatical about sticking to them. The resulting success was deserved. This is why culture eats strategy.

But the postscript to the Iverson era has been interesting, at least from the perspective of the passive investor. Nucor was a brilliant investment in Iverson's time as manager, but if you'd bought the stock in the early 90s when Iverson left the CEO post, your results would have been pretty mediocre since. Can we see why? Let's deduce a few reasons.

  • Partially, the stock was fairly rich at that time – trading for something like 40x price/earnings. That's high even for a good industrial company. It's not so high now. But their fundamental performance has not been nearly as impressive either, in the time since Iverson left, especially in the last five or six years.
  • Partially, the effects of compound interest have served to slow down an increasingly large corporation. Nucor is now a giant in the steel business. They started off as a tadpole. If the company's net earnings had continued to grow at 17% per annum, they would currently be earning $4 billion a year, versus a little over $120 million in 1993. There's only so much profit available in steel.
  • Is there a tinge of Halo Effect here, as described at the beginning of the piece? Perhaps. Iverson would be the first to say his prescriptions were not that ground-breaking. I tend to think some of the attributes above did contribute greatly to its unusual success, but more of the success may have been situational and strategy driven than Iverson recognized.
  • Even more important might be to recognize that the steel business always was a fundamentally hard one, and even the best ships might struggle on a stormy enough ocean. Iverson and his team rowed very hard and successfully for many years, and that has continued to this day. Bethlehem Steel went bankrupt in 2001 and Nucor made money that year. U.S. Steel has been bleeding red ink for years and Nucor, although less profitable than it once was, has still made money. But the ocean current is what it is.

So even if Nucor has been better than most of its competitors in the last ten or twenty years, and I suspect it has, an investor would have had to ask him or herself: Do I want to be in the steel business at all? As Buffett used to say, something not worth doing well is often not worth doing at all.

Regardless, the lessons from Plain Talk show that the roads less traveled can be worth exploring. They're not that complicated. But they work.