Turn on the TV or read the blogosphere and try to figure what is truly going on and you will soon realize that almost all the people either in charge of fixing the problems or the people in charge of commenting on the people in charge are observers themselves. The more I have thought about this, the more I have come to realize that we actually don’t play capitalism at all. We play Fantasy Capitalism.

We have developed a “meta reality” that is distanced from reality. Our culture seems to be obsessed or hijacked by people who claim they know the real world. But all they know is how to bet on the real world. If you look at where money has been made in the past 20 years I would argue a huge part of value creation has gone to people who have placed bets on what other people will eventually do. A smaller portion of that wealth has gone to the actual originators and/or implementers of those ideas.

Is this a problem?

I would say it is an opportunity. I think morality, as one example, fades with distance. Look at the mortgage debacle. The people in charge of those complicated instruments are not bad people. They just had limited visibility. They just didn’t see the people who were ultimately affected. They placed algorithmic bets on faceless papers that had no feelings and no spirit.

I have had the great fortune in my life to work with many entrepreneurs. I believe America and the free world very much were built by these kinds of people. They represent the kind of free market capitalism that I believe we would all be better off if we practiced more of. In this time of mourning the loss of one of the greatest, Steve Jobs, it is important that we reflect on what we can learn from them. Most of them (obviously there are bad apples in every basket) share a few common traits that are worth chewing on:

1. Their idea is their bet and the bet is not their idea

I call this “purpose bigger than product^®”. They are all obsessed by an idea. They don’t confuse means and ends. Sure, over time, they too like making money. But it is never what drove them to do what they did. They have a more respectful and, may I say, enlightened relationship with money, fame and the “objectification” of success than the cadre of billionaires we see today. 

2. They build to last and they often don’t last to see what they built

They are involved in something much bigger than themselves. And they know it. They don’t care. Or rather, they care so much about their idea that their own role is secondary. In fact, they build things for the very purpose of it lasting. Some are so visionary they start projects that for sure won’t be completed long before their grandchildren are gone. Now that’s vision! They don’t involve themselves with exit plans or quarterly valuations or any of the short-term diseases that I believe play too much of a role in today’s value creation conversations.  

3. They keep things simple

Talk to them and their worldview is often refreshingly simple. They have deep conviction and they are as clear about what not to do as they are about what to do. They rarely do anything they don’t understand. They hate bureaucracies, process or political correctness. They call a spade a spade and if something walks like a duck, smells like a duck and behaves like a duck they will call it a duck. For sure.

4. They keep things real

They really do care about their products and how they affect the lives of their customers. They use their products and are obsessed with seeing them grow and improve. If and when something goes wrong they are in the lab, plant or factory to fix, tweak and change things for the better. They tinker, care and tweak. Constantly. Most of their conversations in their companies are therefore about products and customers and less about markets, politics and positioning. They don’t spend much time with lawyers, bankers or PR firms.

5. They are optimists

I saved this one for last. Because I do believe it is the most important point. I don’t believe you can build a strong society from a negative position. And I do believe too many of our leaders today aren’t truly optimistic. In fact, too much of economic activity has become betting “against’ something. That is a foreign concept for an entrepreneur. When someone places a bet against something, isn’t there then an incentive to help that negative outcome to happen? Do we want any intellectual energy in our society spent on making bad things happen? Seriously? What is the true redeeming social value of short–selling, complicated hedges and large speculative positions on important feedstock of society?

It’s easy to think that you are an expert just because you have a pen or you can read. But anyone who has tried to build a real business knows how hard it is to design a product or service, package it appropriately, find your customer base, price it with enough margin for your costs and enough incentive for your customers and then finally execute this process on a continuous basis with ever improving quality. It’s not so easy. It is much easier to get a sophisticated education at a nice University and then spend the rest of your life making bets on what other people are going to do. Particularly when, for some strange reason, we have come to value that activity much higher than the original activity of actually doing it. Go figure?

Obviously I don’t have a grand plan or solution for exactly how to change this. What I have chosen to do is to be a humble servant in the vineyard of real capitalism. I am trying hard, with many good partners, to build great companies that all have a “purpose bigger than their product^®” and that hopefully will serve many good needs and also produce good financial returns for those who invested with me along the way.

But I am a concerned capitalist. I do think we would all be better off if we somehow stopped having so “many second opinions from the cheap seats” and if more got in to the game of actually playing rather than betting on the ones that do.

Capitalism has become too much about the conversation about reality vs the reality itself. We have so much work to do. We have to inspire the future generation to build real companies, with real customers, with real income, with real assets. That should be the primary goal of any economy. We can’t all be speculators, day traders, hedge fund managers, journalists, reporters, bloggers and other forms of spectators to the real economy.

I am sure regulation must play some form of role. While I am not for regulation in general or large governments in particular, I don’t think the markets will solve this one alone. I would like to see more transparent pricing of “bads” (things we know are bad for our selves, our planet or our children) and perhaps penalizing taxation (as opposed to incentivized as we have today) on short-term gains. Regulation should inspire investments in long-term real value creation. Not short term speculation.

I’d say, it is time to try the real form of capitalism.  

It’s Quality, Not Quantity

What fast-food king McDonald's can teach us about recovery

With all the news coverage today on financial mismanagement, I can tell you from first-hand experience that there is one company that continues to prosper amid all the chaos. And I think it is worth trying to understand why.

I have spent most of my career inside McDonald’s. First, as a crew member, peeling potatoes and flipping burgers in my native Stockholm, Sweden; then, as most McDonald’s executives, advancing through the ranks and learning the tricks of the trade through marketing, training, HR and operations. After nearly 10 years at the helm of the Swedish operations, I moved to the U.S. to assume the role of chief strategy officer.

This was a time when McDonald’s was facing its toughest headwind in the history of the company. Some of it was self-inflicted; some of it was just evolutionary. Most institutions die young, as they fail to reinvent themselves. As we celebrate the 200th anniversary of Darwin, it is important to remind ourselves that only the most adaptable species indeed survive. So it didn’t come as a real surprise that after decades of unsurpassed growth rates, even McDonald’s would stall. It happens to almost everyone. But as I studied the corporate history books, I realized that the rather short list of companies that had reinvented themselves was intimidating and certainly humbling.

At McDonald’s, we tried many things. Some might say, too many things. But at least we tried them with a sincere intention to find our “inner voice” again. The job as chief strategist in times of rediscovery is closer to “corporate psychiatrist/philosopher” than traditional strategist. Your tools are less about spreadsheets and data and more about introspection and deep discovery. If you once were successful, chances are that somewhere in the past are also the building blocks of your future. Your job is to find whatever it was that connected you to your audience in the past and then to adjust it to be more relevant in today’s marketplace — without losing its essential connectivity.

Fortunately, there were many people wanting us to succeed. But there were also many, often loud, voices that couldn’t wait to see us fail. Perhaps, they inspired us to try harder. Few things motivate us as much as proving the cynics wrong.

What emerged out of years of hard work were two important insights. Both are simple and powerful. The first was that there was really nothing wrong with the original premise of our business model. As our chief marketing officer at the time, Larry Light, said: “The time we need a new business model is when we believe that our customers no longer ‘Deserve a Break Today.’” Clearly, in today’s time-starved landscape, this was not the case. The second insight was that we had confused size with success. Over time, we started to believe that one more restaurant meant “job well done.” And sooner rather than later, all our metrics, all of our incentives and all of our capital were chasing growth — the bad form of growth: growth from quantity, not quality.

As we dug in, we realized that growth must be “deserved” in order to be sustainable. As long as you are getting better, it is good to get bigger. But if you are buying size, particularly at the cost of quality, then you are on a slippery and ultimately unsustainable slope. In 2003, we launched our new strategy, “Growth from being better.” We aligned the entire company around this very simple idea. Human and financial resources were now being directed at truly improving, not just increasing, their activities.

The rest is really history. The turnaround of McDonald’s has been a remarkable one. To many observers, it has a bit of a surprise. To others, perhaps their own worst nightmare.

To me, it has been a labor of love for a few reasons. First, McDonald’s is an important company. Its success matters to so many — particularly the hundreds of thousands (probably millions) of people who get their first job there and who learn critical skills for life. Secondly, McDonald’s is a decentralized company. It is really a system of companies — thousands of them. Most of them are small entrepreneurs who have invested their savings in a dream to be in business for themselves, but not by themselves. And finally, McDonald’s restaurants serve almost 60 million daily breaks of great value. People depend on getting food served fast. Food they can trust, and food they can afford. What’s even better, McDonald’s is committed to offering more and more healthier choices on its menu and has made significant changes to its line up of “better-for-you” choices in the past few years.

I believe there are important lessons that can be learned from the remarkable turnaround at McDonald’s.

1. How you grow matters as much as that you grow.
Our financial services industry would have benefitted from a focus on “growth by quality, not by quantity”. Clearly, the “growth at any cost” credo of some led to exactly that: any cost.

2.Changing your business model may not be needed, but belief in it is.
Start by asking yourself what business you are in and whether customers still have a need for it. If they do, commit to it — fully. At McDonald’s, we knew that people still “deserved a break today” and they were willing to let go of all other initiatives (many of them very exciting) in order to demonstrate unwavering commitment to the core business.

3. None of us is as good as all of us. It’s the system, stupid!
Large businesses, the financial system and the government are all complex systems. They are not top-down. They are colorful and integrated tapestries spun together by cultural, geographical, ethnic and historical threads. Understanding that you are leading a system, not a company or a person, is a critical insight if you want to successfully change something large. McDonald’s is extremely good at this. To some people (me included), it is a frustrating process. It takes time. It requires buy-in and plenty of patience and tolerance from everyone. It also requires adequate policing, oversight and incredibly detailed measurement systems. This is tedious work, and intimidating to those being measured. But it’s needed.

Large systems work best with a hard-wired operating system in the hub that enables innovation, entrepreneurship and decision-making in the nodes. The Internet would not have happened without HTML. Our country would not have prospered without the U.S. Constitution. But it is worth all the pain. And it must start with the humility that you are in the service of something larger than your own institution. As we say at BE-CAUSE — the company I founded — a purpose bigger than your product.

4. Plan your work, and work your plan.
At McDonald’s we created a “plan to win.” Some would argue that it wasn’t perfect. Perhaps it wasn’t, but we decided that it was. And we haven’t looked back. Even through tragic circumstances — losing two CEOs in less than one year due to tragic deaths — the plan stayed intact and is still central today to the focus and alignment of the organization.

So often, companies feel a need to change something for the sake of changing it. I say, “If it works, don’t change it.”

This blog was originally posted on LRN's Hows Matter site

Unfortunately, one of the most tragic aspects of human progress is that we only learn the real lessons the hard way. Or as Will Rogers famously said: “Good judgment comes from experience, and experience comes from bad judgment.”

Obviously, 2008 was a tragic year in world economic affairs. As the dust settles, we are like archeologists trying to understand what happened, primarily from studying the wreckages of once-impressive enterprises. With time, the clarity and precision of our understanding will no doubt be enhanced and, hopefully, we can at least avoid making the same mistakes in the future. Rest assured, we will make new ones. Such is life. And that’s a good thing. How boring life would be without the anxiety of the declines followed by the exhilaration of achieving new heights previously unimagined. One just wishes that the pain associated with the falls could be better prevented.

One aspect of this crisis that is particularly troubling is the asymmetric nature of the burden of pain. When looking at the past five years of Wall Street bonuses and other forms of financial rewards, it is clear that most of the financial industry executives are likely to be net positive out of this ordeal: The size of their accumulated rewards prior to the crises most likely outweighs their more-recent loss of stock options, direct compensation and short-term humility. Compare this to the many more innocent investors, homeowners and other businesses that have lost a significant part of their net worth without having had the ability to cash in as the financial agents did.

As an entrepreneur, corporate executive, board member and investor, I have during my career always been fascinated with the financial industry. Clearly, the capital markets play a central role in any modern economy. Providing access to capital is the lubricant of our global economy. Without it there will be no forward motion. But what is the price of this lubrication? I have spent most of my career in the restaurant industry, and food, it could be argued, is of similar importance to human nutrition as capital is to economic prosperity. But we don’t pay restaurant operators nearly what we pay bankers.

In the aftermath of this financial tragedy, we ought to have a constructive public discussion centered on what contributions in society should have the highest rewards. To be clear, this is a discussion — I am not advocating regulation or a committee deciding who makes what; I am not allocating blame, either. People make what they make, and the broader society tends to deserve the bankers, businesses, government and media it deserves. Yet another sobering reality of life.

There are many vectors in society that are mysteriously undervalued. Why do we pay so little for great teachers when we know that a better-educated future population would most likely make all of us much richer? Why do we only spend 3 percent of our trillions of dollars in health care investments on prevention when we know that 80 percent of our chronic diseases, which account for a significant percentage of our total health care bill, could often be naturally avoided? Why did we not invest in — particularly in the aftermath of 9/11 — energy solutions that could not only mitigate risks of global warming but also reduce our vast spending on wars fueled by oil that, to a large extent, is consumed by us? There are many more examples, of course.

One could envision many interesting voices passionately arguing for and against different aspects of this issue. The most common voice heard is that we should let the markets sort it out. But who are the markets? Aren’t we the markets?

Clearly, there is only one solution. As Jerry Garcia so wonderfully put it: “Somebody has to do something, and it is incredibly pathetic that it has to be us.” We all —everybody — have to engage and care about where we put our money, where we shop, what banks we do business with, what we ask from our financial advisors and how we value the most important parts of our lives. When you step aside, it does seem bizarre that we appear almost obsessed with shaving off a dollar or two from many items we buy weekly, when we nearly ignore all of the thousands of dollars that are flushed away by people we don’t know in banks and institutions we don’t visit. When did you last visit with the people who manage your 401(k)?

While I don’t have a solution to the problem itself other than to raise the topic and hope that a constructive dialogue ensues, I’d like to contribute two themes that I believe in, and one of them so much that I have devoted my career to it

The first is the time horizon for our financial expectations. I do believe that the longer the horizon, the fewer the problems — within reason. Sure, there are exceptions to every rule, but in general we all value people who spend a large amount of time creating something of great value. Longevity cures a lot of ills. Anything that has stood the test of time is likely to stand a bit longer, and therefore the risk of a large reward for the creators feels more deserved. I learned this from a union leader in Sweden many years ago when we discussed wealth. He told me: “I don’t have any problem with a neighbor of mine, whom I see every day working hard in his yard, having a much nicer yard than I do. I am not jealous. I am impressed. In fact, he inspires me to work harder in my own yard.” I do think it is important for society to reward people the most that we value the most. That creates less friction, less partisanship and less division.

The other theme is one of purpose — a purpose bigger than your product. As mentor, friend and author Charles Handy once said: “Where there is no vision, there you find short-termism, for then there is no reason to compromise today for an unknown tomorrow.” One possible starting point of self-reflection for members of the financial industry is to try to identify their purpose beyond annual bonuses and returns only. If they saw their industry as the true Jiffy Lube of capitalism perhaps many of the more extreme risks and behaviors that today so clearly have exacerbated our crisis could have been avoided. If mortgage industries saw their job as providing homes, not loans, then perhaps we’d have a different housing market.

There is nothing wrong with making money. But making money is always an outcome of what you do — not just an income. If we continue to reward income more than outcome I am rather certain that we won’t like the result.

Author and columnist Thomas Friedman recently said in The New York Times: “We’ve fallen into a trend of diverting and rewarding the best of our collective I.Q. to people doing financial engineering rather than real engineering. These rocket scientists and engineers were designing complex financial instruments to make money out of money - rather than designing cars, phones, computers, teaching tools, Internet programs and medical equipment that could improve the lives and productivity of millions.”

When I read your greenwashing post (about whether implementing chief sustainability officers is a sign of a much-welcomed new approach to larger businesses), it triggered a need to write something about what I believe needs to happen. The problem is less about whether companies are taking ethics or HOWs seriously. I believe they are and I believe they always have been. Most people are honest people. They want to do the right thing. Call me naive, but that is my experience. The issue instead concerns the governance surrounding these officers and who they ultimately answer to.

Most people operate under the assumption that “what interests my boss fascinates me.” In other words they will do what is monitored, measured, and expected. There are two gravitational forces pulling against our natural tendency for doing the right thing. We need to be more aware of them both. First, there is distance in people. Second, there is distance in time.

The first distance has to do with the distance between heart and head that has been created by the many layers of professional managers existing between companies’ owners and their hired executives. The courageous and truly sustainable decisions are often being made by the owners of businesses. They have everything to lose and everything to gain. From that position there is often dilution down the chain of ownership. The further away you are the more tactical your decision-making often gets. Your name is at stake (your reputation is not as much, at least so you think) as long as your numbers are good. Of course this is not true, but it is a persistent illusion.

The other force is the the time horizon we have for our investment activities. I have long been inspired by the Egyptians who decided to build the pyramids. These were people that had a vision so grand they knew that only their grandchildren would be there to enjoy the fruits of that vision. As Charles Handy so eloquently writes: “Set your sights on immortality, or as close to it as you can get, and most of the ethical dilemmas sort themselves out. Today the skyscrapers of business tower over the old cathedrals. We must hope that those who build the enterprises within them are cathedral builders in their turn, for if they fail us then we all fail.”

It is of course a viable question. In today's landcape where CEO's average life expentancy is shorter than time between political elections it is understandable that CEO's feel the pressure to produce enough short term results so that they can extend their tenure and hopefully enhance the future prospects of the company they are leading.

Behind the anxiety of this question lies an interesting paradox. We are trained in a mechanistic, linear way and are not appropriately prepared for the quantum world we now live in. A world where there are connections beyond imagination and where order and chaos are more related than perhaps some of us thought. We are trained to "put our mind to it". We are taught that if we focus hard enough the rewards will come. Of course this is true at a general level. Effort matters. But we need to be clear on what we are focusing on. In the world of rewards and returns we need to focus on inputs rather than outputs.

Most important outcomes are rarely the product of focusing on those outcomes themselves. Take love for example. We don't experience love by focusing on being loved. The same logic is true for most sports. If we focus on winning rather than each shot or each play, we probably lose. The same is true for profits. When we focus on how a company better serves its constituents the result is often that profit growth. But companies or people that set out to "just make money" often don't. Peter Drucker used to say that "most analysts don't understand businesses. They think business make money but businesses make shoes".

This is the problem and the power of purpose. If you set out to have a purpose bigger than your product in order to make more money you will be disappointed. It won't work. But if you are genuine. If you are honest, transparent and passionate about how your company is contributing to improving the lives of its constituents you will build stronger connections, more loyalty and ultimately higher profits. Welcome to the Purpose/Profit Paradox.

As someone having been involved in CSR and corporate strategy for decades these topics are near and dear to my heart and also topics that require constant attention since the field is moving along with a quite rapid and fascinating pace.

All thoughts are welcome.