How Google Works: Eric Schmidt and Jonathan Rosenberg

Anyone purchasing tech stocks of social media or search firms should read this book to understand the industry. The strength of the book involves the 360 view of a company, from management, employees, and the board. Such a broad perspective is rare in most management books. As a manager, I gain insight into some of the practices of a company that contains a diverse workforce that demands excellence from those workers, and provides a culture that nourishes achievement. As an employee, I could extract the expectations of a very successful and innovative company and what that company looks for in its employees. Finally, as a member of a board, the book clearly delineates the role of board members and that of management. That the authors both teach at Stanford Business School allow readers to "attend" a course for the price of the book or a library card.

The book divides into eight chapters, Introduction--Lessons learned from the front row, Culture--Believe Your own Slogans, Strategy--Your plan is wrong, Talent--Hiring is the most important thing you do, Decisions--The true meaning of consensus, Communications--Be a damn good router, Innovation--Create the primordial ooze, and Conclusion--Imaging the unimaginable. These titles sound life ones that you would find in any management book, but the secret sauce is the details and the reliance on data and statistics to support the conclusions that the authors draw.

Upper management creates and determines company culture. Fitting the stereotype of a high tech firm, Google promotes a flat, democratic, adaptive, experimental, and open organizational environment. Things the founders and employees care about and value. Operating on a platform of the internet, management faces these realities: "First, the Internet has made information free, copious, and ubiquitous . . . Second, mobile devices and networks have made global reach and continuous connectivity widely available. A third, cloud computing has put practically infinite computing power and storage and a host of sophisticated tools and applications at everyone's disposal, on an inexpensive, pay-as-you-go basis" (p. 11).  Faced with these forces, Google built a firm full of people the authors label as "smart creative", individuals that differ from the now prevalent, one-dimensional "knowledge workers" because "they are multidimensional, usually combining technical depth with business savvy and creative flair" (p. 17). To keep their workforce networked, Google crowds employees together in close working quarters, tolerates messiness, ignores rank and prizes data, turns the Rule of Seven on its head, and organizes groups functionally and not according to business divisions and product lines to avoid silos.

In the management sphere, the authors discuss strategy, talent, decision making, communication, and innovation. Regarding strategy, the authors take an iterative approach to a company plan, "based on a foundational set of principles that are grounded in how things work today and that guide you plan as it shape-shifts its way to success. The plan is fluid, the foundation stable" (p. 69). The plan rests on technical observations and not on marketing research. Who would have thought Google would innovate the car industry? The book contains Eric Schmidt's format for successful strategy meeting that is worth reading. On the topic of talent and hiring, the authors acknowledge that building a great company entails finding excellent people--the responsibility of not only management but the entire organization. The authors present advise on career-building as well as hiring tips. On the topic of decision making, the authors stress management timing as well as the rightness, the data supporting, of a decision.  Management enables communication to flow--not information hoarders, but information routers. Finally, the sum total of the organization and culture creates a medium where innovation happens.

As an employee, the book offers guidance on the expectations in the world of "smart creatives". The sections of the book on "Google's Hiring Dos and Don'ts . . . Career--Choose the F-16, Treat your career like you are surfing, and Always listen for those who get technology, Plan your career, Statistics is the new plastics, Know your elevator pitch, Go abroad, and Combine passion with contribution" are all worth reading.

Finally, as a member of a board that has had its attention diverted from strategy and product to governance and lawsuits, I found Google's caveat interesting--"If this isn't true, get new board members" (p. 195). A lack of focus erodes business momentum and distracts leadership and strategic thinking.

Schmidt, E. & Rosenberg, J. (2014). How Google Works. New York: Grand Central Publishing.

Boards that Lead : When to Take Charge, When to Partner, and When to Stay Out of the Way

Charan, Ram, Carey, Dennis, Useem, Dennis. 2014. Boards That Lead : When to take charge, when to Partner, and when to stay out of the Way.Boston: Harvard Business Review Press.

In the introduction, the authors list the primary duties of a board--"to select, retain, or dismiss the chief executive, to establish a climate of ethics and integrity, to set the goals and incentives for the executive team, and to pinpoint the company's central idea, risk appetite, and capital structure" (p. 1). With these responsibilities, a board bear a critical portion of the success or failure of an enterprise along with the executive team. The board ideally acts in concert with the management team. The ability of the board to contribute to the enterprise's achievement and partner with management stems from three board attributes--"human dynamics, social architecture, and business leadership" (p. 3).

In line with these goals and with the growing assertiveness of boards, the authors noticed in those that they examined an increase in board functions. "They are taking charge of CEO succession, executive compensation, goal choices, merger decisions, risk tolerance, and other functions that have traditionally been the province of management" (p. 5). As a result, the authors noted the following trends: 90 percent of boards have a lead director, 43 percent of boards have separated the functions of chairman of the board of directors and chief executive officers, the poison pill option has declined to 8 percent, and executive compensation has evolved from fixed pay to "contingent compensation that varies with financial results that directly benefit shareholders" (p. 18).

Traditional obligations for board directors are duties of care and loyalty. The authors define these as, duty of care, "requiring directors to exercise reasonable caution in executing board responsibilities that could harm others if not performed well" (p. 17); and duty of loyalty, requiring that directors exercise good fiduciary judgment on behalf of stockholders" (p. 17).To these obligations, the authors add the "duty of leadership", requiring that directors handle "the increasing complexity of company decisions across virtually every facet of doing business, from sales channels and product categories to price points and product markets" (p. 19). Specifically, the complexity encompasses the overwhelming amount of information must consume and the international nature of business, with its various "regulatory regimes, consumer preferences, and cultural traditions" (p. 19).

From this foundation, the authors delve into the four elements of their board leadership model: (1) strategic decision making, (2) the duties of care and loyalty reinforced with "attention on company strategy, capital allocation, executive succession, management compensation, talent development, and enterprise risk" (p. 21), (3) succession planning, obtaining sufficient information to understand clear the current state to collaborate with executive management when necessary. With these elements, the authors identify four board of director engagement types: "Boards that take charge, boards that partner, boards that monitor, boards that stay out of the way" (p. 22). Because each of these forms of engagement fit within certain circumstances, boards must select the appropriate posture when it is warranted.

The authors offer this checklist.

"Director's checklist for leadership decisions" (p. 24)
"When to take charge
        Central idea
        Selection  of chief executive officer
       Board competence, architecture, and modus operandi
       Ethics and integrity
       Compensation architecture
When to Partner
       Strategy, capital allocation
       Financial goals, shareholder value, stakeholder balance
       Risk appetite
       Resource allocation
       Talent development
       Culture of decisiveness
When to Stay Out of the Way
        Execution
        Operations
        Areas of delegated authority
        Nonstrategic decisions
        Excluded by board charter

 The remainder of the book divides into these sections, Boards that Work, Leading the Leaders, Value Creation. Within Part 1, Boards that Work, the authors discuss, "First things First: Define the Central Idea, Recruit Directors who Build Value, Root Out Dysfunction, Wanted: A Leader of the Board".
Part 2, Leading the Leaders covers CEO Succession: The Ultimate Decision, A Question of Fit, Spotting, Catching, or Existing a Falling CEO. The last, Part 3, Value Creation, addresses Turning Risk into Opportunity, Staying Out of the Way, The Leadership Difference, and A Revised Definition of Corporate Governance.

How to evaluate a Stock by reviewing Financial Information

While reading the book, Financial Intelligence, A Manager's Guide to Knowing What the Numbers Really Mean, I had the annual report of Intrepid Potash in front of me. Because I had paid more than what the stock currently sells for, I wanted to assess whether my belief in its long term potential justified keeping it. For a non-financial analyst, this book offers the basic principles in a readable, easily comprehensible way.

 Having worked for a software company that manufactured accounting applications for Fortune 500 and smaller companies, I have an understanding of accounting principles and month-end, and year-end processing, the balance sheet, and income statements.  What I lacked was how to digest efficiently quarterly and annual financial report information and how to spot quickly the ways companies can distort the numbers to improve bottom-line results. The authors of Financial Intelligence claimed as their philosophy, "that everyone in a company does better when they understand how financial success is measured and how they have an impact on the company's performance" (p. xi) and its first chapter is entitled, You can't always trust the numbers.

In that chapter the authors list a couple of ways a company blatantly 'doctors' its numbers:
1. "One time charge" mechanism: when a company accumulates many charges and
lumps them into one quarter, improving the financials of future quarters instead of recording the charges when they in fact occurred.
2. Financial shell game: Moving expenses from one account to another to improve the bottom line.
3. Retiree benefit accruals: Lowering the numbers even though the commitment remains at the higher rate (this generated, according to the authors, a front page article in the Wall Street Journal.)
4. Determining when to recognize revenue: Although FASB has some rules regarding when companies in some industries can recognize revenue, the authors noted: "According to a 2007 study by the Deloitte Forensic Center, 41 percent of fraud cases pursued by the Securities and Exchange Commission between 2001 and 2006 involved revenue recognition" (p. 8). Options that companies have used include "When a contract is signed, When the product or service is delivered, When the invoice is sent out, When the bill is paid" (p. 8).
5. Accrual, allocation, and depreciation estimated and subjective amounts.

 Part 2 of the book, The (Many) Peculiarities of the Income Statement, covers the components of the income statement--revenue, sales, deferred revenue, earning per share, cost of goods sold, operating expenses, depreciation and amortization,  and one-time charges. The last two items I previously mentioned as areas for financial statement manipulation. Given that focus, the authors begin this part of the book with the chapter, Profit is an Estimate. They elaborate on the topic of profit by discussing it in it many variations, gross profit, operating profit (EBIT), and net profit. To this mix, the authors add contribution margin, "sales minus variable costs. It shows the profit you are earning on what you sell before you account for fixed costs" (p. 81). Part 3, The Balance Sheet Reveals the Most, delved into the sections of that financial statement. According to the authors, the balance sheet constitutes "a statement of what a business owns and what it owes at a particular point in time" (p. 90). Assets reflect what a business owns and liabilities, what it owes.

Part 4, Cash is King, demonstrates by the title the importance that the authors put on this one item.
The authors cite Warren Buffet as an investor that examines the cash position of companies most closely. The authors compress his laser vision on cash by isolating his three practices: "First, he evaluates a business on its long-term rather than its short-term prospects.  Second, he always looks for businesses he understands. . . . And third, when he examines financial statements, he places the greatest emphasis on a measure of cash flow that he calls owner earnings" (p. 125). Obviously, any cash flow that results in owners earnings derives from inflows rather than outflows. Of the cash flows, operating activities, investing activities, and financing activities cause movement. The first and most important cash flow, operating activities, clearly displays the financial health of the firm; it makes more than it spends or vise versa. The second, discloses the amount of money the company spends on future investments. The last, documents how much the business depends on outside financing for its survival. Therefore, an investor needs to examine the connection between profit and cash and where the firm obtains cash to generate its profit.

Part 5, Learning what the numbers are really telling you, documents the various types of ratios investors can use to analyze statements--profitability ratios, leverage ratios, liquidity ratios, and efficiency ratios. For an investor, the authors list five measures--revenue growth by year, earnings per share, EBITDA, free cash flow, return on total capital or return on equity. For the business owner, the authors zero in on the percent of sales figure.

No financial management book would be complete without a discussion of return on investment (ROI) to evaluate capital purchases. This book presents the three methods of calculating RIO, the payback method, the net present value method, and the internal rate of return method.

Finally, the authors advocate educating employees, family, and friends on financial literacy to improve company and personal financial management performance.