Seek, don't hide

What has emerged over the past year with great clarity is that there are two forms of confidence governing business leadership behaviour - external and internal.

Usually, it is external confidence that is referenced - where leadership takes a view on the state of the business and economic environment, including the apparent or perceived confidence of others (consumers and businesses), and makes decisions according to how they feel.

This type of confidence will influence new product development, decisions about expansion, investments, marketing, debt or financing. This is where caution creeps in, through 'gut feel' or from economic data. Business leaders are quite used to the normal cycles of economic recession; they have largely learned to weather the conditions and batten down the hatches as the mood or economic indicators dictate.

But this recession and downturn is very different. No one has ever seen anything of this nature. Although the actual recessions in the UK, EU and US have not been dramatic, they have been sustained, unpredictable and fraught with new types of doubts derived from credit and liquidity issues at the bank and sovereign level.

The fuel crisis of the 1970s was a shock and the depression of the 1930s was far worse but, this time, we are seeing chancellors looking and sounding scared; Ben Bernanke, chairman of the US Federal Reserve, is sounding unsure and, in short, no one has the answers to solve the financial crisis that has been unfolding in many phases since mid 2007.

The crash of late 2008 led to the recession of 2009 and the usual drop in external confidence. But therein lies a huge paradox: it partly speaks to the lag effect but, throughout 2008, the financial crisis, though very serious, never reached into the commercial or consumer economy in a significant way. Two thousand and ten looked like being the recovery year and enough people believed it for external confidence to rise and help the recovery. Then it all slowed down again in late 2010 and growth in the Western world has been flat ever since. In part, this is due to the confidence knock that the Eurozone crisis has caused, as well as the stagnant US economy.

In truth, the recovery was always fragile, like the confidence that was also fragile during 2010.

Now we are seeing repeated evidence of a general weak external confidence in the economy and, more seriously, a weakening in the self-confidence of business leaders and their leadership teams. This is perhaps understandable since the scale and nature of the downturn is unprecedented and no one is predicting the time of full global recovery. Financial and economic commentators are generally gloomy and the governor of the Bank of England, Sir Mervyn King, has been unwisely pessimistic in his pronouncements.

This has led to a loss of external and internal confidence, which is manifested in leaders deferring even decisions that have little or no cost implications. Business leaders are sitting on their hands - as if hoping that the storm will pass and that they will be able to ride on the coat tails of the sunnier economic climes to come. Many businesses are suffering and leaders simply do not know what to do or when; their self-confidence has taken a knock.

There are two clear manifestations of this. Firstly, UK and US corporates are sitting on more cash in their balance sheets than at any time in history. In the US's case, the figure is $20trn. That's almost 50 per cent more than the staggering US debt of $14.3trn. No wonder Obama is imploring businesses to invest and hire.

This is a remarkable and unwelcome state of affairs. Corporates are taking the view that cash is the safest insurance against any further economic shocks. This damages the economic cycle. The larger businesses need to be investing to support the collectively larger small businesses. The wider economy is lacking the growth opportunity that it would otherwise have as a result.

Innovative and bold incentives, as well as political pressure, will be needed to break this cycle before it causes long-term damage.

The second manifestation is that mergers and acquisitions are occurring at a surprisingly high level. Company cash is being used on more deals than the economic conditions suggest would be likely. Why? Again, it's a form of protectionism.

However, acquisitions do not add value to the economy; they usually lead to shrinkage as the combined resources are consolidated. M&As rarely lead to net aggregate growth. They do, however, make CEOs look good and shareholders get an extra kick of hope. Investment banks are, of course, a key driver in this behaviour - they are doing very well from M&As.

Meanwhile, innovation, organic growth drivers and performance progress resulting from good leadership are taking a back seat. This will lead to reduced global competitiveness and a sapping of the enterprise culture.

Clear thinking is needed on this and it is incumbent on boards and shareholders to wake up to the unfolding disaster. The problem is currently being ignored - mainly because very few people recognise it.

The engagement of management is vital if companies are to increase performance and develop externally-focused enterprise initiatives. Leadership must regain its grip on its own raison d' etre as well as the purpose of business.

Since the recession, companies in the UK are hungrier than ever for strong leadership. Now even the good leadership is being challenged; too few examples exist of courageous leadership.

Last February, Henley Business School reported that developing leadership skills was a top priority for 2,500 HR and L&D professionals over the coming year. But although leadership seems to be the Holy Grail of private and public sector organisations today, and pursued incessantly, it remains persistently elusive for many. Where are they going wrong and how can they adapt themselves, their management and teams in order to foster a culture that cultivates leaders capable of making courageous yet low-risk decisions?

Focus

In more buoyant times, many organisations allowed themselves to drift away from their core businesses that enabled success at the outset. This distraction may be in the name of diversification but nonetheless it leads to de-focus and a failure to properly match costs to sales.

In times of crisis, businesses must get much closer to their customers and their core offerings. It pays dividends and customers usually welcome it - especially in the business-to-business environment.

Simplify - cut the admin and process

A common pitfall for many companies is to allow too much process, which can stifle good leadership and block creative thinking. Effective leadership can only happen when leaders are freed from bureaucracy and organisational process, which is an obsession for many businesses. Excessive process is the ball and chain of decision-making and commercial focus, and the handcuffs of leaders who could otherwise foster good, quick decisions and actions.

Companies can free themselves from excess process immediately by cutting down the number of meetings, making them shorter and even taking the chairs away to promote energy and focus! They should train people to chair meetings effectively - good chairing leads to good decision-making, the inclusion of the views of all parties, energy and good time-keeping. This is simple stuff but it can make a big difference.

Structure to flourish organically

To thrive today, companies require simple, de-layered and non-matrix structures. This will allow leaders to have a free run at developing the business and 'getting the job done'. If organisations and departments are kept small, they can expect fuller participation from their teams.

Organisations are successful today if they foster individual thought, talent and a sense of freedom to create. People have mourned the loss of Steve Jobs and his unique leadership. Not so unique: every business has innovators and leaders capable of great things, but they are not encouraged enough.

Leaders must rock the boat

An effective leader needs to stir things up - something that is often feared and discouraged in many companies. Keep people energised and on their toes but also away from a blame culture.

Without a culture of fear, people will push for results without fear. To encourage this is to encourage betterment at all levels in all people. People will see that such enablement is very powerful. These people will make the business better and even be future leaders.

Balance the conflicting demands of shareholders and stakeholders

Shareholders habitually want reliable, predictable behaviour and performance by a business in which they have invested. These organisations were once founded with some risk by entrepreneurs, but shareholders do not really like risk. They may say 'make a big change' or seek to diversify, but any big change will be examined microscopically by investors and analysts who are not close enough to the business to really empathise with the leadership.

Shareholders should be taken closer to businesses to see the value of the longer game, and this is a big challenge for all leaders.

Respect and use the wisdom of your people

Employees are in tune with the current economic climate and the impact this will be having on the company in which they are working. A high risk is with staff morale - it can be terrible, particularly if leadership has allowed it to slip, and even more so if leadership is the actual driving force behind it.

Company leaders need to manage from the front with even greater conviction in order to make the team follow. An organisation that behaves in this way may not grow but it will survive during an economic downturn.

Leaders need to invest in their people more than ever. These staff will be the future of the organisation - if the culture, the leadership and the motivation are right, success will follow, together with better staff retention and commercial effectiveness. The best investment is the one of time with these people. Listen to them and allow them to take a stake in designing the change and survival processes.

If costs do need to be cut, involve staff in this process to the maximum. To do so makes them feel included and empowered.

Companies that prospered during the last recession energised their teams, and they fought their way out of it¹. They did not batten down the hatches or pull up the drawbridge.

Inevitably, in any downturn, there will be companies that don't survive - and it will be down to those that do to fill the market voids. This is the opportunity to build market share, and take the business from those who lost it. And this type of mindset needs to be entrenched into an organisation's employees - they need to see that they will be part of a company that wants to grow its market share and outperform the competition both commercially and psychologically.

Summary simple steps

• Front up to any issues very quickly; tell your staff that the economic conditions are working against the market - not just the business

• Don't leave them in the dark on anything - remove all doubt and ambiguity

• Stress that you have strengths that your competitors don't and that you will focus on these during the downturn

• Remember that nearly all people will want to follow your company's leadership. They will be committed followers

• Adopt the mindset that you will weather the storm, and then you will.

Reference

1 http://www.mybusiness.co.uk/YYAeWF1oRl5jag.html

Stephen Archer is a director and partner of Spring Partnerships LLP. He can be contacted via www.springpartnerships.com