The Engineering Leadership Podscast · Episode 4

The Meaning Revolution

With Fred Kofman Advisor, Leadership Development @ Google

Oct 14, 2019

The hardest business problem has a soft solution. Scientists and engineers display a (well-deserved) skepticism toward touchy-feely ideas such as leadership. Fred shows there's a very technical way to understand why most organizations, from couples to multinational corporations, die a premature death... and what can be done to extend their lifespan.

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SPEAKER

Fred Kofkman - Advisor, VP of Leadership Development @ Google

Fred Kofman earned his PhD. in Economics from the University of California, Berkeley, is Google’s Vice President and advisor of leadership, a director of the Conscious Leadership Center at the Monterrey Institute of Technology, and a founder and president of the Conscious Business Center International. Previously, he was a Vice President of Executive Development at LinkedIn and a co-founder of Axialent, a global consulting company which has delivered leadership programs to more than 15,000 executives around the world.

No gun in the world can get your best. No incentive can get your best. You can only give your best because you want to. It’s not contractible. And that’s the difference between leadership and management for me. Leadership is about eliciting internal commitment. You do it because it comes from the inside.

- Fred Kofman

Fred is the author of the trilogy Metamanagement (2001), Conscious Business (2006) and The Meaning Revolution: The Power of Transcendent Leadership (2018). Since 1990, Fred has designed and facilitated programs on leadership, personal mastery, team learning, organizational effectiveness and coaching for thousands of executives, and consultants worldwide. His book, Conscious Business, has been translated to more than ten languages, received numerous awards and was recently named by Sheryl Sandberg in her New York Times interview as "the business book every executive should read".


This episode is brought to you by the ELC Summit 2020, our community’s 2nd annual engineering leadership conference, happening October 15th & 16th in San Francisco.

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We’ll also be celebrating and recognizing exceptional leaders in the engineering community with the community-nominated... Inspiring Leadership Award!

Even if you can’t come to the Summit, you can still nominate an engineering leader who's made a difference in your career on our website at elcsummit.com

The Summit will be inspiring. There will be great lessons to learn. And fantastic people to meet. We can’t wait to see you there! Head to elcsummit.com to register or learn more.


Resources

Show Notes

  • You don’t know your job. (3:24)
  • Why you’re wrong, how this organizational disease works and kills your organization (8:49).
  • Looking at the whole organizational system vs. the parts. (10:54)
  • The problem you can not avoid. (13:54)
  • Why doing your job may be hazardous to your career. (16:08)
  • Why we’re screwed - the two issues in the economics of information. (18:54)
  • Issues with decentralization vs centralization of the system. (26:50)
  • So we’re screwed... but here’s the solution. (33:20)
  • The assumptions you need to change. (35:16)
  • What makes you give your best effort. (36:44)
  • The two tools incentivizing people’s best. (40:54)
  • The absolute human need. (42:57)
  • Q & A. (47:35)

Transcript

I bet you don't know your jobs. I'm willing to put money on the table. Are you? Will you bet with me that you know your job?

No, you know. I'm from Argentina; you shouldn't bet against an Argentinian. We're not very worthy of trust. But, play with me. Just play with me. You know it's a con so we'll play with funny money.

Let's say I met you out there and we didn't know each other. And you didn't know I was gonna use whatever you said to embarrass you in front of everybody. And I ask you, "so what do you do? What's your job?"

How would you answer that question? Just pause for a second and think how would you answer my question. What's your job? Okay, and the bet, it's a friendly bet. But it's that, in less than two minutes, you change your mind. I see some gestures of, like, really? Well, this is why I bet with people in workshops. If in two minutes you don't change your mind, I leave. And you can tell everybody the story of the asshole who just screwed up the workshop in the first two minutes. I mean that would be a nice story to tell.

So, usually, I poll the room. There's a lot of people here. But we'll just play a friendly game. And I have to tell you, so far I've never failed to stay in the room. But in a sense I bet with people, if I'm right, then you fully engage in the conversation. And you don't just stand off and say, "oh this is bullshit." 'Cause it will sound like bullshit to some of you that are very technical, but I'm going to back it up with a lot of technical, mathematical arguments, eventually. I just need a couple of minutes to introduce the topic.

We met, I asked you about your job. And I say, "no, that's not your job." You'd be surprised and say "prove it to me." I give you an analogy. It's not a proof, but I give you an analogy.

Let's talk about soccer for a second. Everybody knows we Argentinians are the best soccer players, and the humblest ones, in the world. But this is the Mexican goalie. If I ask you, what's the job of a goalie. Trick question, but just play with me. What would you say? Stop goals, of course. What could be more obvious?

But then, I don't know if you watched the last World Cup, but that brings up a question, what the hell was the goalie of Germany doing in the attack in the last three minutes of the game against Mexico? This is a very awkward thing. Why would a goalie, that is supposed to stop goals, be forward? Now, if you haven't seen the game, trust me. This guy was on the side of Mexico trying to score a goal. Doesn't he know his job? He's the goalie of the national soccer team. He's the captain even, so he should know his job. So what the hell is he doing?

What's the job of the team? To win, okay. So the job of the team is to win. And if the job of the team is to win, and you're a player, meaning a member of this team, what is your job?

So what's the goalie's first and foremost job? To help the team win. Do you agree with that? Okay, maybe I missed it. So, let's go back a couple slides.

You know where I'm going. Some of are already going ooh, ooh, ooh, I'm glad I didn't bet. So the job of the goalie is not to stop goals. Stopping goals is the way that, normally, the goalie does his job, or her job if it's feminine football. Soccer, sorry. But the true job of the goalie is the same as the job of an offensive player, which is to help the team win. And it's also the job of the water boy and the coach, and everybody who's affiliated to the team. Everybody is there to help the team win. That's the main contribution, the main value of the players.

Now let's go to a business context. So if I go to any of the codeheads at Google, and I ask, in this case, him, what's your job? What do you think this guy's gonna tell me? Code, I'm an engineer, I code, program. Just what engineers do. And if then I go to the salespeople, and I ask the salespeople, "what's your job?" To sell. You see, this is exactly like the defense and the offense in a soccer team. People are trying to kill the bugs, and the others are trying to make money, or sell, and make revenue.

But they're both wrong. And this mistake is deadly. I'm gonna prove to you, this is what kills every successful organization.

When people ask me what do I do, I tell them I am an organizational oncologist. "You're what?"

"Yeah, I study tumors in organizations.”

"I've never seen a tumor."

"Oh, believe me, your organization is full of them. And they'll kill your organization."

"Where are they?"

"Look in the mirror."

Remember the Matrix, the first movie, when Agent Smith tells Morpheus, "you humans are a disease." Well, we are a disease, we are like tumors because everybody is self-interested, everybody wants more power, more budget, more authority, more autonomy. But that doesn't work for the system, as a whole. Just like a cancer cell grows into a tissue, it grows into a tumor, and the tumor is incredibly successful at growing and achieving more space, more power, more nutrients until it kills the host. And then everybody dies. But the tumor is very successful. The host is the one that is not successful.

So in an organization, the deadly disease is that it disorganizes. Because everybody starts working, doing his or her job, instead of contributing to helping the team win. This is not a joke. I like to say it in a humorous way. But it's not a joke, and there's a lot of suffering that comes from this. So, my goal in this time that we have together is to show to you how does this work and why this is, in my opinion, the most difficult problem every organization has, every family has, every group of people has, from a couple to a family, to a community, to a business, to humanity as a whole. How do we live together without blowing ourselves up?

So let's say that everybody's job in a business is to accomplish the mission with integrity. That's the first approach to an answer. But let's see what happens when somebody doesn't. So, we have the salespeople that are trained to sell. And that's their mission. They've been told, “think like an owner.” I own my piece, I own this part. And to make this part successful, I am going to do everything I can to accomplish my mission, which is to maximize revenue.

But then you have a credit analyst that is the one that decides whether to give credit to a customer, or not. Or you can take a legal department. The Legal Department would be playing defense. Or the credit analyst. What's the job of a credit analyst? Just guess? Well, no, not to say no. But when the credit analyst says no, or when a finance person says no you can't do that deal, what are they trying to do?

Reduce risk, exactly. Prevent bad debt, or minimize losses, or just, if it's a lawyer, just signing a contract that could create trouble in the future, so prevent risk. Again, playing defense. But what's the way to have no bad debt? Don't lend. You know what type one and type two errors. So the salesperson has never seen a customer that doesn't deserve credit. And the credit analyst has never seen a customer that deserves credit.

So what happens, well, these people are gonna get into a tug-of-war. Because each one of them is trying to optimize for their subsystem. You're being told, minimize bad debt, minimize costs, shut down the factory. Of course, nobody's that stupid. But you will have a temptation to do that. Or you're being told maximize revenue, well, you wanna sell. Are you selling the highest margin product? No, you're selling the highest revenue product. But the highest revenue product doesn't mean it's the highest margin product. The goal of the company is to make profits, not to make revenue. But you're being paid, and you're being told, your job is to maximize revenue because that's what you control.

So you think like an owner and you do it. And then these are your enemies. The people that want to launch, are the enemies of the quality assurance people. Because the quality assurance people want to test and the other people want to launch. And when you get requests for reliability engineering, the product people are saying who the hell needs, I mean, we need features, we need cool stuff to put out in the market. Well, I'm sure that never happens in your companies. But I've been in a few companies where I've noticed that that's a recurring dynamic. Not at Google, for sure. Now I can talk about my LinkedIn experience. When I leave Google I'll tell you something with Google, But now, never happens at home.

So here's the problem. The problem is that, in order to optimize the system, you have to sub-optimize the subsystem. So, if you're being told you have to optimize your subsystem for sure, the conversions of those instructions are going to sub-optimize the system and eventually kill the system. You cannot avoid this. This is pure math. It has nothing to do with people being good or bad. It's just the way it is.

But, you say, oh, we just need to work together. How do we work together? How do you evaluate the marginal contribution of a person to optimizing the system? It's a huge problem.

I remember the first, I taught at MIT for a while, my first meeting with a person in the industry was with someone from Digital Equipment Corporation. I asked the person, he was an engineer, the head of supply chain, and I asked him how do you optimize the supply chain? I'm an economist so I used to think in objective functions, constraints. And he looked at me like, "we don't have a clue about any objective function. My problem is that Harry," not real names, but, "Harry hates Sarah's guts and Sarah hates Harry's guts. And they're not communicating, so they're dropping all the balls between the two of them. And so our supply chain cycle time is going through the roof."

That was literally what he said. "Well, how do I calculate this?"

I was coming from MIT. He said, "we don't need calculation, we need some human judgment here."

And I said, "Well, I got a Ph.D. I have bad news, I have a Ph.D. in mathematical economics."

And he said, "well we can get PhDs a dime a dozen, but that doesn't solve the problem."

That wasn’t what I wanted to hear after 12 years of study...

So, you might be thinking, cool, this guy just gave me the keys to the kingdom. I used to think I'd have to sub-optimize, to optimize my subsystem. Now I realize, that's not the way to go. I should work to optimize the system.

Well, let me give you a word of caution. Doing your job may be very hazardous to your career. Why? Well, the problem is that you take a bullet for the team, and then the coach will shoot you. You're all proud, it's like, "coach, I took a bullet "for the team." And then you get shot again.

'Cause KPIs are like playing Russian roulette. Five out of six times, KPIs will give you the right answer. But the sixth time, they'll blow your head off. Because the KPI is telling you to optimize your subsystem. There are times when you need to trade things off, where you have to sub-optimize.

Just like, why was the defensive player, the goalie, in the attack? Because they were losing 1-0, and they were going to be eliminated. Or, 2-1, I don't remember. And everybody knows your job is to help the team win. So, if you're losing you try to tie the game, and you go forward, even if you're in the defense.

But let's just say that your coach has been trained by Harvard Business School. Not MIT, this never happened at MIT. But, you know, that other not very prestigious business school. Well, we'd say we have two sub-teams, let's give them incentives, let's create a good incentive mechanism. How will we evaluate the defensive players? Well their KPI is preventing goals. And the offensive players, they have to score. Now, if you're a defensive player, and let's just say that this bonus really, really counts.

This is your career progress. Do you prefer your team to win 5-4, or your team to lose 0-1? Where do you look better? Where does your career look better? Your goal is to minimize scores against you. What's better for you? 0-1, losing 0-1 is better for you because one goal against you is much better than four.

Now you might say, well, this is a fluke. No, I can create this with any example. Losing 4-5 for an offensive player is better than winning 1-0. This is one of those KPIs where the round is in the chamber, and you're gonna blow your head off. So, what are you supposed to do? Don't use KPIs? I don't think so. This is the problem.

The problem is not just that people don't know their jobs. The problem is, even if you know your job, you can't do it. You'll be fired. Because everything is set up for you not to do your job, regardless of how or where you are, of what your real job is. What are the two problems? I'm going to present to you something that's very similar to the problem we have in physics, the lack of an integrated field theory, or a theory of everything.

If you look at quantum physics, it doesn't cohere with relativity. And if you look at relativity and you try to make it small, you get contradictions. So any of you have seen physics, this is the biggest problem in physics for over 100, for 100 years, more or less, since Einstein started fighting with a relative, with a quantum physicist about is reality stochastic or deterministic? And we're still in that problem. We live in a continuous universe. What the hell is going on? So something is missing.

Well, here I'm going to tell you that if you look at the organization, from the parts to the whole, you get one perspective. If you look from the whole to see what the parts are supposed to do, you get the opposite perspective. And in that contradictions organizations die. Even if you understand what I'm saying, I'm gonna prove, what I tried to prove, is that there's no solution to this problem. I mean, we're screwed, essentially. Life is a terminal disease.

So in economics, we have two issues in the economics of information, which are called moral hazard and adverse selection. You may have heard. These are usually applied to the insurance industry, but they apply to incentive mechanisms as well.

So let me talk first about moral hazard. Moral hazard is, let's just say you go, let's just imagine we all go to a restaurant after this, but we're gonna have dinner. And they have plates for all of us. And someone has a brilliant idea, hey, let's just order and then we'll split the bill. And people are like, ooh, I don't know these people. Okay, let's try. And they have tacos and lobster. And the tacos are worth $6.00 and the lobster is $600.00.

Now, if you were alone, the taco for $6.00 looks pretty good. Lobster for $600.00, no. But you would pay $10.00 for a lobster. I mean, $10.00, it would be reasonable for you to pay for a lobster. So now you go and you say, oh if I order a lobster, what part of the lobster I will pay? And there are 600 people there. Well, it's gonna be only $1.00 because the other $599.00 is gonna be charged to these suckers who are gonna have to pay for it. That's called moral hazard. Because I only pay 1/600th of my order. You pay the other 599/600ths. And being Argentinian, I'm thinking I'm the only smart one here.

So all these suckers are gonna get the tacos, and I'm gonna get the lobster. And I'll pay $6.00 for each taco, $1.00 for my lobster, that's a $7.00 bill, that's great. It's amazing. This is my chance to try this $600.00 lobster order. Of course, I'm not the only smart one. And then we all end up paying \$600.00 each. It's like, who did that?

Everybody starts being angry against everybody else, except for, let's just say, one person who's the team player, the scrupled diner, the person has scruples and, "no, "I'm not gonna take advantage of my colleagues here. "I'm going to order tacos." So, the truth is. Our bill is $599.10. Because one person ordered a taco. But what's worse is that her bill is also $599.10. It's the most expensive taco this lady ever ordered, in her life. So let's just say this repeats. The next week there's another conference, and everybody shows up. Now, what do you think this lady's gonna do? She'll get two lobsters to make up. And caviar to put on top. It's like, this is my chance to get back at these people. So essentially you get Animal Farm. This is the problem.

You can't solve this problem. The only way you can do it is not split the bill. But as soon as you split the bill, you create this moral hazard situation, where people don't have to pay for the costs they impose on the rest.

Now, you know Messi. Suppose that the Barcelona Club, where he plays, says, you know, we don't like this income inequality thing. We're committed to income equality. So, we're gonna pay everybody the same. What's going to happen with Messi? What do you think he'll do?

He's gonna quit. Why? Because average pay drives the best people away. If you're the best salesperson in the world, you wanna be paid average commission? Or you wanna be paid your own? If you're the best. You want your own. The average brings you way down. You're way above average. Now, if you're the worst, you wanna be paid average? Or you wanna be paid your own? You want average because you're way below average, that's what it means being the worst.

So, adverse selection is you create this system, it's like we're all in this together; we are a team. So we're gonna work together and we're gonna split equally. It's the opposite of the moral hazard. We're gonna split, equally, all our proceedings. We're a cooperative and we're all the same.

All the best people are going to leave. 'Cause they'll say it's not fair. Fair is I need to be paid by my contribution. And not everybody contributes the same. Not everybody studied the same, not everybody works equally hard, not everybody has the same talent or is willing to stretch the same. It's not fair that everybody gets the same.

I teach at a university. I offer the kids, here's the deal. If you want to reduce grade inequality, we'll agree at the beginning of the class that everybody gets the same grade. So we take the exam, and whatever the exam yields, everybody gets the average. You want that deal? Nobody wants that deal, ever. And if I enforce that deal, people would drop the class. Because they know what will happen. Some people are going to shirk in the first test. And then more people will do it in the second test. And by the time of the final, nobody's studying anything, because you are getting 1/600th of your grade, because everybody else is counting on you to carry them.

And then you die like the horse in Animal Farm. You work harder, you work harder, and you die.

I'm sure you have seen some traces of this in your companies. This happens in families, in communities. It's called the Tragedy of the Commons where everybody tries to piggyback or ride other people's coattails, and take their sheep to graze in the commons until the commons' overgrazed.

Anyways, it's a big problem to deal with collective property or schemes that are collectivist. And, essentially, that's what destroys communist economies. There are very mathematical, it has nothing to do with political ideology, it's an information and incentive problem in an economy where you cannot evaluate the marginal contribution of people, and you can not calculate, economically, the cost of capital and different production methods. You just get disorganization. You can't keep things together. It happens everywhere.

There's a famous story about six blind men trying to discover the nature of the elephant. And of course, they are fighting, because one of them says, "no, the elephant is like a pipe," touching the trunk.

"No, it's like a column," hugging the leg.

And the other is touching the sides and saying, "no, it's like a wall."

They're all fighting. And a passerby, who's sighted, says, "no, no, you're all wrong. "You're right but you're wrong."

And the blind men say "what the hell do you mean, we're right?"

"Well, you're kind of right because the part that you're touching looks like what you described. But nobody can touch the whole elephant, so you're all wrong because you're extrapolating your part to the rest of the elephant."

And they say, "how do you know?"

“Well, let me walk back and say I can see the elephant because I'm way back."

So the blind men say, "yeah, you can see the elephant but you have no idea of the elephant's texture. You can't touch the skin. You don't know what's happening in each part of the elephant."

And the sighted man says, "you are right."

Well, that same thing happens in companies. If you're on the ground, you have very good granularity but you don't understand how the system works because you can't see the interactions. And if you assume that the rest of the system is like your part, you're wrong. But if you're far enough, let's say an executive, to see the whole picture, well then you don't see the granularity. You just don't understand the particular circumstances of time and place, as Friedrich Hayek described.

So, in this dilemma, most leaders decide to say, okay, here are the rules. You're gonna do that, and you're gonna do that, and you're gonna do that. And that's the collapse. Because when you do that, people get stuck. And they can't do anything. And when people don't do anything, people get aggressive, people get angry. And when people get angry, they get totalitarian.

I'm dead serious, there are 150 million people that were murdered by their own totalitarian governments in the 20th century. And every one of those governments tried to impose centralized control on the economy and society. All of them. Right-wing, left-wing, that's less important than are you gonna have some measure of autonomy for people where they can make decisions and have a decentralized information processing system, or are you going to have a totalitarian, centrally-controlled economy? And they say, "oh, well, we don't have to worry about that, "because we are in a free market. "We work in a business."

But inside the company, it's exactly like a communist economy. You don't own the means of production. There's a board; you're not the owners of the company. You take centralized instructions from the executive team. So, essentially, the executive team is trying to figure out how to run a company like the Soviets were trying to run an economy. It's a lot smaller, and they have a lot of price information around. But it's not very different. It's an isomorphic problem from a pure information theory perspective.

I don't want to pitch my book, but I'm being a little loose here. If you look at the book, or if you read stuff I put online, you'll see that there's very strong science. In fact, one Nobel Laureate, Friedrich Hayek, wrote "the economic problem of any organization is rapid adaptation to changes in its particular circumstances. Then, the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources available to meet them. This problem cannot be solved by first communicating all this knowledge to a central board which then issues its orders.”

So he seems to be saying, “decentralize. You can't manage this system from a central perspective because to optimize the system, you have to sub-optimize the subsystem, and you don't know. You just don't know...”

"...But the man-on-the-spot, if you let people make decisions cannot decide solely on the basis of his limited but intimate knowledge of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions in the whole pattern of changes of the larger system.”

So there he seems to be saying, "you can't decentralize, because people are going to do the best for themselves, but not the best for the system."

Well, Hayek won the Nobel Laureate, Nobel Prize, for studying how the price system in a competitive economy is sufficient, it's a vector of sufficient information to allow people to decentralized decisions that converge to the core of a competitive economy or what could approach an optimal point.

Now I arrived at UC Berkeley to study with Gerard Debreu who was another Nobel Laureate, a French, who actually studied the core of an economy and under what conditions an economy will converge. But then, in Berkeley, I had the pleasure to work with another French guy who then won the Nobel Prize and this is, my advisor was Drew Fudenberg, and then Jean Tirole was his co-author, so I got to work with Tirole. And the two of them were working on agency theory. And this is the clash in economics.

General equilibrium would be like general relativity theory, looking at the company as a whole. Agency theory is contract theory, looking at the individual agents. And you would say, you put together the individual agents, you should get the system. No, you don't. Exactly like, we have the same field problem.

Now, when I discovered that, I was like, oh my god, this is great, this is big. I can write something about this. And then I thought, oh shit, I'm sure I just discovered gunpowder. There's a phrase in Spanish that you just discovered that the earth is round. Big deal, everybody knows this.

So, slightly embarrassed I wrote to Jean, Jean Tirole, and I asked him, Jean, can you look at this manuscript and tell me if I'm screwing up. I basically wrote something that there are 100 papers about this and I never saw them. I'm gonna look like a stupid idiot for having rewritten what has been covered in 20 journals. And he wrote back to me and said, “No, this is pretty cool. I haven't read anything like this.”

“Really? Would you write a quote for my book?” And he did, so if somebody accuses me, I say well, if Jean didn't know it, don't blame me. Because he's the Nobel Prize, not me.

So we're screwed. You're already thinking, so, are we gonna get something uplifting here? Or do we have to wait for the divine? Well, yeah, I have some good news.

And the good news, I'll tell you the story of these two hikers that encounter a bear. And the bear is menacingly approaching them. One of them sits down and pulls a pair of running shoes from his bag. And as he's putting on the running shoes, the other says, "what the hell are you doing?"

"Well, I'm gonna run."

"You can't outrun the bear."

"I don't have to, I only have to outrun you."

This is an unsolvable problem. But you don't have to solve it. You just have to do it better than others to win. Because every organization has this problem. So, in a competitive market, you're not trying to have the bear eat the other person, but you're trying to serve the people that depend on your products and services to have better lives. That's a very noble goal. It's a race to serve people, better, cheaper, with higher quality, and so on, faster, you name it.

So the question is, who's gonna win this race?

And the one that's gonna win this race is the one that ameliorates this problem as best. In the land of the blind, the one-eyed is king. Everybody's blind. So just understanding, I tell you, I've put it now, I think, after studying this for 25 years, I can explain it. But, my god, I broke the whole wall trying to hit the nail on the head. Now I feel like, yeah, this is the freaking nail, and this is the problem.

Now, it's not easy, even after you know the problem, what to do about that. In the last nine minutes, I'll tell you what's the answer. Because the solution turns out to be trivially simple. Wickedly difficult, but very simple to understand. But it's not a solution. We can't solve, this is a mathematical impossibility.

Under the assumptions that I told you, self-interest, private information about the immediate environment, talents, and effort, there's no way to solve this problem. That's proved mathematically in agency theory. You need to condition compensation on performance in order to incentivize the right effort. But if you condition compensation on performance, meaning KPIs, you're going to destroy the global optimality, because people will optimize their subsystems. That's the nut, the crux, of the argument.

So what do you do? Well, you have to change some assumptions. You have to change something. And a basic assumption that I've been using in all my presentations, so far, is the one that is called the economic man, or economic human, which is people respond to incentives, and they respond to material incentives that have to do with rewards and punishment.

I am going to argue, I argue extensively in the book. This is the first three chapters of the book. There are eight more chapters in the book. But this is the first three. Because I find a problem incredibly elegant. As a mathematician, when I discovered it's like, ooh, this is such a beautiful structure, and how everything comes together. I mean, in a sense, it's part of my history. I started with general equilibrium, then I went to contract theory, and then it turns out the two of them give you the exact opposite recommendations on how to centrally manage or decentrally manage a system.

So I said, what's the opportunity? While there's 90% of human energy comes from commitment, nobody can make you do things if you don't want to, with your best effort. And I discovered this thinking about my kids. Because, as a manager, I wanted my kids to, these are not my kids, this is what I wanted my kids to do. Just in case you had a doubt.

This is what I wanted my kids to be. They were dirty and fighting over the iPad. No, they were not reading friendly like this over a book. They were all dirty, they hadn't taken any bath, and they were fighting, yelling at each other, pulling on the iPad. "My turn."

"No, my turn!”

“My turn!"

So what did I do as a manager?

Take away the iPad, "no iPad until you read." So, I succeeded, they read, cursing me under their breath. And I realized as I was watching them, I'm not feeling satisfied. Saying I got them to read; why am I not feeling good about this? And I realized, I don't want them to read. I want them to want to read.

That's a very different problem. So I went to them and said, "until you want to read, no iPad."

Exactly, yeah, you got it! That's like a thief saying, "be my friend!"

"Yes, of course, I'm your friend."

"Give me your money!"

"Okay."

"No, as a gift!"

"Here, have a gift..."

"No, you don't really mean it, I'll shoot you. Mean it or I'll shoot you!"

No gun in the world can get you to respect someone. No gun in the world can get your best. No incentive can get your best. You will only give your best because you want to. It's not contractible. And that's the difference between management and leadership, for me. Leadership is about eliciting internal commitment. You do it because it comes from the inside.

Now, how do you lead people? How do you engage people's internal commitment to pursue a mission? Not because it's convenient, but because it's worth it. That's a totally different problem. And I don't know about you, but nobody told me that in business school. I didn't go to business school, but I did teach that, I have to confess, I didn't teach that at Sloane.

I studied economics and I talked to some professors at the Berkeley School of Business. They don't teach this. They still don't teach. Now they have some leadership courses. But how do you become worthy of being followed? How do you become worthy, how do you earn the moral authority, so that other people will want to pursue the mission that you're inviting them to contribute to?

That's not an engineering problem. That's changing the context in which people will solve any engineering problem. That's what leaders do.

If you remember, there's a part in the movie where the nobles are leading the Scottish Army to fight the English. And people are leaving, saying "we don't wanna fight."

And he comes and he says, "yes, leave and you may leave. Stay and you might die. But wouldn't you trade-off every day from now until the end of your life, to come back to this moment and prove to the English that we stand for freedom.”

Something along those lines. He wasn't saying, “we're gonna win!”

They won, but that's Hollywood. He was saying... It's Henry V. If you haven't seen St. Crispin's Day, go to YouTube, watch St. Crispin. Kenneth Branagh, St. Crispin's Day address.

"We few, we happy few, we band of brothers, for whoever sheds blood with me will be my brother. Being that he ne'er survive, this day shall gentle his condition. And gentlemen in England now abed will feel themselves accursed they were not here to fight with us upon St. Crispin's Day."

Now that is not management. That is not like, "Hey guys, stay and we're gonna win."

That's like, "no, no, no, we're probably gonna get our asses kicked because the French are seven times our number. They're fresh. We'll do our best, but the fewer the men, the greater the share of honor. We'll just die, we don't need more people to die with us."

I mean, what kind of attractive speech is that? As a recruiter, they suck.

But what people want in their lives is not just more goodies. I'm not saying that goodies are not important. That's like walking with your right leg. And it's good to walk with your right leg. But if your left leg is stuck, you're not gonna go very far. So, what I'm saying is, use the two legs. You have compensation mechanisms, you have bonuses, benefits, stock plans, whatever you have to incentivize you and your people. But to get people's best, to solve this problem really, you have to go way beyond that and you have to add another tool, another tool which is non-material incentives.

And non-material incentives are what in economics we call club goods. A club good, it's not exclusive in consumption. But it's exclusionary. You can exclude people from the club if they don't live up to the standards, or they don't contribute to the mission. But once they're in the club, everybody's equal member of the club, everybody can feel proud, everybody can connect to a similar purpose, everybody can uphold certain principles and feel fully integrated and included in a community.

This is what we most want as human beings. This is what we live for. The other stuff, we need the other stuff to live, but this is what we live for. So, as a leader, as an engineering leader or any leader, you have to engage the two parts, make it the right and the left leg. If you want people to walk, you have to get them to understand what you're trying to do, but then you have to make them, like my kids, I had to find a way to have them want to read. I can force them to read only when I'm controlling them. But the moment I turn around, they don't read anymore. And if I pay them to read, I punish them with a reward, because I'm taking away any pleasure they might have of reading. I'm educating them to only respond to monetary incentives. So the moment they don't get it, it's like why should I read? I read to make a dollar per page, or something, whatever daddy gives me. That's very bad education.

So, how do you get people to commit? Again, I'm not selling the book because you're gonna get the book for free. How 'bout that? But my invitation is to look at the book.

But I'll just tell you a story; I'll finish with this story which will give you my ultimate answer. When I was writing the book, I took my wife to Egypt. And I had been to Egypt before, so it was more a gift to her. I wanted to go with her. I'm writing the book, and all that. We went to this temple, it's an Egyptian temple. We went in a barge down the Nile. I think it's Luxor. But we go there, and I remember this temple. But when I saw the temple, I was like, wow, these people, the Egyptians, built this temple to say "look at us; we are important. "We are powerful people. "We've created something worth admiring." And it's an issue of identity. "We participated in a project "that gave us symbolic immortality. "Our purpose was to transcend. "We want it to mean something and this is our call to you "to recognize that we were a great people. "

I'm like, whoa, that's very similar to what every person wants. I want to mean something, I want my life to mean something. And then I walk in, and I didn't remember this, but the moment I entered I realized, I remembered this, it's full of graffiti.

So the soldiers from Napoleon, when they conquered, and the British afterward, they wrote their names. Like "Jean Francois was here, 1802." I mean, literally, they chiseled that. I said, my god, you know there are 5,000 years, more or less, of difference between this temple being built and Napoleon and his soldiers getting there. But these soldiers wanted the same thing.

Jean Francois was saying "I was here, remember me. "I did something important. "I'm worth remembering and admiring "because we conquered this place "with my other fellow soldiers."

And I said, wow, this an absolute human need. We all feel the need to transcend because we know we're gonna die. And we know that in the big scheme of things, this life is absolutely meaningless by itself. So, we need to create something that will go beyond just our material existence.

Meaning does not come from lasting. We want to really live. And some of you say, I wanna change the world. And we can be very grandiose about that. But the impulse is true. It's a very powerful driver of people's motivation. We all want to do something that matters.

Well, businesses can create things that matter. And they can help us transcend in service our own concern for ourself or our egoic stuckness. Because, essentially, when we're in business, we're there to serve the people that we want to help live better lives. And my goal when I wrote the book was to say, huh, is it possible to inspire people with a purpose that will give meaning to their lives? And I believe business is the best shot we have.

If you look at the political landscape, that's kind of a closed door. Not a lot of hope from that domain. But business is about people really helping other people live better lives, and, yeah, being compensated for that. But that's why we get paid. Because, hopefully, we can help our companies develop products and services that will be so valuable that people will want to pay for them, and that creates a cycle of goodness that we can call a free market economy.

So my goal, you know you're gonna listen to Reid afterward. But one of the things that I'm very proud of, and I'm good friends with him, he calls me the High Priest of Capitalism, you can ask him. Why do you call Fred the High Priest of Capitalism?

Because, honestly, I do believe the ultimate driver for human engagement, as a leader, that you can get, is engaging people in a transcendent project that will give meaning to their lives, in a community that accepts them, includes them, and operates with values that will make everybody proud. Thank you very much.

Moderator:

Thank you so much, Fred. We have a few questions from the audience.

Fred:

You manage that, I'll answer as many as you want. But I don't wanna go over time.

Moderator:

Well, the first question hearkens back to the first point you made about Argentina. Why hasn't Argentina won a World Cup for so long, yet? What failed?

Fred:

Well, Argentina won the World Cup. And you may remember Maradona or Kempes. The real winner of the Cup was Menotti. Nobody knows Menotti, but Menotti was the coach. Argentina had wonderful players forever. But they never played as a team. So I think I would say, they won the cup in '78, and then again afterward because they played as a team. And they haven't won ever since because they stopped. And Messi's not enough, and so on, so. That's my answer.

Moderator:

The next one, this is from Mark, "how did you get your kids to want to read "and not fight for the iPad?" And I'm guessing other people can substitute other things.

Fred:

Who says I did? That's an easy question to answer. When did you stop getting drunk? I didn't, I don't drink, so. I never stopped.

Moderator:

So, another question: "are subsystems defined properly if optimizing subsystems is not optimizing the system?"

Fred:

Absolutely, yes, this is pure math. So I guess there are a bunch of systems engineers here. In a nonlinear system, to maximize the system, you have to sub-optimize some subsystems.

If I give you... I'll show you like this. Let's say I give you a million dollars to buy soccer players. And you have an offensive coach and a defensive coach. Well, if you're an offensive coach, and you're thinking sub systemically, you'll say I wanna spend a million dollars to reinforce the offense, or the defense, whatever your job is. But that's not gonna be the best for the team.

The best for the team would be, in general, an internal solution, where you spend some money to uplift the team as a whole. Maybe half and half would be just a focal point. But half and half is neither here nor there.

But if you haven't seen this movie, I suggest you see Moneyball. Moneyball is exactly about this. So, after this talk, you will understand Moneyball very differently. It is an impossibility to define the subsystems in a way that everybody can optimize.

That's the engineer's dream. Oh my god, if we could create the linear proximation to this system, then we optimize the parts, and some computer algorithms for nonlinear optimization will work with linear approximations. But that's not how you can work with an organization. So, watch Moneyball. Allegedly it's a baseball movie. It's really a movie about complex, nonlinear systems. It is, it is. And the main character of the movie is an economist.

The kid that advises the coach, is an economist, that says "we need to sell high, and buy low," the players. So how do we sell high players? Let's sell the players that look good in the statistics, but don't help the team to win so much. And take that money and buy players that don't look so good in the statistics, but they really help their teams win. They hit singles or doubles, no home runs. And they do that. And the first thing that happens is the owners and the fans want to fire the coach. Because they're all assessing the coach went crazy, he's selling the best players and buying bad players.

Now in the end, the A's won with the lowest budget ever, ever, by a mile. An amazing story. So watch the movie and you'll see why this is so important.

Moderator:

Can you talk about how you put some of these ideas into practice at Google?

Fred:

No. It's confidential. No, yes, I can. I mean, just like I'm doing with you. I'm having conversations with people and then teaching them some things. You're actually gonna get two books. My first book is Conscious Business. I wrote them in the wrong order. This is the motivation I couldn't have written. So, Conscious Business is a book on diet. Very simple. But if a book on diet would make you thin, we'd all be thin.

The problem with the diet is not understanding the diet in the book, the problem is that what is good doesn't taste so good. And what tastes good is not so good. So most people work eating with their tongues, they don't eat with their minds. Meaning they go for the sugar of unilateral control, and doing all these things. So, it's all written.

I also, on LinkedIn, I posted on the leadership program I developed for LinkedIn, so it's all there on the LinkedIn platform. So if you go there, there's like 80 videos. And they're all, it's our gift. Jeff Weiner, I tell this story there, but Jeff and I, that was part of our contract. Jeff offered that platform to share my work with everybody. And you're more than welcome to read the books, but you can also go there and watch some of the videos. And if you are interested. That's what we do at Google too, what I'm doing now.

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