A Portfolio of Equity

By Art Kleiner

The following is adapted from Chapter 16 of Art Kleiner’s new book, Who Really Matters: The Core Group Theory of Power, Privilege, and Success, Currency Doubleday, 2003.

    Several years ago, at a medium-sized manufacturing firm, a young electronics engineer named Frederick was assigned to lead a team to develop and launch a new piece of high-tech equipment. Idealistic and thoughtful, Frederick saw his assignment as an opportunity to set an example for the whole company.  Most projects came in after deadline and over budget, in a manic, round-the-clock final stretch accompanied by browbeating from senior management and desperate pleading from customers. This time, they would use state-of-the-art “team management” methods to change all that. They would “own” their project, organizing their own work processes, setting and tracking their goals and targets collaboratively. Frederick 's bosses agreed, and the young team leader went to work.

    But then, a few months after the project began, Frederick took a week’s vacation. While he was gone, his boss stepped in and "tinkered a bit", changing the schedule and undoing a deal that the team had made with a supplier. When Frederick came back, he felt like his legitimacy had been eroded. What was the point of team management, if a higher authority could override it at any moment? Discouraged, Frederick   quit his management role and dropped back to being an engineer again. Within a year, he dropped out of  the company entirely, leaving his profession to become a sculptor.

    "I wasn’t treated like a person," he said. "They treated me like a commodity."

    Three years later, he still spoke of the company with bitterness. And it wasn’t just his loss. The product team forged ahead without him, pulling in his old boss as project manager on top of his other duties. Everyone reverted to the old way of operating: browbeating, missed deadlines, and high-stress panic. Eventually, they produced the new device—two years late and a million dollars over budget, amidst a grueling lawsuit with one of their suppliers. Had Frederick stayed on the scene, by all accounts, he probably would have prevented all that.

    People like Frederick are everywhere, of course, in large organizations – both in good times and bad. And they always seem to fall into the same type of story. Smart and committed, they know a better way to operate. And then, smash! They come up against the organization’s immune system. They go from being the organization’s best hope to being seen as a kind of alien invader. And they never seem to recover their equilibrium.

    Had he been more conscious when his new team approach was approved, Frederick would have realized that he didn’t have the support he needed to make it work. Even though Frederick ’s new approach was formally approved, people all around him just assumed that, when push came to shove, the Core Group would reject it. Naturally, feeling that way, they had to tinker; they had to make Frederick feel like a commodity. They had to destroy the project in order to save it

     Imagine that you are someone in Frederick ’s position-someone who sees a new way of operating or a new strategy, and yearns to make it work in your company. You recognize that the organization, simply by its nature, cares more about the perceived priorities of the Core Group than it does about committed, creative junior people like yourself. How then can you gain any leverage at all? At first glance, the circumstances might seem to call for cynicism; in the working world, you might think, idealists like me will always come to nothing. But there is another way of looking at it that can be highly liberating, one which allows people at every level of an organization to pursue what they most want and what they believe it best for the organization. In this view, Frederick suffered not because he lacked integrity or intelligence, but because he lacked organizational equity—the kind of equity that you can create yourself, which increases your influence in your organization, and helps you fulfill your own dreams.

    You may ordinarily think of equity as the assets, transformed into stock, that shareholders own. And this is of course a valuable form of equity for employees – whether purchased through options, awarded in grants, or bought through 401(k)-style investments. Paradoxically, its greatest value comes before it’s cashed in: as a visible sign of your commitment to the performance of the whole. It aligns your fate and the company’s fate together in a tangible way. But if it’s the only form of equity you own, as many employee-shareholders have seen since 2001, it makes you all too tangibly vulnerable.

    In the end, our conventional definition of equity is far too narrow. Equity is any share of accumulated wealth, including such intangible forms of “social capital” as relationships and reputation.  There are dozens of types of equity that an individual can accumulate, including these: 

• Fungible Financial Equity: Can you accumulate, through savings or other means, enough money to be able to walk away from an organization if you can’t live with the Core Group? Can you accumulate enough to invest in your own development, even if your employer doesn’t? Having this amount actually makes it easier to live with the organization, which will sense that you are staying with it through genuine interest, not financial dependence.

• Rainmaking equity: The ability to raise money or business is a form of capital. It depends, in part, on your contacts in the outside world, and even more on your ability to approach them. If you are not in the Core Group, you can still command respect for this skill, especially in some non-profit organizations.

• Credential equity: Once you have held a position, or acquired a credential, it remains with you for a lifetime. Those who have been presidents of companies can become presidents of companies again. Those with degrees in a field, from engineering to education, are qualified for life for employment in those fields. Most corporations are relatively stalwart meritocracies outside the Core Group; credentials are an indispensable form of equity within them. They’re so invaluable that non-tenured academics at some universities (such as Cambridge University in England ) sometimes pay for the privilege of maintaining an office there, for the credential of association that goes with it.

• Reputation equity: People who live by their wits, like lawyers, doctors, consultants, and writers, have always known the value of managing this kind of equity. “Any general statement is like a cheque drawn on a bank,” wrote poet Ezra Pound. “Its value depends on what is there to meet it. If Marconi says something about ultra-short waves it means something.” I know several innovative managers who have protected their right to innovate by continually writing for outside publication and speaking in outside conferences – thereby demonstrating that someone, at least, honors their ideas.

•Relationship equity: Some people never have a problem meeting new people, or making trusted friends. People seek them out. As Malcolm Gladwell noted in The Tipping Point, Paul Revere was able to roust the farmers of Middlesex because he was a natural convivialist, a frequenter of bars and a member of social groups, including the budding groups of revolutionaries then emerging. In corporate America , such relationship equity (particularly the ability to know the Core Group) can save people from losing their jobs, even though they challenge the top.

    Journalist Dominick Dunne’s memoir/novel of the O.J. Simpson trial, Another City, Not My Own,  is a textbook on relationship equity and how to cultivate it.  Though he was an unabashed partisan who repeatedly proclaimed his belief that O.J. was guilty (the courtroom TV camera focused on his shocked expression when the verdict of innocence was announced), he got to know people on all sides of the story, including celebrities, prosecutors, lawyers, quiet non-celebrity bystanders, those who were estranged from each other, and Simpson’s mother and sister. In one of the book’s most compelling scenes, Dunne’s narrator brings an elaborate present to Simpson’s sisters from the designer Carolina Herrera, who (like most socialites) is convinced Simpson is guilty. Yet the encounter is suffused with graciousness and with the awareness that, despite everything, there is something human common to everyone, something closely tied to the motions of everyday life, that must be acknowledged even in the most extraordinary of circumstances.

•Capability equity: Perhaps the form of equity that does the most for you is your ability to gain new capabilities and skills – because these accelerate your accumulation of all the other forms of equity. Most organizational learning literature, emotional-intelligence literature, all forms of how-to literature, is about building capabilities.

    Health, fitness, family, love, awareness, sensitivity, spirit; these too, are forms of equity that either grow larger or smaller with time, depending on how we cultivate and pay attention to them.

    Some forms of equity are measurable, while others are not; but all of them have two key features in common.

• First, they give you leverage in an organization (and in life in general). 
  

• Second, they accrue exponentially, with the same compound-interest emotional dynamics as a savings account.

    When you first consider building a nest egg (say, in your twenties), it seems impossible that your amounts will ever amount to anything of significance.  But suppose you stick with it. You even pick up the pace of savings as your income increases, eventually crossing a threshold of confidence; the recognition of your own ability to acquire a significant stake. In other words, you’ve demonstrated your ability to save. Moreover, in the process, you’ve learned something about making money and investing it. You’re probably earning more, so your savings is a smaller proportion of your discretionary income. (This is one of the key themes of such bestsellers as Rich Dad, Poor Dad, which stress building financial equity not primarily as money saved but as knowledge of business and of one small realm of investment where your expertise will catapult you into confidence.)

    Sometime in your forties or fifties, your account crosses another threshold – the threshold of sustainability. It is large enough to generate a significant income just from the interest. You have created what economists call capital: a resource that replenishes itself. For example: with enough capital to generate, say, $15,000 per year in interest, you could find a part of the world where you could live cheaply, peel off the interest, keep the principal intact, and never have to work again. You could devote your time and energy to the things you’d always wanted to do: creating a business, writing a novel, starting a new kind of agency, or saving the world. (This is the basic theme of the sustainable-life money guide, Your Money or Your Life,” which posits financial independence as a goal for anyone on any income level.)

    Other forms of equity can also become self-sustaining. People with a sufficient number of friends and acquaintances find it easy to make more; relationships breed more relationships. Similarly, people who already have significant reputations automatically attract opportunities to build their reputations further, through speaking, writing, teaching, and sometimes television appearances.

    All forms of equity involve the same two thresholds: confidence and sustainability. Most coming-of-age stories have to do with crossing the threshold of confidence: Harry Potter learns to play quidditch (skill equity); E.B. White’s Wilbur the Pig establishes a form of notoriety that saves his life (reputation equity) through his ability to befriend others (relationship equity); the J.D. Salinger heroine Franny Glass in his classic novel Franny and Zoey develops a kind of emotional and spiritual depth (capability equity). The message of these stories to the listener is, “You can do it, too.”

    Stories about sustainability usually take the form of tales of long-lived dynasties – the Rothschilds, the Kennedys, the Rockefellers – who continually build on their holdings. And, of course, there are many cautionary tales about ne’er-do-wells or hapless types who lose their sustainable position. Just as a family fortune can be dissipated,  “shirtsleeves to shirtsleeves in three generations,” non-financial equity will erode if it is not well managed. Once it is drawn down past the threshold of sustainability, it no longer can replenish itself, and it can vanish with unexpected speed.

    Although all equity growth is compounded, different forms of equity have different rhythms for growth. Money accumulates gradually, with a smooth exponential curve of steady, mathematical advancement. Skills and capabilities accumulate through a kind of punctuated equilibrium; the innovative organizational psychologist Elliot Jaques demonstrated that the human ability to deal with complexity crosses a cognitive threshold every fifteen years. (Have you ever had the experience of suddenly realizing that you’re routinely doing the kinds of complex tasks that flummoxed you a few years ago? That’s what it feels like to cross a cognitive threshold.) Reputation’s curve seems to advance on accelerated momentum and then come to sudden stops, with no clear cue about when it will start up again. Only seizing the moment when opportunity strikes develops rainmaking equity.

    Our organizations should be helping us accumulate a variety of forms of equity, just as they help us accumulate stock, and for the same reasons: to cement loyalty, align people with the purpose of the enterprise, and build the strength of the whole system. In the absence of that help, at least we can build equity for ourselves, and lead a rich, rewarding life in the workplace, whether or not we are part of the Core Group.

    In retrospect, the reason Frederick , the young electronics engineer, got into so much trouble was this: He didn’t have enough different kinds of equity to match the complexity of the job he had taken on. People like him often are invited to take on roles and projects that look like one-way tickets to the top. But they are actually tickets to failure, granted thoughtlessly and irresponsibly by managers who think they are being beneficent. Before too long, barely visible roadblocks are raised; people come in and micromanage; rumors of incompetence spread. The only way to deal with this is to have accumulated enough equity, of various sorts, that you can protect yourself.

    Consider Frederick ’s story in terms of the equity he had–and didn’t have:

Type of equity	Applicable to this situation	Available to Frederick
Fungible financial equity	Frederick was not being asked to invest money in this project; he would need financial equity only as leverage, in case he decided to walk away from the company.	Ultimately, he did walk away. Had he not had enough financial equity to begin his sculpting career, he would have been stuck in an untenable situation.
Rainmaking equity	The budget was set from above, so ostensibly there was no need for more; in reality, however, the ability to raise more money would have greatly increased Frederick ’s options (and the team's)	Frederick had almost no rainmaking equity, and suffered accordingly.
Ownership equity (stock in his company)	Stock in the company  was not critical for Frederick ’s success. Significant stock or options  would, however, have made it clear that he was potential Core Group material.	There was no plausible way at his level for Frederick to hold enough stock in this company to make a difference here.
Reputation equity	Any new team leader, trying a massive experiment in new approaches needs a highly competent and creative reputation.	Frederick lacked the reputation he needed. At minimum, a presentation of the rationale for his approach would have made a difference. Even if people at the top didn’t attend, the presentation might have made them aware of Frederick 's contribution and foresight.
Type of equity	Applicable to this situation	Available to Frederick
Relationship equity	Frederick needed a great deal of strategic power to maneuver through the in-fighting among his various bosses, to get sponsorship for his new approach, and to provide “air cover” for his team so they would be let alone.	Frederick had excellent relationships on a peer level, and with suppliers. But his lack of good relationships up the hierarchy was a crippling factor. There was no one he could go to for candid counsel or perspective; there was no one who would give him “air cover” without raising eyebrows or concern about the project.
Credential equity	Once you are a team manager, you will always be a team manager.	This was Frederick ’s first time as team manager. He had only partially built the credentials he needed for credibility in this bold step.
Capability equity	Significant capabilities are needed to manage a team that must work together in new ways.	Frederick , despite the training he had undergone in “team dynamics,” lacked the facilitation and project management skills that he needed. He was trying to build them through “on-the-job training,” which meant that he had some capital, but had not yet crossed the second threshold to have a sustainable set of skills.

    Anyone, no matter how downtrodden (or how excluded from the Core Group), can build some kind of equity. But there is no one-size-fits-all strategy for building a portfolio of organizational equity. Your choice  depends on what is easy for you, and what kinds of equity your organization and its Core Group value. Most importantly, your choice depends on the kind of life you are trying to create. Because you cannot tell in advance which will be most useful to you, accruing many forms of equity helps contribute to a well-rounded life. Having a reputation for being trustworthy and capable and an extensive network of competent, trustworthy people who take your calls, is a better hedge than a lot of money invested in an unbalanced portfolio of stocks.  A lifelong strategy of building equity also means that we don’t have to wait for someone else to bestow something on us – whether it’s stock options, jobs, or membership in the Core Group.

    Each of us has a head start in some forms of equity, but not in all of them. Some people who have no money but who have, from a very young age, been gifted in relationship equity, don’t really need  a lot of money to be secure. They will always find a network of people to rely on. They probably grew up in a house with people passing through all the time; and intuitively understood how to cultivate relationships.

    One final bit of encouragement: Building any of these forms of equity is easier than it seems. It always starts off slow and agonizing, until you cross the threshold of confidence. And by the time you cross the threshold of sustainability (if you ever get there), it’s hard to remember that you ever had a problem.

    When taking on a new assignment or pushing your job to a new level, ask yourself: What kinds of equity does this challenge require? How much of that equity will I need ahead of time, and how much can I build on the job? And if I don’t have it, what do I do to develop it, and how long will that take?

    Without any blame or harsh judgment, maybe it’s time to take an inventory of your own portfolio of equity.

    For each of the following, ask yourself: Where am I? Am I past the threshold of confidence? Am I past the threshold of sustainability? And what would be a good indicator that I have crossed the next threshold?

    For instance, if you’re in financial debt (welcome to the club), you’re probably not past the threshold of confidence with fungible financial equity. How much money would you need to accumulate, and how liquid would it have to be, to gain confidence in your ability to preserve that kind of wealth? Or, if you have confidence in your reputation, what would be a sign that your reputation was, in fact, generating more interest on its own?

·        Fungible financial equity

·        Rainmaking equity

·        Ownership equity (stock or other ownership in the organizations where you work)

·        Reputation equity

·        Relationship equity

·        Credential equity

·        Capability equity

·        Health and fitness

·        Family and love

·        Awareness, sensitivity, and spirit.

    Suppose now that you could only focus your attention on one of these at a time.

    Which is the greatest “toothache” – in other words, the gap in equity that screams so much for your attention that it is hard to focus on anything else?

    And which is the greatest leverage – in other words, if you crossed a threshold here, would it help cross thresholds of others?

    Finally, if you were willing to ignore the “toothache” equity long enough to focus on the “leverage” equity, if only for a little while, how would you begin?

Notes

The “ Frederick ” story was derived from a private learning history conducted by Charlotte Roberts, Nina Kruschwitz and myself for Bluefire Partners, Charlotte , N.C. The company whose story is told has been disguised, but the essentials are correct. Probably the best description of “natural capital” and “social capital” is in Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natural Capitalism, 1999, New York, Little, Brown and Company. The Pound quote is from Ezra Pound, ABC of Reading , 1934, Toronto , New Directions, p. 25. The Paul Revere story is from Malcolm Gladwell, The Tipping Point, 2000, New York : Little, Brown. Gladwell in turn builds upon David Hackett Fischer, Paul Revere’s Ride, 1994: New York , Oxford University Press. The scene with O.J. Simpson’s mother and sister is in Dominick Dunne, Another City, Not My Own, 1997, New York : Ballantine, p. 243-4. There are also references to Robert T. Kiyosaki and Sharon L. Lechter, Rich Dad, Poor Dad, 2000, New York: Warner Books; and to Joe Dominguez and Vicki Robin, Your Money or Your Life, 1992, New York: Viking Penguin. I will let you, dear reader, research your own editions of the three coming-of-age stories I mention: The Harry Potter novels written by J.K. Rowling, Charlotte’s Web by E.B. White and Franny and Zooey by J.D. Salinger. Finally, if you want an academic study of one form of equity, here’s one from a legal scholar, no less: Karl S. Okamoto , “Reputation and the Value of Lawyers,”  Oregon Law Review, Spring 1995.