A very business-like post here. Yes, esoteric as this site can be, I do love business, so occasionally I may cogitate and share business lessons!
“Do not pay attention to what people say, only to what they do, and to how much of their necks they are putting on the line”, says Nassim Nicholas Taleb in his new book Skin in the Game.
So begins the book review in The Times from Matthew Syed.
(Note: The Times is behind a firewall, so posting extracts only to start this post off.)
“Skin in the game comes with conflict of interest. What I hope this book will do is show that the former is more important than the latter.”
Taleb is provocative. A Brit might call him “marmite”, something I’ve been called myself. It refers to a spread for toast that is, well, uniquely flavoured. People either love it or hate it. Marmite.
I do love Matthew Syed, who himself writes in a similar field (Behavioural Economics) and I love all of his books and ideas, and I similarly love the way he reviewed Taleb’s book. My favourite Syed book is “Bounce – the myth of talent and the power of practice“, and you can riff off that with Outliers from Malcolm Gladwell.
However, for this post, let me simply cogitate on the idea of “skin in the game”.
A few examples then a focus on corporate and entrepreneurial business leadership.
Syrian refugee crisis
A Canadian friend quit her management job in the west of Canada and flew to work in a refugee camp for a month on her own dime.
Skin in the game. Yes
She also crowdfunded part of her travel cost for this trip, so for those of us who contributed?
Skin in the game? Yes
Does every sentient person watching the news and on social media care? Yes. Do many also post about it, talk about it with others? Yes
Skin in the game? No
US Politics
A friend of mine in the Cayman Islands is a British national married to an American and passionate about politics and change through democracy.
He runs his own business and yet still took most of 2008 off to go to the USA and work in the presidential campaign of Barack Obama
Skin in the game. Yes
With the gun control issues in the USA, does everybody I know outside the USA wish something would change? Yes. Unless we actively do something financially or personally to do something about it that can influence political change…
Skin in the game. No.
Corporate CEOs
Corporate CEOs who have a materially significant amount of their net worth invested in equity shares in their employer.
Skin in the game. Yes
Corporate CEOs who have large salaries, pension pots, bonuses but without a material amount of their net worth invested in equity shares.
Skin in the game. No
Reputation, perhaps. Financial skin in the game, no.
Watch out for whether our corporate leaders truly have skin in the game.
Also, for board directors, look to see if they own shares in that business. Sometimes there is this question of conflict of interest, but I personally believe that one should back the horse your ride on.
Entrepreneurial Business Leaders
Now, to leadership in an entrepreneurial business, the area I’ve spent most of my career in. I have definite opinions here based on experience.
As an investor in many businesses over the years, I do look for skin in the game. I’m not an absolutist on all of these, but here are a few thoughts for those who are or may seek investment, and also for founders and CEOs to consider to what level they have skin in the game.
Small business owners too are not “two feet in” on their business. Yes, I get that some may treat a startup as a “side hustle” as they keep their full-time job. I also get that some may have multiple “balls in the air” as they “bootstrap” their startup. However, as an investor, I’ve rarely found that a business will really take off until the founder truly has skin in the game to the level where they don’t have a safety net, they simply have to succeed.
If this resonates with you and you are not yet “two feet in” to your business, do consider what is stopping you and when you may be ready (if ever, to be fair) to make the leap.
Oh, and this applies all across our lives. Relationships? Education?
Ask yourself, do you have skin in the game?
Employees in a startup / scale up. This is where skin in the game and conflict of interest can work in a negative combination, different from what Taleb talks about.
As an example, on more than one occasion I’ve seen a business that is structured where almost all of the people in it are entrepreneurially motivated, whether on an associate model where if they don’t do client work they don’t earn, or that the senior people are equity investors and have truly committed material funds to the business. Now, on those occasions, the business had got to a point where they’d hired a ‘C’ suite and those people did not have equity, plus they were on steady salaries.
Skin in the game. No
Add to that conflict of interest as their first focus was to make sure there were funds to pay their steady salaries.
I’ve never seen that one end well. Have you?
Incentivising Managers
A really simple one to finish with.
I spent years in the tourism and hospitality business. Loved it. Passionate people who loved service. I worked in sectors in this business from airline to diving to hotels to timeshares to tour companies to marketing agencies to destination marketing and more.
The one area I found, for years, most challenging to align investor and management interests? Restaurants.
It is said that most successful restauranteurs went bankrupt first. Tough business. One idea I tried that did work? Align the incentives of the shareholders with the management.
I’ve seen top restaurant management and chefs paid celebrity salaries.
Skin in the game. No.
I’ve seen them paid bonuses on sales targets.
Skin in the game. No.
No? Really? Yes, as restaurants are famous for letting costs go out of control, often in the interest of service and reputation. Revenue does not equal profit.
What I found worked far better was to a) pay the top chefs and management a little less than they needed as their salary, then b) reward them well based on the bottom line (operating profit within their control) rather than revenues.
Skin in the game. Yes.
Align the incentives and ensure they energise people positively, then they have skin in the game and you don’t need to manage them.