Asset-Based Loans: Not Your Father's Pawn Shop

With credit still tight, small-business people look to leverage their assets to obtain start-up and operating cash.
CFO.com:
Credit & Capital | February 26, 2013 | CFO.com | US
David Rosenbaum

A Canadian businessman had a chance to buy a franchise. To raise cash, he borrowed from friends and relatives, and invested a chunk of his own savings. That covered his initial costs, but to get the business running the way he wanted it to, he needed to invest another $50,000–$100,000. That money was not sitting in his bank account, his friends’ pockets, or his desk drawer.

What was sitting in his drawer (actually, a safe-deposit box) was a collection of diamonds.

“I had other resources available, but I didn’t want to access them and tie up other credit facilities,” he says, declining to allow his name to be used in this article because, well, he owns diamonds and (reasonably) prefers that people not be able to connect them to him.

The businessman has been buying diamonds for 20 years–25 years “as an investment” but “you can’t take diamonds to a bank to use as collateral.” He didn’t want to sell them, and they “were worth more than I needed to borrow.” However, he had heard about asset-based financing and contacted fellow Canadian Steven Uster, who founded Zillidy, an online finance company designed “to help small-business owners who need short-term bridge loans.”

Today, with credit for small businesses still relatively tight, and with many small-business people already having taken equity out of their homes to finance their businesses... traditional routes to obtaining funding for cash flow needs can be bumpy and time-consuming, if they’re accessible at all.

Official portrait of Federal Reserve Chairman Ben Bernanke. (Photo credit: Wikipedia)

As Federal Reserve chairman Ben Bernanke said in a 2010 talk, “The formation and growth of small businesses depends critically on access to credit.” And while using personal assets to obtain credit may sound like what people usually call pawning, personal asset lenders don’t like the term.

“It’s not pawning,” insists Uster, who in 2009 founded Eldridge Capital, a factoring firm (which lends money against accounts receivable) for businesses with annual sales of between $2 million and $30 million. “It’s essentially like having a home-equity line of credit, but instead of tapping the equity in your house, you’re tapping the equity in your personal assets.”

The word pawn “has a stigma,” Uster continues. Zillidy, he says, is like a “private bank” that focuses on collateral rather than creditworthiness (as banks do) or on a predictable stream of future revenue in the form of receivables (like a factor).

The Rolex logo (Photo credit: Wikipedia)

“You bring a pawn shop a $10,000 Rolex, first they’ll tell you what’s wrong with it. Then they’ll loan you a thousand. Then every month you have to go into the shop and pay interest on top of insurance and storage and standing-on-one-foot fees,” he says, referring jokingly in the last instance to a bevy of possible hard-to-understand or undisclosed fees. “And if you miss the reclaim date on the watch, or you can’t afford to reclaim it, they take ownership.”

To get a loan from Zillidy, the borrower fills out a form on the company website. “You tell us what the asset is; we send you a loan offer based on what we can liquidate the asset for. We’ll loan up to 90% of the asset’s value. So if we believe that Rolex is worth $10,000, you send it to us FedEx, fully insured, and we deposit $9,000 into your bank account where it’s available to you within 24 hours,” Uster says. The lender would keep the Rolex until the loan is repaid.

Each month the firm deducts 2.9% of interest (34.8% APR) by debiting the borrower’s account, charging no other costs or fees. The borrower can keep the loan going as long as he or she wants. “If you can’t repay, or don’t want the watch back, there’s no impact on your credit, as there would be on a credit card or a line of credit at a bank. We do not report to credit agencies and we never use collections agencies. If we sell the watch for $12,000, we take the $9,000 loan, and interest, and send the difference to you,” adds Uster.

According to the anonymous franchise owner, “This is very different than walking into a pawn shop and selling an asset at a substantially discounted price. It was the easiest thing I ever did. I met with [Uster’s] gemologist. I didn’t need to liquidate the diamonds. I didn’t have to transfer ownership. It was just a loan with a guarantee, using the diamonds as collateral.”

The franchise owner says he wasn’t using the loan as a last resort. “I was using it as the most convenient resort: access to short-term capital if you can’t go the traditional route,” he adds.

There are, of course, risks. The borrower can always lose the asset because of lack of repayment. So before using it as collateral for a loan, borrowers should think realistically about how (or if) they will be able to pay off the loan, and then what their lives would be like without the asset should reclaiming it become impossible.

However, says Uster, “We’re in the business of making loans, not selling assets. We really don’t want our clients to default.”

Personal asset lending sites like Zillidy, and Borro, which offers short-term loans of up to $1

Pawn Shop at Sherman Way & Reseda Blvd., Reseda, California (Photo credit: Wikipedia)

million against everything from watches to gold bars to luxury cars and even fancy wine (Borro claims to have recently loaned $23,000 against an unopened case of Chateau Petrus, vintage 1989), are proliferating, with the web shielding the small-business borrower from the stigma and discomfort of entering a sketchy neighborhood to walk into a shop with three balls hanging over the front door.

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6 ways to get out of your rut

CBS News:
By 

ROBERT PAGLIARINI / 

MONEYWATCH/ February 20, 2013, 11:28 AM

English: selfmade image of U.S. Unemployment rate from 1890-2009 (Photo credit: Wikipedia)

(MoneyWatch) We've been told that one of the keys to becoming a successful leader and to creating a successful life is to see things as they are and not worse. But if you've been beaten down and suffered setbacks such as unemployment, it's hard to see the positive.  ... [There] is ...[a]  nefarious consequence to your life that can result after you suffer a setback -- maybe ongoing unemployment -- and then only look at the negative.

Martin Seligman Quote (Photo credit: Psychology Pictures)

Psychologists call this phenomenon "learned helplessness." The cause of learned helplessness, according to Dr. Martin Seligman, is being repeatedly exposed to an uncontrollable event such as going on interviews or auditions and not getting a call back. After many repeated and failed attempts to accomplish something while in an uncontrollable event, your brain "learns" that success is beyond your control; that you cannot affect the outcome. Once "conditioned" in this belief, the individual gives up hope and effort, even when later exposed to an event where control is possible. In effect, you've learned to become helpless.

If you truly believe that regardless of what you do today, it won't positively impact tomorrow, you are destined to fall short of your potential. Keep the following six concepts in mind to eliminate learned helplessness:

1. Change is possible. If you don't think your finances or life can improve, then you won't take any steps to make them better. ... If you are still having a hard time accepting this, ask if it is possible for your life to get worse because of steps you take. If your life can get worse as a result of your actions, there's no reason it can't get better too.

2. Think big. ... If you think big enough, you will have the motivation to take the initial steps and the fuel to keep progressing even in the face of challenges and disappointment.

3. Get perspective. If your friend were in your situation, wouldn't you encourage her to think about her situation objectively and to take whatever action that is appropriate? What would you tell her?

4. Set goals. Just the act of setting goals will help you overcome the feeling that you have no control over your future. ...

5. Achieving successes. One of the best ways to overcome the belief that your actions don't affect your future is to start achieving small successes. While goals must be big and motivating, there should also be small and achievable goals along the way.

6. Consider a different viewpoint. Dr. Seligman's research on learned helplessness inspired him to look at optimists and pessimists and examine how both types of people explain good and bad events. In his book, Authentic Happiness, he writes that, "Optimistic people tend to interpret troubles as transient, controllable, and specific to one situation. Pessimistic people, in contrast, believe that their troubles last forever, undermine everything they do and are uncontrollable." In short, if we can change the way we explain the events that occur in our lives, we will be less likely to suffer from learned helplessness.

You do have influence over your life. Even if you don't believe it right now, act as if you do. Start small so you can begin to see how your actions produce results.

© 2013 CBS Interactive Inc.. All Rights Reserved.

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  Robert Pagliarini

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  Robert Pagliarini is obsessed with inspiring others to create and empowering them to live life to the fullest by radically changing the way they invest their time and energy. He is the founder of Richer Life, a community of passionate people who want to learn and achieve more in life and at work. He is a Certified Financial Planner and the president of Pacifica Wealth Advisors, a boutique wealth management firm serving sudden wealth recipients and affluent individuals. He has appeared as a financial expert on 20/20, Good Morning America, Dr. Phil, Dr. Drew's Lifechangers and many others.

  
  

  
  

  
  

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Business Valuation: Key Questions to Ask

By some estimates, roughly 80% of a typical small business owner’s net worth is tied up in her company. Yet, according to experts, most entrepreneurs have not taken the time to formally value their companies.

Financial Planning:

BY: ANN MARSH

FINANCIAL PLANNING

THURSDAY, FEBRUARY 21, 2013

“The value is the amount your business would be worth if you were to sell it to a third party,” says Mark Tepper, the president of Strategic Wealth Partners in Seven Hills, Ohio. Tepper, who specializes in working with small business owners, has devised a multi-step process for doing back-of-the-envelope valuations for his clients.“We put the valuations together as part of our wealth management package,” he says.

English: Figure 13: Break even of costs and revenues; new investment. Belongs to The Organic Business Guide. (Photo credit: Wikipedia)

Given that certified valuations cost between $5,000 and $20,000, Tepper says, many of his clients prefer to use his process at first before making the larger investment. Although he warns that his line of questioning offers only a rough number, he says it can still give clients a preliminary way of thinking about their assets' value. “These are not certified valuations,” he cautions. “You can’t take these to IRS court and challenge a gift tax or estate tax ruling. But we can turn [them ]into a certified valuation in roughly a week’s time” if necessary, he adds.

As part of the process, he says, he asks his clients the following eight questions:

1. Can the company stand on its own two feet and operate independently of the owner?

“A good litmus test is if you don’t have the ability to take a month-long vacation from the business, and shut down email and phone communication for that month, then the business is not independent of you,” according to Tepper. “No acquiring buyer is interested in buying a job. They want to buy an investment.”

2. Does the company have a stable and motivated management team?

“Those are really the biggest assets in an acquisition,” Tepper says. “We want to make sure [the management team] will stick around post sale." To ensure this happens, he says, owners should have some sort of non-qualified deferred compensation in place: Valuable team members "should want to continue working so that their account will vest every single year,” he explains.

3. Are there operating systems in place that can improve the sustainability of cash flows?

To make sure a company is a well-oiled machine, Tepper says, there should be a how-to manual -- so that when somebody acquires the venture, they don’t have to learn everything from scratch. “This also helps to protect you when employees leave,” he says, “even if it’s just a receptionist.”

4. Is there a diversified customer base?

“You don’t want to generate 70% of your revenues from one big company,” he says, “because if they leave, you are out of business.”

5. Are there recurring revenues?

“The greater percentage of your revenues that are recurring, the greater the multiple that you will attract” when selling the firm, Tepper says. Firms are typically sold as a multiple of revenues, such as 10 times earnings or total revenues. “This would be something like a cell phone contract,” he says, “not like buying toothpaste. You want sales on a subscription or contractual basis. The acquiring owner would expect those revenues to continue.”

6. Are the financial statements easy to understand?

Buyers want to make sure your client is not running a lot of lifestyle expenses  -- such as cars, vacations or country club memberships -- through the company. Those would make the company’s tax profile look better than it is in reality, Tepper says.

7. Is the appearance of the facility consistent with the asking price?

There can’t be broken windows or unkempt grounds at  $10 million asking price, Tepper says.

8. Is the cash flow not only good, but improving?

A buyer wants to know he is getting an asset that promises to increase in value, he adds.

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Getting more value from divestitures

Companies often struggle to capture the full value of a separation. Here’s how to do better.

McKinsey Quarterly:

FEBRUARY 2013 • David Fubini, Michael Park, and Kim Thomas

Source: Corporate Finance Practice

Most divestitures start with a strategic decision that a company is no longer the best owner of one of its businesses. ... Indeed, past McKinsey research has shown that companies that more frequently reallocate capital generate higher returns than their peers.¹

But once a company decides to sell, problems can arise. Managers devote their attention to finding a buyer but seldom scope deals from a potential buyer’s point of view, even as they struggle to figure out exactly what should be included in the sale, apart from the productive assets that are its centerpiece. ... Management and the board can get so caught up in the sale that the core business begins to suffer from neglect. All in all, divestiture turns out to be no panacea: sellers can take up to three years to recover from the experience (exhibit). Indeed, some companies are so wary of these pitfalls that they decide to muddle through with businesses of which they are not the natural owners—another unsatisfactory result, as research suggests that these sales can produce significant returns for both the parent company and the divested or spun-off business.²

In our experience, even highly complex divestitures can work well, provided companies follow proven practices, especially in three areas: scoping the deal in detail, addressing the so-called stranded costs left behind when the revenue-generating assets are sold, and managing the expectations and concerns of employees.

... Getting started on these activities quickly, in parallel with the search for a buyer, can unlock enormous value for buyer and seller alike.

Taking the buyer’s point of view

... Admittedly, it’s a bit impractical to define exact deal boundaries before the identity of the buyer and its preferences are known.

To get around that problem, smart sellers define a number of different deal packages—of assets, people, and services—configured to attract interest from a broad spectrum of buyers. These packages not only broaden the field of potential buyers, often in ways that companies cannot envision at the outset, but also help the company cope with the tough questions that buyers inevitably have about what’s in scope, how to separate, the transitional services they can count on, and the financials of the business. ...

English: Diagram of private equity fund structure for Private equity, Private equity fund, Private equity firm (Photo credit: Wikipedia)

Sellers can construct sale packages for a range of buyers. Each buyer is unique and will have more or less need for infrastructure, capabilities, and a geographic presence where the assets for sale are located. To prepare for the wide range of needs, most sellers will want to develop basic packages for at least three types of bidder: a strategic buyer with a local presence, a strategic buyer from another region, and a private-equity firm seeking a stand-alone entity. ...

... And there may also be buyers interested in cherry-picking parts of the core business instead of taking all of it—which, while probably not ideal, should not be discounted out of hand. Sale packages include pro forma financial statements tailored to represent the package being offered to each buyer or class of buyer that highlight the true value of the business, separation and transition plans, and details on proposed management and talent assignments.

When a large industrial company was looking to divest one of its business units in the late 2000s, its managers’ first instinct was to sell to a large strategic buyer. But by conducting a form of due diligence on its prospective buyers ...—including some private-equity firms—the company was able to understand all the potential synergies each would gain by buying the business. That enabled managers to design a specific value proposition for each potential buyer. Eventually, they were able to attract—and sell the business to—a much smaller player ... . Even better, the company got a price 20 percent higher than first expected. In fact, ... the final list of bidders included a private-equity consortium and a few other unanticipated interests.

Rooting out stranded costs

One of the most challenging aspects of a major divestiture is that even sellers that control expenses well are inevitably left with some corporate costs associated with the business but not sold with it. ... Stranded costs essentially can be any type of cost that does not automatically disappear with the transaction, ... . Some of these are fixed, such as the IT system, and cannot be readily reduced regardless of the size of the divestiture. Others are more variable and can contract, for example, with a lower head count—but they can still take years to unwind unless explicitly planned as part of the divestiture. ...

We see three strong practices to reduce overhead. First, ... defining the precise boundaries of potential deal packages early in the deal brings to light the full extent of the subsidiary’s sales, general, and administrative costs. The parent company can make a better attribution of resources to the parent and the subsidiary. That benefits both companies.

Second, successful sellers often use the momentum generated by the divestiture as a catalyst to reduce stranded costs—and to improve the performance of any bloated or inefficient corporate-center activities revealed by the divestiture. (This mirrors a similar effect of transformational acquisitions, in which buyers take advantage of the circumstances of an acquisition as a catalyst to restructure costs more broadly.³) ...

Rooting out stranded costs takes a separation manager with the foresight to rethink the parent company’s cost base and the authority to make it happen—the third good practice. ...

Companies of this size often face a special problem in rooting out stranded costs. For many large multinational companies organized by matrix, the only pragmatic method is for senior management to lead a cross-functional initiative to tackle cross-cutting opportunities such as shared-service and outsourcing operations, as well as the change programs required to support the cost transformations.

Managing employee expectations

The challenges of talent management in a divestiture start at the moment companies begin defining the boundaries of different sale packages and continue right through to the close of the deal. First and foremost, managers struggle to figure out what to say to the people involved. ...  Sometimes company leaders will choose to keep plans for the deal confidential up until signing— as one global CEO and seasoned divestiture veteran told us, “I just deny everything until the deal is signed. It’s easier that way.” This may be true, but it creates a communication challenge. Many employees inevitably will know about the deal because of the massive preparation work that is impossible to conceal. But if management officially denies the reports, it becomes very difficult to put in place communication plans and other measures to minimize the concerns that always arise in such situations—all employees want to know, “What happens to me?”

Some form of short announcement is essential. Once managers make an announcement, they should clearly define and communicate the selection process to keep employees motivated while they wait for news of their fate. ... Ideally, the communication plan should be part of a compelling story that shows not only employees but also investors, analysts, and customers why the divestiture will leave both buyer and seller better off.

Once the word is out, other challenges begin. ... Given the role the exiting managers will play in communicating the business’s value to potential buyers, delay in informing them is undesirable. But once they are informed, they immediately become another party at the negotiating table, bargaining for the talent, assets, and contracts they feel they’ll need to be successful and trying to avoid the ones they don’t want.

Failing to manage the tension between the two groups can be damaging. When a global industrial company divested a multibillion-dollar division, for example, it began to receive a lot of applications for transfers from the entity to be divested back into the parent company—so many, ... that the company was at risk of visibly depleting the divested company ... potentially affecting its value. To discourage the transfers, it aligned the incentives of people in the departing unit to the characteristics of the sale. It decided to reward managers based on earnings before interest, taxes, depreciation, and amortization (EBITDA)—a critical negotiating point with the private-equity firm that ultimately bought it. The emphasis on EBITDA motivated exiting managers to minimize the overhead they took with them; it also reduced transfer requests.

This approach did leave more overhead for parent-company managers to deal with, ... But they made a conscious choice to accept this, believing that the right way to deal with broader cost issues was, ... as part of a thorough change process in the wake of the divestiture. Parent-company managers often lack the incentives that would compel them to take care of the departing entity. ... In our experience, it is important to define and implement a set of performance measures and rewards aligned with value maximization, and to use these with all key people involved in the divestiture process. The most obvious rewards are monetary, but research shows that other incentives (such as recognition and promotions) can be equally if not more important determinants of performance.

Negotiations over talent are particularly sensitive. The first inclination of parent-company managers is to keep the best performers and send the rest with the divested business. That’s not practical, ... the divestor has a moral ... and ... legal [obligation] to make sure the business is a going concern. ... At the same time, the parent company must retain critical resources, and quite often, the exiting managers have the very skills they need. Thus, successful divestors will address the issue of talent early in the process and start building or acquiring the skills needed in both the parent organization and the business to be sold.

Much of the value of a divestiture depends on the effectiveness of the separation process. Defining the right deal, managing talent uncertainty, and rooting out stranded costs can make the difference between a deal that succeeds and one that destroys value. And skill in divestiture is comparatively rare; doing it well can help companies get a competitive edge.

About the Authors

David Fubini is a partner in McKinsey’s Boston office, Michael Park is a partner in the New York office, and Kim Thomas is a senior expert in the Copenhagen office.

Notes

¹ Stephen Hall, Dan Lovallo, and Reinier Musters, “How to put your money where your strategy is,” mckinseyquarterly.com, March 2012.

² Bill Huyett and Tim Koller, “Finding the courage to shrink,” mckinseyquarterly.com, August 2011.

³ Marc Goedhart, Tim Koller, and David Wessels, “The five types of successful acquisitions,” mckinseyquarterly.com, July 2010.

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Six social-media skills every leader needs

Image via CrunchBase

McKinsey Quarterly:
FEBRUARY 2013 • Roland Deiser and Sylvain Newton

Organizational social-media literacy is fast becoming a source of competitive advantage. Learn, through the lens of executives at General Electric, how you and your leaders can keep up.

Image via CrunchBase

Few domains in business and society have been untouched by the emerging social-media revolution—one that is not even a decade old. Many organizations have been responding to that new reality, realizing the power and the potential of this technology for corporate life: wikis enable more efficient virtual collaboration in cross-functional projects; internal blogs, discussion boards, and YouTube channels encourage global conversations and knowledge sharing; sophisticated viral media campaigns engage customers and create brand loyalty; next-generation products are codeveloped in open-innovation processes; and corporate leaders work on shaping their enterprise 2.0 strategy.

English: Data from April 2011 Editor Survey that lists Social Media activities (Photo credit: Wikipedia)

This radical change has created a dilemma for senior executives: while the potential of social media seems immense, the inherent risks create uncertainty and unease. ... Social media encourages horizontal collaboration and unscripted conversations that travel in random paths across management hierarchies. It thereby short-circuits established power dynamics and traditional lines of communication.

We believe that capitalizing on the transformational power of social media while mitigating its risks calls for a new type of leader. The dynamics of social media amplify the need for qualities that have long been a staple of effective leadership, such as strategic creativity, authentic communication, and the ability to deal with a corporation’s social and political dynamics and to design an agile and responsive organization. ...

Equally important, there’s an organizational dimension: leaders must cultivate a new, technologically linked social infrastructure that by design promotes constant interaction across physical and geographical boundaries, as well as self-organized discourse and exchange.

Image via CrunchBase

We call this interplay of leadership skills and related organizational-design principles organizational media literacy, which we define along six dimensions that are interdependent and feed on one another (exhibit).

Our clearest window on the development of these new forms of literacy is General Electric, ... Witnessing GE through this lens is particularly interesting; unlike Google or Amazon, GE isn’t a digital native, and its 130-year tradition of reinventing businesses and itself makes it worth watching. So does GE’s status as a “leadership factory.”

GE’s commitment to social media is perhaps most visible through its digital platform GE Colab,

Image via CrunchBase

designed by GE employees for GE employees to facilitate global teamwork and collaboration. GE Colab combines the capabilities of Facebook, Twitter, and other social applications, allowing easy networking, information sharing, instant communication, advanced search, blogging, videoblogs, and more. Launched in 2012, the platform has already attracted more than 115,000 users.¹

To get a sense of how executives deal with these new realities, we interviewed GE officers of various businesses and regions. ...We drew on those experiences to illustrate the six-dimensional set of skills and organizational capabilities leaders must build to create an enterprise level of media literacy—capabilities that will soon be a critical source of competitive advantage.

1. The leader as producer: Creating compelling content

With video cameras achieving near ubiquity and film clips uploading in the blink of an eye to YouTube or other platforms, the tools for producing and sharing rich media are in everyone’s hands. ...  To engage in real time on a personal level, executives will also need the technical skills to master the basics of digital-multimedia production, including how to shoot and, if necessary, edit videos.

Tools for producing and sharing videos are now in the hands of many executives, who can upload recordings of
meetings (such as this one) to an internal server that employees can access.

© Image courtesy of GE

Mark Begor, who runs GE Capital’s real-estate business, was nervous when he shot his first “unplugged” video message. ... That unease soon vanished with practice. He now routinely produces a weekly five- to ten-minute video for his division. ... Begor says that this routine forces him to crystallize his thinking and that creating short stories people can relate to makes him more aware of his strategy and communication.

... To thrive in the world of social media, leaders need to acquire a mind-set of openness and imperfection, and they must have the courage to appear “raw” and unpolished—traits that may be as challenging for them as developing the creative and technical-production skills.

2. The leader as distributor: Leveraging dissemination dynamics

...While traditional distribution pathways won’t disappear, social media revolutionizes the standard information process by reversing it. Social communication makes distribution the starting point and then invites company audiences to cocreate and contextualize content to create new meaning. Messages are rebroadcast and repurposed at will by recipients who repost videos, retweet and comment on blogs, and use fragments of other people’s content to create their own mash-ups.

... Since executives won’t be able to govern or control a message once it enters the system, they must understand what might cause it to go viral and how it may be changed and annotated while spreading through the network. Distribution competence—the ability to influence the way messages move through complex organizations—becomes as important as the ability to create compelling content.

Equally important is the skill of creating and sustaining a body of social followers who help to spread and reinforce the message. It becomes critical to know who an organization’s key—and often informal—influencers are and to leverage their authority to push content through the right channels. ...

Lorraine Bolsinger, vice president and general manager of GE Aviation Systems, acquired these skills through experimentation. She began blogging a few years ago but initially didn’t get much response. ... To increase the allure and sustainability of the dialogue, she eventually created a “360 blog,” where all her direct reports blog with her on the same platform. This networked blog, with 12 regular contributors, provides additional points of view on issues, promotes more frequent communication, and attracts broader participation. Bolsinger says that the quality of her group’s dialogue about strategy and operations has improved thanks to these efforts.

3. The leader as recipient: Managing communication overflow

Social media has created an ocean of information. ...“There is too much noise out there,” says Stuart Dean, CEO of GE ASEAN,² who is an active blogger and tweets regularly about issues in his market space. “I’d use Twitter much more as a source of information if I could get exactly what I need.”

Dean’s sentiment is echoed by most executives we know—many of them barely find time to catch up with their daily e-mail load. What to do? As a first step, leaders must become proficient at using the software tools and settings that help users filter the important stuff from the unimportant. But playing in today’s turbulent environment requires more than just filtering skills.

... In the social-media realm, information gets shared and commented on within seconds, and executives must decide when (and when not) to reply, what messages should be linked to their blogs, when to copy material and mash it up with their own, and what to share with their various communities. The creation of meaning becomes a collaborative process in which leaders have to play a thoughtful part, as this is the very place where acceptance of or resistance to messages will be built. ...

4. The leader as adviser and orchestrator: Driving strategic social-media utilization

English: Infographic on how Social Media are being used, and how everything is changed by them. (Photo credit: Wikipedia)

In most companies, social-media literacy is in its infancy. ... But without guidance and coordination, and without the capabilities we discuss here, social-media enthusiasm can backfire and cause severe damage.

To harvest the potential of social media, leaders must play a proactive role in raising the media literacy of their immediate reports and stakeholders. Within this 360-degree span, executives should become trusted advisers, enabling and supporting their environment in the use of social tools, while ensuring that a culture of learning and reflection takes hold. ...

Steve Sargent, president and CEO of GE Australia and New Zealand, believes that social media is reshaping the leadership culture by pushing executives to span geographic boundaries, engage more closely with stakeholders, and amplify the impact of employees at the periphery. ... GE employees in Brazil, for instance, now work with colleagues in Australia to develop products and services for customers doing business in both countries. ...

To achieve this goal, leaders must become tutors and strategic orchestrators of all social-media activities within their control, including the establishment of new roles that support the logic of networked communication—for instance, community mentors, content curators, network analysts, and social entrepreneurs. Organizational units that leverage the new technologies in a coordinated and strategically aligned way will become more visible and gain influence in a corporation’s overall power dynamics.

5. The leader as architect: Creating an enabling organizational infrastructure

Leaders who have steeped themselves in new media will testify that it requires them to navigate between potentially conflicting goals: they must strive to establish an organizational and technical infrastructure that encourages free exchange but also enforce controls that mitigate the risks of irresponsible use. ...

... The leader’s task is to marry vertical accountability with networked horizontal collaboration in a way that is not mutually destructive.

This challenge is reflected in GE’s policies, which embrace the value of sharing expertise and perspectives with family, friends, colleagues, customers, and other stakeholders around the world. With this openness comes a shared responsibility: employees must observe GE standards of transparency and integrity, refrain from speaking on behalf of the company without authorization, and be clear in their social messaging that their views are personal. ...

6. The leader as analyst: Staying ahead of the curve

As companies start to digest the consequences of the Web 2.0 revolution, the next paradigm shift is already knocking on the door. The next generation of connectivity—the Internet of Things—will link together appliances, cars, and all kinds of objects. As a result, there will be about 50 billion connected devices by the year 2020.³ This transformation will open new opportunities, spawn new business models, and herald yet another major inflection point that leaders must manage.

It’s imperative to keep abreast of such emerging trends and innovations—not just their competitive and marketplace implications, but also what they mean for communications technologies, which are fundamental for creating an agile, responsive organization. Executives who monitor weak signals and experiment with new technologies and devices will be able to act more quickly and capture the advantages of early adoption.

GE’s leadership university, Crotonville, is leading a number of initiatives to help top executives stay ahead of those changes. ... In Silicon Valley, leaders are immersed in a range of cutting-edge technologies. Part of the program there involves “reverse mentoring,” which connects media-savvy millennials with senior GE leaders to discuss the latest tech buzz and practice. ... Exposing seasoned leaders to the millennial mind-set encourages them to experiment with new technologies—which, in turn, helps them better engage with up and comers.

Clearly, these are early days. Most companies recognize social media as a disruptive force that will gather strength rather than attenuate. But social-media literacy as we define it here is not yet an element of leadership-competency models or of performance reviews and reward systems. Equally, it has not yet found its way into the curricula of business schools and leadership-development programs.
...We are convinced that organizations that develop a critical mass of leaders who master the six dimensions of organizational media literacy will have a brighter future. They will be more creative, innovative, and agile. They will attract and retain better talent, as well as tap deeper into the capabilities and ideas of their employees and stakeholders. They will be more effective in collaborating across internal and external boundaries and enjoy a higher degree of global integration. They will benefit from tighter and more loyal customer relationships and from the brand equity that comes with them. ... And they will be more likely to create new business models that capitalize on the potential of evolving communications technologies.

It takes guts to innovate radically in leadership and organization, for legacy systems, cultures, and attitudes are powerful forces of inertia. ... Social-media engagement will confront leaders with the shortcomings of traditional organizational designs. Leaders who address these shortcomings will learn how to develop the enabling infrastructure that fosters the truly strategic use of social technologies. When organizations and their leaders embrace the call to social-media literacy, they will initiate a positive loop allowing them to capitalize on the opportunities and disruptions that come with the new connectivity of a networked society. And they will be rewarded with a new type of competitive advantage.

About the Authors

Roland Deiser is a senior fellow at the Peter F. Drucker and Masatoshi Ito Graduate School of Management at Claremont Graduate University and author of Designing the Smart Organization: How Breakthrough Corporate Learning Initiatives Drive Strategic Change and Innovation (John Wiley & Sons, October 2009). Sylvain Newton is the GE Crotonville Leadership Senior Leader for Business and Regions.

Notes

¹ See Ron Utterbeck, interview by Robert Berkman, “GE’s Colab brings good things to the company,” MIT Sloan Management Review, sloanreview.mit.edu, November 7, 2012.

² Association of Southeast Asian Nations.

³ See Michael Chui, Markus Löffler, and Roger Roberts, “The Internet of Things,” mckinseyquarterly.com, March 2010.

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