By Martin Zwilling

As a former IBM executive, I used to think that big-company executives would be ideally skilled and experienced in business to run a small company or a startup. Yet that rarely happens, and when it does, like John Sculley moving from Pepsi to Apple, the results don’t turn out so positive. I see this as a variation on the “Peter Principle,” as well as considerably different skills required.

Back in 1968, Dr. Laurence J. Peter first published evidence that promotion strategies in most companies are based on performance at the current task, with the result over time putting people in new tasks over their head. Even worse, top performers are moved to management positions, which are often not their forte or interest, but have higher salaries and more career prestige.

Once topped-out and frustrated in a big company, many of these people seek key positions in a new business or startup where they can again be top dog and feel in control. Even though their resume may look great, I continue to advise small businesses to fill every team position based only on demonstrated current results, motivation, commitment, and not based on any past title.

This is easier said than done, especially in new ventures where the founder is personally inexperienced in hiring and managing employees. Thus based on my considerable experience in both domains, I offer my recommendations on what to look for and how to select people with minimize exposure to the devastating effects of the Peter Principle, past and present:

Favor people who can both communicate and perform well. Small businesses can’t afford two or more people for every task — one to do work, and others to communicate results to all constituents. As the founder, you won’t have a finance chief, a marketing staff or a requirements manager. Everyone must know how to listen, talk and write.

Put a premium on customer-facing and relationship building. In a big company, you often need highly-skilled specialists, doing accounting, research and design, or quality support. These people can excel without ever selling or knowing a real customer. In a small business, everybody is in sales, and the customer is always the main focus.

Prioritize current skills and a demonstrated ability to learn. People who haven’t changed in a while find it harder and harder to do so. If you don’t hear an enthusiasm for new challenges, you won’t find the flexibility you need to anticipate and create the pivots required for success. People trapped by the Peter Principle won’t be happy fixing chaos.
Keep the focus on results – don’t hire or reward for effort. A common refrain I hear from team members in over their heads is how many hours they work and how busy they are. If you hear that in the interview process, change the subject to results, and then move on quickly to the next candidate. Set your metrics and rewards to map to results.
Promote an “up or out” growth culture to prevent role stagnation. Look for team members that see every job as a step, rather than a destination, as the company grows. Make it clear through words and actions that you expect upward growth, and no-growth is a failure for both of you. The alternative is to lose your best people to new ventures.
Look for an ability to manage people, as well as do the work. Some people are great workers, but are barely able to manage themselves. The best are comfortable in both roles, and approach every task from both perspectives. Many big company executives rely on their staff to do the real work. This doesn’t work in a small and growing business.

Provide mentoring and self-learning opportunities. Most small businesses don’t have the time or resources to send team members to formal training classes, either in-house or off-site. Yet every new team member can be assigned an in-house mentor, provided with online seminar opportunities and given special assignments to facilitate new learning.

Another difficult challenge for new entrepreneurs and small business owners is being able to deal immediately with the Peter Principle in current team members, once they see it or recognize a hiring or promotion mistake. It’s as hard as every other pivot you will have to make as a new business, with the same penalty that the longer you wait, the higher the cost of recovery.

If you as the leader don’t deal quickly with incompetent people in key team positions, they will paralyze your business. The best people see the problem and beat a path to the exit, to take new outside opportunities, and only the ineffective ones will remain. That will make you the final proof of the Peter Principle.

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By Gary Smith
It can be argued that China’s deployment of foreign exchange reserves between mid-2014 and the end of 2016 was the most unsuccessful use of such reserves in history.

Around US $1tillion was spent and, despite this, the renminbi declined in value against the dollar by almost 15 per cent. The outcome confounded conventional theory. The relationship between reserves deployment and currency value did not work as expected.

In defence of Beijing, it is impossible to say where the currency might have moved if the reserves had not been deployed. Capital controls played an important part, to halt and then reverse currency weakness in 2017.

However, these factors should not deflect from recognising that intervention to support the currency not only appeared to be unsuccessful, but counterproductive. When the intervention ended, the renminbi rose in value. This adds to the mystery.

The Chinese experience was not unique. There is plenty of evidence to suggest this outcome is probable. A vicious circle can develop, where the use of reserves creates a sense of unease that undermines the currency, as happened in Russia in 2014, South Korea in 2008, and across Asia in 1997.

In these cases the size and rate of depletion became the focus of market attention. Instead of simply being a tool to help achieve currency stability, the reserves became a policy objective in themselves. This is a variation on Goodhart’s law, which can be summarised as stating that when a measure becomes a target, it ceases to be a good measure.
A nation without foreign exchange reserves will be viewed as vulnerable on multiple levels. But a nation with reserves may also look vulnerable the moment they are utilised. As the head of reserves at a central bank with more than US $100 billion in reserves noted at a recent OMFIF seminar, it’s not how much you have, but whether you have had any need to spend.

The concept of reserves adequacy can be rendered redundant by the act of usage.
These circumstances have led to some questions about whether the use and, in turn, accumulation of reserves is pointless. The answer to these questions hinges on the purpose of foreign exchange reserves. In 2018 they are much more than a tool for currency intervention.
Although managing the value of domestic currencies might have been the original reason to hold and accumulate reserves, this use has a poor record of success. In terms of the list of reasons to hold reserves, this should be a candidate for relegation.

To have value as a threat to the foreign exchange markets, reserves (and the assets of related sovereign funds) may need to be more than 100 per cent of GDP, as in Hong Kong and Singapore, rather than the 40 per cent of GDP in China in 2014.
There are two conclusions, with overlapping implications. First, any argument that suggests a need for greater foreign exchange reserves should also demand a more dynamic approach to their management. Second, a relegation of the currency intervention motivation for holding reserves in turn argues for a promotion of the case for the conservation of reserves.
This implies a diminished need for liquidity, and hence greater justification for pursuing yield- enhancing strategies.

Gary Smith is Member of the Strategic Relationship Management Team at Barings and Member of the OMFIF Advisory Council.

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