Most executives naturally gravitate toward one of these two approaches. The challenge is that companies need both.

We once asked a banker and CEO about his decision to lend to a start-up technology company that later became a big success. The banker took out a sheet of paper and wrote two words: assets and liabilities.

He explained that those two words were more than the fundamental building blocks of the basic accounting equation. They also were a statement about human nature. What the banker meant was that some people gravitate toward asset enhancement as a way of providing value to organizations. Such people often see the world as full of opportunities. However, their weakness is that they are prone to fall in love with their overly optimistic assessments. On the other hand, liabilities reduction is also a critical value. People who gravitate toward this approach tend to see the world as full of threats. Their weakness is that they are tone-deaf to value, lack vision and place too much weight on threat.

The banker’s philosophy about making credit decisions was to use the concepts of asset enhancement and liabilities reduction as a framework to look at financial structure and power. At the high-tech start-up he backed, he saw a strong CFO and a strong chief legal counsel monitoring the liability side. He saw strong vice presidents of sales and marketing as champions of the asset enhancement side. And he saw the CEO structuring his role as being the final arbitrator between these two powerful and conflicting forces. The banker liked what he saw.

The assets enhancement vs. liabilities reduction framework sounds almost simplistic; however, it can be surprisingly useful in business. For one thing, it suggests staffing teams with strong advocates for both viewpoints and warns against staffing strongly for the approach the CEO favors. For example, when we do an analysis of companies, we often find strong asset enhancement CEOs closely allied with strong heads of marketing and sales. We then ask questions about how much respect the general counsel and the CFO have in this organization. If they seem merely to be tolerated or if the CFO is thought of as an auditor with a fancy title, the organization may be overly focused on asset enhancement — and overlooking risks as a result.

The asset enhancement/liability reduction framework can also be useful in helping up-and-coming executives reach their potential. Such executives are often told to “think more strategically.” A more precise way of getting at the same developmental issue is to explain to executives that the ability to take multiple perspectives on the same problem will be critical for their success.

The world is complex, but does every management framework require complexity? Perhaps leadership in a complex world ought to start from simple first principles. Honoring the dynamic tension between asset enhancement and liabilities reduction is a simple but useful way of starting conversations about important topics within companies.

3 Comments On: Enhance Assets or Reduce Liabilities?

  • Dr Rajah Kumar | July 7, 2010

    Simple statements with profound meaning.This goes to reinforce my strong belief in sense and simplicity which is incidentally the brand promise of Royal Philips where I worked for 3 decades.

    I agree there is a tension between asset enhancement and liability reduction. But this is a paradox that needs to be managed by the Board – the purpose of the board.

    You have stated the essence of business in these simple words and to manage this needs leadership and right talents. While one needs to encourage entrepreneurship, controls are critical.

  • Jim Tracy | July 16, 2010

    Excellent article. The CEO was very perceptive about the skill set of his team. Also, teching young execs to look at situations from muiltiple viewpoints is sound advice. That is more helpful than the term “thinking strategically”, which too often is a euphemism for “think like me”. I think viewing situations simplistically is an excellent first step. It helps in problem definition, an area we do not spend enough time on. We are too quick to solve ill-defined problems. Thanks.

  • Earl Butler | July 22, 2010

    Interesting article early in my career prior to the Glass-Stegall act being repealled. Wells Fargo was a super regional bank that I believe used this asset enhancement/ Liability model to great financial success. Later in life I met the CEO just prior to Carl Reichardt and he told me that Carl Reichardt’s strength was in balancing this model

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