7.27.2004

Understanding IPO Initial Price

Sometime in the next 12 months, Google, the massive search engine company, is going to hold its initial public offering, placing a portion of company stock into the public markets. A standard IPO this is not, however. It'll be a Dutch auction, which means that each bidding investor will get a chance to name his own price for Google shares. Let the cards land where they may.

Although the phenomenal amount of interest surrounding the impending Google IPO has cooled somewhat, we're talking about something that's gone from standing-on-the-sun hot to merely, say, standing-near-a-nuclear-reactor hot.

That's fine. Ideally, as the actual initial public offering (IPO) comes to pass, the level of interest will have dropped to "who's gonna win this spelling bee" hot. That's my hope, at least -- so people will keep from doing phenomenally bad things like paying way too high a price for shares of Google.

Not that I'm holding my breath.

One of the aspects that people are asking questions about is the nature of the IPO allocation, the "Dutch auction." It's a pretty neat approach that completely takes the judgment of investment bankers out of the pricing decision and places it in the hands of the market.
For those of you who are interested in participating in Google's IPO, or for those of you who are interested in just learning something about the process, below is a simplified version of how a Dutch auction works. This is likely to be old hat to people who have a lot of experience buying or selling goods on eBay (Nasdaq: EBAY), where Dutch auctions are quite common in instances where the seller is seeking to unload a large number of identical items.

The classic IPO

In a normal IPO, an investment bank will come in, do some evaluative work on how much a company is worth, survey the market to determine the interest of potential buyers of a company at X, Y, or Z price point, and then recommend a pricing formula to the management of the company. Once upon a time, this process was used to generate as much capital as possible for the company, but starting with IPOs such as Netscape, Yahoo! (Nasdaq: YHOO), theglobe.com, and so on in the mid-1990s, IPOs came to be measured by how much of a "pop" they generated on the first day of trading. Want a successful IPO? That's easy -- price your shares at about 35% of what they're actually worth, and watch the market swarm, driving the price sky high.

Of course, this greatly kneecapped the ability of the company to raise funds from the equity it sold. A survey of some of the biggest IPO pops of all time shows a list of companies that mostly no longer exist. Fat lot of good the positive vibes of a big IPO did 'em. I'm sure that when all was said and done they'd have preferred the cash from more reasonably valued IPOs rather than pricing them very low so that people they'd never met, who had nothing to do with the companies, could get rich by flipping IPO shares to the public the same day they got them. In fact, I would hope that some of those now-ex-CEOs of now-former high-flying IPO companies would look back and say "hmmmmm, I wonder to whose benefit that IPO "pop" really was? It wasn't the company, for certain.

But I digress. We're talking about Google's IPO here.

The Dutch auction

As a result of this chicanery, several companies that have IPO'ed in the recent past have elected to sell by Dutch auction, including Overstock.com (Nasdaq: OSTK), RedEnvelope (Nasdaq: REDE), and now Google. Overstock's CEO, Patrick Byrne, notes with some satisfaction that Google's decision to go the Dutch route "could be the thing that breaks a sleazy Wall Street system." Our 2002 coverage of the Overstock IPO -- a company that went on very quickly to become a TMF Select and then Hidden Gems recommendation, offers a good view into some of the more recent Dutch auction IPOs.

A Dutch auction curtails or removes the ability of the investment bank to influence the opening price of the shares and its ability to allocate IPO shares at all. It's share democracy at its finest. If you're willing to name an insane price for shares in a Dutch auction IPO, you're going to get 'em. (It should be noted here, though, that Google reserves the right to have "speculative bids" nulled, but the company doesn't define what that means. What's in question is the price you'll pay -- which isn't necessarily the one you commit to paying.)

What you (and everyone who gets shares) will end up paying is the price that the last person past the post has bid. Generically, if there are 1 million shares available, it will work like this:

Investor Bid Amount/share # of Shares Shares Remaining
A $10,000 1000 999,000
B $100 250,000 749,000
C $30.42 100,000 649,000
D $29 550,000 99,000
E $25 100,000 -1000
F $24.99 50,000 0

And so on.

It's important to note that no one who has bid can see anyone else's bid. So once the auction has closed, the shares are all allocated. As you can see, the lowest bidder for whom shares were remaining was Investor E, who offered to buy 100,000 shares at $25 apiece. Every investor who bid higher than Investor E is thus guaranteed shares, but they get them not at the price they bid, but at the one that Investor E bid, $25. So even though Investor A, clearly a delusional soul, offered to spend $10 million for 1000 shares, she will only have to pay $25,000 -- Investor E's price times 1,000 shares. In exchange for this phenomenal cosmic power, Investor E runs the risk of not receiving as many shares as he bid. In this case, though Investor E bid on 100,000 shares, there were only 99,000 left once all of the higher bidders' orders had been filled, so he only gets 99,000.

And what of Investor F, whose bid came in only a penny per share below Investor E's? You guessed it -- neither she nor anyone else with lower bids gets any shares at all in the IPO, and will have to buy them on the open market once they start trading. The total capital raise for the company, gross of fees, is $25 million.

There's one more catch to Google's IPO. At management's discretion, once the bidding is done, it has the right to adjust down the price that successful bidders are required to pay. Let's just say that management thinks that $25 per share is just kooky. It can say "OK, bidders, your price is actually $17." This only goes for the successful bidders though -- Investor F, even though her bid is now $7.99 higher than the price paid, is still out of luck. To pay you must first win.

The mechanics

Right now you might be asking just how the bidding takes place. Is some guy in bib overalls going to show up and break into an auctioneer's cadence? No, not quite. In order to participate, you must do the following:

1. If you don't have one already, open a brokerage account at one of the now 31 banks and brokerages underwriting the auction, including online pureplays E*Trade (NYSE: ET) and Ameritrade (Nasdaq: AMTD), and banking giants Citigroup (NYSE: C) and Wachovia (NYSE: WB). If you want to, you can actually open up an account with E*Trade or Ameritrade through the Fool's Broker Center and get commission-free trades. Credit Suisse, Morgan Stanley, Wachovia, Wells Fargo, Muriel Siebert & Co., Lehman Brothers, UBS, and Goldman Sachs are also part of the Google gaggle. If you do not have an account at one of the 31 underwriting companies, you will not be able to bid.

2. Ask for and receive the Google prospectus. Having gone this far, I highly suggest that you read it.

3. Request a bidder's identification number from the broker. These will not be issued once the bidding is opened.

4. Make your bid, stating the amount of shares desired and the amount per share you bid. If you really, really, really want the shares, bid high. (P.S.: This is a very silly thing to do. Bid what you think they're worth and not a penny more. If you fail to get shares because the investing world loses its collective mind, it could be the best failure you ever endure.)

5. Go make a sandwich. Wait for the results.

The folks at WR Hambrecht put together a pretty nifty slide show on the process of a Dutch auction.

If you go through this process, I wish you the best of luck! Remember, getting IPO shares isn't "winning;" making a good investment decision is. For more information, check out this special (registration required) on the Google IPO produced by the folks at the Wharton School at the University of Pennsylvania.

Finally, read Fool contributor Salim Haji's column today to find out what it will take for Google to succeed.

7.24.2004

IIMs and the Market forces

– Can an intervention be justified?

Prof. Joshi, intentionally or otherwise, has sparked a widespread debate on the IIMs. Desirably, this debate has now spread into the related, but so far largely ignored, issues of – management institutes and business education in India, institutes of higher learning and - in general, about the relationship persisting between the supposedly ‘autonomous’ institutions and the government, in a country like ours – interesting as it is – being on a transformation from a command-and-control structure to a market dependent system.

The purpose of this article is to examine answers to these two questions – interrelated, intertwined and highly relevant in the current context.

1. Who is a manager and what are the qualifications required of a manager? How important are such managers to our country? Are the IIMs imparting such qualifications and producing managers who are both relevant and required in the current period?

2. How much autonomy is required for institutions in a market based economy such as ours? Can the market forces be depended-on to exert a corrective thrust to these institutions, if they fail in their goals? Can the judiciary be entrusted to spell out solutions on contentious issues such as these?

The first question can be answered thus: A manager is a person required to plan, direct, lead and control resources, both financial and human, to attain well-defined and preset goals. A manager is required to have comprehensive and correct understanding of his business, his company, his role in the business, his people and subordinates and should be able to assess himself and his position in the wider economic context of the country.

A manager, more often than not, is a technical person with a few years of field experience behind him – handpicked by his superiors to have the potential and talent for a managerial role and groomed, either in-house or in a management school.

Now let us look at what the IIMs are doing. Who are the students entering these institutes, what kind of training they get and what kind of jobs they land up in?

Here is the profile of a typical IIM graduate. Seventy percent of the IIM students are engineers from IITs or RECs. They are fresh out of college, having excellent academic record in their early schooling and graduation. CAT, the management entrance test is ruthless in its mathematical and analytical demand and this ensures that only the 99th percentile scorers in quantitative ability enter the institutes. With this background, most are well qualified for a research or a scientific career. The skewed salary structure in our country makes these wizards take up a managerial career instead.

The training imparted in b-schools gives too much importance to math and analytical skills, called the hard skills – as compared to soft skills like leadership, people skills etc. This is true, not just of IIMs, but for any American modeled b-school in the world. Which prompted management gurus like Henry Mintzberg to comment that b-school grads cannot be and shouldn’t be recruited for managerial positions. Instead, they would make excellent analysts – with the kind of background and training they have. Worldwide, management institutes have realized this folly and have started to focus on the soft skills part. Now, the Harvard Business Review has more articles on leadership and human aspects of management than anytime in the past.

Being a first year student myself, I can say that a dream job of an IIM graduate is not managing a 1 billion dollar project or creating a startup company, though such students, rare as they might be, do exist. The dream jobs are mostly analytical - like equity research, investment analysis, financial analysis, business analyst, marketing research and so on. Morgan Stanly and Lehman Brothers don’t recruit managers from IIMs. They recruit the best analytical engines of India – easily available after multiple filterings through the IIT-JEE and the CAT.

In the pre 1991 era, most of the businesses in the country were run by the government in the form of PSUs. Middle level managers in these organizations, invariably were the ones who grew-up through the ranks and grown in-house. The top management came from the prestigious civil services route, with the stellar training imparted to them by the practicing gurus. IIMs were operating in this context for decades before we opened-up. Publicly owned corporations weren’t recruiting professional managers as today and private enterprise was stifled by licenses and regulations. In this scenario, IIM graduates found themselves in a bizarre position having had to develop skills on their own after graduation, depending on where they chose to start their career.

After the reforms, with licenses removed and private enterprises being encouraged, the demand for professional managers has skyrocketed in the country. This is evident on both sides of entry and exit from the b-schools. Entry wise, the number of applicants for the IIMs has grown from a few thousands in late 80s to an astonishing 130,000 applications this year. Exit side, almost 50% of the companies that went for IIM campuses this year, returned empty handed – for want of students! This has resulted in new private institutes, mostly substandard ones, springing up all over the country, some even asking students to dare to think beyond the IIMs. Now the PSU’s are being corporatised and its worthwhile to note that traditional public behemoths like the State Bank of India have started scouring for professional managers outside. SBI, for the first time, has visited some IIMs this year for recruitement! Now we need managers who can manage diverse projects spanning across industries, and specializing in tasks like project management, infrastructure management, utilities management, rural management and managing non governmental organizations. Has any of the IIMs started offering specializations like these?

So, in short, its debatable if these institutes produce managers as required by the country, both in terms of quality and quantity. Further, they also have failed to ramp up and revise their offerings as required by the changing economic fabric of the country.

Now, onto the second question. In a market economy, the government has to keep its hands off institutions. True, indeed. This is to make sure that such institutions respond to market signals and change themselves as required. Government intervention and control distorts the market signals and directs the institutions towards ‘priority activities’ that may not be really as urgent or important as portrayed to be. Further, government intervention may lead to manipulating the institutes towards serving partisan interests and not necessarily what is demanded by the market.

So now, can we say that the IIMs didn’t adequately respond to the market signals? Isn’t this evident from the fact that private management institutes that claim to impart better education has surfaced in recent years – some founded by illustrious Indian NRIs like the ISB at Hyderabad and the Great lakes institute at Chennai.

If an institute or a company doesn’t respond to the market then such an institute should slowly fade away from glory. But brand IIM is shining as never before! How can this be explained? One reason for this is, as has been adequately dealt by columns here before, is the caliber of the students entering such institutes. Coupled with the fact that the IITs have been a tremendous success story – and the faith the Indian public has on such elite public institutes are some of the reasons. With so much of investment by the government in such institutions, can it be left to the market forces to determine its future? Can we afford to witness the diminishment of brand IIM, before its directors realize the mistake and revamp the institutes? These are questions that require debate from the multiple stakeholders involved.

Any debate that revolves around government intervention arouse acrimonious arguments concerning ideology. Left wingers who support government control and accountability and right wingers who stand for freedom, autonomy and lean government take fixed ideological positions and refuse to budge or appreciate the merits in the arguments of the other side. How much of government intervention is justified? Who is to determine whar is the laxman rekha and what constitutes excessive control? Can the judiciary be entrusted with such a responsibility?

Fortunately or otherwise, the supreme court has been asked to delve into this issue and the final word is left to the esteemed judges. But Indian judiciary itself has ignored the market signals and now has insufficient courts, lawyers and judges – with a huge backlog of cases. Much like the IIMs themselves, with insufficient seats, faculty and a huge un-catered-to demand. Would a regulator serve the purpose of monitoring such autonomous institutes and initiating corrective measures? With the partial success of regulatory bodies like the TRAI and IRDA, we have all the reasons to believe that a higher education regulatory authority, unlike the UGC and the AICTE that are limited in their scope, would be better suited to take impartial decisions concerning these issues.

Greenspan on Financial literacy

May 13, 2004
At the Federal Reserve Bank of Chicago’s Money Smart Conference, Chicago, Illinois

This morning I should like to broaden the focus of financial literacy to the education you are going to need more generally in the years ahead.

Within the next several years the vast majority of you will have completed your formal schooling and begun careers in private business, government, or the nonprofit sector. I suspect most of you have not as yet figured out what career you would like to pursue. But as with all the generations of teenagers that have gone before you, something will grab your interest and engage you. With me it was music. I was entranced with sound and visualized myself playing with the likes of the Glenn Miller orchestra or becoming another Benny Goodman. I practiced clarinet and saxophone three to five hours a day and, following graduation from high school, toured the country for a couple of years with a dance band.

I was a good amateur but only an average professional. I soon realized that there was a limit to how far I could rise in the music business, so I left the band and enrolled at New York University.

During my dance band years I spent the twenty-minute breaks from playing in reading. I became intrigued by books on finance, and, hence, at NYU I majored first in finance and, as my interest broadened, in economics and in what was then called mathematical statistics and now econometrics. In retrospect, that choice probably was not surprising since math was my most engaging course in high school.

I graduated and joined an economic research organization. But my education did not stop. I earned a masters degree and went on to further studies at night at Columbia University.

At the age of twenty-seven I joined a very small Wall Street firm as a partner and was essentially in charge of making it grow. It did, and I eventually became the senior partner. But twelve hours a day at work left little time for school, and my aspirations to earn a Ph.D. faded, at least for a time. However, the pursuit of my profession as an economist and the head of a consulting firm required that I broaden my knowledge, and I proceeded to read books, not only on economics and mathematics but also on philosophy, history, physics, and astronomy. I was getting a liberal education far beyond the required curriculum of college. Eventually I returned to NYU, took additional courses at night, and completed my doctorate.

Over the past six decades I followed a type of career path that many of you will follow, but with a twenty-first-century cast. I had two careers and four jobs--one as a musician, one as a private consultant, and two in government.

But the world has changed since I was your age, and the pace of change has quickened. Today it is rare that one will finish school and then engage in the same job until retirement, which was the general experience of generations past. Many of you will switch professions once, possibly many times. Almost all of you will have several jobs, some many jobs.

To succeed, you will soon learn, as I did, the importance of a solid foundation in the basics of education--literacy, both verbal and numerical, and communication skills. But beyond that you will need to acquire the on-the-job skills that you will need as you move from one job to another. At some point, almost all of you will lose a job and will want to be reemployed as quickly and as productively as possible. That means you will need the capability of learning a wholly new activity.

The current workforce is increasingly turning to community colleges to prepare for new professions and new jobs. Today, almost a third of those enrolled in community colleges are thirty years old and older. So-called adult education was a rarity in my youth; today it is widespread.

Most of you probably will be engaged in some form of learning through most of your working lives. Already numerous corporations have regularly scheduled classes in basic and advanced subjects directly and indirectly related to job requirements. Such corporate universities, as they are called, are growing rapidly, and I suspect that, as you join the workforce, you will have the sensation that you never left school. That is why it is so critical that you productively employ your current learning experiences to create the base capabilities necessary for continuing your education into your mature years.

Learning, of course, need not be formal. You can engage in it on your own. In generations past, much learning occurred outside a classroom. I am fascinated by the eloquent and literate letters written by some Civil War enlisted personnel, who I doubt had formal schooling beyond the age of ten. Many of these soldiers obviously learned to read and discovered a whole new world of ideas in books. Today's high-school graduates will be confronted with a breadth of ideas never contemplated by an eighteen year old in the 1860s.

The world into which you graduate will require far greater conceptual skills than was required of your parents and grandparents. Productive and satisfying manual labor that engaged previous generations will become increasingly less available as technology substitutes for so many of those earlier skills. Your future incomes will depend on your conceptual abilities.

Just as important, because the complexity of our economic system continues to increase, the skill level that you reach in your twenties will surely be inadequate for the needs of our economy when you reach forty. So education must be ongoing.

But education alone will not guarantee a successful life. In this regard, let me leave you with some challenges I left with a graduating class at Harvard a few years ago.

Decades from now, as you begin to contemplate retirement, you will want to be able to say that whatever success you achieved was the result of honest and productive work and that you dealt with people the way you would want them to deal with you. It is decidedly not true that "nice guys finish last," as that highly original American baseball philosopher, Leo Durocher, was alleged to have said.

I do not deny that many appear to have succeeded in a material way by cutting corners and by manipulating associates, both in their professional and in their personal lives. But material success is possible in this world and far more satisfying when it comes without exploiting others. The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake.

I cannot speak for others whose psyches I may not be able to comprehend. But in my working life, I have found no greater satisfaction than achieving success through honest dealing and strict adherence to the view that, for you to gain, those you deal with should gain as well. Human relations--be they personal or professional--are not, and should not be treated as, zero-sum games.

7.16.2004

Altering DNA After Birth

If anyone out there still believes that DNA is destiny and that claims to the contrary are so much bleeding-heart, PC drivel (my favorite is that parents' treatment of their children has no effect on their character, beliefs, behavior or values), neuroscientist Michael Meaney has some rats he'd like you to meet.
Since the 1990s, he and his colleagues at McGill University, Montreal, have been documenting how mother rats affect their offspring (dads don't stick around to raise the kids). Now they have scored what neuroscientist Robert Sapolsky of Stanford University, Palo Alto, Calif., calls "a tour de force": proof that a mother's behavior causes lifelong changes in her offspring's DNA.

A decade ago Prof. Meaney noticed that newborn rats whose mothers rarely lick and groom them grow up... well, there is a fancy biochemical description for it, but let's just say that they grow up a bit of a neurotic mess. Pups of attentive moms grow up less fearful, more curious, mellower.

Prof. Meaney and his team then showed that this wasn't a case of mellow moms having mellow kids and neglectful moms having maladjusted kids, as the DNA-as-destiny crowd would have it. When the scientists switch around the newborns so that rat pups born to attentive moms are reared by standoffish moms, the pups grow up to be extremely stressed out, nearly jumping out of their skins at the slightest stress. Pups born to standoffish moms but reared by attentive ones grow up to be less fearful, more curious, more laid-back, taking stress in stride.

Rearing, it turns out, affects molecules in the brain that catch hold of stress hormones. Licking and grooming increases the number of these receptors. The more such receptors the brain has in the region called the hippocampus, the fewer stress hormones are released; the fewer the stress hormones coursing through its body, the mellower the rat.

It turns out that all newborn rats have a molecular silencer on their stress-receptor gene. In rats reared by standoffish mothers, the silencer remains attached, the scientists will report in the August issue of Nature Neuroscience. As a result, the brain has few stress-hormone receptors and reacts to stress like a skittish horse hearing a gunshot.

But licking and grooming by an attentive mother literally removes the silencer; the molecule is gone. Those baby rats have lots of stress-hormone receptors in their brains and less stress hormone, and they grow up to be curious, unafraid and able to handle stress.

"In the nature/nurture debate, people have long suspected that the environment somehow regulates the activity of genes," says Prof. Meaney. "The question has always been, how? It took four years, but we've now shown that maternal care alters the chemistry of the gene."

The discovery overturns genetic dogma so thoroughly -- after all, how mom treats the kids isn't supposed to alter something so fundamental as their DNA -- that one researcher reviewing Prof. Meaney's manuscript at a prominent American science journal said there is no precedent for such a claim, asserted that he simply didn't believe it, and recommended that the journal not publish it. The scientists at Nature disagreed.

A key unanswered question is whether DNA can change even later in life. That is, can rats who grow up to be skittish, because they were reared by standoffish mothers, mellow out as the result of some experience? And does parental care, or other experience, alter DNA in people, too?

It would be astonishing if it did not. Altering genes by adding or removing silencing molecules is part of a new field called epigenetics. If epigenetics were a film, it would be "Fahrenheit 9/11," the hot new release and one that is causing more than a bit of consternation among traditionalists. This year's Nobel Symposium in Stockholm featured epigenetics, as did the A-list annual conference of the Cold Spring Harbor Laboratory in New York. Last month, the National Institutes of Health announced a $5 million grant to Johns Hopkins University School of Medicine, Baltimore, to establish the Center for Epigenetics of Common Human Disease, the first of its kind.

Genetic changes are mutations in which one or more of the four chemicals that make up the twisting double helix of DNA is, typically, deleted or changed. Instead of ATTCTG, for instance, you have ATTGTG; as a result, the gene no longer functions as intended.

Epigenetic changes, in contrast, leave the sequence of As, Ts, Cs and Gs untouched. But the DNA acquires some new accessories, as it were: Certain small molecules glom onto the DNA, and suddenly a gene that was silent is active, or one that was active is hushed. That is what happened to Prof. Meaney's rats: A previously silenced gene began singing loud and clear.

The appeal of epigenetics is obvious to anyone who is or knows an identical twin. Despite having the exact same sequence of DNA, identical twins aren't identical, especially when it comes to diseases such as cancers and mental illness. Something has altered their DNA sequence so that disease-causing genes turn on or disease-suppressing genes turn off. I'll explore epigenetics further in next week's column.

7.06.2004

Golf and Leadership

The best players know which iron to use. - by Daniel Goleman

New research on leadership suggests that the best leaders use a collection of distinct leadership styles - each one pulled out at the right time and used in the right degree. Think of it as a skilled golfer who, in the course of a game, picks and chooses each club according to the demands of the shot.

The research, conducted by the consulting firm Hay/McBer, draws on a random sample of 3,871 executives selected from a database of 20,000 executives worldwide. It found six leadership styles, which affect the climate of an organization or department or group. The factors affecting climate include: the sense of flexibility, or how free employees feel to innovate; their sense of responsibility to the organization; their level of standards or how high they set them; how accurate they perceive performance feedback to be and the subsequent appropriateness of rewards; the clarity people have about the mission and values; and the level of commitment to a common purpose.

Each management style has a specific effect on the climate of the team. And the effective leaders - the ones who had the best results - use most of the six leadership styles in a given week depending on the situation. What's most important about the research results is that each leadership style can be learned.

Following are the six styles of leadership and how and when they should be applied:

The Coercive Style

Coercive leaders demand immediate compliance. Needless to say, this style easily creates a reign of terror. Flexibility is impaired since the Coercive Style leader follows a top-down decision-making style that steamrolls over ideas. Likewise, team members' sense of responsibility erodes, as does the perception of apt rewards since high-performing members are motivated by more than financial gains.

This said, however, the Coercive Style is appropriate in circumstances that call for a quick turnaround and during emergencies. The style can break failed business habits and shock people into new ways of working. But it can only work on a short-term basis to deal with the emergency at hand. Used longer than that, the Coercive Style becomes an undermining influence on morale.

The Authoritative Style

Authoritative leaders mobilize people toward a vision. Among the six styles, it is the most effective in ramping up the climate of the work situation. The authoritative leader motivates people by clarifying how their work fits into a larger vision for the entire organization. Because everyone is clear on the vision, everything else revolves around realizing it: Standards are set accordingly; performance is measured against it; rewards are based on realizing it. Flexibility is at a maximum since an authoritative leader sets the goals, but allows people to come up with their own ways of achieving the goals.

Thus, the Authoritative Style is best for most situations, but not all. The style wouldn't work when a leader is working with a team of people who are more experienced than he or she is. They may interpret the authoritative leader as being pompous or out of touch. Also, the authoritative leader runs the risk of being overbearing.

The Affiliative Style

The affiliative leader values people and their emotions over the tasks and goals. Among the positive results of the Affiliative Style: It breeds fierce loyalty by building strong emotional bonds. As a result, communication improves since people who like each other will tend to share ideas and inspiration. Flexibility rises because people tend to trust one another more and the leader doesn't impose unnecessary structures on how people get work done. Rewards are ample since the affiliative leader provides ample positive feedback.

The style is best used to build harmony, increase morale, improve communication, and repair trust. But while the Affiliative Style is largely positive, it has its limitations. For one, constant positive feedback may overlook needed corrective feedback. It may neglect to provide constructive advice on how to improve, thus leaving employees to figure it out themselves.

The Democratic Style

The democratic leader builds consensus through participation. This style draws out people's ideas and buy-in, thus building trust, respect, and commitment. Flexibility and responsibility also increase since everyone gets say in decisions. Morale acts a boost since the democratic leader listens to everyone's concerns. And people tend to be realistic about goals and standards since each has a say in what they are.

There are drawbacks to the Democratic Style though: Meetings can go on and on as each person's ideas are mulled over, and decision-making is slower since everyone's opinion must be taken into consideration. But the style works best when the leader is uncertain about the best direction to take and needs ideas and guidance from able team members.

The Pacesetting Style

Pacesetting leaders set extremely high performance standards and exemplify them; they are obsessive about doing things better and faster and ask the same of everyone else; and they are quick to root out poor performers and demand them to improve lest they be axed.

All these characteristics seem good on the surface, but there are weaknesses in the Pacesetting Style. Employees can feel overwhelmed by the pacesetter's high standards, thus eroding morale. They may get the impression that this leader doesn't trust them to work in their own way or to take initiative. Pacesetters may also fail to state guidelines clearly, expecting that employees will know what to do. Also, pacesetters don't always give enough feedback, or worse, simply jump in on a job when someone is lagging.

Still, the approach works well when all employees are selfmotivated and need little direction.

The Coaching Style

Coaching leaders help people identify their strengths and weaknesses and tie these to personal and career goals. They help employees come up with a plan to achieve longterm goals. They also develop written agreements with their people about their roles and responsibilities, and provide feedback and instruction on the progress of fulfilling these arrangements. Coaches know how to delegate well, provide people with challenging assignments, and put up with short-term failures if it furthers long-term learning.

Of the six styles, the Coaching Style is least used, according to research. That's because few highpowered environments make it easy to use the more time-consuming style effectively. Yet its results are highly positive largely because it's heavy on dialogue. For example, flexibility increases because employees, who know the boss is watching and cares about what they do, are more apt to feel free to experiment. They'll get immediate feedback, which also allows them to know what's expected of them and how their work fits into the big picture. That, in turn, affects responsibility.

But using this style won't work on people who resist learning or changing. And it won't work if the leader doesn't have the expertise to help people, nor the commitment to provide constant feedback.

Adapted from "Leadership that Gets Results," by Daniel Goleman, in Harvard Business Review