Moral and Economic Incentives in Corporate Transitions

I've been thinking about transitions a lot lately. Corporate transitions. Either in strategy or structure or business model. The problem is that executive teams seem to manage through transitions with widely different results. Some highly successful, some poor. There are plenty of books that give recipes and pointers and insights about how to manage transitions and the examples of great leadership and poor leadership, but what is the underlying principle? Why do some fail drastically and others succeed? Why are employees sometimes energized by the change and other times demoralized?

Recent analysis points to the fact that the continuity of a founder is a key factor in company success (can't find the reference I read, if anyone has it, please post back)... why would this be? Why do people often abandon ship during a bad transition instead of sticking it out, especially when everyone knows there's a transition? Why do some companies execute one transition flawlessly only to fail miserably at the next even with the same management team?

The lens I've been using most recently to attack this problem is the concept of Moral and Economic Incentives. I think the great failure in almost all corporate transitions results directly from a failure to address the change in underlying moral incentives. If you take for granted that employees are soley motivated by a combination of moral and economic incentives... then if during a transition you hold the economic incentives fixed the only change that would cause an employee to leave is a change in moral incentives. Turns out this is exactly what happens in transitions.

Take for instance Netscape being acquired by AOL. Netscape employees were motivated by the moral incentive to change the world, to create something great, to ship an amazing browser, to define the future of the web, even to beat Microsoft. Being acquired by AOL -- a player seen as making a strong business in the back-water of dialup internet access based on proprietary standards -- was likely to naturally create a conflict in moral incentives.

I was at Netscape at the time. The AOL/Netscape management team did not come and address those incentives head-on. They could have said "The user base, the financial viability, and the operational excellence of AOL combined with the technical strengths, innovative brand, and assets of Netscape will allow us to achieve a shared vision of the future of web together." They could have recognized that the browser was the core and the brand was revolutionary. In fact, they might have even renamed AOL to Netscape. Instead, they said "Don't worry, you can keep bringing your dogs to work." Seriously, no joke. They might have renamed AOL to Netscape instead of using the innovative Netscape brand for a low-cost ISP play. They could have kept the browser as their flagship entry point. What was AOL acquiring for $8B if not the brand, people, and browser of Netscape? They lost all three by failing to understand the moral incentives that drove Netscape employees.

The Disney/Pixar merger will be a big test. Presumably the Pixar employees have had a moral incentive to prove themselves better and different than the other animation studios. Presumably beating Disney has been an implicit (or perhaps explicit) moral incentive. Presumably their moral incentive has been to create great movies.

Enter the Disney acquisition. Probably reasonable to assume that employees will value the economic impact on their stock differently (investors don't agree, why would employees.) But assuming it is a net neutral, then the success or failure will depend on how the Pixar/Disney executives address the changes in Pixar's moral incentives. Will they argue "Everything will stay the same, we're not going to change anything"? Well, that would make sense if stability were people's number one concern, but presuming people feel comfortable in their job, this message would mess with the moral incentives.

Hard to continue to be motivated by differentiating yourself from Disney. Hard to feel convinced that the quality of your movies won't diminish. Hard to feel like your work won't be watered down by the great muddying affect of Disney.

Now, hopefully the executives can reposition the moral incentives to align with the potential of the merger. This merger is a positive sign that the magic of imagination has regained its prominence at Disney. Pixar is a huge infusion of that magic. John Lasseter is a visionary magician with an intolerance for mediocrity.

For the employees of Pixar, this is a huge opportunity to recharge their moral foundation. Pixar couldn't really expand by making new movies, they would have needed to branch out in different entertainment mediums (amusement parks, ice shows, merchandise). In fact, they were already branching out through Disney, but without direct control. Now the employees of Pixar have the opportunity to help reinvent the magic of imagination. To move beyond the medium of 3D animation to a diverse array of means of inspiring the imagination. They can help reinstill the vision of Walt Disney himself. They can turn a backwater entertainment megaplex into a massive platform for inspiring the future.

The employees of Pixar have a tremendous opportunity to bring their artistry and imagination to the world in a way that separates them not from Disney, but from everyone else using the power of imagination that just the name "Walt Disney" still evokes!