[April 20, 2014] During the Iraq war when parts of my Army unit were in Fallujah (called the second battle of Fallujah) at its worst of times late in 2004, we were given tactical advice by the US Marines. We were operating as engineers in their area and saw them on the frontlines daily and paid close attention to what they had to say…they had, what we called, “skin in the game.” They lived and died by their words and advice, so there was credibility in their advice.
Too often we listen to people giving opinions, making recommendations, telling us what we should do (and not), complaining, and giving advice to us. What they often do not have is “skin in the game.” They have nothing to lose by being wrong. So, why should we listen to them? Well, I don’t think we should listen to anyone without “skin in the game.”
“Skin in the game,”1,2 is a term supposedly coined by Warren Buffett referring to a situation in which high-ranking insiders use their own money to buy stock in the company they are running. The idea behind creating this situation is to ensure that corporations are managed by like-minded individuals who share a stake in the company. Executives can talk all they want, but the best vote of confidence is putting one’s own money on the line just like outside investors.
So, do we listen to those who only talk the talk, or do we listen to those who also walk the walk? The answer for senior executive leaders is obvious; we listen to those who are vested in a positive outcome that aligns with ours.
Senior leadership requires that we are vested in the outcome of our organizations, in mission success, and all its stakeholders. Without senior leaders with “skin in the game,” we cannot truly trust them. Many of the financial failures in the last 20 years have involved fraud but also had an appreciable lack of skin in the game from its most senior leadership.3
To this day, I still thank those US Marines for their advice and for helping us accomplish our mission and survive the fight.
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[1] http://en.wikipedia.org/wiki/Skin_in_the_game_(phrase)
[2] The aphorism is particularly common in business, finance, and gambling, and is also used in politics.
[3] On the other hand, research has shown that there tends to be a negative correlation between excess “skin” and negative returns. The main issues surrounding “skin” or excess “skin” is the principal–agent problem whereby transparency and fiduciary obligations are disregarded by principals who have capital or excess capital (skin) tied into an entity. Many banks and other financial institutions bar employees from having any “skin” where client capital is managed, principally to address the issue of Front running and commingled funds.