Sword of damocles

Is accountability important for an entrepreneur?

In this article, I discuss the last component of ‘SLAP’ formula for wealth creation – Accountability. In my previous articles, I discussed the other components of ‘SLAP’ – Specific knowledge, Leverage and Patience.

What is accountability?

Webster dictionary defines Accountability as an obligation to accept responsibility or to account for one’s actions. This is vague, misleading and does severe injustice to a very powerful tool available to humans.

From an entrepreneur perspective- accountability is the ability to take risks and accept failure in public under ones own name. This is a practical definition that can be easily tested in the real world. Lets see how..

Accountability is the ability to take risks and accept failure in public under ones own name

In his book Sapiens, Yuval Noah Harari introduces us to the code of Hammurabi – Hammurabi was a successful Babylonian king who introduced a  collection of 282 rules that established standards for interactions in the society. This was world’s first documented set of laws even before the famous Ten commandments. 

These rules were carved on a stone that you can find even today in the Louvre Museum in Paris.

One of the rules in this code was

” If a builder built a house for a man & that house collapses, the builder will be executed”

What Webster’s editors cannot articulate in the 21’st century, Hammurabi wrote down more than 3500 years ago. He kind of intuitively understood the concept of accountability.

Three pillars of accountability

Accountability always stands on 3 pillars – remove anyone of the 3, and you don’t have accountability. The 3 pillars are

  1. Risk
  2. Ownership
  3. Public commitment

Let’s look at each of these pillars individually.

Risk

Risk is like a shadow for every entrepreneur – it cannot be separated from an entrepreneur and it goes wherever he/she goes.  In a more generic sense, Risk is the possibility of losing significant personal resources such as life, time, health, money, reputation. I will deal with the concept of risk and its principles in my future arc on ‘Risk and probability’.

Lets look at the inverted risk pyramid, where the top most element is most risky and risk reduces as we move down the pyramid.

At the top, you have risk to your life or health – doing something that can damage your health or in an extreme case, loss of life. Pilots, firefighters and Armed forces fall in this category.

Next is risk to freedom – doing something that can temporarily or permanently take away your ability to make choices in life. CEO’s of large companies risk prison if their companies commit fraud or resort to illegal activities. Some famous examples are Theranos (Elizabeth Holmes), McKinsey (Rajat Gupta) and Bernie Maddof.

Then there is a risk to time – doing something that takes 3/5/10 years of your productive life – if it fails, all your years are gone and you can’t go back in time.

Fourth is risk to capital – investing a lot of capital in a project and risking all of it in that project. And lastly, risking reputation – doing something that can cause harm to your reputation or credibility. In the age of short attention spans, low downside of ‘reputation risk’ is fully exploited by economists, analysts & politicians.

Notice that the top 3 risk types are more serious risk types because they are irreversible – while the other 2 risk types are reversible. You can always earn back the capital you lose but you cannot earn back the time you lost.

Ownership

Second pillar is ownership – Having risk doesn’t necessarily mean you own it. Nassim Taleb in his book ‘Skin in the Game’ talks about risk/reward symmetry – if you own the reward but share the risk, you tend to create an assymetric risk reward profile. Ownership of risk means that if you own the reward, you should also own a proportionate risk.

Taleb gives the example of large banks and institutions – bankers and traders took on enormous hidden risks and when everything was going in their favor, they earned huge bonuses. And when risks blew up one day, these same bankers asked for urgent bailouts and got out of the situation without any personal downside.

Lets look at a similar situation in a startup:
Owner of startup has invested 100,000$ of his own money and spent 2 years building the business. He hires a sales head for a fixed annual compensation of 100k and a variable compensation equal to 5% of yearly sales. Now if things go well, upside is very good for both for the owner and the sales head – both make good money, sales head makes a good bonus at the end of the year.

If things go southward, notice that the risk for owner is pretty high because he not only has to pay out the compensation of sales head but also worry about his own 100k$ already invested in the business. As for the sales head, he will lose the 5% variable pay in the worst case scenario.

This asymmetry of risk and reward leads to ownership problem – while the owner has accountability, the sales head doesn’t. In economics and in life, this is a very important class of problems called the ‘principal-agent’ challenge. I will discuss this in detail in future episodes.

Public commitment

Taking ownership of risk in ‘public’ makes you open to evaluation. Evaluation is integral to accountability – without evaluation there is no accountability. In the business world, such evaluation has many variants – some examples are sprints, sales review, appraisals, quarterly investor meetings etc.

Cicero, a Roman Philosopher, described a tale in his book “Tusculan Disputations” called the ‘Sword of Damocles”. Richard Weshall drew a painting based on the description of Cicero. This painting is the best illustration of the concept of accountability.  The story goes something like this…

A court flatterer named Damocles envies the king Dynosius for all the worldly pleasures he enjoys as the king. Dynosius asks him to sit on his throne and commands his men to treat Damocles like a king. He is served the best wine, food and enjoys the presence of beautiful courtmaids at his service until he looks up. He sees a sword hanging by a horse hair and at any moment, that hair can break and the sword can pierce his skulll. Damocles is terrified and immediately shuns all the worldly pleasures and moves away..

In this the sword is the risk, the throne is the ownership and the safety and well-being of subjects is the public commitment. So the king has total accountability. In the same painting, you can see the minister by the side – being an adviser to the king, he enjoys the position but has no real down side. Has no ownership and no commitment – if the king is dethroned and another takes his place, the minister will switch loyalty immediately..

In the next article, I discuss how to bring accountability into a life of an an entrepreneur. To summarize the key points, 

  1. Accountability is the ability to accept failure in public under your own name
  2. 3 pillars of accountability are risk, ownership and public commitment
  3. Different levels of risk & different levels of ownership of that risk can exist
  4. Public commitment is key for evaluation