UAW members ratify GM labor contract

WASHINGTON (CNNMoney.com) -- The United Auto Workers union Friday overwhelmingly ratified a labor deal with General Motors that included concessions, but is not enough to keep the company out of bankruptcy.

Seventy-four percent of UAW members voted for the contract, which will allow the company to cut costs and "eliminate the wage and benefit gap" with competitors, according to the UAW president and a statement from GM.

"I think it's a disgrace we had to do anything," said UAW president Ron Gettelfinger during a press conference. "We tried to inflict the least amount of pain possible on our retirees."

It was widely expected that rank-and-file members would ratify the revised labor deal, even as General Motors (GM, Fortune 500) seems destined for bankruptcy.

The deal greatly reduced the amount of money that GM is required to contribute to union-controlled trust funds to cover health care costs for hundreds of thousands of retired union members and their families.

In return, the trust fund will receive a 17.5% stake in the reorganized GM starting next year, and the right to buy an additional 2.5% stake in the company.

0:00/3:24GM's fuel efficiency challenge

In addition, the fund will receive $6.5 billion in preferred stock that pays a 9% interest rate, and GM will owe it an additional $2.5 billion. GM will not have to contribute more than $20 billion in cash it owed the trust fund.

The union will have to reduce retiree health care coverage. But the union did not agree to any wage or benefit cuts for the 61,000 UAW members working at GM. However, the job protections for those members were reduced and GM has announced plans to cut hourly employment by about a third to 40,000 by next year as it shuts more than a dozen plants.

The union did win guarantees that GM would build its new small car at a factory that has previously been closed. And the company agreed to put four closed plants on "stand by" status to be restarted if demand for autos bounces back.

The union agreed not to fight plans to import some small cars from outside of North America, such as GM's growing manufacturing base in China.

0:00/02:46Coming to U.S.: GM's Chinese cars

UAW members at Chrysler had already voted overwhelmingly in favor of contract revisions. The union won assurances the company would not use the bankruptcy process to try to gain more painful concessions from hourly workers. A federal judge is weighing Chrysler's restructuring plan. 

Ugh! Gas hits $2.50

NEW YORK (CNNMoney.com) -- The price of gas, rising for the 33rd straight day, has reached $2.50 a gallon, motorist group AAA reported Sunday.

The spike of more than 20% in a month is hitting Americans in their wallets and causing concern among some experts.

The jump in one of consumers' staple purchases comes at a fragile time for the economy. Recently some measures of housing, spending and credit have hinted that the most severe parts of the recession may be easing.

At the same time, gas has jumped in price as the American auto industry is on the verge of a dramatic reshaping amid plummeting vehicle sales.

According to AAA, the national average price for a gallon of regular unleaded gas has edged up to $2.502, from $2.488 the day before.

Late spring is typically a time of year when people drive more. But rising gas prices could cause people to stay home. That would mean less spending, which could dampen governments efforts to stimulate the economy.

0:00/2:24Summer pump jump

"There's way too much optimism about a driving season lift," said Tom Kloza, chief oil analyst for the Oil Price Information Service.

Kloza said the impact will be especially painful in economic "sore spots" like California, Florida, Arizona and the rural South.

Currently, the highest gas prices are in Hawaii, where prices average $2.789 per gallon, and Alaska, where the average is $2.751.

In the lower 48, the highest prices are in two of the states hardest hit by the recession: California ($2.746) and Michigan ($2.745).

Michigan suffers the highest unemployment rate in the nation -- 12.9%. California is close behind at 11%.

The next most expensive states for filling up are:

Illinois, $2.692 Washington, $2.677 Wisconsin, $2.647 New York, $2.634 Indiana, $2.618 Ohio, $2.618 Connecticut, $2.615

The cheapest gas can be found in South Carolina, where the average is $2.309 a gallon.

Despite the recent surge, the average price of a gallon of gas remains well below its all-time peak of $4.114 on July 17, 2008.

But the repercussions of the 2008 gas spike are still being felt.

Last year's gas price spike severely hampered demand for SUVs and trucks, hastening the downward spiral for the Big Three automakers.

Chrysler filed for bankruptcy on April 30 and is awaiting a ruling from a federal judge as to whether it may sell its assets and form a new company. General Motors (GM, Fortune 500) is expected to file for bankruptcy next week and its stock price is trading below $1 a share for the first time since the Great Depression. 

Consumers gain clout in Washington

WASHINGTON (CNNMoney.com) -- Meet Washington's new power brokers on the economy: Consumer advocates.

They are rubbing shoulders with the president at bill-signing ceremonies and getting face time with economic chief Larry Summers. A few are even returning calls from lawmakers whose offices they used to hound.

After eight years of getting the cold shoulder, consumer groups are relishing their new role in the policy-shaping spotlight. Consumer advocates celebrated their biggest legislative victory in years when President Obama signed the credit card bill.

Now they're gearing up for the next big battle: regulatory reform.

"I assure you that when you see our whole vision of our regulatory reform going forward, consumer protection is not a side issue," said Treasury Secretary counselor Gene Sperling on Thursday during a speech at a conference at the Federal Reserve.

On May 7, Summers invited 15 to 20 advocates to the White House to solicit ideas about reshaping the nation's patchwork regulatory system to prevent future financial collapses, according to four participants.

One group, the New America Foundation, a left-leaning think tank sensitive to consumer causes, has had at least a dozen conversations with top White House officials in person and over the phone, according to policy director Ellen Seidman.

Pam Banks, policy counsel for Consumers Union, has seen the inside of both the White House and the Treasury Department in the last several weeks.

"I can say for a long time, there were few consumer groups that had seen the inside of the White House or the Treasury," said Banks. "Now sometimes you go to these meetings, and they say: Tell us what's on your mind. And then they start taking notes ."

President reaches out

Political experts say the ascendancy of consumer activists should come as no surprise; President Obama, during his campaign, pledged to tap them. In addition, he spent his early years working as a community organizer on Chicago's South Side and worked with advocacy groups as an attorney.

But the swift consumer victory on credit cards caused the financial sector lobby -- and even a few consumer advocates -- to do a double take.

Several tough provisions attacking credit card practices, such as allowing consumers to fall two months behind on a bill before seeing a rate hike, made it into the final bill. And that happened despite heavy lobbying by the banking industry to block such provisions.

Consumer advocates say the Senate, in particular, is a tough sell for them, even though the Democrats currently have control of 59 seats. But having President Obama on board "gave us the extra push," said Ed Mierzwinski, a 20-year veteran consumer advocate for National Association of State Public Interest Research Groups.

0:00/1:05'Consumer-friendly' credit

Of course, the financial sector has hardly lost its grip in Washington. In the same weeks that credit card legislation was advancing, financial sector lobbyists fended off a provision in the Senate that would have allowed bankruptcy judges to modify underwater mortgages. And they, too, have been visiting with top White House officials.

The financial sector is not intimidated by consumer advocates, said Scott Talbott of the Financial Services Roundtable, which represents the largest financial services companies. But companies recognize that the stars have aligned to give consumer advocates a bigger, more visible stage.

"With Democrats in control and the wave of populism that has swept through, consumer protections are on everybody's tongue," Talbott said.

Next up: Regulatory reform

One area of regulatory reform that consumer advocates are particularly keen on is a new panel that would regulate mortgages and credit cards. The White House supports the idea of creating a so-called Financial Safety Products Commission, say consumer advocates and legislative aides.

"These are ideas that are not new to us, but haven't been vogue in Washington and they're getting more credence," said Caleb Gibson of the liberal think tank Demos, which has been working on the blueprint for such a commission.

Consumer groups want a strong and independent agency that publicly monitors mortgages and credit cards in a transparent way. But they don't want it to preempt strong consumer laws already in place in some states and localities.

The idea was one that caught the president's attention months ago. While appearing on Jay Leno's "The Tonight Show" in March, Obama used one of the arguments used by proponents.

"When you buy a toaster, if it explodes in your face, there's a law that says, you know, your toasters need to be safe," he said. "When you get a credit card or you get a mortgage, there's no law on the books that says, if that explodes in your face, financially, somehow you're going to be protected."

Consumer advocates say the president embraces consumer protection issues, often far ahead of his own advisers and lawmakers.

"This president gets it on our issues," Mierzwinski said. "And that's great for us." 

States race clock on $19B in stimulus

NEW YORK (CNNMoney.com) -- Some 14 states have only a few weeks left to gain approval for highway projects or risk losing millions of stimulus dollars.

All states have until the end of June to "obligate" half their share of stimulus funds for road and bridge improvements. If they don't, the federal Department of Transportation will redistribute half the leftover money.

That means states must gain approval for their projects from the Federal Highway Administration, an agency of the Department of Transportation. The money doesn't actually have to be spent, which can take months as projects go through the contracting and construction process.

States are sharing $26.6 billion for highway infrastructure projects, though only $18.6 billion is subject to the June deadline. The road allocations are among the earliest of the $280 billion in funds going to states and municipalities as part of the $787 billion recovery act.

While many states have safely cleared the hurdle, several have to buckle down in coming weeks if they hope to reach the 50% mark.

Alaska has only obligated 6.3% of its $122.8 million in funds, while Ohio has gained approval for only 15.7% of its $648.2 million share, as of May 22, according to the department.

These states' progress stands in sharp contrast to places such as Wyoming, which has already won approval of 97.5% of its $110.3 million share.

Federal transportation officials are in close contact with their state counterparts to review and sign off on applications, said Joel Szabat, who co-leads the recovery effort for the department. They are approving nearly $1 billion in projects a week, nearly twice the typical rate.

More than 3,500 projects nationwide have already received the nod. Some states have dozens of projects approved in a day.

"One of our biggest focuses is that every state meets that deadline and is not penalized," Szabat said. The agency is "highly confident that every state will have over 50% obligated by the time the 120-day deadline comes around."

Ohio's unusual path

Ohio transportation officials know they are moving at a slower pace than many of their peers elsewhere in the nation. That's because they took a unusual path to decide what projects to fund, said Scott Varner, the state department's spokesman.

The state received 4,600 ideas after soliciting proposals from cities, counties and people. It then narrowed the list down to 2,200 eligible for federal funding, before choosing 200 to invest in.

The Buckeye State is also seeking to fund some non-traditional projects as part of its highway allotment. For instance, it won approval to spend $6.8 million on replacing a shipyard crane in Toledo, which supports ship maintenance and vessel construction projects and will create or save 187 jobs. It is also hoping to get the okay on a $20 million investment in design work for Cleveland's Opportunity Corridor, aimed at improving access from the city's central east side to the freeway.

These initiatives required closer collaboration with federal officials since they aren't the typical road repaving and bridge replacement work, Varner said.

"It did take a little more time in part because we had to work with our Federal Highway Administration office in Ohio," he said.

Still, state officials say they are not concerned they will miss the deadline. They are receiving approval for millions of dollars worth of projects a week, and have more than $50 million before federal reviewers now.

"We know which projects we have planned to meet the 120-day deadline," Varner said. "We think we're on target."

Still, the delay has meant shovels have yet to hit the Ohio roads. The state has awarded two contracts and expects to approve up to 20 more by week's end. Construction should start within the next month.

Wyoming working double-time

In Wyoming, transportation officials have sped up their contracting process in recent months. Work began on some projects in early May.

Normally, it can take six weeks for the state to advertise projects and for contractors to submit bids. Now it takes only three weeks. Also, the Wyoming Transportation Commission meets twice a month to award contracts, rather than just once.

As a result, the state has obligated nearly all of its stimulus funds for highway projects. And, officials feel that the rapid pace has brought in more competition, especially from out-of-state companies. Instead of having just two or three bidders per project, it is now seeing seven on average. And bids are coming in below estimates, freeing up money to fund more projects.

"If we could get our jobs out the door quicker, we felt we could get more competition from contractors," said Del McOmie, chief engineer for the Wyoming Department of Transportation. 

Troubled mortgages hit record high

NEW YORK (CNNMoney.com) -- Despite all the hand-wringing and attempts to contain the foreclosure plague, the problem still spread during the first three months of 2009, as the number of foreclosure actions started hit a record high, according to a quarterly report.

The National Delinquency Survey released Thursday by the Mortgage Bankers Association (MBA), reported the largest quarter-over-quarter increase in foreclosure starts since it began keeping records in 1972. Lenders initiated foreclosures on 1.37% of all first mortgages during the quarter, a 27% increase from the 1.08% rate during the last three months of 2008 and a 36% rise from the first quarter of 2008. All told, more than 616,000 mortgages were hit with foreclosure actions.

Delinquencies, the stage in which borrowers have fallen behind on payments but have not yet received foreclosure notices, also hit record highs, with the seasonally adjusted rate at 9.12% of all loans, up from 7.88% last quarter.

The ugly report was sobering but not unexpected, according to Jay Brinkmann, MBA's chief economist. He pointed out that foreclosure rates had grown little during the previous three quarters, even as the number of homeowners falling behind on mortgage payments continued to soar.

"We suspected that the numbers were artificially low due to various state and local moratoria, the Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) halt on foreclosures, and various company-level moratoria," he said in a prepared statement.

0:00/2:13Recession's end in sight?

"Now that the guidelines for the administration's loan modification programs are known, combined with the large number of vacant homes with past due mortgages, the pace of foreclosures has stepped up considerably."

And it looks like that pace may continue to increase. There has been a big jump in the number of loans that are 90-days or more overdue, which is a very bad sign since those delinquencies often progress into foreclosure starts. The number of loans 90 days past due rose to 3.39% of all loans, up from 3% a quarter earlier and is more than double the 1.56% level of 12 months ago.

Brinkmann said many seriously delinquent mortgage borrowers have already given up and moved out of their homes, and that these homes constitute a large share of all foreclosures.

"Lenders are not proceeding against any foreclosures they think can be saved," said Brinkmann, "only against vacant properties and others they think have no chance of succeeding."

Prime problem

The nature of these troubled loans is also changing. The mortgage meltdown was ignited back in 2007 by defaulting subprime loans, especially adjustable rate mortgage (ARMs). Now prime loans are the biggest problem.

"The original delinquency and foreclosure problems had a lot to do with loan terms - the toxic mortgages with interest rates that reset higher," said Nicholas Retsinas, the director of Harvard's Joint Center for Housing Studies. "Now we're back to the more traditional reasons why loans go bad. If people don't have jobs, they can't pay their mortgages."

Subprime mortgages were usually issued to the least credit-worthy borrowers and potential payment problems had been offset for years by the hot housing market.

Double-digit home-price increases had enabled cash-strapped borrowers to pay their bills by tapping their added home equity, through cash-out refinancings or home equity loans. Once home prices began to fall, those options evaporated and subprime mortgages began to default at higher rates. The delinquency rate for subprime ARMs reached nearly 28% during the first quarter.

Over the past 12 months, however, as the turmoil in the overall economy increased and job losses mounted, the percentage of foreclosure starts for prime, fixed-rate loans, which account for the majority of all mortgages, have more than doubled, to 0.61% from 0.29%.

"For the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures," said Brinkmann.

"I don't see how it can't get uglier," said Dean Baker of the Center for Economic and Policy Research. "Unemployment will continue to go up and you'll have a lot of people out of work, prime workers in their 40s and 50s, who will exhaust their resources."

They'll have no shot at saving their homes unless they can get new work.

Regionally, the biggest contributors to the record foreclosure rates are the so-called "sand states," California, Florida, Arizona and Nevada. These four, which represent less than 18% of the nation's population, account for 46% of foreclosure starts. More than 10% of all mortgages in Florida are in foreclosure.

Those states had much higher rates of subprime lending than average. California, for example, which accounts for 13% of U.S. mortgages, had 18% of all subprime ARMs outstanding during the first quarter. These states also endured severe home price declines, forcing more homeowners into delinquency.

The fact that delinquencies and foreclosures continue to rise is terrible news for the overall economy, according to Pat Newport, a real estate analyst for IHS Global Insight.

"Just about every number in the report is a record high," he said. "It indicates that the problems with the banks will continue for a long time."

Brinkmann displayed little optimism for the immediate future, saying the level of mortgage defaults will not begin to fall until after the employment situation improves.

"MBA's forecast, a view now shared by the Federal Reserve and others, is that the unemployment rate will not hit its peak until mid-2010," he said. "Since changes in mortgage performance lag changes in the level of employment, it is unlikely we will see much of an improvement until after that." 

Health reform: A $1 trillion question

NEW YORK (CNNMoney.com) -- If President Obama has his way, health care reform will be finalized this year. Key Senate and House committees are planning to mark up legislation in June, and the House is aiming to vote on the issue by August.

And while the specifics of how to fix the nation's health care system are far from final, the debate over how to pull it off will turn on a key question: How to pay for it.

The total cost of overhauling health care is estimated at over $1 trillion, and the administration has made it clear that it doesn't want the overhaul to add to the already giant federal budget deficit.

Senate Finance Committee Chairman Max Baucus, D-Mont., one of theleading legislative players on the issue, last week laid out the likely elements in any health reform package. He also identified some of the main options for how to pay for it.

A system overhaul will guarantee coverage for most of the 47 million people currently uninsured, Baucus said at a Kaiser Family Foundation forum. And there's a good chance that a government-funded public health plan option will be added to the mix of plans offered by private insurers, Baucus said.

The final legislation is also expected to lay out requirements for minimum benefits; prohibitions against denying someone coverage due to a pre-existing condition; and guarantees for affordable, quality health care, he said.

House Ways and Means Chairman Charles Rangel, D-N.Y., another key player, echoed what Baucus outlined at a National Coalition on Health Care conference on Wednesday.

In terms of reimbursing doctors and hospitals, the focus for insurers is likely to shift from paying for the volume of services provided to reimbursements based on positive health outcomes.

When it comes to paying for all those changes, it'll be all hands on deck. Consumers, employers, health care providers and others in the industry will be asked to contribute. "We'll pay for it in a balanced way," Baucus said.

But "balanced" may not guarantee bipartisanship support in the House and Senate. In fact, deciding exactly who pays what - and figuring out how much reform costs can be taken care of through greater efficiencies and increased competition - will be among the hardest issues on which to find consensus.

Here are some of the leading ideas that could most directly affect health consumers' wallets:

Tax part of employer contributions to health insurance: Right now, if you get your health insurance at work, any money your employer contributes to pay for premiums is tax-free income to you.

It's the costliest tax benefit the government offers, reducing federal tax revenue by $226 billion last year, according to the Joint Committee on Taxation. And it's a break that many officials, including Obama, say they are reluctant to change.

But tax and health care experts agree it's not only a costly incentive but one that offers the biggest tax break to high-income workers and to employees with the most expensive plans, which include union workers. Plus, they say, divorcing consumers from the true cost of their health care encourages them to buy more care than they might need and that, in turn, contributes to growth in costs.

Baucus has said lawmakers are considering limiting - but not eliminating - the tax-free exclusion in some way.

Limits might be based on the cost of a plan, an employee's income or some combination of the two. Another option would be to convert the exclusion to a tax credit or deduction. Lawmakers are also considering whether to grandfather in existing plans that unions won through collective bargaining agreements.

How much revenue can be raised is entirely dependent on the option chosen. There are no official estimates available from the Congressional Budget Office yet, but the Tax Policy Center estimates that capping the exclusion at the average cost of health insurance in 2009 ($5,370 for individuals; $13,226 for families) and adjusting that cap for inflation every year could raise $848 billion in revenue over 10 years.

Impose Medicare tax on state and local government employees: Currently the wages of some state and municipal employees are not subject to the 2.9% Medicare payroll tax that other workers and their employers pay. Lawmakers may decide to subject all such employees to the tax.

Tax sugary and alcoholic drinks: One option under consideration would standardize and increase the federal tax on alcohol. Another would impose a new federal tax on beverages sweetened with sugar, high-fructose syrup or other ingredients. Diet sodas and other artificially sweetened beverages, however, would not be taxed.

Change or eliminate Flexible Spending Arrangements: Currently, employees get a tax break for money contributed to FSAs. The amount they may contribute is unlimited, although the employer may set a limit. And the money may be used for a host of health-related expenses that insurance doesn't cover, as well as for dependent care expenses.

Lawmakers are considering either limiting how much money may be contributed or getting rid of the accounts entirely.

Modify Health Savings Accounts: Individuals with high-deductible health insurance policies may set up HSAs to which they and their employers may contribute money tax-free. Earnings on those contributions are tax-free, as are withdrawals used for qualified medical expenses.

Lawmakers may opt to limit the amount of money that may be contributed to HSAs or to boost the penalty for making withdrawals for non-medical expenses. They also may require third-party certification that the withdrawals were used for qualified expenses. 

The upside of the downturn

(Fortune Magazine) -- The recession that followed World War II was hard on everybody, but it was especially tough for Bill Hewlett and Dave Packard. Supplying equipment to the government had been a big part of their young company's business, and that revenue mostly disappeared when the war ended.

Beyond that problem, the overall economic contraction that followed the drop in government spending meant that companies - HP's (HPQ, Fortune 500) other class of customers, since it didn't then sell to consumers - weren't buying either. The firm faced a crisis of survival.

It was one of those moments when the behavior of a company's leaders in a brief period will determine its future for a very long time. As biographer Michael S. Malone has documented, Hewlett and Packard had built their business from the beginning on the principles of loyalty and trust, but in these circumstances they realized that they simply could not avoid mass layoffs. They fired 60% of their employees.

Among the survivors, though, something curious happened. Those who remained were forced to stretch themselves in new ways. The company's manufacturing chief turned himself into a knockout marketer and was so successful that he remained in that role for the rest of his career. Even Packard himself found muscles that no one suspected he had. Though never considered a genius engineer - that was Bill Hewlett's role - Packard returned to the lab at this time when the company was desperate for new products, and he invented one. It was a voltmeter, the beginning of a product line that would serve the company quite profitably for 50 years. Packard never invented any more products; his genius was managing the company. But when a dire situation pushed him beyond his apparent abilities, he excelled.

This recession is much worse than the one following World War II, and for millions of people globally it's a time of deep personal trials. Truly everyone is being stress-tested. Yet of the many opportunities that arise out of troubled times, the most valuable of all for many businesspeople are the opportunities for personal growth, particularly for developing as a leader. But the growth isn't automatic. Achieving it demands that we respond in the right ways.

How leaders view crisis

Turmoil presents the ultimate leadership opportunity, but for every inspiring story of James Burke and the Tylenol crisis, there's at least one less heralded tale of a leader who blows it. Coca-Cola (KO, Fortune 500) CEO Douglas Ivester happened to be in Paris in July 1999 when news reports said that cans of bad Coke had made several Belgian schoolchildren sick. Ivester, a brilliant financial executive with a sharply analytical mind, quickly determined that all production procedures were being followed and that his products did not pose any health risks. He got on his plane and flew back to Atlanta. But more people got sick, images of suffering children dominated TV news, politicians demanded action, and the mess eventually cost Coke millions of dollars plus years of distrust and bad will from all its stakeholders. It also contributed to Ivester's getting fired within months. In a crisis, he turned out to be a manager, not a leader.

So what does true leadership under unimaginable stress look like? It can be boiled down to four actions. They're simple to state and may seem deceptively simple to do, but they aren't. Finding the strength to take these steps will contribute significantly to any leader's growth.

1) Be seen early and often. This most basic requirement is important for a fundamental reason that is often forgotten: People want to be led. The reasons we crave leadership are deep. We want the leader to be a repository for our fears. When people are desperately worried, they want to know that someone with greater power than theirs is working to solve their problems. Thus, successful leaders in a crisis first make emphatically clear that they are present and on the job. This kind of visibility isn't easy, because the leader in a crisis has a million things to do, most of which require being on the phone or meeting with small groups. In a business crisis, lawyers may be advising the leader not to make any public statements. Yet it must be done.

Michael Dell's company was not large or well established in the early 1990s when he was scheduled to appear at a conference where I was moderating. The day before, Dell (DELL, Fortune 500) had announced unexpectedly terrible results. The stock had plunged, and some people wondered whether Dell himself, who wasn't yet 30, could lead his organization past this. The situation was so serious that most of us at the conference assumed he wouldn't show up. But he did, appearing unfazed and explaining his plan. Simply appearing reassured his constituencies and increased their confidence for the future.

2) Act fast. It's amazing how people who would be at one another's throats in good times will accept that in a crisis, decisions have to be made. Leaders in a crisis must not lose their rare opportunity to act. The difficulty is that just when decisions are most easily accepted, they're hardest to make. All business decisions are made with incomplete information, and that's especially true in the heat of a crisis. At the same time, the stakes are much higher than usual. Every instinct tells you to decide more slowly than usual, yet it's vital to decide more quickly.

3) Show fearlessness. When Robert the Bruce led the Scots against the English at the Battle of Bannockburn, he led them literally, riding a horse in front of the rest. As legend has it, a mounted English knight spotted him, lowered his lance, and charged. Bruce stopped and didn't move as the knight thundered toward him. Then, at the last moment, he stood in his stirrups, turned sideways, swung his battle ax, and split the passing knight's helmet (and head) in two. Bruce's troops were so inspired that they roared into battle and won the greatest victory in the history of their nation.

We want our leaders to show us that they're not afraid. In business that means facing bad news head on without cringing. The effective leader announces trouble in unvarnished terms - people can smell evasion a mile away - then explains confidently how it will be defeated. Fearlessness can be shown more tangibly as well, when a leader cuts his own pay or, even more powerfully, uses his own money to buy company stock, as several CEOs have done in this recession.

Note that the advice here is "show fearlessness," not "be fearless." A prominent CEO, who didn't want to be quoted for obvious reasons, told me, "Any CEO who isn't terrified in this recession has no sense at all." To suggest that you be fearless would be ridiculous. But what counts is what you show. Robert the Bruce was probably terrified. It didn't matter.

4) Tell a story that puts the crisis in context. Extensive research has shown that how people are affected by stress depends heavily on the way they see it. Those who see stressful events as bad, abnormal, and inescapable tend to suffer from them much more seriously than do people who see those same events as normal, interesting elements of life from which they can learn and to which they can respond. Some research has found that members of the first group suffer much worse health than those in the second group. The first group burns out more quickly and performs much worse than the second, even though both are subjected to the same stress. A critical question for leaders is whether they can help everyone in the organization respond more like members of the second group. The answer seems to be yes.

When the stock market was dropping in late 2008, I asked Charles Schwab about it. He began his answer by saying, "I've been through nine of these darn breaks. This happens to be the most pervasive in terms of how it has spread through the economy." He went on to explain how it differed from previous market declines and how the market would eventually climb back up. This was precisely a group-two response, starting with the idea that what some investors considered financial Armageddon was really just part of a very long pattern. His overall message was that this is interesting and something to which we're all capable of responding.

***

These four steps may require you to stretch beyond your comfort zone. And that is exactly the point. Research has established that what turns average performers into great performers is a process of being continually pushed just beyond their current abilities, and then responding to the new challenges with focused efforts to overcome them, accompanied by abundant feedback about the results.

But constantly attempting what you can't quite do, which is the essence of the process, is a recipe for trouble in most jobs. It means that you will inevitably make mistakes and have failures. Now if you ask accomplished businesspeople, as I have often done, whether they learned more from their successes or their failures, 100% of them will say the latter. But most employers don't want to hear that your mistakes have been an absolutely necessary part of your growth. They just want you to perform.

So that's what most people do in their jobs, operating entirely within their comfort zones and as a result not getting any better. We know this not just from observing it in our own workplaces but also from considerable research showing that most people improve rapidly in the early days of a given job, then plateau, and may continue for years thereafter without progressing.

Seen against this backdrop, the precise nature of this opportunity is clear. The recession, by pushing everyone past the limits of his or her current abilities, places us all on the first step of the process. Whether we take the next steps is for each of us to decide.

Five moves to make now

Certain practices that are always valuable for a business actually become easier to adopt in a recession.

1) Evaluate employees better. In good times it's easy for employees to look like stars, so evaluations tend to become less rigorous. Managers are fooled into believing they've assembled all "A" players. In tough times it's much easier to distinguish the true stars from the third-stringers. Just as important: With the unemployment rate rising, employees are much more inclined to take evaluations seriously.

2) End guidance. Telling investors what quarterly earnings are likely to be, then talking that number up or down as the quarter progresses, and then contriving to beat it - that corporate game has never served a useful purpose and can lead to much harm as managers feel pressured to hit announced targets. That's why such respected firms as Aetna, General Electric, Intel, and Unilever have stopped giving quarterly guidance in recent months.

3) Manage for value. In good times your company's performance is probably attractive almost any way you look at it. Now it's more critical than ever to focus on what really matters, which is earning a return on your company's capital that exceeds the total cost of all the capital in the business. If that seems painfully obvious, please stop and reflect on whether you or anyone in your business is being paid explicitly for achieving that goal. Most employees at every level are paid to hit other targets - salespeople have sales quotas, plant managers have quality goals, even the CEO may be focused on reported earnings per share. None of those goals is the same as value creation.

4) Expand your mind about risks. The most dangerous risks your company faces are the ones no one wants to address. That is always true; now the trauma of this recession has made it far easier than it has been for years to talk about unimaginable risks.

5) Mine employees for ideas. Potential improvements can hide in a million places. Staples recently found $21 million of efficiencies in the way it runs its warehouses. When I asked CFO Christine Komola how they knew where to look for the savings, she replied immediately, "Ask the associates. They know."