True North Blogs:

Welcome to our new Leadership Blog page

This section is intended to become the source of discussions about leadership among bloggers. In addition to my personal blogs (shown below), we are inviting bloggers interested in leadership to contribute their commentaries to this page, and we will provide readers with a link to your blogs. We have already included links to all those blogs who have written about True North and Authentic Leadership in recent months.

All readers are invited to add their comments, which we will publish on line, to my blogs or any other blogs appearing on this page.

Looking forward to a lively discussion!

Bill George

Bill George's Blog Posts:

May 8, 2008 - Is President Clinton Prepared to Lead?
April 1, 2008 - Filling the Shoes of Your Predecessor
March 18, 2008 - JP Morgan's Jamie Dimon: A Leader Steps Up
March 11, 2008 - "The Spitzer Affair"
February 14, 2008 - An Authentic Leader in the White House?
January 11, 2008 - The Founder Returns: Howard Schultz is back...
January 05, 2008 - Emerging Leaders and the Obama Phenomenon
December 15, 2007 - An Embarrassment of Succession Fiascoes
November 01, 2007 - Does Anyone Care About Homeowners?
October 22, 2007 - Where Have All the Leaders Gone (Part III)
October 04, 2007 - Where Have All the Leaders Gone (Part II)
September 21, 2007 - Where Have All the Leaders Gone (Part I)
September 06, 2007 - Nonperforming CEOs
August 21, 2007 - Who is Governing Corporations: The Board or Governance...
August 02, 2007 - Private Equity = Public Gain
July 23, 2007 - America's Hidden Asset: Leadership of Global Capitalism...
July 19, 2007 - Wall Street Versus Main Street
July 09, 2007 - The Need for Authentic True North Leaders
June 03, 2007 - The Triumph of Competence over Charisma
April 23, 2007 - Where Have All the Leaders Gone?
March 20, 2007 - Are CEOs Overpaid?
March 15, 2007 - Launch of True North
February 27, 2007 - True North and Valentine's Day
February 14, 2007 - "The Takers" Part II - The Executive Compensation Uproar
February 13, 2007 - Takers and Givers

 

 

Is President Clinton Prepared to Lead?

May 8, 2008

An open letter to President Bill Clinton:

You are facing one of the leadership challenges of your life.  You need to decide whether to put the interests of the United States and the world ahead of your personal interests.  Doing so means setting aside getting your wife elected and maintaining control over the Democratic Party.

Only you – not former President Jimmy Carter, not Al Gore, not any other Democrat – can convince your wife that the country’s best interests dictate that she should abandon her failed attempt to become the country’s first female president.  It is far more important that both of you dedicate the next five months to uniting your supporters behind the election of Senator Barack Obama as the next president of the United States.

That’s what leadership is all about.

No one can doubt that you have been a great leader for the U.S. and the world during the past sixteen years.  The contrast of your presidency with that of President George W. Bush is so painful that it doesn’t merit recounting here.  Yet through all of President Bush’s failed attempts to repudiate your accomplishments as president, you have stayed above the fray and dedicated yourself to make the world a better place, using your personal foundation as a vehicle.  In so doing, you have gained the admiration of leaders throughout the world, including many of your former detractors.

One of your greatest qualities as president was facing reality: in 1994 you recognized that you had to abandon your wife’s flawed health care plan in order to save your presidency.  On welfare you faced the reality that the welfare plans of the Democrats’ New Deal weren’t working and joined with Republicans to implement the welfare-to-work plan.  On trade you faced the realities of globalization and supported free trade agreements like NAFTA and GATT, even while sacrificing the political support of the labor unions.  On immigration you faced the reality that expanding visas for legal immigrants was critical for innovation, especially in the high tech industry.  Your brilliant economic policies ignited to the greatest period of growth and innovation since the post-war period and even created a surplus for the federal budget, a dramatic contrast with President George W. Bush’s mammoth deficit spending.

Now you need to face the reality that your wife has already lost her bid to become the first woman president.  The ultimate outcome of the primary campaign has been known since Senator Obama won ten consecutive elections in March.

All too late, Senator Clinton tried to remake her image from a Washington elitist who gained experience as your spouse into Rosie the Riveter, a tough-talking fighter who has endured sniper fire and advocates complex solutions for the working class and the elderly.  To derail Obama’s campaign, she teamed with John McCain in attempting to pin an elitist label on Obama, who grew up with a single mother on food stamps and gave up the potential for the lucrative career as a Wall Street lawyer to work in the projects in Chicago’s south side.

Hillary played up racial fears about Obama by highlighting his associations with Reverend Jeremiah Wright and Louis Farrakhan and suggested that this devoted Christian was not a Muslim “as far as I know.”  As she became more desperate, she reopened fears of September 11, threatened to “obliterate Iran,” and pandered to the electorate with her summer gas tax holiday that she knew would never come to pass.  These actions earned her the support of Rush Limbaugh, whose crossover Republican voters, eager to keep these attacks on Senator Obama going, likely provided the margin of her slim victory in Indiana.

Regrettably, the result of her “scorched earth” campaign to destroy Senator Barack Obama’s bid to become the first non-white president has only helped Senator John McCain’s election bid and provided him with free video clips for the fall campaign.  By pitting whites and Hispanics against blacks, old against young, blue collar against white collar, and women against men, she has employed the politics of “divide and conquer” instead of calling for national unity to restore our country to its former greatness.

If you really want to help our country, you will convince you wife to stop dragging out the inevitable and get behind Obama’s campaign to defeat John McCain while there is still time.  Both you and your wife have proven themselves to be dedicated campaigners.  Now you need to work just as hard to elect Senator Obama.

Although your time to lead the country has past, there is so much you can still do to help the world.  But your most important leadership task now to help Barack Obama become your logical successor, because Obama is the only person who can unite the country to face the ever-increasing problems of the economy, racial divides, education, health care, energy and the environment, and poverty, while getting our troops out of Iraq and rebuilding our relationships with the rest of the world.

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Filling the Shoes of Your Predecessor

April 1, 2008

Question: Are you prepared to step up to fill your predecessor’s big shoes?  When you get that opportunity, how will you stay focused on your True North and not get pulled off course by the pressures and seductions?  

Answer: Stay grounded and never lose sight of your roots.  

Recently, we have seen an ongoing succession of leaders self-destruct because they lost control over their egos – the latest being New York Governor Eliot Spitzer.  These leaders think they are the institution, and they are the sole reason for their organization’s success.

In contrast, authentic leaders know who they are and where they come from.  They don’t get caught up in their egos, nor do they think leadership is having legions of followers.  They recognize their job is to unite their troops around a common vision and values and empower them to step up and lead.

Goldman Sachs CEO Lloyd Blankfein stepped into enormous shoes when Henry Paulson became Treasury Secretary.  Serving on the Goldman board, I watched as Blankfein deftly took over the reins without missing a beat.  In two years he has put his distinctive stamp on the firm, expanding its footprint around the globe and developing quality relationships with everyone from government leaders around the world to inside Wall Street players. 

Son of a postal worker, Blankfein stays grounded by constantly worrying that Goldman’s enormous success today could lead to big problems tomorrow.  That’s how he sensed early signs of the sub-prime crisis and shifted his firm away from its perils just as his competitors were expanding their risks.   

General Electric CEO Jeff Immelt faced a similar challenge in succeeding “CEO of the Century” Jack Welch. Immelt says, “I had one good day as CEO – September 10, 2001 – before the roof caved in.”  The attacks of September 11 impacted a number of GE’s businesses, yet Immelt was undaunted.  Recalling earlier challenges in his career, Immelt said, “At times like these, you’ve got to be able to draw from within. Leadership is one of these great journeys into your own soul.” Immelt focused on making GE more innovative and more customer-focused and launched Ecomagination to unite GE’s energy-related businesses.  

IBM CEO Sam Palmisano replaced an iconic leader in Louis Gerstner, who saved IBM in the 1990s.  The down-to-earth Palmisano didn’t try to emulate Gerstner, but decided just to be himself.  He transformed IBM into an “integrated global network,” focusing the company’s best talents on solving difficult customer problems. To unify his employees around this new vision, Palmisano engaged all 350,000 employees in an on-line “values jam” to create core values – dedication to customer success, innovation and trust. Palmisano’s efforts are paying off as IBM’s revenues and earnings are growing and its stock price soaring.

Target’s new CEO, Greg Steinhafel, is also taking over from an enormously successful predecessor. Target became the first retailer to compete toe-to-toe with Wal-Mart, making discount “cool” and the Target bulls-eye ubiquitous.   Asked how his leadership differs from his predecessor’s, Steinhafel replied modestly, “This isn’t about me. It’s all about the brand.”  

Xerox CEO Anne Mulcahy stepped into very different circumstances when her predecessor was forced out as the company facing possible bankruptcy. With Xerox’ organization imploding, Mulcahy rallied her troops around “restoring Xerox to a great company.” As she endured incredible pressure from bankers, shareholders, and the SEC, former CEO David Kearns asked her, “Do you believe those lies about you in the media?”  “No, David,” she replied calmly.  “Good,” he said. “Then don’t believe it either when they call you the savior of Xerox.”  In spite of Xerox’ remarkable recovery, Mulcahy has never lost her humility.

In our research for True North, authentic leaders described the things they do to stay grounded:

      1. Stay humble, and don’t get caught up in the perquisites of your office.  The best thing we did at Medtronic was to eliminate all officer perquisites back in 1993. 

      2. Don’t lose sight of your roots, and remember your life’s most difficult times. We learn a lot more from our failures than our successes. Starbucks’ founder Howard Schultz still visits Bayview Housing Projects to show his daughter where he grew up in Brooklyn.

      3. Build your support team, starting with your spouse.  Throughout my career my wife Penny has been invaluable as a counselor and supporter.  So has my men’s group that has met weekly for more than thirty years.

      4. Don’t lose sight of your intrinsic motivations. Money, fame, and power will never bring you the satisfaction that making a difference in the world does.

      5. Lead an integrated life: be the same person at home, at work and in your community.  As Jet Blue founder David Neeleman said when he stepped aside as CEO, “Never lose sight that your family is what’s most important.”

      6. Remember: leadership isn’t about you. As GE’s Jaime Irick says, “You’ve got to understand leadership is about serving the folks on your team.”

      Bill’s bottom line: staying grounded is the best way to keep focused on your True North.

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JP Morgan's Jamie Dimon: A Leader Steps Up

March 18, 2008

In these days when corporate executives are keeping their heads down and trying to stay out of trouble, it is refreshing when one CEO steps up to a challenge and a broader responsibility.  In taking over Bear Stearns, the failing investment bank, just hours before it would have been forced into bankruptcy by a proverbial “run on the bank,” JP Morgan CEO Jamie Dimon took on a broad public responsibility to keep financial markets from unraveling and apparently made a very attractive purchase for his institution.

Not that Dimon acted alone.  He had a little help from his friends – namely, Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke – who urged Dimon to step to the challenge of taking over Bear and agreed to guarantee up to $30 billion in failing mortgage-backed securities.

Having watched their shares fall from $170 per share a year ago to the $2 settlement outraged Bear’s shareholders.  On the other hand, media pundits like CNN’s Lou Dobbs called it a “corporate bailout” and charged the Bush administration with enriching Bear’s executives.  Not exactly, Lou.  Thirty per cent of Bear Stearns’ shares are held by executives and employees, who saw their value decline by more than 98 per cent in the last year.

The reality is that there are many more legitimate claimants to a firm like Bear than just its shareholders, especially when its equity value is collapsing.  Investment firms will heavily leverage their equity – in Bear’s case, more than 30:1 – and the lenders and a wide array of counterparties all have a stake in the financial health of the firm.  I believe that Paulson and Bernanke acted wisely to negotiate a settlement that kept Bear from defaulting on its debt obligations while letting the equity holders take the largest financial hit.  After all, they were responsible for the position that Bear Stearns got itself into this past week, and they should pay the price. By the way, this responsibility should also mean that Bear Stearns executives like CEO Alan Schwartz and former CEO James Cayne, who held the top slot until this past January, should not receive any termination or change-of-control payments as a result of the sale to JP Morgan

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"The Spitzer Affair"

March 11, 2008

The shocking news of New York Governor Eliot Spitzer’s liaison arranged by a prostitution ring offers yet another tragic example of how powerful leaders get so caught up in their egos that they lose sight of their True North. 

Governor Spitzer should resign immediately and save himself the embarrassment of being forced from office.  He has violated the public trust he was elected to uphold.  As an aggressive pursuer of wrong-doers on Wall Street and in the corporate world, Spitzer has no justification for attempting to hold others to a higher standard than he holds himself. 

Back in 2004, Spitzer spoke with revulsion when he announced the arrest of sixteen people operating out of Staten Island.  He said then, “This sophisticated and lucrative operation with a multi-tiered management structure was, however, nothing more than a prostitution ring.” 

How carefully did he check out the prostitution firm he hired to provide a call girl to take the train to Washington to meet him in his suite at the Mayflower Hotel?  Might this firm have been run by shady operators who could have blackmailed him in exchange for favors or contracts from the State of New York? 

The experience of John Whitehead, the former head of Goldman Sachs who was running the Lower Manhattan Redevelopment Commission, typifies Spitzer’s aggressive tactics in attacking other leaders.  Two years ago, Spitzer personally attacked Whitehead for writing an op-ed in the Wall Street Journal.  The op-ed criticized Spitzer for accusing Hank Greenberg, who was chairman and CEO of AIG at the time, of being a crook, without bringing charges against him.  According to Whitehead, Spitzer called him that same afternoon and said, “You and I are now at war.  You have shot the first bullet, but I will shoot the last one.  You will regret that you ever wrote that article.  I am coming after you.”   

One disappointing reaction to this tragedy comes from Senator Hillary Clinton, who seems ever mindful of placing political calculations ahead of her principles.  When asked about the sex scandal threatening her political ally, Clinton carefully sidestepped questions. "I don't have any comment on that," she said. "Obviously, I am sending my best wishes and thoughts to the governor and to his family."  

Spitzer did many good things as Attorney General and Governor of New York, but they do not excuse his behavior.  What happened to this 48-year-old rising star, who seemed to have the perfect home life?  None of us will ever know the secrets of his heart or the lust that dominated his emotions. What is evident that he lost sight of his True North – the values and principles he has lived with throughout his life – and was seduced by his power and the apparent thrill of pushing the limits.  As a result, he abandoned his judgment and lost his bearings.  

This is indeed a sad situation for Governor Spitzer, for his family, and for the people of New York who voted to give him their trust.  Hopefully, he will recover in the future to contribute his enormous skills to society – a wiser and better grounded person. 

Elected leaders in the public sector and in the world of business have a special responsibility to uphold the trust placed in them.  They are – or should be – role models of behavior that the rest of society can admire and emulate.  Of course, leaders have failings and weaknesses, just like the rest of us.  All of us make mistakes.  However, this does not excuse the violation of the public trust that characterizes the Spitzer affair.   

As citizens, we deserve better, much better, from our elected leaders.  If is our responsibility, with the support of the media, to make a closer examination of the character of our leaders before they are given the power and to assess how well they practice their values.  Surely, character is a lot more important test than the promises they make or the images they create.

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An Authentic Leader in the White House?

February 14, 2008

The resounding victories of Barack Obama and John McCain in Virginia, Maryland, and D.C. – Obama by an average of 34 percentage points and McCain by 28 - confirm a growing desire of the American public to elect an authentic leader as its next president. 

At every talk I have given this past year on True North and authentic leadership, one of the first questions is, “Is it possible to have an authentic leader in the White House?”  At first, I begged off these questions, saying my research on leaders was based entirely on business and non-profit leaders.  Privately, I had my doubts that our political process, which has become so negative and vicious in recent years, would permit an authentic leader to prevail. 

As this extended primary campaign moves on, it is becoming increasingly clear that the American public is not only open to an authentic leader as President, but demanding one.  The two leading candidates at present, John McCain and Barack Obama, are on the rise precisely because they are authentic.  

The media seems to think this election is about gender and race.  I think it is about authenticity.  Most people under-forty are so cynical about politicians who promise one thing and do another, or who are unwilling to admit their mistakes and shortcomings, that they will only get engaged for a leader that they are convinced is authentic. No wonder that both Obama and McCain have such a following among independents and the younger generations. 

On the Republican side, Mitt Romney may have been the best qualified candidate in either party, but he failed because he lacked authenticity and seemed to say whatever people wanted to hear.  His positions on key issues changed so dramatically since his years as governor of Massachusetts that no one knew what he stood for.  The same could be said for the precipitous fall of Rudy Giuliani, once the Republican front-runner. 

McCain, on the other hand, who was left for dead last summer as his campaign was falling apart, came back on the strength of his authenticity.  McCain, who experienced his crucible as a prisoner-of-war in Vietnam, tells it like it is.  He is not afraid to go against popular positions or the Republican hierarchy, including the current president.  As he has assumed front-runner status for the nomination, the hard-liners in the Republican Party have tried to bring him in line, but he has steadfastly refused. 

On the Democratic side, Hilary Clinton is fully qualified to be president, but people don’t seem to know who she really is.  She is extremely skilled at playing the polls and figuring out the right appeals to voter subgroups, but this has only led to unusually high negatives in the eyes of many people who are politically aligned with her positions.  The one time she showed a little emotion in New Hampshire voters responded by giving her a surprise victory over Obama.  Then she returned to the negative side in South Carolina, and her support has been slipping ever since.

Obama’s authenticity is precisely what makes him so appealing to such a wide range of voters.  He seems “good in his skin,” and is able to rise above the negative attacks.  His message of hope and change, backed up by specific programs that seem logical to most people, is inspiring a lot of Americans to get engaged in the political process.  For all the talk that he would wither under the pressure, he seems to get stronger and more confident as he goes.

Obama talks openly about his crucible – coming from a mixed race family, watching his parents divorce while he was very young, moving to Hawaii, and being confused in high school about which direction to go – until he found himself in his early twenties.  His opponents say that he lacks experience, which is not really true.  At 46 years of age, Obama has had an abundance of life’s experiences, which enable him to understand the lives of ordinary Americans and to empathize with their challenges. 

He is confident enough to sit down with a wide variety of world leaders, even those with whom the United States currently has hostile relationships, and try to work out solutions.  He uses the same approach to health care, offering to bring all the interested parties around a big table and seek solutions, something his opponent steadfastly refused to do in the early-1990s and is currently belittling him for today. 

In a topsy-turvy election year, there’s no assurance that either McCain or Obama will be elected President, but that doesn’t take away from voters’ desires for an authentic leader in the White House. 

This just might be the year.  Wouldn’t that be a change?

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Comments:
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Mr. George, I must agree with your assessment of the public mood. The people are looking, starving actually, for authenticity in their government.

Politics has always been shady. But this most recent epoch of poll tested gridlock and specious wedge issue politics has been so tiresome that the typical American is ready to try anything. We are drowning in mendacity and struggling to break the surface and get some air. We seem to see that a mountain of unsolved problems are going unresolved in a party system whose first priority, only priority, seems to be keeping the opposition out of power.

I note Mr. George, that you are a business leader and have authored books on the topic of leadership. I have not read your work, but I suspect that you might appreciate the 2008 campaign as a bottom up phenomenon. I was privileged to work in early Silicon Valley as a founding engineer at Symantec, VisiCorp, Apple and others. Along the way, especially at Apple, I discovered that the most effective leadership is bottom up. It is not paternalistic, it is inclusive and channels the energy and creativity that is found in nearly all contributors. The individuals in an organization are the source of innovation and creativity, and Steve Jobs will be among the first to say so.

Bottom up leadership is, almost by definition, authentic. Everyone has a stake in the plans and process, from the receptionist to the CEO. It is a very good analogue of a representative democracy. And although most folks could not articulate why what they hear from Obama sounds authentic, they are moved by his singular message of "we" instead of "I". His campaign and his message are and inclusive.

Americans are driving this election bottom up, as if to say to Washington, if you can"t solve our problems we can, so get the hell out of our way. And despite the lamentable conditions that started this phenomenon, it is both fascinating and thrilling to see a nation attempt to take back its government.

- Herrington

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Hillary Clinton and Barack Obama are hypocrites.

After much deliberation, it pains me to say their status as superdelegates qualifies them as hypocrites. I know they're honored by such power, to be voters whose independent votes count more than mine, but that was never what our forefathers intentioned in creating this republic.

People seem to think because a system is in place for a certain amount of time, that its success in flying under the radar of public consciousness is some sort of justification for its existence, but thats not the case.

The system of superdelegation is undemocratic, unfair andjust plain wrong, and the fact that neither of these candidates are more vociferous in its condemnation, or advocating its eradication shows a profound lack of courage and integrity on both their parts. Mr. Obama voiced with his patent subdued cautious style his concerns about the will of the voters potentially being swayed by superdelegates should the convention in Colorado be brokered.

What about the fact that the system is inherently, intrinsically undemocratic, Mr. Obama. What about the fact that your vote carries with it more weight than mine. What about the fact that we hear about Bill Clinton calling some 21 year old little Lord Fauntleroy twerp superdelegate to wheedle his support for Ms. Clinton. I didn't get any calls like that last week.

So I'll keep my vote, you super delegates. Some say you're the lesser of two evils, but I'm not so sure. Your status as superdelegates makes you royalty in a country born of a desire to break from such elitist mindset. I'll keep my vote which doesn't count as much as yours, and you can keep telling yourselves you're serious in restoring democratic values to Mad King George's America.

- Grendl

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in case you're not sure who to voice for...

http://www.youtube.com/watch?v=3gwqEneBKUs

enjoy!

J'net

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I believe J'net's video was a play on this inspirational original:

http://www.youtube.com/watch?v=2fZHou18Cdk&eurl

Joe

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The Founder Returns: Howard Schultz is back as CEO of Starbucks

January 11, 2008

In returning as Starbucks’ CEO, Howard Schultz follows in the footsteps of Steve Jobs, Michael Dell, and a long line of founders who turn the reins of their companies over to a hand-picked successor and wind up being dissatisfied with the results.

Conventional psychology tells us that founders like Schultz cannot let go of their babies, get frustrated being away from the action, and believe that only they can run the company.  If the explanation were that simple, these returning founders would fall flat on their respective faces.  Yet surprisingly, they do extremely well in their encores.  To understand why, we have to look a lot deeper at what’s going on in these “redux” performances.

First of all, founders like Schultz, Dell, Jobs and others have a far better grasp than their successors on the essentials of the business and the internal people who make it go.  Their initial success was based on brilliant intuitive skills that enabled them to create unique value for their customers and to inspire their employees.  They combine that intuition with an unstoppable drive to see their business succeed and the ability to motivate their teams to peak performance.  They are gifted leaders, even without formal management training.

On the other hand, successors like Jim Donald at Starbucks, John Scully at Apple, and Kevin Rollins at Dell were professional managers that specialize in the processes of management, but lack the creativity and passion of the founders.  In attempting to install the type of discipline and systematic approaches that mark a company like General Electric, they fail to grasp what made the business successful in the first place and demotivate the key people who make the company go.  Often, they spend more time in meetings than they do in the marketplace, and more time working the numbers than learning from their employees.

Let’s delve into these three cases in point to see what’s really going on:

These three examples, and many more like them, give us valuable insights into what makes companies successful.  Simply stated, it is leadership.  There is a plethora of skilled managers around who know how to manage budgets, analyze computer models, and run businesses with systems and procedures.  Business schools are turning out more and more of them every year.  All too often these analytically-oriented managers drive out the very leaders who make companies successful in the first place. 

Brilliant leaders understand what it takes for their companies to succeed: inspired employees who can create great value for their customers.  Instead of churning out numbers experts, our business schools ought to figure how to create more entrepreneurs who can follow in the footsteps of authentic leaders like Schultz, Jobs, and Dell.

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Comments:
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As Americans cut back on imported LCD TVs and Starbucks coffee, the U.S. consumer slowdown will undermine the world economy.

This consumer slump in the U.S. will affect business investments overseas, including factories that are springing up in China and elsewhere to feed American demand.

The rule for a prudent individual is simple: Don\'t spend more than you make.

For a long time, the U.S. economy obeyed that rule. As far back as the 1960s, personal spending, adjusted for inflation, has basically tracked the overall growth of the economy, as measured by gross domestic product (GNP).

That pattern changed in the 1990s. As of the third quarter of 2007, the 10-year growth rate for consumption was 3.6%, vs. GNP growth for the same period of 2.9%. This difference represents an enormous gap.

To compete in this downward economic spiral, Starbucks will have to reduce prices (read: reduce profitability), cut out underperforming coffee depots and develop other services/products in order to increase sales to current customers.

- John Agno

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2 comments on leaders returning. I think there are many cases of leaders whose companies have outgrown them and perhaps they should be moving on.

The fact that leaders leave in the first place says a lot about how difficult it is to be a leader. A bit of grass being greener. A bit about trying to achieve life balance

- Jim Estill

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Emerging Leaders and the Obama Phenomenon

January 5, 2008

Barack Obama’s stunning victory in Iowa reveals what many of us have recognized for some time: Gen X and Y are tired of the worn-out promises of the Baby Boomers. How many of you enjoy watching debates between eight older white men, lined up on the stage in dark suits and white shirts, offering the same old bromides?

Obama’s win in Iowa, driven by a huge turnout among young voters, symbolizes the desire of younger generations for authentic leadership in this nation and the world. As Obama said in his victory speech, “It is not about red states or blue states, but the United States.” One of my greatest hopes would be to see his kind of authentic leadership spread around the globe, so we can begin to solve global problems, such as the environment, poverty, education, health care, and peace.

Having spent the last six years in MBA classrooms, it is clear to me that the new generation of emerging leaders is ready to cast off the boomers in favor of one of their own. Whether or not his candidacy is successful, Obama represents that force. Whereas veiled and explicit prejudice against Hispanic immigrants, gays, Muslims, Mormons, Jews, and even assertive females, is more prevalent among the boomer generation than anyone would like to admit, younger generations see the benefits of that diversity.

Consider my elective MBA class at Harvard Business School this fall: it was composed of an equal number of females and males, 30% international students, 30% American minorities, and a wide range of Christians, Jews, Muslims, Hindus, and agnostics. Our class included five people who had experienced the horrors of war first-hand in Afghanistan, Iraq, and Kosovo.

This is not an upper-class crowd, as some might expect. Many of these students come from backgrounds ranging from poverty to struggling middle class. Hearing their stories, one wonders how many of them ever got to Harvard. Perhaps it is precisely the experience of overcoming great difficulties or prejudices that empowered them to strive for the best educational experiences – at their own expense – so that they could live better lives than their parents. Several are concurrently studying for a second master’s degree in government or non-profit management so they are prepared to work in multiple sectors or run for public office.

Throughout the fall my students worked to develop their authentic leadership and to discover their True North. As they brought forward their life stories, it became clear that they appreciated the different points of view resulting from the diverse life experiences in the class. They openly discussed their crucibles, as well as experiences with sexual harassment, religion, and racial differences. There was no prejudice that I could discern, either inside or outside the classroom.

The career choices of these emerging leaders are as diverse as their backgrounds. Skeptical of the traditional corporate structures where they have worked, many are opting to create their own businesses, join a start-up, go overseas, or work for a non-profit organization. Those joining corporations are seeking companies that are family-friendly, open, and diverse. Others view consulting or private equity as a safe starting point to gain the experience that will enable them to find just the right opportunity. Surprisingly, in light of the loans they have to repay, nearly all of these emerging leaders place “making a difference in the world” ahead of monetary compensation.

Is this class a microcosm of leadership of the future? I believe it is. The 20th century command-and-control organizations that go it alone and exclude talented leaders because of their differences are a dying breed. Success in the 21st century can only be sustained through diversity and collaboration. Without leaders who are inclusive of people with diverse life experiences, there is no way we can build great organizations of talented people, empowered to change the world.

To do that in politics, for-profit corporations, and NGOs, it is time to let these emerging leaders step up and take over from the baby boomers.

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An Embarrassment of Succession Fiascoes

December 15, 2007

The main cause of the messes at Citigroup and Merrill Lynch is their boards' failures to develop authentic leaders and succession plans.

What were the boards of Citigroup and Merrill Lynch doing all this time? How often did they take a hard look at the leadership below Chuck Prince and Stan O'Neal to develop successors? Did they monitor the CEOs' performances closely enough to know what was going on and understand the risks of not having succession plans?

It is astounding that a huge multinational such as Citigroup (C), which has 350,000 employees, has not been able to find a leader to succeed Prince. While fortunate to have former Treasury Secretary Robert Rubin as temporary chairman, the board still seems to be searching for that new superhero. (Insider Sir Win Bischoff is interim CEO while the search continues for a permanent successor to Prince.)

The board of Merrill Lynch (MER), meanwhile, moved rapidly to snag John Thain. With his deep understanding of markets and risk gained at Goldman Sachs (GS), Thain is the right leader to bring Merrill's organization under control.

But why weren't these boards grooming internal candidates for the jobs? Many observers have this odd notion that no one can lead these mammoth enterprises. Nonsense. They don't need a Beowulf to slay the dragons but authentic leaders to unify the team at the top and rebuild trust throughout the organization. If the boards of Citigroup and Merrill Lynch insisted on this in the first place, they wouldn't be facing their damaged state.

Unfortunately, these are just the latest examples of boards that failed to build solid leadership succession plans. Look at past problems at Morgan Stanley (MS), Coca-Cola (KO), Home Depot (HD), Hewlett-Packard (HPQ), and Procter & Gamble (PG):

• Morgan Stanley's board let former CEO Phil Purcell force out agreed-upon successor John Mack and then purge most of Morgan's top leaders. Only protests from former executives pressured the board to bring Mack back to put its house in order.

• When Coca-Cola's Roberto Goizeuta passed away, the board promoted Douglas Ivester, who failed in less than two years. Then it compounded its errors by appointing Douglas Daft. After years of market-share losses, new CEO Neville Isidell is attempting to rebuild the company.

• Home Depot's board passed over its executive team to recruit GE (GE) superstar Bob Nardelli, whose lack of understanding of the retail business led to market share losses. Outside pressure resulted in Nardelli's replacement by Home Depot insider Frank Blake.

• Boeing's (BA) board tolerated the ethical deviations of former CEO Phil Condit, turned to Harry Stonecipher, who had his own ethical problems, and finally woke up to recruit Jim McNerney from 3M (MMM). McNerney moved quickly to restore Boeing to world leadership.

• Hewlett-Packard went outside for Carly Fiorina, who failed to grasp the company's culture. With HP's stock price declining, the dysfunctional board mishandled Fiorina's departure but recovered its wits to attract Mark Hurd. He rapidly restored HP's egalitarian culture and its sales.

• Procter & Gamble's board passed over A.G. Lafley to promote Dirk Jager to the top job and "shake things up." After Jager caused a management revolt, the board turned to Lafley, who has emerged as a great leader and superb team builder.

These recurring examples raise the obvious question: Why do so many boards wind up looking outside the company for new leadership? My view is that they spend far too little time building sound succession systems. Lacking well-tested candidates, they presume an outsider can quickly transform the company and its culture.

The evidence clearly disproves their assumptions. In his new book, The CEO Within, my Harvard colleague Joseph Bower makes an irrefutable case that the best CEOs come from within the organization. Outsiders have clear disadvantages: They don't know the company's culture, the key players, and the subtleties of the business. Beyond that, they have to spend valuable time building trust. Or, like Nardelli, they bring in an entirely new team, which causes morale problems.

Contrast these fiascoes with the smooth internal leadership successions at General Electric, ExxonMobil (XOM), Goldman Sachs, Johnson & Johnson (JNJ), General Mills (GIS), and Pepsico (PEP). These companies have benefited enormously from building strong teams of authentic leaders, which resulted in seamless transitions to new leadership.

If you are working in an organization that doesn't do sound succession planning and reward leaders, you might want to jump ship to one that appreciates authentic leadership—and provides you with the opportunity to make it to the top.

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Does Anyone Care About Homeowners?

November 01, 2007

All the talk in Washington and New York these days is about the subprime mortgage collapse and the writedowns at financial institutions like Merrill Lynch (MER) and Citigroup (C). Isn't anyone concerned about homeowners these days? More than one million Americans will lose their homes this year because they cannot keep up with their mortgage payments. So far only Treasury Secretary Henry Paulson seems worried about the homeowners who are being tossed out on the street.

I raised this issue in front of several thousand real estate developers on Oct. 26 in the course of presenting my book, True North. While most of the real estate folks were sympathetic to the plight of homeowners, the head of a large real estate investment trust was first up in the Q&A session. He described people who are losing their homes as "nothing but a bunch of speculators who falsified their mortgage applications."

Predatory Lending Practices

Not exactly, sir. These homeowners are common folks who got talked (might I say conned?) into home purchases with no-down-payment mortgages that offered low rates in the early years until they were adjusted upward. Those people are being forced out of their homes because they can't make the increased payments, and the value of their homes has sunk well below the amount remaining on their mortgages.

Mortgage brokers like Countrywide Financial (CFC), the nation's largest mortgage broker, have been aggressively pushing these offerings. They have been permitted to operate outside the complex regulatory system that governs our banks and the traditional mortgage companies. Now homeowners are paying a big price for the Bush Administration's lack of regulations to protect consumers.

On Oct. 26 Countrywide announced writedowns of $1.2 billion. Its stock has collapsed from $45 earlier in the year to the mid-teens at present, a loss to investors exceeding $16 billion. Has its leader taken the hit for these problems? On the contrary, Countrywide Chairman and Chief Executive Officer still has his job and is a rich man to boot. Mozilo sold $130 million of his Countrywide stock earlier in the year at prices averaging $40 per share. It's too bad the rest of us weren't as capable as Mozilo to see this disaster coming.

Tight Regulations Protected Banks

Merrill Lynch CEO Stan O'Neal (BusinessWeek, 10/30/07) wasn't so lucky. O'Neal, a competent executive who reshaped and diversified Merrill's business in recent years, got too far out on the risk curve in financing these mortgages. O'Neal was forced to resign and take the fall for Merrill's $8.4 billion in writeoffs.

It is noteworthy that more conservative banks with huge mortgage portfolios like Wells Fargo (WFC) and Royal Bank of Canada (RBC) have not experienced unusually high mortgage failures. Authentic leaders like Dick Kovacevich of Wells and Gordon Nixon of RBC stuck to their traditional lending standards and lived within the tight regulations that govern North America's banks.

In mid-October I was in Montreal to speak to executives of the Canadian Mortgage and Housing Corp. CHMC, which has insured $130 billion of Canadian mortgages, has avoided the writedowns that have plagued its U.S. counterparts. As I learned from CHMC CEO Karen Kinsley, the Canadians are more concerned with ensuring their citizens can meet their mortgage obligations than they are with short-term profits. The wisdom of their long-term view is paying off.

Mortgage Brokers Should Be Regulated

In late October Treasury Secretary Paulson took up the concerns of U.S. homeowners. He successfully jawboned institutions like Countrywide to restructure some mortgages to ease the pressure on homeowners. Why didn't any of our regulators think about this problem several years ago before the mortgage brokers were allowed to run free? They could have saved a lot of people a lot of pain by preventing these brokers from offering misleading mortgages and repackaging them for resale to the financial institutions.

In spite of these concerns, don't look for me to be an advocate of more regulations. Instead, I think we should protect U.S. consumers with responsible regulations that all the players in the system have to abide by. It is wrong to put tight restrictions on our nation's leading financial institutions and to permit others, such as mortgage brokers, to operate outside those regulations. This type of uneven playing field only encourages greed and allows unscrupulous businessmen to push the limits of capitalism and foul the ground for everyone else. Free enterprise and aggressive competition offer amazing benefits as long as we all play by the same rules—and understand that we can only be successful if we truly serve our customers' best interests.

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Where Have All the Leaders Gone (Part III)

October 22, 2007

Move over, baby boomers. The emerging leaders have a different set of experiences, expectations, and rules.

When Jimmy Connors reached the top of the tennis world, reporters asked whether he could continue to beat the veterans. His blunt response: "I'm only worried about the young guys coming up behind me."

Well, baby boomers, watch out, because the emerging leaders are coming up fast behind you. Their approach to leadership is entirely different than yours. They don't care about position power, status, and organizational hierarchy, or even having followers. Instead, they are superb networkers who find collaborators to create opportunities and businesses. They are on line 24/7, always networking, always in touch. That's why Facebook and You Tube are so popular.

The emerging leaders are knowledge workers who typically know more than their bosses. They collaborate with people who have skills they don't. Growing up with diversity as the norm, they understand the benefits of diverse people working together to solve the world's most pressing problems.

Detest Corporate Politics

When considering large, well-established organizations, they see bureaucracy, layers of management, policies and procedures, and rules—all things that scare them. At their core they are flexible, fast-moving, and innovative, and they don't want their creativity stifled. They detest corporate politics, as they want to be judged on their merits and have freedom to get things done.

Most important, they want to lead now and use their considerable skills to make a difference. They are highly confident about their abilities and won't wait in line for years to get their chance. They are willing to make great sacrifices to accomplish their goals. If current opportunities aren't satisfying, they won't hesitate to move to more appealing situations.

They anticipate long, active lives—living well beyond 100—but want to make it now. They have a passion to change the world and aren't prepared to settle for less.

The Next Generation

Who are these new leaders? The leading edge includes fortysomethings like Randy Komisar, former chief executive of LucasArts, now at Kleiner Perkins; John Donahoe at eBay (EBAY); Donna Dubinsky, founder of Handspring and Numenta; Kent Thiry, who infused kidney-dialysis company DaVita with new life in 1999; Chip Conley, founder of Joie de Vivre Hotels; and Bruce Chizen, CEO of Adobe (ADBE). They follow in the footsteps of role models such as Howard Schultz, Bill Gates, and Michael Dell.

Let's take a closer look at some younger leaders who are ready to step onto the big stage:

• Wendy Kopp had such passion for improving inner-city education that she founded Teach For America at only 22. With no money or management experience, she overcame enormous obstacles, including resistance from the educational establishment.

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Where Have All the Leaders Gone (Part II)

October 04, 2007

Yes, there is a dearth of genuine leadership in business and politics. But there are examples we can look to for inspiration and guidance.

Since Enron's demise in 2001, a new generation has assumed the helm of U.S. corporations. Very different from their predecessors, they recognize that for the 21st century a new kind leadership is required (BusinessWeek, 09/21/07).

As one current CEO told me, "Many of us followed iconic charismatic CEOs who were used to ruling their enterprises. To get things done in this century, we need organizations that lead by values, not directives, and collaborate with other companies, governments, and nonprofit organizations."

Good-Bye to the All-Powerful Leader

Let me take this one step further: The era of the all-powerful leader who commands people to follow is dead—or it should be. Today's leaders have to lead differently because the people in their organizations have changed.

• Today's organizations are filled with knowledge workers who know more than their bosses.

• Those workers want the opportunity to step up and lead now, rather than wait in line for 10 years.

• They have lots of options, as most will work for multiple organizations during their careers.

• They are highly skeptical of image-oriented leaders who say one thing and do another. They want leaders they can trust, leaders who will empower them, not direct them.

A New Definition of Leadership

Successful organizations in the 21st century—those that sustain superior results year after year—will be led by authentic leaders who know how to motivate this new group of employees and gain their full commitment.

I would like to propose some new definitions for the 21st century leader who can "align, empower, and serve":

• Alignment: uniting the entire organization around a common purpose and values;

• Empowerment: motivating employees to step up and lead to fulfill the organization's purpose;

• Service: dedicating themselves to all the organization's constituencies—customers, employees, investors, and communities.

Serving All the Constituencies

Academics call this approach the "soft" side of leadership. It is anything but soft. It is a lot more difficult to gain alignment of employees around mission and values than it is to meet quarterly numbers or to cut expenses.

Empowering people is hard, but far more effective in getting people to sustain peak performance. Serving all your constituencies is more difficult than a singular focus on short-term shareholder value, but it is the only way to sustain success over the long term.

The good news is that today's most prominent CEOs are authentic leaders who practice 21st century leadership. They are highly competitive individuals dedicated to building organizations for the long term. They engage actively and deeply in their businesses. They have the courage to resist being pulled off course by short-term pressures of the stock market.

Charisma Isn't Everything

Who are these new leaders? They include A.G. Lafley of Procter & Gamble (PG), General Electric's (GE) Jeff Immelt, Andrea Jung of Avon Products (AVP), IBM's (IBM) Sam Palmisano, Xerox's (XRX) Anne Mulcahy, Target's (TGT) Bob Ulrich, and dozens more like them. All these leaders were chosen from within their organizations. By the time they reached the top, they knew the business, people, and culture intimately.

As good as these leaders are—and they are really good—none of them is especially charismatic. But they are genuine and trustworthy, and they have character and integrity.

Let's look at some specifics:

• Lafley, Jung, and Mulcahy were passed over initially, but stuck around until their boards turned to them to lead their companies out of difficulties.

• Facing disappointing results for the first time at GE's plastics division, Immelt recognized that this was a test and a chance to solve the problems his way. Immelt has said, "Leadership is a long journey into your own soul." As CEO, he is applying that philosophy to transforming GE for the next 20 years.

• Palmisano engaged all 350,000 of IBM's employees in an online "values jam" to determine the company's values. Now he is using "leading by values" to create IBM's integrated global organization.

• When Avon Products' stock dropped 30% after years of rapid growth, Jung reinvented herself as CEO by cutting organizational layers dramatically and reinvesting the savings in future growth, which is paying off in Avon's resurgence.

• Mulcahy took over Xerox with $18 billion of debt. Urged to declare bankruptcy, she refused and instead rallied her employees around "restoring Xerox to its former greatness." Not only did she stave off bankruptcy, she also turned Xerox into a highly effective competitor once again.

• Target's Ulrich is not nearly as well known as the famous Target Bull's Eye. Named Chief Executive magazine's "2007 CEO of the Year," Ulrich claims, "It's not about me. It's about this team…the greatest team in the world."

If they want to succeed in the 21st century, corporations would be well-advised to develop authentic leaders like these, who can build and sustain their long-term success.

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Where Have All the Leaders Gone (Part I)

September 21, 2007

The U.S. is going through a crisis of leadership in both business and politics. And it won't be solved until we look at ourselves in the mirror.

Everywhere I go these days, from gatherings of corporate executives to Q&A sessions with large groups, everyone is asking the same questions: "Where can we find leaders we can trust?" "What happened to all those great leaders of the past?"

Some are bemoaning the paucity of statesmen at the top of corporations, while others are fed up with political leaders. The lack of trust in our leaders in virtually every sector of U.S. life is palpable. Recent Gallup polls indicate that only 18% of the American people trust the values and ethics of business leaders; even fewer—15%—trust their elected officials. That's not just a temporary problem. It is a formula for disaster.

Trust is the coin of the realm in both democracy and capitalism. Without trust, the system cannot function effectively. People become cynical, disengaged, and even prone to anarchy and rebellion.

Unlike others who bemoan the leadership shortage, I do not believe the problem is a lack of leaders. Rather, in the corporate realm and in the voting booth, we are choosing the wrong people to lead us—and choosing them for the wrong reasons.

Style Over Substance

Corporate boards, shareholders, and voters—and the media that influence all of us—give far too much weight to leaders' charisma and far too little consideration to their character. They tend to favor style over substance; image over integrity. If we choose our leaders for their charisma, style, and image, why should we be surprised when we fail to get leaders with character, substance, and integrity? Only the latter qualities can build trust.

Many of the chosen leaders want to lead only for their own ego aggrandizement—for money, fame, power, and glory. They want to take as much from the system as they can. They aren't genuine leaders at all. They are just glory-seekers. Yet we set these leaders up as role models. When they prove they have feet of clay, as all leaders do, we take pleasure in their destruction.

No leader is perfect, so we should stop expecting them to be. Genuine humility, the ability to be vulnerable under pressure, and admitting when you're wrong can go a long way toward building trust.

Marks of the Authentic Leader

Authentic leadership is about serving others. And serving others, not seeking glory, is what leaders in both the corporate realm and political arena are selected to do. As the late Peter Drucker said: "Leadership is not rank or privileges, titles or money. Leadership is responsibility."

Authentic leaders take responsibility for their actions and the results of their organizations, but they don't try for perfection. In fact, they surround themselves with other leaders who know more than they do. They openly admit their mistakes. They acknowledge their weaknesses and shortcomings. They ask others to help them through crises. When things go well, they give the credit to others. When they go poorly, they are the first to accept responsibility.

In the past decade many of our leaders tried to pass off responsibility for failure and corruption on their accountants and lawyers, as Jeff Skilling of Enron and Bernie Ebbers of WorldCom did. Leaders like Phil Purcell at Morgan Stanley (MS) rationalized their poor results and fought to the bitter end to hang onto their jobs. Then they demanded—and received—huge termination settlements from their boards. Many of the leaders of failing enterprises such as AT&T (T), Sears (SHLD), and K-Mart got so caught up in playing the short-term stock market game that they wound up destroying their enterprises.

Unrealistic Expectations

The notion of finding a savior who can turn around moribund organizations in a short time has proven to be flawed. The only solution to the current leadership crisis is to select highly experienced, battle-tested leaders from within the organization or the political realm. We need leaders who have had years of proving their character and integrity in the most difficult circumstances and who have achieved results by empowering people, not by using them.

Until we choose leaders who are more interested in serving everyone in the system than they are in taking from it, we will continue to ask plaintively: "Where have all the leaders gone?" without ever acknowledging that we, with our unrealistic expectations, are the source of the problem.

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Nonperforming CEOs

September 06, 2007

Boards are irresponsible if they guarantee pay regardless of performance and such boards put themselves and employees at risk.

The public is outraged these days over CEO compensation, with good reason. Far too many chief executive officers get paid large sums even when they don't perform. I believe that CEOs should be well-paid when they do perform, but there is no justification for paying for nonperformance.

As a result, shareholders are demanding the right to approve CEO pay packages. Following the tradition of British companies, "say on pay" proposals on proxy statements are gaining momentum in the U.S. But under U.S. corporate law, determining the compensation of CEOs is a fundamental responsibility of the board of directors. Directors are charged with the fiduciary duty to use their "business judgment" in these matters, and the courts have consistently backed them up.

However, by not paying CEOs based on company performance boards are failing to execute their responsibilities. Unless they step up to this issue they risk ceding their responsibilities if unhappy shareholders push through say on pay resolutions.

Home Depot, Hewlett-Packard Handouts

If this were to happen, who would determine these complex compensation packages? The courts? The Securities & Exchange Commission? External governance gurus, who have no responsibility for the corporation's performance? None of these alternatives makes sense. In fact, they threaten the very foundation of our system of governance.

I must emphasize that the real problem here is not that CEOs are paid too much money. You don't hear criticism of the compensation of top performers like A.G. Lafley of Procter & Gamble (PG) and Bob Ulrich of Target (TGT). The real problem is paying enormous sums to CEOs who fail to perform. Our system of capitalism is based on taking risks and being rewarded for success, not on guaranteeing huge payouts to CEOs who destroy shareholder value.

How can anyone justify Home Depot's (HD) former CEO Bob Nardelli receiving a $200 million termination settlement after declines in market share and shareholder value? Or the former CEOs of Morgan Stanley (MS) and Hewlett-Packard (HPQ) losing their jobs and walking away with tens of millions? Shareholders ought to be outraged by these inequities.

Taking a Toll on Employee Motivation

It is ironic that by guaranteeing CEO compensation, boards put their CEOs at minimal risk while putting employees at far greater risk. When CEOs in these firms fail, it is the employees who lose their jobs and their income, while CEOs pocket their guaranteed pay.

Is it surprising that outsized CEO pay packages destroy employees' trust? With loss of trust, employee motivation gives way to to cynicism and superior performance becomes mediocre.

The underlying cause of this problem is the failure of boards to develop their future CEOs internally. The board's most important job is to ensure long-term succession plans for the top leadership. But many boards don't take the time and expend the effort to develop seamless internal succession, and consequently they are forced to search outside the company, often yielding to investor pressures to hire a corporate savior.

No CEO Contracts at General Electric

In turn, these high-profile CEOs from outside the company who know little about the business, the company's culture, or its people, hire high-powered attorneys to negotiate multiyear contracts that guarantee their compensation, regardless of performance.

Why do CEOs need contracts in the first place? The CEOs of General Electric (GE), Goldman Sachs (GS), and Exxon (XOM) don't have them. They get paid to perform.

Executive compensation should be tied directly to the company's long-term objectives and based on building the firm's economic value, not its stock price. The best compensation programs tie up half of the executives' compensation for the duration of their tenure, so they cannot cash out when the company's stock peaks. These programs are based on a mix of short-term and long-term incentives so that no one objective can be pursued to the detriment of the firm's interests.

To ensure the CEOs' separation from the compensation process, boards should hire their own compensation consultants who do no work for management.

Finally, CEO compensation should not be based solely on a comparator group, which can be easily manipulated. Rather, internal equity should be given equal weighting so that gaps between CEOs and their subordinates are narrowed, and it is the team that is rewarded for the company's success.

To rebuild the confidence of shareholders and the public and to retain control over CEO compensation, boards of directors should put their CEOs wholly at risk, with no contracts, and pay them only for long-term performance.

That's the only way to restore trust in corporate leaders and in our system of corporate governance.

 

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Who is Governing Corporations: The Board or Governance Gurus?

August 21, 2007

The never-ending barrage of proxy proposals from governance experts raises an uneasy question: Who is governing corporations these days – elected boards of directors or self-appointed governance firms?

The 2002 enactment of Sarbanes-Oxley and NYSE listing requirements has led to significant improvements in corporate governance.  Boards operate more independently and the relative power of CEOs and their boards has been rebalanced.  Even relationships between corporations and the SEC – the official federal regulator of corporate governance – have settled into appropriate equilibrium.

Just as corporate governance gets on track, self-anointed governance gurus – for-profit firms like Institutional Shareholder Services (ISS), the Corporate Library, GovernanceMetrics International (GMI), and Glass, Lewis – are challenging these legally elected bodies for control of corporations.  Not satisfied with the improvements, these firms - which are not shareholders at all - agitate to wrest control for themselves and for shareholder activists.  They purport to represent shareholders by rating company governance, submitting proxy proposals for consideration at shareholder meetings, and consulting with companies desirous of improving their governance ratings.

The governance gurus wrap themselves in the banner of “shareholder democracy,” although governance of American corporations was never intended to be democratic.  The legislators who created governance laws recognized most corporate governance decisions are too complex to be made independently by thousands of shareholders.  Only the most important decisions, such as the election of directors and major mergers and acquisitions, require a special shareholder vote. 

Like elected representatives in the federal government, corporate directors are elected by shareholders and legally charged with the fiduciary responsibility to govern the corporation.  The courts have consistently backed the responsibility of directors to use their “business judgment” in making decisions regarding the corporation’s best interests.

What these governance firms are proposing is not democracy at all, but rather taking control of corporate governance in order to promote an active market of takeovers and force changes in management and boards of directors.  Their power is growing because institutional shareholders are unwilling to do the analysis and invest time into voting proxies for their vast array of shares.  So they follow these firms’ recommendations – all for a fee.

ISS is the most powerful – and most conflicted – of the firms.  It derives its power from its proxy advisory service for institutional shareholders, who currently hold over sixty percent of the shares of U.S.-based companies.  Through its recommendations, ISS can influence - if not control - thirty percent or more of the shares voted.  The “Corporate Governance Quotient,” ISS’ ratings model, attempts to quantify the quality of firms’ governance.  ISS also sells its advisory services to companies anxious to improve their governance ratings, creating conflicts of interest for ISS’ supposedly independent advice.  Nevertheless, many companies cater to ISS to improve their ratings and ensure favorable votes on proxy items.

In recent years governance firms have focused on the annual election of all directors, eliminating multi-year terms and staggered boards in order to enable hostile raiders to replace the entire board at a single meeting.  They have also insisted on majority votes for directors. Recognizing the importance of director elections, many boards have agreed to reconsider directors’ standing in the absence of majority votes. 

But these changes have not satisfied the governance specialists, who are now asking for “cumulative voting” for directors.  Cumulative voting means that a shareholder representing one million shares in an election of twelve directors could cast twelve million votes for a single director, perhaps a write-in candidate.  Shareholder democracy?  

In actions like these governance firms have shown their hand, which is not democracy at all but support for takeovers and management changes.  This enhances their relationships with the hedge funds, which usually care more about events that create volatility than they do about shareholder value. 

Another focus is “say on pay” resolutions, following the British tradition of giving shareholders an up or down vote on the CEO’s compensation.  At first glance, letting shareholders opine on compensation sounds logical, but the problems it creates are enormous.  Legally, determining executive compensation is the responsibility of the board of directors, which in turn is delegated to its compensation committee.  Determining CEO compensation is an extremely complex task, one that must be closely linked to the firm’s objectives and to employee compensation plans. 

Granting shareholders such a privilege raises serious questions about the board’s responsibilities.  What’s the remedy if the shareholders turn down the CEO’s compensation?  Propose another plan and let the shareholders vote again?  The governance firms would likely offer their own alternative to the CEO’s compensation.  At this point, the power transfer from the board to the unelected governance firms would be complete and would lead to their next proposal to increase power.  Boards that naively attempt to curry favor with ISS and others to win their approval will learn the hard way that these outside firms will never be fully satisfied until they have wrested control from the boards.

I am not suggesting that boards should stonewall these initiatives by dissident shareholders and governance firms.  Rather, these unrelenting pressures suggest that board members must step up to their legally-elected leadership responsibilities and become more active in corporate governance.  This requires more time and greater leadership.  No longer can boards delegate their responsibilities to company management – but neither can they abdicate their duties to governance gurus.

The alternatives are clear: either boards step up to leadership, or our entire system of corporate governance is at risk.  The time for leadership is now!

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Private Equity = Public Gain

August 2, 2007

Controversies over the rising power of private equity firms continue to rage.

Time Magazine labels their leaders, “Private-Equity Pigs.” To hear critics describe private equity, they are the new robber barons, ready to plunder our great corporations and leave them in a shambles.

Nothing could be further from the truth. The dynamic leadership of private equity firms and the executives they hire to run client firms is providing great benefits to the corporate world, the American economy, and society as a whole.

Five years ago private equity firms had trouble coming up with more than $1 billion for a single deal. Today, they can top $50 billion, and there seems to be no limit to the size of deals that can be put together. Why? It’s simple: investors are attracted by the returns of these deals and willing to tie up their money for three to five years.

Let’s take a closer look at the myths about private equity:

Myth #1: The growing power of private equity firms is a threat to public corporations.

Unlike the raiders of the 1980s – remember Mike Milken, Irwin Jacobs, and Carl Icahn? – private equity is doing its deals on a friendly basis. They show up when no public buyers are interested. That’s what happened when Daimler put up Chrysler for sale, no automobile companies showed up, so PE leader Cerberus stepped up to Chrysler’s challenges.

Myth #2: Under private-equity, acquired firms get torn apart and value destroyed.

PE does the vitally needed restructuring that the previous public owners did not have the will or ability to undertake. Ten years of changes are compressed into three years or less. PE firms can achieve those high returns by creating value that public managers apparently did not see, and monetizing their gains in the public market.

That’s what happened in 2001when Blum Capital Partners purchased by CB Richard Ellis, the nation’s leading commercial real estate firm. The firm was drastically restructured, and brought public three years later. In three years its market capitalization grew from $1.3 billion to $9.1 billion, a 600% increase.

Myth #3: CEOs flee public companies to avoid scrutiny from demanding investors.

Wrong! Private equity investors are far more demanding than public investors and much more engaged in the business. Leading PE firms generate returns that far exceed the public market.

Just look at what Eddie Lampert has done with the venerable Sears Roebuck, whose public market valuation declined steadily for thirty years as its retail sales slumped. Lampert consolidated Sears into his bankrupt Kmart operation, monetized the value of its real estate portfolio, and brought it back to the public market. Just four years later, its stock has risen ten times.

Myth #4: The greed of private equity owners is harming the economy.

Like any capitalist who starts his own business, private equity firms invest their own money, putting it all at risk. When they gain, they deserve every penny. That’s the essence of capitalism. If their wealth makes us angry, then we should take it out on poor old Warren Buffett, the greatest capitalist of all, who made $40 billion through his investments in select companies and is giving it all away to philanthropy, to be managed by the Gates Foundation.

Rather than harming the economy, PE firms are giving it new vitality by taking moribund corporations – or pieces of them - restructuring them to uncover real value, and making them healthy, competitive, and viable once again. This benefits the entire economy by reducing the “drag” from poorly managed firms and replacing them with revitalized competitors.

This sounds so easy. Why don’t publicly held companies do the same thing? Is Wall Street restraining them from facing problems? Not exactly. Wall Street generally cheers when public firms face the music and restructure, as the stock tends to go up. The answers lie deeper. Here are the reasons why firms under the PE model are doing so well:

1. Take on high leverage and spread the risk. PE firms take on much greater amount of debt. In recent years the low cost of debt and high liquidity have made this model very attractive. Why don’t publicly held companies do the same? No doubt they could handle more debt, but the PE firms can spread their debt across many companies, thereby mitigating the risk. If a public company cannot meet its debt obligations, it is bankrupt, a la Delphi or Delta Airlines. If a PE-held company goes down, the PE holder can cover its losses from its broadly-based balance sheet of multiple holdings.

2. Compress the time frame of making changes. PE firms don’t waste any time making changes. They aren’t concerned with internal objections, reluctant boards, and unfavorable publicity. They determine what needs to be done, and move swiftly with surgical precision to implement changes. Can’t public companies do the same? Of course they can, but often they fall into the trap of worrying about quarterly earnings, internal morale, power struggles on their boards, and external criticism, and vital time is lost. Worse yet, they rationalize the real problems and make “quick fixes” but never get the business healthy.

3. Leadership. Aren’t private equity managers just a bunch of financial manipulators, not leaders?

Au contraire. Private equity has attracted some of the most talented leaders in business, both to run the PE firms themselves and to run the companies they acquire. Their leadership is characterized by extreme intensity and clear focus on the business and its results. PE leaders have the courage to make the changes immediately, and restore the business to on-going health. They are clear in their purpose and decisive in their actions. Sounds like leadership to me. . .

So what’s the risk with private equity? First, if short-term interest rates rise sharply, the high levels of leverage could become infeasible. Second, with more PE money chasing fewer deals, there is always the risk of overpaying for a major deal. Or not having access to the public market to monetize their gains. This is a real risk in the case of Cerberus’ acquisition of Chrysler.

Finally, private equity has had the benefit of paying capital gains taxes on profits rather than ordinary income tax, as publicly held corporations do. These loopholes in our tax system accruing to the benefit of private equity owners are simply wrong: all firms, public and private alike, ought to play by the same tax rules. Congress is right in attempting to correct this inequity.

There are reasonable questions about whether the private equity model works for well-run, long payout businesses like high tech, biotech and pharmaceuticals, and aerospace. Personally, I am very skeptical. Thus far, the PE firms have steered clear of these industries. We’ll see where they go in the future.

What does all this mean for publicly held companies and their boards? There is a great deal they can learn from private equity if they don’t buy into the myths or bury their heads in the sand. First of all, they should take an objective look at their business as if it had just been acquired by PE. What would a PE firm do differently? Where would they find value? What would they jettison? If they can make these changes without damaging the long-term value of their company, then they should act immediately.

In the regard, private equity is serving as a positive impetus to publicly-held companies to get their act together.

Bill’s bottom line: The private-equity movement is good for the U.S. economy and good for business. It will be around for a long time.

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America's Hidden Asset: Leadership of Global Capitalism

July 23, 2007

For the past seven years America’s political leaders have been trumpeting the spread of American-style democracy, with decidedly mixed results. Developing countries aren’t eager for America to impose its form of democracy on their fledgling – and often fragile – governments. In fact, many of them resent America’s attempt to tell them how to run their governments, especially when threats of “regime change” are not-so-subtlety mentioned.

It is American-style capitalism – not democracy – that is spreading like wildfire around the globe.

Every government leader and business executive I have met in developing countries is eager for one thing: American-style capitalism to build their economies, create jobs and wealth for their people, and bring their countries fully into the global trading network. From Kazakhstan to the United Arab Emirates to Vietnam, people are hungry for capitalism. They want to study it in the U.S., learn how to create local capital markets, acquire American technology and know-how, and build up companies that can export their goods around the world, especially to the U.S.

But most of all they want America’s hidden asset: global capitalism leadership.

Let me emphasize that this is not the old-style business leadership of the 20th century which thought U.S.-based companies had superior products and management processes and could simply export them to the less sophisticated markets around the world, eager for American goods and know-how. That day passed by twenty years ago.

In recent years America’s new competitive advantage has emerged: the ability to train and develop global leaders, capable of leading global organizations. These new leaders, who are mostly in their thirties and forties, have lived all over the world and are as comfortable doing business in the Ukraine or Indonesia as they are in Des Moines, perhaps more so. Many of them have attended America’s best graduate business schools, where they interact with a vast array of foreign nationals and newly immigrated Americans with similar leadership abilities and like ambitions.

Attending my class at Harvard Business School, my wife remarked, “I feel like I am in the United Nations.” In fact, more than one-third of Harvard’s MBAs at HBS and two-thirds of participants in its executive programs come from outside the U.S. to learn the latest leadership approaches in global business. These percentages do not include the substantial number of newly-immigrated Americans from all over the world attending these programs.

This new generation of American business leaders – as well as foreign nationals trained in America’s leading academic institutions – is very different than the previous generation: they are authentic leaders - collaborative, not imperial, in their relationships. They genuinely respect and appreciate the comparative advantages that people of other nations bring to their global companies, from manufacturing skills to ingenuity. Most importantly, they know how to bring together and motivate people of very different backgrounds to build high performing organizations.

America’s competitive advantage is seen most vividly in financial markets, where governments and business people around the world are eager to have America’s investment banks help them restructure their financial institutions and industrial companies to become competitive in global markets. Serving on the board of Goldman Sachs, I have had the opportunity to witness first-hand just how important this leadership is to countries like China, Saudi Arabia and the United Arab Emirates. In building financial institutions in these countries, America is developing the relationships with business leaders that will sustain this competitive advantage in global leadership for the next several decades.

For all the xenophobia about immigration and widespread panic over outsourcing, the reality is that America is the world’s melting pot. We are more accepting of people of diverse national origins and ethnic backgrounds than any country on earth. Progressive business leaders like IBM’s Sam Palmisano, Andrea Jung of Avon Products, GE’s Jeff Immelt, and PepsiCo’s Indra Nooyi recognize that diversity is not a challenge to be overcome, but a source of sustainable competitive advantage.

Whatever issues diversity may create – both real and perceived – America’s hidden competitive advantage is the ability of our leaders to operate effectively in integrated global organizations and to deploy the principles of capitalism throughout the world.

Our political leaders would be well advised to recognize this strength and use it to build America’s relationships with countries around the world, while helping them build their economies through capitalism, irrespective of their form of government.

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PBS Nightly Business Report Commentary #2: Wall Street Versus Main Street

July 19, 2007

For the past decade we’ve had a big problem in the corporate world, but no one will name it. The problem is that many leaders believe they are more responsible to Wall Street than they are to Main Street. But it's Main Street where the customers live and where the money is made.

The only way to create long-term value for shareholders is to create superior value for your customers. That comes from motivating your employees to create great products and superior customer service. That’s why companies like Target, Johnson & Johnson, and PepsiCo have been so successful in sustaining their growth.

But companies whose primary focus is on Wall Street, and meeting its short-term goals, are never going to create long-term value. Wall Street may focus on quarterly earnings, but it still takes five years or more to discover a drug, design a semiconductor, or create a breakthrough like the i-pod.

You simply can’t do it overnight. If you don’t stay focused on your True North, you’ll get buffeted by the winds of change, and wind up capitulating to playing the short-term game. At Medtronic, it took a decade to create breakthrough products that restore millions of people to health, but that’s how we created $60 billion in shareholder value– not by responding to Wall Street.

Unfortunately, many corporate leaders don’t have the patience or the vision to do that. They bow to Wall Street, keep shifting strategies, and wind up destroying their value.

Authentic leaders stay focused on creating great value for Main Street customers. And that’s how they create long-term shareholder value. Authentic leaders who focus on Main Street will out-compete every time those who only worship Wall Street.

I'm Bill George.

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PBS Nightly Business Report Commentary #1: The Need for Authentic True North Leaders

July 09, 2007

Bill George is a commentator and contributor to PBS Nightly Business Review. This blog entry is a copy of his first commentary which aired on June 28.

For the past five years we've been facing a crisis in corporate leadership. The Gallup poll says only 22 percent of the American people trust their leaders. That's not just a problem, that's a formula for disaster, because our entire system of capitalism is built on trust.

Many leaders have breeched the trust given them when they were chosen to lead our great companies. It turns out these leaders are primarily interested in taking as much as they can out of the company – money, fame, power and glory. Instead of takers, we need givers whose goal is to serve all their constituencies: their customers, employees, and shareholders.

All too often boards of directors choose the wrong leaders to run our corporations. They select them more for their charisma than their character, for their style rather than their substance, and for their image rather than their integrity. Well, if we choose people for charisma, why are we surprised when we don't get character?

Boards need to stop searching for corporate saviors from outside the company, and get back to developing leaders within their companies – leaders that have the character, substance, and integrity to build companies for the long term. We need authentic leaders who can empower people throughout the organization to step up and lead, and who are committed to serving all their constituencies.Only when we have authentic leaders will we be able to regain the trust of the American people, as well as the trust of customers, employees, and shareholders – and only then can companies create long-term, sustainable value.

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The Triumph of Competence over Charisma

June 03, 2007

Despite all of the failures at the top of companies in recent years – or perhaps because of them – we are finally moving into an era of competent leaders, favoring them over charismatic leaders.

The appointment of the highly competent Bob Zoellick to replace the charismatic Paul Wolfowitz as president of the World Bank is just the latest such move. Zoellick is highly respected by finance ministers and bankers around the world and will be quickly confirmed. He was passed over two years ago for the ideological Wolfowitz who didn’t take long to alienate the bank’s staff as well as financial leaders around the world with his focus on ideology rather than performance. Look for Zoellick to turn that around quickly and to rebuild the trust in the institution. Unlike Wolfowitz, who placed his own interests ahead of the institution he was elected to lead, Zoellick has always been a builder of competent institutions who gets things done.

Zoellick’s selection has echoes of the replacement of Dick Grasso, the charismatic leader of the New York Stock Exchange by the very competent John Thain. The NYSE has flourished under Thain’s leadership, as he has quietly led it into the era of electronic trading and global trading.

It is ironic that several of the most competent leaders of today were initially passed over by their boards who gave preference to charismatic leaders instead. When these charismatic leaders got their companies in trouble, the boards turned to these competent leaders to bail the company out. Just look at the enormous success these leaders have achieved:

• A.G. Lafley at Procter & Gamble was passed over for the charismatic Dirk Jager. In less than two years Jager’s abrasiveness and abandonment of long-held P&G values led to a revolt of its management and his replacement with Lafley. Lafley has rebuilt the trust in P&G while quietly transforming the company into a global powerhouse in consumer goods.

• Anne Mulcahy at Xerox was also passed over for IBM star Rick Thoman, who led the company to the brink of bankruptcy in just thirteen months. Mulcahy avoided bankruptcy and rebuilt Xerox by focusing on its core products, new technologies, and customer service while reducing the company’s debt by 60 percent.

• Andrea Jung of Avon was also passed over by the appointment of a board member who came from Duracell, the battery company. In just twenty months the Avon board recognized its mistake and replaced him with Jung. Jung quickly changed the company’s mission to “the empowerment of women” and built her organization from 1.5 million to 5.5 million people, the largest in the world.

• The board of Hewlett-Packard recruited the highly charismatic Carly Fiorina as its CEO. Fiorina hit the top of Fortune’s “Most Powerful Women” lists several times, just as the company’s performance was tanking and its organization imploding. To replace Fiorina, the H-P board recruited Mark Hurd, another highly competent, but not charismatic, leader. In less than two years, Hurd has put H-P back on track, as it regains lost market leadership and its original culture.

Some of today’s top leaders were simply recognized for their competence – and have demonstrated it time and again, while building great organizations capable of sustaining growth:

• Steve Reinemund led PepsiCo to great heights for six years before deciding to focus on his family and teenage twins.

• Bob Ulrich took over the reins of Target from a failing leader a dozen years ago and has quietly transformed the company into the retail powerhouse with its great values for consumers with fashion-forward merchandise.

• Doug Conant has transformed Campbell’s Soup into a growth company once again by developing competent, authentic leaders throughout his organization.

There are many more examples of competent leaders who are emerging as the giants of the 21st century: Dick Kovacevich of Wells Fargo, Jeff Immelt of GE, Rex Tillerson of ExxonMobil, Sam Palmisano of IBM, Ken Lewis of Bank of America, Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, Ken Chenault of American Express, and Dan Vasella of Novartis. All of them give priority to building leadership in the marketplace and authentic leadership in their organizations over publicity for themselves. They all have well controlled egos and are focused entirely on building great organizations.

Isn’t it time for corporate boards to abandon the needless search for charismatic leaders and simply promote the competent, authentic leaders right in front of them? These new leaders may not impress Wall Street by hyping the company’s stock, but in the long-run they will create far greater shareholder value by building authentic growth organizations that stay focused on their True North.

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Where Have All the Leaders Gone?

April 23, 2007

Paul Wolfowitz, Alberto Gonzales, Joseph Nacchio of Qwest, Heinrich von Pierer of Siemens, . . . What do they have in common?

A failure to accept the responsibilities of leadership.

No one seems to be willing to take responsibility for leading anymore. Either they “don’t know,” “can’t recall,” or “were just following their lawyer’s advice.” These leaders are either asleep, incompetent, not telling the truth about their actions, or simply unwilling to be responsible leaders.

What ever happened to leading with honor and accepting full responsibility for leadership? It brings to mind the title of the introduction to my first book, Authentic Leadership, “Where Have All the Leaders Gone?” – that is also the title of Lee Iacocca’s new book.

Let’s look at what these leaders have done or said and explore the common threads:

Paul Wolfowitz:
Wolfowitz directed the World Bank to pay after-tax compensation at the State Department for his “friend” Shaha Riza which exceeded the amount paid to Secretary of State Condoleezza Rice, and refused to own up to it. In so doing, he has besmirched the values of the office he is sworn to uphold, and completely undermined the credibility of his “anti-corruption” campaign. In working behind the scenes to hang onto his job, he risks cutting so many deals that he will render the power of his office useless.

Why doesn’t Wolfowitz resign with honor?

Alberto Gonzales:
Under oath before the Senate Committee, Gonzales testified time after time that he “could not recall” being involved with the decisions to eliminate the nine prosecuting attorneys and replace them with Bush loyalists. Couldn’t recall? Where was he on such an important decision? Either