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Bill George

Harvard Business School Professor, former Medtronic CEO

Bill George: Crisis of Confidence: Restoring Trust in Our Leaders

Originally posted in the Commonwealth Club on November 24, 2009.

The stock market has recovered from the financial crisis, but a deep scar from the recession remains. Americans lack confidence in the nation’s leadership to address the challenges the nation currently faces.

The Harvard Center for Public Leadership’s 2009 National Leadership Index reveals that 69 percent of Americans think we have a leadership crisis in the country. Another 67 percent believe that “unless we get better leaders, the United States will decline as a nation.”

At the bottom of the index’s ranking of confidence in leadership are Wall Street leaders, closely followed by news media, Congressional, and business leaders. It is tempting for leaders to view these dismal results as a public relations issue emanating from the economic downturn. But this is not a PR problem: it’s a leadership problem.

We opened this decade with a wave of appalling leadership failures. Ken Lay and Jeff Skilling of Enron, Bernie Ebbers of WorldCom, Joseph Nacchio of Qwest, and Dennis Kozlowski of Tyco blatantly disregarded the ethical and legal responsibilities entrusted to them by their shareholders.

We are closing the decade with another wave of leadership failures. Dick Fuld of Lehman, Alan Schwartz of Bear Stearns, Angelo Mozilo of Countrywide Financial, and Chuck Prince of Citigroup sacrificed financial prudence for the possibility of extraordinary short-term gains. Their decisions obliterated billions of dollars of economic wealth and almost destroyed the nation’s financial system.

This crisis won’t be over until a new generation of leaders emerges that understands that long-term institutional stewardship and maintaining public trust are the two imperatives of 21st-century leadership.

Far too many leaders fell into the trap of believing that the purpose of business is to maximize shareholder value and reap personal rewards, rather than serve customers and the society they operate in. In my experience, those that focus primarily on maximizing shareholder value, usually with a short-term focus, are more likely to destroy the value they created.

A recent study of S&P 700 international stocks from 1998 to 2009 shows that only three of the top fifteen winners are American – Apple, Amazon, and Oracle – all of which are headed by leaders with long-term focus. The five worst U.S. stocks – AIG, Kodak, Citigroup, Ford and Bristol-Myers – had leaders with a short-term focus. This list excludes GM, K-Mart, Enron, WorldCom, and Lehman since they declared bankruptcy.

Long-term leaders recognize they cannot rely upon cost-cutting, acquisitions, and other short-term moves to create sustainable value. By focusing clearly on their long-term mission, values, and strategies, they earn and keep the trust of their customers, their employees and the society they serve.

The key to creating sustainable shareholder value is to provide superior value to your customers. Companies like Johnson & Johnson, Target, Google, Medtronic, and Wells Fargo focus on their mission and values, which is what motivates their employees. When a company does these things well, revenues and profits expand and sustainable shareholder value follows.

A number of progressive corporate leaders are emerging that recognize the need for long-term focus to create sustainable value. For example, IBM’s Sam Palmisano embarked upon a seven-year “leading by values” initiative to reposition the firm globally and emphasize its service businesses. Indra Nooyi committed PepsiCo to a long-term focus on expanding healthy food and beverage offerings. Dan Vasella of Novartis invested heavily in drug and vaccines research to prevent and treat intractable diseases. John Chambers is making acquisitions during the downturn to prepare Cisco to lead a new productivity expansion. Amazon’s Jeff Bezos keeps introducing product innovations like the Kindle—even though they take five to seven years to payoff.

In an earlier era, Walter Wriston of Citigroup and John Whitehead of Goldman Sachs capably steered the financial markets with honesty, intelligence, and dignity. As many firms failed in 2008, three Wall Street leaders emerged. J.P. Morgan’s Jamie Dimon created a culture of candor enabling his bank to successfully navigate through the financial crisis. Goldman Sachs’ Lloyd Blankfein (on whose board I serve) built effective risk management into the bank’s DNA. John Stumpf emphasized Wells Fargo’s core strengths and focused on commercial banking to use the crisis to strengthen its franchise.

The path to restoring the public’s confidence and trust in business leaders is clear. We need leaders who are committed to sustainable growth over short-term gains and serving society by creating long-term value.