In this recent interview with the Rotman School of Business in Toronto, I talk about the importance of leaders following their True North in order to avoid being derailed, including your compass for the journey and making the transition from "I" to "We." To read the article, click here.
From MWorld Summer 2012
Steve Jobs has become a symbol of innovative leadership. Sad to say, there aren't many leaders like him. Most of them -- Google's Larry Page, Amazon's Jeff Bezos, Facebook's Mark Zuckerberg, Genentech's Arthur Levinson, and Starbucks' Howard Schultz -- are entrepreneurs who founded and built their businesses.
These days virtually all large companies want to be innovative, yet they aren't producing innovative leaders. What has happened to these leaders in large corporations? Have they been squeezed out by constant focus on producing short-term results and replaced by financially-oriented managers who respond to Wall Street's demands for quarterly earnings? Or do corporate leaders lack the basic understanding of what is required to lead innovative organizations? While hundreds of books and articles have been produced on innovation, very little has been written on what is required to produce innovative leaders.
Research and Product Development Are Not Innovation
In this era, many companies are investing heavily in research and product development, yet they fail to create innovative products and ideas. U.S. pharmaceutical companies like Pfizer and software companies like Microsoft illustrate that heavy spending on research and product development doesn't necessarily yield innovations. In contrast, the breakthrough ideas that created Genentech, Google, and Facebook illustrate what can be done with limited budgets. It is important to recognize that research, product development, and innovation are radically different disciplines.
Research is based on well-established scientific principles. At its best, research produces scientific breakthroughs that extend knowledge like Schottky's invention of the transistor and Novartis's breakthrough drug Gleevec for treating chronic myelogenous leukemia. Product development, on the other hand, follows established engineering principles to improve existing products.
Innovations result from unique ways of looking at problems that produce original solutions. Another approach to innovation takes existing ideas and combines them into unique solutions. In retrospect, the outcome may seem obvious, yet is highly original. Apple's iPad is an example, combining Apple's iPod, iPhone, and iMac to create a breakthrough product.
- Because research and innovation require long time frames, the pressure on business-unit leaders to produce near-term success often results in funds being shifted from innovative projects to product development and product extensions.
- Large organizations that are heavily dependent on previous successes frequently squeeze out innovative ideas and the innovators who create them. Not infrequently, the most innovative ideas run into significant difficulties in their infancy and get killed or underfunded in favor of high-profitability development projects.
- Passion for innovation. Innovative leaders not only have to appreciate the benefits of innovation, they need a deep passion for innovations that benefit customers. Just approving funds for innovation is insufficient. Leaders must make innovation an essential part of the company's culture and growth strategy.
- A long-term perspective. Most investors think three years is "long-term," but that won't yield genuine innovation. Major innovations can change entire markets as the iPod and iTunes did, but they take time to perfect products and gain adoption by mainstream users. Leaders cannot stop and start innovation projects as if they were marketing expenses; they must support innovation regardless of the company's near-term prospects.
- The courage to fail and learn from failure. The risks of innovation are well known, but many leaders aren't willing to be associated with its failures. However, there is a great deal to be learned from why an innovation has failed, as this enhanced understanding can lead to the greatest breakthroughs. At Medtronic, our failures with implantable defibrillators in the 1980s led to far more sophisticated approaches to treating heart disease in the 1990s.
- Deep engagement with the innovators. Innovative leaders must be highly engaged with their innovation teams: asking questions, probing for potential problems, and looking for ways to accelerate projects and broaden their impact. That's what HP's founders Bill Hewlett and David Packard did by wandering around HP's labs and challenging innovators.
- Willingness to tolerate mavericks and defend them from middle management. The best innovators are rule-breakers and mavericks who don't fit the corporate mold and are threatening to middle managers following more typical management approaches. That's why innovative leaders must protect their maverick's projects, budgets, and careers rather than forcing them into traditional management positions.
How can companies develop innovative leaders capable of ascending to top management? They need to identify these emerging leaders and then give them their most challenging projects, while protecting them from failures and organizational conflicts.
Some Examples of Innovative Companies
When I joined Medtronic in 1989, it was evident that the innovation process had broken down. My first week, I was informed that all innovative ventures were being divested because they were losing money and the company needed improved short-term results. The company had many highly innovative people, who were demoralized by lack of senior management support. Engineering problems and product development overruns were absorbing all their funds. To solve both problems simultaneously, we created entirely separate organizations with different profit-and-loss structures and put disciplined leaders in charge of the established organization and innovative leaders in charge of breakthrough ideas.
To solve engineering problems, a highly disciplined engineer restructured the product development process. He cut new product lead times from 48 to 18 months with a rigorous approach that kept unproven ideas and innovation off the critical path. He selected disciplined engineers as project leaders and produced a steady stream of products resulting in near-term success. This provided the profits and cash flow to fund innovative ideas as well as refuel the product development process.
Meanwhile, two very innovative senior executives led the creative side: a scientific leader and a medical doctor with a keen interest in technology and innovative medical ideas. They created a series of venture projects addressing unmet medical needs. Although many projects failed, enough succeeded to propel Medtronic to sustain a growth rate in excess of 18% for a 20-year period. This built the company from $400 million to $16 billion in revenue and gave Medtronic a reputation as "an innovation machine." More important, innovations resulted in a dozen major medical breakthroughs to treat intractable disease, including original therapies for heart failure, spinal pain, cerebral palsy, and Parkinson's disease.
Because the established business organization contained most of the people and budgets, I focused more attention as CEO on the innovators. This ensured their projects and their careers didn't get crushed by the established organization that produced near-term profits. Since many of the innovations couldn't withstand careful scrutiny at their outset, they had to be protected from engineering and financial analysis until they were sufficiently proven to put them through rigorous product design and clinical testing.
In recent decades the creators of America's great growth corporations have been succeeded by established business leaders lacking the innovative drive to sustain growth. The stories of Hewlett-Packard and Amazon are particularly instructive. For 30 years, HP was the role model of innovation, producing 20% revenue growth and 20% operating profits. As it grew, HP became complacent and bureaucratic. In response, its board divested its original businesses and went outside four consecutive times to appoint commercially oriented CEOs, none of whom has restored the company's innovative capacity.
In contrast, Amazon founder Jeff Bezos never wavered in his commitment to online retail marketing, even when the dot-com bubble burst in 2002 and Amazon's stock declined more than 90%. More recently, Bezos ignored short-term profitability to expand into hardware with the Kindle. Faced with mounting costs and technical difficulties, Amazon's financial chief asked him how much he was prepared to lose on this venture. Not flinching, Bezos replied, "How much money do we have?" He was so committed to this venture that he was prepared to stake the company's future on its success. As a result, Amazon is transforming the book world from printed books to electronic.
For America to regain its global competitiveness, a new generation of innovative leaders needs to take over top roles in our leading corporations, not just found startup companies on the West Coast. This new generation seems to be emerging, led by IBM's Sam Palmisano, Ford's Alan Mulally, PepsiCo's Indra Nooyi, Lilly's John Lechleiter, and General Mills' Ken Powell. For America to regain its competitive edge, we will need many more like them.
From New York Times Deal Book: http://dealbook.nytimes.com/2012/08/03/the-long-term-value-of-internet-companies/
A decade after the last technology bubble burst, the signs are everywhere that it is happening again.
Look at what’s happened to the highly publicized initial public offerings: Facebook’s value has declined $30 billion since its I.P.O., costing investors nearly half their investment. Zynga shares have plummeted. Groupon shares trade at such an extreme discount that there should be a Groupon for them. Pandora’s stock, once $17, has touched $7. Companies like Friendster and MySpace, meanwhile, toil in oblivion.
These declines didn’t have to occur. Creating new markets is a messy, fast-moving process in which many companies will collapse. Instead of mourning Facebook’s inability to surpass the market capitalization of General Electric, we should be celebrating the success of companies that have navigated early-stage minefields.
An aggressive approach to early-stage venture investing has led to a bubble in start-up financing. Financial analysts of these growth companies make a host of assumptions to project performance to justify outsize valuations.
As a consequence, promising young companies like Groupon and Zynga get overvalued. To support its I.P.O. valuation of nearly 100 times its earnings, Facebook would have to sustain an unrealistic growth rate. Even at its lower valuation, Facebook’s market capitalization is 12 times its revenue. Last week, Facebook reported respectable growth across all its important metrics: new users, active users, total advertising revenue and operating income. Yet, the vicissitudes of volatile markets caused its stock to decline 12 percent after its earnings announcement.
In a prudent financing environment, investors would be banking on Facebook’s future instead of wondering why it had lost so much of its I.P.O. value. Critics have argued that Facebook’s backers increased value for the company’s original investors by aiming for the highest valuation during the I.P.O. Did they lose sight of the importance of creating long-term value by having a base of stable committed shareholders who understand the business and are focused on its long-term success?
As we learned during the financial crisis, speculative traders looking for outsize returns can increase the volatility of company valuations. In turn, management gets trapped into trying to justify excessive valuations by focusing on short-term results. These huge swings in valuation have consequences. They jeopardize acquisitions. They demoralize employees who are compensated with stock. Most important, they distract senior leaders from their real job: creating great products that serve their customers.
Entrepreneurs who want to build for the long term should avoid going public until they have positioned themselves as market leaders with diverse and stable revenue streams. Even then, they shouldn’t strive to notch 80 times price-to-earnings ratios or a 100 percent pop in its shares on the first day of trading. Google is a classic example of the right way to go public. It delayed going public until six years after its founding. Since its I.P.O. in 2004, Google stock has moved steadily upward, rewarding its investors with a 500 percent return. Google’s $200 billion market capitalization is justified by $40 billion in revenue and $10 billion of net earnings.
Rather than trying to maximize the value of their I.P.O.’s, start-ups should align themselves with capital partners who are builders themselves, interested in sustainable growth and wary of unrealistic valuations. They should select board members committed to the long-term success of the company, compensating their directors with restricted stock. Founders should accept lower valuations in order to attract the right investors – financial partners who will invest in the brand, research and development and operational engine to create sustainable competitive advantage.
The striking example of Warren E. Buffett contrasts markedly with what we observe happening with the social media start-ups. Mr. Buffett cautions his investors about overpaying for assets and often talks down expectations for Berkshire Hathaway stock. He has taken the high road in treating his shareholders like long-term business partners. While shareholders don’t get one-time pops, they have compounded earnings at more than 20 percent a year for 50 years.
These days, the scrutiny of public company leaders is intense, and public markets are unforgiving. The high turnover in hedge fund portfolios makes Wall Street a place where fortunes are made, not where businesses are built.
In contrast, the best entrepreneurs are business builders. They should keep a laserlike focus on precisely that and never deviate to please short-term traders.
The most damaging portion of former FBI Director Louis Freeh's comprehensive report on the Pennsylvania State pedophilia scandal is his conclusion that four senior university officials concealed football coach Jerry Sandusky's child abuse from 1998 to 2011, even from its board of trustees, because they wanted "to avoid the consequences of bad publicity."
In so doing, these officials—including legendary head football coach Joe Paterno and President Graham Spanier—placed their own reputations ahead of the harm that Sandusky did to young boys for the next 14 years.
Ironically, had Penn State turned Sandusky over to legal authorities in 1998, the public would have viewed its actions as protecting the victims, thereby enhancing the University's reputation. Instead, these men caused grave damage to a great university while allowing Sandusky free reign to destroy lives.
Sadly, the Penn State situation is not unique. Consider these other cases:
- Had President Richard Nixon acknowledged his role in the Watergate scandals, he could have saved his presidency and his legacy.
- Had the hierarchy of the Roman Catholic Church acknowledged its pedophilia scandals, it would have protected victims and its moral authority.
- Had President Bill Clinton admitted his relationship with Monica Lewinsky, the scandal would have subsided, enabling him to focus on his pro-growth policies to balance the budget and create jobs; instead, he had to fend off impeachment.
- Had Martha Stewart and Rajat Gupta admitted their roles in insider trading, they could have plea bargained, moved past their ethical lapses, and possibly avoided prison time.
- Had Best Buy founder Richard Schulze not covered up CEO Brian Dunn's improprieties, he could have retained Best Buy's reputation for sound values (and his own).
Contrast these actions with JPMorgan CEO Jamie Dimon, who took immediate responsibility for his firm's recent trading losses, calling them "stupid and egregious." While Dimon has taken considerable heat during the past month, his reputation as a "truth teller" remains intact. Eventually, JPMorgan will be restored and corrective actions put in place to mitigate future risks.
The deeper question raised by these examples is this: What causes leaders to cover up inappropriate actions instead of acknowledging them immediately?
Many leaders strive for such a high degree of perfection that they are unwilling to admit mistakes. They feel tremendous external pressure to be perfect, but in reality they are far more successful when they areauthentic. Were they to think rationally and consult with others about what to do, they would see it is better to acknowledge the truth, no matter how painful, because the truth will surface eventually. More importantly, they can prevent further harm to the victims. While leaders may rationalize that a cover-up protects the interests of their organizations, the damage of one typically harms their institutions far more than the direct admission of a mistake.
The Greatest Generation, venerated for placing stewardship and institutional trust ahead of self-interest, contrasts starkly with those in this generation of leaders who believe that putting self-interest first is acceptable. The cardinal responsibility of leaders is to always put their organizations first. As leaders become increasingly successful, their reputations soar and they begin to think they have to be perfect, contributing to their inability to acknowledge mistakes. Or they conflate their interests with the institution, thinking "I am the institution."
In doing so, they head for a fall—often taking their organizations down with them. Meanwhile, the public loses trust in them, and everyone associated with the organization gets hurt. This problem is compounded when many leaders fail, further alienating the public.
Reversing this loss of trust will require a concerted effort to develop a new generation of responsible leaders. No longer can leaders be chosen strictly for their abilities. In the future they must also be selected for their sense of institutional responsibility, based on their performance under stressful conditions. They must be bound by a sound governance system and constraints that require them to acknowledge their responsibilities to their organizations.
Developing this new leadership generation will require programs that focus on their inner sense of responsibility, their integrity and purpose in leading, and accepting themselves as imperfect human beings striving to do their best to help their organizations. An integral part of their development is gaining the self-confidence to acknowledge mistakes and make their actions transparent. Many leaders fear showing their vulnerabilities, but actually gain power and respect in being authentic.
Improving leadership development and selection won't prevent all failures, but it will go a long way toward minimizing them and restoring trust in our leaders.
Nine years ago today the New York Times favorably reviewed Authentic Leadership, my first book. At the time "authenticity" in leadership was not a well-established idea. Many people asked, "What is an authentic leader?" although the concept seemed self-evident to me as being genuine, real and true to who you are. In those years authenticity has been popularized by Oprah Winfrey and others, as people search for the real thing.
With repeated leadership failures, many people today are eager to find authentic leaders, and the ideas have gradually become widely accepted, even among academics. More and more students are studying authentic leadership and striving to lead in this way. In spite of several well-publicized leadership failures, the new generation of corporate CEOs, many of whom I know personally, are highly authentic and doing an excellent job of leading, in spite of the economic headwinds. I find these trends very encouraging and feel that they bode well for the future of corporate leadership.
For those of you interested in Authentic Leadership and its successor, True North, here are two excellent blogs summarizing its ideas: http://bit.ly/P71wLS and http://bit.ly/NJ7z8x. If you haven't read either or both, of course www.amazon.com would be happy to send them to you.
As always, your feedback on these ideas is greatly appreciated.
By: Joann S. Lublin for The Wall Street Journal
Warning: You could be at risk of contracting "CEO-itis."
An affliction of arrogance that plagues many people picked for powerful posts, its symptoms include a tendency toward isolation, belief that you're smarter than others, preference for loyalists, aversion to changing course even in the face of failure -- and love of royal treatment.
It appears to occur when promising managers reach the corner office or other C-suite spots. Once infected, once-successful executives often underperform and put themselves at great risk of early exits, experts say.
In June, John Figueroa quit after 17 months as chief executive of Omnicare Inc. "He believed he accomplished the goals established by the board,'' the nursing-home pharmacy operator announced.
But Mr. Figueroa also acted imperiously, ignored suggestions from colleagues, and made extensive personal use of the corporate aircraft, according to people familiar with the situation.
In short, the CEO title went to his head, one informed individual says. McKesson Corp., Mr. Figueroa's prior employer, had recommended him as a collaborative team player, another person remembers. Omnicare declined to comment.
Mr. Figueroa says he's "very proud of all the great things we accomplished" during his Omnicare stint, though he concedes he wasn't a warm and fuzzy boss. "I certainly did not make friends with everyone as tough decisions had to be made," he says. "We changed things very quickly, and looking back, I could have been better" at communicating with the board and managers.
Similarly, while Mr. Figueroa denies abusing perks, he confirms that a friend of his daughter flew with him, his wife and daughter on the corporate aircraft during a business trip.
Every top executive once was a rising star, building a base of influence. What changes them along the way?
David Kirchhoff, head of Weight Watchers International Inc., admits that he's had bouts of CEO-itis since assuming command in 2007. "It's almost impossible to avoid completely," he explains. "People treat you differently" when you become chief executive. He says he keeps his ego in check by working closely with people who enjoy teasing him.
Senior managers with an inflated sense of their superiority repeat actions long after they stop working because they overlook "information that has changed," says Carol S. Dweck, a Stanford University psychology professor and author of "Mindset: The New Psychology of Success." The rapid pace of change in most businesses requires more questioning, not less, she notes.
The problem, also called CEO disease, "is beyond epidemic," in part because executives today are so stressed that they fail to open themselves to new ideas and see themselves as "God's gift to the world," says Richard Boyatzis, an organizational behavior, psychology and cognitive science professor at Case Western University. He co-wrote "Primal Leadership,'' a 2002 book that discusses CEO disease.
Still, it is possible to get ahead without getting a swelled head. The remedy, leadership specialists say, involves the often painful process of reattaching an executive's feet to the ground.
Here are suggestions, gathered from ten present and former CEOs, for how to maintain equilibrium after you land a top job:
Surround yourself with highly capable lieutenants.
"You have to have enough self-confidence to know you'll do well if you have a bunch of smart people doing well," Mr. Kirchhoff observes.
Strong, talented associates "make it easy to acknowledge I don't always – or even often – have the best idea in the room," concurs Scott Wine, CEO of Polaris Industries Inc., a maker of off-road vehicles, motorcycles and snowmobiles. That's why "I cannot be arrogant or expect unwarranted privileges," he adds.
Encourage dissent, discourage sycophants.
Help subordinates overcome their fear of offering frank feedback – but resist their seductive accolades.
"Reward people who challenge you," recommends William George, a former CEO of Medtronic Inc. "I didn't promote people who didn't take me on."
Mr. George says he especially disliked associates who frequently flattered him or showed up uninvited at meetings in order to gain face time with the CEO. For the worst sycophants, "I actually had to move them out," recollects Mr. George, now a management practice professor at Harvard Business School.
Regularly admit and fix your mistakes.
Taking responsibility for your errors "is a very powerful way to keep yourself humble,'' Mr. Kirchhoff says. He recently took his own advice.
Weight Watchers' first-quarter profit fell more than expected on virtually flat revenue growth. During a May earnings call, Mr. Kirchhoff blamed the disappointing performance on execution issues. "I bear responsibility for those misses," he said.
Treat every employee with respect.
Carin Stutz, hired to lead Cosi Inc. in January, is trying to revive the struggling fast-casual dining chain. Her predecessor resigned shortly after Nasdaq warned that it might delist the company.
"There is definitely a lot more attention and visibility in this (CEO) role," says Ms. Stutz, previously a Brinker International Inc. executive. "I feel more responsible than ever to respect and support people."
Ms. Stutz chose a highly visible way to demonstrate respect for Cosi workers. She spent ten hours a day during her initial five weeks as CEO going through store-manager training. Among other things, she baked bread, prepared food and ran the cash register at restaurants in three cities.
Find an objective sounding board outside the office.
A spouse, executive coach or informal group of advisors can alert you about looming signs of CEO-itis.
Mr. George, for instance, has attended a men's support group every Wednesday morning for nearly 35 years. "You're losing it (humility),'' some members warned while he ran Medtronic.
He says he was being too direct with his employees because he thought he had all the answers. Thanks to such reality checks, Mr. George adds, "you pay attention to your behavior.''
Our son Jeff names his executive "Dream Team" for Fortune Magazine along with the rationale of his top picks. Who would be on your dream team? It’s nice to see Fortune featuring some of our great leaders, not just exposing poor leaders. We have many exceptional leaders these days who deserve some positive kudos for the amazing leadership they provide great organizations. http://bit.ly/RrKHLb
Here is my Op-Ed on Supreme Court ruling on the Accountable Care Act, published on HBS' website (http://bit.ly/P3J3Rm). I believe it is time to focus on living healthy lives, not just disease care with a national "Healthy Living" campaign. This is the only way to bring health care costs in line and make America a nation of healthy people. Your feedback is welcome!
Last week Harvard Business School Dean Nitin Nohria and a group of senior faculty members led by University Professor Michael Porter and Professor Jan Rivkin, co-chairs of HBS' U.S. Competitiveness Project, led a seminar for 400 leaders and policy makers at the Newseum in Washington DC on the subject of U.S. competitiveness. Fortune magazine did the following article on the session.
By Bill George for the Star Tribune, published June 23, 2012.
The tragic fall of Rajat Gupta, a man who helped so many organizations, is a vivid reminder of the frailties of human character. Convicted of insider trading, Gupta, who once headed global consulting firm McKinsey & Co., joins a lineup of failed leaders that includes ex-HP CEO Mark Hurd, investor Bernie Madoff, Berkshire's David Sokol, ex-Best Buy CEO Brian Dunn, and Chesapeake Energy's Aubrey McClendon.
Will the parade of leaders who fail to fulfill their leadership responsibilities ever end?
CEOs are public figures. Their actions are constantly being scrutinized inside and outside their organizations. For this reason their actions must be beyond reproach. The greatest failure for any leader is putting self-interest ahead of the organization's interests, which is precisely what these leaders did.
A year ago, I wrote an article titled "Why Leaders Lose Their Way" that analyzed ways in which high-profile leaders get seduced. What I learned in researching that article is that leaders who focus on external gratification -- money, fame and power -- instead of inner satisfaction, tend to abandon their roots and lose their grounding. That makes them vulnerable to small unethical violations that gradually build into unfathomable actions.
In choosing leaders, people place their trust in them, believing they will always do their best to build the organization and ensure their organizations can navigate difficult times. Leaders who put their self-interests ahead of their organizations violate this most basic responsibility of leadership.
Why? It's not because they don't understand their responsibilities. Rather, too much credit is given to leaders, who are applauded when things go well as if they were one-person bands. Eventually, they start believing their press clippings.
As Novartis Chairman Daniel Vasella told Fortune magazine: "The idea of being a successful manager is an intoxicating one. It is a pattern of celebration leading to belief, leading to distortion. When you achieve good results, you are typically celebrated, and you begin to believe that the figure at the center of all that champagne-toasting is yourself."
At this juncture, failed leaders start to believe they are above rules that govern others, and even above the law. Fueled by hubris, they violate the most basic principles, rationalizing that they won't get caught. When confronted, they try to talk their way out of it, rather than admitting their mistakes. This only compounds their problems by creating a trail of distortions that eventually brings them down.
It's easy to feel angry toward these leaders, but that misses the larger point. Violating the inherent trust their organizations place in them doesn't just harm the leader, it hurts everyone associated with the organization as well as its reputation. Their actions cause employees, investors and customers to lose confidence in their organizations. It can even put their organizations in play. That's what happened at Chesapeake Energy as Carl Icahn gained four board seats in a proxy contest. Best Buy could be next, due to Brian Dunn's misconduct and former Chairman Richard Schulze's failure to address it.
Gupta's actions tarnished the reputations of many organizations, among them McKinsey, Goldman Sachs, and Procter & Gamble. In the case of HP's Hurd, his termination left the company without a CEO or a viable strategy, leading to a decline in HP's market valuation of $60 billion, or 55 percent.
Each of us is fallible. To minimize the likelihood of leaders losing their way, it is essential to screen them carefully for their values and character. Leaders should be recognized for who they are, not just what they are, as character takes precedence over their résumés. Authentic leadership development opportunities enable them to integrate their life stories and crucibles into their thinking and understand their weaknesses, shortcomings and failures as well as their strengths. Ultimately, great leaders must be comfortable with their vulnerabilities. This requires years of careful preparation to ensure they are ready for the responsibilities of leadership.
Perhaps because of these well-publicized leadership failures, there has been a marked shift in recent years from hiring external candidates to the promotion of insiders whose character and values have been carefully tested. Recently-appointed CEOs seem to have a deep understanding of their personal responsibilities and the importance of staying grounded as leaders and human beings.
Bill George is professor of management practice at Harvard Business School, author of True North, and former chair and CEO of Medtronic, Inc.