From HBS Working Knowledge, June 5, 2014
The New York Times ran a troubling story, "Why You Hate Work," in last week's "Sunday Review." The article indicated that employees work too hard and find little meaning from their work. The anecdotes we all hear about this topic are reinforced by the Gallup Poll, which shows that only 30 percent of employees are engaged in their work.
The issues raised are ones I have worked on for many years. With the drive for higher productivity in the workplace, there is little doubt that people are putting in longer hours than they did two or three decades ago. In part, this drive comes from never-ending, short-term pressures of the stock market. An even greater factor is the global nature of competition today, which pits American organizations directly against counterparts in Asia, where work days are long and onerous.
The much greater issue raised, however, is that many workers do not find meaning in their work. A shockingly low 25 percent of employees feel connection to their company's mission. (Contrast that to the 84 percent of Medtronic employees who feel aligned with the company's mission.) In my experience, if employees don't feel a genuine passion for their work and believe that it makes a difference, engagement drops off dramatically. When engagement falls, so does productivity.
MESSAGE NOT BEING HEARD
Many senior executives have been focused on building mission-driven organizations for the last decade. The CEOs I know are fully committed to getting everyone focused on mission through regular engagement with employees—much more so than CEOs in my generation. So if CEOs are focused on the mission, why aren't these messages getting through to employees?
I believe the answer lies in the highly bureaucratic, multilayered organizations that companies are using to execute their plans. There is so much pressure to realize short-term results that middle managers are consumed by making this month's numbers rather than building teams that focus on achieving their company's mission. Innovating under intense operational pressure is nearly impossible.
In addition, the heavy burden of compliance with government regulations and internal corporate requirements is taking a toll on people, limiting their creativity, and causing them to be risk-averse. In this environment, desired qualities like empowerment, engagement, and innovation are subordinated to control aspects. No wonder people aren't engaged and having fun!
Finally, we have lost sight of the importance of first-line employees—the people actually doing the work—and have given all the power to middle management. We have driven down compensation for first-line employees, increased their hours, and taken away their freedom to act with myriad control mechanisms. When it comes to layoffs, it is the first-line people who get laid off, not the middle managers, as senior leaders protect the people closest to themselves.
What's the solution to this dilemma? I believe we need to restructure large organizations by giving much more responsibility and authority to first-line workers and paying them accordingly—with appropriate performance incentives. We need to trust employees, not control them, by empowering them to carry out the company's mission on behalf of customers. They should be given full responsibility for performance, quality, achievement of goals, and compliance with company standards.
To realize this change, organizational structures need to change. Dramatically. For starters, companies have far too many layers of managers. The best way to address this is to widen the span of control for everyone between the CEO and first-line employees. Instead of six to 12 direct reports, all managers should have 15 to 20 people reporting to them. For many managers, this violates traditional management principles, but it also dramatically reduces the number of layers between the CEO and first-line staff. I know many extremely effective executives, including Mayo Clinic CEO John Noseworthy and Medtronic CEO Omar Ishrak, who have more than 18 direct reports and handle the load extremely well. It just requires ensuring that all your direct reports are competent to do their roles and that you use a superb system of delegation, so that you're not over-managing subordinates.
REQUIRED: LEADERS WHO INSPIRE
Next, the role of middle management requires fundamental changes. Instead of managers who control, we need leaders who inspire in these roles. They should work alongside their employees, doing more than their fair share of the most challenging aspects of the work. Their leadership role is to champion the company's mission and values, and to challenge others to meet higher standards on behalf of their customers. It is the job of these leaders to facilitate the work of the people they lead by making their jobs easier, and removing bureaucratic impediments and other obstacles. Middle managers who cannot make this shift may have to move on to new roles elsewhere. All of these actions make these leaders more like partners and coaches than bosses and controllers in the traditional sense.
Finally, the most senior executives in the organization should be engaged every day with the first-line: working with them in the marketplace and in customer meetings; roaming around the labs, quizzing innovators, scientists and engineers about their latest ideas; visiting production facilities and service centers to check on quality and customer support. That means far less time holding lengthy business reviews in their conference rooms or having 1:1 meetings in their offices. Executives who are fully engaged with first-line employees every day will have a much better sense of how their businesses are running, and their presence will be highly motivating and even inspiring.
As a result of these changes, the employees will be more engaged and more productive, overhead costs will drop dramatically, and customers will report a much higher level of responsiveness. The executives will make better informed, more thoughtful decisions about the business because they are so much closer to their markets and the people doing the work.
Andrew Sorkin for NY Times, June 2, 2014
“I just want to emphasize that this is an industry where it is composed of really great people, working to do good things for patients, for doctors and actually for society, and when I look at our employees, there is sort of a noble purpose to working in the pharmaceutical industry.”
That was Mike Pearson, the chief executive of Valeant Pharmaceuticals International, waxing poetic last week about the virtues of his company. He was doing so as he was trying to sell shareholders of Allergan, the maker of Botox, on his company’s $53 billion takeover bid.
Mr. Pearson may have wrapped himself in the promise of the pharmaceutical industry’s ability to deliver lifesaving breakthroughs, but there’s a not-so-small problem with his self-righteous declaration: Of virtually every big drug company, Mr. Pearson’s may very well be among the least innovative.
To the extent Mr. Pearson has succeeded over the years, he has done so largely by sharply cutting research and development budgets, arbitraging tax domiciles — Valeant left the United States for Canada’s lower tax rates in 2010 by merging with Biovail — and buying rivals so he can cut their costs, too, while they take advantage of his lower tax rate.
Bill George, a professor of management practice at Harvard Business School and the former chairman and chief executive of Medtronic, recently asked a provocative question: “Is the role of leading large pharmaceutical companies to discover lifesaving drugs or to make money for shareholders through financial engineering?”
Mr. George asked the question in the context of Pfizer’s recent failed bid for AstraZeneca, but he could have been talking about Valeant.
Mr. Pearson’s Valeant famously teamed up with Bill Ackman, the activist investor who runs Pershing Square Capital Management, to buy nearly 10 percent of Allergan’s shares through a complicated transaction that some suggested was tantamount to front-running. It hoped to use that leverage to persuade Allergan’s shareholders to accept Valeant’s bid, which it has now raised several times.
Over the last several weeks, Mr. Pearson and Mr. Ackman have engaged in all sorts of criticism and name-calling of Allergan and its chairman and chief executive, David E. I. Pyott.
Mr. Ackman called Mr. Pyott conflicted and said he “appears to be motivated more by personal animus than by what is in the best interest of Allergan shareholders.”
That kind of language may just be part of the game, but it is particularly curious because Allergan isn’t one of those horribly managed businesses that are often the targets of such vitriol. Here’s what the investment firm Sterne Agee said in its recent research report: “The Allergan executive team is one of the best and most shareholder-focused in the pharmaceutical industry.” The numbers tell the story: Allergan’s stock is up 290 percent over the last five years.
And so what we’re left with isn’t a tale about a brilliantly innovative drug company trying to buy a mismanaged fixer-upper; it’s quite the opposite. Valeant, desperate for ways to increase its revenue, needs a cash cow to milk until it can find the next one.
“Allergan spends 17 percent of its revenue on research and development, compared to Valeant’s 3 percent, and Valeant has said it plans to cut around 20 percent of the combined companies’ 28,000 jobs in the merger. We do not believe that this is the sort of economic activity that policy makers should be actively encouraging in their rule-making (or foot-dragging),” Martin Lipton, the co-founder of Wachtell, Lipton, Rosen & Katz, which has long railed against the short-term nature of activist investing, wrote in a note to clients. Given his views, it shouldn’t come as a surprise that Mr. Pyott hired Mr. Lipton’s firm to help defend against Valeant.
In case there is any question about Valeant’s slash-and-burn strategy, here is Mr. Pearson in his own words from last week on the value of research and development: “There has been lots and lots of reports, independent reports, talking about how R.&D. on average is no longer productive. I think most people accept that. So it is begging for a new model, and that is hopefully what we have come up with.”
Mr. Pearson isn’t completely wrong: Research and development has proved to be less efficient at producing blockbusters than it was decades ago. But that doesn’t mean the goal should be to try to purge research and development budgets simply to pay out bigger short-term dividends.
And here is Mr. Pearson on his tax-dodging strategy: “As I think maybe you are aware, we were able to get a corporate tax structure which took our effective tax rate from 36 percent over all to what was actually 3.1 percent, which we hope to continue to work on and move lower.” How much lower can it go?
Mr. Ackman, who has a terrific investment performance record and a mixed activist record — he practically destroyed J. C. Penney while doing miraculous work to resuscitate General Growth Properties — has been encouraging Mr. Pearson to increase his offer to induce Allergan to the negotiating table. On Friday, he announced a new twist that he implied should make it clear this is no short-term play for him.
“Early this morning, I called Mike and offered to give up $600 million of value to the other Allergan shareholders and exchange our shares for Valeant stock if Valeant were prepared to increase its offer to the other Allergan shareholders,” Mr. Ackman said in a statement. “We believe that our gesture to the other Allergan owners makes an extraordinarily strong statement about our belief in the long-term value of this highly strategic business combination.”
Of course, the saddest part of this battle between Valeant and Allergan is you never really know if the target is trying to defend itself against a deal it knows to be destructive or if it is just playing its well-rehearsed part in a negotiating dance to obtain a higher price. But if Allergan sells, you know the outcome.
In a fitting riposte to being cut from the US national soccer team by Juergen Klinsmann, Landon Donovan demonstrated once again why he is the best US soccer player ever: He still has the ability to terrorize opponents by scoring goals. Sunday night he scored two goals and assisted on a third, bringing his MLS total to 158 and becoming the all-time MLS leader in goals. Last summer he broke the US national team record for both most goals and most assists.
Yet Klinsmann judged he wasn't among the top-23 US players to go to Brazil for the World Cup. After cutting Donovan, Klinsmann said, "He has done an amazing job the last ten days he was here. He has done everything right." So the decision must have been made before the camp began?
In Donovan's place, Klinsmann selected 18-year-old German-American Julian Green, who plays in the fourth league in Germany. He has made only one appearance for the US nationals, showing potential but clearly not ready for prime time. Perhaps by 2018 Brooks will be able to help the US team and by 2022 will be in his prime. But who knows? Does anyone recall the hype around Freddy Adu being the future of US soccer?
For most US fans, the future is now. No one will be satisfied to wait until 2018 if the US gets knocked out early in Brazil.
So put yourself in Klinsmann's shoes. It's the second game of the World Cup in Manaus, Brazil, deep in rain forest where the temperature is 92 and the humidity is 96%. The pressure cooker of the World Cup far exceeds the challenges of the weather. Only five of your players have ever been to a World Cup before, and the first timers are very nervous.
After 60 minutes, your team is down 1-0 against mighty Portugal. You desperately need a goal to have any chance of advancing to the second round. Your players are tired and frustrated by being pushed back by Portugal's unceasing attacks. Up front, Jozy Altidore has done nothing all night; Clint Dempsey is pulling back to deep midfield because he is so closely marked he hasn't seen the ball; Michael Bradley is pinned in the defensive zone trying to mark Cristiano Ronaldo; and Donovan's replacement, left midfielder Alejandro Bedoya, is exhausted trying to move up and down the flanks without success. You look at your bench. Who would you put in to give your team a much needed spark? Julian Green or Landon Donovan? The answer seems obvious.
The real reason Klinsmann cut Donovan isn't about having the best 23 players on your team. Klinsmann needs to be the only person on the stage, to be the unchallenged king of US soccer. The problem with Donovan is that he is too highly respected by US players. (Have you heard the disappointed comments from goalkeeper Tim Howard and superstar Michael Bradley about Donovan being cut?) He is too popular with US fans who adore him. The media loves him. In fact, he is too honest with the media about where he stands, and how hard he is working to make the team.
The reality is that Klinsmann never forgave Donovan for his sabbatical in 2012. To Klinsmann, this showed that Landon wasn't committed. Well, if you had devoted your life to soccer for 365 days per year for 25 years since you were five years old, if you had the pressure of carrying all the hopes for US soccer on your shoulders since you were 17 years old, and if you had literally saved the US from an early send off with your last minute miracle goal against Algeria in the 2010 World Cup, wouldn't you want a sabbatical? In fact, when Klinsmann finally gave Donovan a chance with the US team, he dominated the Gold Cup last summer, being named MVP, and scored the winning goal over Mexico that enabled the US to qualify for the World Cup.
Klinsmann is sending a clear message to all the wannabe soccer players of America: you must be 100% dedicated to soccer and have nothing else in your life. If you don't make it, like 99.9% of the aspiring kids, well, sorry. It's too late to graduate from high school. College is out of the question. But we are in need of some good ball boys, so you may want to apply there.
Are you interested? If so, you should ask Landon Donovan to share his wisdom.
If Klinsmann wants to do well in Brazil, he needs to find a way to get Donovan back on the team. He would be in my starting eleven, at left mid. Paired with Dempsey and Bradley, the US might have a chance to score some goals. After all, Donovan has scored more World Cup goals than Ronaldo, Lionel Messi and Wayne Rooney combined. That should carry more weight than an 18-year-old rookie.
Very proud of my wife Penny who continues to champion integrative medicine. Yesterday she opened the new Penny George Institute at New Ulm (MN) Medical Center, part of Allina Health. Full article
On Saturday I was deeply honored to receive an honorary doctorate from Mayo Medical School and to give the commencement address. My subject was “Challenges for the New Generation of Physician and Scientific Leaders” in which I challenged the graduating class of MD/PHDs, MDs and PHDs to step up to leadership roles to transform the nation’s health care system. The text of my remarks can be found here.
Is the role of leading large pharmaceutical companies to discover life-saving drugs or to make money for shareholders through financial engineering? Pfizer claims “both,” I don't believe pharmaceutical companies can create long-term shareholder value by focusing solely on chasing lower tax venues and cutting research and development spending. Read more in my New York Times Dealbook article.
Last night I was deeply honored to receive the Bower Award for Business Leadership from The Franklin Institute along with eight very distinguished scientists. This was the greatest recognition of my professional life.
Looking over the list of previous winners of this award – which includes many of my roles models like Jim Burke of J&J, David Packard of H-P, Roy Vagelos of Merck, and more recently, Bill Gates and Mike Dell – I don’t feel deserving to be recognized among them, but I am deeply humbled.
During the day I also had the opportunity to give an address on “Becoming a Global Leadership” and to talk about the changing role of capitalism and the responsibilities of global companies in the 21st century, plus make a visit to Wharton.
All in all, it was a very special day, and I was very pleased to have Penny be there for the entire time.
Full Press Release
Franklin Institute Awards Bower Award for Business Leadership
Building a great board is a most difficult task. It takes a great deal of time on the part of the board members and the CEO. But it is the key to a strong system of governance. Read my full article from Directors & Boards magazine on transitioning a board's makeup here. Your feedback is welcome.
The “activist hedge fund” is a new breed of shareholder that has emerged in the 21st century, leading to increased pressure on corporate executives and boards through the strategy of taking on more debt and paying out more to shareholders. Because these activist shareholders are generally seeing positive returns and institutional investors are following their lead, it’s clear hedge fund activism is here to stay. Rather than resist the activist shareholder, CEOs and boards must adapt to activist interventions and use them to improve their organizations.
In a new article for Harvard Business Review, Jay Lorsch and I explore the hedge fund activism trend and identify six ways to fend off activist challenges drawing from real examples of companies including PepsiCo, Target, Novartis, Whole Foods, and P&G:
- Have a clear strategic focus and stick to it.
- Analyze your business as an activist would.
- Have your external advisers lined up in advance and familiar with your company.
- Build board chemistry.
- Perform in the short run against declared goals.
- Don’t dismiss activist ideas out of hand.
Read the full blog here. Your feedback is welcome.
Put yourself in Mary Barra’s shoes: After 33 years with the company, you have been CEO of General Motors (GM) for just two weeks – the first operating executive in 30 years to be CEO and the first female. You are determined to transform the moribund GM culture that led the company into bankruptcy by focusing on superior vehicles that meet your customers’ needs with design, quality, and most of all, safety.
Then you learn that the company has a major safety problem with ignition switches on the Chevrolet Cobalt that has caused 12 deaths, and you must recall 1.6 million vehicles. Your investigation uncovers that GM employees have known about this for 12 years but the problem was never surfaced – all to save $1 per car.
You recognize immediately the potential consequences: angry customers, negative publicity, and an array of liability suits, Congressional investigations, and significant financial impact. You recall how Toyota’s quality problems impacted its reputation and cost the company more than $1 billion.
You know there is likely much more looming below the surface. Amid this uncertainty you are determined to be open and honest with your customers and the general public, yet you don’t have all the facts. How can you go public without complete answers and solutions?
The pre-bankruptcy GM often had similar problems but its leaders refused to face reality. Mary Barra is a very different kind of CEO: she is determined to lead GM into a new era that focuses on customers first and sets new standards of transparency in providing the safest, highest quality vehicles. I had the privilege of getting to know her last summer when she attended my Harvard Business School course, “Leading Global Businesses” while she was GM’s chief of worldwide product development.
Thus far, Barra has performed remarkably well under the mounting pressure. She has stepped forward and acknowledged the problems, and taken full responsibility for them. Unlike the old GM, she isn’t hiding behind lawyers and PR specialists. Rather, she has spoken directly to GM’s customers and apologized for what has happened, expressing empathy by admitting that “something went very wrong … and terrible things happened.”
When Congressional hearings begin on April 1, Barra isn’t sending a subordinate: she will testify herself. She has promised to release findings of an internal investigation examining the problem’s root causes and why no action was taken. “Our overriding goal is to be transparent,” Barra said.
Barra is using this crisis to transform the old GM culture. In early March, she wrote to employees: “Our company’s reputation won’t be determined by the recall itself, but by how we address the problem going forward … What is important is taking great care of our customers and showing that it really is a new day at GM.”
To signal her determination to change GM’s culture, she appointed a new chief of global vehicle safety. She has assigned 50 employees to GM’s technical center to handle customer inquiries about safety and is holding daily meetings to oversee the recall. Using decades of experience in designing GM’s vehicles, she is focusing on understanding how the defect occurred and why it took over a decade to bring it to the public’s attention.
With so many problems like GM’s surfacing in the past decade, the American public has lost trust and confidence in the integrity and transparency of corporate leaders. In the automobile industry alone, the public still has raw memories of Ford’s Jacques Nasser blaming Firestone tires for the rollovers of Ford Explorers that caused 273 deaths, and denials of Toyota and Audi about problems with their vehicles.
It takes a long time to regain consumer confidence. By being open and transparent about GM’s problems, Barra has aligned herself with her customers and ameliorated public outrage. Acknowledging there is no quick-fix for these problems, Barra said “We have apologized, but that is only one step in the journey to resolve this … We have much more work ahead of us.” To reinforce her commitment, she announced the recall of 1.7 million newer GM vehicles suspected of carrying faulty airbags.
Barra recognizes regaining the trust of GM’s customers is far more important than the billions of dollars in lawsuits and fines that GM may incur. She weathered decades of “financial engineers” in the CEO’s chair who focused on short-term profit instead of building great products. She has been at GM long enough to know how difficult it will be to change GM’s entrenched culture. To change GM’s culture from its inward-looking, short-term focus, she has to be the role model for all employees of how to treat customers, especially during a crisis.
Mary Barra recognizes that “a burning platform” like this one offers a golden opportunity to convert GM’s culture permanently into a passionate focus on vehicles that make customers’ transportation safer and more enjoyable. Demonstrating her visionary approach to leading GM, Barra says, “We will be better because of this tragic situation, if we seize the opportunity.”
She has the leadership, wisdom, and commitment to do just that.