Posted Sep 21, 2007 by Bill George |
Filed in: Leadership
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.
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.
