Virtually every American institution is facing major crises these days, from declining businesses to evaporating financial portfolios. To get out of these crises, authentic leaders must step forward and lead their organizations through them.
The current crisis was not caused by subprime mortgages, credit default swaps, or failed economic policies. The root cause is failed leadership. New laws, regulations, and economic bailouts won´t heal wounds created by leadership failures. They can only be solved by new leaders with the wisdom and skill to put their organizations on the right long-term course.
Here are seven lessons for leaders charged with leading their organizations through a crisis:
Lesson #1: "Leaders must face reality." Reality starts with the person in charge. Leaders need to look themselves in the mirror and recognize their role in creating the problems. Then they should gather their teams together and gain agreement about the root causes. Widespread recognition of reality is the crucial step before problems can be solved. Attempting to find short-term fixes that address the symptoms of the crisis only ensures the organization will wind up back in the same predicament.
In order to understand the real reasons for the crisis, everyone on the leadership team must be willing to tell the whole truth. As J.P. Morgan CEO Jamie Dimon says, "It´s not sufficient to have one person on your team who is a truth teller. Everyone on the team must be candid in sharing the entire truth, no matter how painful it is." How else can we solve problems if we don´t know acknowledge their existence?
Lesson #2: "No matter how bad things are, they will get worse." Faced with bad news, many leaders cannot believe that things could really be so grim. Consequently, they try to convince the bearers of bad news that things aren´t so bad, and swift action can make problems go away.
This causes leaders to undershoot the mark in terms of corrective actions. As a consequence, they wind up taking a series of steps, none of which is powerful enough to correct the downward spiral. It is far better for leaders to anticipate the worst and get out of in front of it. If they restructure their cost base for the worst case, they can get their organization healthy for the turnaround when it comes and take advantage of opportunities that present themselves.
Lesson #3: "Build a mountain of cash, and get to the highest hill." In good times leaders worry more about earnings per share and revenue growth than they do about their balance sheets. In a crisis, cash is king. Forget about EPS and all those stock market measures. The question is, "Does your organization have sufficient cash to survive the most dire circumstances?"
In the recent financial crisis, Citigroup it ignored the risks inherent in its investments in order to generate fee-based income to prop up 2007 earnings. When the markets turned, Citigroup found itself out of cash and was forced to turn to the federal government to save it from bankruptcy. In contrast, Goldman Sachs anticipated the difficult times built up its cash reserves. When the markets got really bad, Goldman had adequate cash reserves to weather the storm.
Lesson #4: "Get the world off your shoulders." In a crisis, many leaders act like Atlas, carrying the weight of the world on their shoulders. They go into isolation, and think they can solve the problem themselves. In reality, leaders must have the help of all their people to devise solutions and to implement them. This means bringing people into their confidence, asking them for help and ideas, and gaining their commitment to painful corrective actions.
Lesson #5: "Before asking others to sacrifice, first volunteer yourself." If there are sacrifices to be made - and there will be - then the leaders should step up and make the greatest sacrifices themselves. Crises are the real tests of leaders´ True North. Everyone is watching to see what the leaders do. Will they stay true to their values? Will they bow to external pressures, or confront the crisis in a straight-forward manner? Will they be seduced by short-term rewards, or will they make near-term sacrifices in order to fix the long-term situation?
Lesson #6: "Never waste a good crisis." This piece of advice comes from Benjamin Netanyahu, the next prime minister of Israel. When things are going well, people resist major changes or try to get by with minor adaptations. A crisis provides the leader with the platform to get things done that were required anyway and offers the sense of urgency to accelerate their implementation.
Lesson #7: "Be aggressive in the marketplace." This may sound counter-intuitive, but a crisis offers the best opportunity to change the game in your favor, with new products or services to gain market share. Many people look at a crisis as something to get through, until they can go back to business as usual. But "business as usual" never returns because markets are irrevocably changed. Why not create the changes that move the market in your favor, instead of waiting and reacting to the changes as they take place?
Bill´s bottom line: In a crisis we learn who the real leaders are, and whether they have the wherewithal to stay on the course of their True North.
We have a transformative new leader in the White House, but Congressional leadership is playing the same old games as the economy seeks deeper into recession. And the unemployment lines grow . . . and grow . . . and grow.
President Obama understands the urgency and severity of our economic problems, but Congressional leadership does not. Democratic leaders Nancy Pelosi and Harry Reid are using the stimulus package to rewrite social policy, while Republican leaders John Boehner and Mitch McConnell push the same tax cuts that led to this fiscal crisis.
This recession is going to be longer and deeper than anyone acknowledges, but it won´t be corrected by tax cuts or social programs. There are three ways to pull the U.S. economy out of the ditch: 1) jobs, 2) jobs, and 3) jobs.
As bad as job losses were in December and January, they are getting a lot worse. Corporate leaders are recognizing they urgently have to make deep payroll cuts, or wind up in bankruptcy. With General Motors´ car sales down 49% in January, the ripple effects on auto suppliers and dealers are just beginning. At Davos last week, I talked with one steel mogul, who told me that with factories running at 60 percent of capacity, he was forced to lay off nearly 50,000 workers.
By the time GM´s leaders return to Washington on February 17, its $13 billion December subsidy will have vanished in a river of red ink. That river isn´t yet close to reaching its crest. To Americans who just lost their jobs, or fear they are next to go, that five-year-old car doesn´t look so bad any more.
Meanwhile, retail sales are imploding. During January, elite stores like Saks Fifth Avenue had virtually their entire merchandise on sale at 50 per cent or more off. Even so, same store sales declined 24 per cent. How long can that go on without massive store closings and huge layoffs? We´ll soon have so many empty store fronts in overbuilt malls that their owners may turn them into fitness facilities. As corporate travel and conferences get, airlines, hotels, and restaurants will surely feel the pinch.
How do we get the economy moving again? It won´t be with government-guaranteed 4.5 percent 30-year fixed-rate mortgages or $10,000 subsidies for new car purchases. The recently unemployed aren´t going to buy new homes or new autos.
President Obama´s Job #1 is use the stimulus package to create jobs. Not to change social policy, like Speaker Pelosi wants to do. Not to reform tax policy like House Minority Leader Boehner is demanding. And certainly not with "Buy American" clauses to appease labor unions. Foreign leaders at Davos were clear that this will set off global trade wars and lead to further job losses as major exporters like Boeing and Apple find overseas markets closed.
President Obama should ask his budget director to determine how many jobs each line item in the stimulus bill will create, list them in descending order, and draw a line when spending gets to $800 billion. Then forget about everything else - all the pork and all the unnecessary tax cuts. Then he should insist on an "up or down" vote, and challenge liberals and conservatives to abandon their orthodox ideology and act in America´s best interests.
Part of the problem is that business leaders who create jobs do not have a seat at President Obama´s table. Thus far, not a single business leader is part of the Obama team. The president has only held two brief meetings with a politically-correct cross-section of business leaders that provide good "photo ops."
Here´s what happens when business leaders do get involved. IBM CEO Sam Palmisano led an initiative to build the nationwide IT and broadband network. Verified studies show this will create one million new jobs for a $30 billion investment, not counting employment created by innovative companies building on this network. Unlike new roads that create jobs for two years, this investment offers sustainable jobs for twenty years.
Whatever happened to the millions of high-paying jobs in energy, environment, health care and information technology President Obama promised during his campaign? Our future lies in innovation, creativity, entrepreneurship and new company formation.
Our greatest competitive advantage is entrepreneurs like Larry Page of Google and Arthur Levinson of Genentech that create innovative products and services to develop new markets and dominate them globally. With venture capital dried up for entrepreneurs ready to found breakthrough companies, the Obama administration could create a "fund of funds" to get them started in proving their ideas, and use long-term capital gains policies to bring the financiers back to the table.
Let´s refocus the stimulus package on putting Americans back to work so we can rebuild a sustainable, long-term economy.
In spite of the gloom about the economy I witnessed at this week's World Economic Forum in Davos, hope was in the air about a new era of global collaboration resulting from President Barack Obama's inauguration. After a decade of declining respect for American leadership, the time is ripe to get the U.S. back on the track of economic growth, well-run government, and world respect.
In his inaugural address, President Obama called on all Americans to serve their country-a clear message that applies directly to business leaders. In spite of the pro-business orientation of the Bush Administration, every industry and sector has been harmed by the failure to create a fiscally sound, sustainable economy.
As business leaders, we must accept our share of responsibility for this state of affairs. We let self-interest, greed, and instant gratification take precedence over the country's long-term needs. Our failure to provide visionary leadership cost us the trust of the people we serve-our customers, employees and fellow citizens.
President Obama expressed genuine anger over Wall Street bonuses and excessive executive compensation, especially for those taking government money. Calling this "the height of irresponsibility," the President's words stung, but were well deserved. Either corporate board members bring this situation under control or we will abdicate our responsibilities to the government.
As President Obama has moved quickly to fill key government posts with a highly competent group of leaders, it is noteworthy that not a single business leader has been named to a key position, not even Commerce or Treasury Secretary. As a result, business does not have a place at the table.
This does not mean the voice of business is unwelcome. The President has indicated he wants inputs from business leaders, as he received on the stimulus package this past week. But we cannot sit back and wait for the government to propose solutions and then commission our lobbyists to work behind the scenes to shoot them down.
Business leaders need to step up and propose solutions that benefit the entire country. Either we get engaged, or we'll suffer unintended consequences from well-intentioned new programs that don't work in the real world.
Here's a short list of areas where business leaders should contribute to the nation's long-term problems:
Health care. Health care is back on the national agenda. With escalating costs, declining availability, and mixed quality outcomes, employers have been hurt by the absence of sound national policy. The solution is not to take health care away from our employees or to get the federal government to take these problems over. Instead, we should support President Obama's proposal to make health care available to all Americans through the combination of private and public insurance pools.
We need to contribute to creating more efficient and affordable health care, while engaging our employees to take responsibility for living healthy lives. This means supporting an aggressive public health program, supplemented by employer and community initiatives, to cause people to improve their health through regular exercise, nutritional diets, and stress-reduction programs. People with chronic disease should be offered integrated healing plans that combine evidence-based care paths with lifestyle improvements.
Energy and the Environment. The decline in oil prices from $147 to $41 per barrel shouldn't make us complacent about the severity of the energy crisis. Near-term, the best opportunity to reduce dependence on foreign oil is through a massive efficiency program. Increased fuel efficiency and emission reductions for vehicles should be combined with a national initiative to drive efficiency improvements throughout industry and homes. Meanwhile, we need to create cost-effective sources of renewable energy through technology breakthroughs and the formation of startup companies developing innovative solutions.
Financial Services. Business contributed to the current economic crisis by advocating that institutions like hedge funds and instruments like credit default swaps go unregulated and operate without transparency. Lack of "fair value" accounting has shut down the credit markets because no one knows how to value these instruments. Leaders of financial institutions should advocate for full transparency, fair value accounting, and sound regulation in order to restore healthy financial markets.
Innovation. Innovation and entrepreneurship are America's competitive advantages in the global world. Saving jobs that are no longer viable will never restore a sound, sustainable economy. Instead, we need to leverage our strengths by creating new companies and high tech jobs enabling America to dominate high-tech fields while exporting our products and services.
Education. American education is rapidly devolving into a two-tier system that cannot provide enough well-trained employees for the technology age. Nor is it providing an adequate supply of scientists and engineers to compete with India and China. Business should support innovative solutions to K-12 education like Teach For America and expanded grants for engineering and science students.
President Obama's new administration is working to create long-term solutions to all these problems. It's time for business leaders to get behind them with our own initiatives that will restore the U.S. economy to sustainable growth and world leadership.
As former WalMart CEO Lee Scott said in a recent interview in The New York Times, "Businesses have a responsibility to society...There is no conflict between delivering value to shareholders and helping society solve bigger societal problems."
