The disregard for children's health that Mylan CEO Heather Bresch demonstrated in her testimony to the House Oversight and Government Reform Committee directly harms consumers.
Less directly, Mylan's exceptionally high price increases erode public confidence in all medical companies, including those investing billions in research to help people suffering from life-threatening diseases.
When companies like Mylan, Valeant and Turing Pharmaceuticals — which have grown profits through financial engineering, not drug discovery — take advantage of loopholes in our health-care system, they create public outrage against all medical companies. I have a growing concern this outrage will have dire consequences for research-based pharmaceutical companies, and could even lead to price controls.
Rather than acknowledging her mistakes in raising EpiPen prices 500 percent from $100 to more than $600, Bresch has tried to obfuscate her actions by shifting the blame to health plans and pharmacy benefits managers that have instituted co-payment and high deductible plans to keep premiums low for strapped consumers. Mylan's largest price increases came shortly after the FDA pulled its competitors off the market, leaving the firm with a monopoly.
Meanwhile, Bresch claimed Mylan was not making much money on EpiPens while admitting it earned $100 on a net selling price of $274 (after normal discounts). In her testimony she said Mylan earned $100 on a net selling price of $274 (after normal discounts). It turns out that Bresch misstated Mylan's profit on Epipens – it's actually $160, not $100, as the Wall Street Journal reported. That is a profit margin of 60 percent – exceptionally high by any standard. Yet she could not answer basic questions from Congress about revenues from EpiPens and their contribution to Mylan's profits.
Bresch used EpiPen's success to fuel her rapid rise to the CEO's office, yet she proved in that testimony that she is not stepping up to the responsibilities her role demands. Publicly, she led with her chin by saying, "I am running a business to make money" as if she were running a financial fund.
Bresch may feel protected from the wrath of Congress and the public by Mylan's highly unusual governance procedures, established when the company executed a tax inversion to The Netherlands in 2015 after it turned down a purchase offer from rival Teva valued at more than twice today's stock price. Under its procedures shareholders don't get to nominate board members; only the board can do that.
Authentic health-care companies from Mayo to Merck understand they are in business to restore people's health, and if they did that well, profits would follow. Mylan seems to be ignoring Merck founder George Merck's admonition, "Medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear."
At Medtronic, our founder Earl Bakken charged us with "using biomedical engineering … to restore health." As Medtronic revenues grew from $400 million in 1985 to $30 billion today, every CEO has faithfully followed Bakken's mission through good times and difficult ones. Medtronic's proudest achievement over these 31 years is not its growth in shareholder value from $400 million to $120 billion, but fulfilling its original mission by expanding the number of new patients restored each year from 150,000 to 30 million today.
In 1990 in response to public concerns over rising health-care costs, Medtronic instituted a "no price increase" policy. This put pressure on us to reduce our costs while spurring investment in more advanced products. It paid off with rapid growth and high profits, which were invested in research and development, expansion into emerging markets, and acquisitions to broaden the company's base.
One of Bresch's only defenders in this experience is disgraced former hedge-fund manager Martin Shkreli, who resigned as CEO of Turing after his outrageous 5,500 percent price increases on an AIDS drug fueled public anger. To Bresch's credit, she tried to answer questions, while just Shkreli smirked in his Congressional appearance while taking the Fifth Amendment. He later arrogantly called the congressmen, "imbeciles." The public furor these bad actors have stirred up will not subside soon, especially in this election year, and are stimulating legislative actions rather than market-based solutions.
Pharmaceutical companies have long argued that they need patent protection and pricing freedom in order to justify returns on large investments in research. Yet that argument falls flat in the cases of Mylan, Valeant and Turing, which historically have not invested in research. As long as these types of companies stay in news, public pressure will mount for government price controls or at least the ability to negotiate prices. The unintended consequence of such actions could be cutbacks in high-risk research aimed at curing and healing the most threatening diseases that require high returns to justify high costs.
In contrast, the major pharmaceutical companies base their success on high-cost, high-risk science with long lead times and no assurance of returns. In recent years some short-term investors have argued for cutting back research and simply buying drugs from others. Yet those who have committed to research without hesitation — Merck, Amgen, Genentech and Novartis, just to name a few – have created breakthrough drugs that saved millions of lives and generated high returns on their investments for their long-term shareholders.
With pharmaceutical prices now under public scrutiny, responsible leaders of medical companies should call for and demonstrate restraint in setting prices for their products, especially when they enjoy protected positions. Thus far, the only CEOs to speak out publicly against these abuses are GSK's Andrew Witty, Merck's Ken Frazier and Allergan's Brent Saunders. They should be voluntarily joined by other CEOs and industry associations like PhRMA and AdvaMed.
The time for health care's leaders to act is now, before Congress acts for them.
Business leaders have been far too quiet on this key issue.
With the presidential election looming, this much is clear: Populism is the big winner in 2016, and America’s global businesses may be the biggest loser.
Donald Trump claimed the Republican nomination on the strength of a candidacy opposed to free trade. Faced with the insurgent candidacy of Bernie Sanders, former Secretary of State Hillary Clinton, shifted her positions, most notably now opposing the Trans-Pacific Partnership (TPP).
Business leaders face a dilemma: what should they do when both candidates are spouting positions that are directly contrary to their interests? Thus far, they are remaining silent, assuming they can recover after the election through an inside game. This may be a historic misjudgment on their part.
For the past quarter-century, global trade has been the engine of American business growth and its dominance of numerous global markets. Rather than remain silent, business leaders should offer rebuttals, speaking out now to provide policy solutions for the new administration. Let’s look at some of the most vital areas:
Trade has created millions of jobs in the U.S., far more than jobs lost. The U.S. Chamber of Commerce points out that NAFTA alone created 5 million jobs. Other experts warn that the massive 45% tariff on Chinese imports that Trump proposes would cause a trade war with China striking back with excessive tariffs of its own or banning imports from the U.S. altogether. High tariffs on Chinese and Mexican goods would raise prices for U.S. consumers, hurting lower-incomes families who shop at Walmart (WMT) or Target (TGT).
As trade has opened up, American companies dominate the list of the world’s most valuable companies. At the end of 2015, 579 of the 2,000 largest companies are U.S.-based. Abandoning free trade risks both jobs and economic value creation.
Technology and productivity gains, not trade, have held down job creation during the last decade. For example, it takes only 10% as many workers to build a Ford as it did 20 years ago, thanks to automation. Meanwhile, the U.S. auto industry is booming, producing record numbers of vehicles as the Big Three have regained competitiveness with foreign makers. Communications advances have made global outsourcing easier for large U.S. firms who can offshore lower-value jobs, such as customer care or software QA, to cost-effective locations. At Medtronic, we found every factory worker added in our overseas plants created three new jobs in the U.S. in R&D, manufacturing processes, marketing and sales. Silicon Valley companies have an even greater ratio.
Watch Donald Trump’s speech on trade:
U.S.-based companies hold more than $2 trillion of cash overseas, because they refuse to pay both overseas taxes and the higher U.S. corporate tax rate of 35% to repatriate the funds. Meanwhile, this money is not being reinvested in the United States. This dysfunctional system makes U.S. companies more valuable to foreign acquirers than their U.S. shareholders, and has caused several companies to relocate their legal headquarters outside of the U.S.
The U.S. could fix this problem by reducing corporate tax rates while eliminating loopholes in tax policy. Short-term, the government should create a foreign income tax repatriation holiday of taxes at 10-12% for companies with specific plans to reinvest the savings in the U.S. My Harvard Business School colleagues, Michael Porter and Jan Rivkin, would go a step further with territorial taxes that tax profits where they are earned. This would eliminate double-taxation of profits, thereby enabling American companies to redeploy capital in smart investments at home. At the same time, doubling investment tax credits for new tangible assets and increased research and development would strengthen the technology advantage for America’s global companies.
While unemployment has dropped 50% since President Obama took office, millions of Americans that lost their jobs in the 2008-09 recession lack the skills for today’s positions. The failure of the U.S. Congress to authorize funds for job retraining after the 2008-09 recession has contributed to these problems. Our K-12 and higher education systems also do not produce the talent that innovative companies need to grow.
In addition to job retraining, the U.S. needs to strengthen its vocational and technical education system, encouraging more high school students to consider these alternatives. Some companies, such as AT&T, are partnering with schools like Georgia Tech to offer specialized online training. The U.S. could do much more to ensure that educational institutions provide the mentoring, faculty and facilities that produce the types of workers companies clamor to hire.
Isolationism Won’t Make America Great
Concerns about wage stagnation among U.S. workers are legitimate, but they are only part of the broader economic story. Suppressing free trade will harm these workers much more than the companies who can access overseas labor.
Corporate leaders need to take on the importance of making American companies fully competitive in global markets. A pro-growth agenda—one that educates workers for the future, incentivizes investment and allocates resources effectively through trade—is a far better way to navigate the next decade than practicing the politics of isolationism.
Business leaders have an important case to make. There are only two months left to speak out.
Bill George is Senior Fellow at Harvard Business School, former Chair & CEO of Medtronic and author of Discover Your True North.
This article was originally posted on 9/7/16 on Fortune.com.
The Forum was thrilled to have Bill George as our closing speaker on Day 3. Former Chairman and CEO of Medtronic, Senior Fellow at the Harvard Business School, and author of Discover Your True North, Bill discusses finding your own True North – the internal compass that sets one on a path toward their fullest potential as a leader. Today’s global business community calls for leaders who will change the world for the better and inspire others around them to do the same.
This content was originally posted to stthomas.edu on 05/19/16.
With Dr. Glen Nelson's death this month, Minnesota lost a giant who led the building of our health care system for the past 40 years, making health care more effective, accessible, and efficient for everyone.
After graduating from the University of Minnesota Medical School, he began his career as a surgeon at Park Nicollet Medical Center. Nelson built Park Nicollet into a progressive multi-specialty practice as its president and CEO.
During the early 1980s, he helped create the health maintenance organization American MedCenters, becoming its chairman and CEO. He was part of the Jackson Hole Group, a leading proponent of managed competition in health care that influenced President Bill Clinton's health care plan and President Obama's Affordable Care Act. Joining Medtronic in 1986, he teamed with CEO Win Wallin and myself to transform Medtronic from a pacemaker pioneer into the world's leading medical technology company.
From 1986 to his retirement in 2002, Nelson led Medtronic's introduction of 12 major advances in medicine. The company achieved breakthroughs that included the pacemaker-cardioverter-defibrillator and treatments for heart failure, incontinence, and Parkinson's disease.
I first got to know Glen in the 1970s, but our deeper relationship began in 1989 when I joined Medtronic. We formed a partnership, with Glen taking the lead on all aspects of medicine and technology, both internally and through acquisitions and mergers. We teamed together on strategy and organization, and in resolving the most difficult issues facing the company, from FDA relationships to thorny quality and people issues. He served on the Medtronic board for 20 years, guiding it to aspire to greater heights for the company.
In no small measure, he played a leading role in the company's growth from $400 million in revenue to its current size of $29 billion in revenue and market capitalization of $112 billion, making it one of the nation's most valuable companies.
Glen's impact as a human being far exceeded his tangible accomplishments. To me, he was a friend, colleague, and mentor. When I was elected CEO of Medtronic in early 1991, I asked Glen to be my partner, not a subordinate, and to consult with me on all decisions, large and small.
He was the smartest and wisest person I have ever known. When I arrived at Medtronic, I had 25 years of high-tech experience but knew nothing about medicine. I relied on Glen to teach me the medical business and to explain how our products worked inside the human body. We worked together on a wide array of acquisitions, as we endeavored to broaden Medtronic's technology to treat diseases as diverse as cerebral palsy, sleep apnea, diabetes and spinal surgery.
In 1998, Medtronic faced a growth crisis; expansion in our core business had slowed to less than 7 percent, well below our historic 18 percent growth rate. Several key executives recommended retrenching to cardiac rhythm management, which would have spelled Medtronic's death knell as an independent company.
Instead, I asked Glen to ramp up our acquisition efforts. Within months, we made six major acquisitions totaling $13 billion and transformed Medtronic from a cardiac rhythm company into the world leader in medical technology. Had it not been for Glen's perceptive judgment and his skill at working with entrepreneurs, this never would have been possible.
After retiring from Medtronic, Glen devoted himself to helping young entrepreneurs translate their ideas into successful companies. At his peak, he served on 13 boards, as he became the "go to" person for aspiring innovators. He could never say no and always took time to help anyone who asked. No wonder so many people loved and admired him.
Glen Nelson was a visionary, entrepreneur and pioneer. More than anyone else, he understood the intersection of medicine and technology and what advances would work inside the human body. Far beyond that, he was a compassionate leader who strove to help people both inside and outside Medtronic.
His loss will be widely felt locally and nationally, as he leaves an unparalleled legacy for others to emulate in helping people create medical breakthroughs.
Bill George, the former chairman and CEO of Medtronic, is senior fellow at Harvard Business School and author of "Discover Your True North."
In health care, there are no shortcuts and no quick paths to market.
Health care companies face challenging times as they adapt to the Affordable Care Act (ACA) while still delivering for customers and shareholders. Most companies have navigated these fast-changing times well. But three bad actors – former Turing CEO Martin Shkreli, former Valeant CEO Michael Pearson, and Theranos’ Elizabeth Holmes – threaten to drag down the legitimate companies.
The Price Gouger
Pharma’s bad boy Shkreli became the poster child for abusing patients through price gouging by hiking the price of Daraprim, a 62-year-old HIV/AIDS drug, from $13.50 to $750 per pill. Then he had the audacity to flaunt it by saying, “I wish I had raised prices more.” Merck CEO Ken Frazier called Shkreli “a hedge fund guy masquerading as a pharmaceutical executive.”
Shkreli incurred the wrath of the general public. Even presidential candidates rebuked him. His actions had broad implications because they threatened the already unsteady alliance between big pharmaceutical companies and the Obama Administration. These pharmaceutical companies had agreed to pay $70 billion to support ACA in exchange for a legal restriction on the U.S. government in negotiating drug prices.
The “Quick Fix” CEO
Valeant’s Pearson also raised prices 500-800% on older drugs, but his flawed approach went much further. He claimed his company did not need to do research on new drugs because it could simply buy older drugs and take over companies like Salix and Bausch & Lomb. His business model called for limiting drug development expenses to 3% of revenues and paying only 3% in taxes through a series of clever tax schemes. Big investors like Sequoia, Pershing Square, and Value Act talked up the stock as Valeant’s market capitalization rose to $91 billion. And several other mid-sized pharmaceutical companies copied Valeant’s approach.
Those with a long-term view called out Valeant’s short-term game. Presidential candidate Hillary Clinton ran ads attacking the company. Warren Buffett told CNBC, “You wouldn’t want your son to grow up like Mike Pearson.” Buffett’s partner, Charlie Munger, called Valeant a “sewer.” The game ran out when a short-seller exposed Valeant’s distribution through specialty pharmacies that forced enormous price increases. In the past six months, Valeant investors have lost $81 billion, dragging down the activist funds that propelled the company’s growth.
Theranos’ Holmes claimed her company could render obsolete the one billion blood draws done in the U.S. with a simple prick of the finger – an exciting prospect that caused investors to value her private company at $9.1 billion. Her board of directors included several former U.S. senators and former presidential cabinet members, but few with experience in medical technology.
With her story and her glamour, Holmes became the darling of the media and Silicon Valley moguls. Theranos went directly to the consumer market by cutting big deals with Walgreens and Safeway, but Holmes never produced any test data to validate the claims, citing confidentiality concerns. The media passively accepted her lack of transparency.
Then the Wall Street Journalpublished an expose calling into question the effectiveness of the company’s testing methods and scrutinizing its resistance to share test results to back up its claims. WSJ published this piece in spite of heavy pressure from Theranos’ legal team, which was led by high-profile lawyer David Boies. Since the WSJ article was published, the company has imploded. Now the U.S. government has launched a criminal investigation to determine whether Holmes intentionally misled her investors. Thus far, Holmes has yet to produce validated test results proving Theranos’ claims.
A Hippocratic Oath for Health Care Companies
While these three companies and their leaders will be mere footnotes in business history, they cause great harm to legitimate companies trying to help patients. Their missteps confirm the importance of putting patients first, rigorous testing, FDA oversight, transparency, and pricing products to support patient access, regardless of their income bracket.
When scandals occur, they have a negative impact on companies that are doing things right. The subsequent public outcry tends to harm the committed, experienced companies, as politicians paint all health care companies with the same brush. This leads to delays in the FDA approval process for the most scientifically minded companies, denying patients products they need. It also creates public pressure for price controls.
Theranos, Valeant, and Turing took multiple shortcuts, and they won handsome short-term rewards for their behavior. But others who jumped on board have now lost billions. Neither Shkreli, Pearson, nor Holmes had any health care experience before taking over their companies: Shkreli worked at hedge funds, Pearson was a McKinsey consultant, and Holmes was a 19-year-old freshman at Stanford. Facebook’s Mark Zuckerberg’s motto of “move fast and break things” may be valid for social media, but it doesn’t work for heart surgery, drug development, or medical devices.
The first rule of the Hippocratic Oath all doctors take is, “First, do no harm.” Why did Theranos, Valeant, and Turing assume so much risk? They focused on the short-term at the expense of their companies, their patients, and the health care industry. These companies proved what others have known all along: when you’re dealing with human health, shortcuts backfire.
Worst of all, these three companies fostered the impression that health care companies try to take advantage of an unsuspecting public. As a result, legitimate medical entrepreneurs now have trouble finding the funding required to do rigorous clinical trials in leading academic medical centers—something that Theranos refused to do.
For capitalism to work in the medical field, companies must be able to make the long-term investments required for breakthrough bio-pharmaceuticals and medical therapies. There are no shortcuts and no quick paths to market, but the long-term payoff can be enormous.
Investors with a fiduciary responsibility to their clients should carefully evaluate the leaders of companies they are investing in to ascertain their medical expertise and soundness. Entrepreneurs, who are essential to foster medical breakthroughs, need to learn the lessons from these bad actors and avoid taking shortcuts when human lives are at stake. We need to be patient with healthcare timelines, so we can enjoy the tremendous benefits that legitimate companies can offer.
Bill George is Senior Fellow at Harvard Business School, former Chairman & CEO of Medtronic, and author of Discover Your True North.
This article was originally published by Fortune.com on 5/10/16
Earning money and having power over others are easy ways to gauge success. But they’re also limited.
Open your eyes, look within. Are you satisfied with the life you’re living? —Bob Marley
In my forties, I was unhappy with my career and where it was heading.
Driving home on a beautiful fall afternoon, I looked in the rearview mirror and saw a miserable person—me. On the surface, I appeared to be confident and successful, but inside I was deeply unhappy.
For 20 years, I had been a successful executive on a fast track to the top, or so I hoped. I was getting closer to that goal, as I took on responsibility for Honeywell’s most challenging businesses. At the time, I was on my third set of turnarounds, responsible for three groups, nine divisions, and 18,000 employees. Yet I began to wonder if Honeywell was the right place for me. As executive vice president of Space and Aviation Systems, my team and I uncovered losses exceeding $500 million that had not been recognized or accounted for properly. Presenting this news to Honeywell’s board caused a great deal of concern. As I said to myself repeatedly, “I didn’t create this mess. I’m just the guy who has to fix it.” I always saw myself as a builder, not a turnaround expert, but I did what needed to be done to restore Honeywell’s businesses to long-term health.
But on that autumn day, I realized I wasn’t passionate about Honeywell’s businesses. Even worse, I was becoming more concerned about becoming CEO than being a leader who could make a positive impact on the world. I faced the reality that Honeywell was changing me more than I was changing it—and I didn’t like the changes I saw in myself.
David Brooks’ The Road to Character challenges us to consider our resume virtues against our eulogy virtues. Resume virtues are what we write about ourselves to measure up to the world’s expectations. Eulogy virtues are what others say about us at our funeral: what kind of person we were and how we cared for others.
Many of us focus on resume virtues because they’re easy to measure and give us superficial self-esteem. Earning a lot of money, receiving promotions and prestigious titles, and having power over others are easy ways to gauge success. But more difficult tasks—like making a positive difference in the lives of others or becoming the type of person you want to be—have few measurable benchmarks.
When I was at Honeywell HON -0.16% , I had all the trappings of success, but my life lacked the significance I yearned for. That day I recognized I needed to get back to what I call my True North. Your True North, which is derived from your beliefs, values, and the principles you use to lead others, is your internal compass. It’s unique to you and it represents who you are at your deepest level.
With my wife Penny’s encouragement and support from my men’s group, I reopened job discussions with medical device company Medtronic MDT 0.25% , which was at the time a much smaller company but one with a passion to help millions of people live a full, healthy life. After having interviews with the CEO, the founder, and board members, I accepted Medtronic’s offer and became president and chief operating officer at the company. Two years later, I was elected CEO.
At Medtronic, I found a place—or it found me—that let me focus on significance over success. Medtronic’s mission inspired me from the moment its founder Earl Bakken described it to me. When I arrived in 1989, Medtronic helped restore someone to health once every 100 seconds. By the time I completed my tenure in 2002, that figure had fallen to five seconds. Today it is down to one second, with 30 million new patients every year. That’s a much more meaningful metric than a stock price.
What’s significant in your life may change over time. After retiring from Medtronic in my late 50s, my purpose changed from leading large organizations to helping other people lead authentically by discovering their True North. Teaching authentic leadership at Harvard Business School the past 15 years, I receive a modest salary and have no positional power, yet I find great significance in the work I am doing. As one friend told me, “Bill, you seem to take vicarious pleasure in the accomplishments of others.” Indeed, I do.
While helping people lead authentically is my mission, it doesn’t impede other areas of deep importance to me. My family, friends, colleagues, and mentees provide consistent sources of significance. In 1975, I began a men’s group with four close friends after a weekend retreat, and four others soon joined us. Forty years later, we’re still meeting weekly to discuss our spiritual beliefs, our aspirations, career challenges, marriage and family problems, and the process of personal development.
How will you measure your life? That’s the title of my HBS colleague Clay Christensen’s latest book. Are you striving so hard to find success that you’re playing the world’s game rather than fulfilling your core desires? If so, I encourage you to pull back and reflect on your life. Go on a spiritual retreat or start a journal. Better yet, engage a mentor, therapist, or close friend to dig deep into what’s most important to you.
This is hard work, as you peel back the layers of your inner self and learn to accept yourself fully, weaknesses and all. It means digging deeply into past wounds, failures, and disappointments, and discovering what you learned about yourself that can guide you going forward. To get started, think about the end of your life and hypothesize your granddaughter asking you, “What did you do to make a difference in the world?” What will you tell her?
The time to start acting on that is now, not then. Life beckons you. Don’t wait until it’s too late. You may discover that what’s missing in your life is not success, but significance. We only go around once in life, so we need to seek all the wonders it has to offer.
Bill George is Senior Fellow at Harvard Business School, former Chairman & CEO of Medtronic, and author of Discover Your True North.
This article was originally published on Fortune on 4/27/16.
Iger places faith in his creative directors and allows them to propose original ideas.
In 2015, Bob Iger, CEO of Disney DIS -1.58% , told his top 400 executives, “The riskiest thing Disney can do is maintain the status quo.” Iger knows that simply leveraging the traditional Disney brands like Mickey Mouse and adding theme parks is insufficient to sustain the company’s growth.
As organizations grow, their capacity for innovation tends to stagnate—as my Harvard Business School colleague Clay Christensen explained in The Innovator’s Dilemma. Iger would not consider himself an innovator in the class of Walt Disney or Steve Jobs, but he is a master at identifying, motivating, and supporting creative leaders.
Why are there so many innovators, but so few innovation leaders?
Today, there are tens of thousands of innovators, but few outstanding innovation leaders. Those companies with innovation leaders at their helm, like Google, Apple, Amazon, Gilead, Disney, 3M, Tesla, and my former company Medtronic, have sustained their growth and performed exceptionally well. Meanwhile, one-time innovation pioneers that lost their mojo (such as Hewlett-Packard) have stagnated.
Startups, smaller companies, and academic institutions currently drive most of our nation’s innovation. It doesn’t have to be this way. Companies like Google GOOGL -0.59% , 3M, Disney, and Apple show that corporations can stay creative even as they grow large. Many people call these companies “experts on innovation,” but the truth is a bit more nuanced. These organizations don’t just develop innovative ideas; they develop innovation leaders.
Before Iger became CEO of Disney, his predecessor used a disciplined, “factory-like” process to produce films. Business development teams came up with ideas and then handed them to directors. Iger rearranged the process, placing faith in his creative directors and enabling them to propose original ideas.
Iger isn’t the only leader at Disney inspiring creativity. Disney subsidiary Pixar has two of the world’s finest innovation leaders in Ed Catmull and John Lasseter. Thanks to their leadership, Pixar has created the 12 most successful animated films of all time, including the 2016 Oscar winner, “Inside Out.” After he was fired from Apple AAPL 1.03% , Steve Jobs bought controlling interest in Pixar, and he learned first-hand from Catmull and Lasseter how to lead innovators. This experience paved the way for Jobs’ string of successes when he returned to Apple in 1997.
During a corporate board trip I took in 2013 to Pixar with Iger, Catmull, and Lasseter and learned first-hand why they are so successful. We visited their teams—the first-line innovators that create Pixar films – and saw how these innovation leaders interacted with them. Catmull said that as part of the merger, Iger asked him and Lasseter to take over Disney Studios because it had become bureaucratic and slow-moving. In turn, they revived its fortunes – a success which was evident in the popular 2013 film, “Frozen.” Iger didn’t stop with Pixar, though. He later bought Lucasfilm and Marvel Entertainment, and retained their innovation leaders.
Examining Alphabet (nee Google), we see the same caliber of leaders. The former CEOs of Nest, Genentech, and Bloomberg all work for Alphabet. They operate within a common corporate framework because CEO Larry Page, who is himself a great innovation leader, gives them the latitude, resouces, and teams to engage in highly risky projects.
So, what are the key qualities of innovation leaders? What makes them so effective at bringing out the creativity in others? After all, the characteristics of great innovation leaders are dramatically different from traditional business managers. The following seven elements are the key ingredients to innovation leadership.
Passion for innovation. Innovation 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. Thus innovation leaders are sometimes willing to sacrifice near-term financial results to seize longer-term opportunities.
Companies like Apple and Alphabet find ways to shield their leaders from the day-to-day demands of investors. Google’s “X” runs the moonshot projects of Alphabet, which include driverless cars, drone delivery, and robotics. The division doesn’t measure its success by dollars created. Instead, it focuses on “speed of failure.” By changing the metrics of success, Page and co-founder Sergey Brin are able to balance fiscal discipline with the need to give innovation leaders a safe space to incubate new ideas.
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 MDT 1.23% , 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. Innovation leaders must be highly engaged with their 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. My HBS colleague Amy Edmondson says groups where members can air wild ideas are “psychologically safe.” In such settings, participants feel respected even when their ideas are rejected, and they don’t fear airing opposing views. The more failed ideas that come up, they more likely the group will land on a successful one.
Willingness to tolerate mavericks and protect them from middle management. The best innovators are rule-breakers who don’t fit the corporate mold. These people are often threatening to middle managers, many of whom adhere to standard practices. That’s why innovation leaders must protect their mavericks’ projects, budgets, and careers rather than forcing them into traditional management positions.
Opening up time for creativity and brainstorming. Innovation leaders understand how to give their people the time to think—the difference between “maker time” and “manager time.” As Paul Graham wrote, managers break up their time into 30- to 60-minute chunks, feeling satisfied with tight schedules of meetings throughout the day. For makers, this is disruptive, because it is impossible to generate the time and freedom to be creative. Innovative thinkers need a few consecutive hours to enter “flow” – a mental state in which people are fully immersed in the creative process. Innovation leaders fit meetings around the needs of their creative teams. For instance, Steve Jobs held three-hour meetings on marketing – an unusual amount of time in a CEO’s schedule.
Being self-aware and mindful. The best innovation leaders understand the importance of self-awareness. Without knowing their limitations, they’ll be unable to bring out the strengths of those around them. Honest feedback is often hard to get because many people tell leaders what they want to hear rather than the unvarnished truth. For this reason, many leaders use 360-feedback from their peers and subordinates.
Mindful practices such as daily meditation, prayer, journaling, or jogging also helps leaders to be more creative and open to new ideas. For Iger, this means waking up every morning at 4:30 a.m. to be alone. For Jobs, this meant Zen Buddhist meditation. As I have learned from my personal practice of meditation, mindfulness helps me reflect on myself and my ability to lead others. Many of my strongest ideas have come from meditation.
Innovation leaders don’t create innovations themselves, but they are effective at leading creative people. While many companies claim they are innovative, few successfully develop leaders who understand how to lead creative teams. Many large companies often stifle innovation leaders. Short-term pressures, zero-sum success, and an unhealthy focus on the status quo all prevent innovation leaders from emerging.
Iger calls creativity “the heart and soul of Disney,” but, in truth, innovation leaders are at the core of every creative company. Without their leadership, companies begin to manage for short-term results and eventually decline. To stay ahead of their competitors, companies must have innovation leaders who inspire the creativity of others.
Bill George is Senior Fellow at Harvard Business School, former Chairman & CEO of Medtronic, and author of Discover Your True North.
This article was originally published by Fortune.com on 4/4/16.
MPR News host Kerri Miller talks with Bill George, Senior Fellow at the Harvard Business School, and Washington University law professor Adam Rosenzweig about corporate tax inversions and why the issue seems to have taken a timid foothold in this year's presidential election. With both Democrats and Republicans taking aim at companies who employ tax inversion, Kerri delves into the reasons why, what the concerns are with this sort of corporate maneuvering and what might be done to get at the root causes behind U.S. companies taking their operations overseas.
CNBC Contributors Jeffrey Sonnenfeld of the Yale School of Management, and Bill George, former Medtronic chairman & CEO, talk about the leadership challenges facing Alphabet with the various companies in the corporate structure.
This article was originally posted to CNBC.com on 3/29/16.
Bill George of Harvard Business School, and Jeffrey Sonnenfeld of Yale School of Management, discuss the proxy fight launched at Yahoo by Starboard Value and how the current and proposed boards could do.
This article was originally posted to CNBC.com on 3/24/16.