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Why Leaders Lose Their Way

David Sokol, Mark Hurd, Greg Mortenson, Eliot Spitzer, and Rajat Gupta.  The list of talented leaders at the top of their game losing their way continues to expand. All of these leaders were highly successful in their respective fields and had promising careers ahead of them. For this reason, their behavior is especially perplexing and raises many questions:

  • What causes these leaders who have been known for their integrity and their leadership to engage in unethical activities?
  • Why are they willing to risk great careers and unblemished reputations for such ephemeral gains?
  • Is this simply greed, as many have suggested, or is something deeper going on?
  • Do they think they won't get caught, or could they honestly believe their elevated status puts them beyond the law?
  • Did they get caught the first time they did something inappropriate, or have they been building to this for a long time with lesser actions paving the way?

Despite myriad news articles, I have yet to see one that illuminates what led to such unusual behavior by such successful people. To be clear, I’m not taking a position on the legality of their actions, but rather examining the root causes of their actions.

After the fall of Enron, WorldCom, et. al. in 2003, I became very troubled by what had happened to so many of our corporate leaders. In 2004 I wrote a paper for my new class on "Leadership and Corporate Accountability" at Harvard Business School titled, "Why Leaders Lose Their Way." I’ve excerpted pertinent examples below, which seem very pertinent to today’s cases:

Part I - Why Leaders Lose their Way

 In the seemingly never-ending revelations of corporate scandals that have been exposed since the fall of Enron, the media, politicians, and the general public have taken to characterizing their leaders `as “bad people,” even to the point of considering them evil.  The rest of our leaders have become suspect, as corporate executives are tied for dead last with used car salesmen in terms of the public trust. These overly simplistic notions of “good leaders” and “bad leaders” only serve to cloud our understanding about the nature of leadership in the business world and how good leaders can lose their way. 

Very few people go into leadership in business to cheat or do evil things.  Yet all of us have the capacity to do things we deeply regret unless we develop the means of staying centered within our leadership. These leaders are not bad people; they have just gone astray. 

Before anyone takes on a leadership role, they should first ask themselves two fundamental questions, “Why do I want to lead?” and “What is the purpose of my leadership?”  These questions are simple to ask, yet the process of seeking answers to them is profound and may take decades, even a lifetime, to answer.

If the truthful answers to the first question are simply power, prestige, and money, these leaders may be at risk of relying on external gratification as the source of their fulfillment.  There is nothing wrong per se with desiring these outward symbols as long as they are combined with a deeper desire to serve something greater than oneself, such as to be responsible to those you are leading and to serve them.  That’s where the deeper sense of inner satisfaction comes from, not from having money, prestige or power. 

Leaders whose singular goal is the quest for power over others, unlimited wealth, or the fame that comes from success tend to look to others to give them a superficial sense of satisfaction and to attest to their greatness, if not their goodness. In public, as well as in private, these individuals exhibit ego-centeredness.  As their names appear more frequently in the media, they start to believe their own press.  As leaders of institutions, ultimately they come to believe that they are the institution and that the institution cannot survive without them.

Most leaders don’t start out this way.  Yes, they like to be fairly compensated for their accomplishments and to have the material pleasures that come with them.  Being given added power reinforces their success, and they enjoy the prestige that goes with it.  But along the way, their success in these realms can go to their head, and they start seeking more and more external success until they cannot get enough.  It is at this point – at the height of their power, their fame, and their material wealth - that they are most susceptible to losing their way, if they haven’t already lost it.  Their string of successes creates a deep desire to keep it going, just as they feel more and more like imposters in their roles. Out of fear of losing their status and stature, they are prone to doing increasingly bizarre and even illegal things. 

Losing Touch with Reality

Let’s examine how this happens.  By focusing on external gratification instead of inner satisfaction, leaders find it difficult to stay grounded.  They begin to lose touch with reality, even if the ability to define reality accurately was a key quality that brought them success in the first place.  Typically, these leaders reject the honest critic who holds up a mirror to them and “speaks the truth to power.”  Instead, they surround themselves with sycophants who tell them what they want to hear.  Over time, these leaders lose the capacity for honest dialogue, as others learn not to confront them with reality or the truth. 

Craving Success

Let’s look deeper into the root causes of these behaviors.  Losing touch with reality, which is one of the most common and dangerous traits of successful leaders, often results from the lack of introspection about who they are.  Underlying these tendencies may be an insatiable craving for success caused by a burning desire to overcome narcissistic wounds from childhood.  These wounds may have been caused by perceptions that their parents did not love them, they are not good people, or the trouble they had in making friends in their early years.  So they try ever harder to keep their string of accomplishments going so the external world will view them as highly successful.

. . . and Fearing Failure

The other side of the coin of craving for success is a deep-seated fear of failure.  Many leaders get to the top by imposing their will on others, even to the point of destroying people that stand in their way.  By the time they reach the top, they may be paranoid that someone else waiting in the wings to knock them off their pedestal.  This is akin to the “King of the Hill” game that little children play in the schoolyard.  Thus, these leaders can develop “the imposter complex,” caused by a deep insecurity that they really are not good enough to hold such a powerful leadership role and that any day now someone is going to unmask them.

To prove that they are not imposters, they drive so hard for perfection that they are incapable of acknowledging their failures and their weaknesses.  When confronted with information demonstrating their failures, they try to cover it up or to create a rationale that convinces others these problems are neither their fault nor their responsibility.  Often they will look for scapegoats on who they can blame their problems, either internal to their organization or on the outside.  Through the combination of power, charisma, and communications skills, they force others to accept these distortions, causing entire organizations to lose touch with reality.

Making Big Mistakes

At this point leaders are vulnerable to making big mistakes, such as violating the law or putting the very existence of their organization at risk.  In their desperation to keep their success going, they may wind up stretching the rules beyond legal limits.  In some cases their distortions of reality and powers of persuasion enable them to convince themselves and others they are doing nothing wrong. Or they believe they can outsmart the enforcers of laws.  Some rationalize that their deviations are acceptable because they are seeking to create a greater good.

In examining the behavior of leaders at this stage, one may conclude that they lack a moral compass, a sense of their “true north,” that keeps them centered.  Some may have had a moral compass originally, but lost sight of it as they got caught up with external gratification. 

The Loneliness Within

It is lonely at the top.  No one doubts that.  When you’re in that position, you know that the lives and fortunes of so many people rest in your hands, and you are ultimately responsible for what happens.  If you fail, many will be deeply hurt.  You try to deny that loneliness, which may lead to avoiding the anxiety of facing reality.  You shut down your inner voice, because it is a constant reminder that long ago you abandoned your true self.  It is just too painful to confront or acknowledge, but it returns to you in your dreams as you try to resolve the irresolvable conflicts rustling around inside your head.

 . . . that Can Lead You Astray

Lacking connection with your own inner voice, you start listening to all the voices pressuring you, thinking that if you can satisfy them, all will be well.  But their advice is often conflicting, or too painful to face.  So you choose to listen only to those voices that reinforce your views. Meanwhile, your work life and your personal life are growing more and more unbalanced.  Fearing failure, you favor your work life, even to the point of saying, “My work is my life.”  You lose touch with those closest to you – your spouse, your children, and your best friends – or you co-opt them with your point of view. Eventually, you lose your capacity to think clearly about important issues. 

By now your little mistakes have turned into major ones.  No amount of hard work can correct them.  In your desperation you keep digging yourself a deeper and deeper hole.  The collapse is near.  When it comes, there is nothing you can do to avoid it.  You attempt to stave off the consequences, but societal powers overwhelm you.  You are trapped.  The tragedy of your behavior is unfolding to its ultimate conclusion.  There is nothing you can do.

Who are you?  You could be one of those executives facing prosecution for their actions.  Or just a former CEO forced to resign “for personal reasons.”  But “you” could be me, as we are all subject to these tendencies, in greater or lesser ways.  We may not face a plight as severe as these leaders, but we can all go this route.

Next Generation of Leadership Discussion at Center for Public Leadership

Here's an interesting video from a panel I participated in last fall at Harvard Center for Public Leadership's Fellows Reunion. Thepanel discussion was on "Next Generation Leadership." The panel included David Gergen, executive director of the Center for Public Leadership; Rosalinde Torres, managing director of the Boston Consulting Group; Betsy Myers, leadership advisor and former chief operating officer for the Obama campaign; and myself. It was moderated by George Leadership Fellow John Coleman who was in his final year of the joint degree program of Harvard Business School and Harvard Kennedy School.

 

Authentic Leadership Development Executive Education

Our new executive education course at Harvard Business School, “Authentic Leadership Development,” which is based on True North, launched in February and was a big success. Check out the participants’ feedback on this link: Several called it “a transformative experience.” 

We have scheduled a second course at HBS on September 25-30, 2011 with the same great faculty: Dean Nitin Nohria, Rob Kaplan, Scott Snook and Joshua Margolis. Hope you can join us. Applications are open at HBS executive education.

 

Leadership skills start with self-awareness

Last week I served as faculty chair for Harvard Business School's new executive course, "Authentic Leadership Development." Sixty-four executives from 60 global companies spent five intense days honing their leadership.

Here's the catch: They concentrated almost entirely on leading themselves, not others.

What does leading yourself have to do with becoming a leader? Everything, actually.

Traditional leadership development programs have missed the mark for years, as they tried to remake leaders into someone different. I had this unfortunate experience numerous times in my career. It was never successful.

One boss told me that I needed to improve my management style, which was an accurate observation. When I asked for clarification, he said, "Be more like me." That feedback wasn't helpful, as his style and strengths were completely different than mine. If I emulated him, others would have seen me as phony, and I would have been much less effective as a leader.

We've all seen dozens of leaders fail in trying to emulate great leaders. At a recent conference, I asked the participants, "Can we all agree that the 'Great Man' theory of leadership is dead?" The essence of leadership is not trying to emulate someone else, no matter how brilliant they are. Nor is it having the ideal leadership style, achieving competencies or fixing your weaknesses. In fact, you don't need power or titles to lead. You only have to be authentic.

In observing leaders for 40 years, I have never seen someone fail for lack of IQ. But I have seen hundreds fail who lacked emotional intelligence (EQ). Psychologist Daniel Goleman first popularized the concept in his 1995 book, "Emotional Intelligence.'' He defined EQ as competencies driving leadership performance, including:

• Self-awareness: reading emotions and recognizing their impact;

• Self-management: controlling emotions and adapting to change;

• Social awareness: understanding others' emotions and comprehending social networks;

• Relationship management: inspiring, influencing, and developing others while managing conflict.

In researching my 2007 book, "True North,'' several colleagues told me they hoped we could identify the definitive traits of successful leaders. More than 1,000 prior studies had failed to do so. In interviewing 125 authentic leaders, we learned that the essence of leadership comes from not from having pre-defined characteristics. Rather, it comes from knowing yourself -- your strengths and weaknesses -- by understanding your unique life story and the challenges you have experienced.

Everyone has a life story they are eager to share if anyone will listen in an accepting, nonjudgmental way. I have great admiration for Sen. Scott Brown's courage in telling his story of being sexually abused as a child. His story acknowledges the life forces that shape who we are. In sharing their stories at last week's program, the executives found liberation and power by claiming who they are, not by trying to emulate someone else.

This isn't a new idea. Four thousand years ago the Oracle of Delphi said, "Know thyself." What's new is that we are learning how important self-awareness is to leadership development. Being self-aware is easier said than done. That's why so many leaders engage in self-defeating behaviors that cause them to fail.

How can you become a self-aware leader? Start with experiences in leading others in school, sports, or early work assignments. However, having one experience after another is not sufficient. Instead of plunging immediately into the next experience where you are prone to repeat your mistakes, you need to reflect on what you learned. Introspection can come from keeping a journal, meditating, praying or just sitting quietly.

Next, seek honest feedback from people you work with. The best developmental tool is 360-degree feedback from peers, subordinates and superiors. As one leader said, "Feedback is the breakfast of champions."

Finally, develop a small group of people with whom you can be completely open and honest in sharing your joys, sorrows, fears and dreams. They will support you in challenging times and provide invaluable insights that enable you to grow as a human being and leader.

We call these small groups "True North Groups" because they help you stay on course.

Leadership is not exerting power over others or exhorting them to follow you. Rather, it results from your example of empowering others to step up and lead. Leaders do that by learning to lead themselves, becoming self-aware and behaving authentically.

 


Source: StarTribune.com
Date: February, 26, 2011

President Obama' Challenge to Business: "It's Time to Invest in America"

Last August I wrote a column for the New York Times urging President Obama to make concrete moves to "invest in America." On Monday the President went to the U.S. Chamber of Commerce - his nemesis the past two years - offering to partner with business to get the U.S. economy rolling, saying,  "Now is the time to invest in America." He urged business leaders to work with his administration to "out-innovate, out-educate, and out-build our competitors." The President said he would go "anywhere, anytime to help American business."

Cynics might say that these are just words from an eloquent President. Actually, the business community hasn't heard anything close to these words in the last two years; instead, it has been blamed for America's ills of income disparities, corporate greed, and excessive profits.

In the past six weeks, the President has not only changed his tune, but is backing up his music with concrete actions. For example,

  • Negotiating the Recovery Act that continues the Bush tax cuts for two years;
  • Providing100% depreciation on capital investments in 2011;
  • Making R&D tax credits larger and permanent;
  • Breaking down regulatory barriers by eliminating onerous regulations;
  • Expanding exports and free trade via agreements with India, China and South Korea, and negotiating treaties with Columbia and Panama;
  • Upgrading transportation and IT infrastructures;
  • Encouraging American innovation by expanding investment in basic research;
  • Investing in training skilled workers by increasing math and science education;
  • Freezing domestic government spending;
  • Proposing to reduce corporate income taxes and eliminate loopholes.

In addition, the President has made dramatic changes in the people advising him to include more "business-friendly" faces, such as:

  • Businessman Bill Daley as chief of staff and Gene Sperling as chief economic advisor;
  • GE's Jeff Immelt to head President's Council on Jobs and Competitiveness
  • Steve Case, founder of AOL to head Start-Up America, designed to use public-private partnerships to stimulate new company formation;
  • Boeing's Jim McNerney and Xerox' Ursula Burns to co-chair export council.

These aren't just words. They are concrete actions. Of course, we need to see results from them, but they are clearly a move in the right direction. Taken as a whole, they represent a very impressive package.

Some people are asking, "Is this just good politics, or has the President changed his beliefs about business?" I prefer to believe the President is growing in his appreciation for the private sector and its capacity to create jobs and build create successful businesses that pay taxes. He may even recognize that he was led astray by his former advisors who urged him to increase federal spending to stimulate growth and jobs. Learning that it didn't work, the President has not only changed advisors but turned to the business community to invest to make American businesses stronger on a global scale and to create sustainable jobs.

Echoing the famous words of President John F. Kennedy's inaugural address, the President  challenged business leaders, "Winning the future is not just about what the government can do to help you succeed. It's about what you can do to help America succeed."

I agree with this notion. President Obama has symbolically offered business an olive branch by going to the Chamber to make his appeal. It's time for business to meet him (at least) halfway by investing in America to create innovative products and services, highly efficient manufacturing facilities, energy and efficiency savings, and sustainable jobs. It will be difficult for American companies to establish themselves as global leaders unless they have healthy markets here at home into which to sell.

Even if it took a "shellacking" in the mid-term elections to serve as a wake-up call, President Obama clearly understands that America needs to invest at home in order to compete with China, India and all the other rising nations to create world-class companies and to win the competitive race for jobs and investment.

Enlightened leaders will seize this opportunity as a "win-win" solution to facing global challenges. The time is now for American business to invest in America to make this country more competitive on a global scale. 

Obama 2.0: The President's Speech

In the State of the Union address on Tuesday, President Obama has the opportunity to recapture the hearts and minds of the American people and unify the country. Will he seize the moment?

He did so brilliantly in the 2008 campaign by integrating visionary leadership with pragmatic politics. When he became president, the American people expected him to inspire us to restore America’s leadership at home and in the world.

Instead, President Obama abandoned any pretense of vision and narrowed his focus down Pennsylvania Avenue to Capitol Hill. Led by Rahm Emmanuel, his “win-lose” chief of staff, he played “inside the Beltway” politics so well he ignored the moderates and independents who elected him.

He used Democratic majorities to force through major legislation: $878 billion stimulus virtually ignoring private enterprise; health care focused on access to the exclusion of cost and quality; and financial services requiring two years of regulation writing just to define derivatives and proprietary trades.

In the process the president failed to convince the American people why these moves would help them. Mr. Obama’s visionary rhetoric of the campaign turned into “political speak” that was both confusing and uninspiring. Not understanding the benefits, people turned against his initiatives, giving Republicans an enormous opening.

Since the November election, President Obama seems like a different leader. He is listening again to a wide range of thoughtful people. He has replaced his hardball chief of staff with a mature, experienced business executive. He upgraded his chief economic adviser to a pragmatic negotiator who gets things done.

He is reaching out to chief executives and responding to their input, while dropping his antibusiness rhetoric. He is focusing on private sector jobs, domestic manufacturing and exports. He even negotiated a centrist tax package with the Republicans that will serve as a major economic stimulus.

Now he has one more task: to present a compelling vision to the American people of where America is headed and how it will regain its stature in the world.

Everyone knows he can do this better than anyone since John F. Kennedy. The question is not “can he?” but “will he?” In Arizona, at a memorial service for the victims of the Tucson shooting rampage, he seemed to regain the touch. Now he has to broaden the issues and set the course for the rest of his presidency.

What should he say on Tuesday night? Here’s the theme I would propose:

“It’s time to invest in America. For decades we have helped the rest of the world. We aren’t abandoning them, but the pressing need is to invest here at home. We must commit ourselves to building America for the 21st century. Here are seven areas for investment to become globally competitive once again.”

Health and Wellness The health reform act granted access to 25 million more Americans, but offers no concrete way to pay for their health care. The president should declare a “national health and wellness campaign” and charge Americans with taking responsibility for their health. Incentives need to be reversed to reward people for staying healthy and holding medical systems responsible for keeping people healthy.

Education The United States is rapidly deteriorating into a two-tier education system, which can only lead to greater unemployment and political rifts. Education Secretary Arne Duncan’s “race to the top” is on the right track, but we need to educate people for 21st century jobs.

Infrastructure The antiquated infrastructure in the United States will take huge investments to bring it up to world-class standards. Are we prepared to raise the bar to the levels of Europe, Japan and even China?

Jobs With 27 million Americans looking for full-time jobs, America cannot have a vibrant economy until people get back to work. This requires investments in retraining and vocational/technical education.

Manufacturing and Exports The manufacturing sector and exports are suddenly showing signs of life, led by the resurgence of the Big Three domestic automobile makers. President Obama’s new Jobs and Competitiveness Council, led by Jeffrey R. Immelt of General Electric, is an important first step. New tax incentives will spur investments in automated, high-tech manufacturing and increase exports.

Innovation Entrepreneurship and innovation are America’s competitive advantages. We need to stimulate investments in research and development, inventions, breakthrough ideas and venture capital.

New companies and small businesses New jobs come from start-ups and small businesses. We need to ease regulations to let companies build their businesses and expand hiring.

If the president begins such an “Invest in America” program and asks Americans to make sacrifices to bring this country back to global leadership, he can set off an American renewal.

It can be done. What is needed is the president’s vision on Tuesday.


 

Posted in the New York Times DealBook on Monday, January 24, 2010

The Obama 2.0 Series

I have written on the importance of investing in America as a way to rebuild the economy and create jobs, not only replace the ones that we have lost.  It is time for Obama 2.0.  Below I've pulled together my series on the emergence of Obama 2.0 as the President. 

 


Time to Invest in America

 

In talking with dozens of chief executives, I hear pragmatic managers focused on building their businesses and earning fair returns for shareholders, yet extremely concerned about government policy. Here are the real reasons they are not investing in America:

  1. They expect no real domestic growth for the foreseeable future. In contrast, they foresee emerging markets sustaining double-digit growth. As a chief executive at a large consumer products company told me: “Half our revenues already come from Asia; within 10 years it will be 70 percent. Naturally, we are shifting more operations there.”
  2. To compete with local companies, global companies are investing overseas in factories and sales and marketing personnel. Foreign governments like China and Singapore make investments very attractive. One chief executive noted that he chose China for his $62 million factory because local subsidies reduced his investment to only $13 million.
  3. Companies are also moving infrastructure support from the United States to lower-cost areas in Asia. Unable to obtain visas for its Indian employees, a major computer software company moved most of its software operations to India, where well-educated employees enjoy higher standards of living at one-quarter of the cost.
  4. Without domestic growth, there is no need for additional employees. Instead, companies are achieving productivity gains by running lean. Mounting costs of doing business and increased benefit costs have created so much uncertainty that chief executives are reluctant to hire, especially small business owners.
  5. Chief executives feel they have access in Washington, but limited influence. Without any business people in the Obama administration, there are no advocates for sound business policies. A successful commercial banker described how open the president appeared to his concerns, yet the next day — without any consultation — the administration announced a new $50 billion bank tax.

Ask yourself: if you were faced with these conditions, would you be investing in America and hiring more people? Unless the climate in Washington changes dramatically, this no-growth, no-jobs environment will continue indefinitely.


 

It's Time for Obama 2.0

In Obama 1.0, the president stabilized the economy with government spending that minimized job losses and personal bankruptcies. But the economy has stagnated as these policies have been ineffective in stimulating private sector growth, jobs and innovation. Relying on monetary policies and deficits to drive consumer spending is not working, because the economy is experiencing fundamental structural changes that are impervious to these macroeconomic approaches. That’s why there are 26 million people — 16.5 percent of the workforce — who would like to be working full time but are not.

Now is the time to introduce Obama 2.0 by initiating pro-growth economic policies that will invigorate job growth. This means investing in America to unlock the $2 trillion currently in corporate coffers and to stimulate private-sector hiring. Mr. Obama also needs to make fundamental changes in relationships with the business community, overcoming the distrust that has developed on both sides.

The president’s Labor Day proposals were encouraging. He offered a 100 percent deduction for capital investment until the end of 2011, an increase in research and development tax credits that would make them permanent, and an additional $50 billion in infrastructure spending. All three initiatives suggest Mr. Obama is finally moving away from trying to cure the economy’s ills with deficit-fueled government spending and beginning to enact policies that foster private-sector investment and job creation.

 


What He Should Say at the State of the Union

 

Health and Wellness The health reform act granted access to 25 million more Americans, but offers no concrete way to pay for their health care. The president should declare a “national health and wellness campaign” and charge Americans with taking responsibility for their health. Incentives need to be reversed to reward people for staying healthy and holding medical systems responsible for keeping people healthy.

Education The United States is rapidly deteriorating into a two-tier education system, which can only lead to greater unemployment and political rifts. Education Secretary Arne Duncan’s “race to the top” is on the right track, but we need to educate people for 21st century jobs.

Infrastructure The antiquated infrastructure in the United States will take huge investments to bring it up to world-class standards. Are we prepared to raise the bar to the levels of Europe, Japan and even China?

Jobs With 27 million Americans looking for full-time jobs, America cannot have a vibrant economy until people get back to work. This requires investments in retraining and vocational/technical education.

Manufacturing and Exports The manufacturing sector and exports are suddenly showing signs of life, led by the resurgence of the Big Three domestic automobile makers. President Obama’s new Jobs and Competitiveness Council, led by Jeffrey R. Immelt of General Electric, is an important first step. New tax incentives will spur investments in automated, high-tech manufacturing and increase exports.

Innovation Entrepreneurship and innovation are America’s competitive advantages. We need to stimulate investments in research and development, inventions, breakthrough ideas and venture capital.

New companies and small businesses New jobs come from start-ups and small businesses. We need to ease regulations to let companies build their businesses and expand hiring.

If the president begins such an “Invest in America” program and asks Americans to make sacrifices to bring this country back to global leadership, he can set off an American renewal.

What the President Should Say Tomorrow Night

Tomorrow night the President addresses the nation.  He's made great strides to rebuild relationships with business leaders over the last four months, but now it is time to reconnect with the American people.  He must address the big issues facing our country:  

  • Health care reform 

  • Education 

  • Infrastructure 

  • Jobs 

  • Manufacturing and Exports 

  • Innovation 

  • New companies and small businesses 

I continue the conversation on what the President should say on the New York Times DealBook.

Revisiting the rights and responsibilities of business

"Businessmen that take seriously their responsibilities for providing employment, eliminating discrimination, avoiding pollution . . . are preaching pure and unadulterated socialism."
Milton Friedman, 1970

Nobel prize-winning economist Milton Friedman penned those fiery words back in 1970 in his influential article "The Social Responsibility of Business Is to Increase its Profits." He continued to defend them until his death in 2006.

Friedman has had a monumental influence on economists and CEOs who have followed his philosophy. Although we cannot attribute the global economic meltdown of 2008 to him, his ideas certainly influenced its root causes.

A short-term focus on shareholder gains has substantially increased the velocity of stock market trading. In the past 25 years, holding periods for stocks have fallen from eight years to six months. CEOs focusing on meeting the demands of short-term investors have led to the destruction of many once-great companies, including General
Motors, Sears and Enron. This culminated in the 2008 global financial meltdown, when over-leveraged financial institutions collapsed as they tried to maximize short-term value.

The havoc caused by the short-term shareholder value ideology has led to a narrow focus on shareholders, the loss of America's innovative edge and the hollowing of communities. As a result, employees have lost their jobs, customers lost their suppliers, communities lost valued supporters and, ironically, shareholders lost a fortune. Collectively, these factors have contributed to the loss of trust in free enterprise companies.

In a sharp rebuke to the Friedman philosophy, my Harvard colleague, Michael Porter, and his co-author Mark Kramer have written a seminal piece in this month's Harvard Business Review: "The Big Idea: Creating Shared Value." They advocate that creating shared value between companies and society "holds the key to unlocking the next wave of business innovation and growth [and] reconnecting company success and community success."

The time is ripe to reassess the true purpose of business. In a free-enterprise system corporations are chartered by society and endowed with certain rights and responsibilities. Those that fail to contribute to society may find their charters withdrawn or their freedom to operate restricted.

The French experience
I had this experience in 1982 while serving on the board of Bull SA, the French computer company. When the Socialists under Francois Mitterrand swept into office, Bull and 10 other large French companies were nationalized, thereby losing their status as capitalist enterprises. In the 2008 collapse, AIG, General Motors, Fannie Mae and others were effectively taken over by the U.S. government.

The public outcry subsequently led to financial services reform legislation restricting the freedom of financial services firms. Across cultures and legal systems, there's an unalterable truth: Business is a social institution that must satisfy society's needs.

Today there's a growing consensus among opinion leaders and many CEOs that it's time to reassess the purpose of business. I propose that, "The role of business is to
increase value for all its stakeholders -- customers, employees, shareholders and communities -- while safeguarding the societal ecosystems in which it operates."

Economists find this definition imprecise, as they prefer a single yardstick for measuring corporate performance. However, elegant theory rarely captures the messy complexities of reality.

The new generation of business leaders recognizes that sustainable value for shareholders, employees and communities can only be achieved by creating superior value for customers. Employees are far more motivated to serve customers with innovative products and better service than they are in trying to get stock prices up. This more-expansive view of creating shared value results in a growing business that can increase its profits, reinvest in the business and reward shareholders while simultaneously fulfilling society's needs. That's the only way to achieve long-term success.


Here in Minnesota this course is being pursued by companies such as 3M, General Mills, Target, U.S. Bancorp, Medtronic, Cargill and others. These companies have grown and prospered for decades -- relying on the community while also contributing to it.

In contrast, recall the case of my former company, Honeywell. Its former CEO sold this global leader to Allied Signal for a modest premium and moved its headquarters to New Jersey. As a result, 21,000 well-paid Minnesotans lost their jobs and the state lost a generous community citizen.

As employment stagnates and the public remains exasperated with business, leaders who don't adopt this broader view of the corporation's role in society are likely to see their free-enterprise prerogatives sharply curtailed. As a fervent capitalist, I believe this would be a disaster. Instead, we need corporate leaders who align their missions with the interests of society in order to innovate, grow and create jobs. Minnesota businesses can provide the proving grounds for this renewal.

 

(Note: This article was originally published in the Minneapolis StarTribune on January 15, 2011.)

Politics Trumps Sound Fiscal Policy (Again)

Yesterday's "compromise" between Republicans and the President proves an old adage: political giveaways always trump sound fiscal policy. Or stated another way, it's easier to agree to increase the deficit $4 trillion over the next ten years than it is to reduce it that amount.

What a difference a weekend can make. Just last Friday the 18-member Deficit Reduction Commission, appointed by President Obama and led by former Republican Senator Alan Simpson and former Clinton chief of staff Erskine Bowles, voted 11-7 to pass a package of deficit reduction items totaling $4 trillion over the next decade. That would have helped the United States get out of the financial ditch we're in right now and back on the road to fiscal responsibility.  Unfortunately, the seven "nay" votes, six of which came from politicians, keeps the majority from forcing a vote on this package in Congress. Now it goes to the White House for "review."

One would have hoped this moderate set of fiscal policy initiatives, backed by a bipartisan majority, would have given the President the courage to recommend adoption by Congress. Quite the contrary. Republican leaders, who historically represented the party of balanced budgets and fiscal stability, instead negotiated with the President increase the ten-year deficit by $4 trillion by extending the Bush-era tax cuts. Granted, this is a "temporary" extension for two years, but who believes in the heat of the 2012 Presidential elections that sixty senators and a majority in the House will vote to kill further extensions. Don't bet your Medicare on it!

For the mathematically inclined, that's an increase of $8 trillion in the deficit in just three days. As they say, not bad for a weekend of work.

There is no doubt that today's American voters favor unlimited tax cuts and unlimited government spending for their retirement and their health care. Instant gratification rules over long-term plans.

The consequence? This generation will pass on an impossible financial situation to the next two generations, which inevitably means their standard of living will decline. Just paying interest on our national debt will absorb the bulk of taxes Americans pay.

To their credit, Bowles and Simpson along with their fellow commissioners tackled the deficit head on.  Esteemed for their independence, they took on a task that nobody in Washington will touch: telling the truth to the American people.  They recommended raising the Social Security age, reducing the number of federal workers, dramatically cutting defense spending, eliminating many tax deductions, and reforming both personal and corporate income tax rates. All sound ideas, mostly containing some short-term pain for long-term gain.

Congress is broken.  An incumbency bias, an increasingly polarized media, and hyper-partisan political parties are destroying the last shreds of civility – and replacing it with an angry, ineffective politics that fans the flames of anger and hostility throughout the country. Thus, our political leaders are contributing to the tendency of Americans to think they are entitled to instant gratification and can blame someone else for their troubles.

Starting in January, the U.S. government will officially have split government. The President and the new Congress face problems of extraordinary magnitude.  Senate Budget Committee Chairman Kent Conrad affirms that the United States borrows 40 cents of every dollar it spends, and the federal budget deficit equaled 8.9% of Gross Domestic Product for the fiscal year ending September 30. 

There is much talk of the problem, but little serious dialogue about how Republicans and Democrats might work together to solve it. Instead, both sides sound like they prefer “gridlock” for the next two years. If President Obama is re-elected in 2012 and the Republicans take the majority in the Senate, gridlock could last for six years.

This country can ill afford gridlock and economic malaise while the deficits continue to grow. Meanwhile, other nations like China, India, Germany, Brazil, Singapore, and even the United Kingdom are moving ahead rapidly to become more competitive in world markets.

In the end, a nation’s strength comes more from its economic strength than its military might. On that score at least, we are steadily losing the battle for global competitiveness as our standard of living is forced to decline.

The real problem is elected leaders looking for short-term solutions – quick fixes, if you will – to long-term, intractable problems. Our problems of fiscal stability, job creation, economic strength, and education can only be solved with long-term solutions that require unified action. 

Politicians who place narrow self-interests ahead of the long-term best interests of the nation imperil our future. It is time for our elected leaders, Democrats and Republicans alike, to treat the American people like adults and tell us the truth about the near-term sacrifices we must make if the country is to regain its economic might and national pride. 

Let’s get on with solving long-term problems with long-term solutions. It is the only way to catapult the U.S. back into global leadership.