Monday's Wall Street Journal covers the complete highlights of last week WSJ CEO Council in Washington. Here I would like to share some of my own reflections.
I participated as a subject expert on the "Restoring Confidence in Business" task force, one of five CEO task forces to develop the recommendations highlighted in today's paper. The others included 1) health care, 2) global finance, 3) energy and the environment, and 4) creating sustainable jobs.
Throughout the two-day event we heard from significant members of the Obama administration, including Secretaries Gates (Defense), Geithner (Treasury), and Duncan (Education), White House economists Summers and Goolsbee, and Republican and Democratic House and Senate leaders.
The most impressive speaker and most sensible was New York Mayor Mike Bloomberg. He has as keen an understanding of what it will take to get the country and New York moving ahead as anyone I've heard. Too bad he's not running for President in 2012! As he pointed out, a fiscally-conservative, socially-liberal candidate does not have much chance of getting either party's nomination. Nor could an independent ever hope to garner the majority of electoral votes required to avoid resolution by the House of Representatives.
As for other speakers, Bob Gates and Arne Duncan both made very strong impressions. Gates' departure as Defense Secretary in 2012 will leave a void that will be hard to fill. He has guided DOD skillfully through two administrations and two wars, and was quite clear that he is planning to reduce unnecessary costs to bring budget levels down.
Sounding more like a free marketer than a typical education leader, Duncan is making significant progress in reforming the nation's K-12 education systems. His "Race to the Top" is committed to focusing on rewarding the best teachers and getting rid of those who aren't cutting it, and using federal funds to do so. He's supporting school closures and their replacement with public charter schools.
At the other end of the spectrum were the politicians and economists. The only one of this group that made any sense to me was Republican Eric Cantor, the new House Majority Leader. More typical was Austan Goolsbee, chairman of the White House Council of Economic Advisors, who seemed to be clueless about what steps were required to get the economy growing and create private sector jobs. It was even more discouraging to listen to Rep. Kevin McCarthy, the new Republican Whip, who promised to block every spending bill, reduce the Fed's charter, and generally serve as an obstructionist, without having anything positive to offer. After listening to Goolsbee and McCarthy, I made a mental note not to come back to Washington for anything remotely political during the next two years.
In sharp contrast, the nineteen proposals developed by the one hundred CEOs in attendance were logical, sensible, and hopeful. If only someone in Washington was listening! When it came time to vote on the final recommendations, I found it difficult not to support all nineteen of them as vastly superior to what we were hearing from the politicians.
The business community is blessed with a remarkable group of new corporate CEOs. As a group, they are pragmatic rather than ideological, slightly to the right of center, and willing to put the long-term interests of the country ahead of their short-term self interests. They have learned the lessons from their predecessors' failures, especially in chasing short-term stock price gains.
They seem committed to using their leadership roles and their company missions to create exceptional products and services for their customers, sustainable, well-paying jobs for their employees, and value for their shareholders. They keenly understand the important role that their companies play in building a growing economy and healthy communities, while preserving the societal ecosystems that have enabled capitalism to flourish for the past century. They too are extremely frustrated that no one in the White House or Congress seems to understand what it will take to get U.S. private-sector economy back to creating jobs and growing.
Bill's Bottom Line: In spite of polls showing the American public lacks trust in its leaders, this new group of CEOs are worthy of trust and support for their ideas.
Additional Wall Street Journal Articles and Video Clips from the Meeting
Earlier this week I had the privilege of participating in the Wall Street Journal's CEO Council Annual Meeting in Washington, DC. Over the course of two days 100 leaders in the areas of business, finance, and policy came together to discuss and propose solutions to some of the world's largest policy challenges: health care, energy, the environment, jobs, and global finance.
Two things I wanted to share. First is an article written by Joann Lublinn, and second is my appearance on CNBC discussing my experience from the meeting.
WSJ: Medtronic Ex-CEO Suggests Steps to Boost Business
William W. George, a former chief executive of Medtronic Inc., suggested steps to stimulate business investment in the U.S., including 100% depreciation on capital equipment through 2012 and a reduction in the 35% repatriation tax rate to 20% for businesses that “invest in tangible assets.”
A lower repatriation tax rate “would have a direct [positive] tradeoff,” Mr. George said in an interview Tuesday morning at The Wall Street Journal CEO Council. He now is a management practice professor at Harvard’s business school. He also sits on the boards of Exxon Mobil Corp. and Goldman Sachs Group Inc.
Mr. George advocates a tax holiday on tangible capital assets for any company that holds assets for a decade — and eventually, a graduated capital-gains tax. And he favors making it easier for foreign graduates of U.S. universities to obtain visas so they can work in the U.S. and possibly start companies here. At the moment, he added, “we are not graduating that many Americans with technical degrees.”
Taken together, such actions will stimulate U.S. job creation and long-term investment at a time when foreign competition is intensifying, according to Mr. George. Other countries see their economies rebounding faster than the U.S., he noted. “Why can’t we get this country moving [again]?”
But split control of Congress could impede passage of certain economic revival steps, Mr. George said. “We’ve had [political] gridlock for two years,” he observed. “We could have gridlock for six years.”
When Twitter co-founder Evan Williams announced that he would be stepping down as CEO of the company, the news was met with shock and bewilderment. Why would the CEO of a rapidly growing tech company step down from such a high profile position? Doesn’t he want the glory?
Instead of prioritizing his own career advancement and keeping control over the company, Williams made a sound decision for the long-term health of the company. He has tapped COO Dick Costolo to step into the role of CEO, recognizing that Costolo’s experience makes him more apt to lead the company through its current stage of growth and development.
Costolo has significant experience monetizing a popular consumer Internet product, as he founded Feedburner in 2007 and later sold the company to Google. Twitter needs to develop a sound revenue strategy to deliver returns for its investors, which have poured more than $100 million into the company. Williams recognized that the specific skill sets that Costolo has are needed in the CEO to allow the business to succeed.
Williams will maintain focus on developing a great product where he can add the most value, while Costolo’s strength in leadership and vision will propel the company further into profitability. It took a self-aware and humble leader to recognize that there was a better suited candidate in the company to be CEO in this period.
Many entrepreneurs fail to recognize that different kinds of leadership and skills sets are needed in the sustainable growth phase than was required in their start-up challenges. Keenly recognizing what Twitter needs to power forward in competing with dynamic sites like Facebook and Linked-In, Evan Williams faced reality, avoiding a potential crisis of leadership and vision.
By choosing someone with Costolo’s skills and experience to lead the company, he demonstrated that he knows his strengths and weaknesses, and is giving the company the best chance to succeed. Williams showed authentic leadership by recognizing his strengths as a leader and putting the long-term health of the company ahead of personal accolades.
In boardroom discussions and individual talks with numerous chief executives in recent days, I have heard repeatedly just how wide the gulf of distrust is between leading business executives and the Obama administration. Chief executives lack clarity about where the White House’s policies are headed and are deeply concerned they will have a long-term negative impact on the private sector. In addition, they feel their concerns are not being heard.
As a result, they are holding back on further investments in this country, preferring to shift resources to faster-growing emerging markets.
These are not just talking points of the business community looking for short-term profits. And this is not about wealthy people fighting higher taxes. The debate taking place is about policy. As a board member and an educator, I am seeing how the Obama administration’s approach to business is impacting day-to-day decisions in both big and small companies across the nation.
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.
It is none too soon. A new economic direction will give the Obama presidency a much-needed shot in the arm at a time when the Democrats are in danger of losing a significant number of seats in Congress and quite possibly control of the House of Representatives.
The situation is similar to President Bill Clinton’s problem after the 1994 elections swept Republicans into House leadership. Mr. Clinton brought in a Republican presidential adviser, David Gergen, to help reshape his presidency, and relied on Treasury SecretaryRobert E. Rubin to guide the economy to its strongest growth period since World War II. Mr. Clinton’s policies shifted to the center and won the confidence and praise of the business community. By stimulating private-sector spending, corporate growth and profits surged and 23 million jobs were added.
Personal earnings and capital gains were exceptional, buoyed by the strongest stock market in 50 years. With low unemployment and high earnings, tax receipts surged and the federal government produced a surplus for three consecutive years. That is a sharp contrast with the enormous deficits compiled by the Bush and Obama administrations.
President Obama needs to surround himself with more diverse advisers with private-sector experience. There is still no one in his cabinet or in the higher levels of his White House staff who has ever worked in the private sector. In my business years, I found it essential to surround myself with people who had different expertise and contrary opinions. This need is even greater in the isolating White House environment. I witnessed this first-hand regarding Vietnam during the presidency of Lyndon B. Johnson.
The president should appoint a savvy business leader to replace Mr. Summers, to advise him daily and be in constant touch with business leaders. Mr. Obama should follow the lead of Prime Minister David Cameron of Britiain, who appointed HSBC’s chairman, Stephen K. Green, as his minister for trade and investment. There are many strong candidates from which to choose, but the position must have adequate authority and influence for someone to give up his current position, just as Henry M. Paulson Jr. did in 2006, when he left the top post at Goldman Sachs to become Treasury secretary.
Here is my short list of recommended candidates:
Anne M. Mulcahy of Xerox: Ms. Mulcahy did a remarkable job in saving Xerox from bankruptcy and restoring its innovative spirit while serving as chief executive. She has also served on an important set of corporate boards. (Full disclosure: we served together on theTarget board for nearly a decade.)
Eric E. Schmidt of Google, John T. Chambers of Cisco Systems or John J. Donahoe of eBay: All three of these chief executives are extraordinary leaders who could refocus the American economy on research and development, innovation and creativity that will add sustainable jobs for the next decade.
John Doerr of Kleiner Perkins Caufield & Byers: Mr. Doerr is the nation’s leading venture capitalist, whose firm has invested heavily in renewable energy and information technology, and would be a great advocate for new company formation.
Edward E. Whitacre Jr. of General Motors: Mr. Whitacre did a spectacular job in turning around G.M. with his practical, no-nonsense style. If President Obama wants to reinvigorate mainstream American companies, Mr. Whitacre is the perfect person.
Carlos M. Gutierrez of Kellogg: A former Commerce secretary who previously led the cereal maker Kellogg, Mr. Gutierrez is a superb leader who has the confidence of the business community. In adding a Republican, Mr. Obama would signal he is serious about bipartisan, centrist approaches.
Richard K. Davis of US Bancorp: Mr. Davis is an extraordinary commercial banker who largely avoided the 2008 meltdown. (His bank was among the first big institutions to repay TARP loans.) As chairman of Financial Services Roundtable, he worked toward sound regulation in the Dodd-Frank Act.
That’s an abundant list of strong individuals who can hold their own amid Washington’s political infighting. As innovators and company builders with long-term vision, all bring distinctly non-Washington experiences that would be useful to President Obama.
The country needs leaders with courage to make the hard choices necessary to sustain economic growth. Mr. Obama has an opportunity to rival Mr. Clinton’s economic success, but this will not happen with the usual suspects by his side.
The message from Washington this week that Dr. Larry Summers, President Obama’s chief economic advisor, will return to Harvard after the mid-term elections signals an opportunity for the President to revamp his economic policies and institute fundamental changes in his administration’s relationship to the business community.
Further rumors indicate that the President is considering appointing a leading chief executive to this essential post. In this regard his actions would parallel U.K. Prime Minister David Cameron’s appointment of HSBC Chair Stephen Green as minister of state for trade. Green’s charge is to attract international investment and drive growth in the country's exports – precisely what the U.S. economy needs, along with a heavy dose of innovation and private investment.
With the exception of Treasury Secretary Tim Geithner, Obama’s entire economics team is turning over, less than two years into this administration’s term. Preceding Summers’ departure were budget chief Peter Orszag and Christina Romer, chair of the council of economic advisors. Given the persistently high jobless rate and slow growth of the economy, the timing is right for the President to undertake a thorough review with a new team to develop a new set of pro-growth policies.
The President’s original team did a good job in stabilizing the U.S. economy with government spending and stopping the bleeding in terms of job losses and personal bankruptcies. However, it is been largely ineffective in stimulating private sector growth, jobs and innovation. As a result, the economy has stagnated, relying too heavily on the Fed’s monetary policies and massive deficit spending. These moves were intended to drive consumer spending, but with 26 million people still looking for full-time jobs, they obviously are not working.
It’s time for a sharp change in direction: the President should pivot to a new set of policies aimed at “Investing in America” to unlock corporate spending and stimulate hiring in the private sector.
His recent proposals on Labor Day were encouraging. The President offered a 100 percent deduction for capital investment until the end of 2011, an increase in research and development tax credits while making them permanent, and an additional $50 billion in infrastructure spending. All three initiatives suggest the President’s thinking is finally moving toward private-sector investment and job creation, and away from trying to cure the economy’s ills entirely with Keynesian approaches to massive deficits.
It is none too soon. A new economics team can give the Obama presidency – which inevitably will suffer significant reductions in November in its enormous Congressional majorities and possibly the loss of House leadership – a much needed shot in the arm.
This situation is similar to President Clinton’s challenge in 1994 after the Republicans’ mid-term gains swept them into House leadership. Clinton brought in Republican presidential advisor David Gergen, who helped him reshape the remaining six years of his presidency. After that, President Clinton relied more heavily on Treasury Secretary Robert Rubin, who masterfully guided the U.S economy to its strongest growth period in the last fifty years. Clinton’s policies shifted to the center, as he often co-opted Republican opposition in Congress. They won the confidence of the business community and stimulated private-sector spending. Twenty-three million jobs were added as corporate growth and profits surged.
Ironically, in those days no one ever complained about tax rates being too high. Small wonder: unlike the last decade with Bush’s tax cuts, personal earnings and capital gains under Clinton were exceptional, buoyed by the strongest stock market in fifty years. As a result of low unemployment, high individual earnings, and strong corporate profits, tax receipts surged and the U.S. government actually produced a surplus for three consecutive years! That’s a sharp contrast with the enormous deficits compiled by the Bush and Obama administrations in the past decade. Who says deficits don’t matter?
I have longed argued that President Obama needs a savvy business leader in the White House, advising him on a daily basis. With Summers’ pending departure, he has his opportunity. The good news is that there are many strong candidates from which to choose. However, the position must have adequate authority and influence to get chief executives to give up their current positions to serve their country, just as Henry Paulson did in 2006. Here is my short list of recommended candidates, all of whom are current or former CEOs:
Anne Mulcahy, Xerox: She did a remarkable job in saving Xerox from bankruptcy and restoring Xerox’s innovative spirit. She has also served on an important set of corporate boards so she knows how corporate leaders and board members think. (Full disclosure: we served on the Target board together for nearly a decade.)
Eric Schmidt, Google; John Chambers, Cisco; John Donahoe, eBay; or John Doerr, Kleiner Perkins: All four are extraordinary innovation leaders who could refocus the U.S. economy on R&D, innovation, and creativity that will add sustainable jobs for the next decade.
Ed Whitacre, General Motors: Whitacre a spectacular job did in turning around General Motors with his practical, no-nonsense style. If the President wants to reinvigorate the mainstream of American companies to get back to growth strategies, Whitacre is the perfect person.
Jeff Immelt, General Electric: It would be very hard to get him to step down from GE, but like Whitacre, he is a tremendous mainstream executive who has been a big advocate of manufacturing in the U.S.
Jamie Dimon, JP Morgan Chase: He has done a tremendous job in successfully guiding his bank through the economic meltdown of 2008-09, incorporating Bear Stearns and Washington Mutual, and positioning JP Morgan for future success. He knows Wall Street as well as anyone and would also be a superb Treasury Secretary if Geithner decides to follow Summers in stepping down.
That’s a fulsome list for the President to choose from. All of these CEOs are strong individuals who can hold their own in the political in-fighting in the White House and in Congress, yet all have the long-term vision and courage to rebuild the strength of the U.S. economy.
If the President has the wisdom to choose one of them and take their advice, his next six years could rival Clinton’s for economic success. For the long-term health of our country, let’s hope he does so.
I was recently asked by the editor of The Economist to participate in an Oxford-style debate* on the question, “Has President Obama Been Good for Business?” Originally asked to take the negative response to this question, the editors later shifted me to the positive side.
As readers of my blogs and columns know, I have been critical of the Obama administration for neglecting to focus on jobs and investment in America and for failing to build closer ties to business, as well as having no business people on the White House staff or in the cabinet. My comments in The Economist debate notwithstanding, I still believe that the President needs to pivot to the economic center and focus on investment, trade, and jobs. His recent pronouncements provide encouragement that he understands this and is moving in this direction, even before mid-term elections.
In my challenge to argue that the President has been good for business, I started with the situation he faced upon taking office in January 2009. Through my research I realized that his administration has made enormous progress in less than two years in restoring stability to the U.S. economy and addressing long-standing problems through multiple initiatives like financial services reform, automobile competitiveness, health care, government-funded research, and restoring America’s infrastructure.
That said, much remains to be done to ignite the domestic economy, re-establish confidence in the business community, and create sustainable jobs. This is where President Obama should focus his efforts in the next two years. Having a new economics team that understands investment and jobs is a major step in the right direction.
* Economist Debates adapt the Oxford style of debating to an online forum. The format was made famous by the 186-year-old Oxford Union and has been practiced by heads of state, prominent intellectuals and galvanizing figures from across the cultural spectrum. It revolves around an assertion that is defended on one side (the "proposer") and assailed on another (the "opposition") in a contest hosted and overseen by a moderator. Each side has three chances to persuade readers: opening, rebuttal and closing.
Posted Sep 20, 2010 by Bill George |
| Filed in: Leadership
This summer I read four very important leadership books that I commend to you for your fall reading. You may not see them on the best-seller lists, but let me assure you that all four have more substance and depth than most of the books on those lists. All of them are written by extraordinary leadership scholars whom I have known for many years.
Here are my recommended books, followed by my thoughts on each of them:
Professor Emeritus Paul Lawrence was one of the dominant leadership thinkers of the 1960s and 1970s. He was my professor at Harvard Business School in 1965-66. Years later, he and Professor Jay Lorsch (also one of my mentors) wrote Organization and Environment: Managing Differentiation and Integration, a breakthrough book in 1986 that described the shape of emerging organizations. Now 85 years old, Lawrence has spent the past decade attempting to develop a comprehensive theory of leadership, something no leadership scholar has ever accomplished.
To formulate his theory, Lawrence has gone back to Charles Darwin’s second book, Descent of Man. There he discovers what he argues are Darwin’s real theories about the evolution of the species. In the Introduction, he cites Darwin’s famous quote, “It is not the strongest of the species that survives, nor the most intelligent. It is the one that is the most adaptable.”
Lawrence describes how the leadership brain is evolving to have the capacity to integrate the four drives of man – security, material acquisition, bonding, and comprehension – into an integrated, holistic decision-making process. He proposes that this is the capability that effective leaders must have in order to deal with all the pressures they are under and resolve them to make effective decisions.
Lawrence’s notion of the four drives is not new. He and Nitin Nohria, the new dean of Harvard Business School, presented this idea in their 2002 book, Driven: How Human Nature Shapes Our Choices. Unfortunately, these ideas never caught hold because they were overwhelmed by the economists’ theories about people being driven only by material acquisition, which conveniently aided their mathematical modeling of human behavior.
Lawrence describes the leadership brain which has the capacity to evolve leadership abilities and decision-making. His hypotheses are very consistent with the breakthrough scientific work of Dr. Richard Davidson. Davidson uses fMRI technology to test the evolution of the neo-cortex with meditators to develop increased self-awareness and self-compassion. These new research findings are demonstrating that these portions of the brain can be evolved, even in as short a time span as eight weeks. Thus, neurological scientists are moving away from the notion of the entire brain being hard-wired to recognize how it evolves, which they term neuro-plasticity.
Throughout the book Lawrence attempts to apply his emerging theories to practical situations, with greater and lesser success. In some ways we should consider this work as an evolution in the thinking of a great scholar, not a finished product. Nevertheless, it is a most important step in understanding leadership and leadership development at much deeper and more scientific levels than have been previously attempted.
In contrast to the scholarly depth of Lawrence’s work, Bennis’ memoir is a delightful journey through six decades of the evolution of a great leadership scholar and, literally, the field of leadership itself. Bennis has been my mentor for the past dozen years and has served as conceptual editor for all my books, which like Lawrence’s recent work have been published as part of Jossey-Bass’ Warren Bennis Series.
Bennis breezily navigates through seven decades of his adult life and introduces the reader to myriad leadership scholars such as Douglas McGregor and Erik Erickson, with whom he worked earlier in his career. He shares openly his frustrations with being a university president (at the University of Cincinnati), his exploration jaunts to teach in Switzerland and live on a houseboat in Berkeley, and his multiple marriages that ultimately brought him back to his first true love and current wife, Dr. Grace Gabe.
As we accompany Bennis on his personal journey, we get to see first-hand the evolution of a great leadership scholar, who has legitimately earned the title of “The Father of Leadership.” Along the way we learn how the field itself has gone from fledgling efforts to a dominant area of both academic and practical focus. Bennis has the unique ability to span both arenas without compromise.
Yet he never loses his humility or his humanity. He remains throughout a gentle soul, a mentor to many, and a guiding light to all who seek his wisdom. In the words of his tribe, he is indeed a mensch.
In 2007 Srikant Datar and David Garvin, two of my most distinguished colleagues at Harvard Business School, undertook a two-year field study of leading business schools throughout the world that led to this most timely study of the current state of MBA education. Unlike many of the critiques of graduate business schools, which devolve into more of a polemic than a rational analysis, Datar and Garvin have undertaken extensive field research, including an in-depth examination of leading MBA schools, interviews with their deans, and extensive discussions and interviews with leading business executives.
With compelling logic, the authors make a persuasive case that “it is indeed time to rethink the MBA.” As a result of decades of increasing focus on economics-based disciplines, they argue that “the center of gravity of MBA education shifted strongly toward ‘knowing’ and away from ‘doing’ and ‘being.’ We believe it is now time to rebalance the scales.” They assert that “a number of critical managerial and leadership skills are simply not being taught fully or effectively. . . Remedying these deficiencies will require a substantial shift in pedagogy away from lectures and greater use of reflective discussions, practical exercises, personal coaching and experiential learning.”
For anyone interested in educating business leaders for the future, this book is a must read.
This collection of 26 essays by world-renowned leadership scholars is edited by two of my closest colleagues at HBS, Nitin Nohria, the new dean, and Rakesh Khurana, whose seminal work, Higher Goals to Hired Hands, set the stage for the current rethinking of business education. Its 800 pages are not light reading, nor is this book for everyone. But it has already gained widespread readership among people interested in what constitutes genuine leadership, the theories underlying leadership, how effective leadership works in practice, and how it is evolving in today’s context.
It is the caliber of the authors of these essays, and their contrasting and complementary points of view, which makes this collection so valuable. Its deficiency, if there is one, is that there is no integrating thesis that pulls all of them together, nor is there presented a generalized theory of leadership, such as Lawrence has developed. These efforts must be undertaken in a future work with tomorrow’s scholars that build on these very valuable ideas.
Taken as a whole, these four books are setting the stage for the revolution that is underway in the understanding what constitutes effective leadership and how leaders are taught and developed. Placed in an historical context, the timing could not be better for this revolution to take place, nor can it happen fast enough.
I am very excited to share with you information about a new leadership course that I will be leading for executives on the HBS campus, along with Dean Nitin Nohria and a terrific faculty. Called “Authentic Leadership Development,” it compresses the popular 12-week MBA course I created in 2005 into five days. It will be held on February 12-18, 2011. Joining us on the faculty will be Professors Rob Kaplan, Joshua Margolis, and Scott Snook.
This course is aimed at rising executives who want to develop their leadership and are prepared to participate openly in discussing their leadership journeys, their crucibles, and the challenges they face. The course will draw on my book, True North, along with exercises drawn from Finding Your True North: A Personal Guide. We will focus on the leader’s inner journey and ways to improve your EQ and self-awareness in order to become a more effective leader. In addition to personal reflection exercises and class sessions, you will be part of a 6-person Leadership Development Group.
With 26 million people unable to find full-time jobs, Americans are outraged by disparities in pay between executives and average workers as real incomes continue to decline. Multimillion-dollar bonuses at American International Group (AIG) and Merrill Lynch (BAC) certainly didn't help. Two consecutive years of declining CEO pay, on the other hand, haven't either.
As a result, politicians are lining up to give shareholders greater control over executive pay. On the surface these changes sound like shareholder democracy, which would be a good thing. But rather than solving problems with executive compensation, they may result in myriad unintended consequences.
Case in point: The Dodd-Frank Wall Street Reform and Consumer Protection Act grants shareholders advisory votes on compensation, allows activist shareholders with only 3 percent ownership to nominate board members, and prohibits voting by retail brokers representing small shareholders. These changes are likely to empower short-term money movers such as hedge funds at the expense of long-term owners—and pressure management to focus on the short term, which is the exact opposite of what's needed.
In another example of good intentions not adequately thought through, The New York Times called on the Securities and Exchange Commission to publish ratios of CEO pay to "typical employees," ignoring variations between industries. What about businesses focused on low-wage emerging markets? What about differences between high-wage software developers and low-wage service companies?
Imposed formulas for executive compensation simply won't work at many companies. And we've seen how powerful the temptation can be for executives to manipulate short-term results to increase their compensation.
The regulations that will spring from Dodd-Frank are still being written. In the meantime, rather than just responding to pressures, boards and CEOs have a shot at restoring the confidence of the public by crafting responsible compensation policies unique to their needs. Doing this now will give U.S. companies an edge in fending off investors who are in it for the quick kill. It will also raise their odds of holding on to the top talent whose pay is the target of all this debate and ire.
Here are six policies that should be rigorously followed, including in bad times when boards are more prone to bend the rules for those in their top ranks:
1. Provide full transparency for compensation policies and actual practices. Principles and pay policies should be consistent over time. Novartis (NVS) has been the forerunner in Europe by making its compensation practices fully transparent.
2. Create policies that reward long-term performance with long-term pay. ExxonMobil (XOM) withholds more than two-thirds of its officers' compensation until they retire or for 10 years, whichever is greater. This focuses executives on long-term results and provides for sound succession.
3. Reward executives for their performance, not the company's stock price. Target (TGT), for example, compensates its executives based on same-store sales performance relative to its peers.
4. Lengthen the time horizon for bonuses. Companies should withhold significant amounts of compensation using restricted stock, with forfeiture for accounting adjustments and leaving the company. In 2009 the top 30 officers of Goldman Sachs (GS) received no cash, getting bonuses in restricted stock with three-to-five-year vesting periods instead.
5. Avoid formulaic approaches. Compensation tied only to short-term metrics leads to long-term problems. Companies should include qualitative performance measures like strategy implementation, research milestones, and leadership development. To make its shift to "leading by values" relevant, IBM (IBM) includes bonus opportunities for furthering its values, especially in global collaboration.
6. Boost equity between workers and executives. People with greater responsibilities should receive greater compensation, but one way to signal that everyone matters is to drop special plans, benefits, and perks for executives. Medtronic (MDT) gives employees a "means to share in the company's success" by enabling them to become shareholders through company-funded employee stock ownership plans.
To rebuild trust and negate the impact of restrictive regulations, corporate boards must develop compensation systems that reward all employees fairly and are applied consistently. This will focus leaders on long-term value creation and give boards a solid footing from which to defend their policies. It might even enlighten policymakers as they figure out how to put Dodd-Frank into practice.