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Bill George

Harvard Business School Professor, former Medtronic CEO

Where Have All the Leaders Gone (Part II)

Yes, there is a dearth of genuine leadership in business and politics. But there are examples we can look to for inspiration and guidance.

Since Enron’s demise in 2001, a new generation has assumed the helm of U.S. corporations. Very different from their predecessors, they recognize that for the 21st century a new kind leadership is required (BusinessWeek, 09/21/07).

As one current CEO told me, “Many of us followed iconic charismatic CEOs who were used to ruling their enterprises. To get things done in this century, we need organizations that lead by values, not directives, and collaborate with other companies, governments, and nonprofit organizations.”

Good-Bye to the All-Powerful Leader

Let me take this one step further: The era of the all-powerful leader who commands people to follow is dead-or it should be. Today’s leaders have to lead differently because the people in their organizations have changed.

  • Today’s organizations are filled with knowledge workers who know more than their bosses.
  • Those workers want the opportunity to step up and lead now, rather than wait in line for 10 years.
  • They have lots of options, as most will work for multiple organizations during their careers.
  • They are highly skeptical of image-oriented leaders who say one thing and do another. They want leaders they can trust, leaders who will empower them, not direct them.

A New Definition of Leadership

Successful organizations in the 21st century-those that sustain superior results year after year-will be led by authentic leaders who know how to motivate this new group of employees and gain their full commitment.

I would like to propose some new definitions for the 21st century leader who can “align, empower, and serve”:

  • Alignment: uniting the entire organization around a common purpose and values;
  • Empowerment: motivating employees to step up and lead to fulfill the organization’s purpose;
  • Service: dedicating themselves to all the organization’s constituencies-customers, employees, investors, and communities.

Serving All the Constituencies

Academics call this approach the “soft” side of leadership. It is anything but soft. It is a lot more difficult to gain alignment of employees around mission and values than it is to meet quarterly numbers or to cut expenses.

Empowering people is hard, but far more effective in getting people to sustain peak performance. Serving all your constituencies is more difficult than a singular focus on short-term shareholder value, but it is the only way to sustain success over the long term.

The good news is that today’s most prominent CEOs are authentic leaders who practice 21st century leadership. They are highly competitive individuals dedicated to building organizations for the long term. They engage actively and deeply in their businesses. They have the courage to resist being pulled off course by short-term pressures of the stock market.

Charisma Isn’t Everything

Who are these new leaders? They include A.G. Lafley of Procter & Gamble (PG), General Electric’s (GE) Jeff Immelt, Andrea Jung of Avon Products (AVP), IBM’s (IBM) Sam Palmisano, Xerox’s (XRX) Anne Mulcahy, Target’s (TGT) Bob Ulrich, and dozens more like them. All these leaders were chosen from within their organizations. By the time they reached the top, they knew the business, people, and culture intimately.

As good as these leaders are-and they are really good-none of them is especially charismatic. But they are genuine and trustworthy, and they have character and integrity.

Let’s look at some specifics:

  • Lafley, Jung, and Mulcahy were passed over initially, but stuck around until their boards turned to them to lead their companies out of difficulties.
  • Facing disappointing results for the first time at GE’s plastics division, Immelt recognized that this was a test and a chance to solve the problems his way. Immelt has said, “Leadership is a long journey into your own soul.” As CEO, he is applying that philosophy to transforming GE for the next 20 years.
  • Palmisano engaged all 350,000 of IBM’s employees in an online “values jam” to determine the company’s values. Now he is using “leading by values” to create IBM’s integrated global organization.
  • When Avon Products’ stock dropped 30% after years of rapid growth, Jung reinvented herself as CEO by cutting organizational layers dramatically and reinvesting the savings in future growth, which is paying off in Avon’s resurgence.
  • Mulcahy took over Xerox with $18 billion of debt. Urged to declare bankruptcy, she refused and instead rallied her employees around “restoring Xerox to its former greatness.” Not only did she stave off bankruptcy, she also turned Xerox into a highly effective competitor once again.
  • Target’s Ulrich is not nearly as well known as the famous Target Bull’s Eye. Named Chief Executive magazine’s “2007 CEO of the Year,” Ulrich claims, “It’s not about me. It’s about this team…the greatest team in the world.”

If they want to succeed in the 21st century, corporations would be well-advised to develop authentic leaders like these, who can build and sustain their long-term success.

Where Have All the Leaders Gone (Part I)

The U.S. is going through a crisis of leadership in both business and politics. And it won’t be solved until we look at ourselves in the mirror.

Everywhere I go these days, from gatherings of corporate executives to Q&A sessions with large groups, everyone is asking the same questions: “Where can we find leaders we can trust?” “What happened to all those great leaders of the past?”

Some are bemoaning the paucity of statesmen at the top of corporations, while others are fed up with political leaders. The lack of trust in our leaders in virtually every sector of U.S. life is palpable. Recent Gallup polls indicate that only 18% of the American people trust the values and ethics of business leaders; even fewer-15%-trust their elected officials. That’s not just a temporary problem. It is a formula for disaster.

Trust is the coin of the realm in both democracy and capitalism. Without trust, the system cannot function effectively. People become cynical, disengaged, and even prone to anarchy and rebellion.

Unlike others who bemoan the leadership shortage, I do not believe the problem is a lack of leaders. Rather, in the corporate realm and in the voting booth, we are choosing the wrong people to lead us-and choosing them for the wrong reasons.

Style Over Substance

Corporate boards, shareholders, and voters-and the media that influence all of us-give far too much weight to leaders’ charisma and far too little consideration to their character. They tend to favor style over substance; image over integrity. If we choose our leaders for their charisma, style, and image, why should we be surprised when we fail to get leaders with character, substance, and integrity? Only the latter qualities can build trust.

Many of the chosen leaders want to lead only for their own ego aggrandizement-for money, fame, power, and glory. They want to take as much from the system as they can. They aren’t genuine leaders at all. They are just glory-seekers. Yet we set these leaders up as role models. When they prove they have feet of clay, as all leaders do, we take pleasure in their destruction.

No leader is perfect, so we should stop expecting them to be. Genuine humility, the ability to be vulnerable under pressure, and admitting when you’re wrong can go a long way toward building trust.

Marks of the Authentic Leader

Authentic leadership is about serving others. And serving others, not seeking glory, is what leaders in both the corporate realm and political arena are selected to do. As the late Peter Drucker said: “Leadership is not rank or privileges, titles or money. Leadership is responsibility.”

Authentic leaders take responsibility for their actions and the results of their organizations, but they don’t try for perfection. In fact, they surround themselves with other leaders who know more than they do. They openly admit their mistakes. They acknowledge their weaknesses and shortcomings. They ask others to help them through crises. When things go well, they give the credit to others. When they go poorly, they are the first to accept responsibility.

In the past decade many of our leaders tried to pass off responsibility for failure and corruption on their accountants and lawyers, as Jeff Skilling of Enron and Bernie Ebbers of WorldCom did. Leaders like Phil Purcell at Morgan Stanley (MS) rationalized their poor results and fought to the bitter end to hang onto their jobs. Then they demanded-and received-huge termination settlements from their boards. Many of the leaders of failing enterprises such as AT&T (T), Sears (SHLD), and K-Mart got so caught up in playing the short-term stock market game that they wound up destroying their enterprises.

Unrealistic Expectations

The notion of finding a savior who can turn around moribund organizations in a short time has proven to be flawed. The only solution to the current leadership crisis is to select highly experienced, battle-tested leaders from within the organization or the political realm. We need leaders who have had years of proving their character and integrity in the most difficult circumstances and who have achieved results by empowering people, not by using them.

Until we choose leaders who are more interested in serving everyone in the system than they are in taking from it, we will continue to ask plaintively: “Where have all the leaders gone?” without ever acknowledging that we, with our unrealistic expectations, are the source of the problem.

Nonperforming CEOs

Boards are irresponsible if they guarantee pay regardless of performance and such boards put themselves and employees at risk.

The public is outraged these days over CEO compensation, with good reason. Far too many chief executive officers get paid large sums even when they don’t perform. I believe that CEOs should be well-paid when they do perform, but there is no justification for paying for nonperformance.

As a result, shareholders are demanding the right to approve CEO pay packages. Following the tradition of British companies, “say on pay” proposals on proxy statements are gaining momentum in the U.S. But under U.S. corporate law, determining the compensation of CEOs is a fundamental responsibility of the board of directors. Directors are charged with the fiduciary duty to use their “business judgment” in these matters, and the courts have consistently backed them up.

However, by not paying CEOs based on company performance boards are failing to execute their responsibilities. Unless they step up to this issue they risk ceding their responsibilities if unhappy shareholders push through say on pay resolutions.

Home Depot, Hewlett-Packard Handouts

If this were to happen, who would determine these complex compensation packages? The courts? The Securities & Exchange Commission? External governance gurus, who have no responsibility for the corporation’s performance? None of these alternatives makes sense. In fact, they threaten the very foundation of our system of governance.

I must emphasize that the real problem here is not that CEOs are paid too much money. You don’t hear criticism of the compensation of top performers like A.G. Lafley of Procter & Gamble (PG) and Bob Ulrich of Target (TGT). The real problem is paying enormous sums to CEOs who fail to perform. Our system of capitalism is based on taking risks and being rewarded for success, not on guaranteeing huge payouts to CEOs who destroy shareholder value.

How can anyone justify Home Depot’s (HD) former CEO Bob Nardelli receiving a $200 million termination settlement after declines in market share and shareholder value? Or the former CEOs of Morgan Stanley (MS) and Hewlett-Packard (HPQ) losing their jobs and walking away with tens of millions? Shareholders ought to be outraged by these inequities.

Taking a Toll on Employee Motivation

It is ironic that by guaranteeing CEO compensation, boards put their CEOs at minimal risk while putting employees at far greater risk. When CEOs in these firms fail, it is the employees who lose their jobs and their income, while CEOs pocket their guaranteed pay.

Is it surprising that outsized CEO pay packages destroy employees’ trust? With loss of trust, employee motivation gives way to to cynicism and superior performance becomes mediocre.

The underlying cause of this problem is the failure of boards to develop their future CEOs internally. The board’s most important job is to ensure long-term succession plans for the top leadership. But many boards don’t take the time and expend the effort to develop seamless internal succession, and consequently they are forced to search outside the company, often yielding to investor pressures to hire a corporate savior.

No CEO Contracts at General Electric

In turn, these high-profile CEOs from outside the company who know little about the business, the company’s culture, or its people, hire high-powered attorneys to negotiate multiyear contracts that guarantee their compensation, regardless of performance.

Why do CEOs need contracts in the first place? The CEOs of General Electric (GE), Goldman Sachs (GS), and Exxon (XOM) don’t have them. They get paid to perform.

Executive compensation should be tied directly to the company’s long-term objectives and based on building the firm’s economic value, not its stock price. The best compensation programs tie up half of the executives’ compensation for the duration of their tenure, so they cannot cash out when the company’s stock peaks. These programs are based on a mix of short-term and long-term incentives so that no one objective can be pursued to the detriment of the firm’s interests.

To ensure the CEOs’ separation from the compensation process, boards should hire their own compensation consultants who do no work for management.

Finally, CEO compensation should not be based solely on a comparator group, which can be easily manipulated. Rather, internal equity should be given equal weighting so that gaps between CEOs and their subordinates are narrowed, and it is the team that is rewarded for the company’s success.

To rebuild the confidence of shareholders and the public and to retain control over CEO compensation, boards of directors should put their CEOs wholly at risk, with no contracts, and pay them only for long-term performance.

That’s the only way to restore trust in corporate leaders and in our system of corporate governance.

Who is Governing Corporations: The Board or Governance Gurus?

The never-ending barrage of proxy proposals from governance experts raises an uneasy question: Who is governing corporations these days – elected boards of directors or self-appointed governance firms?

The 2002 enactment of Sarbanes-Oxley and NYSE listing requirements has led to significant improvements in corporate governance. Boards operate more independently and the relative power of CEOs and their boards has been rebalanced. Even relationships between corporations and the SEC – the official federal regulator of corporate governance – have settled into appropriate equilibrium.

Just as corporate governance gets on track, self-anointed governance gurus – for-profit firms like Institutional Shareholder Services (ISS), the Corporate Library, GovernanceMetrics International (GMI), and Glass, Lewis – are challenging these legally elected bodies for control of corporations. Not satisfied with the improvements, these firms – which are not shareholders at all – agitate to wrest control for themselves and for shareholder activists. They purport to represent shareholders by rating company governance, submitting proxy proposals for consideration at shareholder meetings, and consulting with companies desirous of improving their governance ratings.

The governance gurus wrap themselves in the banner of “shareholder democracy,” although governance of American corporations was never intended to be democratic. The legislators who created governance laws recognized most corporate governance decisions are too complex to be made independently by thousands of shareholders. Only the most important decisions, such as the election of directors and major mergers and acquisitions, require a special shareholder vote.

Like elected representatives in the federal government, corporate directors are elected by shareholders and legally charged with the fiduciary responsibility to govern the corporation. The courts have consistently backed the responsibility of directors to use their “business judgment” in making decisions regarding the corporation´s best interests.

What these governance firms are proposing is not democracy at all, but rather taking control of corporate governance in order to promote an active market of takeovers and force changes in management and boards of directors. Their power is growing because institutional shareholders are unwilling to do the analysis and invest time into voting proxies for their vast array of shares. So they follow these firms´ recommendations – all for a fee.

ISS is the most powerful – and most conflicted – of the firms. It derives its power from its proxy advisory service for institutional shareholders, who currently hold over sixty percent of the shares of U.S.-based companies. Through its recommendations, ISS can influence – if not control – thirty percent or more of the shares voted. The “Corporate Governance Quotient,” ISS´ ratings model, attempts to quantify the quality of firms´ governance. ISS also sells its advisory services to companies anxious to improve their governance ratings, creating conflicts of interest for ISS´ supposedly independent advice. Nevertheless, many companies cater to ISS to improve their ratings and ensure favorable votes on proxy items.

In recent years governance firms have focused on the annual election of all directors, eliminating multi-year terms and staggered boards in order to enable hostile raiders to replace the entire board at a single meeting. They have also insisted on majority votes for directors. Recognizing the importance of director elections, many boards have agreed to reconsider directors´ standing in the absence of majority votes.

But these changes have not satisfied the governance specialists, who are now asking for “cumulative voting” for directors. Cumulative voting means that a shareholder representing one million shares in an election of twelve directors could cast twelve million votes for a single director, perhaps a write-in candidate. Shareholder democracy?

In actions like these governance firms have shown their hand, which is not democracy at all but support for takeovers and management changes. This enhances their relationships with the hedge funds, which usually care more about events that create volatility than they do about shareholder value.

Another focus is “say on pay” resolutions, following the British tradition of giving shareholders an up or down vote on the CEO´s compensation. At first glance, letting shareholders opine on compensation sounds logical, but the problems it creates are enormous. Legally, determining executive compensation is the responsibility of the board of directors, which in turn is delegated to its compensation committee. Determining CEO compensation is an extremely complex task, one that must be closely linked to the firm´s objectives and to employee compensation plans.

Granting shareholders such a privilege raises serious questions about the board´s responsibilities. What´s the remedy if the shareholders turn down the CEO´s compensation? Propose another plan and let the shareholders vote again? The governance firms would likely offer their own alternative to the CEO´s compensation. At this point, the power transfer from the board to the unelected governance firms would be complete and would lead to their next proposal to increase power. Boards that naively attempt to curry favor with ISS and others to win their approval will learn the hard way that these outside firms will never be fully satisfied until they have wrested control from the boards.

I am not suggesting that boards should stonewall these initiatives by dissident shareholders and governance firms. Rather, these unrelenting pressures suggest that board members must step up to their legally-elected leadership responsibilities and become more active in corporate governance. This requires more time and greater leadership. No longer can boards delegate their responsibilities to company management – but neither can they abdicate their duties to governance gurus.

The alternatives are clear: either boards step up to leadership, or our entire system of corporate governance is at risk. The time for leadership is now!

Private Equity = Public Gain

Controversies over the rising power of private equity firms continue to rage.

Time Magazine labels their leaders, “Private-Equity Pigs.” To hear critics describe private equity, they are the new robber barons, ready to plunder our great corporations and leave them in a shambles.

Nothing could be further from the truth. The dynamic leadership of private equity firms and the executives they hire to run client firms is providing great benefits to the corporate world, the American economy, and society as a whole.

Five years ago private equity firms had trouble coming up with more than $1 billion for a single deal. Today, they can top $50 billion, and there seems to be no limit to the size of deals that can be put together. Why? It´s simple: investors are attracted by the returns of these deals and willing to tie up their money for three to five years.

Let´s take a closer look at the myths about private equity:

Myth #1: The growing power of private equity firms is a threat to public corporations.

Unlike the raiders of the 1980s – remember Mike Milken, Irwin Jacobs, and Carl Icahn? – private equity is doing its deals on a friendly basis. They show up when no public buyers are interested. That´s what happened when Daimler put up Chrysler for sale, no automobile companies showed up, so PE leader Cerberus stepped up to Chrysler´s challenges.

Myth #2: Under private-equity, acquired firms get torn apart and value destroyed.

PE does the vitally needed restructuring that the previous public owners did not have the will or ability to undertake. Ten years of changes are compressed into three years or less. PE firms can achieve those high returns by creating value that public managers apparently did not see, and monetizing their gains in the public market.

That´s what happened in 2001when Blum Capital Partners purchased by CB Richard Ellis, the nation´s leading commercial real estate firm. The firm was drastically restructured, and brought public three years later. In three years its market capitalization grew from $1.3 billion to $9.1 billion, a 600% increase.

Myth #3: CEOs flee public companies to avoid scrutiny from demanding investors.

Wrong! Private equity investors are far more demanding than public investors and much more engaged in the business. Leading PE firms generate returns that far exceed the public market.

Just look at what Eddie Lampert has done with the venerable Sears Roebuck, whose public market valuation declined steadily for thirty years as its retail sales slumped. Lampert consolidated Sears into his bankrupt Kmart operation, monetized the value of its real estate portfolio, and brought it back to the public market. Just four years later, its stock has risen ten times.

Myth #4: The greed of private equity owners is harming the economy.

Like any capitalist who starts his own business, private equity firms invest their own money, putting it all at risk. When they gain, they deserve every penny. That´s the essence of capitalism. If their wealth makes us angry, then we should take it out on poor old Warren Buffett, the greatest capitalist of all, who made $40 billion through his investments in select companies and is giving it all away to philanthropy, to be managed by the Gates Foundation.

Rather than harming the economy, PE firms are giving it new vitality by taking moribund corporations – or pieces of them – restructuring them to uncover real value, and making them healthy, competitive, and viable once again. This benefits the entire economy by reducing the “drag” from poorly managed firms and replacing them with revitalized competitors.

This sounds so easy. Why don´t publicly held companies do the same thing? Is Wall Street restraining them from facing problems? Not exactly. Wall Street generally cheers when public firms face the music and restructure, as the stock tends to go up. The answers lie deeper. Here are the reasons why firms under the PE model are doing so well:

  1. Take on high leverage and spread the risk. PE firms take on much greater amount of debt. In recent years the low cost of debt and high liquidity have made this model very attractive. Why don´t publicly held companies do the same? No doubt they could handle more debt, but the PE firms can spread their debt across many companies, thereby mitigating the risk. If a public company cannot meet its debt obligations, it is bankrupt, a la Delphi or Delta Airlines. If a PE-held company goes down, the PE holder can cover its losses from its broadly-based balance sheet of multiple holdings.
  2. Compress the time frame of making changes. PE firms don´t waste any time making changes. They aren´t concerned with internal objections, reluctant boards, and unfavorable publicity. They determine what needs to be done, and move swiftly with surgical precision to implement changes. Can´t public companies do the same? Of course they can, but often they fall into the trap of worrying about quarterly earnings, internal morale, power struggles on their boards, and external criticism, and vital time is lost. Worse yet, they rationalize the real problems and make “quick fixes” but never get the business healthy.
  3. Leadership. Aren´t private equity managers just a bunch of financial manipulators, not leaders?

Au contraire. Private equity has attracted some of the most talented leaders in business, both to run the PE firms themselves and to run the companies they acquire. Their leadership is characterized by extreme intensity and clear focus on the business and its results. PE leaders have the courage to make the changes immediately, and restore the business to on-going health. They are clear in their purpose and decisive in their actions. Sounds like leadership to me. . .

So what´s the risk with private equity? First, if short-term interest rates rise sharply, the high levels of leverage could become infeasible. Second, with more PE money chasing fewer deals, there is always the risk of overpaying for a major deal. Or not having access to the public market to monetize their gains. This is a real risk in the case of Cerberus´ acquisition of Chrysler.

Finally, private equity has had the benefit of paying capital gains taxes on profits rather than ordinary income tax, as publicly held corporations do. These loopholes in our tax system accruing to the benefit of private equity owners are simply wrong: all firms, public and private alike, ought to play by the same tax rules. Congress is right in attempting to correct this inequity.

There are reasonable questions about whether the private equity model works for well-run, long payout businesses like high tech, biotech and pharmaceuticals, and aerospace. Personally, I am very skeptical. Thus far, the PE firms have steered clear of these industries. We´ll see where they go in the future.

What does all this mean for publicly held companies and their boards? There is a great deal they can learn from private equity if they don´t buy into the myths or bury their heads in the sand. First of all, they should take an objective look at their business as if it had just been acquired by PE. What would a PE firm do differently? Where would they find value? What would they jettison? If they can make these changes without damaging the long-term value of their company, then they should act immediately.

In the regard, private equity is serving as a positive impetus to publicly-held companies to get their act together.

Bill´s bottom line: The private-equity movement is good for the U.S. economy and good for business. It will be around for a long time.

America’s Hidden Asset: Leadership of Global Capitalism

For the past seven years America´s political leaders have been trumpeting the spread of American-style democracy, with decidedly mixed results. Developing countries aren´t eager for America to impose its form of democracy on their fledgling – and often fragile – governments. In fact, many of them resent America´s attempt to tell them how to run their governments, especially when threats of “regime change” are not-so-subtlety mentioned.

It is American-style capitalism – not democracy – that is spreading like wildfire around the globe.

Every government leader and business executive I have met in developing countries is eager for one thing: American-style capitalism to build their economies, create jobs and wealth for their people, and bring their countries fully into the global trading network. From Kazakhstan to the United Arab Emirates to Vietnam, people are hungry for capitalism. They want to study it in the U.S., learn how to create local capital markets, acquire American technology and know-how, and build up companies that can export their goods around the world, especially to the U.S.

But most of all they want America´s hidden asset: global capitalism leadership.

Let me emphasize that this is not the old-style business leadership of the 20th century which thought U.S.-based companies had superior products and management processes and could simply export them to the less sophisticated markets around the world, eager for American goods and know-how. That day passed by twenty years ago.

In recent years America´s new competitive advantage has emerged: the ability to train and develop global leaders, capable of leading global organizations. These new leaders, who are mostly in their thirties and forties, have lived all over the world and are as comfortable doing business in the Ukraine or Indonesia as they are in Des Moines, perhaps more so. Many of them have attended America´s best graduate business schools, where they interact with a vast array of foreign nationals and newly immigrated Americans with similar leadership abilities and like ambitions.

Attending my class at Harvard Business School, my wife remarked, “I feel like I am in the United Nations.” In fact, more than one-third of Harvard´s MBAs at HBS and two-thirds of participants in its executive programs come from outside the U.S. to learn the latest leadership approaches in global business. These percentages do not include the substantial number of newly-immigrated Americans from all over the world attending these programs.

This new generation of American business leaders – as well as foreign nationals trained in America´s leading academic institutions – is very different than the previous generation: they are authentic leaders – collaborative, not imperial, in their relationships. They genuinely respect and appreciate the comparative advantages that people of other nations bring to their global companies, from manufacturing skills to ingenuity. Most importantly, they know how to bring together and motivate people of very different backgrounds to build high performing organizations.

America´s competitive advantage is seen most vividly in financial markets, where governments and business people around the world are eager to have America´s investment banks help them restructure their financial institutions and industrial companies to become competitive in global markets. Serving on the board of Goldman Sachs, I have had the opportunity to witness first-hand just how important this leadership is to countries like China, Saudi Arabia and the United Arab Emirates. In building financial institutions in these countries, America is developing the relationships with business leaders that will sustain this competitive advantage in global leadership for the next several decades.

For all the xenophobia about immigration and widespread panic over outsourcing, the reality is that America is the world´s melting pot. We are more accepting of people of diverse national origins and ethnic backgrounds than any country on earth. Progressive business leaders like IBM´s Sam Palmisano, Andrea Jung of Avon Products, GE´s Jeff Immelt, and PepsiCo´s Indra Nooyi recognize that diversity is not a challenge to be overcome, but a source of sustainable competitive advantage.

Whatever issues diversity may create – both real and perceived – America´s hidden competitive advantage is the ability of our leaders to operate effectively in integrated global organizations and to deploy the principles of capitalism throughout the world.

Our political leaders would be well advised to recognize this strength and use it to build America´s relationships with countries around the world, while helping them build their economies through capitalism, irrespective of their form of government.

PBS Nightly Business Report Commentary #2: Wall Street Versus Main Street

For the past decade we´ve had a big problem in the corporate world, but no one will name it. The problem is that many leaders believe they are more responsible to Wall Street than they are to Main Street. But it’s Main Street where the customers live and where the money is made.

The only way to create long-term value for shareholders is to create superior value for your customers. That comes from motivating your employees to create great products and superior customer service. That´s why companies like Target, Johnson & Johnson, and PepsiCo have been so successful in sustaining their growth.

But companies whose primary focus is on Wall Street, and meeting its short-term goals, are never going to create long-term value. Wall Street may focus on quarterly earnings, but it still takes five years or more to discover a drug, design a semiconductor, or create a breakthrough like the i-pod.

You simply can´t do it overnight. If you don´t stay focused on your True North, you´ll get buffeted by the winds of change, and wind up capitulating to playing the short-term game. At Medtronic, it took a decade to create breakthrough products that restore millions of people to health, but that´s how we created $60 billion in shareholder value- not by responding to Wall Street.

Unfortunately, many corporate leaders don´t have the patience or the vision to do that. They bow to Wall Street, keep shifting strategies, and wind up destroying their value.

Authentic leaders stay focused on creating great value for Main Street customers. And that´s how they create long-term shareholder value. Authentic leaders who focus on Main Street will out-compete every time those who only worship Wall Street.

I’m Bill George.

PBS Nightly Business Report Commentary #1: The Need for Authentic True North Leaders

Bill George is a commentator and contributor to PBS Nightly Business Review. This blog entry is a copy of his first commentary which aired on June 28.

For the past five years we’ve been facing a crisis in corporate leadership. The Gallup poll says only 22 percent of the American people trust their leaders. That’s not just a problem, that’s a formula for disaster, because our entire system of capitalism is built on trust.

Many leaders have breeched the trust given them when they were chosen to lead our great companies. It turns out these leaders are primarily interested in taking as much as they can out of the company – money, fame, power and glory. Instead of takers, we need givers whose goal is to serve all their constituencies: their customers, employees, and shareholders.

All too often boards of directors choose the wrong leaders to run our corporations. They select them more for their charisma than their character, for their style rather than their substance, and for their image rather than their integrity. Well, if we choose people for charisma, why are we surprised when we don’t get character?

Boards need to stop searching for corporate saviors from outside the company, and get back to developing leaders within their companies – leaders that have the character, substance, and integrity to build companies for the long term. We need authentic leaders who can empower people throughout the organization to step up and lead, and who are committed to serving all their constituencies.Only when we have authentic leaders will we be able to regain the trust of the American people, as well as the trust of customers, employees, and shareholders – and only then can companies create long-term, sustainable value.

The Triumph of Competence over Charisma

Despite all of the failures at the top of companies in recent years – or perhaps because of them – we are finally moving into an era of competent leaders, favoring them over charismatic leaders.

The appointment of the highly competent Bob Zoellick to replace the charismatic Paul Wolfowitz as president of the World Bank is just the latest such move. Zoellick is highly respected by finance ministers and bankers around the world and will be quickly confirmed. He was passed over two years ago for the ideological Wolfowitz who didn´t take long to alienate the bank´s staff as well as financial leaders around the world with his focus on ideology rather than performance. Look for Zoellick to turn that around quickly and to rebuild the trust in the institution. Unlike Wolfowitz, who placed his own interests ahead of the institution he was elected to lead, Zoellick has always been a builder of competent institutions who gets things done.

Zoellick´s selection has echoes of the replacement of Dick Grasso, the charismatic leader of the New York Stock Exchange by the very competent John Thain. The NYSE has flourished under Thain´s leadership, as he has quietly led it into the era of electronic trading and global trading.

It is ironic that several of the most competent leaders of today were initially passed over by their boards who gave preference to charismatic leaders instead. When these charismatic leaders got their companies in trouble, the boards turned to these competent leaders to bail the company out. Just look at the enormous success these leaders have achieved:

o A.G. Lafley at Procter & Gamble was passed over for the charismatic Dirk Jager. In less than two years Jager´s abrasiveness and abandonment of long-held P&G values led to a revolt of its management and his replacement with Lafley. Lafley has rebuilt the trust in P&G while quietly transforming the company into a global powerhouse in consumer goods.

  • Anne Mulcahy at Xerox was also passed over for IBM star Rick Thoman, who led the company to the brink of bankruptcy in just thirteen months. Mulcahy avoided bankruptcy and rebuilt Xerox by focusing on its core products, new technologies, and customer service while reducing the company´s debt by 60 percent.
  • Andrea Jung of Avon was also passed over by the appointment of a board member who came from Duracell, the battery company. In just twenty months the Avon board recognized its mistake and replaced him with Jung. Jung quickly changed the company´s mission to “the empowerment of women” and built her organization from 1.5 million to 5.5 million people, the largest in the world.
  • The board of Hewlett-Packard recruited the highly charismatic Carly Fiorina as its CEO. Fiorina hit the top of Fortune´s “Most Powerful Women” lists several times, just as the company´s performance was tanking and its organization imploding. To replace Fiorina, the H-P board recruited Mark Hurd, another highly competent, but not charismatic, leader. In less than two years, Hurd has put H-P back on track, as it regains lost market leadership and its original culture.

Some of today´s top leaders were simply recognized for their competence – and have demonstrated it time and again, while building great organizations capable of sustaining growth:

  • Steve Reinemund led PepsiCo to great heights for six years before deciding to focus on his family and teenage twins.
  • Bob Ulrich took over the reins of Target from a failing leader a dozen years ago and has quietly transformed the company into the retail powerhouse with its great values for consumers with fashion-forward merchandise.
  • Doug Conant has transformed Campbell´s Soup into a growth company once again by developing competent, authentic leaders throughout his organization.

There are many more examples of competent leaders who are emerging as the giants of the 21st century: Dick Kovacevich of Wells Fargo, Jeff Immelt of GE, Rex Tillerson of ExxonMobil, Sam Palmisano of IBM, Ken Lewis of Bank of America, Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, Ken Chenault of American Express, and Dan Vasella of Novartis. All of them give priority to building leadership in the marketplace and authentic leadership in their organizations over publicity for themselves. They all have well controlled egos and are focused entirely on building great organizations.

Isn´t it time for corporate boards to abandon the needless search for charismatic leaders and simply promote the competent, authentic leaders right in front of them? These new leaders may not impress Wall Street by hyping the company´s stock, but in the long-run they will create far greater shareholder value by building authentic growth organizations that stay focused on their True North.

Where Have All the Leaders Gone?

Paul Wolfowitz, Alberto Gonzales, Joseph Nacchio of Qwest, Heinrich von Pierer of Siemens, . . . What do they have in common?

A failure to accept the responsibilities of leadership.

No one seems to be willing to take responsibility for leading anymore. Either they “don´t know,” “can´t recall,” or “were just following their lawyer´s advice.” These leaders are either asleep, incompetent, not telling the truth about their actions, or simply unwilling to be responsible leaders.

What ever happened to leading with honor and accepting full responsibility for leadership? It brings to mind the title of the introduction to my first book, Authentic Leadership, “Where Have All the Leaders Gone?” – that is also the title of Lee Iacocca´s new book.

Let´s look at what these leaders have done or said and explore the common threads:

Paul Wolfowitz:
Wolfowitz directed the World Bank to pay after-tax compensation at the State Department for his “friend” Shaha Riza which exceeded the amount paid to Secretary of State Condoleezza Rice, and refused to own up to it. In so doing, he has besmirched the values of the office he is sworn to uphold, and completely undermined the credibility of his “anti-corruption” campaign. In working behind the scenes to hang onto his job, he risks cutting so many deals that he will render the power of his office useless.

Why doesn´t Wolfowitz resign with honor?

Alberto Gonzales:
Under oath before the Senate Committee, Gonzales testified time after time that he “could not recall” being involved with the decisions to eliminate the nine prosecuting attorneys and replace them with Bush loyalists. Couldn´t recall? Where was he on such an important decision? Either he failed to do his job, or he had a convenient memory lapse. In hanging onto his job, he damages the credibility of the Attorney General, and brings dishonor to the President.

Why doesn´t Gonzales resign with honor?

Joseph Nacchio of Qwest:
Last Thursday Joseph Nacchio, the former CEO of Qwest, was convicted on nineteen counts of insider trading for selling his Qwest stock just before it collapsed, at the same time he was giving shareholders rosy predictions about earnings growth. Nacchio led Qwest´s hostile takeover of U.S. West, a regional Bell operating company, drove its stock price to $60/share by initiating dramatic cuts in its service levels, and then sold his stock while the stock price declined all the way to $1.07 per share when the telecommunications bubble burst.

Shortly thereafter, he was replaced as CEO by the Qwest board of directors. Now it seems our legal system has judged him accordingly.

Heinrich von Pierer of Siemens:
As CEO and now chairman of Siemens during the 1990s, Heinrich von Pierer was one of Germany´s most respected business executives. He resigned last week to remove himself as a focal point of criticism of the firm for its alleged $500 millions in illegal payments by its communications division. While von Pierer claimed no knowledge of the payments, one has to wonder how engaged he was in the business if he did not know, or why he had not put in an effective audit system that would reveal the payments.

To his credit, von Pierer did the honorable thing and resigned.

 

All of these cases lead the general public to the conclusion that leaders can no longer be trusted. This is a very dangerous conclusion because the very nature of leadership requires that leaders maintain the trust and confidence of their constituencies.

 

The problem is not that leaders cannot be trusted. Rather, we are choosing the wrong people to lead. We should choose responsible leaders who are well grounded in their values and place the interests of their institutions and their constituencies ahead of their own. We don´t need leaders of public or private institutions that are known for their charisma, their style or their image. We need leaders known for their character, their substance, and their integrity. We need leaders who have demonstrated throughout their lives the capacity to lead in a responsible manner, especially under pressure – and when they fail in their responsibilities, to resign with honor.