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Bill George

Harvard Business School Professor, former Medtronic CEO

Category: Business

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.

Are CEOs Overpaid?

Not if they create great value for their shareholders. Here´s why:

The controversy over CEO pay will continue to heat up as corporations announce their CEO´s pay according to the new transparency tables mandated by the SEC. That´s a good thing. But we need to distinguish between CEOs who create value for their shareholders over the long-term and those who destroy it.

What really upsets me is the number of CEOs who destroy shareholder value and walk away with tens or even hundreds of millions of dollars for failing. Remember Bob Nardelli´s $210 million payout for his failures at Home Depot? Today´s poster child for an overpaid CEO is John Antioco, who presided over Blockbuster Videos´ loss of market share to Net Flix and led his company into the red during his ten-year tenure. Why did the board sit idly by as Antioco´s failure to lead destroyed 75% of the company´s shareholder value over the past five years?

It took the election of a dissident shareholder by the name of Carl Icahn to get the board to act. And now they have acted responsibly in using “negative discretion” to reduce Antioco´s contractual termination pay from $21 million to $8 million. My question is this, why did the board fail to act until pressured by Icahn? Why did Antioco have a contract that guaranteed him termination payments in the first place? I have served on the boards of some of America´s leading companies, and none of their CEOs, myself included, have contracts. They serve at the pleasure of the board, which in turn is elected by the shareholders to protect their interests, not those of the management.

Contracts for CEOs are the root cause for the inequities in executive compensation, precisely because they are designed to protect the CEO in case of failure. Of all people in the organization, the CEO should be the most at risk when the company fails to perform and the best rewarded when it succeeds, not the reverse that we have seen in recent months. First-line employees at Blockbuster and other companies have no contracts guaranteeing their jobs or their pay, so why should the CEO?

Some will argue that boards recruiting CEOs from outside the company have to guarantee their pay with a contract. That problem just highlights the real cause of the problem: when the board has to look outside its ranks for a new leader, it has failed in its responsibility to provide adequate succession for management. In other words, the board has failed to do its most important job in ensuring the company´s continuity of leadership.

In sharp contrast to Blockbuster´s failed CEO, look at these two examples from today´s news:

  • Delta Airlines CEO Gerry Grinstein, who shepherded the company through its reorganization to come out of bankruptcy, will not receive any severance, incentive payments or stock when he retires and a new CEO is chosen.
  • Ken Lewis, chair and CEO of Bank of America, one of America´s largest banks, received $23 million in compensation last year, only $1.5 million of it in salary. Too much? I would argue not, because he and his organization have performed so well for their shareholders. During the last five years B of A´s shareholders have been handsomely rewarded as its returns have been 2.5 times greater than the Dow Jones Industrial Average. Lewis exercises his stock option gains not to maximize his gains, but on a pre-programmed earnings basis.

The time is long overdue for corporate boards to “pay for performance,” not for failure. For increasing long-term shareholder value, not destroying. And for building succession into the ranks of management to ensure leadership continuity.

I welcome your comments and feedback to these ideas.

‘The Takers’ Part II – The Executive Compensation Uproar

Two weeks ago President Bush had the audacity to say that executive compensation should be based on “pay for performance” and long-term incentives. As reported by the media present at this event, the business executives in his largely Republican audience sat in stunned silence. No one spoke in support of his proposal.

As often as I disagree with the President in matters of foreign affairs and government budgets, I think he is right on the money here. Who can argue with “pay for performance”? Only the “takers,” I guess. Why didn´t the business community rise up in support of the President on this point? Were we too focused on getting whatever we could take from the system?

The President was simply stating a basic principle of capitalism: those of us engaging in capitalistic businesses get rewarded for creating value. In my experience, those capitalists that create long-term value for their organizations and their shareholders claim the greatest gains. Think of Bill Gates, Warren Buffett, the late David Packard, Michael Dell, and Oprah Winfrey.

Are we so enamored with people like Bob Nardelli, Bill McGuire, Donald Trump, Marc Rich, and Michael Milken and their enormous wealth that we are prepared to abandon even the most basic principles of capitalism? If we are, I predict that capitalism is doomed. We will have regressed to Russian-style capitalism: take all you get for yourself legally, and then take whatever else you can get illegally, and ship your spoils out of the country. Be sure to keep your passport with you and your private jet available at all times so you can get out of the country before the law catches up with you, as it did with Jeff Skilling, Bernie Ebbers, Dennis Koslowski, Richard Shrushy and their compatriots.

It´s about time the rest of us who care about the future of capitalism speak out on behalf of “pay for performance” and not leave the President standing alone.

Let me know your views on these thoughts.

P.S. If I have offended any of you who are “takers,” please look in the mirror before responding.