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Bill George

Harvard Business School Professor, former Medtronic CEO

Category: Press

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.

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.

True North and Valentine’s Day

It is just four weeks and a day until the official launch of True North, and the excitement of our team as well as my own excitement about the launch is growing rapidly.

(For those of you who would like the first copies off the press, I suggest you pre-order True North at a handsome discount from or We guarantee that you will have your copy prior to the March 15 launch date.)

Why did I write True North (with wonderful help from Peter Sims)?

After I wrote Authentic Leadership, many leaders asked me, “How can I become an authentic leader?” Admittedly, I never answered that question, as one critical reviewer pointed out. Jim Collins, in his best-selling Harvard Business Review article on Good to Great rhetorically asks a similar question, “How can you become a Level 5 leader? The answer is, we do not know.”

Over one thousand studies done in the last fifty years have failed to produce verifiable answers to that question. My colleagues at Harvard Business School encouraged me to find out the key characteristics, skills, competencies, and styles of authentic leaders that made them so successful.

With the assistance of my colleagues Diana Mayer and Peter Sims, I set out to find out. In the space of just six months we interviewed 125 authentic leaders from business and non-profit organizations, ranging in age from 23 to 93, about how they developed as leaders. These in-person interviews lasted an average of seventy-five minutes, resulting in 3,000 pages of transcripts. All in all, it represents the largest, in-depth study ever conducted on how leaders develop.

The results were striking. These 125 leaders did not identify any characteristics or competencies that made them successful. Instead, they talked about their life stories and the people and the transformative events (which we call “crucibles”) that enabled them to find their passions and the purpose of their leadership and to lead authentically. They shared their motivations, the ways their values were tested, and the many things they did to sustain their leadership, in spite of the pressures and seductions they faced in their leadership roles.

Most importantly, they talked about their “True North,” which many described as their inner compasses that enabled them to stay true to who they are and to their deepest beliefs when faced with the enormous pressures and seductions they faced in their leadership roles. That´s why we decided to title the book, True North, and to use the metaphor as a compass to guide you on your leadership path.

In True North we share well over one hundred stories told to us by these authentic leaders – some short and some quite extensive – that capture the essence of how you can discover your authentic leadership. And we include a series of exercises that I have used in my course at HBS, “Authentic Leadership Development,” to give you the tools to guide you on your way.

A warning: there are no quick fixes here, no easy answers. (If you want easy answers, pick up a book of fables at the airport the next time you are taking a flight. By the time you arrive, you will feel a lot better, but you won´t know any more about how to become an authentic leader.)

Becoming an authentic leader takes a lot of work on your part because ultimately you are responsible for developing yourself as a leader. Mentors, courses, and books like True North can serve as a guide, but there is no way to get there other than taking responsibility for developing yourself. But doing so is a heck of a lot more rewarding.

I hope you will go on-line and pre-order True North, and then send me your reactions and your stories to this website. I will take the best of them and use them in the many speeches and media appearances coming up as a way of illustrating your True North – without violating your confidentiality.

Good reading!

‘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.