Chapter One
Trusted Leadership as an Imperative for Success
The price of greatness is responsibility.
Winston S. Churchill1
the giant multinational pharmaceuticals company Novartis SA contributes more than 2 percent of its annual sales—in 2005 $696 million—to its Access to Medicine program, which gives away drugs to those most in need around the world. The program has cured more than 5.5 million patients of leprosy, treated more than 3 million malaria sufferers, and provided more than half a million free treatments for tuberculosis. "As leaders, we are responsible for setting an example through our actions," says Novartis CEO Daniel Vasella.
when ed breen became chairman and CEO of Tyco International after Dennis Koslowski left under a cloud of suspicion, investors adopted a wait-and-see attitude. But their patience wouldn't have lasted long had Breen not stepped forward almost immediately with a solid hundred-day plan.
Breen told investors that he was:
1. Committed to integrity
2. Dedicated to strong corporate governance
3. Focused on customer satisfaction
4. Intent on strengthening leadership in subsidiary companies
5. Devoted to creating a positive environment for employees
Breen's stated goals were reinforced by his behavior. During his first hundred days he fired the board, hired a senior vice president of corporate governance, rebuilt every senior corporate direct report, devised a new operating blueprint, and put everything under a Six Sigma umbrella. The result was an entirely new corporate culture and a rebuilt internal trust. That's the kind of affirmative action Wall Street recognizes and usually rewards.
when anne mulcahy became president of Xerox in 2000 the company was facing a looming liquidity crisis. She boldly announced that Xerox had "an unsustainable business model" and would have to undergo a dramatic, transformational shift. The stock price almost immediately plunged 26 percent. But Mulcahy realized that as the top executive driving a sharp turn, her most critical job was to be brutally honest to those outside and inside the company about Xerox's near-term future. She realized the urgency and the need to motivate Xerox's employees. In twelve months she traveled 100,000 miles talking to employees about the new direction she wanted to take the company. The stock price tripled between December 2000 and February 2006.
In 1997 Sir John Browne, group chief executive at BP (formerly British Petroleum), stood before an audience of fellow executives at Stanford Business School and pledged to cut carbon dioxide emissions by 10 percent in five years in order to combat global warming. At the time, most of the business world—and certainly the other oil industry leaders—weren't even admitting that global warming was a serious problem. Soon afterward BP launched its new green sunburst logo with an ad campaign aimed at signaling that the oil business as usual was a thing of the past at BP. Browne began talking about earning a seat at someone else's table, not just allowing critics to sit at his table.
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the four disparate CEOs mentioned above, whom we'll meet in detail later, share a common characteristic: They have all made earning the trust of stakeholders the cornerstone of building their companies' bottom lines. Once ubiquitous, such leaders are only now coming back to the forefront of international business.
It wasn't long ago that the vast majority of corporate leaders were heroes, lionized in the press, on television, and in boardrooms, even leaders of unprofitable companies were looked to as sources of wisdom and enlightenment. No longer. In the wake of the indictments and convictions of former top executives at WorldCom, Adelphia, Tyco, Enron, and elsewhere, even the best news from the corporate arena is subjected to intense scrutiny.
Corporate decisions are questioned everywhere, from the halls of Congress and city councils to annual meetings to the blogs. Shareholders, whom you might expect would want companies to do everything possible to make high profits, are increasingly reading between the numbers and questioning the reality behind them. The corporate scandals of the recent past have taught them that they too can be fooled.
The misdeeds of a handful of top executives have done serious damage to the institution of the CEO and have exacerbated the pressures on all executives. Lack of trust has eroded the goodwill and respect they previously counted on in doing their jobs. All companies have suffered from this bad behavior. According to a 2004 Gallup poll, only about 20 percent of the American public rated business executives as "high" or "very high" in honesty. Only lawyers and car salesmen ranked lower.2
Corporations are perceived equally poorly. According to the international survey firm Globescan Inc., only 38 percent of people around the world trust that global companies will operate in the best interests of society, compared with 68 percent who feel this way about NGOs, also known as nonprofit organizations.3 Clearly, business leaders are perceived to be operating without a strong set of values.
Losing Credibility
Leaders who find themselves frustrated by their inability to get people to cooperate with them on the tasks vital to the success of their companies can probably trace this failure to a lack of trust that has developed among one or more important stakeholder groups. A leader doesn't have to break promises on the level that executives at Enron and AIG did to breed mistrust. One obvious example is when a CEO promises Wall Street a certain result and fails to deliver. But a disingenuous advertising campaign is equally damaging. A corporate image program that proclaims "Employees are our most important asset" while the company is at the same time laying off great numbers of people is not going to resonate with the employees who remain behind. As a result, the next time the CEO asks for sacrifice and team effort, he is less likely to get it.
Trust is harder than ever to cultivate, primarily due to a few well-publicized examples of executives who have been lax in carrying out their responsibilities to their stakeholders. Globally, this failure of trust and focus on shortsighted, greedy, or unethical behavior has greatly affected the ability of leaders to do their jobs.
Job Insecurity
As a result of these new attitudes toward corporate leaders, the premature departure of a CEO is no longer the exception; it is the rule. CEOs worldwide can now expect to spend only three years in their current positions, and 40 percent of all new CEOs will lose their jobs within eighteen months.4 According to a recent study by the human resource consultant Drake, Beam & Morin, a CEO appointed after 1985 was three times more likely to be fired than a CEO appointed prior to that date. Only one in four companies worldwide kept the same CEO during the 1990s, half (51 percent) of all CEOs hold their position for less than three years, and 72 percent have been in office for less than five. Only 12 percent have been in their position for a decade or more.5 And at the start of 2006, eight of the thirty companies in the Dow Jones Industrial Average began the year with a different CEO than they had twelve months earlier.6
The Wall Street Journal likened the year 2005 to that of 1989, comparing the symbolic, powerful imagery of the fall of the Berlin Wall to the "fall of a string of powerful chief executives."7 Arthur Levitt, former chairman of the Securities and Exchange Commission, calls the transformation that's been occurring at the top executive level a "vast cultural change." He places the blame squarely at the top, arguing "the common catalyst for this unprecedented spurt of board action and for many of the more than 100 CEO changes last month [April 2005] is nothing less than hubris."8
CEO Survival
How does a CEO survive in this unsettled environment? The easy answer is by maintaining shareholder value, largely measured by a company's stock price. Booz Allen Hamilton's 2004 CEO succession report found that underperformance—not ethics, not illegality, not power struggles—is the primary reason CEOs get fired.9
At first glance, this seems self-evident. A CEO's reputation will always be grounded in his or her ability to deliver sound financial performance. That's why CEOs have traditionally been, first and foremost, financial managers, and why indicators like profit, competitiveness, and costs loom so large in the thinking of so many leaders. The pressure to make the numbers Wall Street expects reinforces those tendencies. The market looks favorably on companies that meet quarter-to-quarter targets and punishes those who do not. We've all seen the Street's harsh reaction when earnings deviate even slightly from forecasts and expectations. This trend has become even more pronounced as hedge funds have assumed control of a higher percentage of traded assets. It's no wonder that corporate leaders sometimes take short-term measures to temporarily boost performance, like a onetime sale of an asset, or booking a large order prematurely.
But there is a fatal flaw in this strategy. For CEOs, indeed for anyone responsible for a profit center, the most obvious way to keep their job may be to make certain the company or division meets short-term targets. The problem is that no company's stock price rises in an endless line. Every company goes through business cycles with varying levels of performance.
Fortunately for some, unfortunately for others, we have entered a new era in which financial performance is no longer the only predictor of CEO longevity. In this new environment, financials are important, but only insofar as they are a measure of leadership success. Simply getting your stock to soar or posting spectacular yearly results is no longer enough. Today's more sophisticated stakeholders consider those only partial measurements of performance. Over the long term, a leader can only survive the inevitable financial ups and downs by convincing a company's various stakeholders that he or she is the person with the drive and vision to keep the company on its best course. A mark of success is the ability to inspire trust in others.
A Matter of Values
Corporate social responsibility has become so frequently discussed that it has attained its own acronym, CSR. Yet too many leaders still believe that CSR is no more than window dressing—something nice to do, but not nearly as important as short-term results. Those are the leaders who tend to cut these programs when the economy softens or their results falter. But such inconsistency undermines trust, even among shareholders who used to look only at financial performance. Not only do stakeholders want to believe a company's leadership has a firm set of values, but there is also emerging evidence of a correlation between financial performance and measures of corporate social performance. (I discuss this further in chapter 2.)
"The real goal of corporations these days is high performance with high integrity," explains Ben Heineman, GE's senior vice president for law and public affairs during the prosperous Jack Welch years. "The critical secret sauce is how you interrelate these two elements into your systems and processes. And then how do you create a culture so that people are complying with both the law and with the ethical standards your company has adopted, not just because if you don't, you'll be punished, but because you want to? Ethical behavior must be internalized so that it's not something people do because they're afraid of getting caught, but because it's something they believe is right." (Ben Heineman; in discussion with the author, February 2006.)
Values and Profits
There are plenty of examples of companies that have flourished while pursuing a value-based corporate strategy. Daniel Vasella, chairman and CEO of the pharmaceutical company Novartis, believes that Novartis's strong financial results are "the consequence of good work."10 Vasella is a strong advocate for making corporate social responsibility a part of a company's business plan. He believes his company's core value should be to "develop innovative medicines to ease suffering and cure diseases," and its corporate purpose not to develop me-too, salable products of limited market need.
Vasella has shown that eschewing a philosophy of maximizing profit no matter what does not have to yield poor financial results. In fact, putting this personal value system into practice as a corporate goal has further fueled the company's financial performance, which stands out among its competitors. "It may sound trite," says Vasella, "but I truly believe your ability to keep your shareholders' faith in the company in the end depends not on whether you ‘make the quarter,' but on who you are, what your guiding principles in life are, and your behavior."11
A Strong Set of Values Will Disarm Your Critics
Most critics really care about the actions taken by your company. They probably have very specific objections, and because communications now go worldwide in a nanosecond, they have the ability to spread negative information rapidly to employees, customers, Wall Street, and your other stakeholders. But they can also spread positive information just as quickly. Smart leaders don't resist or avoid their critics. Instead, they make room at the table and engage them in two-way communication. The goal is to open a frank dialogue—and make warranted changes so that significant critics know you are listening to their concerns. Once that happens they will, amazingly enough, grow quieter. They may even begin helping you to communicate some of your positive messages. Approaching critics in the right way begins by opening a dialogue with the most powerful people, who have the longest reach, among your most important stakeholders. Remember that your critics can come from any of the other stakeholder groups—investors, employees, customers, or NGOs. Often they come from all these groups simultaneously. There is an interconnectivity among these populations that never existed prior to their ability to so easily communicate with each other.
You can learn a lot by investigating what is being said about your company in blogs. Send representatives to significant NGO meetings and ask for personal meetings with major critics. And when you get there, avoid defensiveness. Don't try to justify your actions; just listen for a while. Do your best to understand their objections and objectives. Sometimes you may have made assumptions about their goals that are far from the truth. Your aim should be to find any common ground and leverage them to achieve common goals. But even if you can't, be sure to get the conversation to the point (perhaps not in your first meeting) where you can agree to disagree. Then maintain communications about what you are doing to deal with their concerns. You never know when an action you take will change minds.
Copyright © 2007 by Kathy Bloomgarden. All rights reserved.
