The Success Formula: How smart leaders deliver outstanding value 9781472916846, 9781472917577, 9781472916860

Table of contents :
Title Page
Copyright Page
Contents
Chaper 1 Understanding value
A variety of values
Delivery failure
Banking without value
Flaws of the value jungle
Testing, testing
Value creation
Belief limited
Delivered value
Equating success
Best formula
Understanding value: In summary
Key questions
Chapter 2 Diversity of thinking
The road to diversity
A way of working
Global thinking
Diversity plus
Components of diversity
Making sense of diversity of thinking
Diversity of thinking: In summary
Key questions
Chapter 3 Discipline 1—Evidence
Pragmatic science
Evidence-averse
Knowing the unknowable
Evident characteristics
The discipline of evidence: In summary
Key questions
Chapter 4 Discipline 2—Mission
Command and liberate
How mission impacts the organization
The vision thing
The meaning of vision
Mobile missions
The discipline of mission: In summary
Key questions
Chapter 5 Discipline 3—Alignment
Wrestling with alignment
Aligned and engaged
Aligning HP
Alignment of thinking
Alternative energy
Strategy versus Delivery
Working through politics
Understanding politics
Systems and people together
The discipline of alignment: In summary
Key questions
Chapter 6 Discipline 4—Engagement
Engagement direct
Blue Ocean value
All’s fair
Rules of disengagement
Visioning—Top team
Dialogue—Top team
Building the capability to hear
Foundations of engagement
Dialogue versus debate
Finally engaged
The discipline of engagement: In summary
Key questions
Chapter 7 Discipline 5—Leadership
The leadership challenge
In flight change
Leadership for a purpose
The good, the bad, and the ugly
The discipline of leadership: In summary
Key questions
Chapter 8 Discipline 6—Governance
Governance as we know it
Toothless tigers
Dynamic governance
Making dynamic governance work
Enterprise fault lines
Who owns what?
The discipline of governance: In summary
Key questions
Chapter 9 Discipline 7—Wisdom
Evidence-led wisdom
Disruptive wisdom
Telescopic thinking
Reflective wisdom
Maturing wisdom
Capturing wisdom today
Learning wisdom
Neuro wise
Dilemmas and wisdom
Three dilemmas
Working wisdom
The discipline of wisdom: In summary
Key questions
Chapter10 Key questions
Questions for the CEO
Questions for the chairman
Notes
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Index

Citation preview

Praise for The Success Formula “Andrew Kakabadse’s book offers unique insights and practical suggestions. Success, particularly in turbulent and unpredictable environments, is driven by value and decisions anchored to value. A recent parliamentary commission on future of management identified people, purpose, and potential as drivers of success. This book offers practical suggestions in all three areas.” Professor Abby Ghobadian, Head of School of Leadership, Organisations and Behaviour, Henley Business School “In front of the ‘hard’ leaders are the smart leaders. A world filled with smart leaders.” Yvon Pesqueux, Professor, Conservatoire National des Arts et Métiers, Paris, France “Understanding what makes a successful organisation is vital in today’s fast changing environment – The Success Formula explores the relationship between, values, evidence, strategy and engagement.” Lesley King-Lewis, CEO, Windsor Leadership “Finally we have a book which recognizes that organizations cannot achieve genuine sustainability unless social value is given equal weighting to shareholder, other stakeholder and financial value. If there is a strong values base, diversity of thinking and effective governance, organizations can build long-lasting success.” Simon Osborne FCIS, Chief Executive ICSA

“This book contains a multitude of insights concerning success that Andrew has derived from interviews with senior managers from over a 100 organizations in 14 countries. It provides much useful advice as to how to recognize successful organizations and how to determine what is required to make success a reality.” Dr Chris Pierce, CEO, Global Governance Services Ltd., London “Kakabadse’s extensive global research shows how few top companies have a proper engagement with their stakeholders and his evidence reveals the great and sustainable success arise from so doing. A must read for the C suite and the Board.” John Board, Dean of Henley Business School “Once again, Dr Kakabadse’s in depth research draws out governance and dynamic governance insights, helping us to drive value in our companies.” Yasmin Allen BCom, FAICD and Company Director, IAG, Cochlear and Santos Ltd “The evidence-based account, and unparalleled access, of Professor Kakabadse cuts like a knife to the very heart of this complex and frequently misunderstood subject. This book is a must read for anybody attempting to come to terms with organizational success - or failure.” Dr Ian Richardson, Director of Executive Education, Stockholm Business School, Stockholm University “I read The Success Formula with great interest, and recommend it to any business manager who seeks to ensure the health and continuity of the enterprise he/she leads. Andrew Kakabadse’s guidelines in this book strike me as convincing and eminently practical.” André van Heemstra, Former member of the board of Unilever “This book is about leadership, about sustaining vision and values to deliver consistent quality, about the humility to respect the team and the intellectual rigor to challenge its certainties. This is a manual on how values generate value.” Dr. Ilia Roubanis, Athens

“The Success Formula is a refreshing read for those leaders committed to employee engagement and transformational results. It underlines the role of the leader in building alignment and delivering results based on trust, authenticity and a clear Organisational purpose.” John Pollaers, Chairman of the Australian Advanced Manufacturing Council and Former CEO of Fosters Group and Pacific Brands “There a few books which combine such outstanding academic knowledge and real world experience on leadership as this one. Government and business leaders in Europe should use it when preparing for the challenge to bring back economic growth and social progress.” Dr Stefan Schepers, Secretary General of the independent tripartite High Level Group on Innovation Policy Management (2012–2014) “Andrew and David have produced seriously worthwhile insights and a global perspective on success. They focus on reality coupled with sound delivery processes as a basis for successful decisions and that’s just the beginning!” Peter Jollie, Director, Reliance Rail “Kakabadse has produced yet another outstanding work, cutting through the complexity of leadership to the heart of the issue to provide an accessible and actionable formula for success.” Robert Galavan, Professor of Strategic Management, National University of Ireland Maynooth

The Success Formula

The Success Formula How smart leaders deliver outstanding value

Andrew Kakabadse

Bloomsbury Information An imprint of Bloomsbury Publishing Plc LON DON • N E W DE L H I • N E W YOR K • SY DN EY

Bloomsbury Information An imprint of Bloomsbury Publishing Plc 50 Bedford Square 1385 Broadway London New York WC1B 3DP NY 10018 UK USA www.bloomsbury.com BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published 2015 © Andrew Kakabadse, 2015 Andrew Kakabadse has asserted his right under the Copyright, Designs and Patents Act, 1988, to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. No responsibility for loss caused to any individual or organization acting on or refraining from action as a result of the material in this publication can be accepted by Bloomsbury or the author. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: HB: 978-1-4729-1684-6 ePDF: 978-1-4729-1686-0 ePub: 978-1-4729-1685-3 Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress.

Design by Fiona Pike, Pike Design, Winchester Typeset by Deanta Global Publishing Services, Chennai, India

Contents About the author

xi

Acknowledgmentsxiii List of figures 

xix

Forewordxxi Prefacexxiii Introductionxxv   1 Understanding value

1

  2 Diversity of thinking

23

  3 Discipline 1—Evidence

43

  4 Discipline 2—Mission

61

  5 Discipline 3—Alignment

75

  6 Discipline 4—Engagement

95

  7 Discipline 5—Leadership

113

  8 Discipline 6—Governance

131

  9 Discipline 7—Wisdom

151

10 Key questions

177

Notes183 Index187

About the author Andrew Kakabadse is professor of governance and strategic leadership at Henley Business School, UK, and emeritus professor at Cranfield School of Management. He teaches and consults in corporations and governments throughout the world. His research covers boards, top teams, governments, and policy design. Andrew has published fortytwo books, over 240 articles, and eighteen monographs. His books include Leading the Board (coauthored with Nada Kakabadse), Bilderberg People (coauthored with Ian Richardson and Nada Kakabadse), and How to Make Boards Work which was co-edited by Lutgart Van den Berghe. In 2011 and 2013, he was named in the Thinkers50 ranking of the world’s top management thinkers. More information can be found at Andrew’s website: http://www. kakabadse.com. HEIDRICK & STRUGGLES We Help Our Clients Change The World, One Leadership Team At A Time™ Heidrick & Struggles is the premier provider of senior-level Executive Search, Culture Shaping and Leadership Consulting services. For more than 60 years, we have helped our clients build strong leadership teams through quality service, deep insights and our relationships with talented individuals worldwide. Today, Heidrick & Struggles’ leadership experts operate from principal business centers in North America, Latin America, Europe, Asia Pacific, Africa and the Middle East. For more information about Heidrick & Struggles, please visit www.heidrick.com.

Acknowledgments I would like to acknowledge with deep gratitude the fantastic inputs and insights of all those who spared time to be interviewed. Thank you to • Paul Achleitner, Chairman, Supervisory Board, Deutsche Bank, Germany • Achal Agarwal, President, Asia Pacific, Kimberly-Clark, Singapore • Michael Andrew, Global Chairman and CEO, KPMG, Hong Kong • Ilana Atlas, Director, Coca Cola Amatil, and portfolio NED, Australia • Gihan Attapatu, President, Ball Asia Pacific, Singapore • Jaspal Bindra, Group Executive Director and Chief Executive Officer Asia, Standard Chartered Bank, Singapore • Ian Blackburne, Chairman, Aristocrat, Australia • Peter Bodin, Chairman, Grant Thornton International, Sweden • Ken Borda, Chairman, Santos, Australia, and Chairman, Aviva Asia, Hong Kong • Graham Bradley, Chairman, Stockland Corporation, and portfolio NED, Australia • Alec Brennan, Chairman, EMECO Holdings Limited, Australia • Berndt Brunow, Chairman, Finnish Food and Drink Industries’ Federation, and Fazer Group, Finland • Stephen Chipman, CEO, Grant Thornton, LLP, Member firm of Grant Thornton International Ltd, USA • David Cunningham, President, Asia Pacific, Federal Express, Singapore • Georges Dabaghi, General Manager, Middle East and CIS countries, Vubiquiti, UAE • Lord Geoffrey Dear, House of Lords, UK • Bob Dudley, Group CEO, BP, UK • Doug Elix, Chairman, Advance Global Advisory Council, Australia, and retired Senior Vice President, Group Executive Sales and Distribution, IBM, USA • Jeff Fettig, Chairman and CEO, Whirlpool, USA

xiv Acknowledgments

• Mark Gainsborough, Executive Vice President, Global Commercial Business, Royal Dutch Shell, Singapore • Stephan Gerlich, Chairman, Bayer Group, Mexico • Chris Gibson-Smith, Chairman, London Stock Exchange, and Partnership, UK • Rickard Gustafson, CEO, SAS Airlines, Sweden • Stig Gustavsson, Chairman, Konecranes, Finland • Diane Grady, Director, Macquarie Group, and portfolio NED, Australia • Russell Higgins, Director, Telstra, and portfolio NED, Australia • Sarah Hillier, Team Manager, Northamptonshire County Council, UK • Jeremy Hunter, President, Henkel Adhesive Technologies, India • Belinda Hutchinson, Director AGL, and portfolio NED, Australia • Mike Jeans, Independent NED (Deputy Chairman), Gemserv, UK • Gunender Kapur, CEO and Managing Director, TPG Wholesale Private Ltd, India • Graham Kraehe, Chairman, BlueScope Steel, Australia • Sanjiv Lamba, Member of the Executive Board, The Linde Group AG, Germany • Ronnie Leten, CEO, Atlas Copco, Sweden • Rod Leaver, CEO, Lend Lease, Asia Region, Singapore • Lionel Lim, CEO, CA, Asia Pacific, Singapore • Catherine Livingstone, Chairman, Telstra, and portfolio NED, Australia • Kevin Lobo, President & CEO, Stryker Corporation, USA • Dave Mackay, Director, Woolworths, Australia, and retired President & CEO, Kellogg Worldwide, USA • Vadim Makov, Chairman, OMZ Group, Russia • Charlie Mayfield, Chairman, John Lewis Partnership, UK • Alexey Marey, CEO, Alfa Bank, Russia • Trevor Matthews, Chairman Financial Skills Council, and portfolio NED, Australia • Kevin McCann, Chairman, Macquarie Group, and Origin Energy Ltd, Australia • Paul McClintock, Chairman, Myer Holdings Limited, Australia • Darshan Mehta, President & CEO, Reliance Brands, Ltd, India • Bruce Morgan, Director, Origin Energy Ltd, and portfolio NED, Australia

Acknowledgments xv

• • • • • • • • • • • • • • • • • • • • • • • • • • • •

John Neill, Chairman and Group Chief Executive, Unipart Group, UK Helen Nugent, Chairman, Funds SA and portfolio NED, Australia Renè Obermann, CEO, Deutsche Telecom, Germany Michael Olosky, President, Henkel, Asia Pacific, Singapore Sir John Parker, Chairman, Anglo American, UK Jonas Persson, President APAC, Assa Abloy, Asia Pacific, Hong Kong Madhabi Puri Buch, Director, Agora Advisory, and Greater Pacific Capital, Singapore Ed Rapp, President, Construction Industries, Caterpillar, Singapore Monika Ribar, former CEO, Panalpina Group, Switzerland and portfolio NED. Diane de Saint Victor, General Counsel & Board Secretary, ABB, NED, Barclays Bank, Switzerland Ulf “Mark” Schneider, CEO, Fresenius Group, Germany Steve Sargent, CEO, GE Australia & New Zealand, Australia Nitin Seth, Managing Director and Country Head, India, Fidelity Worldwide Investment Ranjit Shahani, President, Novartis Group, India N Sivaraman, Whole-Time Director, L&T Finance Holdings Limited, India Sergey Soldatenkov, Chairman of Board of Directors, Megafon, Russia Ajay Srinivasan, CEO, Financial Services, Aditya Birla Group, India Sam Su, Chairman and CEO, Yum! Brands, China Rajesh Sud, Managing Director and CEO, Max Life Insurance, India Ashu Suyash, CEO, L&T Investment Management Limited, India Robert Swannell, Chairman, Marks and Spencer, UK Kim Taylor, Group Chairman, Asia Pacific, Johnson & Johnson, Singapore Shane Tedjarati, President and CEO, Honeywell Global, High Growth Regions, Singapore Michael Treschow, Chairman, Unilever, Sweden Arvind Uppal, Regional President, Asia South, Whirlpool, India Rajiv Verma, Group CEO, HT Media Ltd, India Petteri Walldén, Chairman, Nokian Tyres, Finland Vladimir Yakunin, President, RZD (Russian Railways), Russia

The designations and organization of each interviewee are as offered at the time of interview. Numerous respondents now hold different positions in different enterprises.

xvi Acknowledgments

Thank you also to all who have made this book possible. My heartfelt gratitude goes to Stuart Crainer and Des Dearlove, outstanding editors and accomplished authors in their own right. You have really brought this book to life. My deepest thanks go to my wife, Professor Nada Kakabadse, and Madeline Fleure, who patiently and with good humor prepared numerous drafts. Very special thanks to my Heidrick & Struggles colleagues who have given so generously of their time to make this project happen. My thanks to the partners and staff of Heidrick & Struggles, who arranged the interviews and discussions with top executives worldwide and developed and coordinated the global surveys. Thank you to Torrey Foster, Bill Matthews, and Randall Thorne in America Vicki Hickson, Russell King, Will Moynahan, Andrew Myers, Anabelle Parsons, and Dave Tullett in the United Kingdom Tuomo Salonen in Finland Alain Deniau in France Christine Stimpel in Germany Elise Andström and Carina Nordgren in Sweden Christina Atchison, Anna Knuckey, and Thomas Liddle in Australia Yao Li and Linda Zhang in China Karen Fifer, Robert Knight, Karen Lau, Richard Meiklejohn, Harry O’Neill, Seth Peterson, and Lily Siu in Hong Kong Rajiv Inamdar, Neha Jain, Arun Das Mahapatra, Gauri Padmanabhan, and Puneet Pratap Singh in India and Stafford Bagot, Karen Choy-Xavier, Charles Moore, Hamish Shaw, Frazer Wilson, and Alex Yew in Singapore

Acknowledgments xvii

In addition, there are my three Heidrick & Struggles colleagues without whom this project would never have taken off. Peter Lever in London championed and supported this project from the start with his initial thoughts on engagement and alignment. Thank you, Peter. My deepest gratitude goes to Steve Mullinjer in Shanghai whose thoughts on cultural diversity brought an exciting and new dimension to the original thesis. His support and thoughtful guidance has not only made this study possible but has enriched it with new insights. Finally, I wish to convey a very special thank you to David Pumphrey in Sydney for his facilitation, perseverance, and persuasion in making this project happen. He guided me through the study and through the writing of the manuscript and ensured that the process ran smoothly. I and this book have benefited considerably from his generous counsel. As you can see, this book has been made possible by an extraordinary level of team work. From those who gave their time for interviews, to those who organized one meeting after another, to those who managed the surveys, and to those who were part of the development of the manuscript, I am grateful for all you have done. Andrew Kakabadse

List of figures Figure 2.1 Diversity

40

Figure 6.1 Quality of relationships

100

Figure 6.2 Organizational performance qualities

109

Figure 6.3 Impact of handling awkward or sensitive discussions at an earlier stage

110

Figure 8.1 Enterprise fault lines

143

Figure 8.2 Input into the development of the corporate strategy 

146

Figure 8.3 Average number of meetings per annum

147

Figure 8.4 Shared view regarding the criteria for appointments to the Board 

148

Figure 8.5 Shared view regarding the criteria for the appointments to the Executives/ Management Team

148

Figure 9.1 Those involved in determining the strategic direction of the organization

174

Foreword Robert Swannell, Chairman, Marks and Spencer, UK What matters in business? First, results. Executives and their organizations have to deliver performances that satisfy all the stakeholders involved. Second, how you behave. What kind of manager and leader are you? What kind of culture do you help create and nurture in the organization? How do you treat people you work with? It is tempting, especially reading the media, to regard results as the be-all and end-all of corporate life and to begin to believe that they exist in some kind of vacuum. Reality is different. Results and behavior are inextricably linked. I don’t believe that true sustainable value can be created without values. If anyone didn’t believe that before the recent banking crisis, surely it is now clear. I spent my working life in banking. It’s a simple business at heart that depends on the trust of depositors and customers to exist from day to day. Trust depends on values and behaviors that are real and demonstrated every day, year after year. Businesses without values don’t stand the test of time. In terms of behavior, as a leader it is worth reminding yourself of how you would have liked to have been treated earlier in your career. If you were fortunate, you would have worked as part of a team where you were given freedom to make things happen and achieve results. Your role in the success of the team and the organization would have been acknowledged, perhaps celebrated. Often this does not happen. It should. The work of leadership is to build such engagement so that all contribute and their contribution is fairly acknowledged. The leader also must build trust. As a chairman, this is a vital part of my role. Trust is not an abstract concept; it is a day-to-day reality and it is built on respecting

xxii Foreword

individuals, listening to their concerns, and distilling and communicating them. The last element is vital. Communication needs to be open and should be encouraged throughout any organization. Engagement and trust take time. It is a long-term commitment, but one that needs to percolate into your daily activities. You must, for example, spend time on the front line of the business. In the retail world, this is comparatively easy. You can visit a store. You can feel the mood of the business and its ethos. But it is not that difficult in any business. Only by being there on the commercial front line will you really understand the company, its culture, and its performance. Results and behavior—not necessarily in that order—lie at the heart of my view of business. This coincides with the most persuasive themes of The Success Formula. As Andrew Kakabadse argues, business is not a complex science governed by a complex algorithm, but a compelling combination of art and science.

Preface For more than 60 years, Heidrick & Struggles has helped global organizations secure, build, and strengthen their leadership teams. As the complexities of leadership have increased, we have continued to explore the factors that underpin success. In this recent collaboration with acclaimed top leadership advisor and business author Professor Andrew Kakabadse of Henley Business School, we set out to better understand the dynamics of leadership, diversity, and the power of teams. Our goal in supporting the global research project that forms the foundation of The Success Formula was to cut through the clutter and demystify the link between leadership and sustainable business value in today’s fast-paced world. Accelerated globalization and technology have redefined the leadership skills to be successful in the global marketplace. Many CEO’s find their skills becoming obsolete as their organizations change in this volatile and unpredictable landscape. The new normal requires continuous shifts in people, process, technology, and structure to be competitive. The skills and abilities leaders once needed to create value in their organizations are no longer sufficient. New CEO skills are required to win in this new world. The ability to harness culture and diversity of thinking to strategy has emerged as a key competitive discipline for twenty-first-century leaders. Further questions were advanced and tested for the research. How, for example, do successful business leaders organize their strategies and teams to identify—and deliver on—fleeting opportunities in an era of relentless complexity? What matters most? Is it the advantage of crosscultural diversity across the management suite and the boardroom? Is it a bold strategy communicated robustly across all levels of the organization? What are the best companies doing and how can we learn from them? In The Success Formula, Andrew argues that in the new VUCA world (the military acronym for Volatility, Uncertainty, Complexity, and

xxiv Preface

Ambiguity), strategy works best when leaders create an evidence-based culture—one in which they are able to transform their vision into their organization’s purpose and encourage diversity of thinking to gain alignment and engagement. An organization needs to have a culture with which people are engaged and aligned before their strategy will deliver real value. And diversity of thinking is the glue that creates a common culture that encourages adaptive advantage in highly diverse markets. It provides a new model for globalizing an organization. The best-led organizations have their eyes open to opportunities, ideas, and perspectives. They embrace them where once they attempted to railroad a way through them. Evidence and reality checking are a vital part of building the organizational coalitions and momentum required to succeed and overcome obstacles in the twenty-first century. Andrew talks persuasively of the need for evidence-based leadership. For senior executives, this means that each and every leader in an organization must be constantly engaged with how the company creates value in a complex and ambiguous world. Strategy matters, but leaders must use practical evidence to illuminate reality and be willing to question—and even shatter—the status quo when necessary. The power of evidencebased leadership is its ability to harness multiple stakeholder points of view to create a dynamic strategy that engages and aligns the organization to create sustained value. Andrew’s research is robust and practical. The book explores the seven disciplines vital to fulfilling the success formula and concludes with a series of thought-provoking questions that provide a starting point for CEOs and chairmen to apply the findings in today’s fast-paced, complex, and uncertain world of business. We hope that The Success Formula helps you approach your organization’s challenges and opportunities with renewed vigor and a clearer sense of purpose. Strong leadership is required. With it, our teams will be empowered to not only succeed, but change the world. Steve Mullinjer Regional Managing Partner, Asia Pacific Heidrick & Struggles

Introduction Each and every organization—and individual—has an idea of what success looks like. It might be a matter of getting through the next quarter, mere survival. It might be a specific target—a level of profitability, market share, ROI, or some other on offer from the host. It might be a grand vision of creating a different world. Over the last five years, I have traveled across the globe interviewing leaders to gain new insights into the nature of organizational success and how it is created. In-depth interviews were carried out in over 100 organizations in private, public, and third sectors in fourteen countries. Insights and quotations from the research interviews are used throughout the book. Those interviewed were all senior leaders in their organizations, including many CEOs and chairmen. Their companies, from Europe, North America, Asia, Africa, Australasia, and the Middle East, spanned industries from financial services to fast-food restaurants; airlines to IT; car making to chemicals; public services to pharmaceuticals; software to shampoos; heavy machinery to home appliances; telecoms to transportation; mining to banking; cereals to minerals; and retailing to railways. The Success Formula is the result. My research—supported by the global leadership firm, Heidrick & Struggles—found that the starting point for any successful organization (or, indeed, any individual) must be value. Always. Value is the currency of success. The types of value organizations seek to create and how they approach doing so lie at the very core of any understanding of what success looks like and what is required to make it a reality. Different types of organizations seek to create different sorts of value— whether it is shareholder value, social value, stakeholder value, or financial value. But all organizations must create value to legitimize their existence and to be regarded by themselves and others as successful.

xxvi Introduction

Creating value, therefore, is the primary purpose of leadership and the building block of every success story that adorns annual reports, magazine covers, and more. How do leaders create value? And how do they create value that can be sustained? The leaders I talked to in my research fell into one of three broad categories, according to their approach to value creation. Their approach was typically one of the following: • Replicate: reproduce a previously successful strategy/value proposition. • Formulate: take a gamble on an unproven strategy/value proposition. • Evidence-led: Create a value proposition hypothesis and interro­ gate it with evidence. Clearly, the replicate and formulate approaches are flawed. Replicating what worked elsewhere is a surprisingly commonplace approach. After all, that is what many consulting firms effectively sell. I have also encountered many executives who have simply applied the same approach, wisdom, and ideas at a series of organizations; they are corporate groundhogs in search of their next groundhog day. The value this delivers will inevitably diminish with time as the world and contexts change. If someone has a track record, it can be persuasive—for recruiters, colleagues, and others. But what if they are intent on simply doing the same thing again but in a different context? A track record is obviously good, but it needs to be combined with a willingness to evolve, develop, and respond to new contexts. The formulate category includes executives—and there are many—who see the creation of strategy to deliver value as a gamble, an intuitive and somewhat desperate art. They formulate strategy in a glorious vacuum. Sometimes it works, but good fortune has a knack of petering out fairly quickly. Executives willing to wrestle with reality, to interrogate the facts, have a much better chance of repeating the successful creation of value. What I discovered in my travels in C-suites worldwide is that smart leaders create value and deliver success through what I describe as

Introduction xxvii

evidence-led stakeholder engagement: they build the commitment and passion that delivers value through real evidence rather than neat consultant-generated strategies, or distant dreams. In these successful organizations, evidence is not an aberration, but the result of hard work, persistence, and structure. Reality is robustly and constructively interrogated and examined. Organizational success is built on a disciplined approach to an array of key issues—from mission to diversity. The insights from my research have a deceptive but refreshing air of simplicity: success is about delivering value and this is best and most reliably achieved through engaging with people, markets, and data and then gathering evidence on that reality and making decisions accordingly. Sounds simple. Reality is quite different. Engaging with people within their context in order to win over their commitment, appreciating the finer points of competitive advantage, locality by locality, and pulling all that together through a cleverly thought-out global corporate strategy require a sophisticated level of what I describe as diversity of thinking. When managers are comfortable with complexity and are able to leverage that defining difference, then leaders can genuinely claim that the organization delivers value. Value delivery and diversity of thinking are inextricably linked. They are the two sides of the same coin and both are required to create organizational riches. The challenge for the leadership of the enterprise is to nurture a mindset of value delivery together with a diversity of thinking so that true differentiation is realized. These insights led to the development of the success formula, a simple but powerful means of getting to the heart of value. It argues that three elements are critical to value creation: strategy, engagement, and alignment. Strategy: the plan for how the organization intends to create value going forward Engagement: the extent to which people will voluntarily invest their efforts beyond the financial or contractual benefits to them and Alignment: the structures, systems, processes, and protocols necessary to position the organization to realize its strategy, objectives, and desired outcomes.

xxviii Introduction

How these elements are configured is the difference between value creation and value destruction. As always, below the simplicity lies a sometimes dauntingly deep vein of complexity, which we will explore. The Success Formula explains how the three elements work and what organizations and leaders need to do to deliver value. Value is the lifeblood of organizations and the raison d’être of leaders. My hope is that The Success Formula will broaden our understanding of the meaning of success and the vital role played by value and evidence in making success a reality. Andrew Kakabadse, September 2014

Chapter 1 Understanding value What is your definition of success? I have asked this question of executives throughout the world. Among them was Georges Dabaghi, general manager of Vubiquity in the Middle East and for the CIS countries, and formerly with SeaChange, Lucent Technologies, and AT&T. Vubiquity is the world’s largest provider of multiplatform video services and Georges has been involved in telecommunications in the Middle East and Africa for nearly twenty years. His answer was characteristically thoughtful and explored some of the issues others raised when the question was posed: I’m tempted to say that success is about meeting goals you set earlier, but I think there is more to it, a feeling of creating value somehow, that you created something. I would measure success on more than one dimension. There is financial success, which you cannot ignore, whether it is revenue growth, profitability, or the number of employees you have. And then you have the non-quantifiable elements of success: employees’ happiness, your own happiness, how others look at you and whether you bring value to their businesses and the community they belong to. Even though it’s a very small example, we created our own company in the UAE [United Arab Emirates] so that all our financial transactions pass through UAE banks, all our food and drinks and hotels and conference booking, and travel is passing through local entities, which is adding more to GDP, bringing more value and making the economy here a little bit more prosperous. I see that as success. Success is also measured by how much you give—to the industry, to other operators, to people doing menial jobs and so on. Georges Dabaghi’s answer to the question of what constitutes success raises many of the issues we will explore in the pages that follow. Success

2 The Success Formula

is a potent and often troubling cocktail of the short-term and the longterm, money and conscience, the company and the world, and the individual and the organization. So, what is success? To distill it down, success is the creation of value—economic and social benefits and outcomes that serve a purpose for the people they are intended to help, in accordance with a set of values that the organization subscribes to. Organizational success generally comes from having a clear plan or strategy to deliver on a mission. But a strategy is not a success until it delivers its intended value. “I think the most important role for the CEO is to, first, develop a great leadership team and to develop with that leadership team a clear strategy,” Renè Obermann, CEO of Deutsche Telekom, told me. “This involves analyzing the business and its perspectives; understanding the market and changes in the market; understanding technologies and the key drivers for the business; and then developing a strategy. Thereafter, the CEO and leadership team provide strategic clarity to the organization and constantly work on the alignment and execution of that strategy. All of this in order to generate value to all stakeholders.” Successful organizations create value. Organizations, of course, come in many shapes and sizes, flavors and colors. This book is predominantly concerned with companies, but the same points apply to all organizations. The definition of success will vary from organization to organization, but the need to create value in support of a mission is universal.

A variety of values In the case of a company, this might be shareholder value. Asked what success looks like, Sally Tennant, CEO of Kleinwort Benson Bank, replied: “Creating shareholder value, having a larger client base where you’ve delivered and your clients are satisfied. You measure that partly by being one of the places where people want to come and work. And have a top quality team so that you could fall under a bus and the place wouldn’t collapse. I don’t think it’s success if it’s down to an individual.”1

Understanding value 3

In the 1990s, the focus of organizations worldwide shifted to generating shareholder value. Suddenly this was seen as the most relevant measure of a company and leader’s success. Its allure has since paled, but it is clearly a vital ingredient in any consideration of what constitutes corporate success. Pure financial value also has its place. Chris Gibson-Smith, chairman of the London Stock Exchange and formerly the chief geologist at BP, recounted to me how he helped “turn a cash negative, one and a half billion, into the largest single source of cash revenue in the BP group worldwide.” Turning losses into profits, creating financial value where it didn’t previously exist, can be immensely exciting and satisfying. This is the corporate equivalent of alchemy, the marvelous transition of losses into profits. Clearly, companies need to make money to survive and provide value more generally. But that is not the be-all and end-all of most organizations—or should not be. As Henry Ford observed, “A business that makes nothing but money is a poor kind of business.” In my interviews, it was interesting how little emphasis there was on financial performance. It is necessary but not sufficient, the organizational equivalent of breathing. These are enduring themes—as old as business itself. Money, price, and profit are simply indicators of value. They are by-products of value creation. So, too, is quality. As the great management thinker Peter Drucker observed: “Quality in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for. A product is not quality because it is hard to make and costs a lot of money, as manufacturers typically believe. This is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitutes quality.”2 In other words, value is in the eye of the beholder. Value is something that is created in the mind of another person. It may have a price tag or it may be something less tangible. Value might be seen in terms of social value. Increasingly, the companies I encounter throughout the world have a clear notion of contributing to society more generally. They want to help make the world a better place, while still making a profit.

4 The Success Formula

Value is often also seen in terms of the stakeholders involved: the individuals, groups, or organizations with a direct interest in the activities of a corporation. These include shareholders, customers, suppliers, employees, investors, and members of the community in the location where the company operates. Stakeholder value thinking has been central to research at Harvard University and many American corporations. In particular, the work of Michael Jensen has been influential.3 In recent years, thousands of initiatives have been launched and billions of dollars have been spent in the quest for improving stakeholder engagement to generate value. Yet, the results are mixed. Our notions of value are continually evolving. Leading the current intellectual charge is the familiar form of Michael Porter of Harvard Business School. The originator of the Five Forces framework now talks of “creating shared value.” The debate about what constitutes value is gathering pace as the next set of challenges facing companies become clearer. “[Companies] remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success,” lament Porter and Mark Kramer in their 2011 Harvard Business Review article “Creating shared value.”4 Calling on companies to take the lead in bringing business and society back together, Porter and Kramer argue that “the solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking.”

Delivery failure Value in its many manifestations is at the center of corporate life. Different types of organizations will seek to create different sorts of

Understanding value 5

value, but all organizations must create value to legitimize their existence. Value is truly the currency of success. So far, so good. But while it is easy to agree that delivering value is the essential ingredient of success, time and time again it has become evident that value is not being delivered. In the success formula of many organizations, the numbers simply don’t add up. Value is left on the factory floor or the boardroom table. Consider the very basic notion of financial value. If corporate profitability alone is taken as the key measure of value, the reality is disappointing. This is brutally exposed in Richard D’Aveni’s 2012 book Strategic Capitalism. “America’s long run profitability was highest during the 1950s and 1960s,” reports D’Aveni. “Trouble started in the early 1970s but the U.S. rebounded until returns peaked somewhere around 1980 in both the services and manufacturing sectors. Since then we have seen a continuous, long run decline in corporate profitability (return on assets), even during periods of economic growth. The decline has been about 3 percentage points in profitability for both sectors from their peaks of 9 percent in manufacturing and 5 percent in services around 1980. (It is worth noting here that service industries have not been the saviors anticipated. They haven’t filled the employment gulf created by the downsizing of the manufacturing sector. Nor have services generated the same level of return on assets that manufacturing did over the last 50 years.).”5 By this measure, US companies have, on average, been less successful over time. Increased global competition accounts for some of the decline, but there are other factors at work—including value destruction as a result of misguided management. In particular, one pernicious trend is at work: the tendency to manage companies for the short term in order to boost the share price, to the detriment of the company’s long-term position. Value is being unsuccessfully delivered in other areas. We will come to a variety of examples of this later. First, to better understand how companies have failed to deliver value, which defines success, let us look at value propositions. They are the starting point of value. Modern management theory dictates that all organizations should have a clear and compelling value proposition. In simple terms, a value proposition

6 The Success Formula

is a positioning statement that explains what benefits (value) the organization provides for whom and how it does it uniquely well. The value proposition is derived from the competitive advantage enjoyed by the organization. In his highly influential work prior to his championing of shared value, Michael Porter argued that there are three generic strategies that companies can pursue based on their market positioning and competitive advantages. They are either low cost, or differentiation, or focus. In this view, a company chooses between one of two competitive advantages—either it competes via lower costs than its competitors or it competes by differentiating itself along dimensions valued by customers to command a higher price. A company also chooses one of two types of scope—either focus, offering its products and services to selected segments of the market, or industry-wide, offering its products and services to many segments. Which generic strategy a company adopts reflects these choices. As useful as Porter’s model still is, an organization’s strategy should follow from its value proposition rather than vice versa. This often does not happen. Failure to define the value proposition properly is one of the most common problems in organizations. But there is another, potentially even more insidious, danger. Too many senior management teams—led by ambitious CEOs—create a strategy to support a flawed value proposition, or for reasons that have little to do with value creation. Business history is replete with examples of CEOs who went on an acquisition spree—buying companies not because they were adding value but because they were empire building. Value propositions can be left behind in a headlong rush to pursue imaginary or elusive alternative sources of value. Interestingly, too, the very same traits or behaviors that made leaders successful earlier in their career can derail them. Indeed, what has been a highly successful strategy for a CEO over many years can unwind in spectacular fashion if the context changes. The evidence shows that a CEO who was widely admired for his or her strategy and value proposition thinking can become infamous for the very same strategy and value proposition at a later time.

Understanding value 7

Banking without value When the Royal Bank of Scotland (RBS) acquired NatWest Bank, a bank three times its size, for £23.6 billion in 2000, for example, its newly appointed CEO Fred Goodwin was the toast of London’s Square Mile. Goodwin had joined RBS in 1998 as deputy CEO to Sir George Mathewson, who had ambitions to develop it from a regional bank into an international player. Mathewson led the NatWest deal, but it was Goodwin’s diligence and sharp mind that impressed investors and won them over to cement the deal in the face of fierce competition from its rival the Bank of Scotland. In January 2001, Goodwin was promoted to CEO and cut 18,000 jobs by merging parts of RBS and NatWest. Nicknamed “Fred the Shred” for his ruthless ability to acquire and absorb banks, over the next seven years Goodwin presided over RBS’s rise to global prominence as the world’s largest company by assets (£1.9 trillion) and fifth largest bank by stock market valuation. But if RBS’s rise was meteoric, its fall was even more precipitous. In 2008, during the banking crisis, it was forced into nationalization—bailed out by the UK tax-payer. In October 2008, Goodwin officially resigned as CEO. Shortly afterward, RBS announced that its 2008 loss totaled £24.1 billion, the largest annual loss in UK corporate history. Goodwin’s lack of humility, reluctance to give up his undeserved bonuses, and failure to show contrition over his handling of the crisis led to his becoming the United Kingdom’s poster boy for the excesses of the banking industry. His unpopularity contributed to his knighthood—awarded in 2004 for services to banking—being canceled and annulled in February 2012. Goodwin’s rise (and eventual fall) should not really have come as a great surprise. He was simply replicating a previously successful strategy that had worked for him as RBS expanded. The trouble was that the context had changed. The same high-risk, aggressive strategy that had made the RBS Group into a global banking powerhouse, creating massive increases in shareholder value, led to its failure some eight years later. Yet, with one or two notable exceptions, how many voices warned of the dangers?

8 The Success Formula

This is a story repeated many times in corporate history. As contexts change, highly successful companies and leaders can find themselves high and dry, stranded, clutching an outdated business model and a value proposition that makes no sense in the new world order. A predisposition for a perceived value proposition (it has worked before, so it will work again) blinds the leader to the evidence needed to deliver value. The success of the past poisons the individual’s capacity to be adaptive to today’s circumstances and, as everyone in business knows, today is always different. Always.

Flaws of the value jungle At least Fred Goodwin and the like have a track record of delivering value. Less obvious but more common are CEOs who believe in a flawed value proposition. In other words, they believe that their strategy will create value for stakeholders even though their value hypothesis is untested and there has been no systematic gathering of evidence. These leaders formulate a value proposition and then move to create a strategy to deliver it. Rather than test the hypothesis and open it up to debate with stakeholders, they forge on with their unproven value proposition. Typically, they are selective in soliciting opinions, listening only to those who agree with them or support their worldview. The results are usually disastrous. You might think this sounds highly unusual. But, the reality is that CEOs and organizations regularly pursue strategies that even if perfectly executed are misguided because the value proposition is flawed. Over time, a gap develops between the reality of what’s happening on the ground and what the CEO believes is happening. The CEO goes into denial, choosing to ignore information that does not fit with his or her value hypothesis. The organization creates capabilities and delivers products and services that are out of kilter with what customers value. The last person to know is often the CEO, who increasingly adopts a bunker mentality, refusing to listen to the evidence from the market. One senior manager described his experience on being parachuted into a problem area of a company that had been ignored for many years.

Understanding value 9

An untested strategy had been failing but until he arrived no one had done anything about it: When I arrived at my office there was about a quarter of an inch of dust on my desk. And that dust was reminiscent of the dust that was on the company. The people walked around with their heads down. There was a culture of fear. In my first hour I felt gripped by this no-can-do culture. I walked around as if I was a ghost. Not a single person knew who I was or came to say hello. My first interaction was with the company lawyer, who said: “Are you the new guy in charge of China? You better read this because we’re about to get sued big time and I need to brief you.” So this was nine o’clock. It was a terrible place. I walked around for a while and then went back to my seat and said, what am I going to do?6 What this manager was experiencing was the result of a strategy that had not been evidence-tested. Everyone in that part of the business knew it was failing but the fear culture meant that the message had not reached the CEO at corporate headquarters. Indeed, one of the most daunting facts of a CEO’s life is how little real information he or she receives. People’s default setting is to give the CEO good news. Bad news rarely percolates through the hierarchy. It needs to be sought out. If you have ever watched the TV series Undercover Boss you will have seen this in practice. In each episode a business leader comes face to face with the day-to-day reality of his or her business on the front line. In virtually every instance, he or she is dismayed to find poor processes, inadequate resources, demoralized people, and unhappy customers. The staggering thing is that it requires a TV program for business leaders to confront reality.

Testing, testing More enlightened CEOs, on the other hand, are always testing their value propositions and value hypotheses with their stakeholders. They are endlessly curious to understand what stakeholders really value. They are constantly testing their perceptions against reality. So, they visit their company’s stores, they talk to customers, they mingle on the factory floor, they call people to thank them, and much more.

10 The Success Formula

Leaders have to constantly hunt down the truth by pursuing evidence. As Ed Rapp, president of Caterpillar’s Construction Industries group headquartered in Singapore, explains: The biggest risk in this job—and I would say any job of leadership—is isolation and filters. Every time I look at a presentation the question I ask myself is how many filters has it been through before it got to me? If you maintain access throughout all levels of the organization it really does give you the ability to bypass the filters that develop in a large company. The worry is if people don’t always put reality on the table. What I keep trying to help people understand is we’ve got a lot of talented people and if we put reality on the table I’m convinced as a group we can fix it. If we don’t have reality on the table we can’t fix what we can’t see. So that’s the one challenge I continue to work, getting people to feel comfortable delivering bad news, feel comfortable putting tough issues on the table. However, when they put reality on the table, they also need to come with suggested solutions. Leadership is not just about identifying issues, it’s also all about fixing them. The truth is elusive. Organizations are made up of human beings with their usual array of concerns, worries, fears, prejudices, and much more. Understanding and capturing the range of realities and perceptions that people hold in any organization is fraught with difficulties, but essential if the power of the success formula is to be understood and exploited. Evidence must be the mechanism to surface these realities and to act as the platform for constructive and continual dialogue. Listen to how Mick Davis explained his role as CEO of the global mining company Xstrata: In the case of Xstrata, we have 35 to 40 people in our head office and none of us aspires to—or probably has the skills to—run any of our individual operations. We can identify risk, we can interrogate information, we can ask the right questions and we know how to evaluate performance. What we don’t do is attempt to take on any of the individual operations’ management decisions, which means we find no need to build a bureaucracy.

Understanding value 11

The trick to managing numerous operations successfully is to narrow down “who does what.” We have a clearly defined and proscribed “role of the center.” In most organizations, there is a blurring of who takes responsibility and accountability; but, if you want to be an organization in which your executives have freedom to act, you actually have to give them this freedom. And that means a very, very small head office in which you don’t have people at headquarters second-guessing what the people who run the various components of the whole enterprise are doing.7 Note the importance attached by Davis to asking questions, interrogating reality, seeking out the evidence. Get to the truth and then give people the freedom to execute. In an interview, Richard Laxer, president and CEO of GE Capital Europe, Middle East and Africa, explained his approach. “My job is to create a strategy for the business. I spend a lot of time on that and the only way I can do it is by staying close to what’s happening externally and internally. It can’t be a strategy that’s developed in a vacuum; it has to be something that reflects the real world.”8 It is perhaps no surprise that vacuum-packed strategies tend to be vacuous. The ability of an individual or organization to deliver value can never be taken for granted. At every stage it needs to be tested and tested again.

Value creation To better understand the dynamics at work here, let’s take a step back. If value is the route to success, how do you create value? This was something I put to all the leaders I interviewed. Their responses were revealing. Over time, it became clear to me that there are two different approaches to creating value as a leader. One is about perceived value; the other is about delivered value. In the course of my research, I noticed that these different ways of going about creating value indicated two different types, or styles, of leaders. The creator of perceived value is more likely to be a big picture thinker who elevates strategy above all else, while the creator of delivered value

12 The Success Formula

is characterized by his or her closeness to customers and other stakeholders. Most leaders have a default setting, leaning toward one or the other mindset. Let’s take a look at what I mean by perceived value. Leaders with a predisposition for perceived value start by formulating a value proposition (actually it is probably best described as a value hypothesis) and then look for evidence to support their strategy. They have a preconceived notion of how the organization can create value and enact a strategy to achieve it. Usually, the strategy emanates from inside the boardroom and is informed by a value hypothesis that determines the strategy. Consider the recent history of one of the great success stories of the first flush of the technology age, Hewlett-Packard. In early 2005, news emerged of an imminent boardroom reshuffle at HP. The move marked the beginning of the end for Carly Fiorina, the company’s high-profile and controversial CEO. On February 9, Fiorina stepped down from her position at the helm of the $80 billion company. In a press statement, Fiorina declared that her exit was related to differences with the board over “how to execute HP’s strategy.” Prior to becoming CEO, Fiorina had been a highly successful executive. Much of her success had come from her keen intellect, charismatic charm, and strategic boldness. Yet, the very same attributes that had brought her success earlier in her career contributed to a lack of judgment that led to her downfall. Her talents blinded Fiorina to the evidence that her chosen strategy was destined to fail. She didn’t listen to the people around her. The ultimate thing that derailed her career at HP was her inability to achieve alignment among HP managers in order to engage the company’s workforce with her vision. A big contributing factor was the company’s poor performance in the months prior to her departure. But underpinning that performance and creating tension within the company was Fiorina’s controversial merger with Compaq, starting in 2002, which she saw as the key to the company’s future. Fiorina was so convinced that her strategy would create value for the company and its customers that she forced it through despite the concerns of board members including Walter Hewlett, son of the company’s cofounder, who strongly opposed the deal.

Understanding value 13

The claims of synergy failed to materialize and the company lost ­considerable value. Analyzing the case in Fortune at the time, Carol Loomis asked: “Did the famed merger that Fiorina engineered between HP and Compaq produce value for HP’s shareholders? Second, with that merger almost three years past, is HP in shape to thrive in its brutally competitive world? The answers are no and doubtful.”9 This was a classic case of a CEO with a very clear idea of what she thought would create value for the company, who failed to truly interrogate the evidence and to take her board with her. More than that, Fiorina made her perceived value the centerpiece and make-or-break move of her tenure.

Belief limited Fiorina’s time at HP exemplifies a pattern among CEOs with this mindset. This type of leader justifies his or her strategy with “perceived value”—“a belief.” This may be no more than an unproven value hypothesis supported by analysis—that the prescribed value proposition is attractive and can be achieved in the future. This type of leadership approach is to formulate a value proposition and then act on an unproven belief. The process of engagement is to win support from other key managers and board members, while overriding the views of those who question the efficacy of the strategy. As a result, a damaging whirl of organizational politics is usually unleashed. One senior manager in Australia confided that his CEO’s attempts to achieve a major change of structure and practice in the organization were pursued without any trial run. “The CEO’s friends in the top team and on the board supported his idea and those who attempted to challenge were browbeaten into submission. The line managers did not dare say a word and yet they all knew that a new service offering to the market was going to fail. In this case, it was a vigilant press and media in Asia and Australia that brought the failing strategy to the attention of the board. What happened? We, the general managers, got the blame.”

14 The Success Formula

With the perceived value approach, there is a real danger that strategy will become dogma as senior management will seek to justify its preconceived view of the world and value creation. Once a bandwagon is moving, it takes a brave man or woman to stand in its way. In one case, for example, I encountered a legal services firm which had decided it should go into employee development. The head partner was convinced that this was what the market wanted but didn’t check with customers or service deliverers whether that would create value. It didn’t and is a good example of how a strategy-driven approach can backfire. What happens next is an all-too-familiar pattern: value creation becomes uncoupled from reality and from the evidence. Routine and denial take over and the organization may run on preexisting competence for some time rather than on excellence. But ultimately it is doomed to failure. In recent years, no idea has done more damage in this regard than the slavish pursuit of shareholder value. Even Jack Welch, the celebrated former CEO of General Electric who consistently delivered on it during his tenure, described shareholder value as “the dumbest idea in the world.” The preoccupation with shareholder value has contributed to a growing gap between the real market and the expectations market. One of the most outspoken critics of this process over recent years is Professor Roger Martin, the former dean of the Rotman School of Management in Toronto. In his book Fixing the Game, Martin points out that CEOs and their top teams are often incentivized to focus more on expectations of success and value than on creating real value through the goods and services their companies produce. The “real market,” Martin explains, is the world in which factories are built, products are designed and produced, real products and services are bought and sold, revenues are earned, expenses are paid, and real dollars of profit show up on the bottom line. The “expectations market” is the world in which shares in companies are traded between investors—in other words, the stock market. In this market, investors assess the real-market activities of a company today and, on the basis of that assessment, form expectations as to how the

Understanding value 15

company is likely to perform in the future. The consensus view of all investors and potential investors with regard to expectations of future performance shapes the stock price of the company. “What would lead [a CEO],” asks Martin, “to do the hard, long-term work of substantially improving real performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level.”10

Delivered value While some leaders play the expectations markets, others gather evidence from stakeholders inside and outside to determine the value the organization is delivering today and can deliver in the future. A strategy is then put in place to support those findings—and is deliberately exposed to challenges from stakeholders to create engagement. These are value delivery-driven organizations. Connecting the dots of reality on a daily and dynamic basis is the foundation to truly delivering value. Alexey Marey, chief executive of Alfa Bank, one of Russia’s largest private commercial banks, operating in the turbulent and rapidly changing Russian and Ukrainian banking markets, explains: Historically, we said we would try to create value in people’s lives. This means different things to various groups of people. We are the best in internet banking and mobile banking. We are the best in customer experience, so we care. And that’s what we try to promote. We compete on speed and professionalism. We aim to be smarter because we give people more freedom. One of our core values is entrepreneurship because we are privately owned and therefore it allows people to not only work by the rules but actually create the rules. It drives a certain culture within the bank. And the core of the relationship is your current account—the account that is used every day.

16 The Success Formula

Looked at this way, value is not an abstract notion but an inescapable and common touch point. Companies that are successful over a number of years find ways to inculcate their values and approach into the acts of value creation and delivery. This point was powerfully brought home to me when I was talking with John Neill, chairman and group chief executive of the Unipart Group of companies: The Unipart Way is a philosophy of working underpinned by tools and techniques which form part of our knowledge management systems. But to grasp it you generally have to see it in action and so we’ve created an experience here in our company including our company university, a teaching distribution center, factory, and office, which enables employees, current and new ones as well as our potential clients, to see the Unipart Way in action and that generally enables them to grasp the power of it. Many then say could you implement the Unipart Way for us? And often the answer is yes. Gathering and reviewing evidence is central to the Unipart Way. In particular, this includes: • embedding the Unipart Way, tools, techniques, culture in the offices, the distribution centers, factories, and in fact anything and everything that is Unipart • promoting a problem-solving philosophy that engages all • emphasizing an evidence-based approach through pertinent data gathering to improve quality, cost, and waste issues from top to bottom of the organization • becoming self-reliant, self-confident, and self-sufficient in the tasks and techniques, in fact, the knowledge base of the Unipart Way, and • acting as a coach to others. In this way, Unipart combines the hard side of evidence with the soft side of engagement. Leaders like John Neill strive to create a culture that constantly interrogates the evidence to test the strategy. These sorts of leaders are driven by value creation among stakeholders outside of the boardroom and are focused on “proving” their strategy every day with the evidence gathered. This is “delivered value.”

Understanding value 17

Equating success As these two worldviews became clearer from my interviews, I created a shorthand way to denote each approach. It uses the three elements described earlier—strategy, engagement, and alignment. What I found was that the three elements were important to both approaches, but the way they were combined was significantly different. In some organizations strategy came first and was used to drive engagement and alignment. I denote this as: STRATEGY × (ENGAGEMENT + ALIGNMENT) In organizations driven by S × (E + A), the leadership focus is on creating and then implementing the strategy. Unfortunately, the two other elements that make up the context—engagement and alignment—are not factored into the strategy. If their sum is not a positive number, then strategy alone will not create value as it is simply a multiplier of their combined values. (This is strategy multiplied.) What emerged from the research is that strategy is important, but it’s not the most important factor. The key to long-term success is getting the balance between the reality of engagement and the reality of structure and systems alignment, and the very delicate relationship between engagement and alignment to make things happen now versus strategic thinking, which aims to shape the future. The research provided surprising results, challenging some key parts of traditional business school thinking. Since the 1920s, the way business schools teach has been heavily influenced by the approach of the Chicago School of Economics, which emphasized the importance of getting the strategy right to realize competitive advantage. Such thinking was based on the rationalist philosophy of Sir Francis Bacon. The essence of rationalism is that “once it is clear to all what is the right strategy then all will fall in line.” Yet, my research found that such rationalism is not the mindset of those leaders who create and deliver best practice. Getting the strategy right is step one. Step two is holding the tensions and contextual reality of each organization between alignment and engagement. What this research shows is a fundamental shift in leadership emphasis.

18 The Success Formula

We have moved from a world where leadership was about formulating a value proposition, creating a strategy to support it and then executing on that strategy, to a world where leadership is about testing a value proposition with stakeholders to create the right balance between alignment and engagement in order to develop a strategy that can be implemented. The old leadership model was driven by the belief of the leader. The new model is driven by evidence, which fosters the belief of the organization in what the leader and the strategy is trying to do. To make better sense of this in my interviews I developed a formula—not in the scientific sense, but more as an aide memoire, a handy reminder; a constant and simple means of making sense of these organizational phenomena I was being exposed to. The predominant success formula described earlier—think of the HP example—is when an organization is being led by perceived value. This is the corporate equivalent of putting the cart before the horse. Strategy is used to drive engagement and alignment. In other words, strategy comes first and then the stakeholders are expected to execute on it—even if they don’t agree with it or have not been consulted. The leadership focus is to get the strategy right. The result is usually resistance, leading to a reluctant and highly politicized organization that is likely to eventually fracture. The leadership focus of this poor but commonplace practice can be summarized as: STRATEGY × (ENGAGEMENT + ALIGNMENT) = VALUE PROPOSITION Worse still is a situation where the organization pursues a strategy based on an unproven value hypothesis and the organization is aligned behind it. This is the corporate equivalent of lemmings marching off a cliff in step. It is summarized as: (STRATEGY × ALIGNMENT) + ENGAGEMENT = VALUE PROPOSITION When the only objective is to drive cost out of the business, this formula can work in the short-term, but at a human and cultural cost. (This could be described as engagement plus.)

Understanding value 19

One executive confided how the efficiency with which his CEO drove cost out of the business eventually led to the CEO losing his job and much more: He got the strategy right and then we as a team sorted out our roles and who was responsible for what and then just drove the new structure hard through the organization. Many were traumatized. They had been there for many years, good and loyal and in many ways well able to contribute. But they did not fit the new cost consciousness that was needed. Cost was really driven out of the business and quickly. Many left but we also brought in new hires that had nothing to do with our history and old culture and the new organization was built on them. We then faced the very awkward situation of having to have the CEO leave. He certainly was not the one to build the new entity. He was just hated even though what he was doing was right. It took a lot of courage and hard conversations with the chairman and the board to persuade the CEO to leave. When he went we were all relieved. Had he stayed he would have destroyed the very entity he had created.

Best formula The organizations I encountered that had sustained success over many years had a different success formula. They were focused around value delivery. The onus was on achieving engagement and alignment of view. These two elements, together with the market conditions, constituted the context within which the organization had to operate and therefore within which the strategy had to be effective. The strategy was then added to support and serve the proven value proposition. In other words, in the best performing companies, the strategy is a good fit with the context, not the other way round. Rather than attempting to shape the context to fit the strategy, these organizations place great store in collecting evidence to understand the context. This open-mindedness and willingness to consider multiple points of view, in effect a mindset of diversity of thinking, allows them to maximize alignment and engagement. Seen in this light, the purpose of collecting evidence is to optimize these two components (alignment and

20 The Success Formula

engagement). The evidence gathered may support or challenge the value proposition underpinning the strategy. Either way, senior management should listen to it. If the evidence contradicts the value proposition, then the strategy has to change. Collecting evidence becomes the safety catch that prevents an organization from embarking on a disastrous strategy. Fully understanding the context sharpens the strategy. The leadership focus of this delivery-based approach can be distilled down to: STRATEGY + (ENGAGEMENT × ALIGNMENT) = VALUE DELIVERY The logic of S + (E × A) is this: First achieve consensus about where value lies, and the organization’s capability to deliver it. Then, and only then, formulate a strategy to deliver that value, and constantly test that strategy and the assumptions that underpin it with stakeholders and reality. This is Strategy plus. Understanding the success formula—S + (E × A) = V—and the disciplines it involves, is the subject of the rest of the book.

Understanding value: In summary • Success is the delivery of value. • Our understanding of what constitutes value is constantly evolving and differs from organization to organization and from individual to individual. • There are two general approaches to creating value as a leader: perceived value and delivered value. • Delivered value demands constant questioning of reality and the gathering of evidence. • There has been a shift in the best performing companies from getting strategy right and structure following to a two-step approach of getting the strategy right and then paying attention to the unique balance of alignment and engagement in this context.

Understanding value 21

• Best performing companies have a structure preceding strategy to initiate change. • Strategy + (Engagement × Alignment) = Value Delivery

Key questions • In your organization, what really constitutes success? • Is value really delivered? • Are you a leader who pursues your own ideas and convinces others of their merit? • Are you a leader who is willing to test your ideas through evidence and see which will survive scrutiny? • What do those around you really think of you? • If you are the chairman, what criteria do you use to evaluate the strategy and value proposition that emanates from the CEO and the management team? • If you are the CEO, do you harness the opinions of general management on the strategies you wish to pursue? • If you are a general manager, what do you do when the strategy given to you from above is unlikely to work?

Chapter 2 Diversity of thinking The starting point for this book was sustainable success. How can and how do some organizations repeatedly achieve success? As we have seen, success is about delivering value. This led to an examination of value in all its many guises. Creating value—and thereby achieving success—means different things to different people at different times and in different situations. The more I talked to managers and leaders, the more I began to see that this simple observation about success had profound implications. Stakeholders view the organization through different lenses depending on where they are. If success has multiple meanings and interpretations depending on where you view the organization from, then how it can best be pursued will also look different from different angles. Think about trying to create a three-dimensional map of a landscape that you wish to navigate. It may not be obvious from the top of a hill that an area below is covered by marshland, or that there is a deep ravine in the way. The same is true for an organization trying to create a strategy. It is only through an understanding of the diversity of viewpoints that the leadership can hope to see the full picture. By surveying the area from multiple positions, it is possible to build up a composite view that combines knowledge on the ground with the view from the hill. Diversity of viewpoints—what I call diversity of thinking—becomes a competitive advantage. Success demands both value delivery and diversity of thinking. Much of the recent debate about diversity has centered on the best way to allow different voices to be heard—a wholly laudable and important goal. Typically this is characterized along the lines of gender, race, and religion. These are useful but limited ways to describe how the world looks from where an individual is standing. As we shall see later in this chapter, recent study shows that gender and nationality are at the bottom of the list of priorities when it comes to diversity. What really adds value to the conversation is the ability to seek out different

24 The Success Formula

perspectives and points of view, to see the world through the eyes of others. This is the really critical aspect of diversity in organizational life. It provides a way of fostering the alignment and engagement necessary to achieve the success equation. Clearly, diversity of people is important. But, diversity of thinking is the essential element. Without it there will be no true diversity. In the same way as there are people who have one year’s experience twenty times, there are culturally diverse teams that look at the world through blinkers. Diversity of thinking is what we need to build in organizations.

The road to diversity This became clear as my interviews progressed. I began to notice a pattern. Senior managers talked about the difficulties of aligning the multiple meanings of success and operational perspectives in a way that engaged the enthusiasm of their people to execute on the strategy. Many of these senior managers understood that without the necessary coalitions and support in place further down the organization, especially at general manager level, they could not deliver the value proposition. Managers in the front line, however, had a different concern. Time and time again they explained how, by overlooking the obstacles they faced in their part of the business (the marshland or ravines), their strategy was doomed to fail. The general managers in particular had important information and evidence that senior management needed to know about to avoid making bad decisions. The general managers had a unique point of view within the organization and they wanted to be heard. They wanted to have a voice in the conversation. This diversity of opinion and viewpoint within any organization is the essence of diversity of thinking and I have come to the conclusion that it is absolutely vital to the sustained success of any organization. Indeed, my research suggests that the leaders who achieve sustained success apply broad interpretations of value, and emphasize the importance of creating value for stakeholder groups. They encourage and reward diversity of thinking.

Diversity of thinking 25

Robert Swannell, chairman of the UK retailer Marks and Spencer, is among the senior business leaders who promotes diversity of thinking. “You have to bring calm and clarity to some really quite intractable problems. What I have always tried to do is build around me groups of people who enjoy working with me and each other and that means giving them the freedom and the acknowledgement of their part in the success of anything I do. You need a style of leadership that helps people to be a part of that.” This sort of inclusivity is a key component of diversity of thinking.

A way of working In Shanghai I asked a group of executives what a leader newly appointed to China needed to know about the Chinese. Some said it was knowledge of the history of China, the Chinese culture, Chinese people, and the particulars of Shanghai. However, one opinion stood out against the others. Yes, knowledge of China and the Chinese is interesting for the dinner table, but to do business here you need to have a mindset of diversity of thinking. Why? Because understanding your and others’ competitive advantage is going to create the critical advantage. Through embracing diversity, the enterprise is differentiated from others. These words were repeated across the world by some of the highest performing leaders I met. It is not knowledge of national culture but more a positive attitude to diversity of thinking that contributes to the success formula. A collection of people from across the world can still offer a blinkered view. Equally, a mono cultural team can offer diversity of thinking. Diversity of thinking emerges as much a vital concept as that of alignment and engagement. Indeed, engagement and diversity of thinking are two sides of the same coin. One cannot function without the other. The organizations that impressed me most were the ones that had truly and powerfully embraced diversity of thinking. The more I studied them, the more I came to realize that diversity of thinking is not just rhetoric in these organizations, it is a modus operandi. They are successful because they listen to and show respect for diverse points of view. They use the diversity of thinking as a platform to gather evidence

26 The Success Formula

about external market forces and internal capabilities and adjust the strategy accordingly. Truth be told, my research highlights unexpected findings concerning diversity. Attending to cultural, national, regional, and faith-based differences does not add a great deal of value to the effective functioning of the organization. This suggests that a great deal of corporate money is wasted. An initiative to have more women in the senior echelons of a company is meaningless if fundamentally the company’s culture does not embrace diversity of thinking. An open-minded approach does not work in a narrow-minded organization. Developing a culture of diversity of thinking enables the organization to better engage with a wide variety of agendas and interests and integrate them in order to enable the pursuit of the mission of the enterprise. Diversity of thinking allows these organizations to see the world through the eyes of their stakeholders—employees, customers, suppliers, shareholders, local communities—and to respond to its ever-changing nature. Diversity of thinking provides them with the eyes and ears to comprehend and capitalize on their business universe. It is, I believe, an approach that allows organizations to execute on a global strategy.

Global thinking The word global is key to any modern understanding of diversity of thinking. The context for the success formula to be delivered is now truly global. Organizations are global. Leaders now have to be global in outlook and experience. In her book, The Culture Map, Insead’s Erin Meyer makes the interesting point that being a global executive was once the preserve of the chosen few who traveled the world, but now it is much more generally experienced—global managers may never leave their desks but can be emailing, Skyping, conference calling, and communicating with people from other cultures. We are all globalists. Many of the leaders I interviewed had riveting stories about how their international assignments, projects, and experiences—not to mention the challenges—had shaped their leadership. It is from their diversity of

Diversity of thinking 27

background and experience that people develop a unique viewpoint, which fosters diversity of thinking. It is diversity of thinking rather than gender, race, or faith that is the most powerful and beneficial element in an organization’s ability to sustain success. Through penetrating diversity of thinking, gender, race, and faith are harnessed to their full potential. Take Jeff Fettig, chairman and CEO of Whirlpool: I grew up in a small town in Indiana, and I jokingly tell people that for 18 years I’m not sure I ever left the county! Certainly, I was never outside of a two-state radius. And then my first ten years at ­Whirlpool I was really travelling, living all over the US and as we began to execute our globalization strategy, I was in the opening wave of US expats. It certainly helped me and shaped my thinking, but it also helped the company as a whole. We’ve always, even way back then, talked about diversity. But, once you travel and, particularly, live abroad, you are immersed in different cultures and learn that the US is pretty insulated, and doesn’t necessarily always have a good perspective of what happens outside our country. So, what did Jeff Fettig learn? You learn that there are different ways of thinking about things—some you may agree with, some you may not agree with, but nevertheless, they aren’t necessarily right or wrong, they’re just different. And that’s when you start really understanding diversity. So, for all those reasons, it was great for me in my career, as a person. It forced me to demonstrate, without leaving companies, that you could operate in very different businesses, because our businesses outside the US were completely different than the businesses inside the US. So, you get, in a way, multi-company experience, within the company. And it just so happened that was a critical part of our strategy, so I was fortunate to be where our strategy was being enacted live. I think there’s a great myth that there are all these cultural differences between people. And my view is that there are cultural differences, but not with people—there’s just cultural differences with cultures, and people are people—and that a best practice that works in one

28 The Success Formula

part of the world, will likely work in other parts of the world. We’ve got 25 years of demonstrating that that’s true. If you respect cultures and respect people, then you will do well anywhere in the world.

Diversity plus Given such role models at the top of most large organizations, it is surprising that encouraging and enabling diversity is still an issue of discussion. Even in the second decade of the twenty-first century, many corporate boards remain astonishingly lacking in diversity. The debate about diversity tends, inevitably, to become bogged down in how many—or how few—women now sit on boards. This is undeniably important. But, despite all the publicity this issue attracts and the introduction of quotas in some countries, the figures remain low. According to research by Heidrick & Struggles in Europe, the proportion of women on European boards is 17 percent. This figure is higher the further north you move. The lowest proportions are in Portugal (7 percent) and Poland (8 percent). The more positive news is that the trend is upward. The proportion of women on European boards has increased by nearly 70 percent over the last four years. It is also notable that women are more likely to fill the roles of non executive directors.1 Age is another area of debate explored by the Heidrick & Struggles European research. The reality is that the people on company boards tend to be those who have accumulated years of relevant and useful experience. In Italy and Spain, around one in six board members are over seventy. The Heidrick & Struggles research shows that the overall average age of board directors is 58.3. Chairmen tend to be in their sixties and CEOs in their early fifties. Over a third of European board members have some form of CEO experience. Boards are also becoming more international in their make-up. The proportion of non national directors on boards is 30 percent—up from 23 percent in 2009. Companies are increasingly eager to add board members with experience and expertise in Asia. The will to change appears real. In its European research, Heidrick & Struggles found that a total of 63 percent of its survey respondents

Diversity of thinking 29

rated a diversity mix as being important for board effectiveness.2 If boards are to be more alert to the external environment, their make-up must mirror that environment. “You need a diverse board, and what I mean is diverse in mind. All questions are asked and they need to be asked from different angles,” stated one internationally experienced chairman of a global multinational. Of course, it is one thing to be willing to build a more diverse board and quite another to actually do so. Heidrick & Struggles surveys show that nearly two-thirds of directors find it difficult to hire well-qualified ethnic minorities and more than half reported that it was hard to hire qualified women directors. Nor is there widespread trust in the mechanisms for fostering diversity. The Heidrick & Struggles European research suggests that among men on boards, only 13 percent support quotas compared with 41 percent of women directors. Board members argue strongly that diversity for diversity’s sake is dangerous and likely to be self-defeating. Instead, diversity must be rooted in meritocracy and the attainment of business goals. The needs of the business drive diversity. And more diversity appears to be an unstoppable trend. “Boards will also need to widen their lens beyond executives with operating experience and look for diverse candidates who are in functional roles, former government or military leaders, who serve not-for-profits or are entrepreneurs,” predicts the Heidrick & Struggles report Bringing Asia onto the Board.3

Components of diversity My study breaks down diversity of thinking into five components: • A passion for diversity of thinking The desire to search for something new and escape from routine and predictability, which inhibit the wish to explore, is the first sign of possessing a passion for diversity of thinking. Leaders with such a passion often hold many interests and are able to converse across a number of subjects. Their presence attracts welcome attention as they are able to impress others, quite unintentionally, with their range of

30 The Success Formula

knowledge. As one senior Chinese executive said to me, “John is an interesting person to do business with. We do not just talk numbers and results, but have conversations across many fields. My people have really taken to him. It’s his insights into the Chinese psyche that they find most attractive.” Ed Rapp of Caterpillar told me of his background: I hail from a very, very small town in the Midwest with a population of 700 and I had three older brothers that went into the family business. By the time I got there I decided the business just wasn’t big enough for a fourth and convinced my parents to let me go to college 30 miles down the road at the University of Missouri. I graduated from there in 1979 and the interviewer from Caterpillar came on campus and I researched like everybody does for a job interview and what really intrigued me was Caterpillar’s global operations. I asked the guy on the interview, if at Cat it was really possible to experience the globe. I’ve used his quote a thousand times and he said “young man, Caterpillar is a company where if you work hard and apply yourself you can see the world and you get paid to do it.” That’s what I have been doing for the last 35 years. But adjusting to global cultures is not as easy as it seems. I went through three stages of cultural diversity training. Stage one was why don’t you guys just do it my way and this is going to be a lot easier. It was not a very successful stage. Stage two was to understand the differences in how people from Northern Europe look at an issue versus someone from Southern Europe or Latin America. But phase three and I think probably the big benefit of spending as much time in Europe as I did was understanding that cultural diversity is good for the business. People will just look at things from a different angle, they protect you from your blind spots so I think its debate and discussion based on the knowledge they have in the business but also the fact that they will just look at things from a different perspective than maybe I will. The best leaders are open to new experiences and perspectives. They have a passion for learning about themselves and discovering the world. They develop in stages, but they do develop a worldview as well as new views about themselves.

Diversity of thinking 31

• International exposure Having international exposure is not pre ordained. Many of the leaders I talked to had actively sought it out. What I found amazing while talking to business leaders throughout the world was the global ­ momentum of their careers. It was not that the careers appeared pre determined, but once they got moving they appeared to take on a life of their own. Take Sam Su of Yum! Brands in China. This is how he explained his career: My family is from mainland China, but I grew up in Taiwan and finished all my education up to university level there. I served in the army for a couple of years; then I came to the United States to study for an engineering degree at Penn State. After two years, I went back to Taiwan and worked there. I worked for a petrochemical company for three years, and then I decided it wasn’t the career I wanted, so I came back to the States and studied at Wharton. I got an MBA there, and so re-started my career. I was recruited by Procter & Gamble for their international business. I went to Germany and worked there for three years to get sort of certified, and became a brand manager. Then I was sent back to Taiwan. And so I worked for another three years at Procter as a brand manager and associate. So then in 1989 I decided that was enough. I joined KFC International, first in Japan. I was interested in what was happening in Japan and we had a very successful business in Japan. And then things changed. After six months they had a reorganization and I was asked to move to Hong Kong. So I became the marketing director of Asia Pacific. And because of the reorganization my territory expanded to include China, so I came to China at the end of 1989. With my boss as head of Asia Pacific we decided that China was mismanaged, so we changed the management team. I became, as a side job, acting general manager of China. The ­China GM job became bigger and bigger over time, so I stayed on and gradually quit the other marketing director responsibility. Along with that change, my territory of responsibility continued to shrink. I was at one time the head of North Asia, and then shrunk it to Greater China. Eventually I shrunk it to only mainland China. But the fact mattered that the China business was growing so much, I didn’t get paid less, I got paid more. I also got a bigger title, and so

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on and forth. So 20-something years later I’m still here and I’m now the chairman-CEO of the China region. For successful leaders, truly global experience is now essential but, like Sam Su, they have to go looking for it and be able to maximize its organizational and personal value. • Open communication I asked Catherine Livingstone, chair of Telstra, about the make-up of her board: The first order value is challenge. There’s no one on the board who’s a shrinking violet, that’s for sure, and they will challenge from different perspectives. I’ve just been through five hours of challenge and the outcomes are better for it. And because there’s a good relationship between the board and management, management doesn’t feel threatened by the challenge and in fact management is happy to push back and then the outcomes are better. There was one particular issue we discussed today where management put forward a recommendation on a particularly tricky situation and some of the board members thought that was the right thing to do and others didn’t. As a result of the challenge we’ve actually ended up with a better solution, a solution that no one had thought of initially. Well, we hope it’s a better solution, but I think the board add value because they come from different perspectives, different industries; it’s the diversity of thinking. So different questions that they ask might not be challenges, but maybe just questions for further understanding. But again that leads to evolution of ideas. Kevin Lobo, chairman and CEO of the Stryker Corporation, was born in India, grew up in Montreal, and has worked in the United States and Europe. What knowledge had he acquired along the way? I learned to be more open-minded by living in different countries, as well as changing industries. I became more receptive about what business models are needed to drive success, and you just don’t use the same hammer for every nail. That is a big advantage. I also adapt to different styles. You become, much more flexible as a leader, and you become more insightful, to look through style, to

Diversity of thinking 33

understand what really are the drivers of the business, and which people can be successful, and you don’t have a cookie-cutter view of talent, when you do your talent assessments. We have board members with many different backgrounds. It gets back to open-mindedness, so if someone’s challenging, I don’t start off with a defensive attitude, ever. The term we use in ­American sports is a home game and an away game, and if you haven’t, been in away games frequently in your life, then you tend to think you’re right; you tend to be defensive, and more ingrained in your approach. If you have spent a lot of time in away games, in foreign environments, then you just have a different way of operating, where you’re more prone to listen and be open to different suggestions. It doesn’t mean you’re not confident, but there’s a different level of open-mindedness. For Kevin Lobo, exposure to different cultures and ways of life created the open-mindedness that induces a positive attitude to challenge. He continues: The biggest surprise coming in as a new CEO was how much time you get to spend with your board, it’s vitally important, and it’s been very rewarding. The board members share their unique perspectives with me and give me advice about how I could be more effective, about how we can work together and ultimately how we can increase shareholder value. I have found that my time with each board member and the entire group has been very, very helpful. So when I am traveling, I’ll drop in and see a board member and I think that time is extremely important, and frankly, that’s helped build trust among the overall board, knowing that I have those individual relationships, and they can talk to me about something outside of the board meeting. The theme of trust was reinforced many times over in this study. Robert Swannell of Marks and Spencer captures the point admirably: Trust is a very important component. The people who I was advising [when I was an investment banker] and the people who worked with me trusted me in many different ways, either with their particular personal issues or their concerns for the company. I think in many

34 The Success Formula

ways these experiences set me up for being a chairman, listening, distilling, fostering trust. These are the key qualities you need. Robert’s use of language is indicative of the trust he has generated; note his expression “working with me,” not “for me.” Vadim Makhov, chairman of the OMZ group, a Russian organization, is in his early forties. He shoulders the responsibility of upgrading and repositioning the nuclear and other engineering assets of Russia: a most sensitive and demanding undertaking. In two-and-a-half years, he has achieved what his predecessors could not have hoped to realize. Vadim embraces diversity. His conversation can switch from the management and leadership of OMZ to global politics to philosophy, and to the improvement of the quality of life of the Russian citizen. For all this, he is action-focused. Explains Makhov: The customer normally gives us the projects which nobody else can do—even the best competitors. This normally takes three years by international standards; they want it to be delivered yesterday. So one of the very big projects we’ve got was when all of our foreign competitors simply refused to participate because they say we need at least one year more. We were the only ones who participated and now we’re managing it. During this project, this big customer told us okay, if you make it you would pass the test so you would earn money on further projects. You passed a very tough test. In many other projects it’s the same. Talking in Dubai with Georges Dabaghi, the general manager for Vubiquiti for the Middle East and the CIS countries, I asked which place he called home. “That’s a difficult question! I’ve been wandering for 23 years during which I’ve lived in five countries,” he replied. “I don’t know, I’m tempted to say home is where the heart is, but I find also home is where the mind is. Home has shrunk. Home lives in the internet, in your mind, and in your heart. As you walk down the street, you have the world at your fingertips, all these restaurants, all these cultures.” Exposure to different cultures stimulates the learning of how to integrate in different environments. This surfaces a deep instinct about working with others and gaining their respect. Key to this is open and frank communication. The message is simple: open up.

Diversity of thinking 35

• Engaging with the center Diversity of thinking is an important element of the relationship between the corporate center and its operational centers. The interplay between the two is often fraught and unproductive. Diversity of thinking requires the presence of open and honest communication. Positioning for competitive advantage in different localities is necessary but may not be in keeping with the demands, protocols, and processes of the corporate center. However, the targets and KPIs require that the operating business develop the necessary skills to be differentiated within its country or region. The operating business may clash with the systems of the corporate center and the need for consistency of practice across the enterprise. There is no easy way round this other than managing upward. This is a distinct skill. It requires patience and the time to develop more intimate relationships with the key corporate directors, particularly those running support functions. This is easier said than done. “But that takes time and means I am away from my customers and the key people in the region. How can I do both, as doing one may lose me business and doing the other alienates me from the center?” one executive asked me as I explained the need to engage with the center. Expecting diversity of thinking from those in the region is insufficient. The corporate center itself needs to exhibit its own diversity of thinking and display an understanding of the varying contextual demands in each of the regions and business areas. David Cunningham, president of Asia Pacific for FedEx, holds the corporate center of his organization in high regard: In the case of FedEx I’m obviously biased, but I think it’s an iconic company. There are few places that I’m aware of where you have the opportunity to work with an individual to create an industry in which you work and is as engaged today and is as passionate today as he was, you know, 15, 20, 30 years ago. Regretfully, most senior managers do not share David Cunningham’s experience. My research notes are littered with complaints and concerns about the lack of diversity of thinking at the center and the blockages that have to be constantly renegotiated.

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The problem, seen from the viewpoint of the general manager, is often that the center won’t listen. He or she is constantly having to explain the reality on the ground to people at corporate HQ who simply don’t listen. There are two sides to every story, of course. There are examples where the GM is unable to see the bigger picture or could be achieving more than they are. But, and this is the point, if successful organizations are those that welcome and encourage diversity of thinking, then ignoring the point of view of a key layer of senior managers is misguided. Worse still, it is likely to lead to a disconnect between the people who are creating the strategy and the people responsible for making it work on the ground. Listening first and making managers feel they have been heard is an integral part of evidence-based leadership. This does not mean that all evidence and opinion is taken at face value. But it should mean that that they are taken into account. General managers are prone to the usual human frailties of ego and arrogance, but they have an unrivalled perspective on how the strategy will play out in their markets. They should be included in the conversation, not shut out of it. One senior general manager told me: I run probably the highest performing and most cost-efficient part of the company. In Asia I have fewer people than anywhere else, but I make more than twice the profit of any other region. I am seen and sometimes even openly accused of being a renegade. I just do not fit with the systems and processes of the company. I just do not need these costs and that is what irritates my vice president and colleagues. When I retire, I foresee one of the VPs coming to my office to, in their eyes, to put right what I have done wrong. Cost will increase, the business will be run down and then they will blame me. What keeps me here is my pride and my need to protect my people. These high performers will be first to go when I leave. He may or may not be correct in his analysis. But he clearly feels strongly about the situation. The question for the senior management team is how to respond. How can his passion be channeled in a productive way? Diversity of thinking in organizations is only possible when the culture of diverse thinking is promulgated from the top of the organization.

Diversity of thinking 37

When this does not happen, the corporate center is likely to impose disciplines and protocols that at best provide little value to the businesses and at worst alienate the critical business heads. Ask the following four questions to the key business heads as a test of the level of diversity of thinking at the center: • What value does the corporate center provide? • Does the corporate center support your pursuit of competitive advantage for your business? • Do the processes and procedures of the corporate center support the doing of business in your area? • Do you as a business head feel part of the top team? Simple yes or no answers will quickly indicate the level of diversity of thinking, which stimulates engagement between the corporate center and the operating businesses. For Jeremy Hunter, president of the Henkel Group in India, the answers to the four questions are all a resounding yes. He explains: I get a huge amount of support . . . a huge amount. And it comes in different ways. So we operate a matrix management system. I sit as the president of the Henkel group here in India, but I don’t have all the levers that I pull. So, nominally, at least half the people on our management team report outside of India. Finance reports to regional finance, supply chain operations reports to regional operations and so on. It clearly works but only if both parts of the matrix work well together. We get regular visits from people that run the functions, run the supply chain, run operations, run the different SBUs. I get a huge amount of support from the regional guys in terms of investment, in terms of commitment, then that’s also been very strong. • The team The selection of the right people for the top team is increasingly critical. This must be based on a desire to learn rather than tokenism. Attracting a team made up of people with diverse skills, experiences, and outlooks enables the team to avoid group thinking and to make the right decisions for the business. Diversity of thought is the key.

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This was brought home when I was talking to Doug Elix. He recounted how his cultural antennae had been developed over his career. In Asia he recalled giving an award to one of his staff for doing an outstanding job. Routinely, he presented the award in front of the other members of the team. Afterward, the recipient came to him and asked him not to do so again. For the recipient, the public recognition was embarrassing. He thought the team should be acknowledged rather than an individual. Leaders have to be sensitive to such cultural and personal issues. Elix expanded the point: To me, when I hear someone talk about cultural diversity, I think of it not only as diversity of people, employees, managers, board members and so on, but also as diversity of the markets in which you operate. It’s a globalized world, it’s highly interconnected, and any mediumsized business is probably never going to be able to say they operate in a local market and they only have local competitors. There are going to be global competitors in any sizeable market. So, even if you don’t have designs on going out to markets outside your home market, you have certainly got to understand how others can behave, and get yourself competitive—and to be competitive, you’ve got to understand how they think and how they manage and how they are likely to approach a market. If you go back say 30 to 40 years and consider America. Had they thought more about Japan’s mind-set, then the future of their electronics industry may well have been different. It is one thing for the top man or woman to applaud the diversity in the enterprise, but the real test is the opinion of the general managers and key country heads. Here’s the view of Stephan Gerlich who was managing director of Bayer, India: I believe that a company like ours does not need to force cultural diversity, because our company is just a mirror of the society where we operate. We reflect the society we’re in, and we’re catering to that as a company. And therefore, that cultural diversity within India

Diversity of thinking 39

is natural. We have people from South India working and living in north India and that is not obvious because normally family ties don’t make these moves easy. For many decades we had a very German management in Germany. With more globalization, naturally you find today a much more diverse management- Bayer AG’s CEO is Dutch-American; our CEO for Bayer crop science is from Ireland; the head of pharma in China is from India. I mean, an Indian in China, who would have thought that years ago? This diversity, I think, has come to us very naturally because of our global setup and access to talent all over the world. You just have to pick the best man or woman for the job. Stephan Gerlich epitomizes the quality of diversity in Bayer. As he so rightly points out, diversity is not only good for business, it makes business!

Making sense of diversity of thinking So what do the statistics from the latest, not yet published, research that I have conducted with Heidrick & Struggles say (Figure 2.1)? Actually, the stats say much the same as the senior executives I talked with. Diversity of knowledge, experience, background, and diversity of contribution are at the top of the list when it comes to what organizations require of their leaders. In order to make sense of the range and diversity of challenges, developing a global, overarching mindset is vital. Only then can those who think differently be appreciated and the space made to attract a diverse group of people. Although important, gender and nationality are at the bottom of the list. For the high-performing organization, the message is that it matters little who you are, or where you have come from. What is critical is to have developed that necessary diversity of thinking that appreciates the nature of challenges and dilemmas and the engagement necessary to work through contrasting agendas. Diversity of thinking is at the heart of this book and of the success formula. It is the sense-making part of value creation. There are three distinct elements to it.

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A diverse blend of knowledge/expertise A diverse range of different experiences/backgrounds A diversity of contribution A global mindset Members who think differently A diverse group of people A diverse gender mix A diverse nationality mix 1 The Executive/Management Team

2

3

4

5

The Board

Figure 2.1 Diversity. • First, diversity of thinking allows an organization to capture multiple experiences, context, and interests. • Second, that data may be used as evidence to understand the opportunities and threats facing the organization if it pursues a given course or strategy. • Third, the evidence is interrogated (teased out, tested, and challenged) as the basis for strategic decisions. An important point to recognize here is that evidence may be rejected or set aside in the interests of the organization, but the process by which it is collected and considered must be fair and handled with respect. It is the job of senior managers to decide which pieces of evidence are relevant and important. If people feel they have been heard, they are far more likely to engage and align with the strategy.

Diversity of thinking: In summary • Diversity of thinking is fundamental to strategy and execution. • No diversity of thinking = no overview • No overview = no ability to recognize how to work through the tensions between Engagement × Alignment

Diversity of thinking 41

• Diminished understanding of the dynamic between engagement and alignment leads to comments being seen as criticism and negativity. Good people leave. • No diversity of thinking = no talent pool • No talent pool means there is no effective strategy. If this is the case, then it matters little what the relationship between Strategy, Engagement, and Alignment is. All three are deficient.

Key questions • Do you display a diversity of thinking mentality that not only challenges but also excites the others around you? • Do you display a diversity of thinking that gives others the confidence that you will be able to pull together the multiplicity of views and agendas to maximize competitive advantage? • When your diversity of thinking is challenged, are you willing to give air time to the views of others?

Chapter 3 Discipline 1—Evidence Key to creating a culture built on diversity of thinking is the role of evidence. Evidence-led leadership is about encouraging and rewarding diversity of thinking as a means to engage with different parts of the organization and create alignment. It recognizes that listening to multiple points of view and responding respectfully is an integral part of building and sustaining the coalitions required to implement the strategy. Evidence-led leadership involves seven distinct disciplines. They can be categorized as the following: • • • • • • •

Evidence Mission Alignment Engagement Leadership Governance Wisdom

Let us begin by looking at evidence. It is worth stressing that none of these disciplines can be viewed in isolation. All are dynamically—and often messily—linked. They exist in a dynamic flux of context and relationships and a host of industry and organizational dynamics. For example, my research suggests that it is a big mistake to view mission in isolation from the other disciplines.

Pragmatic science “I’m a believer in science, or you can say engineering, approach to decision-making. I’m more a science-based decision-maker. I’m not a passion-based decision-maker,” Sam Su, chairman and CEO of Yum! Brands in China, told me. I asked Sam what he meant by science.

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“For me the basis is always the consumers. You have to look at the consumers to see what they want and also look at your competitor to see what they have done. Then you look at what you have done, and try to see whether there is any potential gap and how you can do better.” Sam was not alone among the people I interviewed in pinning his faith in a more scientific approach, but which was at the same time, not blindly analytical. Perhaps it could be described as pragmatically scientific: based on facts, focused on delivery. The starting point of the success formula, and for executives like Sam Su, is evidence. The importance of evidence was really brought home to me as I looked at stakeholder value. The leaders who achieve sustainable success by pursuing long-term value creation do so by listening to their stakeholders. As the leadership coach, Marshall Goldsmith puts it: “The more successful you become, the more helping others win is how you win!” These leaders are passionate about maximizing the interests of all the internal and external stakeholders involved with their organizations. Displaying respect and concern for all parties, irrespective of any misalignment of objectives and expectations, is central to the delivery of value and ensures the long-term future of the company, thanks to the continuing deep support of stakeholders. The central difference between the delivered value and the perceived value mindsets is the attitude toward evidence. “The support from my chairman is tremendous, but he emphasizes—I want to see the evidence!” one CEO confided. “It was pure evidence,” another CEO told me, talking about how his organization developed a new strategy. “We had some fundamental issues. We then formed a group which worked together to coherently bring the other directors to our point of view and then move the company in the right direction.” In the most successful organizations, leaders interrogate the evidence. Factual detail is the fuel of constructive interrogation. Evidence captures the merit of the case. Evidence draws out the counter arguments, distinguishing assertion from well-balanced argument. A clear display of point and counterpoint enables leaders to reach a shared and balanced view.

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Of course, leaders often use different languages to describe what they mean by, and how they gather, evidence. This is the take from Telstra’s Catherine Livingstone when I asked her about evidence: It’s trying to look for the right evidence, look for patterns actually; more patterns rather than evidence. It’s a bit more messy than your description, but it’s not just letting things happen. It’s about thinking forward. What’s the agenda going to look like? What’s our program of work for 12 months? Is it base case? Does it move around? It’s about having a view about where we’re going to spend our time, is the balance of time right, making sure management knows what we want to look at and when, so they can organize themselves. So, what do we mean by evidence (as opposed to analysis) and why are so many organizations averse to evidence?

Evidence-averse It is a paradox that in the age of Big Data and analytics at every corner, so many important decisions are based on prejudices, preconceptions, entrenched beliefs, outdated views of the world, and egos. Strategy formulation is often highly politicized—a factor frequently driven by consulting firms. In working with organizations throughout the world, what we see repeatedly is the CEO going through political machinations trying to find support for his or her strategy where there is scant evidence to support it. The research shows that there always is some evidence to partly support the view of the driven CEO. However, this evidence is never fully tested and remains unchallenged by the very people who have a strong grasp of what will and will not work, and they are the general managers below the top team. Decisions may be (and frequently are) based on one who is championing a strategy rather than analyzing the evidence. Typical behaviors include trying to disincentivize evidence-based managers. One senior executive said of a general manager: “John is here to confuse us with evidence.” His reaction was to try to undermine and ridicule a manager for wanting proof. I wonder how many people challenged Fred Goodwin

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as he led RBS to ruin? If they did not, why did they not? Even if you are in the right, you and your ideas need to be constructively challenged. Leaders of organizations that sustain success over a long period recognize that gathering evidence has two purposes. First, it is a way to understand what is really happening in their markets and in their operations in order to create a strategy to deliver value; and second, it is a transparent process to build alignment and create engagement to gain traction for the strategy (issues we will explore further in Chapters 5 and 6). As we saw in Chapter 1, the success formula is made up of these three elements. How they are combined determines whether they generate perceived value or delivered value. How the organization’s leaders approach evidence determines which type of value equation they follow. Simply put, evidence-based leaders seek out and reward multiple points of view (diversity of thinking), while proposition-based leaders are selective, filtering out, and punishing dissenting voices and only listening to evidence that supports their point of view. Evidence-based leaders gather evidence from stakeholders to create engagement and alignment, and to adjust the strategy if necessary to deliver value. Proposition-based leaders prefer to drive the strategy through the organization using whatever means are necessary, ignoring or removing naysayers and dissenters. These leaders believe that the end will justify the means, while the evidence-based leaders understand that the means is vital to achieving the end. At the heart of evidence-led leadership is the ability to interrogate evidence in order to facilitate engagement and alignment. These leaders seek to understand how the strategy looks from different viewpoints. Are there obstacles that the leader is not aware of? Does the Chinese operation face different operational or cultural challenges that mean the strategy will fail? Is the southern European market more resistant to the new approach? In interrogating the evidence, the leader also signals that he or she is prepared to listen to the people on the ground and consider their perspectives (creating engagement and alignment with the strategy). Not all leaders are evidence-led, of course. As referred to in the introduction to this book, my research indicates that leaders fall into one of three camps: Leaders who

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• replicate reproduce a previously successful strategy/value propo­sition. • formulate take a gamble on an unproven strategy/value propo­sition. • are evidence-led create a value delivery hypothesis and interrogate it with evidence. Let’s examine each of these styles. • Replicate Replicate leaders are those who have a model of success, but one that is based in the past. Unable or unwilling to change, they draw on prescriptions already learned as a way to now carve out the future. What is missing is that sharp insight and analysis of context. Where is the replicate leader most obvious? At dinner. Imagine a two-day strategy retreat, bringing together the top team and the board. On the surface, it has been a success. Day one: key issues were discussed. The board mingled with the management. Each learned from the other’s experiences. However, a feeling pervaded the management team that what was discussed and almost decided would not take place. The evening dinner is equally enjoyed by all. The main meal is over and the coffee and the after-dinner drinks are being served. The CEO starts by thanking everybody for making the day so successful. He emphasizes his great pleasure at being at the helm of such a great organization. It is what he says then that shows his true leadership quality. The stories start, but they are about the past. Successes and failures merge into one. The humility shown about lessons learned is equally evident, but someone not mesmerized by the stories would be able to recognize the pattern because the same pattern runs through all stories. The message so sensitively hidden is that what worked in the past will work here. The delivery of that message is enticing, and that is why replicate leaders go from one key role to the next. They have a capacity to charm but not the ability to excite with a vision for the future. • Formulate In contrast, the formulate leader excites with his or her high IQ. His or her analysis of the present is astounding, in both its breadth and detailed accuracy. The case for moving forward acknowledging the

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challenges, hurdles, and benefits to be realized is compelling. What others remark is, “What a brain!,” “What a person!,” “How fortunate we are!” Where does one see formulate leaders at their best? Probably informal in style and willing to attract an audience, formulate leaders are at their most persuasive at the start of a day over a cup of coffee. An informal chat in the open coffee area, even of 5-minutes duration, can leave those close by highly enthusiastic about the future. Plans, aspirations, strategies, and even tactics are integrated into an exciting vision of what is to come. For the more discerning listener not charmed by intellect and conversation, one factor is likely to remain undiscussed: whether these ideas and plans have been tested and what quality of evidence has emerged to indicate their viability. However, imagine asking about the evidence available, during these few minutes. Whatever the reply, the audience is likely to be dismayed by the insensitive nature of the question. In fact their whole morning, even day, could be spoilt by the impertinence of the question, “Will it work?” So, no one asks and the formulate leader pushes forward in the knowledge that he or she has the full support of those around. • Evidence-led Evidence-led leaders are not driven by being their best in the morning or evening; they question the data all day long. To some, they may seem cold in style. These leaders interrogate the issues through the data, but never through the person. They recognize the emotional (soft) evidence as well as the intellectual (hard) evidence. Stringent, they seek to test any strategy before it goes live. Evidence is their essence. Catherine Livingstone describes her experience as a CEO at a previous company: It was ultimately evidence that persuaded the managers that we needed to change. It was getting them to accept emotionally that what had been good performance in the past was not going to be good performance in the future. That was a very hard thing. It was probably easier for me to prosecute the argument because I was new as the CEO so a lot of things were changing. Had I been the continuing CEO I think it probably would have been a lot tougher.

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Unipart’s John Neill discussed how to integrate different strands of evidence. Darshan Mehta, president and CEO of Reliance Brands, goes one step further and emphasizes the power of evidence as detail. Evidence without detail is no evidence at all. Says Mehta: A very execution and detail-orientated mind-set is something that we tend to lay a lot of focus on. We believe that with a continued and sincere focus on customer delight rather than on the customer wallet, one would make a long-term hostage out of a customer who otherwise is used to flirting with brands. Given the young demography of the Indian consumers, who are still at an early stage of making brand choices, this is a winning long term business strategy at Reliance Brands.

Knowing the unknowable One interesting aspect of the importance of evidence is that often leaders are dealing with issues where their knowledge is limited. If you are CEO of a pharmaceutical company, you are unlikely to be able to have an especially informed debate with your researchers. Leaders in an array of technology industries face similar challenges. Renè Obermann, CEO of Deutsche Telekom, conceded as much when we spoke: It’s sometimes hard to provide evidence when you’re thinking about product and technology choices for the future, i.e. when you are part of a technology standardization community, or when you have to decide about implementing a new mobile operating system into your roadmap. Of course, you collect as much information and forecasts as you can about what is there, which problems can be resolved, what will be the acceptance of this new solution. But often what you call evidence is actually a lot of projections from other people/experts. It is not evidence. They are just people trying to project the future. And you aggregate all of this and you think then that’s the truth. So yes is the answer to the question of whether evidence is important, get as much as possible, but still, don’t ignore your own intuition when taking decisions.

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Evident characteristics The leaders I talked to who had an ability to assemble and maximize evidence for the greater good shared a number of characteristics: • Belief in evidence Leaders who are evidence-oriented live that as a way of life. It is their philosophy. It is what has made them successful. There is nothing casual or opportunistic in their approach. It is part of their philosophy of life. Living and working with evidence so that it makes a powerful difference to the running of the organization needs to become a habit. It is about practice, practice, practice. As Unipart’s John Neill explains: We’ve been building the Unipart Way system for 25 years and on that journey we’ve tried many tools and techniques, some of which work, some of which don’t. Some work but they don’t work in harmony with the others. And so to try and synthesize 25 years of development of a body of knowledge is not easy. It’s a bit like saying just explain how Beethoven’s ninth works. It requires the right instruments, the musical score and dedicated musicians practising with all of their instruments over many years under great coaches to become very good individually with each instrument and then collectively as an orchestra. One of the most enthusiastic practitioners of evidence-based management I encountered was Sam Su of the China Division of Yum! Brands. This is how he explained it to me: It’s much easier to deal with facts. But facts can be sometimes biased, because everybody has their own feelings. So you have to check what are presented as facts to make sure they are unbiased facts. That’s not usually easy. When people are passionate about something, it can be a little more difficult. A passion-based decision is very dangerous. There can be emotional traps. So I always ask the passionate people to check their gut. Why do they feel so strongly? Try to find out what is the real reason or what are their data points. Passion is usually based on some personal experience, and we all somehow feel that whatever I experience matters more

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than what I read. If I never experienced it, it will never mean as much to me as something I experienced. That’s just human nature. So once you realize that someone may have a strong passion about this, it may still be able to be broken down into data. What have you observed? Why do you feel so strongly about that? What did it teach you? If you find out what’s the source of that conviction, that passion, you generally discover something. And then I say, I know why you feel this way. And sometimes I just say, okay, if I follow your logic it doesn’t really make sense. I know you feel strongly, but if we do it your way then there may be undesirable consequences, and sometimes that will make them think twice. But it is for the benefit of the whole room that it is said and they realize every point of view has value, and is being properly analyzed. And I will do an analysis to show people why one option has a better chance for success than another option. • They start evidence gathering from day one “Leaders convene conversations. They set the stage that enables others to develop solutions,” says Rosabeth Moss Kanter.1 It starts on day one. The evidence challenge is never clearer than when a leader first takes over. There are a host of books on making an impact. Leaders are expected to change the world in 90 days, 100 days, and so on. But changing any organization without evidence to back up the need for changes is a hopeless task. Evidence is the fuel of change. Kevin Lobo of the Stryker Corporation offered this advice to any new leader entering an organization: If a CEO is coming in from the outside, my advice would be to really take the time to meet individually with every member of the leadership team and with the board of directors to gain insights on the strategy and culture of the company. Where are they? How are things really? What’s working, what’s not working? Make sure you test and ensure that there is alignment, and do that diagnostic in the first 45 days, and be very thoughtful before forming any opinions or conclusions. If a person is inside the company, it’s a little bit different. There, I would encourage a lot more interaction. First you need to stabilize

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your team and then build relationships with the board and it’s critically important to do it quickly. If I had to do it over again, I would have done that even faster. • They are comfortable with hard and soft evidence Evidence falls into two categories: hard numbers and rational evidence about market trends, HR strategic modeling, etc.; and contextual evidence (soft) about how things work around here. The best organizations gather both simultaneously. But senior managers can find this threatening because of the implied criticism of their performance that may emerge. Evidence must go hand in hand with constructive criticism. Says Ulf “Mark” Schneider, CEO of the German Fresenius Group: We like open debate, it’s pretty much no holds barred and I think that we pride ourselves in having a pretty raucous debate at times, but we are as unified as possible both to the outside world and also when it comes to then passing on leadership decisions down the organization. Robert Swannell of Marks and Spencer concurs: I get that insight by spending time in the business. I encourage the non-executives to do that as well. I think in a retail business it is easier than in others because you can actually go to the stores. You visit people who really understand the customers’ viewpoint and what products appeal to them. We talk a great deal about the distinctive M&S culture, embodied in Plan A—simply put its “doing the right thing” and I think this way of operating is embedded in M&S, probably more so than in most other companies. • They emphasize the quality of evidence The quality of evidence is partly determined by the methodology adopted, but for leaders it is the accurate capture of reality. John Neill again: Yes, methodology is important, but surfacing what is really going on is vital. The outstanding leaders describe what it takes to capture quality evidence.

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First listen to many people and identify which of those hold the critical perspective. The aim is to compare and contrast different realities. Each of those is true, even if they contradict as each individual believes that to be their thought and is the basis of their actions. Many leaders told me “do not contradict these realities simply use what is said to go to step two which is identify the questions to ask the broader population.” How well these questions are formed is critical to the quality of evidence that emerges. Step two goes to step three which is test these questions as the wording and the tone indicate whether there has been some real listening. Now Step four, the methodology to be adopted. At this point the smart leader should have a view on how to use the evidence that will emerge to realize his/her particular goals. Is there to be a quantitative questionnaire with the end results, after statistical crunching, being numbers? How are these numbers to be positioned? Alternatively is the methodology more interviews and so how will more soft evidence determine the reality that is to be shared? There is one final step and that is to genuinely learn something. The simple manipulation of data to achieve the ends the leader wants does little for engagement. To admit to feeling that I have really learned something even if I disagree is a big step forward in winning of hearts and minds. So, we have a very big logistics business, increasingly, around the world and we have a growing consulting business. So, we’re big in manufacturing, logistics and consulting. We have two world-class factories, which the City advised us to exit 25 years ago. And we’re growing our manufacturing footprint. We’re halfway through a £30 million investment program for our two factories. So, the business is doing well. It’s well diversified both in terms of clients and geography and, you know, we know that the next five to ten years will still be a rollercoaster ride. The evidence for being evidence-led is overwhelming. • They actively listen Says Stryker’s Kevin Lobo: You’re always going to have conflict and different points of view. Consensus is a nice ideal, but it’s rare in life if you have people with

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divergent thinking, that you’re going to be able to reach consensus. So you really need to be able to have everyone’s voice heard, and for them to feel that they’ve been heard, and then be able to move towards making decisions. As long as their voice is heard, and I mean, really, genuinely heard and listened to, debate the alternative, make the decision and then we’re going to march forward. A transactional mindset will not do. The necessity is to make the time to fully engage. The matter is one of prioritization. Now the space is created for a diversity of input to be appreciated. • They use evidence as a platform for independent debate The reality is that evidence is often uncomfortable to confront. The issues that derail strategy need to be gathered and made public—a delicate exercise. This is how one chairman explained his approach: Helping people listen takes time. Listening of itself is a skill and that skill is not learnt overnight. In the company there was no habit of listening. In fact the habit was of challenge, which of itself was fine, but the nearest we got to listening was when each person politely waited for the other to finish before they made their point irrespective of what the other had said. It took a bit of a crisis to change things. We had really mismanaged the Bulgaria team and so at our next board dinner, I simply asked, why had we allowed Bulgaria to go wrong? One of the senior non-executive directors said, but it was them who had allowed it to go wrong. I responded, it is exactly as you said, them, we allowed a culture of us and them. And I also indicated that the management had warned us. The same colleague immediately sprang back and said, but none of us thought it was important and even you (meaning me the chairman) did not push it hard. I agreed with him and stated that it was my fault, but had we all listened we would have used our considerable experience and knowledge in a different way. My board colleagues agreed and so I simply asked for one very easy discipline to become a habit. Could we please just summarize what

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our colleagues have said before we jump in and as we are summarizing could we please consider whether what we want to say links with the point our colleague has made. We tried. It caused a few irrational moments and also a few laughs, but slowly it began to sink in that as a board we were sometimes behaving like an unruly group of fourteen-year-olds. We are still not the best at listening but at least we will not have another Bulgaria situation. And, of course, it needs to be understood that all the evidence in the world may not sway people from a particular course. A leadership team can always get it wrong or simply listen to the wrong people. All executives have tales of how they were ignored or overlooked when they had an important strategic insight. Corporations are made up of human beings with all the frailties this involves. Renè Obermann, CEO of Deutsche Telekom, recalls a frustrating debate around text messaging: It was one of the most fantastic revenue streams. But some of us knew it would come to an end at some stage. Some of us saw the internet revolution coming many years ago, and that IP messaging would eventually replace, or at least cannibalize big time, the established model. I had controversial discussions with our mobile managers at the time, trying to convince people to find alternative models by which we could charge fair and bulk prices, like $5 or so for “as much as you can use” packages for IP Messaging like today’s Whatsapp. I said, “let’s cannibalize ourselves with a much more convenient and price aggressive model” before so called over-the-top players could attack. The organization constantly pushed back and I did not manage to get the key people behind it. I guess the reason why I didn’t was because I didn’t show them that there was a good business future if we did this. I just told them that customers will eventually walk away from the established model. But I didn’t give them a clear enough picture as to what could excite our customers even more and how we’d make money from it. Or, alternatively, if there isn’t enough money to be made, face the truth and say this business-model will be going down the drain over time. We have to aggressively build a

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new business-model for messaging services, but the margins will be much lower and we have to deal with it. Still, this is better than losing it completely. Evidence facilitates the reaching of an informed view. More than that, well-considered, detailed evidence acts as the basis for sound teamwork. Trust in each other as team colleagues is insufficient. Sharing a platform of detail stimulates discussion on the contributions necessary to effectively execute strategy. Each member of the team has a role to play in determining the future. Renè Obermann helpfully outlines what happens when insufficient attention is given to being evidence-led, project by project. To emphasize the point, evidence-led leaders make that a lifelong habit, and even then they may falter. • They build an action-focused debating team In evidence, the debate really is the thing. We look at the difference between dialogue and debate in Chapter 6. Dialogue is the starting point for debate. “The big question on my mind at the moment,” says Telstra’s Catherine Livingstone, “is, with large organizations and complexity, how do you get to the right point in the discussion, or the right point in the level of detail, so that the board can engage and add value without going into management’s role? If you stay at the top it’s easy to get comfortable answers but you may not know what questions you really should be asking unless you go down. So how, in the material that’s presented and brought to the board, do you manage to enter at that level of detail so the discussion enters a level where questions can be asked? Now, when there’s a problem of course you do enter that level automatically.” “Boards are like marriages; you can look at something from the outside and from the inside it can look completely different. So judging from the outside is really problematic.” Just as with listening, being willing to challenge ideas and strategies based on evidence needs to become an executive and organizational habit. As Catherine indicates, that example has to come from the top,

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from the chairman, or CEO, or hopefully from both together. A few years ago, that example would have emanated solely from the CEO, now the chairman is also key. • They make time for debate There are also downsides. Evidence gathering can be a slow process and can be seen as a strategic disadvantage. Leaders may have to accept that a first-mover advantage is hard to achieve. It is sometimes better to delay a decision or a move until everyone is on board and all the relevant evidence gathered. Ed Rapp of Caterpillar makes the point: We debate everything from the long term strategy, what are the key market segments, do we have the right products and solutions, do we have a competitive manufacturing footprint and supply chain, are we effectively going to market with our dealers? But, perhaps the most important question we ask is, are we building a pipeline of great leaders. As leaders, we have two accountabilities; leave the place better than we found it and in more capable hands. If we as leaders do this, the business is sustained over the long haul. I think the hardest part of any business is making choices. When it comes to resource allocation the choices you make on where you invest in the business, the choices you make on technologies you select for future development, the choices you make about the people you put into key roles, perhaps the most critical choice in resource allocation. Where are you going to make your bets in terms of people, where are you going to make your bets on technology, where are you going to make your bets in terms of the capital that you employ in the business? I think that’s probably where we have the most robust discussion. The one thing we do as a team fairly well is have a robust discussion and debate and argue different points of view, but when we break as a team and go external to the organization we do it as a team. Our intent is the debate happens behind the door but when we go out to our organization we adapt and have one voice or the organization will pick up on it.

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A similar view comes from Kevin Lobo who argues that the debate required to interrogate the evidence requires time: Our meeting agenda time has changed significantly. We used to have very little time on our board agendas for open debate, so we’ve reduced the amount of items by almost 50 percent and allotted more time for each subject. This means we actually have time to stop and have different people voice their opinions. In case of a major decision, we’ll ask each person to give their point of view, and go around the table. If people aren’t ready to make a decision, we will have follow-up calls. It is about being very deliberate and ensuring that everyone’s heard. It’s an important facilitation exercise and it means being willing to change your position. Once you demonstrate that the group can shift direction, then everyone realizes, this process is real; this team, this company, this leader, is listening to us, and factoring our views. You just have to walk the talk. I’ve been very fortunate that I’ve worked in a lot of good environments where I’ve always been able to voice my opinion, always be heard, and I’ve encouraged that of my team. I expect to be challenged, and if the majority of people are going in a different direction than I am, and I understand the reasons why, then I’m willing to drop my point of view if their points have merit. And I think that’s the key: If the leader never shifts their opinion, then you can talk all you want, talk is cheap. So the lesson is to allow messages to filter through in order to see the underlying patterns. However, with that comes commitment. Ed Rapp emphasizes the commitment to speak as one and position the organization behind the leadership. Kevin Lobo draws attention to another form of commitment, the willingness to change if the evidence clearly points to the need to alter course. If other commitments are not honored, then as Kevin Lobo says, “talk is cheap” and so is the outcome. • They seek evidence in a structured way Evidence-based leaders need to be clear about the proof they seek. What evidence? From whom? Which stakeholders? It is critical to create a

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robust and resilient culture of “interrogating the evidence,” rather than interrogating the people who deliver the evidence. That goes to the heart of their role as leader. Explains Sam Su of Yum! Brands: We are a group of people and we have a very important journey to make. And I happen to be the CEO. They want to achieve, they want to do this thing. And my job is to help them remove any obstacles and help them come together. So my role is not so much leading, rather it’s supporting. I’m not a great visionary kind of guy: I’m an analyst. And my job is to see all the different angles and try to integrate them. Often, these are habits leaders have acquired in other customer-facing roles. (It is notable that many leaders have had, at one time or another, direct customer-facing roles.) One top investment manager explains: When I was in investment banking, the first thing I did when targeting a publicly listed company was to look at the top guy’s remuneration in the annual report and find out what was driving him. Was it return on equity? Was it growth in net income? Was it cash flow? I set myself a goal that within two meetings I’d find the metrics of success of the key decision makers. Now you appreciate what’s driving them. For the leaders in our study, the leveraging of evidence is key to delivering value.

The discipline of evidence: In summary • Evidence is the starting point of understanding the success formula. Evidence is the basis for independent thinking and debate. • In order to lead for sustainable success, drawing on evidence must become a habit. • Good evidence surfaces the true nature of an organization’s context; bad evidence automatically supports a particular view point. • A willingness to gather evidence to truly understand the context requires humility.

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• Considerable sensitivity is needed to determine the shape and nature of good evidence. • Successful evidence-led leaders • believe in the power of evidence; • start evidence gathering from day one; • are comfortable with hard and soft evidence; • emphasize the quality of the evidence; • actively listen; • use evidence as a platform for independent debate; • build an action-focused debating team; • make time for debate; and • seek evidence in a structured way.

Key questions • Do you believe independent thinking and dialogue are necessary components for leading for sustainable success? • To what extent do you feel that evidence is a critical part of your leadership contribution? • To what degree have you made the gathering of evidence a habit? • To what degree have you made this habit evident? • Do you use evidence as a platform for stimulating penetrating debate and discussion? • Do you insist that the evidence be gathered in a structured and disciplined way? • How do you think the general managers in your organization would respond to the above questions, and would their response be different from that of the top management?

Chapter 4 Discipline 2—Mission In the previous chapter, we saw that how leaders gather and evaluate evidence determines whether they apply the formula for delivered value or perceived value. The next discipline to explore is that of mission. This is critical. A clearly defined mission determines the purpose of the enterprise. Without that sense of purpose, the organization is exposed to damaging fractures, political infighting, and a future of decline. Though often confused, an organization’s mission and vision, as we shall see, are not the same thing. Mission is its ultimate purpose. Consciously determined, deep-seated values guide the leader through the tensions and dilemmas of the Engagement × Alignment (E × A) element in the success formula. Deeply held values support that mission and vision realizes that mission. Moving further down toward execution, strategies are the ways to go about realizing the vision. In value delivery organizations, the mission is a compass always pointing true North. Every strategy should be tested against the organization’s mission to clarify the fit. Here’s what Charlie Mayfield, chairman of the John Lewis Partnership, told me: John Lewis is a unique organization. Leading successfully here requires interpretation and judgment to be exercised that respects our mission and founding principles. We have an organizational structure and a governance structure, which reinforce and reflect those principles. We adhere to them and we abide by them. The concept behind the partnership is actually very entrepreneurial. Our founder thought of himself as an entrepreneur, but one who was particularly interested in the natural world. He was inspired by nature, and he described himself first and foremost as a naturalist. He was an avid collector of birds, bees, insects, all sorts of things. There was something about the inherent balance in nature that he

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was seeking to reflect in the organization and indeed within the constitution of the Partnership. “We’re global in the sense that we need to be on the ground and make our products or deliver our services very close to where the patients are, that’s our mission,” says Ulf “Mark” Schneider, CEO of the Fresenius Group. Mission-based organizations are dependent on the promulgation and living of their core values. How to nurture a mission-based culture and promote high levels of trust and an equally high discretionary adaptability in order to realize operational flexibility are the key themes of this chapter. Values and mission are intertwined. For health-care providers, for example, waiting lists and tick boxes may have a part to play, but they are not the same as creating patient value. In an accident and emergency department, the mission is all about providing reassurance to each individual patient—never about how many patients are treated in a 24-hour period. It is about values. Do leaders live the values? And do they do so in a fastmoving context? The measure of a good leader is his or her ability to constantly challenge value creation to support the organization’s mission.

Command and liberate Nowhere more is this true than in the military. The concept of mission command is instructive here.1 In the early nineteenth century, Napoleon was the conqueror of Europe. In 1806 he defeated the Prussians at the battles of Jena and Auerstedt. The vastly bigger armies of the Prussians were crushed by the flexible and adaptable French forces. The French used localized force to gain superiority. The Prussians were slow and cumbersome. Yet, the Prussians learned and one of the greatest military thinkers Carl von Clausewitz went on to revolutionize military thinking. Even now, the British and American military draw on his ideas (even if they may not always acknowledge their source). Von Clausewitz knew that success

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depended on flexibly responding to situations. Failure meant overreliance on detailed planning, which was irrelevant when the enemy was encountered—“Whatever you plan it falls apart when confronted by the opponents.” The not-so-secret fundamental in mission command is values. It is the mission and the values people live and not the vision that binds the organization together. Under mission command principles, the senior middle-ranking officers are responsible for both strategy and tactics. Each commander, confident that he has the support of his senior officers, handles his circumstance in the most appropriate way. The topranking officers trust their commanders to adapt to each situation, but all are bound together by a strong sense of purpose and mission. In contemporary times, my Cranfield colleague Arnoud Franken has drawn lessons from the Royal Marines. The Royal Marines are the Royal Navy’s 7,500-strong commando-trained amphibious infantry and are the core component of the United Kingdom’s Rapid Reaction Force. Says Franken: For senior executives, one of the key lessons from the Royal M ­ arines approach for planning in the face of uncertainty is that it is not about gathering and crunching vast amounts of data, using advanced mathematical techniques to create an accurate model of the world that reduces the inherent uncertainty and to use that as a basis for developing strategy by the executive team. Neither is it about using traditional planning tools inherited from a bygone linearthinking and efficiency-oriented era that assume the environment does not change, nor is it about skipping thinking because it is too difficult and just doing. Instead it is about creating prepared minds and maintaining flexibility of mind and attitude to achieve a commonly understood desired end-state. It is the planning that matters, not the plan itself. Further, in dynamic environments planning cannot be the preserve of the executive team as they are not able to understand, plan, lead and manage in detail at the rate of change in the environment. Therefore, the planning process should not be exclusive but inclusive, drawing on the knowledge, insights, skills and qualities of people at every level of the organization.

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For Franken, as for many others, involvement and inclusiveness are fundamental components of engagement.2 Another useful take comes from Chris Zook of Bain & Company who talks about “commander’s intent.” This is how he explains it: The origins of commander’s intent can be traced right back to the Napoleonic Wars. It came from a situation where a number of military leaders, including Admiral Nelson, found it very powerful to be able to have a very simple statement that every one of the commanders knew and understood. It was a statement of the strategy and some of the non-negotiable principles of behavior, because unexpected elements always emerge during combat, and the more decisions that you can push down to the front line, the better. One reason for Nelson winning so many naval engagements was that he and his band of brothers, the other captains, had a clear set of principles of behavior. It meant that even under unexpected conditions or when they were unable to see the other ships, they could anticipate what Nelson would expect them to do. In business, the analogy is the non-negotiable principles of the business. Many of the most successful and enduring businesses are those that have actually been able to push decisions closer to the front line, with fewer layers in the middle. It’s because the commander’s intent, the essence of what the business was trying to do, and the key nonnegotiable principles, were so well understood. 3 Adapting to context, being able to respond to confrontation with the enemy, has clear organizational repercussions. Leaders in my interviews repeatedly spoke about the need for less rigid organizational forms and the necessity for the gathering of evidence to be close to the customer. Take this CEO’s description of how the mission of his organization influences its structure: We’re highly integrated. We are a multidimensional organization. We operate in much more of a multidimensional world and it really is a challenge for people when they join the company. We provide an

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awful lot of systems, so it is an organization where you need strong influencing leadership skills to get focus above you, beside you, below you, and get everybody aligned.

How mission impacts the organization How does a sense of mission and purpose become central to the leadership and functioning of the organization? Here are some lessons learned from leaders: • Appoint managers and leaders according to their values and not just their technical skills. In challenging and rapidly changing markets, decisions based on training and experience do not necessarily produce the optimum results. Believing what is the right thing to do (which in many ways goes against the argument for evidence but supports the need for trust) produces the necessary results. When all the evidence is not available, leaders draw on their values and that in many ways is their key defence for their decisions in the wider context. Actions determined through values are powerful when one is faced with ambiguity. The interpretation and articulations of the values of the organization need to have a cohesive logic. They sit within what have been described as “the culturally recognized parameters of acceptable organizational practice.” Such values do not lie within nicely designed charters exhibited to the staff as wish lists. Instead they are deeply ingrained and determine the actions of leaders when they are under pressure. • Feel your way through danger: The mission command logic is that control of context is impossible. For outstanding leaders, the source of competitive advantage is a combination of mission, strategy, and tactics. In practice, this is likely to mean shorter decision-making loops that maintain focus on the market, but are guided in a clear direction by the ultimate purpose of the enterprise. Discretion is key, but it is discretion with distinctive parameters. • Make general managers part of the top team: My research points to the fact that general managers are the heart and soul of the organization. The GMs know quicker than anyone else what will work and what will not. By the nature of their role, they are or should be part of the top team, but in many organizations they are not invited to sit

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anywhere near the top table. Mission command demands intimacy between the top team and the general managers. More than anything, the GMs’ desire that leaders live their values and do not place them in the uncomfortable situation of having to implement a strategy they know will not work. • Surface the dilemmas: The nature of leadership is the working through of dilemmas. The classic dilemma of being disciplined on costs and yet investing in people and the organization has no neat solution. More important is the manner in which each dilemma is handled context by context. Again, values come into play. Knowing the values of the top management builds trust at times of difficulty (or, alternatively, damages confidence even further). To address dilemmas in isolation is not a wise move. Leaders must surface the dilemmas and then share them with the general management population to create a team bound together by unwelcome challenges, but able to work through the dilemmas faced. • Be seen as authentic: One common theme in leadership books of recent vintage is the need to act authentically. The reality is that most leaders find this task impossible. There are, of course, exceptions. “I feel totally at ease in my professional environment because fundamentally I’m free to go, no one is going to be able to twist my arm. I’m going to do what’s right. No one told me that I’m free to do what I think I should be doing, I just took it for granted,” one C-suite executive told me with great confidence. Constant change and pressure works against executives acting authentically. They simply do not feel they can be themselves. The changing nature of circumstances requires adaptive behavior. What was said six months ago may now be contradicted. The loss of two major orders can wreck the balance sheet. In interviews, nearly all the leaders I talked with described this authenticity challenge. All felt themselves to be authentic, but most, when they were honest, admitted to being seen as inauthentic. Authenticity is deeply personal but it also rests in the eye of the beholder. For many the fact that they were seen as inauthentic hurt. They were striving to lead the organization in the best way they possibly could, but this had led them to make decisions that contradicted their previous statements.

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As one CEO told me, “I really feel myself to be an authentic person. I know I have been criticized for being inauthentic, but when I have a look at the total picture, I have been told that I am recognized as authentic even though some of my actions appear to run counter to that. I always left an open door for conversation and when the chips were down I was told, ‘we understand, we probably would have done much the same as you and faced the same criticism and backlash as you. We respect that.’ As a leader you accept that backlash and see it as your responsibility when in fact you are more a victim of circumstance.” Winning that respect is the crucial leap in leaders being recognized as authentic rather than as behaving consistently, which, given the fast changing circumstances, is simply impossible.

The vision thing It is worth exploring the difference between vision and mission. Too often they are used almost interchangeably in the organizational world. In fact, they have very different meanings. In contrast to mission-led organizations, a vision-led organization depends on the leader whose vision shapes the future of the enterprise. The difference between the two is profound. The long-term sustainable future lies with the mission-based enterprise. If there is a clear sense of mission, the transition from one leader to the next is not too potentially damaging. The deeply embedded values of the organization and the belief in its continued success sustain the enterprise from one change of leadership to the next. In contrast, vision-driven organizations are dangerously dependent on their leaders to create that vision. By definition the vision-led organization is vulnerable to a poor choice of leader or to a leader who holds a contrasting vision to his or her predecessor. A leader going in a different direction without having built the necessary capability can be more damaging than a leader without a vision. Of course, visions have been around for centuries. In modern times, think of Martin Luther King’s “dream” of racial equality or President

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Kennedy’s ambition to put a man on the moon. In the business world, remember Henry Ford’s aspiration to produce cars for the masses or Microsoft’s hope of putting a computer on every desk and in every home. In the 1980s, the leadership researcher Warren Bennis embarked on a now-famous study of ninety American leaders including former astronaut Neil Armstrong and a tightrope walker. Bennis sought to identify and codify effective leadership. He offered a view of leadership based on four factors: vision, meaning, trust, and the deployment of self. Vision comes first. Indeed, Bennis defined leadership as “the capacity to create a compelling vision and translate it into action and sustain it.”4 Without a vision of what you would like to achieve, what you do achieve is no benchmark of success. Henry Kissinger claimed: “Leaders must invoke an alchemy of great vision. Those leaders who do not are ultimately judged failures, even though they may be popular at the moment.” 5

The meaning of vision As a starting point, it is useful to explore the real meaning of what a vision is, and how it should be constructed and used. In their influential book Built to Last, Jim Collins and Jerry Porras view the function of a leader thus: “to catalyze a clear and shared vision of the organization and to secure commitment to and vigorous pursuit of that vision.” The vision catalyzes the organization. Collins and Porras contend that vision has two main components: a guiding philosophy and a tangible image. The guiding philosophy is “a system of fundamental motivating assumptions, principles, values and tenets” that stems from the organization’s core beliefs, values, and purpose. Making up the tangible image are a mission and a vivid description. The mission is “a clear and compelling goal that serves to unify an organization’s effort. An effective mission must stretch and challenge the organization, yet be achievable.”6 In his influential work on the learning organization, Peter Senge emphasizes that a shared vision is a vehicle for building shared meaning in an

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organization, particularly if it is built in a participative way.7 He sees a vision as representing the organization’s guiding aspirations. These are composed of: • Vision: an image of our desired future • Values: how we expect to travel to where we want to go • Purpose or mission: what the organization is here to do • Goals: milestones we expect to reach before too long. So, what does a vision mean in the context of creating value? Borrowing from the definitions above, a value-enhancing vision meets the following criteria: • It acts as a catalyst—offering an alternative future that challenges the status quo and mobilizes commitment. • It offers a tangible picture of a destination—a better place that will create more value for stakeholders. In this way it provides the bridge from the present into the future. • It attracts commitment and energizes people—by creating meaning between workers’ lives and their work, by making them feel they are part of a greater whole. • It establishes a standard of excellence and stimulates improvement. • It emerges from a considered process of thought, connection, and communication. Visioning is an inclusive process. It is the alchemy of alignment and engagement. By its nature, then, a vision cannot emerge fully formed. It is by working out the fine details—both at the level of strategy and at the level of how each individual will relate to it—that people engage with the vision to bring it alive. In other words, how we follow the vision in one department or role will be different from how we do it in another—not least because each starts from a slightly different place. But both are moving toward a shared destination. Collins and Porras treat vision as an entity. Vision belongs to someone, usually the CEO, and goes with that person when he or she departs. The vision needs to be embedded into the organization so that when the successor arrives, the entity displays and lives a clear purpose. That does not happen by accident and is difficult to achieve. So the alternative is to use vision as a process and address the challenge of how to go about creating a shared vision that is, by its nature, engaging.

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A study of the process of visioning, carried out with my wife Nada and Linda Lee-Davis, found that poorly pursued visioning is a key reason why organizations are unable to realize their objectives.8 The result can be organizational chaos, with divisions and departments spending more time in dysfunctional competition with each other, creating a deeply divided company. Paradoxically, managers are empowered to develop their own agendas and pursue them with an enviable discipline, but are insensitive to the vicious spiral that is winding down the organization. “Selfish Business Units” slowly bleed the corporation to death. The end result is a culture of in fighting and a short-termist/survivalist mentality that erodes the company’s competitive advantage. To combat this, my own research identified four steps toward effective visioning: • Personal conviction to break the downward spiral. Holding a conviction concerning what needs to be done and how is pivotal to the whole visioning process. The conviction comes from seeing what actually can be realized with the organization and the gains that can be made from a less divisive process that breaks away from a mindset of division. The conviction equally depends on realistically knowing what is needed to influence external factors as well as the critical internal stakeholders. Personal conviction and staying power are intertwined. • Commitment from the senior team. A divided organization generates continuous mixed messages. For this to change, the leader has to show how discretionary power can be productively used. A great deal depends on creating a culture of listening. Making sufficient room for each person in the team to surface what motivated him or her and why he or she had such little trust in the organization and its leadership encourages disclosure and sharing. Allowing enough room for listening and discussion stimulates diversity of thinking, which channels energy toward meaningful agreement. The key objective is buy-in and ownership of the actions that need to be taken. • Fast feedback. Issues need to be addressed as they arise. Feedback needs to be given as comment is made. That is a big behavioral leap. In a divided organization, politeness at meetings and agreement offered readily act as a prelude to renegotiating all that was agreed on

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at the meeting once the meeting is over. Issues are not addressed and comments are not challenged. The CEO and chairman find themselves being influenced by the last person who saw them. The switch must be to a situation where all discussion takes place at the meeting. Period. Transparency and equal opportunity to speak become the norm. Insisting that evidence-determined positive and negative feedback be offered is the way to create a culture of dialogue. The culture needs to be accepting of constructive comment without defensiveness. • Establishing a visioning culture. The sense of partnership in shaping the future, based on fast feedback and personal and team commitment, needs to be further drilled down into the company This should be based on a willingness to address concerns that many may silently have held and to establish a culture of envisioning a clear way forward based on shared ideals and values. Depending on the challenges the organization has experienced, the process of creating a visioning culture may need to be broken down into manageable parts, rather than addressing the big problem at once. Grasping the low-hanging fruit and the quick wins that arise is a powerful motivation. Soon a common language emerges and this needs to be cultivated throughout the organization. Retrospective reflection is sustainably reduced and substituted with a wider exploration of new opportunities.

Mobile missions How a company understands success and the value it needs to create to get there is not fixed permanently in place. How an organization understands success changes. Indeed, for many leaders, changing the understanding of what constitutes success is part and parcel of their job. Listen to what Kevin Lobo of Stryker shared with me: We’ve changed the definition of winning in the company by focusing metrics on the outside world, so it’s winning versus the competition, and we don’t have a totem pole inside the company. We have shifted people across divisions, changed incentives, and created opportunities for multiple divisions to work together for customers.

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For a mission-led enterprise such as Stryker, Kevin Lobo uses vision as more of an operational tool than a distant decorative adornment. Ed Rapp of Caterpillar observes: The key thing for me when you get to this level is this, can you create a compelling vision and can you then break it down into pieces where every person in the organization understands what role they play? With leadership that’s the hardest thing. As leaders sometimes our eyes are bigger than our stomachs, we take on a multitude of initiatives instead of asking: what are those few initiatives that are going to make the biggest difference? I’m looking for leaders who can create that clarity, I’m looking for someone who understands the business and the levers that drive the value. They can intuitively look at the numbers and know when they’re right or wrong. They know our business model and the levers to pull to create value for customers and value for shareholders. Then there are two accountabilities—driving continuous improvement, leaving the place better than we found it, and in more capable hands. You don’t want people who make it more about them than about the company. If you look at a strong personality in the corporate world often there is a huge vacuum after they leave and so we are looking for people who are stewards of the business rather than personalities in the business. In the final analysis, as Ed Rapp’s comments suggest, mission is not personal. It has to extend beyond the agenda of an individual to vibrantly engage and enhance the organization, the market, the industry, and the world.

The discipline of mission: In summary • Mission-based and vision-led organizations are two different entities. • Mission-based organizations focus on realizing their ultimate purpose on a bedrock of values deeply held by the leaders and members of the enterprise.

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• Consciously determined, deep-seated values guide the leader through the tensions and dilemmas of Engagement × Alignment. • The nature of these values is critical. Unreflected values promote prejudice, which blinds individuals and the organization to its own challenges and problems. • Thought-through values promote inclusiveness and an environment suitable for innovation, the building of trust, and the spotting of new opportunities. • Being vision-oriented overexposes the organization to the values and directional view of one individual, thus making the enterprise vulnerable.

Key questions • Is yours a mission- or a vision-based organization, and if so, how do you know? • What are the true and behaved values of your organization irrespective of what is written down? • Do the values of your organization promote inclusiveness, transparency, and a culture of innovation? • Does the CEO promote his or her views and values, which will dissipate once he or she leaves? If not, how will these become embedded into the fabric of the enterprise? • Do you feel that the values of your organization are consciously determined, evidence-based, and deep-seated so that managers are guided through the tensions and dilemmas they face?

Chapter 5 Discipline 3—Alignment When I spoke to René Obermann, he was CEO of Deutsche Telekom. He had been with the company for eighteen years of which he had spent seven as its head and eleven as a board member. Soon after we spoke, Obermann announced that he was standing down as CEO. He wanted to move closer to operational activities than is possible for the CEO of an international corporation and to take on even more entrepreneurial activities: “I want to go back to having more time for customers, for product development and for technology,” he said. At the end of 2013, Obermann left the company. It was a notable event: in this era of growing executive churn, not many CEOs leave on their own terms, and not many manage their succession so clearly or have such a compelling idea of their legacy. Looking back on his tenure, this is what René Obermann said: In the last few years we have found solutions for our key issues—we show a much stronger performance in the US, are much more competitive in our home market than several years ago, being recognized for the best network, the best customer service in the industry and we are expanding with a variety of innovative products and services. As an employer, we have given the topic of diversity new momentum, which has been recognized and even emulated beyond the company. Furthermore, we have put a lot of focus on key values in our company, from customer centricity to respect and integrity. And the company has a solid financial foundation and has regained the confidence of the investor community. In short: this is the right time to prepare to pass the baton and ensure a smooth transition. When I spoke with Obermann in his office a few months before his departure, he told me about the challenges he had faced during his tenure. Central to them was the issue of alignment. This is how he explained it:

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We are rapidly transforming from the old telco world into the IP world. That is more than a technological transformation, it changes everything we do. The company has evolved in its efficiency significantly, so we’re much more competitive than we used to be seven or eight years ago. We have established a leadership position in a number of wireless markets, including Germany. We have developed a much better focus on customer services, proven by a lot of KPIs, which are objective so it’s not just my wishful thinking. And we have integrated the different operations, particularly wireless and fixed line, and content distribution services, into one face for the customer. So we have taken the company from a product-line organization to a customer-facing organization, with the focus on consumer and also on business customer needs. We are on the way to driving international scale—though we have not yet established a strong enough functional integration across borders in order to drive those international scale effects, which are badly needed in an internet world, where markets are, by definition, without borders. The challenge really is to find the best alignment of structures and processes, across borders—for instance, in product development—and to establish a glocal model. There are many activities which need to be local, but there is a lot which needs to be global. In some areas we do it already, such as in procurement; in other areas we do it only partially, such as product development or partnering with internet companies. For example, we’ve partnered with Spotify in some markets and in other markets with another music streaming company. And many more examples like this. So we have not found the “glocal” optimum yet. But we are working on it. Obermann refers to creating structures that deal with the complexity of markets and finding that challenging balance between global and local demands. Although he does not directly refer to diversity of thinking, his comments exemplify diversity of thinking. He is offering models outlining what is the optimum structure for addressing the tensions between global and local needs. Alignment is, first of all, a common view on key market developments, a common view on customer needs, on priorities, and on the

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strategic roadmap. And a very strong common orientation on the company values. For us customer delight is the first value. The second value is integrity and respect. And the third value is team together/team apart. The fourth one is, to create the best place to work and grow. And the fifth one is, count on me. If you go and talk to senior managers, and ask them about these values, I believe you’d get similar answers. They may not be exactly and immediately in the right order, but they would come up with these five values. So customer delight would be the first. The second, people might feel has been even overstressed. The third one, team together/team apart, has improved, because we have much less politics and leakage than we had five years ago. We are not perfect, we still have some political behavior here and there, but it’s not at all on the same level as it used to be. On “create the best place to perform and grow,” I think we are not yet much better than other telcos, even though we try to turn the pyramid and emphasize the appreciation for engineers and customerfacing people, but still it’s a pretty hierarchical organization. I think that needs to be taken care of more. The fifth one, the reliability topic, I also think has also been embraced well in the organization.

Wrestling with alignment René Obermann candidly describes the real battlefield of aligning a large international organization. It is a constant struggle, a laborious wrestling match trying to pin the organizational beast on the ground, only to see it writhe away once more. Alignment is one of those curious things. Senior executives tend to talk about it a great deal. And yet, as a discipline, it is not as zealously researched as other areas, such as engagement and mission. Alignment is a vital element in the success formula, perhaps the most vital as it is so often so lacking. Alignment refers to the structures, systems, processes, and protocols necessary to position the organization to realize its strategy, objectives, and desired outcomes. In effect, alignment is the platform that must be built to execute strategy.

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This is how Kevin Lobo, CEO and president of Stryker Corporation, describes the process of alignment he has been working on: The four themes I introduced as CEO were globalization, collaboration, innovation and cost optimization. My four shuns, I call them. The collaboration one is a massive change and my own team is actually spending more time together. We have more common metrics and goals that are aligned and that shift is new for our company. It’s going well, but we’re still in the early days of that process. Here’s how Paul Achleitner from Deutsche Bank describes his process of alignment: Deutsche Bank is one of the few European institutions that has the potential to compete globally with the American banks. In order to get to that position, it had to transform itself and move forward from its roots—142 years of history—into a global, Anglo-Saxon­driven capital markets environment. It is one of the few institutions that has successfully integrated a large global investment banking activity and grown it. That puts cultural strains on the organization but it is an institution that has the potential to actually compete in that area and the challenge is to make that happen in a changed regulatory and political and competitive environment. To make that happen will require, first of all, creating a culture that actually values systems and processes and the basics of the plumbing as much as the frontline revenue generators. It requires a culture that actually focuses on clients, as opposed to counterparties, and it will require an awareness that, in today’s societal and political environment, banks need to be seen as prudent guardians of a stable financial system, rather than innovators of new financial products. From these perspectives, three key elements of alignment can be identified: One: Alignment of thinking between the key players. In particular, the thinking of the top team and the board, and that between the board and the top team, and between the top team and general management needs to be aligned. It is critical that there is broad agreement on the nature of the strategy and what is required in terms of structural shape

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and investment in particular processes in order to execute that strategy. My previous research on top teams and boards highlighted a demanding but universal challenge in delivering value. From a database of 12,500 top teams spanning 21 countries and 5,000 boards spanning 14 countries, over 34 percent of top teams were found to be continually misaligned on the mission, vision, and strategy of the organization. Perhaps not surprisingly, this led to dysfunctional political behavior being the norm. Further, over 66 percent of top team members and general managers reported being unable to raise critical concerns and, through their inaction, allowed the organization to erode. Similarly, over 80 percent of boards were found to be out of touch with the reality of the organization, thus making their contribution peripheral. Getting this alignment right begins when people are recruited. Research by the member-based global advisory company, CEB, of C-suite executives found that outside hires take twice as long to ramp up as a leader promoted from within. Astoundingly, C-suite executives report that only one out of five executives hired from outside are viewed as high performers at the end of their first year in-house. And ultimately, of the 40 percent of leaders who are hired from outside each year, nearly half fail within the first 18 months. CEB studied more than 320 leaders in 36 organizations and found that external leaders fail because they just don’t work well with the people on their teams. As a result, according to CEB, leading companies and search firms are changing their hiring criteria—focusing not just on skills and cultural fit but also on network fit: how well the potential hire will fit with the way his or her new colleagues work. The research shows that hiring for this more colleague-centric type of fit can improve performance at the two-year mark by 30 percent. It has more than twice the impact of assessing only for general culture fit. For example, Ingersoll Rand shifted its approach to assessing potential leaders, focusing not just on qualifications but on four new “fit categories”—knowledge, values, career experience, and leadership behaviors—which in combination produced a more complete view of the executive’s style and how he or she was likely to approach work.

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Ingersoll Rand recognizes that to fit, an executive does not always have to have the same style as the team. The company has two types of fit: “conformist,” same as the in-house team, and “complementary,” which might be called for when the purpose of bringing in a new executive is to spark some productive disruption in the way the current team is working. Two: Alignment of structure, namely the actual structural configurations that will achieve particular ends, for example, centralized versus decentralized, or matrix structures. Organizations are increasingly complex. Forget straight line reporting. The reality in most organizations is that life is matrixed—there aren’t straightforward singular reporting lines any more. In my book Working in Organizations, I devote an entire chapter to different structural forms, which today have effectively morphed into variations of matrix structures. Henry Mintzberg has written extensively on structural configurations, outlining the strengths and weaknesses of each. In the past, many large companies went through painful restructuring programs, often at the recommendation of consulting firms. The aim was to improve efficiency, but restructuring does not always lead to greater effectiveness. When restructuring fails to integrate thinking on alignment with the reality of engagement, the efficiency gains are often illusory. Three: Alignment of systems, namely the operational systems (HR, IT, finance, procurement) and protocols, mainly from finance, that allow the structures to work and facilitate the execution of strategy. Dave Mackay, former president/CEO and director of Kellogg Worldwide, speaks of his experience: When I took over running the US operation, the organizational structure was more driven by the corporate functions than by the business units. Those business units had been disempowered, the corporate functions were making more of the calls than they should. You really need the operators to be running the business and corporate support functions are not there to impose their political will. So, I had to go about unwinding that structure, creating proper business units with the right level of authority and accountability. I clearly was not popular with the corporate functions because

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they were losing power as a lot of people had to go; there was a fair amount of change and ultimately we got the business structure to run and back into a more reasonable role.

Aligned and engaged Although alignment and engagement are two separate elements of the success formula—and therefore require two distinct sets of processes and considerations—the research shows that the two are interconnected. So if alignment is the logic and structure to execute strategy, then engagement is the desire, willingness, motivation (or demotivation) to make the structures and processes work. Yet, typically, these two considerations have been treated separately—both academically and from a consulting perspective. The structural forms or processes that are implemented will have engagement repercussions. Yet the debate on the repercussions of alignment rarely occurs inside organizations as the topic raises distinct sensitivities. How does one challenge the CEO and tell him or her that his or her structure is wrong? What to do when KPIs push the organization into the siloed way of thinking and operating, and yet, cross-functional teamwork is necessary but cannot easily be measured as an output? How does one induce a culture of client referral from one department to the next when the consultants involved are rewarded on the size of contract achieved? Client referral means sharing the pot and few organizations have developed the maturity for such a practice. The sensitivities are understandable. Challenging the boss, challenging the system, and challenging the whole fabric of the organization usually does little to further one’s career. This needs to change if misalignment is to be tackled. Constructively challenging ingrained views and practices is necessary.

Aligning HP The business press is full of stories about misguided strategies. Lurking just below the surface of many of these are the repercussions of mismanaged alignment and engagement. Take the example of Hewlett-Packard a few years ago.

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This is how Fortune described Mark Hurd, the then newly appointed CEO of HP following the dismissal of Carly Fiorina as CEO: Hurd gets jazzed by diving into sales numbers—he jokes about “interrogating the data” until it confesses. Fiorina loved the limelight; Hurd did not want to be on the cover of this magazine. Fiorina owned Davos, the annual teach-in for “Plutocrats” in the Swiss Alps; Hurd skipped this year’s session citing “customer commitments.” Fiorina was always on message; Hurd is sales optimization in a suit.1 The article emphasized the differences of vision and approach between Hurd and Fiorina. Particularly visible is the alignment Hurd created between market opportunities and the company’s strengths. “Hurd boils down HP’s opportunities to three market trends that neatly match the company’s three main units . . . no matter how you dress up his views, he is simply trying to leverage the things HP is already good at,” the story continues. “It’s as if a new CEO of Procter and Gamble were to demand—what else can we do here with toothpaste and diapers?” Hurd dismantled the centralized selling group and reversed the Fiorina structure, which combined printers and PCs. Despite layoffs, a reduction in R&D spending, the introduction of global promotion schemes, and a freezing of pension benefits, management and the work force seemed to be behind Hurd. He also brought in new management talent, and the results of his endeavors were increased profits and share prices. Alignment provides a two fold advantage: the reduction of complexity and greater clarity by clearly displaying the links between initiatives. The value proposition is clear. From then on, interrogation focuses more on detail.

Alignment of thinking As one senior general manager observed: “It’s never the structure or the systems; it is the fact that my bosses do not have joined-up thinking. Why do you think we keep changing the structure every nine months or so? It is because we cannot agree on how to do our business.” My research supports this view. When the top team does not agree, each member pulls in a different direction. The mixed messages that ensue

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drive general managers further away from the center. The end results are a structural nightmare with the center being seen as providing no value, a misaligned organizational quagmire rather than a dynamic value-adding hub. Linking back to the formula—S × (E + A)—which describes poor performance, my research shows a particular pattern in the manner in which strategy is implemented when there is little alignment of thinking at the top. The politicization of winning the support of friends, colleagues, and anyone else predominates. With sufficient backing, the next step is for structure to follow strategy, an already established wisdom and seen by many as best practice. My research shows that this is often not the case. The organization has not bought into the way forward. Despite this, the strategy is pushed through structure. Current wisdom has it that the next step is for the change program to be cascaded down the enterprise. In effect, management and the employees are sold the way forward. Their concerns and objections, although heard, are little more than a release of the pressure valve to reduce tension. If the hard sell of the strategy does not work, then it is a matter of shut-up or shove-off. You do not fit and are damaging to what we are trying to achieve. Despite the extensive findings scattered in the academic and also the popular management and strategy literature concerning mergers and acquisitions that fail, change programs that derail and culture and value initiatives that do not work, the practice of S × (E + A) = V continues. Strategy and structure are positioned as the evident way forward. Instead of feedback, the strategy is sold to the rest of the organization. Against all the evidence, the current wisdom of get the strategy right, structure follows strategy, and then sell, or tell, the people in the organization changes that they often know will not work continues with an astonishing frequency. Managers who once championed change programs frequently, on reflection many years later, relate to me how they underestimated the influence of culture and the damaging impact of poor engagement. I have followed up with some of the managers who related their disappointing experiences. Many go on to repeat exactly the same approach to change elsewhere.

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Alternative energy There is an alternative. Jeff Fettig of Whirlpool provides a way forward, using values: We have five values: Respect, integrity, diversity & inclusion, teamwork, and spirit of winning. These five core values are very powerful, very important. They’re not slogans on the wall, we have a very clear expectation for each. For each value, we outline to our employees what Whirlpool expects of them, and what they should expect from Whirlpool. We then reinforce that through our development systems, by incorporating it into our assessment process, into our professional development plans, and as part of our annual performance assessments. Embracing our values is among the top five criteria we use to measure performance. We’re big believers in both the “what” and the “how” being equally important in our work. A lot of people only care about the “what.” At Whirlpool you have to pay attention to both. If you are really good on results, but don’t fully demonstrate our values, you will not be successful here. The other thing that supports all this is our performance-management process, which we’ve honed—and continue to hone—for the last 15 years. And it’s very thorough and it’s very disciplined—it’s inescapable at every level of the organization. And, we’ve got the tools and the systems we’ve built up over time to tell us whether we’re on the right track or the wrong track—from an enterprise level to an individual level.

Strategy versus Delivery An important distinction needs to be made here—between strategy- and delivery-led organizations. Strategy-driven organizations are about accountability. But value delivery-led organizations are about taking responsibility (mission-led). To be clear, strategy remains important. No one is saying that a company does not need a strategy. But strategy in isolation is dangerous. Every

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organization operates within a context. A strategy that is out of kilter with the context—internal capabilities and external market conditions—is destined to fail. This is where alignment comes in. To be effective, the organizational capabilities and the market opportunities and threats should align with the strategy. Otherwise, the strategy is misdirected. The point of a strategy is to identify the territory that the organization wants to occupy in the future—whether it be in one, three, or five years’ time. There is no point in having a strategy that the organization is totally ill equipped to execute on or where the identified market space does not exist. Strategy is about ambition. Strategy is about a set of goals and targets that the organization’s stakeholders commit to. Strategy, though, is not about numbers. It is about intent. The key question for strategy is: given who we are, where we are, and what we’ve got, where can we move to that would place us in a stronger position? As Catherine Livingstone of Telstra explains: I would see strategy as ideally a five-year view. Nowadays it tends to be if you get a two or three-year view you’re doing well. It’s not in the first instance to do with numbers; budget discussion is not a strategy discussion. Strategy discussions should be held in the absence of detailed numbers. You might scope a strategic ambition; either in X percent growth terms or saying we’d like to go from a $2 billion company to an $8 billion company over this period, so you’re scoping it in financial terms but you’re not saying our revenue will be this and our expenses and our gross margin . . . that’s a budget discussion. A strategy discussion is really looking at the business model, the shape of the business model, and asking how it’s going to evolve in the context of technology but also industry sectors, how they’re going to change, how you’re going to maintain a competitive advantage, where’s the proverbial white space, and hopefully how you can grow and contribute to growth in shareholder value? So the strategy is all about setting the ambition and deciding on probably the two or three major moves that you might make over, say, that five-year period, whether you re-orientate the organization or really push hard on the current trajectory. And then once you’ve set that, then you

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come back and say, okay, that’s great, so now what are we going to do tomorrow, and how are we going to implement that.

Working through politics “Thirty years ago, we were like most other companies. You know, people like to talk about good things, they like to ignore problems, and everybody tried to avoid controversy,” says Jeff Fettig of Whirlpool. “On the political nature of our company, we’re probably a one or a two on a ten scale. We just don’t believe in it, we don’t allow it, we don’t accept it.” Creating the right platform of alignment and engagement requires trust. Trust requires a degree of goodwill and a willingness to put the company first. The best-managed organizations seem to be able to cut through the politics because they are built on this sort of platform. Explains Ed Rapp of Caterpillar: I don’t know how many times through my career I’ve had a message on my phone that started with heads up. Heads up, I was at a meeting and the boss is asking this question or they’re questioning this direction or. . . I think the underpinning of the culture is not one based on gotcha; that you get ahead at the expense of somebody else. This isn’t to say that in a big company like CAT politics don’t play, but there is an unspoken understanding that the company comes first and is bigger than any individual. In other organizations there is no such unspoken understanding. Indeed, misalignment is routinely manifested in an abundance of organizational politics. The true test is to ask the general managers two levels below what is really going on. Usually the story is quite different from what you hear at board level. You will often discover that politics is a reality, deeply embedded in the organization. The Oxford English Dictionary defines politics thus: “Activities concerned with the acquisition and exercise of authority or government.” To some extent, politics is inevitable. But how can and should it be managed?

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My global studies identify seven steps to working through contrasting demands: • Map the agendas—Identify those critical stakeholders likely to powerfully impact the organization. In so doing, understand their objectives and motivation. Consider the reasons for the positions they have taken. Then consider how open to persuasion each stakeholder is. A candid view came from one chairman: I try to get things done by talking to people and try and do it diplomatically. I don’t try and go behind closed doors. I think it’s so much better to be open, honest, clear, and transparent about your views. I probably get myself into trouble on that sometimes, but I do think it’s the better way to go. But I am political in terms of trying to be diplomatic, not trying to blow the thing up. When people do try and blow things up because they’re trying to make a case. It’s not quite making a case, you’ve actually got to work together, it’s much better to get the issues on the table and make it clear—don’t get people offside, you’ve still got to work together. • Bring all close—The maxim of “bring your friends close, but your enemies closer still” did not survive the scrutiny of my research. Many C-suite executives emphasized treating everyone equally. Profess­ ionally intimate and open relationships can be crafted. Showing favoritism erodes relationships. Closeness of relationships nurtures the necessary comfort to share experiences, doubts, and views. Real conversation about why deep differences exist can begin. • Shift mindset—After opening up relationships, “nudging” others to one’s own viewpoint is considered the most sensitive and critical skill of politics. This subtle influence process can be pursued one to one, in a small group, formally and/or informally, at parties or even in chance encounters. No one way works best. Sensitively handling each stakeholder is critical. So, many described the process as mentally exhausting and time-consuming, but absolutely vital to undertake. One senior independent non executive director described how his chairman induced a fundamental shift of thinking on the board:

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He brought us all together, ostensibly as an away day, but it was the evening chat that made all the difference. He asked us how we found the board and the organization and what our experiences and recollections of the past into the present are. “It would be good to hear how we all feel about this board and what we are doing,” he said. I am one of the longest serving members on the board and so I had many stories to tell. I have very good memories of this board. I narrated our wonderful past and the impact it had on me. As I spoke it began to dawn on me that the past was holding me back and that I had to rethink my role and contributing on this board. In fact as I was talking it came clear to me that the role and contribution of the board had to shift. Then the second longest serving member spoke. He too painted a picture of a glorious past and I could see as his tale was woven, a new realization came about. And so the third longest serving, fourth and so on spoke, each with a positive view of the history of the board and each silently reconsidering how to move forward. It was then that the newest member of the board told her story. She thanked us for our stories and admired the legacy that she had taken on, but asked why we have brought the past so much into the present. For her it was evident that change was needed and the change depended on a shift of thinking before anything else. Through all this the chairman smiled, nodded, made a few supportive comments and simply sat back and watched our shift of mindset. This is probably why I respect this man so much. He said little but aligned us all in a way that few could do. • Be smart with information—The eighteenth-century British parliamentarian, Edmond Burke, popularized the phrase “economical with the truth.” Most leaders interviewed stated that they did not distort the truth, but presented information in such a way that it was difficult for others to come up with an alternative argument. In this way stakeholders are gently led to a particular conclusion. Being “smart with information” was an oft-repeated phrase among my interviewees. • Network legitimacy—Many C-suite executives draw on their influential network to legitimize their view. The opinion of the highly revered

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“relevant other” is powerful. Drawing on the network support requires investing in energy and time. However, it is worth it when that support is needed. • Be ruthless/be respectful—Despite all efforts, certain negotiations do not proceed well. An immovable confrontation looms. One or more parties may have to leave the organization. Making that break requires being ruthless. Yet, many of the C-suite executives warned that being ruthless and disrespectful leads to the loss of valuable friends. The high performer goes out of his or her way to be utterly respectful to those who take a contrary position, thanking them for their contribution but emphasizing the damage that would occur to both the top team and organization if fundamental differences of opinion continue. The more respectful the C-suite executive, the more likely others will leave of their own volition, often publicly supportive of the very person they opposed. • Know yourself—C-suite politics is no game. The future of the enterprise is at stake. Thus, politics is a deeply personal experience. Each does it his or her own way. Maintaining conversation under adverse circumstances is of prime importance. We have already seen how many C-suite executives, through no fault of their own, are accused of being inconsistent and inauthentic. Many acknowledge the inconstancy and put that down to the volatile nature of changing circumstances. Yet, few feel themselves inauthentic. To minimize such accusations, it is important to know oneself and recognize one’s impact on others.

Understanding politics Politics is about making the impossible, possible. Politics is about dealing with misaligned complexities and diversities where few are willing to shift position. Politics is a negotiation that brings together the bright and dark side of organizational life. Despite the negative connotation that politics holds, it actually has a rich intellectual history. Aside from the famous Machiavellian Prince, modern-day thinking of organizational politics dates back to how communities in the 1950s in the United States resolved their differences. It became clear to the sociologists that the learning derived from

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observing local community-based politics could be applied to organizations. The 1960s and 1970s spawned a rich literature on how to handle the politics of management. It equally became evident that the managers’ job is highly political. Then political correctness took over in the 1980s. The surfacing of tensions did not fit well with the corporate philosophy of “in order to realize competitive advantage get the strategy right and then structure follows strategy.” It became difficult to openly examine the unwelcome tensions prevalent in any organization and their repercussions. Everyone knew what was going on, but nobody said anything. A managing director, who wished to remain anonymous, told me his story. His bank had acquired a number of high-profile businesses but never really integrated them into a cohesive whole. Separate HR, finance, and IT systems plagued payments, access to information, and the availability of a rich talent pool. Just simply to be paid expenses was a nightmare. “No one wanted things to change, but the excuse was brand identity. If we all merged then we could easily lose the loyalty of long-standing clients or at least that was the story told,” he said. The politics for turf, promotion, getting the deal, keeping the deal, and staying as far away as one possibly could from the center dominated the attention and time of managers. After a while even the senior management did not bother to pretend. The manager told me that he once attended a top-level company conference. On the first evening, the two key speakers were two senior VPs from the corporate center. Both talked glowingly about the organization and the level of cooperation at the top to integrate systems and bring about a meaningful corporate brand. One of the two VPs apologized for not being able to stay for dinner as he had another commitment that evening. Hardly had he left than the one who remained really opened up. “Now let me tell you the truth,” he said. “Let me tell you what it’s like to be blocked and not be able to do your job because of the politics around here.” The audience sat dismayed. All that they had been told was a myth. In reality they knew it, but hearing it demotivated them even more. Sometimes being proficient at politics does not work out. The culture simply does not want to shift. Frustration with the politics of the enterprise can lead to a deterioration in discipline and the

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relationship between members of the top management team, as witnessed in the case mentioned above. That really pushes mixed messages down the line. The success formula of Engagement × Alignment becomes ill balanced. Not knowing what to do with the negative interactions that now become part of the culture, many CEOs and top directors give undue attention to structures, processes, and procedures. That is their way of handling tensions and counterproductive behavior. From all of the studies I have conducted, the overwhelming evidence is that in such organizations, no matter how much money is spent on alignment, engagement still remains zero and so the end result is still a zero. The only way to address engagement concerns is to face up to them and work through them. As one outstanding global CEO said to me, “Life is one part strategy and nine parts engagement.” Of course, not all interactions and negotiations are political. Many are straightforward, where “normal” rules of engagement hold. The trouble is that for the C-suite executive, normality and predictability are rare. The challenge is to turn the abnormal to extraordinary success. Aligning polar opposite interests is not a form of Machiavellianism. It is a core C-suite skill. Working through incompatibilities and irrational behavior requires high levels of moral worth, sensitivity of style, and a deeply powerful intellect.

Systems and people together Integrating alignment and engagement is no simple task. I have already outlined how the two pull apart from each other. Yet, if the enterprise is to function effectively and be differentiated from competitors, these two sides to organizational life must be brought together. For Kevin Lobo it is all about trust: We have made two large acquisitions since I became CEO in 2012. One was getting into the lower priced segment in China, and the second was getting into very high-end robotic surgery for joint reconstruction. There’s no way we would have been able to make those moves if there wasn’t alignment between the board and management team on the strategy.

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There is always risk associated with deals, so, first making sure our management team was very aligned, and then secondly, that the board was engaged was essential to completing those deals. Trust and alignment on the strategic direction; together, that equals engagement. So part of it’s trust, and also being clear on what the strategy is, and the fact that we were able to get that engagement, and facilitate making those moves, which otherwise wouldn’t have happened. There would have been paralysis, we would have debated them forever, and we probably wouldn’t have pulled the trigger. For Paul Achleitner of Deutsche Bank, it is creating the structure that brings about the desired engagement: They need to coordinate. They need to be aligned at the hip and what’s important is they are actually being measured by the board as a joint result. So their individual gratifications and bonus structures are measured as one. So we have deliberately not said this is your part of the empire and this is his part of the empire because I don’t think that that would be very good. It is a very important element that there is joint responsibility but then a simple division of labor, as opposed to a division of responsibilities. The message from Kevin Lobo and Paul Achleitner is that structure does not necessary follow strategy. Structure brings about the behaviors that make the strategy work and that is the basis of trust.

The discipline of alignment: In summary • Alignment is the means to an end; it is the means by which resources are positioned to realize value. • As markets and circumstances are dynamic, considerable thought needs to be given to the structure and shape of the organization. • Get alignment considerations wrong and the consequences are that resources are misused and strategic objectives not realized. • Addressing challenges of misalignment requires engaging with leaders who have been disengaged for some time. • Addressing misalignment concerns purely through reorganization and restructuring has a long track record of failure. • Surfacing engagement concerns is the first step to addressing alignment challenges.

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Key questions • As markets are dynamic, what level of scrutiny has been given to examining how the structures of the organization position resources to effectively meet external challenges and internal needs? • Do you agree that structures are a means to an end, the means by which resources are positioned to realize value? • If you agree, then how have you made your organization a dynamic entity able to adapt to changing conditions and draw on different structural configurations as external conditions demand? • If you are really honest, would you say structures have become an end in themselves in your organization? • How would you know whether your organization is aligned or misaligned? • What are the symptoms and effects of misaligned organizations?

Chapter 6 Discipline 4—Engagement Research repeatedly shows that only a small number of corporate workforces are fully engaged with their work. Most are not. In my research, where engagement was at its highest, organizations emerged with familiar operational and opportunity gains—high levels of motivation; commitment to the strategy; strong stakeholder values; sustainability; clear product/service positioning in the market; better search for top positions; smoother transitions into senior posts; greater allegiance and effectiveness in the supply chain and more. Obvious enough. But the really interesting insight was that organizations where engagement with employees and other stakeholders was the highest were not those led by charismatic and visionary leaders. The leaders who achieved superior levels of engagement were often quiet and unassuming. In his book Good to Great, Jim Collins makes much the same observation, describing leaders who combine exceptional humility with the will to succeed as attaining the highest level of leadership, which he calls Level 5 (see page 126). Humility is important because without this attribute, listening is impossible. And listening is a vital prerequisite for engagement of any sort. A willingness to listen allows leaders to be open to alternatives, especially when they are already driving through a strategy and there is an inherent danger of closing down options. Here, Cicero’s view of outstanding leadership built on learning in ­vivo—learning as you do—provides an interesting historical reference point. Cicero—soldier, politician, advocate, and philosopher—lived through the turbulent decline of the Roman Republic. Cicero was deeply concerned about the politics of his day as he readily recognized the demise of the Roman Empire. Aside from his contribution to

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Stoicism and other schools of philosophy, his view on leadership is most interesting. Cicero observed little learning among his compatriot leaders. His great contribution was to show that an open mindset is one that can live in a turbulent context and at the same time stand above that context so that the individual can reflect on what he or she is doing at the time of doing. Cicero combined emotionality and rationalism and argued that discipline over both was the key attribute of leaders. There were echoes of Cicero’s observations among the leaders I interviewed. These, too, are turbulent times. The leaders who achieved the highest levels of employee and stakeholder engagement emphasized the need to make decisions based on the facts. They also demonstrated a curiosity and appetite for reality checking that bordered on the obsessional. They were learning as they were doing. These leaders saw gathering evidence from stakeholders to make decisions as a vital part of their job and a means of reaching the right decisions and building the right strategy. They saw this as important for two reasons: first, to garner accurate information about the real world; and second, to make it a transparent process for building commitment and trust. Collecting alternative points of view was also viewed as essential for creating value. This flies in the face of the commonly held belief that engagement stems from charismatic and visionary leadership. The more I examined organizational success, the more I felt many of the comfortable assumptions and stereotypes eroding.

Engagement direct At the heart of the success formula is engagement. Indeed, at the heart of any organizational or leadership activity is engagement. Says Stryker Corporation’s Kevin Lobo: I think engagement and trust among the executive team and with the board is critical for success. It’s hugely important. One experienced CEO recalled a difficult conversation with his leadership team to offset a slump in sales:

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On Friday afternoon we called in, say, 50 or 60 leaders and I had two slides. I said, guys, what I’ve got to say is not fun. You have to think about it over the weekend, only make sure you respect everybody. I had one slide where I showed why I had to do it. The second was a slide saying what we were going to tell them what to do. On Monday I said nothing and yes, they did it. They did the communication. Doug Elix recounted his first entry into general management and the realization that engaging people was—and is—the essence of any general management job: I had to come to the realization that I couldn’t do everything myself. If the management team were not doing their job, I could not personally reach enough people to cover for it. So the lesson of “you must be able to do this through a talented and highly motivated management team that carry messages all the way through the business” was quickly learnt. Getting to people in a large organization of thousands or even a hundred thousand or more, is complex. Large organizations resemble an organism with a mind of its own as to how it works and pulsates, and it is very complex to manage. You may think you have command and control, but that’s not how things get done. So, just the sheer complexity and the multidimensional nature of a very large organization is the most complex challenge I found. You know, managing by logic and persuasion rather than authority and positional power was the thing that I found very challenging, but very satisfying when you can make it work. When I spoke with Charlie Mayfield, chairman of the John Lewis Partnership, he shared the experience of a debut speech: I remember when I first became chairman I made a speech to the Partnership Council—my first speech—and I talked about the fact I wanted the Partnership to be an enterprising Partnership. I explained that I wanted Partners to feel that they had the opportunity to be enterprising in how they carried out their jobs, because the most satisfied, happy Partners I’ve met were the people who felt that they were able to make a difference, were acknowledged for that and therefore felt encouraged to continue to make that contribution.

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Engagement is a happy by-product of good leadership and value ­delivery- and evidence-based strategy. But, even with the other disciplines in place, you need to ensure that people are treated fairly and openly, and are rewarded for their efforts. But for all the well-intentioned words of leaders, employees make up their own minds. That’s the whole point! Engagement is about whether people will voluntarily go the extra mile when there are no financial or contractual benefits for them. To elicit engagement requires leaders to make employees feel there is something about the organization that makes them want to contribute their best efforts. And that’s why engagement is so difficult to achieve. People have to feel it is worth it. Far from being warm and fuzzy, the real engagement process is surprisingly cold and calculated—it is based on whether there is evidence that the leadership and strategy is creating real value in line with the mission. The opposite is equally true. Has evidence been gathered so that improving the organization through its blockages can be addressed and progress made?

Blue Ocean value Current management thinking supports the importance of involving workers in hard decisions. In their bestseller, Blue Ocean Strategy, Professors W Chan Kim and Renèe Mauborgne posed the question: “Why is it that some companies succeed in achieving sustained high growth in both revenues and profits?” The answer, they asserted, concerned a company’s approach to strategy. Instead of focusing on staying ahead of the competition, successful companies set out to make the competition irrelevant, adopting a strategic logic the authors termed value innovation (back to that word value again). The key lesson from Blue Ocean Strategy is that value is not set in stone but is constantly being redefined and reinvented by the most conscientious companies. Rather than simply accepting the assumptions of others or even their own views about what constitutes value, value innovators are constantly striving to create more value. They view the world

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not through a value telescope but through a value kaleidoscope, where constantly changing patterns offer new opportunities to create value in an ever-changing world. In their 2014 article “Blue Ocean Leadership,” Kim and Mauborgne apply their ideas to leadership. According to research by Gallup, 70 percent of workers are disengaged from their jobs. If companies could convert them into engaged employees, then they could achieve a huge increase in performance and productivity. But most managers and leaders lack a clear understanding of the changes that would bring out the best in everyone. To address this, Kim and Mauborgne advocate that managers systematically ask their customers (the employees) which leadership acts and activities will inspire employees to give their all. In this way, the idea is that the leaders can focus on the tasks that will make a difference. In their earlier work, Kim and Mauborgne argue that trust plays a vital part in motivating employees during difficult times. They champion the concept of “fair process.” “Fair process is based on the simple human need for intellectual and emotional recognition,” says Kim. “There is a difference between a fair process and a fair outcome. If there is fair process based on engagement, explanation and clarity then painful and difficult goals can be achieved.”1 According to Kim, many companies have lost significant ground in employee morale and customer service by announcing cost-cutting without involving their staff in the process. This is a violation of fair process and undermines trust and morale. In tough times, companies need the active engagement of their people. “There is a need for voluntary co-operation; willingness to go beyond the call of duty has to come from the heart. Voluntary co-operation is to do with the process. Fair process is a motivational tool which is critically important,” he says. “Transformation requires that companies earn the intellectual and emotional commitment of their employees. To do so requires a degree of fairness in making and executing decisions. All of a company’s plans will come to nothing if they are not supported by employees. Fair process is based on the simple human need for intellectual and emotional

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recognition. Without fair process it can be difficult for companies even to achieve something their people generally support.” There are some very basic questions that senior managers need to ask themselves if they are to embrace fair process. First, says Kim, they need to ask whether they engage people in decisions that affect them. Fair process is about engagement. Do they ask for input and allow people to refute the merit of one another’s ideas? Do they explain why decisions are made and why some opinions have been overridden? And, after a decision is made, are the rules clearly stated so that people understand the new standards, the targets, responsibilities, and penalties?

All’s fair Recent research undertaken with colleagues from Heidrick and Struggles provides some support for Kim’s perspective of fair process and engagement (Figure 6.1). Relationships between the chairman and

Between the Chairman and the CEO/MD Between the Board and the sub-committees of the Board Within the Board as a whole

Within the Executive/Management Team Between the Board and the Executive/Management Team Between the Executive/Management Team General Managers Across the organization as a whole 1

2

3

4

5

Average scores ranging from “Very poor” to “Excellent”

Figure 6.1  Quality of relationships.

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CEO, between the board and management, within the board, and within the management team usually emerge as those of high quality. However, relationships between the management team and the general management and those between the top management and the organization as a whole are identified less positively. The evidence is clear; fair process as a mechanism to realize engagement needs to be consistently pursued right through the organization and the general managers need to be at the center of such initiatives.

Rules of disengagement Disengagement means demotivated people. Disengagement equates to an unwillingness to go to work. Disengagement can (and sometimes does) induce subversive and damaging behavior, not just from employees but also from managers. More likely, disengagement leads to passivity: “just tell me what to do and that is all I will do.” Victor Lipman writing in Forbes highlights an interesting statistic. Only 29 percent of employees are fully engaged and 26 percent are disengaged. This means that three quarters of the employees of an organization are not working to their best. Lipman concludes that disengagement results from poor relationships with the “immediate supervisor.” 2 Sadly, my own research concurs. Having to deal with a difficult, obstructive, aggressive, and even undermining boss has a major impact on anyone’s emotions, mindset, and desire to contribute. Such continued negativity induces stress and an increasingly commonly experienced condition: burnout. My initial investigation into burnout came up with a startling conclusion: 93 percent of managers are likely to burn out 2.3 times in their career. Some face-damaging consequences— loss of job, loss of spouse, loss of the capacity to maintain relationships, and, for the particularly unfortunate, a life of continued ill-health. However, my research has come up with another surprising finding. It is not just the boss who creates disengagement but, as Doug Elix observes, also the sheer complexity of large organizations. I referred in

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Chapter 5 to the tension at the top-team level. Digging deep into my global statistics reveals the nature of the concern.

Visioning—Top team How many members of the top team report fundamental divisions within their team concerning the future? 33% 20% 23% 25% 30% 31% 32% 39% 39% 40% 42% 48%

China Sweden Japan Finland United Kingdom Austria Germany France United States Spain Hong Kong Ireland

For 20 percent to over 50 percent of the world’s top corporate teams, strife and tension is the norm. The most common reason for the corporate lack of cohesion is the fact that disagreement exists over the nature of the strategy being pursued. A more common reason for strategic tension is concern over how that strategy is implemented. A German country manager of one major multinational related to me: “It is not so much the global marketing strategy that is the issues, but more the fact that no one in Chicago will listen to what I have to say about the buying habits of the German housewife. Just because it works in America does not mean to say it will work here. Every time I raise the issue of adapting the strategy, everybody thinks I am challenging the corporate center.”

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Dialogue—Top team How many managers believe there are issues that should be aired but are too sensitive to be discussed in the top team and so are not? 36% 47% 49% 50% 58% 61% 62% 67% 68% 77% 80%

France United Kingdom Finland Sweden Hong Kong Germany United States Austria Ireland Japan China

Holding a different view about the nature of strategy and its implementation is one thing, but raising sensitive issues is quite another matter and, in fact, a much bigger problem. From 36 percent of top teams in France to 80 percent of senior managers in China, raising uncomfortable issues emerges as a deep concern. One senior VP talked about his experience: It is really difficult to raise certain matters. Many of my colleagues talk about taking a risk with your job and the career-limiting effect of challenging the CEO. It is all that, but what I find more difficult is just discussing uncomfortable topics as, that makes everyone edgy and unwilling to participate in the conversation. The room is full of damaging negativity, which makes it difficult at times to find the right words to say. Yes, to the consequences of raising the unwelcomed truths, but just simply talking about that truth is more problematic. Contemplate that last sentence. Talking about the truth is problematic! How can that be?

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So what are boards doing? Creating procedures for risk assessment and meeting compliance standards does not address the reality of a disengagement that badly impacts on strategy and its execution. My study of British board directors highlights the fact that many turn up at meetings to examine the numbers and proposals, but not to dig deep into the heart of the organization to surface the market impact of a disengaged management. I identified numerous hard and soft measures of board performance. All board members rated themselves on these measures. I then asked the top managers who had a working relationship with their boards to rate their board colleagues on exactly the same measures. The results show that whatever impact board members think they make, the management downrates its board colleagues by 40 percent. The level of respect for the board is limited. Surprising for some is the fact that US boards fare worse. There are boards where the chairman, CEO, or president is rarely challenged. Equally, the level of insight of US external directors into the reality of how the organization, on whose board they sit, really operates emerges as even lower than that of UK directors. The culture of poor relationships with your boss starts at the top. The greater the level of disengagement, the more individual board members and managers know what is wrong, what to do to put things right, and whether things will ever be right. The ultimate paradox is the greater the inhibition, the greater the insight to move forward, the greater the paralysis.

Building the capability to hear The message from my research is that managers and board members do not wish to hear, cannot hear, or both, but with damaging consequences. Hearing is not simply a matter of listening. Hearing is the capacity to digest unwelcome, undesired, or difficult-to-explain information. The individual’s ability to hear depends very much on his or her resilience to absorbed emotionally challenging input. It can take six months of hard and intensive coaching work to enable a top team to listen.

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Says one chairman: I do try to read people and I try to understand what their agenda is and what their objective is, so I do try to do that. I try to do my homework on what it is that they’re trying to achieve and how I can accommodate what they’re trying to do? I think I’ve become much better at reading people and I think I’m much better at engaging with people and listening to what they want. Far better that the chairman or CEO sensitively investigates the nature of the issues at hand and his or her incapability to listen to unwelcome messages. Knowing the range of covert agendas and the capacity of each top-team member to face up to unwelcome truths sets the basis for engagement.

Foundations of engagement “Value is created through people, not technology; value for customers, value for employees and the creation of such value laid the foundation for my company’s success,” said the chairman of an international IT company. Engagement needs to be built on dialogue and trust. It is the leader’s job to create a culture of constructive dialogue; to interrogate the argument; to provide intellectual due diligence; to push and question in search of the best solution. Aside from ensuring the success of the proposal, reducing risk, and safeguarding the reputation of the organization, one additional and powerful benefit that accrues from interrogating the argument is commitment. A robust management putting forward a well-prepared case, which is analyzed in a systematic and logical manner, not only strengthens the case but also elicits a greater commitment from those involved. Working together to improve proposals enables all concerned to identify with the outcome as well as allowing for recognition of one another’s strengths and contribution. Well-positioned logic and constructive criticism strengthen relationships, rather than damaging them. Encouraging criticism requires resilience and robustness. Resilience is needed to respond positively to comment, even if critical, and recognize

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that the contribution is worthwhile. Such resilience is essential in order to gain from the debate. This requires the building and maintenance of robust relationships. Trust is essential to engender transparency and open understanding. Interrogating the argument without resilience and robustness turns positive contributions into a defensive nightmare. Certainly one fact is clear. Examination of any proposal requires the challenging of assumptions and a critique of the logic and consistency of the argument presented. In the heat of discussion, standing back and recognizing the benefits to be gained from stretching analysis requires not only a sharp and logical mind, but also a personal quality of not taking offense and instinctively assuming that a critique is a cover for personally directed criticism. So much depends on the quality of dialogue.

Dialogue versus debate While the terms dialogue and debate are used interchangeably, in fact, the difference between them is considerable. Dialogue goes back to ancient Greece, to Socrates in particular. Socrates— philosopher, orator, teacher, and one of the most formidable intellectuals of his day—wrote nothing. Plato wrote Socrates. What we have is Socrates, second hand. Through Plato, Socratic philosophy has influenced generations, particularly in forms of oratory.3 Socrates championed dialogue, not debate, for the purposes of achieving diligent inquiry. His unique contribution to the art of rhetoric is about reasoning, the construction of an argument and refutation of the argument being a collaborative rather than an adversarial experience. In Socratic dialogue, no one wins, but all are engaged. The search is for the very best argument. The very best is determined according to circumstance and context. What is the best supportive case? What are the very best objections? Learning has to totally encompass the individual and the group, the essence of Socratic philosophy. The term dialogue comes from two Greek roots, dia meaning flowing through and logo meaning the clarifying of assumptions and mental modes, in keeping with today’s commonly made interpretation of logos being the word, the word of God, or the ultimate statement. Through dialogue, the champion of an initiative encourages uninhibited

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examination, requesting that colleagues adopt counter positions in order to explore what of the argument put forward could survive. “Look at the world from the other point of view; see if it makes sense!” they challenge. During dialogue, all discussants act as champions of 360° interrogation in order to have the confidence in the components of the argument that survive discourse. No one loses; everyone wins. The emphasis is on ceaseless conversation, which can involve negotiation, compromise, mutual exploration, inquiry, with the cycle repeating itself many times over. Sounds simple enough, but not according to Socrates. For Socrates, dialogue is a state of mind, not a mode of conversation. Such a state of mind is not easily realized. More common is debate, a particularly English innovation captured in the very structure of the House of Commons, the lower chamber of the United Kingdom’s Houses of Parliament. Debate denotes beating down, breaking the argument of the other side. Debate requires the taking of sides and confrontation. The side that wins, wins the argument. Winning and not necessarily emerging with the best case distinguishes debate from dialogue. Winning can be based on strength of argument. Winning can also be entirely dependent on undermining the case of the other side or, worse still, discrediting the other side rather than paying attention to improving one’s own case. Debate can also mean bullying. The loudest voice wins irrespective of the prevailing logic. Robert Swannell, chairman of Marks and Spencer, captures the nature of dialogue in action: The first thing I said when I became chairman of M&S was that I wanted this to be a very open board where people can talk about failure as easily as they can talk about success. That starts from the top and starts with the pivotal relationship with the CEO. We have both encouraged our non executives to speak out, to go into the stores and to see what is going on. We are lucky with a business like M&S as it is sufficiently tangible and interesting that you do not have to try too hard to get people to share, speak and offer their view. Socrates emphasized it, Robert Swannell promotes it: having dialogue as a way of life built into the fabric of the enterprise. Understanding the difference between debate and dialogue is vital if the arguments put forward are to be truly interrogated, understood, and acted on.

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What sort of individual/team are you? One that enters into debate or one that encourages dialogue? The following questions may help: • Do you prepare for meetings to win your point of view or to meaningfully discuss the issues at hand? • When the argument does not go your way, do you lose face or emerge as enriched because you have learned how to better deal with the issue the next time? • Do you push your point of view or try to understand the mindset of the others and where they are coming from? • Do you make clear propositions or ask more penetrating questions? • How do others really see you, as a fearsome advocate or as someone open to alternative viewpoints? If you have emerged more with the first option, you are debate-oriented. The second option shows those more concerned with dialogue. Now have your colleagues and those general managers who will genuinely give you feedback ask the very same questions of you. See if comparable results emerge. If not, it’s time to rethink your approach to engagement.

Finally engaged The thing about engagement is that it is fundamentally easily measured. You can tell when you walk through the door of a company’s office whether the people there are engaged or not. You can tell around a boardroom table. You can tell around a coffee machine. David Cunningham, president of Asia Pacific at FedEx, equates highquality engagement with a diversity of thinking and approach in order to make strategy work. The latest research Heidrick & Struggles and I have conducted totally supports Cunningham’s perspective (Figure 6.2). Engagement, strategy, and diversity of thinking and approach emerge as the three most critical organizational performance qualities. Says David Cunningham: I can’t tell you the number of times that members of the board are engaged. A board member and I will be having a coffee. We’re talking

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Engagement

Diversity of Thought - Board level Diversity of Thought - Executive/Management Team level Strategy Development Qualities

Strategic Direction Qualities 1

High performing

Fairly high performing

2

3 Average Scores (1 = Low, 5 = High)

4

5

Average performing

Figure 6.2  Organizational performance qualities. about particular issues, or he is asking me what’s going on with the business. What are the challenges? Whenever they’re in a region or in a city they will engage with the management team there. It motivates us and helps them be knowledgeable. Sam Su of Yum! Brands in China talked about collaboration. Collaboration for Sam appeared to be partly cooperation, partly feeling comfortable to speak out, and also partly feeling encouraged to come up with something new and different, but focused. This is what a truly engaged manager sounds like: The word I use is actually not collaboration. The word I use is integration. So it’s not just cooperating. It’s easy just to cooperate. It’s much more than this. It’s actually a much higher level of skills than the willingness to cooperate actively. I always believe you must have a mindset, a right attitude, but you have to acquire the skills to do it. You have to have the correct mindset, but the more challenging one is the set of skills that I call integration. So I do try to teach the integration skills. Integration skills mean you really learn, you listen, you seek. You have got to be able to ask questions, get people to tell you what they think and you have got

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to listen very, very attentively, and be able to truly understand. Then you have to be able to communicate what you think. Then we had to go through that final process of trying to sort of synergize everything and making it into something that’s truly useful. It requires a lot of maturity and experience, but I think it can be learned. So I try to role model these behaviors. My research with Heidrick and Struggles captures the benefit of addressing engagement concerns at the earlier stage (Figure 6.3). The message is, better relationships at the top means being better able to deal with risk, restructuring, succession planning, and meeting targets as well as enhancing competitive edge. The survey also shows that a better performance from employees improves customer focus. Now the E of the (E × A) is better balanced against the A.

Greater strategic alignment Better relationships between the Board and the Executive/Management Team Improved capacity to consider and adapt to risk and innovation Better discussions concerning sustaining a competitive edge Better relationships among members of the Board Better performance from the organization’s employees Better discussions concerning restructuring Better discussions concerning succession planning Improved customer focus Improved ability to meet financial targets Improved capacity to undertake mergers/acquisitions 1

2

3

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Figure 6.3  Impact of handling awkward or sensitive discussions at an earlier stage.

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The discipline of engagement: In summary • Respect the inhibition that arises from disengagement. Raising and dealing with uncomfortable issues are some of the greatest challenges leaders face. • Addressing engagement concerns is as vital as restructuring and getting the processes and systems right. • Addressing challenges of engagement is a sensitive affair and for this reason, many leaders sidestep this responsibility. • Addressing engagement concerns requires the gathering of sometimes damning and damaging evidence • Most change programs fail because issues of engagement have been ignored. • In fact, disengagement is normality. • Dialogue is the route to effective engagement.

Key questions • Have you felt inhibited in raising/dealing with uncomfortable issues? If so, why and under what circumstances? • Do you feel that your team members and/or general managers find it difficult to raise relevant/critical but uncomfortable concerns? • If yes, what are the consequences of not addressing these concerns?

Chapter 7 Discipline 5—Leadership Lou Gerstner was one of the business heroes of the 1980s and 1990s. He was the former management consultant who became CEO of IBM when it was at its lowest ebb and led its transformation into a twenty-firstcentury corporation. Popular business mythology has Gerstner down as a charismatic change agent. Former IBM vice president Doug Elix recalls it as more than that: People talk about what Lou Gerstner did and attribute many things to him. Like, he was the guy that saw the service business, he was the guy that saw the value of software and completely restructured the company. But it was much more than that. He was the guy who realized the style of leadership and the caliber of executives that should run the company in a rapidly changing IT industry, and his great skill was to make the majority of the leaders people with enquiring minds, open to feedback, good listeners and able to face reality and act on it. We went from a very closed, hierarchical management culture to one that was market driven and client focused. The market had to speak, the management had to listen, the customer had to speak, the management had to listen, and he appointed people who felt the same way, and all of a sudden there was this wonderful relief of wow, we’ve got an open management system here. Lou Gerstner’s contribution to IBM was not just his brilliant strategic insights but also his insistence that the company’s managers face up to reality. Instead of ignoring the evidence, Gerstner forced them to confront it and embrace an alternative future. In one famous example, Gerstner was watching a series of presentations by senior IBM managers that had become a ritualized form of denial. Once a year managers gathered at the company’s headquarters in Armonk, New York, to present a sanitized view of the business. Bad news was routinely excluded from the slides because they thought that

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executives at HQ did not have the stomach for it. Sitting in the darkened room, Gerstner listened to the first presentation, before halting the proceedings. Calling for the lights to be switched on, he told the managers present that things had to change. In a passionate plea he said that IBM was sleepwalking off the edge of a cliff, and that there was too much at stake to allow that to happen. The jobs and livelihoods of the company’s thousands of employees were too important to ignore. Within hours, the message had reached every IBM office in the world. Gerstner meant business. He wanted the truth—and he wanted it now.

The leadership challenge How do leaders create sustainable value? In Chapter 3, we looked at the characteristics of a particular style of leadership that I call evidence-led leadership. These leaders deliberately gather evidence from multiple stakeholders to ensure the organization benefits from diversity of thinking. They also proactively seek to nurture and develop other evidence-based leaders. This is important because it creates an evidencebased culture that is less susceptible to hubris. Interrogating the data becomes an instinct. But it is also a habit that can be nurtured over time. How can that instinct be enhanced? The leaders I talked to displayed three key qualities: • smartness, a high-level ability to model and conceptualize • profound moral consciousness and • persuasive advocacy to turn arguments in their favor. It was the way these qualities were combined that made the difference. • High IQ Of these three, high IQ emerges as a profound influence on a manager’s leadership style. Explaining reality by integrating the different demands, pressures, and forces that the organization faces, but in a way that makes sense to all, acts as the basis for respect and trust. The leaders may or may not be liked but the trust of others in their capacity to find pathways through demanding circumstances emerges as fundamental to ensuring loyal followership. Making sense of complexity, sometimes

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even making complexity look easy, is a phenomenal attribute of intelligence. Doug Elix used the word sophistication to describe the leadership skills required in the higher echelons of a major organization. I asked him about the step up to a senior leadership position: I would say it was a huge step up in sophistication rather than mental ability. Once you have 100,000 people, there are always going to be several dimensions to how the management system will work. It’s not a clear hierarchical command and control system anymore. It’s the realization of a different thought model, and a different structure of how things should work, an acceptance of building linkages that previously you didn’t think you’d have to worry about, and learning how to make it work. I use the word sophistication. I’ve always thought of it that way, but really it’s the ability to think differently. Chris Gibson-Smith, originally a geologist, now chairman of the London Stock Exchange, emphasizes that the development of IQ capacity and the thirst for knowledge need to start at an early age: Business fulfilled my personal wanderlust. I spent several winters in the Canadian Arctic, I spent a summer on the edge of the Greenland ice cap, I spent time in the Borneo jungles. I think the most interesting thing that I learnt from business myself was its relevance to the world society, and how human civilization is operating, why it has the shape it does, what the origins of wealth are, how humans have to behave to generate wealth between themselves; and so for me, the most important element of the curriculum was macroeconomics and microeconomics. Microeconomics truly did explain the intricacies of high performance efficiency within firms in a structured way that was to me wonderful. And macroeconomics told me about my society and I had to be completely opaque to that point, and I had never even stepped into those roles of thinking. Breadth of mind, resilience, wanting to know the truth, and a natural curiosity are all elements of the success formula.

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In flight change When I spoke to him, Rickard Gustafson, CEO of the airline SAS, was particularly interesting because of how he was using the power of evidence to bring about necessary and radical changes in the organization. It is a truism that change to deliver value is part and parcel of the leader’s job. But what is less explored is the fact that evidence is a vital propellant of change. SAS was in a bad way when Gustafson took over in February 2011. In 2009, the airline made a loss of over 3 billion Swedish Krones. In 2010, it lost close to 3 billion Swedish Krones. In 2011, it lost a further 1.5 billion Swedish Krones. Gustafson had worked at Andersen Consul­ ting and GE Capital and had been CEO of the insurance group Codan. But he was a newcomer to the airline industry. Tough times demanded tough decisions. This is how he described the starting point of the ­process of change at SAS: When I embarked on this journey, I thought that there’s only one thing that I can do, and that is to make sure that on every occasion we are extremely transparent, to not just our people, but also our unions, about the state of the business. And I made that my kind of trademark. The challenge Gustafson faced was considerable. His way forward was based on transparency and the sharing of evidence. I have 37 different unions to negotiate with. I told them that I want to meet them on a very frequent basis to ensure that they have the same information as I share with my board of directors. We all need to have the same “version” of the reality. I’ve had big union meetings when I presented the state of the business. After the presentation, I pointed to the board employee representatives in the room and asked them to please confirm to their colleagues that this is exactly the same information as I presented to the board yesterday. They couldn’t hide. They acknowledged that this was the message, and this was probably the truth. So that was the reason we were able to create the sense of transparency and trust that was the basis for this massive change. People understood

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that we had come to a kind of road end. Either we transform this business to market-based conditions, or it will be game over. That was a real threat. But it took me a year of constant communication to really make sure that this was obvious to all stakeholders. Yet, convincing those closest to you can be as much of a challenge as dealing with those that oppose you. And the challenge was also to convince my executive colleagues, my legal counsel, and to some extent my board to be this open and transparent. We’re a public listed company so there’s only so much information you can share without getting into some sort of grey zone. But I said, if we’re going to win this, we have to take a bet. We got people to sign non-disclosure agreements and that worked. We did not have any leakage. The reason why the board was concerned about this open book strategy was that some of them have been on the board for a few years, and leakage had been a constant issue. Basically, some of them said that the day after a board meeting they could read all about it in Scandinavian newspapers. But that didn’t happen. I think that the union representatives respect what we have done, they realize that we did it in a decent way, and that we treated people fairly throughout the process. It is painful and they don’t like it, but they respect it. Respect is central. Gustafson goes on to show that respect, integrity, and trustworthiness are not only closely interrelated, but also critical for the continued exercise of high-quality leadership. The foundation I rest my leadership on is integrity and trustworthiness. The day they can say that they don’t trust me, that I’m telling them something that’s not 100 percent accurate and true, or that they in any other way can question my integrity. That day I fail as leader. I think that management in SAS has a history of trying to outsmart the unions, and the unions have in the past, tried to outsmart management. This has created a massive lack of trust between the unions and the management. I hope that my transparent approach has started to bridge that gap. Integrity for me is not just that you never do anything that is unethical or not legal. But it’s also that you treat people with respect,

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you never lie, you never fabricate data to force a story. You should know that if we have a conversation, and you tell me that now Rickard, I want you to keep this between us, you can rest assured that the information shared won’t come out. Gustafson makes a compelling case for ethics to be core to the business school curriculum. • Moral consciousness I teach ethics in business on a number of business school programs worldwide. I could teach ethics in one or two ways: I could emphasize what is required ethical practice and what leaders in organizations should do, or examine the ethical dilemmas faced by leaders. So I asked my various student groups which of the two approaches they would desire. The response from my various audiences has been overwhelmingly in favor of examining the nature and impact of ethical dilemmas. As one talented, mature MBA student in Germany said to me: “We have been preached at on ethics programs consistently, but none of that is useful. I know what I should do. I do not need anyone else to tell me. What I find difficult is doing what is right in circumstances that are just wrong.” A sense of moral consciousness requires insight into one’s own integrity and an understanding of how to behave in a context that stretches the moral worth of the individual. Navigating your way through contrasting agendas requires moral worth and also sensitive conversations. It is worth noting that conversations can range widely without damaging engagement. Even over issues of ethics and morals realizing engagement is key. • Persuasive advocacy My research highlights the fact that the leaders who display compelling advocacy are not the most assertive, or the most glamorous. They are the ones who seem to have a feel for what is going on. For John Parker, chairman of Anglo-American, persuasion, advocacy, and winning hearts and minds are all rolled into one. The powerful advocate “gets close to others” and shows that he/she feels what others go through.

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The old adage “walk the talk and talk the walk” still holds particular relevance for outstanding leaders. Here’s what John Parker observed: I’ve seen some highly intelligent managers in general management who believe they have assessed a situation from afar, instead of getting down there, sniffing the air, looking people in the eyes, getting an emotional feel of what’s going on. And this is where the guy with strong emotional intelligence wants to be engaged in the dialogue with those on the ground, whereas someone may look at a bunch of figures and say, oh, I know what’s wrong here, this is what we’ve got to do here. And the reality is they will not be in a position to capture the hearts and minds of those within their business where things have to change. Unless you go down on the ground, you can’t spot the good people; you can’t spot the weaker links. So I think engagement and kicking the tires, and the ability to be seen to kick the tires. A top manager goes out and gets engaged with the people, goes and eats with the miners in the canteen when he goes to Brazil or Chile or whatever—and that visible presence and engagement of the leader makes a huge impact. And I think that leaders sometimes underestimate the impact they can make by actually being there, and not on a regular basis, but doing it regularly—I don’t mean every month, but being in Brazil every year, or Chile every year, whatever, and just doing the check on the ground relative to what your reports and your reviews are telling you. As John Parker emphasizes, persuasive advocacy is impactful only when one is embroiled in context. Being with and a part of the people is primary, even if only for a short time. Soft data can be powerfully impactful. Once the attention of the critical stakeholders has been won, effective persuasiveness involves seven steps: • • • • • • •

handling criticism positioning the argument managing expectations reworking the argument fostering a no-shame culture avoiding personal agendas and pet themes and zooming in, zooming out

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• Handling criticism For some, interrogating the argument is uncomfortable. A critique is taken as personal criticism, more likely if they are the champions of a project. In fact, well handled, the converse should be true. Critiques not only strengthen the argument, but they also attract greater involvement. The more individuals dig deep, the greater the likelihood of commitment from the board, especially when the going gets tough. Together with my wife, Nada Kakabadse, we identified in our book, Leading the Board, the steps to take in handling a critique. How well sequenced is the argument justifying the case? Accompanying attention to detail is sequencing. The quality of the evidence may be impeccable. But, the positioning of evidence requires equal attention. Sequence the argument, clearly displaying the step-by-step logic of the case. Even if flaws exist, they should be made transparent. Weaknesses exist in virtually every case. Highlight these as well as the logic of the proposal and then support for the proposition put to the board is likely to be more forthcoming. Appreciation of the totality of the argument likely guarantees the commitment to proceed. • Positioning the argument The second step is to position the argument. Dialogue encourages in-depth, uninhibited exploration, whereas debate induces win/lose situations, the taking of sides, for and against, so that the most powerful presence in the room carries the case, irrespective of whether that is the best argument. How leadership teams work in practice varies. But an evidence-based proposition with argument is a primary requirement of decision making. Additionally, any major project needs championing. Being a champion is a passionate affair. Strong bonding with the initiative and the people involved is natural. Hidden beneath clearly thought-through argument are powerful emotions. Scrutinizing any case requires attention not only to logic but also to relationships so that the coherent logic underlying the argument prevails without undermining the passion for success. In verbalizing the argument, the manner of conversation needs consideration. Is it dialogue or debate? A great deal depends on the depth of

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understanding desired by the parties involved. The psychological contract with each other has to be appreciated as, so often, that determines the quality of outcome of the debate process. • Managing expectations The third step is to manage expectations. Remember, too, that no CEO likes surprises. One of the most important aspects of the leader’s role is to set the context for discussion. How an argument is introduced and the signals from the leader can make a huge difference. In particular, the leader can either defuse a highly charged atmosphere—or light the fuse. A positive relationship between chairman and CEO is often crucial. Words such as openness, trust, respect are used to describe a productive and fruitful relationship. Yet these words are dyadic, capturing the intimacy of the relationship between the two people. What about the quality of relationships at meetings, where comment and counter comment are the realities within the setting of a group? Terms such as robustness and resilience are more appropriate. The relationship between the chairman and CEO is no love-in. Quality of evidence, structure of argument, and attention to detail are essential ingredients to gaining approval of the case put to any group. There is a final consideration and that is the positioning of expectations. How should the case be viewed? How to bring out a positive view from people in order to achieve desired outcomes requires the leader to mold the thinking of individuals and the organization as a whole. This requires a personal and sensitive touch. There are no universals in this. • Reworking the argument The next step is to rework the argument. Sound discussion is provided if expectations have been appropriately positioned. Once the interrogation has run its course and further work is necessary from the management team, practical steps to reworking the argument and winning final approval add a final sense of completion. There is no shame in reworking the case. Indeed, it is often necessary. Ultimately all benefit. But, our research shows that many share this

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view but few practice it. The majority admit to caution in presenting a case to the board that may not survive their scrutiny. If the case is poor, then caution to proceed is understandable. If the relationships between the chairman and CEO, between board members, and/or between the board and management are dysfunctional, it is understandable that caution arises. On the management side, all too often propositions never reach the board for fear of rejection, not because the case is weak but because the board is not ready. • Fostering a no-shame culture Loss of face, loss of credibility, even shame—these are the experiences described by both management and board directors when proposals are rejected or returned, as requiring further deliberation. The two who feel most sensitive are the chairman and CEO. But why? Assuming that open and transparent deliberation surfaces valuable suggestions for improvement to the original proposal, why the negative emotions? Dialogue requires examination of the case from all angles. Identifying improvements contributes greatly to the longer term sustainability of the proposal. There is no shame in being asked to improve an already well-thought-through case. Einstein, one of the outstanding minds of the twentieth century, did not publish much, but what he did publish was in academic journals, which required what is called blind peer review. Unknown fellow academics confidentially critiqued his papers. The response to Einstein was, revise and resubmit—your work is great but there is room for improvement. Imagine the twentieth century if Einstein had sulked and said—no, to hell with you, accept what I have submitted or nothing at all! Perfecting the proposal goes hand in hand with a robustness and personal resilience to challenge, listening, and counter challenge. Pushing for open and in-depth conversation leads to a no-shame culture. • Avoiding personal agendas and pet themes Nurturing a no-shame culture demands objectivity and impartiality from board members. What undermines a positive and progressive approach to conversation is the pursuit of pet themes. Taking into account the contextual pressures management faces aids scrutiny of the proposal. Other contextual experiences of board

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members, unless directly relevant, should be omitted from the conversation. There is a natural tendency to refer to powerful, personal experiences as the benchmark for determining the merits of a case. • Zooming in, zooming out We work in an environment where global effectiveness is essential. But, there is no single program, function, or discipline that provides you with the capabilities and competencies you need to succeed as a global leader. How, then, can you become personally and organizationally effective in a modern leadership role? The effective global leader is adept—almost mechanically so—at moving in and out of contexts, cultures, and characters. I call this zooming in and out.1 Think of a zoom lens on a camera: it allows the operator to pull back and see the big picture but it also allows them to zoom in on the detail. Like a skillful photographer, the best leaders move from big picture to nitty-gritty detail—switching perspective many times within the same conversation or meeting. Indeed, among the hundreds of boards I have studied, I have observed that the ability to zoom in and out in a measured and skillful way is one of the characteristics that mark out exceptional leaders—be they chairmen or chief executives. In many cases, they use their zoom lens to probe and uncover the issues just below the surface that need to be resolved, separating the personalities from the policies and the cultural nuances from the business context. In this way, the most effective chairmen or CEOs are able to tease out the real issues and resolve problems to make things happen. They do this in three distinct domains: the characters they are dealing with, the context of the meeting, and the culture in which they are operating. Each of these domains ranges from the big picture level to the highly granular nitty-gritty level. Take the character domain, for example. A CEO might look around the boardroom table and see the bigger picture of the characters there—viewing them as their job title: the CFO, CTO for Europe, and global HR director. But when required they can also zoom in to see

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them as individuals—Susan, David, and Pablo, with all their human idiosyncratic ways. How does this work in practice? In contemplating the CTO’s negative response to a proposal, for instance, the CEO zooms in on his character. He remembers that David was overlooked for promotion last year and is still sore about it. That knowledge may allow the CEO to unlock David’s response to persuade him to support the idea on the table, perhaps with a gentle reminder that the project will create a new role of global CTO that he would be well qualified to fill. Surprisingly, too, the ability to zoom in and out is not as common as you might imagine. Many highly competent leaders I have studied have a weakness—or blind spot—in this area. Most leaders have a default preferred setting—they either lean toward the zoom out position—often characterized as big picture thinkers; or they like to zoom in—characterized as the nitty-gritty guys or dealers in detail. They are capable of zooming in and out on occasions, but they do not do so automatically. But there is a third group of executives with a very different style. These leaders are highly adept at zooming in and out during the course of a meeting—or any other situation where they exercise their leadership. Having observed their behavior over many years, I have found that these individuals are far more effective at getting their desired outcomes from meetings and other management situations. They make excellent chairmen and chairwomen. They are more effective at creating buy-in and identifying and fixing problems before they become a block in organizational effectiveness. In short, they reap the profits of zoom. There are three aspects to this: • zooming in and out of context; from big pictures to budgets—­strategy to execution • zooming in and out of cultures; regional or national culture to departmental culture • zooming in and out of characters; learning in vivo, job title to individual personality. The ability to zoom in and out of different cultures, contexts, and ­characters is key to the effectiveness of evidence-based leaders.

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Leadership for a purpose Real leaders lead for a purpose. They believe in the organization and the value it creates. They are not simply going through the motions to collect a monthly paycheck. It is their commitment that attracts and retains followers. As Caterpillar’s Ed Rapp explains from the implementation perspective: People stay at CAT and, we say that Caterpillar people have yellow blood. From my perspective, yellow blood is sourced from three things and that’s why people stay. Number one, people like working for a leader. Now we never take our leadership position for granted. We know we have to earn it each and every day but I think people like to wear the Cat logo on their shirt because they’re proud to work for CAT and like the fact that we’re a global leader. Secondly, and it may sound corny, but most of us do believe that what we do matters. We build roads, dams, airports, and other infrastructure around the world. You cannot take me to any country around the world where you can see a higher standard of living without the build-up of basic infrastructure. We say at CAT the road to progress begins with a road, period. People like being associated with a company that does something that’s real. Thirdly, it’s a relationship business and we just happen to sell machines and parts. We meet people around the world and we get reconnected with people that we’ve worked with before. We form deep relationships with customers that have lasted generations, dealers that have been with us for 60 years. So if you were going to leave CAT it wouldn’t be like leaving a job, you’d be leaving your friends, your family. Jim Collins, author of the 2001 bestseller Good to Great (and coauthor of the 1994 bestseller Built to Last), has championed something he calls Level 5 Leadership. The highest level in a hierarchy of executive capabilities, according to Collins, Level 5 is a potent blend of selflessness, humility, and iron will. Those who exhibit it are typically “quiet leaders” rather

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than the larger-than-life figures associated with transforming organizations. In many ways, the managers Ed Rapp describes at Caterpillar. Humility is a key ingredient. According to Collins, the simple formula is Humility  Will = Level 5. “Level 5 leaders are a study in duality,” notes Collins. “Modest and wilful, shy and fearless.” They are more likely to attribute their success to luck than any heroic leadership qualities. They are ambitious for the company rather than for themselves. They tend to leave a more durable legacy when they step down, but they are not preoccupied with their legacy; they are preoccupied with doing their job and that involves creating value. Leaving a legacy is a happy by-product of doing the job well, and wanting to leave the organization in better shape than they found it. Evidence-based leaders place the organization above the individual leader. As Kevin Lobo, CEO and president of Stryker Corporation, puts it: “My first concern is with the company, not with my legacy.” Caterpillar’s Ed Rapp makes much the same point: Caterpillar has been around since 1925 and our general belief is that we are simply stewards of the business for a period of time. As stewards we have two accountabilities. Number one, leave the place better than we found it. In other words every day how do we get better in terms of the product or operations or whatever it may be. Secondly, make sure we leave it in more capable hands. When I’m gone I hope the response is I really miss the guy but we’re doing fine without him. We all have a pretty good understanding that that’s what we’re here to do. It’s not individual, it’s not about a personality, it’s about sustaining a business over the long term and I think we try to keep that in perspective. As Rapp indicates, too, the leadership role changes over time. “I have worked for Caterpillar for 35 years but I have worked for five or six different Caterpillars as we reinvented ourselves over time to adapt to the world that we compete in.” Ed Rapp, Jim Collins, and Kevin Lobo offer similar messages—take the holistic view, be guided by your values, and from this understand the challenges you have to address and the consequences of not doing so. The evidence-led leader lives and breathes S + (E × A) = V.

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The good, the bad, and the ugly Unfortunately, for every example of exceptional leadership, there are many more instances of leadership failure. James McGregor Burns, the father of modern leadership theory, described leadership thus: “Leadership over human beings is exercised when persons with certain motives and purposes mobilize . . . resources so as to arouse, engage, and satisfy the motives of followers.” Note the assumption that leadership is a positive and a good thing, where leaders “engage” and “satisfy.” But is this rose-tinted view of leadership an accurate one? Harvard University leadership expert Barbara Kellerman thinks not. In her book Bad Leadership: What It Is, How It Happens, Why It Matters, Kellerman discusses the dark side of leadership. 2 Using the terms good and bad implies that leadership is black and white, which is rarely the case. In my experience, a more productive way to frame this is to talk about effective and ineffective leadership. But here I will use Kellerman’s terms to avoid misrepresenting her. History not only tells us that there are plenty of bad leaders, but also, more confusingly, that effective leadership and bad leadership are not necessarily incompatible. You can be highly effective and still be a bad leader. We should acknowledge the fact, argues Kellerman, and seek to understand bad leadership, instead of conveniently ignoring the subject. Kellerman’s bad leaders come in seven types: Incompetent; rigid; intemperate; callous; corrupt; insular; and evil. (Bad leaders may inhabit more than one of these groups.) Kellerman makes a broader distinction between ineffective and unethical leaders. Ineffective leaders fail to get things done. They are marked out by “missing traits, weak skills, strategies badly conceived, and tactics badly employed.” While ineffective leaders may set admirable objectives, they lack the means to achieve those objectives. Ineffective leaders are often complemented by ineffectual followers. Research has identified the best, most effective followers as those that “think for themselves; self-direct their work; and hold up their end of the bargain. They continuously work at making themselves integral to the enterprise, honing their skills and focusing their contributions and

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collaborating with their colleagues.” By contrast, ineffective followers are weak and dependent, and do not commit or contribute to the group. Unethical leaders are those who appear unable to tell the difference between right and wrong. Good leadership is invariably associated with ethical leadership. Burns offers three characteristics of ethical leadership: Ethical leaders put the needs of their followers before their own. Ethical leaders exemplify private virtues such as courage and honesty. And ethical leaders exercise leadership in the interest of the common good. Unethical leaders do none of these things. Bad leaders may be ineffective, unethical, or a mixture of both. So why is it important to consider the nature of bad leaders? For one thing, Kellerman believes that by knowing what constitutes bad leadership and followership we can seek to avoid them. Bad leadership can be corrected. Not by changing human nature though. Nor by burying our heads in the sand and avoiding the issue. Neither will it change without also changing bad followership. Notwithstanding these caveats, there is action that can be taken. Leaders can, Kellerman suggests, limit their tenure; share power; avoid believing the hype about their abilities; stay in touch with reality; compensate for weaknesses; retain a sensible work-life balance; remember the organization’s purpose; keep psychologically and physically healthy; be creative; keep appetites under control; and set some time aside for regular contemplation. With regard to their relationship with followers, leaders can also establish a culture of openness; appoint an intermediary like an ombudsman; encourage strong independent advisors; disseminate reliable and complete information; and establish a system of checks and balances. Such measures will never eradicate bad leaders entirely. But they can go a long way toward it. By identifying these two broad categories of bad leadership, Kellerman raises an interesting question. What constitutes good leadership? There are many examples of leaders who got things done by persuading their followers to deliver on a set of unwelcome objectives—but by terrible and morally repugnant means.

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Clearly, the almost unanimous verdict on this type of leadership is that it is totally undesired. Therefore good leadership must be about more than effective leadership. The extra element appears to be the ethical component. Good leaders must be both effective and ethical. Leadership can be misused. It can end badly. But, it is vital in achieving anything in any organization. Understanding and implementing the other disciplines requires and demands leadership.

The discipline of leadership: In summary • Know what sort of leader you are and how your style and mindset will shape the future. • Displaying the IQ capability to address the challenges being faced is first and foremost. • Moral consciousness is a critical factor in leading for sustainable value. • Read context sensitively and accurately. • Persuasive accuracy is fundamental for compelling leadership.

Key questions • As a leader, how would you describe your style and mindset? • What do you think others say about you? And do they say it to you or behind your back? • How would you describe your moral and ethical consciousness? • How accurately and sensitively do you read and work within context? • Do you agree that persuasive advocacy is fundamental for compelling leadership? • Do you practice that or, alternatively, are you a persuasive personality? • Ultimately, what is your leadership purpose and what do others see your purpose as being? • What kind of a person for you is a bad leader and do you display any of these traits?

Chapter 8 Discipline 6—Governance Governance is the engine oil of the success formula. Without it the engine will grind to an inglorious and abrupt halt. But, governance is not simply a straightforward administrative exercise. Getting the balance right with governance is a big challenge and should not be underestimated. Once again independence and diversity of thinking are key. Governance is not a matter of simple compliance and time-consuming box ticking. When independently minded non executive directors bring diverse points of view to the boardroom, then compliance takes care of itself. On the other hand, when these two critical aspects are missing, no amount of box ticking will create effective governance. The reason is that governance has two vital dimensions: monitoring and mentoring. It is only when both of these roles are fulfilled that the governance role of the board is effective. Monitoring is all about the controls, protocols, and procedures that provide early warning signals and enable the board to take action to prevent wrongdoing or bad decisions. The other side to governance is that of mentoring. Diversity of thinking bridges the divide between compliance and independence. It translates form into substance. By bringing different points of view to bear, the board is able to challenge, nurture, and guide the management team. As Sir John Parker, chairman of Anglo American, explains: As the chairman of the board, you have built up a strong relationship with your board collectively and individually. And, secondly, I think if you do your job well as the chairman, you will have ensured that they and the next layer of management, in particular, have got to know each other. It allows that layer of management to get to know the directors informally. And the other great bridge is that you rely on your chief executive, who, after all, is very much part of your board, to be giv-

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ing the same missionary messages to the next layer of management so that the cascading of the message is very, very important to strengthen the linkage. For Sir John Parker, mentoring predominates. When I asked Jeff Fettig of Whirlpool about the role of the board, here’s what he said: It’s crystal clear. First and foremost: pick the right CEO. Second: oversight and strategy. Third: monitor operations. Fourth: audit controls. And fifth: strong governance. We look for successful people who know how to do those things. That’s why, in my opinion, it’s experienced business people who know how to do those things best.” The strong emphasis on monitoring is clear, but is that sufficient? Jeff Fettig continues: So, with that as a starting point—very strong talent, great experience, great diversity of thought and everything else. I would say our board has got a great respect for each other, and great respect for the management teams that they deal with, and vice versa. Our board has got the right mix of both, on one side, supportive, when it counts—key word: when it counts—and provocative, when it’s needed. They do both, and I think they do it very well. And so, a board, in a way, is like a management team, which is like a leader—you never know how good they are until you’re facing tough issues. And we’ve had enough of them, and I can tell you, our board’s pretty good, because they’ve always given great wisdom and guidance when we’ve faced tough issues which has been a huge support to me. Sir John Parker and Jeff Fettig jointly emphasize the need to balance mentoring with monitoring according to the needs and challenges facing the board and the enterprise.

Governance as we know it In the wake of the corporate scandals of the early years of the century and the financial crisis, a host of regulations, standards, initiatives, programs, and much more have emerged—from Sarbanes-Oxley to the OECD’s updated Principles of Corporate Governance.

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At their best, the new regulations provide a vital check on the actions of executives to prevent the sorts of excesses that we have seen in recent years. At their worst, they can resemble a never-ending and largely futile round of box ticking that distracts the board from its other vital function of providing strategic input, leadership experience, and guidance to help the executive team create value and sustain success. “It is important to pay attention to corporate governance but it must not be allowed to dominate the agenda to the detriment of the board not spending enough time on the business,” noted one interviewee in my research. “The burden of compliance and reporting is becoming too time-consuming,” lamented another. The lament of being overburdened is echoed quite openly in many management teams and covertly in boardrooms. Together with my wife, Nada, I took a walk through the corporate collapses and scandals from the 1970s onward. Two themes clearly emerged, which apply to the vast majority of organizations. The corporate governance formalities and protocols were often exemplary. Yet, misjudged and mistimed investments, and poorly thought-through acquisitions and corruption including offering of favors, gifts, and briberies, still took place. What is amazing, and that was our second finding, is that board members knew. Individual directors may not have had the information concerning any single situation, but their understanding of the circumstances was sufficiently insightful to ask the pertinent questions: Why are we doing this? Why is this happening? Instead, silence. As mentioned, crucial to the discipline of governance is the relationship between monitoring and mentoring. Instead of being seen as two sides of the same coin, monitoring and mentoring have intellectually been positioned as far apart from each other. Why? In the 1920s, America witnessed a dramatic revolution in terms of wealth creation and ownership. The talented men and women who had made industrial modern America became rich. They stood back from their own business entities, dropping their identity as owner-managers and adopting the status of investors. The question of trust arose. Did these investors sufficiently trust the very managers with whom they had worked? Would these managers make best use of their wealth?

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The Harvard Business Review took up the debate and one of the most influential papers written was on the nature of the relationship between the owner and the corporation. The classic 1932 Adolf Berle and Gardiner Means book, The Modern Corporation and Private Property, outlined the notion of agency theory, which has dominated governance thinking ever since.1 Basically, the investor did not trust his managers and so an intervening agent was introduced into the corporate hierarchy in order to monitor and control the activities of corporate executives. This has been the basis of agency theory. The board is supposedly the investors/shareholders’ agent and its job is to control the management of the company, as the managers cannot be trusted. Monitoring has become a particular US-oriented, deeply seated practice. In some organizations, this means that board members are kept away from managers in case they become corrupted. Astonishing, really. I recently ran a session on “Board Governance Practice” at Henley Business School. One of the attendees recalled his frustration of sitting on an American board: They [meaning the management and the CEO] really pushed me to do all the governance and compliance stuff. I questioned how it would help, especially now that we are using our Asian base to penetrate China. I said to them, do you really know what it is like operating in China? Do you really know how much of our governance procedures have no meaning in China? Should we not be talking about the reality of doing business in China and the role and responsibility of the board in this situation today? What I got was a push back, polite, but firm, “Your job is to sit on the board and make sure we keep to the straight and narrow from the data we provide you. Do not interfere with management.” No one said it, but I could feel what all were thinking including my board colleagues, and that was how could you as an American understand the rules of engagement in the relationship between the board and the management. The director resigned shortly after but later contacted me and told me of the embarrassment the company faced in China. “We needed to get involved. We should have been facilitating the management through these very stormy waters.” The case being made is for mentoring, but the reality was monitoring with no substance.

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Monitoring without mentoring means inadequate, unproductive governance. Perhaps the biggest irony (or is it a sign of diversity of thinking?) is that Harvard has disagreed with itself publicly for the last eighty years and will likely continue to do so. Harvard Business School promoted the 1920s’ debate on shareholder value and agency theory. Harvard Law School challenged such thinking through a series of contributions acknowledging the presence and the power of stakeholders. The term introduced was stewardship, the sensitive and yet tough strategic facilitation of the management. In effect, Harvard Business School championed monitoring and it was the jurists who promoted mentoring. It has taken many decades for Harvard Business School to acknowledge the value of mentoring in conjunction with compliance and control. Harvard Law School, however, has not changed its position: “Laws aiming at the protection of stakeholders (such as codetermination or restrictive employment law) are therefore normatively more desirable in the presence of stronger shareholder influence, particularly under concentrated ownership,” says another leading academic in the field, Martin Gelter.2 Why do we not integrate monitoring with mentoring?3 Never stated but lying deep in the psyche of management is the need to preserve and promote shareholder value. Herein lies the unspoken logic for the combination of the roles of CEO, chairman, and president within the one person. The logic is speed of decision making. Someone who has the ultimate authority to act quickly, within governance stipulations, in order to maximize profit, supposedly can best service shareholder value. Yet, Harvard Law School continues to challenge that thinking. Professor Lynn Stout of Cornell Law School has drawn attention to the myth of shareholder value.4 Her thesis is that the mistaken claim that shareholders own the corporation together with macroeconomic data stretching back years shows overall investment returns to be declining. Putting shareholders first harms the investors, the corporations, and the community at large. Martin Gelter concurs and, in his seminal discussion paper, states: The insulation of managers exacerbates the agency problem with respect to shareholders, which is a legitimate concern.… Hence, the creation of an optimal corporate governance regime should be seen

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as an exercise of striking the right balance between the minimization of agency cost and holdup to the benefit of shareholders. In some situations, however, the beneficiaries of holdup may be managers themselves.5 As Martin Gelter emphasizes, it is balance, the balance between mentoring and monitoring that dynamically varies board by board, business by business.

Toothless tigers The press and media are filled with scandals that reflect an overemphasis on monitoring and a lack of attention to mentoring. How could the board have allowed that scandal to happen when, in fact, some of the best governance brains were members of the board? The financial services industry continues to experience one scandal after another. The reality is that too many boards are not addressing the governance and business issues they should be looking at and end up being little more than toothless tigers with directors more willing to cozy up to one another than encourage debate. In place of raised voices, there is the quiet hum of a box-ticking machine on autopilot, desperately trying to avoid controversy of any kind. On such boards, leaders don’t rock the boat. What is needed is more leaders who are able to create creative conflict. The new rules on boards introduced by black letter law (well-established technical rules that are beyond dispute) are partly to blame. They risk undermining the effective functioning of the political process. For example, in the United States, Sarbanes-Oxley introduces protocols determining the behavior of board members. The temptation for board members anxiously eying their growing responsibilities is to concentrate on the administrative process and spend less time on discussion and thinking. It is difficult to engage in robust dialogue if you are busy ticking boxes and looking over your shoulder. Indeed, there is a worrying lack of vigorous debate in many boardrooms. Differences of opinion are the stuff of which board meetings should be made. This means recognizing that resolving conflicts of opinion and interest is integral to what boards do.

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Conflict needs to be managed because, as the HP example shows, when it becomes personal, it often turns toxic. In America’s boardrooms, the shift from club to team is already underway, but has some way still to go. Research on 760 directors, by James D. Westphal of the University of Michigan and Ithai Stern of Northwestern University, found that the route to sitting on numerous boards had more to do with conformity, flattery, and favors than with activities on behalf of shareholders. Black letter law has shifted attention onto performance—or at least compliance—at the expense of esprit de corps. Great teams have both. Think back to any effective team you were involved with and you will know that silence is unhealthy. The board is the ultimate high-performing team—or should be. They need to meet frequently enough to get to know each other and establish a sense of shared purpose and comfort with each other that will enable them to debate without its becoming personal.

Dynamic governance Companies worldwide increasingly appreciate that effective boards need to move beyond mere compliance to create a more flexible and progressive form of governance. In its research in Europe on governance, Heidrick & Struggles has coined the phrase dynamic governance to describe what is now required. It argues that the demand for dynamic governance is based on two main realizations. First, leadership starts at board level. How and to what end the board of directors of a company exercises leadership sets the standard for any organization. Second, governance is a means of enabling and driving business performance. All things being equal, well-governed companies excel. This new breed of dynamic governance responds quickly and adaptively to the changing circumstances of business. It is agile and resilient, constantly evolving. It is governance on the front foot, rather than governance characterized by defensiveness and bureaucracy. It is built on the appreciation that the most effective companies are those that

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anticipate what’s happening and what’s going to happen in the business world. The best companies do not wait to be governed. Instead, they shape the debate and set the best practice. The subject of corporate governance has been a major issue within boards over the past decade. But while some parts of the world have gone down the compliance route, most notably the United States, others focus on overall board performance. Heidrick & Struggles has produced biennial corporate governance reports in Europe since 1999, and in the Asia Pacific region for the first time in 2014. Its 2014 Asia Pacific report, entitled Foundations and Building Blocks for High-Performing Boards, draws on data from 170 publicly listed companies on stock exchanges across six countries in Asia Pacific—India, China, Hong Kong, Singapore, Australia, and New Zealand. In addition, the research included a survey of 165 board members in those countries. It notes that: “While recognizing that compliance is important, there have been significant improvements made across the Asia Pacific countries in recent years with regard to performance, although there is work still to be done, with regulators continuously pushing for improvements. The debate, however, has shifted from pure governance to a greater emphasis on the effectiveness of boards. Common culture, behavior and experience all have an influence on board effectiveness.” The Heidrick & Struggles study identified four capabilities that were accepted as the foundation of the board’s ability to perform. These were: 1. People: the need to continually review top talent and engage in succession planning 2. Vision: the importance of having a clear vision and strategy that is both shared and understood 3. Leadership: the need to promote team dynamics through the leadership of the board and 4. Innovation: the capability of maximizing the capacity of the board to consider and adapt to risk and innovation. In addition, the report also identified nine drivers for achieving best practice levels. Of these, four were core drivers:

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•  balance of skills, knowledge, and expertise •  empowered support of committees •  regular board evaluations and •  identification of board improvement opportunities. An additional five were supporting drivers: •  the balance between executive and non executive directors •  regular board meetings •  clear criteria for board member replacement •  diverse gender and nationality mix and •  a representative number of independent directors. Key to all this is a belief that corporate governance is not an act of compliance but that there is a spirit of governance. This spirit is inextricably linked to the culture and performance of an organization. The best companies explore what this spirit really means and what its implications might be. As they think about how the company is governed, they consider what it means to be well governed and what stakeholders require. It is not minimal compliance, but maximum engagement and impact. For some, this is a frightening prospect. Dynamic governance requires a more adult conversation between stakeholders and board members, as well as between board members. The question must be whether boards are up to this level of debate and willing to invest time in making it happen. Dynamic governance demands that boards be more externally focused. They need to be connected with a broadening range of stakeholders and society. As Sir Adrian Cadbury argued, corporate governance “should recognize the rights of stakeholders established by law or through mutual agreement and encourage active cooperation in creating wealth, jobs and the sustainability of financially sound enterprises.”6 This also requires judgment rather than the tame application of a rule book. It embraces the reality that there are gray areas to governance and that they need to be navigated with integrity, insight, and intelligence.

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What, then, are the characteristics of dynamic governance? The 2014 Heidrick & Struggles European report, Towards Dynamic Governance, identifies six characteristics that boards need to develop and foster if they are to achieve dynamic governance: •  Deep business knowledge: Board members must understand the commercial DNA of the company. •  Diversity of thought: The most important attribute consistently identified as important to board effectiveness is having the right balance of skills, knowledge, and experience to constructively challenge management. •  Engaged leadership: The chairman is the guardian of dynamic governance. The chairman choreographs a board’s activities and provides leadership. •  Strategic alignment and execution: Boards must use their knowledge and experience to help executives develop robust and sustainable strategies. •  Capacity to adapt: In changing times, boards must be able to change direction and to tack with strategic, financial, market, and human changes. •  Top talent: Identifying, developing, and utilizing talented people lies at the heart of governance. Talent and succession planning need to top the boardroom agenda and be acted upon. Of course, compliance is necessary and important. But the route to excellence in corporate governance lies in understanding and acting on these six elements to achieve truly dynamic governance.

Making dynamic governance work The challenge is to implement the recommendations of Heidrick & Struggles. As Charlie Mayfield, chairman of the John Lewis Partnership, points out: We’re not just doing the engagement bit for fun, or for the happiness of Partners; it’s actually with a very clear commercial purpose. And the key in the Partnership is to bring those two things together. This is about one Partnership and one business, and the connection of those values to everything we do.

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Most right-thinking, sensible people, when you share information with them and you explain the context and you explain the problem you’re trying to solve, will engage with you in finding the right solution. Mayfield points to “the right solution.” But what is the right solution? During another study, I looked at a well-known, global food company, which had won a number of international awards for its corporate responsibility practice. At the time, the organization was rethinking its strategy concerning the sourcing and cultivating of vanilla. Vanilla is a most fragile plant, but in high demand. At the time, it was sourced from its native home, Madagascar. The research explored the responsibility practice covering the growing, pricing, and marketing of vanilla. At the corporate center, the sense of responsibility and clear governance procedures were second to none. Corporate sustainability was prompted hand in hand with human rights and the protection of children. Our inquiry focused on the adoption and implementation of the social responsibility policy. Below the corporate center level, the divisional management displayed a distinct awareness concerning the social responsibilities of the corporation. Little emphasis was placed on how CSR was to be practiced. At the level below that, the buyers of the vanilla pods expressed scant knowledge of the CSR polices of the corporation. In reality they focused on price, quality of delivery, and reliability of supply. CSR held little meaning for them. Their focus was on negotiating the cheapest price at the lowest cost. The internal quality audit function scrutinized many areas, but the social responsibilities of the corporation were not among them. Below the buyers were the traders, who acted as the middlemen between the curers/producers and the buyers. No knowledge of CSR policies was evident, nor was there any motivation to adopt these policies in their part of the supply chain. Next to the traders stood the curers, who ran the curing houses for the vanilla pods. They too expressed no interest in the corporation’s CSR polices. In fact, the curers had an antagonistic relationship with the corporation as they felt they were being unfairly squeezed on price. At the bottom of this supply chain were the farmers who grew the vanilla. Many lived in poverty. Child labor was common and, in fact, it was

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the only way to keep starvation at bay. Where was the board? Certainly their presence in the governance of fundamental human rights seemed absent. This is all too common a story. The board does not know or does not wish to know the reality of how the corporation’s affairs are conducted down the organization and through the supply chain. My study highlights the fact that instead of attending to such concerns, the board and the management team often tussle over “who owns the strategy.” Does the management own the strategy and the board ticks off (approves) that strategy? Or does the board own the strategy and the management implement it? My global studies show this to be an utterly irrelevant question. Best practice is that management owns the strategy and the board owns the culture. The implications of this single finding are profound. The board needs to be far closer to the reality of what happens in the organization in order to provide the stewardship that adds value together with the support and approval of the management. How many top teams are willing to accept this? From the individual non executive/external board director perspective, sensitive stewarding and strategic facilitation take time. A portfolio of more than four concurrent directorships is counterproductive. It is interesting that the Australian ASX has introduced a points system as a guideline for how many boards an individual can be a member of. It suggests that two chairing roles, or four or five directorships, should be the maximum. Elsewhere, ShareSoc, the United Kingdom’s shareholder investor society, now recommends four to five directorships as the limit to the director’s portfolio.7 For many directors, this means a reduction of their portfolio. For management and shareholders, this means paying board directors considerably more for the time needed to adequately steward the enterprise. If these challenges are not addressed, boards will simply fail to provide the necessary stewardship over the fault lines of the organization.

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Enterprise fault lines A fault line is where what is intended deviates in a different direction. The reasons could be many. Those at that juncture do not share the same mindset, or expectations, or objectives, or ways of working. The outcome? Strategy goes wrong right in front of your eyes. My research identifies three critical fault lines in today’s complex international enterprises. The same applies to public sector bodies and NGOs. First is the governance fault line, between the board and the top team. Poor delineation of duties and an attempt by management to keep the board at a distance means the board is ineffectively utilized. Its stewardship of the organization is undermined. Second is the strategy fault line between the top team and general management. All too often general managers feel that they have not been consulted, or involved in the strategy design of the enterprise. Being at the mid-point between the strategy formulation and implementation, the general managers are acutely aware of what works context by context. Being held accountable for a strategy that is not theirs, but theirs to implement causes tensions, frictions, and poor strategy adoption.

BOARD

Governance TOP TEAM

GENERAL MANAGEMENT

Figure 8.1  Enterprise fault lines.

Strategy

Operations

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Deeply concerned about organizational fault lines, Robert Swannell of Marks and Spencer outlines his approach to bridging these gaps: We have quite a few breakfasts where the non-executives come and talk to people of all levels in the business. We want people to really understand what the Board does and can contribute. I think it always surprises people in the business how in touch the board is with the day to day life here in M&S. I think that is really valuable. Of course, I do quite a number of these as well. Hopefully our employees get a sense that they should trust these people to hold the executive team to account and to challenge, but also support. I think this open dialogue also encourages the executive team. As Robert Swannell aptly indicates, commutation of itself is fine, but its true value lies in critically enhancing the capabilities for accountability, responsibility, and challenge: the essences of leading and governing the enterprise. Third is the operations fault line between the general management and the rest of the organization. Conscious that certain strategies are unworkable, the general managers are still required to put that strategy into action. The middle management population, aware that their bosses hold doubts about the viability of strategy, are left bewildered about why they are being tasked to do something that will fetch little return. This leads to anger at being positioned to fail. The case study of vanilla is a typical example of fault lines in action, except that there were more than three fault lines present. The boards’ intimate knowledge of how the organization operates and where the tension lines exist allows for effective stewardship of the enterprise. I undertook a study of governance and board behavior in Russia. To my surprise, the results indicated a far higher standard of governance and boardroom contribution than in many of their Western counterparts. A colleague at the Russian Management Association related that many Russian corporations are trying desperately hard in a most unfavorable environment to reach world-class standards on strategy, tactics, and governance.

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This insight was reinforced in my discussion with a particular Russian oligarch. He owns more than 80 percent of one of the largest companies in Russia and wishes to introduce world-class governance as part of fulfilling his ambition of creating a truly world-class company. He undertook an international search for each board role. Highly experienced, high-performing non executive board directors were appointed, including a chairman. But there was a difference. Each was paid above the market rate and expected to work hard. All had to agree that they would only hold two or three board positions, thus leaving them free to concentrate on the affairs of the Russian board. One director in particular covered sensitive international locations where potential human rights questions could arise. He was tasked with identifying the risks and potential damage to the company’s reputation in these locations. With twelve board meetings a year, each director probably had to work about sixty days. The international director in question who had to implement corporate social responsibility requirements probably worked more than seventy-five days. This is how the oligarch summed up the situation: I am the CEO and I am the owner and I pay really well. But these guys have to work. This board is not a committee. This board is a hardworking unit that adds value to my business. Even though I am a shareholder, I expect them to scrutinize me in my role of CEO. Previous studies identify one critical discipline of boards: the clear delineation of roles and duties. But this clarity is negotiated and renegotiated. Once the chairman and the CEO have clearly divided up their areas of responsibility according to the challenges at hand and the strategy being pursued, the same delineation discipline applies to the relationship between the board and the management. All know what they are doing and why. The enterprise fault lines are now minimized. Such delineation is based on a key theme running through this book, the use of evidence to realize value delivery. When it comes to gathering evidence, a company’s board can often play an important role. They are a sounding board and also, if they are working well, a vital provider of a broader view of the world and the marketplace.

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Strategy Input (%)

The SubThe Board Executive/ committees General Chairman CEO/MD as a whole Management of the Managers Team Board 3.0

0.7

2.9

0.7

44.7

7.5

Undertakes analysis

17.8

50.0

15.3

73.6

17.4

72.4

Formulates it

32.6

83.1

17.5

72.9

12.1

54.5

Debates it

74.8

71.3

86.1

77.1

43.9

47.8

Approves it

84.4

54.4

88.3

22.1

24.2

9.7

Implements it

14.8

80.9

10.9

77.1

7.6

62.2

No involvement

Figure 8.2  Input into the development of the corporate strategy. As Telstra’s Catherine Livingstone says: It amazes me that so many top managers do not use their board as a dry run to the market. We are safe! We can spot the problems before they occur! We can give feedback without prejudice! I just wish that we were better used. The latest study by Heidrick & Struggles and myself confirms the trends captured in my interviews (Figure 8.2): •  The chairman and the board debate and approve strategy. •  The CEO and the executive team formulate, debate, and implement strategy. •  The general managers analyze and implement strategy, but are less involved in the formation of strategy. The interface between the executive and the general management is confirmed as a fault line. •  Perhaps the most interesting is the unclear role of the subcommittees of the board.

Who owns what? So who should own what? As already emphasized, my research clearly shows that in high-performing organizations, the top team owns the strategy and the board owns the culture. The reason? The board has to

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steward and mentor the implementation of strategy across the organization’s fault lines. The board balances through governance the tensions between the engagement and alignment elements of the success formula. From that guidance, the management is freed up to direct the way forward. Working through such tension requires an intimate understanding of the people and the way the organization operates. The latest Heidrick & Struggles survey confirms that in comparison with average- and poor-performing entities, high-performing organizations, •  have board and top team members that have worked together for some time •  have considerably fewer meetings per year (Figure 8.3) •  spend longer times at each meeting and enter into more productive dialogue and •  hold a clear and shared view regarding criteria for appointment to the board (Figure 8.4) and to the top team (Figure 8.5). All this requires time. Such time comes at a cost. Board directors need to be paid according to their contribution. Board directors equally will need to reduce the spread of their board portfolio and concentrate on two or three boards rather than four-plus. 70

Number of Meetings

60 50 40 30 20 10 0 Average performing Number of Board meetings per annum

Fairly high performing

High performing

Number of Executive/Management Team meetings per annum

Figure 8.3  Average number of meetings per annum.

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100 90 80

Percentage

70 60 50 40 30 20 10 0 Average performing

Fairly high performing Yes

No

High performing

Don’t know

Figure 8.4  Shared view regarding the criteria for appointments to the Board. 100 90 80

Percentage

70 60 50 40 30 20 10 0 Average performing

Fairly high performing Yes

No

High performing

Don’t know

Figure 8.5  Shared view regarding the criteria for appointments to the Executives/Management Team. There is a further impediment to boards owning the culture, and that is accepted wisdom. In the McKinsey Quarterly, Chinta Bhagat and Conor Kehoe examine what is on the agenda of high-performing boards. Strategy is number one whereas organizational health and talent management emerges as fourth on the list of six key priorities in terms of board members’ investment of their time.8 The shift of mindset for boards to own the culture is substantial.

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The discipline of governance: In summary •  The top team owns the strategy. •  The board owns the culture. •  It is mentoring that makes the governance difference. This stewardship requires time, commitment, and consideration of how and with whom to engage. •  Boards underplay mentoring in favor of monitoring. This is dangerous. •  Boards need to mentor strategy execution through the governance fault lines. •  Boards need to dig deeper into the organization.

Key questions •  If I were to talk separately and confidentially with your CEO and chairman, what would each tell me about who owns the strategy, the top team or the board? •  Do you want the board to own the culture? •  Are the board directors capable and do they have the time to devote to owning the culture? •  Do you feel that the board is in touch with the reality of the organization? •  What will it take to realize that extra level of engagement between the board, the management team, and the rest of the organization? •  Does the board add value? •  If not, why does it not and what would it take for that extra value to be realized? •  In reality how is governance practiced and what do the general managers and the rest of the organization experience? Is it constraint and bureaucracy or some tangible, value-adding contribution?

Chapter 9 Discipline 7—Wisdom A well-known prayer, attributed to the American theologian Reinhold Niebuhr, is apt for CEOs and senior managers: God, grant me the serenity to accept the things I cannot change, The courage to change the things I can, And the wisdom to know the difference. Wisdom, then, is the final discipline. Often it is hard earned through years of experience. And unlike so much else in life, it becomes more potent with age. Wisdom comes from reflection and a willingness to keep on learning. Socrates has been called the father of wisdom. A famous story tells of Socrates visiting the Oracle of Delphi. When the Oracle is asked who is the wisest of them all, she replies that Socrates is. Astounded, Socrates relates how many other people have greater knowledge and wisdom than he and how by comparison he cannot meet their standards. Such is the fundamental quality of wisdom: humility and a lack of arrogance. We do not know what Socrates wrote (or even if he wrote at all) as none of his work survived. Rather, Plato wrote about his beloved master and, later, Aristotle, who was the pupil of Plato. Building on Socrates, Aristotle wrote about phronesis, practical wisdom or, more tellingly, the wisdom that drives practice. In the Aristotelian interpretation, wisdom is knowledge, both factual and rational, and also knowing how to live and succeeding in living well. In fact, Socrates rounded off the notion of wisdom in his famous phrase “an unreflected life is not worth living.”

Evidence-led wisdom Reflection is often in scant evidence in modern corporations. So, too, is regard for the truth. The denial of deteriorating performance—value

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destruction—is, as you will now appreciate, astonishingly commonplace. This is what happened at IBM in the 1980s. This was a fantastic example of a company behaving without practical wisdom. To find out more about what actually happened at IBM over this period, and how the company bounced back and re-created itself, I spoke with Doug Elix, now retired after a long and successful career with Big Blue, where he was vice president of Executive Sales and Distribution. Decades later, it is easy to forget that IBM very nearly collapsed. It was only the timely intervention of Lou Gerstner that turned the company around. When we spoke, I asked Doug about what went wrong and the real lessons that should be learned—and were learned—by Big Blue: We became a captive of an approach to the market that had been successful for so long that we felt it would never end, and would be forever productive and profitable. We failed to act on a fundamental shift in the marketplace—the PC and the client server era, where Microsoft and others were born and became giants. Instead of adjusting to the trend and transforming the company, we fought it, stuck to our old mainframes, leaving the company completely over-structured for the business that was left. It was basically an unwillingness to act on a fundamental shift in the industry. What perhaps is the most interesting aspect of the IBM story is that there were plenty of people in the company voicing concerns. The evidence was there in front of their eyes and they desperately sought to bring it to the attention of their colleagues. They could see the edge of the precipice and were telling people about its imminent approach. The alternative opinion was there, but was not heard. I put this to Doug Elix: There were those who spoke out, but their views were not accepted. In many cases it was seen as being disruptive and not following the company line. In fact, IBM had written strategic papers on it. The company had recognized trends. A classic example was the IP network trend. IBM stuck to its own network architecture while the whole world was moving to

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Internet protocol standards. Voices inside IBM were saying the company had to change or it would lose out, but other senior voices were saying no, they don’t know what they’re doing, we’ll stay with our own. The company fell behind as a result. “There were a couple of times in IBM that happened,” Elix explains. “One was the client server era, from which Microsoft and Intel became the chief beneficiaries, and the second was the IP network era where Cisco became the notable beneficiary. Had we reacted promptly some of that market cap could have been ours.” Listening to former IBMers, I wondered what form this debate about the company’s future had taken. What kind of data and analysis was at work? Or was it fueled by opinions? The evidence used was data-based, but it was flawed, because it omitted to count any downside. It acknowledged huge potential opportunities but assumed that the company’s existing business would be unaffected.

Disruptive wisdom The IBM case is a reminder of Professor Clay Christensen’s notion of disruptive innovation. Christensen’s work over many years has looked at why so many well-managed companies struggle to deal with radical innovation in their markets. These companies often fail, he suggests, because the very management practices that have allowed them to become industry leaders also make it extremely difficult for them to develop the disruptive technologies that ultimately steal away their markets. Christensen and Joseph Bower coined the idea of “disruptive technologies.” They noted: “One of the most consistent patterns in business is the failure of leading companies to stay at the top of their industries when technologies or markets change.” For example, Goodyear and Firestone entered the radial tire market late; Sears gave way to Wall-Mart; Xerox let Canon create the small copier market; and Bucyrus-Erie allowed Caterpillar and Deere to take over the mechanical excavator market. But the most striking example of this phenomenon is the computer industry.

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IBM dominated the mainframe market but was slow to respond to the emergence of minicomputers, which were technologically much simpler than mainframes. Digital Equipment (remember them?) dominated the minicomputer market but in turn missed the personal computer (PC) market. These observations led Christensen and Bower to pose the question: “Why is it that companies like these invest aggressively—and success­ fully—in the technologies necessary to retain their current customers but fail to make certain other technological investments that customers of the future will demand?” In answering this question, Christensen and Bower argue that bureaucracy, arrogance, jaded executives, poor planning, and short-term investment horizons all play a part. But there is a more fundamental reason: there is a basic paradox at work—and it is that paradox that gives rise to the innovator’s dilemma in the title of Christensen’s 1997 book. At the heart of this paradox is the insight that “leading companies succumb to one of the most popular, and valuable, management dogmas. They stay close to their customers.” When a new technology is first introduced, although it may be cheaper, it typically will not be as good as the existing—or incumbent—technology. This is not surprising as the new technology has yet to be refined and perfected. At this point, if the companies that supply the existing technology ask their customers whether they want the new technology, the answer will almost always be no. It is less reliable and less attractive. Furthermore, the company is already earning good margins from its existing technological innovations and has little incentive to invest in new technologies, which will eventually compete with their existing products and earn lower margins. As a consequence, incumbent companies have no incentive to develop the new technology that will in time disrupt their markets. Over time, however, the new technology is refined so that it offers many of the same benefits at a lower price. At this point, the customers who used to prefer the incumbent technology want the new technology and desert their former supplier. This, in essence, is the innovator’s dilemma: do you develop new technologies that your customers don’t think they

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want and which will earn you lower profits? Or do you continue to invest in improving products that your best customers love? This dilemma is played out in industry after industry. What Christensen’s model suggests is that the danger to an incumbent company usually comes when an inferior, cheaper product enters the bottom of the market. Over time, that cheaper technology evolves and moves up the value chain to displace the incumbent technology. The computer industry is a good illustration of this process at work. My own research suggests that another aspect to the innovator’s dilemma lies in the unwillingness of senior managers to confront the changes that are about to impact on their markets. On the surface, these managers are unwilling to embrace new technologies and other innovations that will erode their margins with their best customers, and look as if they fail to believe the evidence that change is about to engulf them even when it is staring them in the face. They look as if they are in denial, hoping that their own business model will be unaffected by changes elsewhere in their industry or other industries. Recent study shows a different picture. Rather than denial, both the management team and the board are acutely aware of their circumstances. Their challenge is how to shift capabilities and expertise and still keep customers and shareholders content. “We would have had to have made no profit for almost five years while we repositioned our people, the organization and our expertise. We would have had to become a new organization while our customers wanted us as we were and our shareholders as demanding as ever. How do you do that, become something that you are not and still keep all on side? Yes you have to see the world as it is, but just sometimes what that tells you is you will die. Certain changes are just too great!” one chairman reflected to me on a change challenge that defeated him. The wisdom of leading through discontinuity is to see the world as it is and sometimes also recognize the unpalatable truth that the stretch in resources and investment is too great. The chairman continued, “So we did the next best thing. We ran the business down humanely, protecting our shareholders as we could, finding jobs for our people whenever we could and being honest with our customers.”

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Telescopic thinking Critically for IBM, it learned its lessons and embedded the learning in the organization. Big Blue switched from a value telescope pointed at the past, to a value kaleidoscope trained on the future. The starting point was to see the world as it truly is, with all its changing patterns. The next time it was impelled to change, it moved decisively. Doug Elix explains: Having almost died, the very next mega trend facing IBM was the Internet, new ways of deploying computing infrastructure, new types of software and servers, and so on. We recognized this is as another life threatening change, and needed to restructure ourselves to do things differently. We invented the term e-business, which not many people remember, and went about transforming all of our hardware, software and service offerings to accommodate the market. This time we ended up as a large beneficiary of the market shift. Big Blue did it yet again about five years later when it realized how important services were. The company bit the bullet and created IBM Global Services—which now generates revenues of $57 billion (2013). And it did it without having to face a cataclysmic event.

Reflective wisdom It may seem incredibly distant, but I believe the idea of wisdom and the Socratic tradition applies as much to a modern twenty-first-century corporation. Many of the leaders in my research were reflective people, continually dedicated to learning more. “I’m still learning,” Sam Su of Yum! Brands told me. “Every day in China managing a business is always a huge amount of learning. I mean from day one coming to China, I realized that I had to learn how to manage a joint venture, learn to recruit people in a difficult environment, and I had to understand and accept and actually get support for the whole idea. But in general anybody who comes to China will realize that this is probably the most testing, challenging job for any general manager.”

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To understand, accept, and get support is what Sam Su considers to be vital for a leader operating in China. These three qualities are fundamental to sustainable value delivery. But Sam Su’s comments also imply wisdom, a quiet reflective activity important for rethinking how to operate in adverse or new situations.

Maturing wisdom A sense of reflection and the wisdom accumulated through experience was strongly present when I spoke with Stephen Chipman, CEO of Grant Thornton LLP (the US member firm of Grant Thornton International). He is a member of the global network’s board and runs its American practice, which accounts for around a third of its revenues, clients, and people. Chipman started his career with Grant Thornton at its office in Plymouth in the United Kingdom where he trained as a chartered accountant. He wanted the opportunity to live and work overseas and moved to the United States with Grant Thornton in the mid-1980s on a two-year assignment, which was extended. He then spent four years in Hong Kong, responsible for building and developing the firm’s Asia Pacific platform. After another period in the United States, he led the development of the firm’s China practice. At the end of that assignment, he moved to Chicago to take on the role of American CEO. Talking in his office, Stephen Chipman guided me through his process of learning: Moving to Texas in the mid-1980s was a big shock. It was a shock how different things were in the United States and how, at the time, very insular the United States was, in terms of lots of peoples’ views and their understanding of the UK and other parts of the world. So, there was that level. Then at a personal level, building relationships, understanding people’s points of view, their mindset around various issues, their approach to technical aspects of the job, their view of an a­ ccountant—all of that was very different from the view of an accountant in the UK. And then on the professional level, ­understanding how the

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organization worked, understanding how people interacted within the organization, the competitive nature of doing business here in the United States, the work ethic, the results-orientated nature of the culture, the speed and energy in the way people approached work—not to say there isn’t speed and energy in other countries, but it was a different type of dynamic here in the United States. Stephen Chipman emphasizes that the transition to truly appreciating context takes time, is not easy, and is not possible unless each person has an open mindset to understand what it really takes, “to make things happen around here.” So, all of that was coming at me at the same time and it was quite overwhelming. It took a lot longer to sort out and sort through than I realized. The same thing happened to me when I went to China. The longer that you are in a culture, the more you realize you don’t know. So, you know, after three months you think you’ve got it figured out and after six months you start to realize, well, maybe you don’t have it figured out and after two years, you realize you knew nothing and you now know less than you did when you started. That happened to me when I moved to the States and it happened to me when I moved to China. The longer you’re around a culture that’s not your birth culture, the more you realize how little you know. Obviously, the Chinese and American cultures were extremely different and they were different experiences. In terms of commonalities, I would say the recognition, I call it the new baby syndrome, that once you recognise the fact that you’re newborn all over again and you’ve just got to start absorbing everything that’s around you because you’re learning it all from scratch all over again; that was a common feature. Another common feature was the recognition that it all becomes a lot easier—not easy, but easier—when you realize that there’s not a right or a wrong, but things can be done differently and that’s okay and you don’t have to constantly evaluate whether it’s the right way or the wrong way. Once you accept that it’s just done differently, that acceptance opens the door to a much more productive and rewarding experience.

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Suspending being judgmental about new experiences considerably helps to appreciate understanding and respecting difference. In effect, Chipman stresses the diversity of thinking necessary to be able to appreciate working in new realities. However, this is easier said than done: Initially, I kept trying to force what I knew coming out of the UK into what needed to be accomplished in the US. Take a simple example: financial reporting. Because I was a young staff person, that was a lot of what I was doing. Rather than coming to grips with the fact that it was a totally different approach to financial reporting in the US and it was a totally different way of looking at financial statements, putting information in them, writing the notes to the statements, I kept trying to link what I’d learned in the UK and force it into the US system. I think, that was, actually, a little bit of a metaphor for the whole experience: you keep trying to translate, rather than to say, well, I had this interesting experience in my prior life and I now need to put that to one side; draw on it but not try and squeeze all that into here. The other thing was I found it very difficult early on to accept other people’s opinions on issues that I felt they were ill-informed about. I was younger too, but it was difficult for me to maintain a level of patience and acceptance of that so I found myself getting into some fairly heated debates with people, where I was getting very frustrated because I felt they were very full of opinions and it was not based on facts. I don’t think that was very productive. I learned to be more tolerant and to recognize that people come from different backgrounds and they gain different perspectives as part of their background. Recall Cicero. His point is made time and again. Learning in vivo makes that crucial difference, but what Chipman adds is that this can only be achieved through a mindset of humility and tolerance: All of this was a big learning and part of a maturing process. I was still in my early to mid-20s, finding out who I was. When I moved to Asia, some of the biggest learnings there were around this issue of acceptance that things can be done differently. Stephen Chipman provided for an illuminating interview. His career was interesting, but what was fascinating was how he had made sense of

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his experiences and learned from them. There was a real sense that his experiences had led him to better understand himself. He had acquired wisdom through experience.

Capturing wisdom today The helpful guide, coach, and councillor are in great demand today. It’s important and well-rewarded work. Needing someone to talk through the challenges being faced, having available the kind guiding hand, and reflecting and commenting in a nonjudgmental way command a high level of remuneration. Wisdom is important work. The process of wisdom is gentle and slow but deeply penetrating, forcing the seekers to deeply reflect on their actions and their reasons for action. In their seminal work on “Aristotle meets positive psychology,” Barry Schwartz and Ken Sharpe argue that wisdom is the “master virtue of solving problems of specificity, relevance and conflict that enviably arise whenever character strengths must be translated into action in concrete situations.”1 When confronted with dilemmas the only viable lever to draw upon is wisdom. Yet, the very same authors argue that despite its deep relevance, practical wisdom is increasingly difficult to develop and exercise. The demand to solve problems immediately even when they are unsolvable rather than patiently working through issues, engaging others, and bringing them with you is central to the problem-solving process. How can a paradox be solved? A paradox can only be worked through, sometimes painfully, with those relevant others. Resilience and commitment to see things through are as much a part of wisdom as is reflection.

Learning wisdom I asked Whirlpool CEO Jeff Fettig what he enjoyed most about his numerous international postings and assignments. “Just learning,” he replied, going on to describe the joys and challenges of living in Italy, and elsewhere. You have to want to learn. A friend of mine, the dean of an international business school, came out of a dispiriting meeting with corporate clients and remarked: “If

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only I could bottle wisdom, this would be the richest and most famous business school of all.” The reason for his comment was his frustration of dealing with clients who seemingly changed their mind and position constantly, but blamed others for not coming up with the solution they demanded. The dean wanted to capture how to handle and deal with “irrational behavior.” Evidence shows that this is not possible. My studies of chairmen identify that the older the chairman, the more capable he or she is of leading the board. The recent Heidrick and Struggles Asia Pacific Board report concurs. Those that stand out are ones who neither issue commands nor impose their will, but are able to surface the real issues, and especially negativities that damage the functioning of the board. Such chairmen are proficient in working through complexity, but a complexity that does not deal with just rationally multivariate problems, but also involves the stewardship of emotions and damaging conflicts. Sense making combined with sense giving provides the ability to integrate the past, present, and future—and thus evolve the powerful capacity for sense breaking.2 Sense breaking allows people to let go of the past, to set aside the habits of yesterday, and entices the full participation of all concerned. Such is the essence of shaping consensus in the boardroom through guiding toward desired outcomes by addressing the challenges of business and organization as well as overcoming negativities and undermining emotions. Why someone older? Because such people are able to control their ego, have less need to project their personality, and are more able to win others over in demanding circumstances. They have seen it all before, but their sensibilities are still open to newness.

Neuro wise Research in neuroscience has found that with age, older people develop a skill of bilateralization. They are able to use both sides of their brains instead of just one. So while young adults rely on the right frontal lobe, older adults use the right and the left. Moreover, research in neuroscience by Barbara Strauch reveals that the amount of myelin, the fatty (80 percent lipid, 20 percent protein) substance that insulates nerve

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fibers, continues to increase well into middle age (peaking at the age of fifty and in some cases when people are in their sixties), which boosts brain cells’ processing capacity.3 The increase in myelin seems to boost the brain’s ability by up to 3,000 percent, suggesting that brain biology is behind a person’s becoming a wise middle-aged adult and that older people are much better at controlling and balancing their emotions as the maturer brain is less dopamine-dependent, making older people less impulsive and less controlled by emotion. The neuroscientist who led the trial said this increase in myelin can boost our brain’s ability by up to 3,000 percent, and is “the brain biology behind becoming a wise middle-aged adult.”4 At the International Congress of the Royal College of Psychiatrists, it has been observed that older people are able to draw on extra brain reserves, which enables them to get to the point of an argument faster than a younger person, and are able to analyze situations more accurately and solve problems.5 Research shows that the amount of myelin increases in the parts of the brain we use the most, the frontal lobes, which control emotion, risk taking and decision making, as well as the temporal lobes, which are responsible for language, music, and mood. The good news and bad news here relates to two types of cognition: fluid and crystallized. Until their forties, people are likely to have a mindset that neuroscientists call fluid. This means that their cognition is fluid; their mind can act like water flowing anywhere. They can deal with problems, recall people’s names, handle numbers, communicate, and so on. They are transactionally competent but that does not mean that things run smoothly. At this point, individuals may begin to appreciate wisdom. Crystallized cognition means that faced with a challenge, people are able to identify the interfaces, people, emotions, cultures, strategic thinking, and the diversity of thinking that they need, and then have the leadership skill to pull it together. The crystallized cognition capacity begins to really show itself around the age of sixty. Specifically, older people show a greater capacity to reason and work through social dilemmas and conflicts. Relative to young and middle-aged people, older people make more use of higher-order reasoning, which results in their being able to adopt multiple perspectives. Knowing how to engage, or, in contrast, how not to alienate other people allows for

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compromise and the ability to recognize what can really be achieved situation by situation. Social reasoning improves with age despite a decline in fluid intelligence. The dream for any organization must be to take the wisdom of the seventy-five-year-old and put it into the forty-year-old. Interestingly, other studies have found that middle-aged people outperform younger ones. For example, a study of 118 pilots aged forty to sixty-nine showed that the older participants outperformed their younger colleagues when avoiding traffic collisions using simulators. Recent research results suggest that it might be advisable to assign key social roles involving legal decisions, counseling, and intergroup negotiations to older individuals. Moreover, as crystallized intelligence may continue to improve with age, many people continue to gain expertise and skills in particular areas throughout life. Hence, our results add to this body of knowledge that older chairmen have inherent strengths associated with aging. Older chairmen deal better with matters where doubt and deliberation are required, such as handling of sensitive strategic issues or individual egos, as well as exploring how things can be other than the way they are, such as how conditions in an organization or society could be made better. Moreover, they are better in using their faculty of opinion in judging matters relating to what is right and wrong for a board, a company, and/or society as a whole.6

Dilemmas and wisdom In conversation with a globally renowned chairman, the latter remarked on the nature of the greatest challenges he had faced: “The board is the meeting place of dilemmas. The management may take action on these dilemmas but it is the board that has to find the pathway through these difficult situations.” The chairmen of boards all over the world have made this admission. What is a dilemma? A dilemma is a no-win situation. Whichever way you look at things, you are wrong. The reconciliation of dilemmas requires great wisdom in order to find ways through which chairmen

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can minimize damage and reputational harm while still maintaining engagement with critical stakeholders. Dilemmas always have ethical connotations: what is the right thing and what is the wrong thing to do under various circumstances? Ethics comes from the Greek term ethikos, meaning custom or usage. The way through an unacceptable common practice is to reflect and consider alterative pathways, which requires not only an IQ of considerable weight but also strength of character, a mindset of commitment and irreproachable personal standards. Commonly, the terms ethics and morals are used interchangeably. This is understandable as both are concerned with appropriate conduct, rules, and outcomes. In effect, the difference between them is our sense of right and wrong; what is termed ethical or unethical is derived from our sense of morality. So though the two are intertwined, being concerned with rules, conduct, and outcomes, it is critical that each individual develops his or her own moral platform, which acts as the basis for his or her actions. Decisions about ethics and morals require the making of choices, drawing on logic, deductive thinking, and irrational thinking, as well as emotions, all of which determine choices—how people feel about their circumstances. Although people’s choice-making behavior varies from individual to individual, how they fundamentally think and feel has two distinct patterns. One form is known as teleology, where the individual’s pattern of thinking and feeling is determined by how others think and the predominate emotions that determine opinion in any situation. The other is deontological, characterized by an independence of mind and character and an individual’s pursuing of what he or she considers is right, irrespective of the consequence. The teleological individual overplays engagement and underscores alignment. The deontological person is exactly the opposite, almost to the point of being impervious to engagement. These are two contrasting mindsets. Under pressure, the first may feel embarrassment—what will others think of me? The second does not easily relate to embarrassment but is more likely to be concerned with rights—am I being treated

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with respect? In a crisis when both revert to type, they probably cannot even agree whether it is day or night. “There by the grace of God, go I,” said a senior banker to me. He was confidentially discussing the activities of his bank prior to the global financial crisis of 2008: Yes, we knew that many of these financial instruments were risky, but everybody was flooding the market with them and we were all making money. After a while that felt normal even though all of us knew that what we were doing was screwing investors and ordinary people who were using their life savings to provide an income for their future. The notion of being driven by others has its roots in ancient Greece. A teleological-minded individual is considered ethical or unethical according to the norms and shared views of current circumstances. If you think badly of me I am unlikely to do it, said the banker, but if I get the praise I might do that very same thing twice over. The great German philosopher, Emmanuelle Kant was the champion of the deontological theory of ethics. According to Kant, certain universal principles dominate the whole of life and these stand above the demands of context, circumstances, families, and individuals. So Kant promoted the notion of absolute virtue. Deontological philosophy denotes a deep moral sense and requires considerable strength or character to fulfill duties. Under teleological philosophy, the ends justify the means, especially if the community is to benefit. Under deontological philosophy, it is impossible for the ends to justify the means, for the only right and moral way forward is to do what is right; even if nobody wins, at least the right actions were taken.

Three dilemmas Wisdom is continually tested in organizations. Here are three dilemmas I have encountered commonly in one form or another. Depending on the teleological or deontological orientation of the person concerned, each dilemma is likely to be handled differently.

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• The sensitivity dilemma As previously highlighted, tension, disagreement, and inhibition are the norm in many organizations, and the reality is that any senior manager has to face up to that or otherwise allow the slow erosion of his or her enterprise to take place before his or her eyes. The dilemma of sensitivities is how to negotiate difference of vision, strategy, and tactics and emerge with an aligned management. Those differences are not shallow; champions of one direction or another have usually thought through their case and have substantial detail supporting their position. In fact, the top team is a forum of often reasonably well-constructed alternative logics. Due to the nature of the contrasting arguments, finding a way through is not easy and yet, the longer such tensions reign, the more likely personal animosity will take over from logic. Holding a different view from your colleague can, after a while, make you the bad guy. Personal animosities must be substituted with commitment to the team and the greater whole so that it becomes much easier to deal with the conflicting issues facing the top team and the board. Ultimately, sacrifices have to be made and compromises reached. It is creating the environment for compromise to be accepted as the way forward and not trying to involve contrasting perspectives head on that works. One chairman I talked to highlighted the trauma he experienced in dealing with the sensitivity dilemma: It really stretched me because I had built such a good relationship with my board colleagues and the management team. I spent a great deal of time on supporting and coaching the CEO. As two people we got on really well, but as two leaders we held different mind-sets. I allowed my personal feelings and liking of the CEO to get in the way. I should have acted sooner, but in a sense I forgave what the CEO could not achieve and spent an increasing amount of time coaching him through the challenges he faced in his role. It was clear to others and eventually it became clear to me, that I had to let him go. I found that most difficult. It was painful for me to face my colleagues as some felt I had betrayed the CEO and others that I should have acted sooner. Time has gone by, but on certain days my mind still drifts back to that time and that board and I still feel the dilemma of facing the people I seem to have let down.

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Leaders who are naturals at engagement are so because they feel their context. They are part of their context and so work within that context. They are teleological in their philosophy and these sentiments run deep. Breaking boundaries and relationships that have been built for some time is hurtful— hence, the dilemma between maintaining relationships and doing the right thing. Someone less contextually sensitive and more deontological in their orientation will not experience these emotional depths, but will find realizing engagement a sizably equal challenge. • The timing dilemma Clay Christensen’s thesis is that timing for fundamental shifts is critical: when the top manager can see that a market is going to dramatically change but neither shareholders, press, media nor even customers recognize that change, then trying to change becomes impossible. The individual who makes those changes in preparation for dramatic market ruptures displays considerable strength of character, but will feel isolated. “How come I can see what I need to do but no one else can?” one executive complained. Others have usually seen what needs to be done but feel too deeply inhibited to even discuss the subject, for by doing so, they would be committed to act. The way through such a dilemma must be to force the passive parties to at least admit to what they know and what they are prepared to do. The individual change agent may still be isolated, but at least the debate is public. At a workshop for top executives, while discussing how to lead through strategic discontinuities, one consulting partner commented somewhat hopefully: “There must be a technique to this. Surely we can study timing and what it takes to act strategically so that we can make the jump between the strategy that is dying and the strategy that will move us forward.” If only it was that simple. One is dealing with different mindsets. There is the CEO and other members of the top team who have to implement strategy and, irrespective of the potential long-term gains, each has to meet short-term targets. And then there are the board directors who are at best part-timers and, of course, the investors, shareholders, and customers. How can a technique align all these different parties so that

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management can switch from one strategy to the next in many ways, ahead of customer expectations? One generally taciturn CEO explained how he solved this dilemma: It is not technique. It is trust. The trust that has been built over time not in me as CEO, but in my judgement as a person. That trust has many angles. Yes, it is about people being able to relate to me. And yes, it is about how I have managed to focus the team and at the same time engage with them as people. But most of all, it is a trust in my intelligence. It is the trust that I can see what will happen in the markets but that I can also make the compelling case to all the different stakeholders. You see, many of my team can also see when to have a shift strategy ahead of the time, but how then to make the compelling case and deal with the backlash of why are we giving up on an established income stream is the real issue. I have to say my IQ and my engagement sensitivity are the real components of that trust. Once built up that trust is defended at all costs and that in an odd way is the problem. Having established that trust and my key colleagues knowing I can make the compelling case, I become hindered by the fact that I should not break that trust. My spontaneity is undermined and so is the necessary timing of when to shift! So we are back to IQ, that smart business intelligence that makes all the difference in working out what to do next. Teleological and deontological individuals as much lack or have, and have developed, the IQ needed to do the job. Smart intelligence and ethical reasoning are not neatly coupled. • The transparency dilemma The third dilemma is perhaps the most problematic of all. It is about transparency and what constitutes good business practice. There are many aspects to this dilemma, but one (extreme) example illustrates the challenge. At a seminar for the board of directors of a world-renowned company, the board secretary approached me after dinner on the second day: “I have a real dilemma and I do not know what to do.” With barely a pause, he continued: We operate in many difficult parts of the world, Chile, Romania, ­Turkey, Peru and so on. We are a mineral resources company, we deal

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with governments, our public position is that we do not bribe but, in fact, our profits are based on bribery. We have got used to that but our new CEO has just changed things, he has publically stated that any manager caught bribing will face the legal consequences of their actions but with no financial or any other support from us. Since that statement was made I have been inundated with phone calls from country heads. What am I supposed to do? They ask. If I do not bribe I do not make profits, the company loses and in turn I lose my job. Yet if I do bribe and I am caught I am abandoned despite being a good and loyal servant for the company. So what am I supposed to do?” These words were echoed by the company secretary. So what to do? We talked but it became obvious that this was a no-win situation and, as the legal guardian of the company, the company secretary knew he was totally implicated for essentially being of a sympathetic disposition. Weeks later the company secretary resigned much to the dismay of the country managers who now knew they had lost their only friend at the top management table. The company secretary was deontological; the country managers, teleological; and the CEO, as it turned out, was deontological about everybody else but teleological about himself. He applied different standards to others than he did to himself and his friends. Not an uncommon situation. Whatever the personal orientation of the individual, the challenge of the role may force the person to compromise his or her own moral consciousness. The CEO later admitted to me, “What else could I do? I know the reality of our organization and the way we do business, but I also have to be concerned about our reputation and our public image. I concluded that reputation and public image have to be defended at all costs. Country managers may despise me, but they will come and go. Reputation and image may come many times but have the very unfortunate habit of going only once and that is for ever.” The CEO’s dilemma was how to win and maintain trust under these circumstances. This is not an isolated incident. We all know that. The question is whether organizations can find the wisdom and candor to own the problem and manage it. This is a critical challenge of engagement.

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Working wisdom The three dilemmas discussed above represent thorny issues. They would not be dilemmas if they did not. By their nature they are hard to manage, requiring a blend of pragmatism and judgment, guided by a moral compass. This is not the realm of black and white answers but of the exercise of wisdom. One of the most interesting (and comforting) aspects of wisdom is that it may actually increase with age. Yet companies often view age narrowly—an aging board may be seen as a sign of weakness rather than wisdom. Jeff Fettig, the Whirlpool CEO, spoke expressly of wisdom. He was especially proud of the makeup of the company’s board. “I’m very proud of where we are today. We have four decades, from an age and experience standpoint, on our board—we have one member in his seventies, we have two or three in the 60s, we have two or three in the 50s, and we’ve got two in their mid-forties,” he explained. I asked, in response, what the differences were between the seventyyear-old and the forty-year-old in terms of their contribution. He replied: Well, I would say: wisdom, subject-matter expertise . . . both are important. Wisdom is the ability to face a particularly difficult situation, or an opportunity, and cut through all the ramifications and complications and offer the logic that, basically, says, do the right thing. And, sometimes the right decision is a hard decision. Sometimes the right decision has consequences. Sometimes the right decision might be personally hard on me, or our people, but at the end of the day, it’s when your wise, savvy people who’ve been through all the ups and downs come through and put their arms round you and say, you know, this is the right thing to do, we support what you’re doing—that means more than anything else. The combination of sharp rational deduction and recognizing that non rational behavior is simply a form of contextually rational action not understood by all, supported by a deep moral consciousness that guides action, is the basis for working with wisdom to positive effect.

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Four steps to practical wisdom emerged from my studies: • Stand back The ability to stand back and think is a rare one in the action-focused C-suite. The best leaders, however, have the ability to control the urge to act, especially when pressurized by others and circumstances. To do so requires a high level of personal discipline as the leader has to resist all emotions of context in order to rationalize what is wrong and how to move forward. To some extent this is a cultural issue. Leaders can create a culture where it is acceptable to stand back so that people can be clear about what to do and why. • Hold back Sometimes leaders must raise their hand and say, hold on, let’s slow down and rethink the current situation. They must have the ability to make others open up about their feelings concerning the current situation and the courage to surface the unspeakable truth. Sam Su of Yum! Brands told me there was courage in this approach. It seemed an unusual word so I asked what he meant by courage: The courage is having the commitment to yourself that you will do what is right for the shareholders. And to me that’s been the basis. That has to be the most important thing. I always tell my people that if I can leave behind one thing to this organization, to this team, they can forget everything else, but just remember one thing: to have the courage and skills to do what is right. You cannot just have the courage. You also have to have the skills. And a lot of people have the skills and no courage; or courage and no skills, and sometimes neither. I think the best people are the people who have both. Have commitment, are willing to do the right thing no matter how difficult it is, but at the same time acquire the skills to do the right thing. Doing the right thing takes a degree of self-confidence, the courage of your own convictions. One executive told me: Very early on, I made the decision that I was not going to be a corporate soldier. I want to be able to do what is right. And to me it

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wasn’t that difficult. I just made a decision that I can leave any time: I can leave this organization; I can quit this job at any point. And so once I realized that, I’m okay. I just told myself I can find a job. I’m sure I can find a job to feed myself and family, and so at that point I said I will not shy away from any debate, any discussion, any challenge. But if I feel right and somebody else disagrees with that, that’s their right. I fully respect that, and it’s up to me, so I have to really ask myself how come I don’t have the skills, to get them to see what I see. Because I always believed that if you are reasonable people, and you have the same perspective, generally you come to the same conclusion. So those are my beliefs. • Feedback Feedback provides the ability to use evidence to make sense of the current situation in preparation for the future. Darshan Mehta, president and CEO, of Reliance Brands in India, talked to me about this. He highlighted one critical success factor that has led to Reliance Brands becoming one of the most successful fashion retail companies in India—constantly raising the bar on performance through critical feedback. The real value of feedback is sense-making. Everyone needs to understand the nature of the current challenges and how to move forward. This is how Darshan Mehta put it: We work with more than 40 global brands. It is an immense learning process for people who are constantly willing to learn. We are ceaselessly pushing people to break out of their comfort zones and to unlearn and that’s a big challenge. Not everyone can take critical feedback as a tool to reset the bar on performance! As a result, Reliance Brands may not be in the running for the Best Employer of the Year Award but it is certainly the single most sought after organization to build one’s career in fashion retail.” Feedback is about the ability to build commitment, through dialogue and evidence, to move forward. Once the evidence, which makes sense of the current situation, has been examined, positioning that evidence to build engagement and commitment to act is the challenge. Evidence needs to be positioned in a way that will enable other parties to hear and acknowledge the substance of the message. The rational exercise of

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gathering evidence requires the contextual sensitivity of knowing how people will respond to the message being presented. What are the contextual triggers that help people listen? What experiences and examples can be called upon so that those listening can experience the reality of the message? What switches people on? My research has identified that executives can be assessed in terms of their rationalization capacity and also their capability to position messages. Different audiences need messages positioned slightly differently through the use of stories, examples, and the personal experiences of those listening so that the message is understood and owned. The unique blending of a deductive process and emotional awareness makes for a true communicator. The charismatic presenter who calls on drama and powerful strap lines does not necessarily help the audience to become part of the message being promoted. All may be enthralled at the meeting, but left cold days later. The quiet, introverted leader can make a powerful engagement impact. Effective communication is about what happens after the meeting rather than the feel-good factor during the meeting. My latest research with Heidrick & Struggles highlights the fact that in determining the strategic direction of an organization, the general managers and other critical stakeholders are at the bottom of the list (Figure 9.1). What the results scream out is that the damaging practice of strategy first, structure follows strategy, sell the message or shut up is the norm in so many organizations. The case for shifting mindset is compelling. • Never go back The past is history. Wise leaders have the ability to shape a pathway that shows how to move forward and negates the desire to return to the past. To never go back to the way things were is the true sign of having balanced the needs for engagement and alignment. The evidence that balances what may be required in terms of organization, structure, processes, producers, costs, and the engagement needs of the rest of the organization is at the very heart of this book. Listen to the story of Rajiv Verma, CEO of HT Media in India, outlining the development of the Hindustan Times:

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Remain focused to meet the challenges ahead Use appropriate information/data which is readily available Understand the nature of the strategic options facing the organization Utilize hard rather than soft evidence Understand the implications of implementing the wrong strategy Take time to ensure that the strategic direction is fully understood by all concerned Readily engage with parts of the organization Allow others to have a constructive input rather than one or a few people getting their own way Effectively utilize the right balance of skills, knowledge and experience of those developing the strategy Allocate enough time in meetings to discuss strategic issues Give General Managers the opportunity to feedback their views Actively engage with external stakeholders/shareholders 1

2

3

4

5

Average scores ranging from “Never” to “Always”

Figure 9.1  Those involved in determining the strategic direction of the organization. In the early 2000s, we were short on resources and low on liquidity; today arguably, we are among the most valuable media companies in India. We pioneered the move to inject private equity into the company. It wasn’t common for media companies to accept external funding at the time. This provided us with capital, eventually helped us take the company public, and created resources for a turnaround. Subsequently, we launched our flagship newspaper in Mumbai where the market was dominated by a large rival. We were a Delhibased company in people’s eyes and it was a complete act of courage. Analysts thought we wouldn’t be successful given our meagre war chest. Sure, we didn’t have resources to waste, but we did have the will to win, to take on formidable competitors. My team and I were newcomers to the media business, and had little idea as to what worked and what didn’t in the industry. Yet, today, our Mumbai foray has been hugely successful. It has made our competition, which we also fight in Delhi, more honest. It has restored the equilibrium in both markets.

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My most significant learning was that it was possible to transform a company tottering at the edge of a precipice into a stable, thriving, successful one. I’d read about it in business books. I’d imagined it. But I had never effected a transformation, a turnaround, and my experience taught me that it could be done. It taught me that leadership models work, that core values are important. We transformed the company by building teams, creating a shared vision, and making sure everyone delivered. Our success was made possible by the complete trust and support of all stakeholders. Rajiv Verma, who won against all odds, captures the heart of this book. The considered, sensitive, and effective balancing of engagement with alignment can turn around the most vulnerable of strategies. Yes, there is a sense of excitement! In the words of so many of the others quoted earlier, there is impressive passion and professionalism. These people care. They care about their organizations. They care about doing something worthwhile. They care about contributing. Most of all, they care about delivering value. That, they know, is the measure of success. Always. They live the success formula, S + (E × A) = V.

The discipline of wisdom: In summary • Learning needs to be a lifelong habit. • It is normal for leaders to continuously face dilemmas; the issue is how they address such concerns. • Exercising wisdom can be painful, and so, being resolute, learningoriented, and humble is an important component of making wisdom work. • Learning with age facilitates wisdom. • Part of wisdom is coming to terms with one’s ethical orientation. • Working through dilemmas is fundamental to leadership. If that is too difficult, do not lead. • Wisdom is critical to finding the pathway between E × A context by context.

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Key questions • • • •

Is learning for you a built-in habit? Do you face dilemmas, and, if so, what is their nature? Do you feel it is normal for you to repeatedly face dilemmas? Do you feel it is unfair that you have to face unpleasant and emotionally stretching dilemmas? • Do you almost feel “what I have done to deserve this?” • When “forced” to compromise your values, are you distressed and uncomfortable? • If you cannot compromise your values or position, do you resign, irrespective of the consequences for you?

Chapter10 Key questions The overriding conclusion about leaders who are able to sustain success over a long period is that they never take value creation for granted. Even if a strategy or business model has been successful in the past, or seems tailor-made for the future, these leaders continually check their perceptions against those of others and against reality. They know that this is the best protection against organizational hubris. In the 1980s, IBM was almost destroyed by hubris. What saved Big Blue—and has enabled it to flourish once more—is its changing to an evidence-based culture. By constantly taking soundings from its stakeholders—employees, customers, suppliers, and others—IBM developed a radar for big shifts in its industry, navigating dangers and successfully identifying opportunities for growth. Big Blue learned to renew itself. At the heart of the organizations that sustain success is a continual process of gathering and interrogating evidence and an appreciation for diversity of thinking that creates engagement and alignment to support the strategy. So how does an organization become evidence-led? It is not a destination, rather a journey without end. The following questions, based on hundreds of hours of interviews, are designed to help organizations and leaders setting out on that journey.

Questions for the CEO 1. Do you have an evidence-led mindset? How would you describe your mindset? Can you tell the difference between critique and criticism and are you comfortable with critique? Are you more of the replicate, formulate, or evidence-led leader? Once you have an idea, do you pursue that idea through gathering and interrogating evidence in order to see how much of the idea, once scrutinized, will survive?

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Do you, once you are clear on the strategy to pursue, negotiate for support of your strategy within the top team and board? Are you convinced of the value proposition that you are trying to pursue and feel that this is sufficient reason to move forward. Alternatively, are you more concerned with the value that is to be delivered? And if so, what effort do you make to determine what value will be delivered from the strategy/idea that you have initiated? Whatever your conclusion, do the others agree? What sort of feedback have you received, and from whom, concerning you as a leader and the nature of your mindset? 2. Do you know and feel the difference between strategy and strategizing? On the basis that strategy is the resource allocated to a decision made, strategizing is the shaping of thinking behind the ultimate decision that is reached. Certain top executives can tell the difference intellectually, but emotionally they may experience the cut and thrust of strategizing as an encroachment on their right to make strategic decisions. If this is the case with you, it is likely that you are a leader who emotionally links forming the strategy with the value proposition you are convinced is the right one to pursue. You are unlikely to draw heavily on scrutinizing evidence that will determine the real value that will be delivered. 3. Have you created a culture of innovation? Does the general management, in particular, feel comfortable to try out new ideas? Are you accepting of failure as long as learning has taken place? Are you able to facilitate and mentor such a culture by drawing heavily on the discipline of evidence to guide you? 4. How do you really handle critiques of your ideas/projects? No matter what you hear on the day, do you later find out that others did not dare to tell you that your ideas/projects were suspect and prone to failure? Alternatively, do you insist that all key projects/programs are vetted through an independent evidence-gathering process and that the outcomes are owned by the critical stakeholders involved? In effect, have you nurtured a culture of diversity of thinking?

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5. Let me ask the question once again, have you prompted diversity of thinking? Why do I ask the question twice? Because diversity of thinking is integral to value delivery. Without diversity of thinking, your organization is likely to be undifferentiated and also probably not constructively criticized. 6. What is your personal habit for gathering evidence? Do you rely on more formal channels of feedback such as surveys, questionnaires, or discussion in formal groups? Alternatively, in order to gain a clear idea of what is really happening in the place, do you walk around, having evolved a spread of relationships where people feel comfortable to let you know of their opinion of reality? To what extent do you go out of your way to gage the opinion of the general managers and to what extent do you make them feel comfortable to have them let you know what is really happening as opposed to their offering what they feel you want to hear? How do you handle conflicting evidence? Are you able to see the wood for the trees and are you sensitive enough to detect the true impact of strategy execution? Strategies do not fail simply because they are poorly thought through. Most fail on execution. Let me repeat what an outstanding global leader said to me: “Life is one part strategy and nine parts execution.” So much is dependent on the extent to which you are able to capture the reality of strategy execution in your organization. Having an evidential ­mindset is particularly pertinent when you are attempting to reach a view of whether to leverage “first-mover advantage.” The fact that you are first in the market does not always mean that you will gain the greatest advantage. Who is likely to have a view on when to enter the market? The general managers whose role it is to execute strategy. So, coming back to your personal habit of gathering evidence as the mechanism to identify what to do when, how strong is this habit? 7. When and how do you know you have reached alignment of thinking and engagement with critical stakeholders? It is evident that it is difficult to gather all information to make critical decisions. A balance has to be struck between knowing when you have sufficient evidence to justify putting resources behind a decision and

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having the confidence that critical stakeholders, especially general managers, are truly engaged and will, with vigor, execute that decision. The balance is between IQ, namely knowing how to put forward that compelling case, and EQ, namely feeling confident of others’ support for you and the decisions made by you.

Questions for the chairman 1. What is your habit for discerning the DNA, the heart, of the organization so that you appreciate what is the essence of the company and what makes it, or could make it, great? On the basis that the chairman is the guardian of the enterprise, it is imperative that he or she and the board appreciate the nature of the enterprise’s competitive advantage/differentiation. With that insight, they can more favorably influence critical external stakeholders, shareholders, the press, and the media. 2. Are you clear about the absolutes, where the boundaries should be drawn, and where discretion is to be exercised? Depending on your view of the DNA of the organization, your responsibility is to clearly delineate the boundaries of the chairman’s role and that of the CEO, and the board’s role and that of the management team. Such boundaries are dependent on who does what to realize competitive advantage. In reality, my research shows that these deeper levels of engagement are the experience of only about 33 percent of boards and top teams. 3. How able are you to put forward the compelling case of what makes this company great? How do you balance your IQ capacity for rationalization with your political and sensitivity skills to gain the necessary buy-in from the management about the value of the enterprise and the political skills to weave through the contrasting agendas different stakeholders pursue? The management may be polite but are they wary of you? 4. How do you gain “the permission” to dig deep in the organization? The evidence underlying this book strongly shows that control and monitoring mechanisms act as the basis for minimizing risk and

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preventing harm to the enterprise, but do not provide that extra stimulus for the organization to excel. It is the subtle balance between monitoring and mentoring that has management and other stakeholders acknowledging that the board provides value. Effective mentoring requires intimacy of understanding of what is happening in the organization. This book challenges the current belief that for the board to be independent, it has to maintain a distance between itself and the management of the organization. It is the general managers who are likely to offer the greatest insight concerning what is happening in the enterprise and which strategies/projects are likely to succeed or fail. The chairman’s and the board’s insight concerning the true sentiments of the general managers will determine how the governance of the enterprise and the balance between mentoring and monitoring is to be pursued. So what is your “real” access to the general managers in your company? 5. Have you nurtured a culture of diversity of thinking on the board? You will really know this only from the exuberance of free and open communication from the board that spreads right through the organization.

Notes Chapter 1   1 Crainer, Stuart (2011), “Leading with purpose,” Business Strategy Review, Autumn.   2 Drucker, Peter (1985), Innovation and Entrepreneurship. New York: Harper & Row.   3 “Value Maximization, stakeholder theory, and the corporate objective function,” working paper -01-01 HBS October 2001.   4 Porter, Michael and Kramer, Mark (January 2011), “Creating shared value,” Harvard Business Review, 89: 62–77.   5 D’Aveni, Richard (2012), Strategic Capitalism. New York: McGraw Hill.   6 All quotations are from research interviews unless otherwise stated.   7 Crainer, Stuart (2011), “Mining success,” Business Strategy Review, Autumn.   8 Dearlove, Des (2012), “Builders not bankers,” Business Strategy Review, Autumn.   9 Loomis, Carol (2005), “Why Carly’s big bet is failing,” Fortune, February 7. 10 Quoted in Denning, Steve (2011), “The dumbest idea in the world,” Forbes.com, November 28.

Chapter 2 1 European Board Survey 2014 (2014), Heidrick & Struggles Europe. 2 European Board Survey 2014 (2014), Heidrick & Struggles Europe. 3 Ha, Julia and O’Brien, Anne Lim (2011), Heidrick & Struggles Governance Letter, Q3.

Chapter 3 1 Kanter, Rosabeth Moss (2014), tweet from@rosabethKanter, August 14.

Chapter 4 1 Yardley, Ivan, Kakabadse, Andrew and Neal, Derrick (2012), From Battlefield to Boardroom. Basingstoke: Palgrave Macmillan. 2 Franken, Arnoud, Paton, Chris and Rogers, Simon (2010), “How the UK’s Royal Marines plan in the face of uncertainty,” Harvard Business Review website http://www.hrb.com, November.

184 Notes

3 Zook, Chris (2013), Interview, http://www.thinkers50.com 4 Bennis, Warren (1989), On Becoming a Leader. Reading, MA: Addison Wesley. 5 Sidey, Hugh (1980), “The task of the leader,” Time, October 20, p. 39. 6 Collins, James C. and Porras, Jerry I. (1996), Built to Last: Successful Habits of Visionary Companies. New York: HarperBusiness. 7 Senge, Peter, Roberts, Charlotte, Ross, Richard B., Smith, Bryan J. and Kleiner, Art (1994), The Fifth Discipline Fieldbook: Strategies and Tools for Building a Learning Organization. London: Nicholas Brealey Publishing. 8 Kakabadse, A., Kakabadse, N. and Lee-Davis, L. (2005), “Visioning the Pathway: A Leadership Process Model,” European Management Journal, 23(2): 227–302.

Chapter 5 1 Lashinsky, A. (April 17, 2006), “The Hurd Way: How a Sales-Obsessed CEO Rebooted HP,” Fortune, 153(7): 83–8.

Chapter 6 1 Kim, W. Chan, and Mauborgne, Renée (2014), “Blue Ocean Leadership,” May, https://hbr.org/2014/07/ from-blue-ocean-strategy-to-blue-ocean-leadership/(Accessed: 20.07.2014). 2 Victor Lipman, (2013), “Why are so many employees disengaged,” Forbes, January 18, p. 1. 3 For further information on dialogue, Plato and Socrates, read: Kakabadse, N. and Kakabadse, A. (2003), “Polylogue as a platform for governance: integrating people, the planet, profit and posterity,” Corporate Governance: The International Journal of Business in Society, 3(1): 5–38.

Chapter 7 1 There is an article by Rosabeth Moss Kanter which also uses this terminology. “Managing Yourself: Zoom In, Zoom Out,” Harvard Business Review, March 2011. 2 Kellerman, Barbara (2004), Bad Leadership. Boston, MA: Harvard Business School Press.

Chapter 8 1 Berle, Adolf A. and Means, Gardiner C. (1932), The Modern Corporation and Private Property. New York: Harcourt, Brace & World. 2 Gelter, Martin (2008), “The Dark Side of Shareholder Influence: Toward A Holdup Theory Of Stake­ holders in Comparative Corporate Governance,” Economics, and Business Fellows’ John M. Olin Centre For Law, Discussion Paper Series, Discussion Paper No. 1707/2008, Cambridge: Harvard Law School.

Notes 185

3 Grechenig, Kristoffel and Martin, Gelter (2008), “The Transatlantic Divergence in Legal Thought: American Law and Economics vs. German Doctrinalism,” Hastings International and Comparative Law Review, 31: 295–360. 4 Stout, Lynn A. (2013), “The Shareholder Value Myth,” Harvard Law School Forum on Corporate Governance and Financial Regulation, January 26, http://www.blog.law.harvard.edu/corpgov/2012/ 06/26/the-sharholder-value-myth/. 5 Grechenig, Kristoffel and Martin, Gelter (2008), “The Transatlantic Divergence in Legal Thought: American Law and Economics vs. German Doctrinalism,” International and Comparative Law Review, 31: pp. 295–360. 6 Kakabadse, Andrew and Kakabadse, Nada (2008), Leading the Board. Palgrave, p. 182. 7 ShareSoc (2013), Chair and Non-Executive Director Guidelines, January. 8 Bhagat, C. and Kehoe, C. (2014), “High-performing bars: What’s on their agenda?,” McKinsey Quarterly, April, pp. 1–5.

Chapter 9 1 Schwartz, Barry and Sharpe, Kenneth E. (2005), “Practical Wisdom: Aristotle Meets Positive Psychology,” Journal of Happiness Studies, 1–19. 2 Kakabadse, N. K., Knyght, R. and Kakabadse, A. (2013), “High-performing chairman: the older the better,” in Kakabadse, A. and Van den Berghe, L. (eds), How to Make Boards Work: An International Overview. Basingstoke: Palgrave Macmillan, p. 352. 3 Strauch, B. (2010), The Secret Life of the Grown Up Brain: The Surprising Talents of the Middle-Aged Mind. London: Viking. 4 Power, Marianne (2010), “The midlife brain surge that means we DO grow wiser as we get older,” Mail on Line, July 27, http://www.dailymail.co.uk/health/article-1297847/The-midlife-brain-surge-meansDO-grow-wiser-older.html. 5 Jeste, D. (2010), “Why the wise man takes up juggling in old age,” Hastings International and Comparative Law Review, 31(1), http://ssrn.com/abstract=1161168 (Accessed: 20.07.2014).. 6 Kakabadse, N., Knyght, R. and Kakabadse, A. (2013), “High-Performing Chairman: the Older the Better,” in Kakabadse, A. and Van den Berghe, L. (eds), How to Make Boards Work: An International Overview. London: Palgrave, pp. 342–59.

Index Achleitner, Paul  78, 92 action-focused debating team  56–7 agency theory  135 alignment  xxvii, 17–19, 43, 75–7 closeness of relationships  87 vs. engagement  81 of Hewlett-Packard, case example  81–2 information and  88 integrating engagement with  91–2 key elements of  78–81 meaning of  77 network support  88–9 personal experience, role of  89 position in success formula  77 process of  78 repercussions of  81 being ruthless and disrespectful for  89 shift of thinking  87–8 of strategy and structure  82–3 of structures  80 of systems  80–1 of thinking  82–3 of thinking between the key players  78–9 working through politics  86–9 see also engagement alternative energy  84 Aristotle 151 Armstrong, Neil  68 banking and values  7–8 being driven, notion of  165 Bennis, Warren  68 Berle, Adolf The Modern Corporation and Private ­Property  134 Bhagat, Chinta  148 bilateralization 161 black letter law  136–7 Blue Ocean Leadership  99 Bower, Joseph  153–4 brain’s processing capacity  161–3 Burke, Edmond  88 Burns, James McGregor  127 Cadbury, Sir Adrian  139 CEO, questions for  177–80 chairman, questions for  180–1 Chipman, Stephen  157–9 Christensen, Clay  153–4, 167 Cicero, M. T.  95–6, 159 Clausewitz, Carl von  62–3 closeness of relationships  87

collaboration 109 Collins, Jim  68–9, 126 Good to Great 95 commander’s intent  64 commitment  70, 95 competitive advantages  6 conformist 80 contextual evidence  52 see also evidence corporate center and diversity of thinking  35–7 corporate governance  138 corporate sustainability  141 crystallized cognition  162 CSR polices  141 C-suite executives  79 culture fit  79–80 culture of us and them 54 Cunningham, David  35, 108–9 Dabaghi, Georges  1–2, 33 D’Aveni, Richard Strategic Capitalism 5 Lee-Davis, Linda  70 Davis, Mick  10–11 delivered value  11, 15–16, 44 delivery-led organizations  84–6 deontological philosophy  164–5 dilemmas and wisdom  163–9 disengagement  101, 104 see also engagement disruptive innovation  153 disruptive technologies  153 disruptive wisdom  153–5 diversity & inclusion  84 diversity of contribution  39 diversity of knowledge  39 diversity of thinking  xxvii, 22–3 components of  29–39 international exposure and  31–2 as an issue of discussion  28–9 modus operandi  25–6 need for  39–40 open communication and  32–4 passion for  29–30 in relationship between corporate center and its operational centers  35–7 road to  24–5 team for  37–9 see also global thinking Drucker, Peter  3 dynamic governance  137–42 characteristics to achieve  140

188 Index

Elix, Doug  38, 97, 113, 115, 152, 156 engagement  xxvii, 17–19, 43, 81, 96–8 benefit of addressing  110 as a by-product of good leadership and value delivery 98 dialogue vs. debate  106–8 fair process and  99–101 foundations of  105–6 individual’s ability to hear in  104–5 need for dialogue in  103–4 process of  13 trust, significance in  105–6 see also alignment; disengagement ethical leaders  128 ethics 164 evidence 101 action-focused debating team for debating  56–7 belief in  50–1 characteristics of  50–9 collection timing of  51–2 contextual 52 culture of interrogating  58–9 debating on  57–8 in developing knowledge  49 importance and purposes of  45–9 leveraging of  59 as platform for independent debate  54–6 quality of  52–3 rational 52 without detail, impact of  49 evidence-based managers  45 evidence-led, approach  xxvi evidence-led leaders  46, 48–9, 114, 126, 177–8 successful 60 evidence-led leadership  43 evidence-led stakeholder engagement  xxvi–xxvii evidence-led wisdom  151–3 expectations market  14 fair outcome  99 fair process  99–101 feedback  70–1, 172–3 Fettig, Jeff  27, 84, 86, 132, 160 financial value  xxv, 5 Fiorina, Carly  12 Ford, Henry  3, 68 formulate, approach  xxvi formulate leader  47–8 Franken, Arnoud  63–4 front line managers  24 Gelter, Martin  135–6 general managers  24 Gerlich, Stephan  38–9 Gerstner, Lou  113–14, 152 Gibson-Smith, Chris  3, 115 global cultures  30

global managers  26 global thinking  26–8 see also diversity of thinking goals 69 Goldsmith, Marshall  44 Goodwin, Fred  7–8, 45 governance  43, 131 black letter law and  136–7 and board behavior in Russia, study 144–5 board governance practice  134 company’s board, role in  146–8 criteria for appointments to board  148 to executives/management team  148 critical fault lines of enterprises and 143–6 delineation of roles and duties  145 dimensions of  131 drivers for achieving best practice ­ levels 138–9 dynamic 137–42 Harvard Law School vs. Harvard Business School 135 principles of corporate  131–6 spirit of  139 Gustafson, Rickard  116–18 Heidrick & Struggles  xxv, 29, 38, 108, 110, 137–8, 161 capabilities as foundation of board’s ability to perform  138 company’s board, role in governance  146–8 comparison with average- and poorperforming entities, high-performing organizations 147 Towards Dynamic Governance 140 Foundations and Building Blocks for High-Performing Boards 138 strategic direction of an organization 173–4 Hewlett, Walter  12 high-quality leadership, qualities of avoiding personal agendas and pet themes 122–3 fostering a no-shame culture  122 handling criticism  120 integrity 117 managing expectations  121 moral consciousness  118 persuasive advocacy  118–19 positioning the argument  120–1 reworking the argument  121–2 transparency and sharing of evidence  116–17 trustworthiness 117 zooming-in, zooming-out  123–4 HP-Compaq merger  12–13

Index 189

humility 95 Hunter, Jeremy  37 ineffective leaders  127 innovation 138 integrity 84 international exposure  31–2 Jensen, Michael  4 Kakabadse, Nada  70 Kant, Emmanuelle  165 Kanter, Rosabeth Moss  51 Kehoe, Conor  148 Kellerman, Barbara  127 key performance indicators (KPIs)  35, 76, 81 Kim, W. Chan Blue Ocean Strategy 98–9 King, Martin Luther  67 Kissinger, Henry  68 Kramer, Mark  4 Laxer, Richard  11 leadership  43, 138 correcting bad  128 high IQ  114–15 instances of leadership failure  127–9 purpose and  125–6 qualities (see high-quality leadership, qualities of) sophistication and  115 learning 95 process of  157–8 wisdom 160–1 listening 95 Livingstone, Catherine  32, 45, 48, 56–7, 85, 146 Lobo, Kevin  32–3, 51, 53, 58, 71–2, 78, 91–2, 96, 126 Mackay, Dave  80 Makhov, Vadim  33 management politics  89–91 Marey, Alexey  15 market share  xxv Martin, Roger  14–15 Fixing the Game 14 Mathewson, Sir George  7 maturing wisdom  157–60 Mauborgne, Renèe Blue Ocean Strategy 98–9 Mayfield, Charlie  61–2, 97, 140–1 Means, Gardiner The Modern Corporation and Private ­Property 134 Mehta, Darshan  49, 172 mentoring  131–2, 135 Meyer, Erin  26 The Culture Map 26

mission  43, 69 command principles  62–5 difference between vision and  67–8 led enterprises  71–2 lessons learned from leaders  65–7 organizational impact  65–7 in value delivery organizations  61 see also vision mission-based organizations  62 monitoring  131, 135 moral consciousness  118 morals 164 myelin 161 Napoleon 62 NatWest Bank  7 Neill, John  16, 50 Niebuhr, Reinhold  151 non-negotiable principles of behavior  64 “nudging” others  87 Obermann, Renè  49, 55–6, 75–7 open communication  32–4 organizational chaos  70 organizational performance qualities  109 organizational success  xxvii, 2 ownership 133 Parker, John  118–19, 131–2 perceived value  11–13, 44 performance-management process  84 personal conviction  70 persuasive advocacy  118–19 planning process  63 Plato 151 politics defined 86 understanding organizational  89–91 Porras, Jerry  68–9 Porter, Michael  4, 6 profitability xxv proposition-based leaders  46 Prussians 62 quality of relationship  100, 121 Rand, Ingersoll  79–80 Rapp, Ed  10, 30, 57–8, 72, 86, 125–6 rational evidence  52 see also evidence real market  14 reflective wisdom  156–7 relationships 100 in alignment  87 between corporate center and its operational centers 35–7 culture of poor  104 within management team  101, 104

190 Index

positioning an argument in  120 see also engagement replicate, approach  xxvi, 47 respect 84 Russian banking market  15 Sam Su  31–2, 43–4, 50, 59, 109, 156–7, 171 Schneider, Ulf “Mark”  52, 62 “Selfish Business Units”  70 Senge, Peter  68 senior managers  24 sensitivity dilemma  166–7 shareholder value  xxv, 14, 135 shift of thinking  87–8 social reasoning  163 social value  xxv Socrates 151 spirit of winning  84 stakeholder value  xxv, 44 stakeholder value thinking  4 stewardship 135 Stout, Lynn  135 strategic tension  102 strategizing 178 strategy  xxvii, 17–19 formulation 45 vs. strategizing  178 strategy-driven organizations  84–6 Strauch, Barbara  161 success 91 best formula for  19–20 combination of strategy, engagement and alignment for  17–20 definition of  1–2 importance of evidence  44 leadership focus  17–19 strategy + (engagement × alignment) = value delivery  20, 126, 175 Swannell, Robert  25, 33–4, 52, 107, 144 teamwork 84 teleological individual  164 telescopic thinking  156 Tennant, Sally  2 timing dilemma  167–8 tokenism 37 transactional mindset  54 transparency dilemma  168–9 trust 86 two-day strategy retreat  47

Ukrainian banking market  15 UK’s Rapid Reaction Force  63 unethical leaders  128 Unipart Way  16 value creation  xxvii, 11–13 value delivery  xxvii value-enhancing vision  69 value for stakeholder groups  24–5 value innovation  98 value organizations  xxv value proposition hypothesis  xxvi value propositions  6 as delivered value  15–16 flawed 8–9 as perceived value  13–15 testing 9–11 values  2–4, 69 banking and  7–8 unsuccessfull delivery of  5–6 vanilla cultivation, case study of  141, 144 Verma, Rajiv  173, 175 vision 138 driven organizations  67–8 meaning of  68–71 shared 69 steps towards effective visioning  70–1 value-enhancing 69 see also mission visioning culture  71, 102 voluntary co-operation  99 wealth creation  133 Welch, Jack  14 willingness  95, 99 wisdom 43 dilemmas and  163–9 disruptive 153–5 evidence-led 151–3 learning 160–1 maturing 157–60 in neuroscience  161–3 present times  160 reflective 156–7 steps to practical  171–4 telescopic thinking  156 working 170–5 Working in Organizations 80 working wisdom  170–5 Zook, Chris  64