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LEADING IN CRISIS
Never let a good crisis go to waste.
—Winston Churchill, prime minister, United Kingdom
In the past 2 decades, we have careened from one crisis to the next. The new century started full of optimism but quickly turned tragic when New York's World Trade Center twin towers were toppled by al‐Qaeda on September 11, 2001.
Shortly thereafter, companies like Enron, WorldCom, Tyco, and others melted down in a pool of fraud and their chief executive officers (CEOs)—Jeff Skilling, Bernie Ebbers, and Dennis Kozlowski—wound up with long prison sentences. Meanwhile, dot‐com companies saw their stock prices collapse, as Cisco lost 83 percent of its value and Amazon went down 89 percent. Those two quickly rebounded, while many others never recovered.
Boom years in stocks followed, driven by aggressive traders, high leverage, and minimal liquidity. Corporations were forced to respond to demands for short‐term earnings and increased cash returns to shareholders via stock buybacks. Widespread lack of fiscal responsibility led to the global financial crisis, triggered on September 14, 2008, by the bankruptcy of Lehman Brothers. Its collapse was quickly followed by the insolvency of leading financial institutions, including Citigroup, Merrill Lynch, AIG, and dozens more, causing credit markets to shut down completely.
There followed a decade of recovery until the 2020 arrival of the COVID‐19 pandemic. It shut down economies all over the world until governments stepped in with massive deficit funding to ameliorate the damage. In 2022, Putin's Russia launched a brutal invasion of Ukraine, starting the largest war in Europe since World War II. Meanwhile, climate disasters like rampant forest fires, tornados, and earthquakes occur with increasing frequency as the planet's mean temperatures continue to rise.
What's next? None of these major crises were predicted, beyond a handful of after‐the‐fact “I told you so” claims. As leaders, the question for us becomes: How should we lead through these unexpected events?
At the end of the 20th century, students at the U.S. Army War College predicted the world of the 21st century would contain volatility, uncertainty, complexity, and ambiguity—VUCA for short. The last 2 decades have proven how prescient they were. This raises the question: What qualities do leaders need to navigate crises successfully? For that, we propose VUCA 2.0: Vision, Understanding, Courage, and Adaptability (Figure 12.1).
In leading through crisis, think of yourself as captain of the ship. Because of all the uncertainty, you need to have a clear vision of where you are going. As Stephen Covey writes, “Begin with the end in mind.” That is your destination. No doubt your ship will be buffeted by winds and storms. To navigate through them, you need to have a deep understanding of how things work—the knowledge that comes from years of experience. Then you need to summon the courage to lead your team through the storm without vacillating in the face of uncertainty. Because you will face unexpected events, you must have adaptability in your tactics yet be unwavering in your vision.
Figure 12.1 VUCA and VUCA 2.0
Indra Nooyi: Performance with Purpose
Vision, understanding, courage, and adaptability describe the leadership of CEO Indra Nooyi as she built PepsiCo for 12 years through consumer challenges, stock market criticisms, and activist investors trying to break up the company. Born in Chennai, India, she graduated from Madras Christian College and then came to America to study business at Yale. Afterward, she worked for storied enterprises, including Johnson & Johnson, Booz Allen Hamilton, Boston Consulting Group, Motorola, and ABB, before joining PepsiCo in 1994.
When Indra became CEO of PepsiCo in 2006, she laid out a bold vision, Purpose with Performance, which had four goals: (1) return value to shareholders; (2) nourish people and societies; (3) minimize impact on the environment; and (4) cherish employees. Indra says, “It was incumbent to connect what was good for the business with what was good for the world.”
Every company has a soul, made up of all the people who comprise the enterprise. Employees do not want to park their persona at the door. They want to work for a company where they can bring their whole selves to work, a company that cares about the world.
To nourish people, Indra focused on advancing healthier eating and drinking habits by increasing zero‐ and low‐calorie options with innovation and marketing of good‐for‐you products like juices, teas, and oatmeal while retaining its traditional fun‐for‐you products like Pepsi Cola and Frito‐Lay chips. To balance PepsiCo's portfolio, Indra created a nutrition group led by food scientists that focused on reducing sodium and sugar in company products.
While her new mission was well‐received internally, the financial community was skeptical. Their focus was clearly on short‐term earnings, which to them meant soda and chips. One sarcastic portfolio manager asked Indra, “Who do you think you are? Mother Teresa?”
Indra faced her first major crisis in 2011 when Pepsi fell behind Diet Coke to the #3 position for the first time as market share slipped. Immediately, investors' knives came out, charging that PepsiCo had lost focus on its core business. In Indra's first 5 years, PepsiCo stock had grown only 3 percent, while Coke's stock rose 42 percent.
In response to investors' criticisms, Indra made a series of tactical changes without wavering from her vision. She invested $600 million more in marketing its soft drinks, tacitly acknowledging that Pepsi needed to refocus more on its core business. She also made a series of leadership changes, most notably replacing the head of North American beverages.
Her changes led to a steady recovery, and PepsiCo stock responded accordingly in 2012 and 2013. Then activist investor Nelson Peltz, owner of Trian Partners, saw the opportunity for a short‐term gain with an aggressive proposal to break up the company, spinning off its beverage business and merging its snacks business with Mondelez—a company he controlled. To pursue his plan, he purchased $1.5 billion in PepsiCo stock (1 percent ownership) and launched an active media campaign to tout his proposal.
After reviewing the proposal with her board, Indra turned Nelson down. She went on CNBC and made her case convincingly. She had a surprise supporter in Warren Buffett, who told CNBC, “If I owned control of PepsiCo, I'd keep both businesses. One of them (snacks) is a terrific business. The other (beverages) is a perfectly good business. Why break them up?” Then he added a dig at activists, saying, “I believe in running a company for the shareholders that are going to stay, rather than ones who are going to leave.”
Over lunch, I asked Indra, “Why are you so concerned about a 1 percent stakeholder?” She responded thoughtfully that many of her largest funds might be persuaded to back Peltz's proposal to garner near‐term gains. The following February, Nelson renewed his campaign with a 37‐page letter he sent over Indra's head to the PepsiCo board. Presiding director Ian Cook took the lead 10 days later, forcefully shutting off any interest in Nelson's proposal, writing, “Our focus is on delivering results for our shareholders, not new, costly distractions that will harm shareholder interests.” Two years later, Indra and Nelson settled.
In the end, Indra's tenacity, long‐term focus, and Performance with Purpose strategy carried the day. Her responses to the 2011 criticism led to 7 years of outstanding results. These were also reflected in PepsiCo's stock price, which climbed 78 percent, more than doubling archrival Coca‐Cola's stock gains of 31 percent.
Indra's story shows that, when results are lagging, the best leaders stay fully committed to their long‐term vision while making tactical adaptations. In the end you will win out, as Indra did, if you bet right and don't deviate from your goal. In making transformative strategic moves that anticipate societal changes, leaders need to stay on course, warding off or adapting to intervening events with tenacity and the courage of their convictions.
Leading through Crises
Inevitably, all leaders will face one or more crises during their time at the helm. Just as no mariner ever became an expert sailor in calm waters, leaders who try to avoid challenges won't be prepared to confront greater challenges when they are on top. Often there is no way to prepare for a specific crisis except having had prior experience in challenging times, but there are 7 lessons for leading in crisis that all leaders should follow (Figure 12.2).
Figure 12.2 7 Lessons for Leading in Crisis
Lesson 1: Face Reality, Starting with Yourself
Let's contrast Indra Nooyi during PepsiCo's crisis with General Electric (GE) CEO Jeff Immelt. Indra faced shareholder crises that she successfully navigated. She faced the reality of PepsiCo's lost market share in 2010 and made tactical adjustments by increasing soft drink marketing with an additional $600 million investment but never deviated from her purpose.
In contrast, Jeff Immelt never acknowledged his crises, which included poor acquisitions, performance failures, and a $15 billion undisclosed insurance liability. Rather than address its overdependence on GE Capital, Jeff instead quintupled the size of GE's consumer finance business, overleveraging its balance sheet. When the banks crashed in 2008, Jeff had to call President George W. Bush to get bailed out along with the banks.
Meanwhile, Jeff sold GE's insurance business in 2004 while keeping the long‐term liabilities but failing to disclose them, forcing his successor to take a $15 billion write‐off in 2017. He finally sold the remaining parts of GE Capital in 2015, taking a $16 billion loss and then using $50 billion to buy back GE stock at double today's price. He paid too much for high‐profile acquisitions like Alstom and Baker Hughes while selling off many of GE's traditional businesses at modest prices.
Under Jeff's leadership, GE investors lost more than $300 billion in shareholder value. He tried to turn GE into a high‐tech company, but high tech wasn't in GE's DNA. In the end, his initiatives were mostly shut down by his successors. GE's demise proved that the conglomerate model does not work because it lacks a central purpose that unites its employees and a clear strategy that leverages the company's unique strengths. It is built on financial engineering, not on a central purpose, strategy, and sound business practices that enable the company to grow its market position and long‐term shareholder value.
Ask yourself, when you faced disappointments and crises in your past, did you face reality? Did you look in the mirror and probe how your actions may have contributed to the crisis? Did you take full responsibility, or did you blame other people or external factors? You can learn from mistakes you make in early crises in leading when the stakes are lower so that you will be prepared to deal with larger crises when you take on greater responsibility.
Lesson 2: Dig Deep for the Root Cause
Oftentimes a new leader is called on to take over during a financial crisis. Xerox's Anne Mulcahy is an exceptional leader who led Xerox through the greatest crisis in its history when the company was facing bankruptcy. Thrust into a position she never anticipated, Anne demonstrated a remarkable ability to rally Xerox's 96,000 employees around a common purpose. Her empowering approach not only averted bankruptcy but also built a healthy culture for her successor, Ursula Burns.
The Xerox board's decision to promote Anne to CEO when her predecessor failed surprised her as well as everyone else. She explains,
It was like going to war, knowing there was so much at stake. This was a job that would dramatically change my life, requiring every ounce of energy I had. I never expected to be CEO, nor was I groomed for it.
What no one understood when Anne took the helm in 2000 was that Xerox was facing a massive liquidity crisis as revenues were declining, its sales force unraveling, and new product pipeline depleted. The company had $18 billion in debt and credit lines were exhausted. Morale inside the company had plummeted, and its share price was in free‐fall.
With just 1 week of cash on hand, Xerox's external advisers were recommending Chapter 11 bankruptcy filing to erase its debt payments. To make matters worse, Xerox's chief financial officer (CFO) was preoccupied with a Securities and Exchange Commission (SEC) investigation into its revenue recognition practices. It took a lot of digging, but eventually Anne uncovered the root cause of Xerox's liquidity crisis: its accountants booked future revenues without recognizing expenses.
Since this was at heart a financial crisis, how did Anne cope with it when she had no financial background? To ameliorate the gaps in her experience, she asked the treasurer's office to tutor her on finance.
As she uncovered the company's problems, Anne's purpose became clear: not only to save Xerox from bankruptcy but also to restore it to its former greatness. Her challenge was to unite the disheartened organization and get leaders throughout the company to step up.
Instead of endless meetings at headquarters, Anne visited customers to stem the tide of customer defections and field‐sales resignations. She told the sales force, “I will go anywhere, anytime, to save a Xerox customer.” Her customer engagement sent an important signal that solidified the Xerox field organization and restored customer confidence.
In October 2000, Anne candidly told investors that Xerox's business model was unsustainable. The next day, the stock dropped 26 percent. She notes, “This was my baptism by fire.”
My greatest fear was that I was sitting on the deck of the Titanic, and I'd get to drive it to the bottom of the ocean. Nothing spooked me so much as waking up in the middle of the night and thinking about 96,000 employees and retirees and what would happen if things went south.
Despite her doubts, Anne provided her team confidence that Xerox could survive, yet she was not immune from uncertainty and stress.
One day I came back from Japan and found it had been a dismal day. Around 8:30 pm on my way home, I pulled over on the Merritt Parkway and said to myself, “I don't know where to go. I don't want to go home. There's just no place to go.”
Have you ever felt like that? In my experience, feelings of loneliness and despair are quite common for leaders, but most do not have the courage to admit it. In times like these, you need the support of your colleagues. Anne credits an uplifting voicemail from her chief strategist in helping her come back inspired the next day.
When the company's external advisers argued that Xerox should prepare for bankruptcy to erase its $18 billion in debt, Anne exploded, “Bankruptcy's never a win. I'm not going there until there's no other decision to be made. Our people believed we were in a war we can win.”
Anne did win in the end. She staved off bankruptcy by cutting billions in operating expenses and reducing Xerox's bloated staff by 38,000 employees without touching research and development (R&D) or field sales. In launching 60 new products with new color and digital technology, she restored revenue and profit growth.
Lesson 3: Engage with Frontline Teams
In 2017, when Dr. Peter Pisters was named president of The University of Texas MD Anderson Cancer Center, the nation's leading cancer institute, he inherited an organization with morale at its lowest point following two years of financial losses. MD Anderson faced an unprecedented exodus of highly talented faculty members, who left for a variety of reasons including feeling pressure to increase their productivity to fund research.
Returning to MD Anderson after serving as CEO of Toronto's University Health Network, Peter recognized he had to express confidence, humility, and sincere interest in listening and learning.
On his first day as president, he sent a message to the entire organization: “I'm willing to unlearn and relearn through a listening and learning tour, where I can learn from you what is great about our organization and where you believe my attention and our resources need to be focused.” He explains,
I visited 200 units in our organization from the frontlines to topflight talent, making rounds in the hospital at night and weekends. Reaching out to frontline people and seeing notes from patients to their housekeepers gave me first‐hand knowledge of the organization.
To improve executive leadership's dynamic throughout the institution, he began meeting with top leaders on a regular basis. Peter says,
The visibility onsite in operational units and face‐to‐face meetings helped rebuild the trust. We established a quarterly leadership meeting, leading off with a patient's story, after which everyone is wiping their eyes and understands with clarity what our purpose is and why are we here. Getting out into the organization on a very regular basis builds the trust that's so important to engineer changes.
The effectiveness of Peter's efforts was confirmed in the biennial employee engagement survey, which had a record participation rate of 89 percent and showed double digit increases in engagement, 6 percent reduction in burnout rates, and stunning 98 percent alignment with MD Anderson's mission.
Lesson 4: Never Waste a Good Crisis
On Sunday morning, September 14, 2008, Penny and I were in Newport, Rhode Island, celebrating my birthday, when I joined a Goldman Sachs (GS) board call at 7:30 a.m. Though I was aware of concerns about Lehman Brothers' financial viability, a Sunday meeting was highly unusual. Goldman president Gary Cohen opened the meeting, saying Lehman would go under that day unless last‐minute government efforts could save it. He also indicated that other overleveraged financial institutions might also fail in the coming days.
Gary said Goldman was in good shape due to the large amount of liquidity it had built up to prepare for external financial shocks. That was due to Goldman top management's concerns about instability in subprime mortgages that led to a decision to exit the subprime market and increase liquidity by $100 billion. Those actions enabled Goldman to navigate the greatest financial crisis since 1929 virtually unscathed, aided by Warren Buffett's $5 billion investment.
Were Goldman's leaders smarter than everyone else, or just lucky? Neither. Goldman CEO Lloyd Blankfein, himself an exceptional risk manager, led his team brilliantly through the crisis, as did Jamie Dimon of J.P. Morgan. Both firms bounced back quickly in 2009. In the aftermath of the crisis, Goldman faced intense criticism for its high compensation practices and engaging in a controversial mortgage transaction that led to an SEC lawsuit, Congressional hearings, and negative media stories in spring 2010.
Rather than acting defensively as many leaders would, Lloyd formed the Business Standards Committee (BSC), which included 150 senior partners and was led by GS's vice chair. I was asked to chair a four‐person board committee to oversee these efforts. This effort involved a top‐to‐bottom examination of all of GS's business practices, including its committee structures and approval mechanisms, as well as the transparency of communications and professional training. The BSC report, released in January 2011, included 39 recommendations to improve the firm's practices. By being proactive, Lloyd preempted external intrusion and used the crisis to make Goldman a more effective firm in serving its customers.
Lesson 5: Get Ready for the Long Haul
Only 8 months into her tenure as CEO, Corie Barry faced the COVID‐19 pandemic, which threatened Best Buy's in‐store and in‐home business model. Realizing the pandemic could last a long time, she called her team together and formulated three principles for decision‐making through the crisis:
- Make safety of employees and customers Best Buy's highest priority.
- Avoid layoffs as long as possible, even if stores were forced to close.
- Make decisions based on long‐term value creation.
Corie announced in mid‐March that retail operations would be limited to curbside pickup with no customers permitted in its stores, as Best Buy closed 1,026 locations. In addition, Geek Squad's in‐home services were suspended, and corporate employees worked from home. A month later, she furloughed 51,300 employees, approximately 20 percent of its workforce. She notes, “Our goal was to come out the other side of this pandemic a vibrant company.”
We held off long enough to bridge employees until the government stimulus kicked in, so we weren't leaving them high and dry; however, I could not offer them any certainty about when the furlough might end. We made the decision for the health and safety of our customers and employees.
Corie and her board also took 50 percent pay cuts, and her direct reports took 20 percent cuts. To preserve cash in case the crisis worsened, Best Buy drew down its entire revolving credit facility of $1.25 billion, in addition to its $2 billion cash on hand. To preserve cash, she also suspended share repurchases, reduced incoming merchandise deliveries, extended vendor payment terms, reduced promotional spending, and ceased capital expenditures.
In the early stages of a crisis, leaders never know how long it will last, nor do they understand its full implications. By November 2020, Corie realized that Best Buy had not only successfully navigated the crisis but also accelerated its new business strategy of combining in‐store merchandising, online purchasing, and in‐store pickup. Best Buy discovered the competitive advantage of its Geek Squad could be expanded through remote service as well as in‐home. By preparing for a long‐term downturn and broadening its buying options for customers, Best Buy gained market share through its crisis management.
Lesson 6: In the Spotlight, Follow Your True North
CEOs and company leaders are just one incident away from being thrust into the spotlight. That's what Starbucks chair Howard Schultz and CEO Kevin Johnson learned when two Black customers were arrested in its downtown Philadelphia store, and a video of the incident went viral. Their charge? Trespassing—or as they explained, waiting to meet a friend. Their arrest violated Starbucks' basic value of treating everyone equally. Speaking with Gayle King on CBS television, Howard said,
When I first saw the video, I was sick to my stomach. I was embarrassed and ashamed. This is the antithesis of what Starbucks stands for. It is undeniable that I am personally responsible. We need to address it transparently and honestly.
Later Howard said he asked his manager, “If those two young men were White, would you have called the police? To her credit, she said, ‘Probably not.' Once I knew that, I had a moral obligation to tell the truth.”
No doubt Starbucks was in the wrong here, but Howard followed his True North and reaffirmed Starbucks' values. He went immediately to the scene, apologized to the men, made a financial settlement, and acknowledged his accountability publicly. Starbucks then closed all 8,000 of its U.S. stores for a day of racial‐bias training.
By taking full responsibility for the incident followed by specific actions, Starbucks was able to minimize the damage. Obviously, it would have been better to avoid this situation, but people make mistakes. When they do, your job as a leader is to take responsibility and initiate corrective action immediately.
Lesson 7: Go on Offense, Focus on Winning Now
Emerging Leader: Jenn Hyman
Jenn Hyman did not build the iconic Rent the Runway (RTR) brand by being timid. Intelligent and confident, she cofounded the company to solve a problem nearly every woman has encountered: “a closet full of clothes, but nothing to wear.” Over the course of a decade, Jenn raised more than $340 million and recruited celebrities like Beyoncé and Gwyneth Paltrow as supporters and board members. Eleven years in, the company's subscription service was growing more than 100 percent year over year.
Then COVID‐19 hit, and RTR faced rapid revenue declines. As Jenn explains, “You don't really need to have a new outfit every day if you're sitting at home in your pajamas.” She acted quickly, cutting everything from capital expenditures to inventory, cutting budgets, and reducing headcount by 40 percent. She then raised $100 million in debt and equity to ensure the business could continue operating regardless of how long the pandemic endured.
Transparency helped Jenn earn trust during an uncertain period when she was forced to make difficult choices to stabilize the business. She says,
I had to communicate that we were in a crisis. We were reinventing our business model under the hardest external conditions the company has ever experienced. Crisis situations present an opportunity to flex a new kind of leadership muscle and learn new skills—how to deeply connect, motivate and inspire, develop resilience and grit, and ruthlessly prioritize with fewer resources.
Jenn articulated to her team her resolute belief that Rent the Runway's “Closet in the Cloud” would be even more resonant in a post‐COVID‐19 world. She says, “Once we made the cuts needed to survive, we used this time to transform the business and ensure we came out stronger than before.” She laid out a bold strategy to achieve this:
- Reinventing RTR's core subscription model in favor of tiered pricing customized to consumers' usage
- Using demand downturn to restructure operations and execute process improvements to strengthen efficiency
- Launching a resale vertical, adding revenue, and creating a new funnel for attracting new subscribers
- Shifting its product acquisition toward capital light channels where designers have more of a partnership model with RTR
Jenn anchored her strategy in the original mission of the business but envisioned post‐COVID‐19 as “a second founding moment” for the company:
Fashion is an undemocratic industry in which only 1 percent of people could access the things we aspire to. Our mission is to say to women, “You can have whatever you want.” That was a galvanizing idea for our founding team. There was a rebellious spirit of: we're going to take this elitist industry and turn it on its head. We weren't going to let a once in a 100‐year pandemic destroy this vision.
By affirming its mission of democratizing fashion for everyone and creating a more competitive business model, Jenn used the pandemic to RTR's advantage. In October 2021, Jenn took RTR public, becoming the first company to make an initial public offering (IPO) with a female founder–CEO, chief operations officer (COO), and CFO.
Bill's Take: Crisis Is the Real Test for Leaders
As a leader, you will inevitably face a crisis during your career that becomes the defining moment of your tenure. When you are following a plan and things are going well, it is relatively easy to perform and get people to follow your lead. When the crisis comes, whether from internal issues or external sources, your leadership is truly tested.
In a crisis there is no playbook about what to do, nor are the root cause and its implications clear. That's when you need to pull your team together, face the crisis objectively, consider worst‐case possibilities, and develop a flexible plan to navigate it.
Throughout my career I have faced many such crises and have observed how differently leaders handle them. It is surprising how often people we thought were strong leaders in good times fail to step up to the challenges. That's when the real leaders take charge to bring people together to find a way through.
Crisis reveals courage. Leaders who are more concerned about external appearances may lack the courage to take decisive action when the way forward is unclear because their fear of failure takes hold. Courageous leaders don't worry about looking good; they just want to rally people to get through it. They are willing to face all obstacles and lead people to a better place.
As an emerging leader, you need to test yourself in lower‐stake situations to prepare for greater responsibilities when the stakes are higher. The only way you can develop courage is by testing yourself in the most difficult circumstances. My advice is: seek these opportunities; don't hold back from them. When greater crises emerge later in your career, you will be prepared not only to lead your team through them but also to have the courage to make bold moves that enable you to emerge as a winner.
Idea in Brief: Leading in Crisis
Recap of the Main Idea
- Crisis is the real test for every leader.
- All leaders inevitably face crises during their time at the helm.
- To navigate through a crisis, you need to be unwavering in your vision with deep understanding of how things work, summon the courage to lead your team through the storm, and be flexible and adaptable in your tactics.
- The 7 lessons to follow in a crisis are:
- Face reality, starting with yourself.
- Dig deep for the root cause.
- Engage with frontline teams.
- Never waste a good crisis.
- Get ready for the long haul.
- In the spotlight, follow your True North.
- Go on offense, focus on winning now.
Questions to Ask
- Ask yourself, when you faced crises in your past:
- Did you face reality?
- Did you look in the mirror and probe how your actions may have contributed to the crisis?
- Did you take full responsibility?
- Or did you blame other people or external factors?
- Envision a future crisis. How would you respond? Do you have the right team to navigate it? Do you have the right purpose and strategy to use as your destination?
Practical Suggestions for Your Development
- Be transparent with your team about the challenges your organization faces and encourage them to contribute to solutions.
- Meet with employees, customers, and advisers to understand the problems and hear different perspectives.
- Develop decision‐making principles and long‐term plans to navigate the crises.
- Use the crises to transform your business and your organization to enable you to strengthen your market position for the future.