9

A Higher Ambition for Business

MOST ORGANIZATIONS, in our experience, are able to realize only a small fraction of their potential. They leave much of the energy and talent of their people untapped. A large measure of the human energy they do unleash is dissipated in organizational friction, whether within individual work units, vertically across layers of management, or horizontally across functional, business, or geographic boundaries.

Despite dramatic gains in information processing and communications technology over the past two decades, the gap between performance and potential, in our observation, is actually enlarging. Growth in scale, global reach, business scope, and knowledge intensity is increasing overall organizational diversity and complexity. Simultaneously, the strengthening market for corporate control and the intensifying pressures for short-term results have made managers more inclined to do what is expedient rather than in the long-run interest of the institution.

The CEOs we have described in this book are bucking these trends. They have been crafting a way to lead and manage that, even in the face of these pressures, can achieve superior results in both economic and social terms. Their simultaneous embrace of these dual objectives is precisely why they are able to succeed. By attending seriously to the social dimension, they can create an organizational model that is both “higher energy” and “lower friction,” which allows them to succeed in economic terms. By succeeding in creating economic value, they can invest over time in ways that deliver win-win outcomes to all their key stakeholders and sustain the institution’s social fabric.

Let us recap the highlights of this higher-energy, lower-friction model.

• Higher energy.In chapter 3, we described how higher-ambition CEOs are able to forge a strategic identity for the company that creates greater meaning for people in their work and that keeps them connected with the company’s core values and heritage. In chapter 4, we then described how these leaders are able to build energy and excitement about achieving performance excellence. In chapter 5, we saw that being part of a community of shared purpose can create a connection to peers and a sense of personal respect that enable people to bring their whole selves to work. In chapter 6, we highlighted how clarity of priorities and sustained focus create a context for individual initiative. Finally, in chapter 7 we saw how the strong commitment of higher-ambition CEOs to the development of down-the-line leaders creates, in turn, a higher level of commitment from these individuals to the long term success of the institution.
• Lower friction.In response to the typical dysfunctions in vertical relationships—conflicting priorities, inconsistent resource allocation, sandbagging of budget targets, routinized performance reviews, and constricted upward communication—these CEOs and their organizations spend a disproportionate amount of time: making the direction and priorities clear and consistent; instilling an approach to performance management that shifts the balance from external controls and extrinsic rewards to harness greater levels of peer- and self-governance; and creating channels for vertical communication that increase ongoing learning. In chapter 5 we saw that, in response to the typical challenges in collaborating horizontally across functions, geographies, and other boundaries, these leaders create a community of purpose out of diversity, reduce horizontal friction, and increase the capacity to manage conflict productively. In chapter 6, we noted the emphasis on fairness and inclusion of key stakeholders in difficult decisions. In chapter 7, we saw how the level of the CEOs’ personal investment in aligning their senior team and in addressing conflicts directly can enable more unified leadership from the top, reinforced and amplified through an extended leadership group woven together and aligned through a network of personal relationships and high levels of involvement. In essence, these CEOs are creating higher trust systems; trust, in turn, is a huge contributor to reduced friction.

Realizing the Organization’s Full Potential

The process of building a higher-ambition institution is an organic, fluid process informed by ongoing organizational and individual learning. The leaders profiled in this book constantly sought to develop the enterprise, to help it evolve and become a higher-ambition firm, just as they themselves grew and deepened their understanding of what they were trying to do and how to do it.

Thirty years ago, the quality movement overturned the prevailing wisdom that cost and quality were trade-offs. Through a different approach to management, the quality movement was able to close the gap between reality and potential performance and demonstrate that “quality is free.” By eliminating waste—the hidden costs of nonquality—quality management could deliver superior performance on multiple dimensions simultaneously: quality, cost, and time.

Higher-ambition CEOs, we assert, are demonstrating something comparable in the realm of leadership. Through integrated, mutually reinforcing principles and practices, they are showing an ability to realize more of the organization’s full potential. Where quality management was concerned with meeting a predefined standard, higher-ambition leadership raises aspirations and defines new possibilities, beyond any benchmark. Just as eliminating waste enables greater quality, faster cycle time, and lower cost, so higher ambition leadership enables superior performance on both economic and social dimensions through greater energy and reduced organizational “friction.”

We see these CEOs as part of a vanguard that offers a fundamentally better way to lead large, global, complex institutions in the twenty-first century. As we noted in the introduction, the CEOs we spoke with continue a long tradition of institution builders—such as David Packard and Bill Hewlett at HP; Herb Kelleher of Southwest Airlines; and Matsushita Konosuke, founder of Panasonic, among others—who saw profit as an outcome of good management, as opposed to the sole goal of business. The contribution of the leaders in this study is that they have found a way—a set of principles and practices—that enables successful institution building even in the face of headwinds from capital markets, rapidly changing technology, and unrelenting global competition from sources not experienced or envisioned by institution-builders of the past. We also found that these principles and practices apply for a wide range of businesses and across a spectrum of industries, whether based in India, Europe, or the United States.

We do not claim that these CEOs have perfected this leadership approach, nor that it is sufficient to ensure sustained success. These leaders would be the first to point out the relentless challenges of market dynamics, technological discontinuities, and competitor initiatives.

But we do assert that the world would be a better place if more CEOs led firms in this way. We believe that business institutions play a fundamental role in ensuring that our societies are both prosperous and healthy, creating both economic and social value. The CEOs we interviewed revalidated the vision of Edwin Gay, founding dean of the Harvard Business School; the purpose of business, he believed, is to do “well and good.” A century later, we believe this vision still holds.

Leif Johansson elaborated on one particularly distinctive contribution that companies can make to society:

Name any nationality, any background, any religion—we have them at Volvo. We see them and treat them as colleagues. We, as companies, have a great opportunity to contribute to the development of societies, because we have a much simpler case of integration than most societies do and most political leaders are faced with. We have a really good way of measuring whether we actually succeed at working in a diverse group. And we can celebrate our success, or we can say we did not succeed.

In that way, as Johansson suggests, corporations can help build a global community.

What Can Be Done?

Our focus throughout this book has been on the leader, in the belief that many more leaders could and would choose to pursue this approach if they could clearly see their way to doing so. For these practices to become the norm, however—both accepted and expected—substantial changes need to occur in two other relevant arenas: boards of directors and business schools. Additionally, measures that encourage shareholders to take a long-term perspective on value creation could potentially accelerate the shift.

Reconceive the Role of the Board of Directors

Many of the leaders in our study highlighted the importance of their relationship with the board of directors to their efforts in building a sustainable institution. In most cases, the CEOs felt fortunate to have supportive boards, which understood and embraced the long-term, transformative nature of their leadership task. When CEOs had taken dramatic, bet-the-company moves (for example, Sands and Davies’ Christmas-time acquisition of Korea First Bank), they spoke of tight alignment with the board as a critical enabler.

However, we would observe that many CEOs are not this fortunate. We have seen too many instances where the board’s predominant focus on financial returns or loss of nerve in the face of predatory hedge-fund share purchases derailed the CEO’s institution-building work or, in the extreme, led to the CEO’s ouster, despite a strong multiyear track record of improving performance and transforming the company’s culture.

We think fundamental change in the role and work of the board is needed if higher-ambition leadership is to become the norm. The failures of companies like Lehman Brothers, Bear Stearns, and Country Mutual during the economic meltdown of 2008, and Enron and WorldCom a decade earlier, point to an uncomfortable truth: boards do not pay sufficient attention to the CEO’s values and purpose or the kind of institution their CEO is building.

Based on our research and work with a variety of companies, we believe that boards must more consistently:¹

• Hold CEOs accountable for achieving short-term performance targets in a way that builds long-term success, and develop a strong social institution that delivers value to all stakeholders, not just the shareholder.
• Insist that their CEO and top team, working in partnership with them, articulate a higher purpose and related performance goals, and a set of values that provides a fundamental compass to ensure that the enterprise stays on track. Too many boards restrict their work to financial reviews and acquisitions and not to strategy and, in particular, purpose and values.
• Manage CEO succession with explicit attention to candidates’ capacity for providing higher-ambition leadership.
• Provide oversight of how effectively the purpose, goals, and values are realized throughout the organization. This requires the adoption of what Mike Beer has called a “learning and governance process” that ensures transparency and voice from deep in the organization.² For example, as we have seen, Becton Dickinson’s Ludwig has repeatedly used a team of high potential employees to learn about his organization and culture. He has also voluntarily shared the unvarnished truth he learned about his company’s strengths and weaknesses with his board members and kept them informed about the progress of the corporate transformation.

Develop an Integrative Curriculum at Business Schools

A degree in business, particularly an MBA, has become a virtual necessity for those seeking a leadership position at the top of any large corporation or an influential position in consulting, investment banking, or private equity.³ Business schools form the assumptions of their students about the purpose of business and “good” leadership and management practices. Correspondingly, their graduates’ practice of management shapes business schools.⁴ Rakesh Khurana argues persuasively that the original high aspirations of business school founders like Gay, quoted earlier, are as yet unfulfilled. Management, unlike medicine or the law, has yet to become a profession characterized by standards of practice that are motivated by moral and social purpose; those standards would bring to management and business institutions greater legitimacy in the eyes of society.

It seems clear to us that the leaders in our study have broken free of the assumption, perpetuated by many business schools, that the purpose of business is solely to increase shareholder value. Instead, they have been guided by a vision similar to that of Gay in shaping the development of their own leadership principles and practices.

How should business schools incorporate what our CEOs have learned into their curricula? Unless they redesign their courses, the wisdom our leaders developed is unlikely to become the norm and the schools are unlikely to create higher-ambition leaders in any significant numbers. As the start of a broader discussion and debate on curriculum design, we return to a fundamental principle that we have shown underlies the practice of higher-ambition leaders—integrity.

By integrity, we do not mean more courses about right or wrong or the legal sanctions that follow ethically questionable business practices, though these are also important. The integrity that we saw our CEOs display had a lot more to do with integration—the integration of the principles and practices represented by our chapter headings into a coherent, systemic approach to building a higher-ambition company. Starting with the development of the firm’s strategic identity, the CEOs proceeded to develop practices for performance management, community building, leadership development, and sisu personal leadership that were mutually reinforcing and tied to their fundamental human values. These practices represented an integrated, coherent whole; the CEOs adapted the practices to enable a “simultaneous solve,” a way to create both economic and social value. And their own identity as leaders continued to evolve based on self-reflection and the will and skill to learn from their experience. These were not isolated practices developed by the strategy or human resource departments. Their architecture sprang from the leaders themselves.

We observe as teachers and/or former students of business management that most MBA curricula do not integrate the multiple disciplines of management. Courses are stand-alone affairs. Students learn about strategy and finance in isolation from each other and from other courses about operations, organizational behavior, or marketing, for example. When students take a course in leadership or ethics, it is disconnected from courses that teach the hard stuff of finance. What schools need is a curriculum that teaches students these subjects and perspectives in relationship to each other and in the context of building a higher-ambition institution.

Even when business schools attempt to integrate technical subjects, as several have done, that integration is still devoid of a definition of corporate purpose and values, something on which faculty from diverse functional disciplines such as finance and organizational behavior would be hard-pressed to agree. Schools base academic advancement on peer review and recognition, which pushes faculty to become discipline-centric, making it virtually impossible for them to agree on the values and purpose of business and how to integrate and adapt their respective technical subjects to each other. That is the challenge.

Fresh thinking will be required from many quarters. Particularly promising, in our view, is engaging higher-ambition leaders themselves to help reshape business education. Examples are Ken Freeman, former CEO of Quest Diagnostics, as the dean at Boston University’s School of Management and Bill George, former CEO of Medtronic, now at Harvard Business School, who has refocused leadership development on student self-reflection and clarification of personal values.

Encourage a Long-Term Shareholder Perspective

Markets are powerful catalysts for economic growth. They release animal spirits that engender entrepreneurship and economic value creation. But, as the economic meltdown of 2008 once again taught us, markets can also encourage speculation and an exclusive focus on short-term gains, while discouraging investment in social value creation. The contribution of the CEOs we profile here is that they found a way to maintain a long-term perspective of investment and institution building in the face of pressures for short-term results.

We would be foolish to believe that the higher-ambition leadership our CEOs demonstrated can become the norm without changes in the context that shapes investor behavior. In a governance model that gives primacy to shareholders, we think it important to find ways to encourage shareholders themselves to take a long-term perspective on value creation. In a thought-provoking study, Danny Miller and Isabelle Le Breton-Miller have shown that family-controlled businesses that take a longer-term shareholder perspective and are less subject to the forces of the market for corporate control outperform public companies in shareholder value creation.⁵ They found that one of the main reasons is the greater commitment of the leaders of these businesses to a multi-stakeholder approach and a greater motivation to leave an enduring legacy. The leaders build both economic and social capital, developing stronger long-term relationships with their employees, suppliers, and customers. They also control risk—for example, avoiding too much debt or acquisitions that could jeopardize the firm—yet are able to act decisively at moments of discontinuity. All this is enabled by a shareholder perspective that is strongly weighted to the long term.

In public shareholding contexts, such as in the United States and United Kingdom, where there has been a significant increase in the weight of short-term versus long-term shareholding, we think it critical to examine the issue. We do not offer specific solutions, but encourage research and discussion of potential ideas, such as those proposed by the Aspen Institute’s Business and Society Program, that might lengthen the time horizon of investors or increase the voice of long-term shareholders, as a way, in turn, of extending the time horizon of the board and of business leaders.⁶

The focus of this book has been on a distinctive approach to leadership. We learned from CEOs about the aspirations, principles, and practices that, in combination, allowed them to achieve a higher ambition. We were inspired by the leadership stories we heard and believe that employees, investors, customers, communities, and society at large will benefit if more leaders—a significant majority—adopt higher-ambition leadership.

Ultimately, if higher-ambition leadership is to become the norm, societies have to develop the institutional context—standards, structures, policies, incentives, and cultural understandings—that shape leadership and organizational behavior.⁷ We urge higher-ambition leaders to help spread their approach, mentor other leaders, and reshape the role of the boards where they have influence; researchers and educators to help develop a deeper understanding of higher-ambition leadership and to use those insights to reshape business education; and policy makers to consider the ways they can help reshape the institutional context.