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Published: May 29, 2007

 
 

The Era of the Inclusive Leader

Inclusiveness, Engagement, and Involvement
With the board of directors more deeply engaged and owners actively involved in governance and strategy, inclusiveness is the most critical new attribute for the CEO, starting with the ability to take into account the concerns and suggestions of investors, employees, and government. Given the unrelenting pace of change in global business today, stakeholders may see threats and opportunities sooner than the board and management team do. Listening to stakeholders increases the likelihood that a company will act quickly and effectively. Fortunately, most stakeholders care primarily that their concerns be heard and addressed, not that their specific suggestions be followed. Investors, for example, are satisfied with business improvements that significantly increase a company’s value and generate attractive returns even if they had suggested different means to increase value.

Bob Nardelli’s dismissal from Home Depot, for example, was driven by his failure to hear and respond to investors’ concerns — very much the actions of an imperial CEO. These concerns included the erosion of the company’s competitive position against its chief rival, Lowe’s (culminating in Nardelli’s refusal to even publish same-store sales comparisons), and his strategy of expanding into a lower-margin, nonretail business, as well as his refusal to answer shareholder questions. In contrast, Temple-Inland CEO Kenneth Jastrow listened to the concerns and suggestions expressed by Carl Icahn and other investors, and, in response, crafted a transformation plan that breaks the corporation into three focused companies (manufacturing, financial services, and real estate). The restructuring should not only strengthen each of the three businesses, but also create better opportunities for employees. It is already generating higher returns to investors.

Transparency about results is an indispensable element of inclusiveness. Several CEOs have been dismissed in the last four years in the U.S. because of inadequate transparency — with regard to both the board and shareholders — about their compensation. During 2006, the primary compensation transparency issue was backdated stock options, which resulted in the dismissal of 0.7 percent of the CEOs of North American companies, including such long-term successes as William McGuire of UnitedHealth Group and Bruce Karatz of KB Homes.

Inclusiveness is valuable only if a CEO can effectively mobilize his or her company to identify and seize the best opportunities wherever they appear. Inclusive CEOs recognize their own strong points and limitations, and then surround themselves with a highly qualified management team and with trusted advisors whose skills round out their own. Opportunities can present themselves as operational improvements, new technologies, sales or marketing improvements, major transactions, cost reductions, and prospects for growth — and no CEO is equally effective in all these areas. Restricting themselves to actions in their comfort zone means that CEOs will remain effective only as long as the best opportunities fall there.

Including board members in the development of strategy — not merely asking them to approve a strategy developed by management — is the best way to gain the board’s confidence and buy-in. It’s an effort well worth making: Board backing is invaluable to CEOs who may face investor challenges while waiting to see if a new strategy will pay off. GM’s Rick Wagoner, for example, benefited from such support when Kirk Kerkorian and Jerry York challenged the pace of GM’s transformation. But CEOs need to understand that such support can come only after meaningful debate among board members who may have different perspectives on the facts and different judgments. Conflict in these moments will be increasingly common; inclusive CEOs will welcome the debate.

The board of directors, in turn, must embrace deeper engagement. Because of intensifying global competition and ever-higher expectations about corporate performance, companies now need the board of directors to proactively offer suggestions, to debate threats and opportunities, to push back aggressively if management is heading in the wrong direction, and to make informed judgments. Deep engagement requires directors to participate in dialogues with customers, channel partners, suppliers, and employees — not different in concept from the traditional role of the ideal director, but completely different from the usual practice. These dialogues in turn require directors to devote time beyond the quarterly board meetings, probably earning compensation greater than what they receive today.

 
 
 
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Resources

  1. Eleanor Bloxham, editor, Corporate Governance Alliance Digest: News and analysis on corporate governance. Click here.
  2. Ram Charan, “Boardroom Supports,” s+b, Winter 2003: Directors play a crucial role in selecting, training, and nurturing a new CEO. Click here.
  3. Rakesh Khurana and Katharina Pick, “The Social Nature of Boards,” Brooklyn Law Review, vol. 70, no. 4, Summer 2005: Unearths the relationship between board makeup and succession decisions.
  4. Chuck Lucier, Paul Kocourek, and Rolf Habbel, “CEO Succession 2005: The Crest of the Wave,” s+b, Summer 2006: Last year’s study heralded the end of the era of the imperial CEO. Click here.
  5. Ira M. Millstein and Paul W. MacAvoy, The Recurrent Crisis in Corporate Governance (Palgrave Macmillan, 2004): In seeking stronger governance, the authors make the case for an active board of directors led by an independent chair to take responsibility for corporate management.
  6. Michael Schrage, “Ira M. Millstein: The Thought Leader Interview,” s+b, Spring 2005: Reform board structures or accept more value destruction, the corporate governance doyen warns. Click here.
  7. For more articles on strategy, sign up for s+b’s RSS feed. Click here.
 
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