Leadership lessons and the economic crisis
Predictably, one result of the economic crisis is the cry for a new style of leadership. In thinking about what qualities are needed as we move forward, it’s helpful to consider where we’ve been and what the times will require from the next generation of leaders.(originally published by Booz & Company)
Since September 2008, the leadership and management practices of financial institutions have been widely discredited. This has precipitated new thinking about organizations and leadership within financial-services — and in business in general. The new leadership styles that prevail, and associated changes in management and governance structures, will shape the development of business institutions generally. It isn’t yet clear what norms and values the new industry leaders will champion, but the pressures on them are evident, and the history of managerial culture suggests that we will see some major transitions, and some unexpected ones.
Popular conceptions of what constitutes good business leadership will extensively influence this new style. Between the early 1980s and 2001, the “leader as hero” was a celebrated model. Exemplars like Jack Welch at General Electric Company and Sir John Browne of BP shook up old organizations that were weighed down by processes and committees, and, shining clear light from the top, transformed their performance. But after 2001, the dot-com bust and other factors pushed this individualistic model of leadership off the pedestal. That downturn revealed the flaws, failures, and even disgraceful conduct of some noteworthy individualistic leaders, including those of Enron, WorldCom, Tyco, and Parmalat.
The “leader as hero” model was superseded by enthusiasm for the concept of “leadership teams.” Better performance, the theory ran, came from combining a variety of management talents and styles into a single cohesive and mutually supportive group. In 2006, Booz & Company’s annual study of CEO succession trends was titled “The Era of the Inclusive Leader.” Life at the top became more touchy-feely. The team-based model was well suited to a generation of CEOs who were less hierarchical, less schooled in the military, and more collaborative by inclination than those who preceded them.
Now we face another transition. The economic crisis and the entanglement of so many trusted financial-services firms have once again shaken our confidence in the prevailing leadership style. With apologies to Winston Churchill, never in the field of commercial business has so much been damaged for so many by so few. The failure of expectations has been widespread, severe, and rapid. That discredits past leadership practices — but what will replace them?
The quickest impact on business leadership in business will probably be felt at the board of directors level. Driven by fear of the risks that have been exposed, board leaders will start by changing their own behaviors. Directors want more visibility into corporate practices and risks, and more data to directly verify more dimensions of corporate performance. They feel their positions are much more on the line, and they are starting to ask for the staff and capabilities to do more checking up, probing more deeply even in areas historically left to management.
Boards will revise formal governance structures, adjust team composition, and reconsider the personality and skills of the people placed in top positions. As always, they will respond to prevailing interpretations of recent history. In seeking a new form of leadership, boards will start with the oldest truths: Those in authority must have foresight, and they must lead by example. They must motivate and inspire on a moral basis, through aspiration as well as rewards and punishments. It is precisely this calm, considered, and ethical leadership, required to lead large numbers of people when the economy is tough, that seems to have been in such short supply recently.
Guided by their boards, many institutions will recommit to public responsibility. Trust and simplicity will become major selling points. Enterprises in banking or in business in general industry that can command greater trust or offer closer connections with their customers will enjoy substantial opportunities. There could be a renaissance of institutions with a tradition grounded in cooperatives or member-owned organizations, of which there are many in Europe (including some, like Rabobank Group in the Netherlands, that have weathered the storm in financial services reasonably well). As corporate governance writer Marjorie Kelly has suggested, a broader scope of alternatives to the shareholder-centric corporate model will be tested, and some will win favor.
Many companies will also need to find structures and processes, both formal and informal, that challenge thinking and retain productive dissent. The leadership team form will be left intact, but its potential will be tapped in new ways. Teams will be populated with more diverse personalities, whose challenge will be to work together to set some new directions and renew moral leadership while paying closer attention to day-to-day execution.
These leadership team members will have to learn to recognize the power of the unknowable. We have found out the hard way that conceptual financial models, which seemed for a time to provide a new means of rapid growth, can actually obscure the underlying realities of the economic system. We now have some catching up to do as we recognize the failure of these models to comprehend and control the complexity and interdependence of our world. Leaders in financial services might do better if they understood that we human beings are all limited, that our best course is to accept that we are intrinsically prone to get things wrong, that we need to keep our wits about us, and that to succeed in the arcane world of finance, we need most of all to stay grounded in day-to-day reality.
We must promote leaders for whom doubt and uncertainty are simply a part of the human condition, not the enemy of action or a sign of weakness. They must tolerate questioning and doubt within their own organizations, and apply it productively themselves. We must make it an organizational habit to regularly challenge even what seems to be most obviously true, to remain open to different types of data, especially including direct experiential and “feet on the street” observations. I wonder what would have happened if the boards of the banks had visited the neighborhoods whose homes they were financing.
The makeup and management of executive teams may have to change. The evidence is clear that the most productive teams contain diverse people. Teams composed of people from a range of backgrounds, including prosaic ones, outperform teams composed entirely of the so-called best and brightest, for example. The dynamics of team interaction often make it hard to preserve diversity, even though it is diversity that makes the team productive. The bright guys want to hire more bright guys, for example. Moreover, in a typical leadership team, the variety of personality types tends to make the team itself short-lived. People who want to get things done (and there are a lot of them in business) drive out those who want to stop and debate or who value perspective and understanding as much as action. As those latter individuals go, so goes the ability to challenge. And those who shrink from conflict or believe that only harmonious teams can be effective will also disapprove of the kind of open dissent that encourages better leadership and decision making. That is a different definition of productive teamwork than has been applied in the past.
If people recognize this, we should see improvements in the organization and management of executive teams and boards. In composing teams, boards will tend to favor a diversity of characteristics, and they should guard against the drift toward homogenization. Further, power and control will be separated more actively and structurally. There may be a segregated, internal governance structure in some organizations — beyond the CEO’s control, but reaching down into the company — whose role will be to audit and hold to account those with primary decision-making authority. Rather than accepting conventional wisdom and existing policies, they will need to look for disconfirming facts and contrary evidence.
This type of governance structure is made even more necessary by the fact that only 25 percent of new CEOs today come from outside the company. Consequently, the outsider’s perspective is not coming from top executives. Many corporate leaders will thus need organizational innovations that provide visibility and challenge to management at quite detailed levels. The financial control function at most companies is an excellent and well-established example; this oversight arrangement can be extended to other corporate functions.
We see this already in a few companies. It has helped some institutions avoid or mitigate the effects of the crisis. Central corporate leadership at the financial-services firm Barclays PLC is entirely devoted to governance, leaving day-to-day and even month-to-month management to the divisions. The center has a strong risk control function, but also governance roles across many other areas of the business. And despite Barclays’ extensive involvement in the debt market and other troubled markets, it has avoided many of the problems facing other banks.
Of course, there is a risk that such governance models will simply re-create the old bureaucratic staff structures that hobbled companies in the 1960s and 1970s. What we will need is tightly limited roles and processes, a separate voice and perspective, and a smaller number of resources and processes. This spare, collective, and relatively informal approach will require leaders who are unusually holistic, integrative, and dispassionate in their character and thinking. This is not a time for leaders who will be waylaid by details, nor for those who are convinced they see the future clearly and want their organizations to fall in line. Rather, they must see the general patterns, and see them better than others, while recognizing, not suppressing, the risk and uncertainties.
The most successful leaders of these newly transformed organizations will do one more thing distinctively well. They will set the overall purpose and mission of the organization, not just its strategy. Indeed, they will often concentrate on corporate purpose or mission, leaving strategies to the executive team. We already know that companies with an articulated purpose that goes beyond simply the expediency of “making more money” have fared much better in the downturn. They will also fare better in the recovery. But this will depend on the temperament of leadership. If we are fortunate, the leaders who emerge this time will be honest, robust, and farsighted enough that their prevailing style will last for some time.
- Richard Rawlinson is a Booz & Company partner based in London, where he leads the organization, change, and leadership practice.