Harvard Business Review - June 2009

Citation preview

From the Editor | Trust Revisited

T

HE PUBLIC’S trust in business leaders has

never been weaker. According to the Edelman Trust Barometer, released in January, trust in U.S. business dropped from 58% to 38% in one year. European businesses are in nearly as much trouble with the public. Businesses in emerging markets are faring better – but not by a lot. If companies can’t address this problem, an economic turnaround may be delayed indefi nitely: Banks won’t lend money; innovation will slow to a crawl; trade across borders will fall even more rapidly; governments will overregulate the private sector; unemployment numbers will continue to rise; and consumers won’t open their wallets for anything they consider nonessential. A complex modern economy simply can’t function unless people believe that its institutions are fundamentally sound. The Spotlight articles in this issue make clear, though, that trust is not a simple concept. Rod Kramer, in “Rethinking Trust,” argues that most of us trust others far too easily. As social animals, we’re hardwired to do that. In recent years we’ve been hoodwinked into trusting people and institutions that were behaving badly, according to Kramer, a social psychologist who teaches at Stanford. So, while the pundits claim that businesses need to rebuild consumers’ trust as soon as possible, Kramer demonstrates the opposite: We need to remain skeptical. We must also demand that our institutions become more worthy of trust. Joel Podolny’s piece on business education, “The Buck Stops (and Starts) at Business School,” indicts the schools that train managers and executives. Indeed, in the months since the meltdown began, MBAs have been caricatured as greedy, selfish creatures. Podolny’s argument is subtler than that. (In fact, he finds the populist anti-MBA rage a bit frightening.) His thoughts about how to reinvent business education – and thereby regain people’s trust – were previewed in a lively online conversation he led on our website in April (mba-future.

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hbr.org); excerpts from that conversation appear on page 106. Podolny, who taught at both Stanford and Harvard business schools and served as dean of the Yale School of Management, is now heading up Apple’s corporate university. Meanwhile, trust inside organizations is also faltering (though less dramatically). James O’Toole and Warren Bennis – who have studied organizational behavior for decades – argue passionately that senior managers must build a culture of transparency to repair that problem. It won’t happen by itself. Without strong leadership from the top, managers hoard information and flatter their bosses instead of questioning tired assumptions and speaking truth to power. “What’s Needed Next: A Culture of Candor” makes the case that trust within organizations is the bedrock for rebuilding it in business as a whole. Also of interest in this issue: conversations with economist Paul Krugman (on what surprises him about the financial crisis) and chef Alice Waters (on how to keep a high-end business relevant during a downturn). The HBR Case Study looks at whether banks should actually thank the public for bailout money. In addition, we welcome Michael Watkins, the world’s leading expert on transitioning into a leadership position, who analyzes Barack Obama’s first 90 days in office. And finally, “How to Be a Good Boss in a Bad Economy” takes a different perspective on senior management behavior. During tough economic times, executives tend to become more guarded. As they consider how to cut costs without destroying future growth, they isolate themselves in conference rooms, talking only to a few close colleagues. Meanwhile, their employees become hypervigilant, watching for signs of impending doom. Bob Sutton, another Stanford professor, explores this destructive dynamic – and describes a better one. If you have time to read just one article this month, read this one. Your organization will thank you.

–Adi Ignatius

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5/1/09 5:18:36 PM

STRATEGIC HUMOR

Togetherness

“

Everyone values a team that, when faced with a challenge, responds with a can-do attitude.

”

Vanessa Urch Druskat and Steven B. Wolff “Building the Emotional Intelligence of Groups” Harvard Business Review March 2001

“I got it! Let’s get everyone together, clean up that old building out back, and put on a show!”

“I wanted to get your opinions before I go ahead and do what I want.”

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George Abbott, Roy Delgado, and Patrick Hardin

“Form a committee? This is a committee!”

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A survey of ideas, trends, people, and practices on the business horizon

GRIST

How Concepts Affect Consumption ing up with the Joneses is an obvious example. The SUV in the driveway is only partly about the need for transport; the concept consumed is status. Dozens of studies tease out the many ways in which concepts influence people’s consumption, independent of the physical thing being consumed. Here are just three of the classes of conceptual consumption that we and others have identified. Consuming expectations. People’s expectation about the value of what they’re consuming profoundly affects

Our prehistoric ancestors spent much of their waking hours foraging for and consuming food, an instinct that obviously paid off. Today this instinct is no less powerful, but for billions of us it’s satisfied in the minutes it takes to swing by the store and pop a meal in the microwave. With our physical needs sated and time on our hands, increasingly we’re finding psychological outlets for this drive, by seeking out and consuming concepts. Conceptual consumption strongly influences physical consumption. Keep-

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their experience. We know that people have favorite beverage brands, for instance, but in blind taste tests they frequently can’t tell one from another: The value that marketers attach to the brand, rather than the drink’s flavor, is often what truly adds to the taste experience. Recent brain-imaging studies show that when people believe they’re drinking expensive wine, their reward circuitry is more active than when they think they’re drinking cheap wine – even when the wines are identical. Similarly, when people believe they’re taking

Michael Byers

by Dan Ariely and Michael I. Norton

hbr.org

5/1/09 5:21:24 PM

DOWNSIZING

cheap painkillers, they experience less relief than when they take the same but higher-priced pills. Consuming goals. Pursuing a goal can be a powerful trigger for consumption. At a convenience store where the average purchase was $4, researchers gave some customers coupons that offered $1 off any purchase of $6, and others coupons that offered $1 off any purchase of at least $2. Customers who received the coupon that required a $6 purchase increased their spending in an effort to receive their dollar off; more interestingly, those customers who received the coupon that required only a $2 purchase to receive the dollar off actually decreased their spending from their typical $4, though of course they would have received their dollar off had they spent $4. Consuming the specific goal implied by the coupon – receiving a savings on a purchase of a designated amount – trumped people’s initial inclinations. Customers who received the $2 coupon left the store with fewer items than they had intended to buy. Consuming memories. One study of how memories influence consumption explored the phenomenon whereby people who have truly enjoyed an experience, such as a special evening out, sometimes prefer not to repeat it. We might expect that they would want to experience such an evening again; but by forgoing repeat visits, they are preserving their ability to consume the pure memory – the concept – of that evening forever, without the risk of polluting it with a less-special evening. So concepts not only can influence people to consume more physical stuff, but also can encourage them to consume less. Offering people a chance to trade undesirable physical consumption for conceptual consumption is one way to help them make wiser choices. In Sacramento, for example, if people use

After Layoffs, Help Survivors Be More Effective by Anthony J. Nyberg and Charlie O. Trevor

If your firm has downsized recently, you’re now managing a bunch of survivors – the lucky ones who didn’t get laid off. But good fortune doesn’t make for good performance – at least not in this situation. Chances are, you’re presiding over a heightened level of employee dysfunction, even if you don’t see it yet. Here are areas to address to limit the damage, according to our research and influential studies by others, including Teresa Amabile of Harvard, Regina Conti of Colgate, Wayne Cascio of the University of Colorado, Joel Brockner of Columbia, and Priti Pradhan Shah of the University of Minnesota. Creativity. Evidence from several researchers suggests that downsizing dampens survivors’ creativity – a potentially dangerous development for almost any company. To offset the drain on innovative energy, managers should put renewed effort into team building. Maintaining or improving work-group stability and providing challenging work stimulates creativity. Communication. Downsizing tends to disrupt social networks and information exchange within companies, adding to employees’ negative feelings. Leaders should encourage increased contact among managers and employees, promote active listening, institute open-door policies, and get employee input into decision making. Perceptions. Layoffs tend to increase employees’ levels of stress, burnout, and insecurity and to decrease morale, job satisfaction, and trust. Such perceptual changes are linked to greater turnover, diminished willingness of employees to help one another, and poorer job and company performance. Managers need to help employees see the downsizing process as fair and show that other options had been considered first. A moratorium on future layoffs, even if it has an explicit end point, might also be helpful. One study found that the anticipation of downsizing can have an even stronger effect than layoffs themselves on employees’ negative perceptions of their work environment. Turnover. Our own research shows a substantial increase in voluntary departures after layoffs, even if the downsizing was small. The costs of being understaffed and of employee replacement and training are particularly unwelcome when a company is attempting to save money. All the above recommendations can help limit voluntary turnover. And for the future, institute HR policies that promote a sense of justice, such as confidential problem-solving avenues and effective grievance or appeals processes. Companies with those policies had smaller increases in voluntary turnover after layoffs. Stars. Pay special attention to high performers. Research by one of us (Trevor) shows that those with the most training, education, and ability are the most likely to quit if dissatisfied. Provide support and encouragement, and help them see that downsizing opens new opportunities and channels for promotion. Anthony J. Nyberg ([email protected]) is an assistant professor at the University of South Carolina’s Moore School of Business. Charlie O. Trevor (ctrevor@ bus.wisc.edu) is an associate professor at the University of Wisconsin–Madison School of Business.

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less energy than their neighbors, they get a smiley face on their utility bill (or two if they’re really good) – a tactic that has reduced energy use in the district and is now being employed in Chicago, Seattle, and eight other cities. In this case, people forgo energy consumption in order to consume the concept of being greener than their neighbors. We suggest that examining people’s motivations through the lens of conceptual consumption can help policy makers, marketers, and managers craft incentives to drive desired behavior – for better or for worse. Dan Ariely ([email protected]) is the James B. Duke Professor of Behavioral Economics at Duke University and the author of Predictably Irrational. Michael I. Norton ([email protected]) is an assistant professor of business administration at Harvard Business School. The full paper

As governments struggle to fix the crisis, plenty of experts have weighed in on its causes, from excess leverage to lax oversight to faulty compensation structures. These explanations can account for how individual banks, hedge funds, and so on got themselves into trouble, but they gloss over the larger question of how all these institutions, acting independently, managed collectively to put trillions of dollars at risk without being detected. This risk was invisible because it was systemic – it resulted from the unpredictable interplay of myriad parts in the system. Think about power grids again. Engineers can reliably assess the risk that any single power generator in the network will fail under some given set of conditions. But once a cascade starts, they can no longer know what those conditions will be for each generator – because conditions could change dramatically depending on what else happens in the network. The result is that systemic risk, which can cause the system as a whole to fail, is not related in any simple way to the risk profiles of the system’s parts. Financial systems are arguably far more complex than power grids, but the fundamental problem of systemic risk is the same: Risk managers are only able to assess their own institutions’ exposure

on which this article is based is available at www.people.hbs.edu/mnorton/ariely norton 2009.pdf.

Reprint F0906A

RISK MANAGEMENT

Too Big to Fail? How About Too Big to Exist? by Duncan Watts

In 1996 a single power-line failure in Oregon led to a massive cascade of power outages that spread across all the states west of the Rocky Mountains, leaving tens of millions of people without electricity. Over the past year we have experienced a different kind of cascade in the financial system, which has produced the equivalent of a global blackout. Having studied the dynamics of cascades in complex systems, I suspect that the most damaging ones are impossible to anticipate with any confidence. The solution may therefore be to make the system less complex to start with, in order to reduce the chance that any one part can trigger a catastrophic chain of events. In the financial system, this means limiting how big companies are allowed to become.

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on the assumption that conditions in the rest of the financial world remain predictable, but in a crisis these conditions change unpredictably. No one anticipated that an investment bank the size of Lehman Brothers could collapse as suddenly as it did, so no risk managers built that contingency into their models. How do we reduce the risk of cascades in the financial system? One approach builds on the way regulators currently make judgments about systemic risk, in particular when they decide that some institutions are too big to fail. There are lots of problems with these judgments, as the Lehman Brothers fiasco revealed, but the most serious is that they are made after a crisis emerges, at which point only drastic responses are available. A better approach, therefore, would be for regulators to routinely review firms and ask: “Is this company too big to fail?” If yes, the firm could be required to downsize or shed business lines until regulators were satisfied that its failure would no longer pose a risk to the whole system. Correspondingly, proposed mergers and acquisitions could be reviewed for their potential to create an entity that would be too big to fail. Governments telling firms what they can and can’t do sounds like dangerous meddling in free markets. But antitrust law already permits regulators to prevent firms from growing in ways that stifle competition, and somehow our free market has survived. The current crisis has demonstrated that markets do not automatically control systemic risk, any more than they automatically create competition. Pragmatically speaking, therefore, government intervention is required to prevent markets from destroying themselves, and the relevant question is what kind of intervention is effective. The answer will be complicated, but it should include this simple principle: Firms should not be allowed to grow too big to fail in the first place. Duncan Watts ([email protected]) is a professor of sociology at Columbia University and a principal research scientist at Yahoo Research. He is the author of Six Degrees: The Science of a Connected Age (Norton, 2003).

Reprint F0906C

hbr.org

5/1/09 5:21:38 PM

DOWNSIZING

cheap painkillers, they experience less relief than when they take the same but higher-priced pills. Consuming goals. Pursuing a goal can be a powerful trigger for consumption. At a convenience store where the average purchase was $4, researchers gave some customers coupons that offered $1 off any purchase of $6, and others coupons that offered $1 off any purchase of at least $2. Customers who received the coupon that required a $6 purchase increased their spending in an effort to receive their dollar off; more interestingly, those customers who received the coupon that required only a $2 purchase to receive the dollar off actually decreased their spending from their typical $4, though of course they would have received their dollar off had they spent $4. Consuming the specific goal implied by the coupon – receiving a savings on a purchase of a designated amount – trumped people’s initial inclinations. Customers who received the $2 coupon left the store with fewer items than they had intended to buy. Consuming memories. One study of how memories influence consumption explored the phenomenon whereby people who have truly enjoyed an experience, such as a special evening out, sometimes prefer not to repeat it. We might expect that they would want to experience such an evening again; but by forgoing repeat visits, they are preserving their ability to consume the pure memory – the concept – of that evening forever, without the risk of polluting it with a less-special evening. So concepts not only can influence people to consume more physical stuff, but also can encourage them to consume less. Offering people a chance to trade undesirable physical consumption for conceptual consumption is one way to help them make wiser choices. In Sacramento, for example, if people use

After Layoffs, Help Survivors Be More Effective by Anthony J. Nyberg and Charlie O. Trevor

If your firm has downsized recently, you’re now managing a bunch of survivors – the lucky ones who didn’t get laid off. But good fortune doesn’t make for good performance – at least not in this situation. Chances are, you’re presiding over a heightened level of employee dysfunction, even if you don’t see it yet. Here are areas to address to limit the damage, according to our research and influential studies by others, including Teresa Amabile of Harvard, Regina Conti of Colgate, Wayne Cascio of the University of Colorado, Joel Brockner of Columbia, and Priti Pradhan Shah of the University of Minnesota. Creativity. Evidence from several researchers suggests that downsizing dampens survivors’ creativity – a potentially dangerous development for almost any company. To offset the drain on innovative energy, managers should put renewed effort into team building. Maintaining or improving work-group stability and providing challenging work stimulates creativity. Communication. Downsizing tends to disrupt social networks and information exchange within companies, adding to employees’ negative feelings. Leaders should encourage increased contact among managers and employees, promote active listening, institute open-door policies, and get employee input into decision making. Perceptions. Layoffs tend to increase employees’ levels of stress, burnout, and insecurity and to decrease morale, job satisfaction, and trust. Such perceptual changes are linked to greater turnover, diminished willingness of employees to help one another, and poorer job and company performance. Managers need to help employees see the downsizing process as fair and show that other options had been considered first. A moratorium on future layoffs, even if it has an explicit end point, might also be helpful. One study found that the anticipation of downsizing can have an even stronger effect than layoffs themselves on employees’ negative perceptions of their work environment. Turnover. Our own research shows a substantial increase in voluntary departures after layoffs, even if the downsizing was small. The costs of being understaffed and of employee replacement and training are particularly unwelcome when a company is attempting to save money. All the above recommendations can help limit voluntary turnover. And for the future, institute HR policies that promote a sense of justice, such as confidential problem-solving avenues and effective grievance or appeals processes. Companies with those policies had smaller increases in voluntary turnover after layoffs. Stars. Pay special attention to high performers. Research by one of us (Trevor) shows that those with the most training, education, and ability are the most likely to quit if dissatisfied. Provide support and encouragement, and help them see that downsizing opens new opportunities and channels for promotion. Anthony J. Nyberg ([email protected]) is an assistant professor at the University of South Carolina’s Moore School of Business. Charlie O. Trevor (ctrevor@ bus.wisc.edu) is an associate professor at the University of Wisconsin–Madison School of Business.

Reprint F0906B

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June 2009

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less energy than their neighbors, they get a smiley face on their utility bill (or two if they’re really good) – a tactic that has reduced energy use in the district and is now being employed in Chicago, Seattle, and eight other cities. In this case, people forgo energy consumption in order to consume the concept of being greener than their neighbors. We suggest that examining people’s motivations through the lens of conceptual consumption can help policy makers, marketers, and managers craft incentives to drive desired behavior – for better or for worse. Dan Ariely ([email protected]) is the James B. Duke Professor of Behavioral Economics at Duke University and the author of Predictably Irrational. Michael I. Norton ([email protected]) is an assistant professor of business administration at Harvard Business School. The full paper

As governments struggle to fix the crisis, plenty of experts have weighed in on its causes, from excess leverage to lax oversight to faulty compensation structures. These explanations can account for how individual banks, hedge funds, and so on got themselves into trouble, but they gloss over the larger question of how all these institutions, acting independently, managed collectively to put trillions of dollars at risk without being detected. This risk was invisible because it was systemic – it resulted from the unpredictable interplay of myriad parts in the system. Think about power grids again. Engineers can reliably assess the risk that any single power generator in the network will fail under some given set of conditions. But once a cascade starts, they can no longer know what those conditions will be for each generator – because conditions could change dramatically depending on what else happens in the network. The result is that systemic risk, which can cause the system as a whole to fail, is not related in any simple way to the risk profiles of the system’s parts. Financial systems are arguably far more complex than power grids, but the fundamental problem of systemic risk is the same: Risk managers are only able to assess their own institutions’ exposure

on which this article is based is available at www.people.hbs.edu/mnorton/ariely norton 2009.pdf.

Reprint F0906A

RISK MANAGEMENT

Too Big to Fail? How About Too Big to Exist? by Duncan Watts

In 1996 a single power-line failure in Oregon led to a massive cascade of power outages that spread across all the states west of the Rocky Mountains, leaving tens of millions of people without electricity. Over the past year we have experienced a different kind of cascade in the financial system, which has produced the equivalent of a global blackout. Having studied the dynamics of cascades in complex systems, I suspect that the most damaging ones are impossible to anticipate with any confidence. The solution may therefore be to make the system less complex to start with, in order to reduce the chance that any one part can trigger a catastrophic chain of events. In the financial system, this means limiting how big companies are allowed to become.

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on the assumption that conditions in the rest of the financial world remain predictable, but in a crisis these conditions change unpredictably. No one anticipated that an investment bank the size of Lehman Brothers could collapse as suddenly as it did, so no risk managers built that contingency into their models. How do we reduce the risk of cascades in the financial system? One approach builds on the way regulators currently make judgments about systemic risk, in particular when they decide that some institutions are too big to fail. There are lots of problems with these judgments, as the Lehman Brothers fiasco revealed, but the most serious is that they are made after a crisis emerges, at which point only drastic responses are available. A better approach, therefore, would be for regulators to routinely review firms and ask: “Is this company too big to fail?” If yes, the firm could be required to downsize or shed business lines until regulators were satisfied that its failure would no longer pose a risk to the whole system. Correspondingly, proposed mergers and acquisitions could be reviewed for their potential to create an entity that would be too big to fail. Governments telling firms what they can and can’t do sounds like dangerous meddling in free markets. But antitrust law already permits regulators to prevent firms from growing in ways that stifle competition, and somehow our free market has survived. The current crisis has demonstrated that markets do not automatically control systemic risk, any more than they automatically create competition. Pragmatically speaking, therefore, government intervention is required to prevent markets from destroying themselves, and the relevant question is what kind of intervention is effective. The answer will be complicated, but it should include this simple principle: Firms should not be allowed to grow too big to fail in the first place. Duncan Watts ([email protected]) is a professor of sociology at Columbia University and a principal research scientist at Yahoo Research. He is the author of Six Degrees: The Science of a Connected Age (Norton, 2003).

Reprint F0906C

hbr.org

5/1/09 5:21:38 PM

Conversation Economist Paul Krugman on being surprised by the spread of the downturn

P

aul Krugman, a professor at Princeton and the

any major financial crises

most recent winner of the Nobel econom-

for about 50 years after the

ics prize, says his real talent is his ability to

1930s.” Maybe you didn’t get

create simple models that represent complex

quite as much interest on

economic phenomena. That’s in his academic

your bank deposit in those years as you did after regula-

work. In his other career, as a blogger and New York Times

tions were weakened, but that doesn’t seem as important

columnist, he shows a similar talent for getting to the

now as it did.

essence of complicated questions. What are some of the less-obvious causes What surprised you as the meltdown unfolded?

of the crisis?

The strength of the international transmission mecha-

You could certainly argue that Harvard economist

nism was shocking. I don’t think anyone would have pre-

Michael Jensen, writing in HBR and other publications,

dicted as coordinated a world slump as it turned out to be.

got us into this by pointing out that managers’ interests

Every country out there took a serious hit. I used to think

weren’t naturally aligned with shareholders’. The idea that

the idea of financial contagion – the idea that Brazil could

you need to give executives a stake in company profits –

get a financial flu from Russia because a failed hedge fund,

in order to give them the right incentives – has been very

say, had invested in both – was far-fetched. But such rapid

influential, and arguably it’s caused a lot of damage. On

transmission turned out to be at the core of the problem.

Wall Street, that system has meant that people were given

I didn’t take it as seriously as I should have.

outsize compensation for generating profits for a couple

The lack of a unified government in Europe turned out to be a real problem, too. European leaders couldn’t figure out how to coordinate with each other. We kept finding bursting bubbles where we weren’t paying attention:

of years, but there was no downside for them when it all turned out to be an illusion. The economics profession doesn’t get off scot-free, by the way. The efficient markets theory – which led to our

Spain and Ireland on one hand and the Eastern European

near-total failure to regulate the financial markets – came

countries on the other. That was a huge, further down-

from the economists.

draft on the world economy that we weren’t expecting. Some people thought that the United States had too

Do corporate managers need to change their

much entrepreneurial and innovative energy to go into a

behavior?

deep, persistent stagnation. Being innovative, hard driving,

I have to admit that I don’t think about that very much –

and creative is good for long-term economic growth, but

the economist’s vice is the working assumption that most

it doesn’t insulate you from nasty business cycles. It may

of the time the private sector knows what it’s doing. Non-

actually make you more exposed. America in the 1920s

financial corporations didn’t seem to be the villain in this

was the most innovative, productive place on the planet.

thing at all. Productivity growth over the past 10 years has

That didn’t protect us against a financial collapse and a

been very high, which suggests that nonfinancial corpora-

very nasty depression.

tions are doing a good job.

Does this crisis give socialism a better name?

executive compensation – which clearly played a big role

No. It gives regulated capitalism a better name. A very

in the financial sector’s downfall – are to a lesser degree

That said, I assume that some of the issues around

short time ago, a significant number of influential people

distorting decisions in the rest of the corporate sector.

believed that the whole structure of financial regulation

Executive compensation seems excessive in a lot of cases,

and safety nets inherited from the New Deal was unneces-

that’s for sure.

sary and distorting. And now you look back on the era of

– Sarah Cliffe

stronger regulation and say, “Gee, we didn’t really have

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LEADERSHIP

GLOBALIZATION

Ten Fatal Flaws That Derail Leaders by Jack Zenger and Joseph Folkman

Poor leadership in good times can be hidden, but poor leadership in bad times is a recipe for disaster. To find out why leaders fail, we scrutinized results from two studies: In one, we collected 360-degree feedback data on more than 450 Fortune 500 executives and then teased out the common characteristics of the 31 who were fired over the next three years. In the second, we analyzed 360-degree feedback data from more than 11,000 leaders and identified the 10% who were considered least effective. We then compared the ineffective leaders with the fired leaders to come up with the 10 most common leadership shortcomings. Every bad leader had at least one, and most had several.

The worst leaders: Lack energy and enthusiasm They see

Have poor judgment They make deci-

Don’t learn from mistakes They may

new initiatives as a burden, rarely volunteer, and fear being overwhelmed. One such leader was described as having the ability to “suck all the energy out of any room.”

sions that colleagues and subordinates consider to be not in the organization’s best interests.

make no more mistakes than their peers, but they fail to use setbacks as opportunities for improvement, hiding their errors and brooding about them instead.

Accept their own mediocre performance They overstate the difficulty of reaching targets so that they look good when they achieve them. They live by the mantra “Underpromise and overdeliver.”

Lack clear vision and direction They believe their only job is to execute. Like a hiker who sticks close to the trail, they’re fine until they come to a fork.

Don’t collaborate They avoid peers, act independently, and view other leaders as competitors. As a result, they are set adrift by the very people whose insights and support they need.

Don’t walk the talk They set standards of behavior or expectations of performance and then violate them. They’re perceived as lacking integrity.

Resist new ideas They reject suggestions from subordinates and peers. Good ideas aren’t implemented, and the organization gets stuck.

Lack interpersonal skills They make sins of both commission (they’re abrasive and bullying) and omission (they’re aloof, unavailable, and reluctant to praise).

Fail to develop others They focus on themselves to the exclusion of developing subordinates, causing individuals and teams to disengage.

These sound like obvious flaws that any leader would try to fix. But the ineffective leaders we studied were often unaware that they exhibited these behaviors. In fact, those who were rated most negatively rated themselves substantially more positively. Leaders should take a very hard look at themselves and ask for candid feedback on performance in these specific areas. Their jobs may depend on it. Jack Zenger is the CEO and Joseph Folkman is the president of Zenger/Folkman, a leadership development consultancy. They are the authors, with Scott K. Edinger, of The Inspiring Leader: Unlocking the Secrets of How Extraordinary Leaders Motivate (McGraw-Hill, 2009). Reprint F0906E

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Losing (Ownership) Control by Ken Smith

Notwithstanding a temporary lull during the financial crisis, global industry restructuring is driving a dramatic increase in cross-border acquisitions, and some countries are selling a lot more than buying – notably the U.S., the UK, and Canada. While individual sales can benefit the selling country, a net loss of corporate ownership control is worrisome. Inbound foreign investment is good for an economy when it results in more capital projects, increased innovation, improved productivity, and job creation. However, the sale of the controlling interest of a company achieves none of these ends in and of itself. Whether foreign investment creates value or simply changes ownership control is a distinction worth making. As a country sells off corporations, especially large ones, the shift in head-office functions abroad is inevitably followed by a migration of their supporting professional and business infrastructures. The ripple effects can be severe: After all, the headquarters of large corporations and their associated capital markets and services are core to the New York, London, and Toronto economies. As the map shows, the U.S. is the world’s largest net seller of billion-dollar corporations. The UK is a close second, followed by Canada and then the Netherlands. The rest of the developed countries are staying even or gaining, including small countries now home to global giants in industries such as mining and brewing. Ownership and domicile of global companies provide direct economic benefits, and corporate leadership enhances a country’s international influence. The U.S., the UK, and Canada will fall behind if they do not address the growing imbalance in global industry restructuring. Protectionism isn’t the answer – the globalization of the economy and the formation of large companies with international value chains arguably benefit all

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5/1/09 5:21:49 PM

The Flow of Cross-Border Acquisitions

CANADA is the thirdlargest net seller of billiondollar corporations and is the largest relative to the size of its comparatively small economy.

THE NETHERLANDS slid into negative territory with the single sale of ABN Amro for $100 billion.

THE UK is the secondlargest seller, but a substantial portion of its deficit is in the sale of Crown assets, such as utilities, for which the ownership control has been retained through “golden shares.”

FRANCE is the largest net buyer, owing to its aggressive global industrial policy.

THE U.S. is the world’s largest net seller of ownership control.

Change of Ownership Control

Net value (outbound minus inbound acquisitions) of all deals greater than $1 billion, 2000–2008

countries – but action on three levels is needed. At the public policy level, if these three countries are to continue to welcome foreign investments, they must press for equal access, otherwise ownership control will tend to amass in more protectionist countries. At the governance level, corporate boards are increasingly folding to pressure from hedge funds and private equity firms

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for short-term takeover gains. Directors need to recognize when the long-term interests of the corporation are better served on the buy side of consolidation and when to say no to the shortterm sale gain. At the executive level, corporate leaders need to recognize that to the extent that they allow their companies to fall behind in international acquisitions they are ceding their firms’ competitive advantage in the global

+

$1 1B – $9 B – $8 B – $8 B + $1 5B + $2 0B + $3 0B + $3 3B + $3 7B + $5 3B + $6 7B

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$1 3B

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et he rla nd s

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Source: Bloomberg Financial; Secor analysis

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$1 11 B

B

TOP 10 COUNTRIES WITH A NET GAIN

$1 58

B $1 87 – K U

U

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$2

20

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TOP 10 COUNTRIES WITH A NET LOSS

economy. Companies that are not developing a global leadership position, even companies that are leaders at home, will eventually be targets or mere regional players in the global market. Ken Smith ([email protected]) is the managing partner of the New York office and chair of Secor Group, an international strategic management consulting firm.

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Reviews

Dance with Chance: Harnessing the Power of Luck Spyros Makridakis, Robin Hogarth, and Anil Gaba (OneWorld, 2009)

War in the Boardroom:

The recession has made a hash of many a

Why Left-Brain Management and Right-Brain Marketing Don’t See Eye-to-Eye – and What to Do About It

predictive model, and now several books are piling on the critiques. This engaging

Al and Laura Ries (Collins Business, 2009)

account, by a statistician, a psychologist,

Playboy is starting to sell discs containing digital images of its entire halfcentury archive. That sounds like a reasonable marketing tactic, but Al Ries and his daughter and business partner, Laura Ries, take a dim view of the lineextension strategy promulgated by that much more famous father-daughter team, the Hefners. Digitizing Playboy “is only the latest in a long line of similar mistakes,” the Rieses say. Extending a brand into new territory may sound like an opportunity to make more money, but it’s really a way to lose focus. As evidence, the authors point out that after extensions of the brand into casinos, books, videos, cable channels, calendars, clothing, cigars, and an energy drink, the prerecession value of Playboy Enterprises’ stock had sunk to a fraction of what it was when the company went public, nearly four decades ago. Managers, the Rieses argue in their latest book on marketing, are relentlessly wrongheaded when it comes to brands. Managers typically believe, for example, that an improved product will be perceived as better, that a brand should copy a competitor’s successful tactics, and that a product line should evolve so that customers stick with it for life. Good marketers know better: Perception is based on positioning, not quality. A brand should strive to be different, not the same. And a brand that appeals to a particular demographic group should stay focused on that group. Their engaging arguments are presented in a simple-to-read format, and the examples are persuasive. By charging 60% more than the competition, Grey Goose positioned its product as the “ultrapremium” brand in the marketplace for vodka – a beverage that is colorless and essentially flavorless. Monster became the most successful Red Bull wannabe by not copying the leader’s 8.3-ounce serving size and instead going with huge 16-ounce cans. The Saturn, originally perceived as an inexpensive, good-looking compact car for young people, sold very well in the 1990s but slid toward oblivion as managers stretched the brand to retain aging customers. The Rieses give the impression that all a business leader needs to do to ensure success is to think like a good marketer. For example, if only Saturn’s managers had focused exclusively on the demographic group that already loved their car, everything would have turned out differently. It’s easy to sound right about these things. The authors conveniently neglect to examine the business from executives’ or shareholders’ viewpoints, dismissively labeling most managers “left-brain types.” They make no attempt to understand the logic behind brand expansion or management’s views on the importance of product quality. And while it may seem unfair for me to focus on niggling details, the book’s ponderous title and lifeless dustjacket design demonstrate that even the savviest marketers can and do stumble into bad decisions. An acknowledgment of that fact of business life would have given the account some needed balance.

tempts to reduce risk in areas such as med-

and a decision scientist, looks at failed atical science, happiness psychology, and the stock market. Attempts to generalize about future management performance, the authors argue, are especially problematic. Companies proclaimed to have been “built to last,” or to have gone from “good to great,” often started tanking soon after appearing in best sellers. We humans are overconfident in our predictions because our minds excel at imposing patterns even when none exist. So we succumb to a dangerous illusion of control. Yet fatalism is no better. The book urges us to adopt simple heuristics to guide decision making.

Not Everyone Gets a Trophy: How to Manage Generation Y Bruce Tulgan (Jossey-Bass, 2009)

Here’s cold water for people thinking we’ll need less management and hierarchy in the age of the knowledge worker. Tulgan, a consultant, agrees that employees born after 1978 are the best educated and the most resourceful cohort ever. Early reports suggest that they can do impressive work at younger ages than other generations did. Yet because of their hyperscheduled upbringing with “helicopter” parents overseeing their every move, they struggle to learn the basics of organizational life and self-discipline – a dramatic shift from the previous generation of latchkey kids. As Tulgan argues, Gen Y employees need extra direction, encouragement, and feedback in order to stay focused and loyal. The good news is that they’re usually grateful for this intervention, unlike earlier generations. Managers hate dealing with high-maintenance employees, Tulgan concludes, but that’s their future. – John T. Landry

– Andrew O’Connell

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Health & Well-Being BY THOMAS H. LEE, MD

Good News for Coffee Addicts

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stuff that drinkers add to coffee. Taken black, coffee is a nearly calorie-free beverage brimming with antioxidants and other phytonutrients. Add cream, sugar, whipped cream, and flavorings, and it turns into a fat- and calorie-laden dessert, which can add pounds that offset any possible health benefits. For example, a 16-ounce Mint Mocha Chip Frappuccino with chocolate whipped cream contains 470 calories. Tucked into this beverage are 12 grams of saturated fat – nearly a day’s worth – and 58 grams (that’s 14 teaspoons) of sugar. For most people, though, the health and social benefits of coffee outweigh the hazards, and the daily grind keeps American business percolating. Thomas H. Lee is a professor of medicine at Harvard Medical School in Boston, the CEO of Partners Community HealthCare, and the editor of the Harvard Heart Letter. Reprint R0906A To order, see page 115.

Getty Images

Health Professionals Follow-Up and WHAT’S THE ENGINE that drives AmeriNurses’ Health studies show that drinkcan business? Innovation? Perspiration? ing coffee cuts the risk of dying early Capital? Try coffee. From the shop floor from a heart attack or stroke. Coffee to the boardroom, java – and I don’t also appears to offer some small protecmean the software – fuels workers and tion against Type 2 diabetes, gallstones, shapes office culture. What’s more, a and Parkinson’s disease. steaming cup of joe may be as good for It’s possible that the bean improves your health as it is for the bottom line. productivity, too. A jolt of caffeine wakes Many people take their coffee with up millions of workers a small dose of guilt, worin the morning (alried that it isn’t good for Functional MRI though this hints at the body. That’s a holdscans show that its addictive property). over from studies done in coffee activates Controlled laboratory the 1950s and 1960s showexperiments indicate ing that coffee drinkers parts of the brain that it causes feelings were prone to pancreatic that help focus of well-being and incancer, heart disease, and attention on creases energy, alertother woes. These studtasks at hand. ness, and motivation. ies failed to account for Functional MRI scans cigarette smoking, which show that coffee activates parts of the once went hand in cup with coffee drinkbrain involved in short-term memory, ing. Since then, the medical community the kind that helps focus attention on has done a gradual about-face on the tasks at hand. health effects of coffee. For all that, a word of warning is in Large, long-term studies show that order. The average cup of coffee serves coffee doesn’t promote cancer and may up about 100 milligrams of caffeine, and even protect against some types. It’s safe a large specialty coffee can deliver five for the heart – so safe that the American times that much. If you aren’t used to cafHeart Association says it’s OK for heart feine, it can make you jittery, boost your attack survivors to have a cup or two a blood pressure, and dehydrate you. But day even as they recover in the coronary the biggest health hazard is the extra care unit. Results from the long-running

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HBR Case Study BY RANDLE D. RAGGIO COMMENTARY BY MICHAEL McCULLOUGH, ALAN PARKER, AND C. WILLIAM POLLARD

Do You Thank the Taxpayer for Your Bailout?

Daniel Vasconcellos

ReliantShare has accepted government money, and its reputation is badly dented. The bank’s leadership is deeply divided over how to restore public confidence. BEN MARSHALL DIDN’T like handouts. His father had raised him to take care of himself. But here he was, the CEO of ReliantShare Bank, about to receive $5 billion in federal funds, and the prospect of government intervention tied his stomach in knots. At the same time, unrelenting media scrutiny was starting to stifle even everyday business decisions. He knew that ReliantShare had to break free of the bunker mentality that had gripped everyone in financial services – but how? He turned into the driveway of ReliantShare’s executive retreat, a gorgeous five-bedroom, four-fireplace house on several wooded acres of Connecticut dreamland. Discussions at “Camp Ben,” as the team liked to call it, were usually fairly forthright. The casual setting – coffee in the kitchen, a beautiful view through the large glass doors – put people at ease, so they felt less selfconscious and more direct when they sat down for a robust discussion. They could air their ideas in a safe environment and then go back to make a final decision in the boardroom. As he pulled up to the graceful, ivy-covered front entrance, he idled his black BMW for a moment before turning off the engine. He was still in a sour mood following the negative

publicity from the previous week’s congressional hearings. The bank’s top managers were anxious to deliver a more positive message than consumers and the market were getting from the financial pages and from Washington. Both the chief financial officer and the chief customer officer had ideas about what the message should be. Less than an hour later, the bank’s leadership team assembled around the Victorian mahogany table in the dining room. No one seemed relaxed, despite the bucolic surroundings. Everybody wanted to get right down to business. Ammon Rodriguez, the chief customer officer, started the proceedings. “Ben, we’ve got to acknowledge the funds,” she said. “Break from the cold, unfeeling image and show we are grateful and responsible. Show the taxpayers that we respect them and that they can trust us. Show some…well, humility.” The words got Ben’s attention. None of the more than 400 U.S. banks receiving funds had publicly outlined specific plans for spending the money responsibly. He had made that point HBR’s cases, which are fictional, present common managerial dilemmas and offer concrete solutions from experts.

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HBR Case Study Do You Thank the Taxpayer for Your Bailout?

hbr.org tors and financial talking in an e-mail to the whole How would you heads with the themes of company about being “achandle PR at a firm stability and strength. If we countable stewards” of the accepting government funds? Weigh in do that, we may be able to public’s trust and money. at bailout.hbr.org. put a floor under our fall“Our ad agency has develing share price and hang on oped a thank-you campaign,” for the long haul. We don’t Ammon continued,“that will want to have to come back to the table target consumers, directly acknowledge again with our hands out.” their ‘investment,’ and give us a platform Some of the executives, including Amfor proactive communication and prodmon, looked a bit taken aback. Trying to uct development.” use a more reasonable tone, Vernon said, Vernon Scott, ReliantShare’s CFO, couldn’t hide his irritation. “A good “Look, talking about the bailout can only hurt. A, it will advertise that we needed steward doesn’t waste money,” he cut in help, and B, the press will jump all over sharply. “We should be targeting inves-

us again. People want to see that we’re moving forward, optimistic about the future, and advancing the recovery.” Ammon shook her head impatiently. “That’s simply not a message anyone is going to believe today. Do you seriously imagine that investors will be piling back into bank stocks anytime soon? The people we’ve got to be talking to are the taxpayers.”

It Was a Very Bad Year With precrisis assets nearing $114 billion, ReliantShare was the 20th largest bank in the United States. It focused

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article continued.

The Benefits of Beefing Up Servers

When it comes to servers, Ken the IT guy knows how to handle things. “It’s important that you’ve got a separate server for every different process. Ideally, we’d have a separate server for every single department. It makes our job about a thousand times harder, but I’m pretty sure that more servers means more power. And more power means you get more done. At least that’s what we’re banking on.” It seems many companies are following Ken’s lead these days, which is to say they’re spending more time fixing servers than solving problems. Indeed, running around and having to maintain servers all day long has become the bane of Ken’s department. “Frankly, it’s kind of a nightmare, when you think about it. But that’s just how we do things around here, I guess.”

be on track with the lack of growth enjoyed prior to these troubling times. “I’m not sure the economy makes much difference. Things have been this way around here for a long, long time. It might not be the smartest way, but it’s our way. And now’s no time to change what we’ve been doing or haven’t been doing. Stay the course, that’s our motto. Sure, we could probably be doing a lot more. But we could be doing a lot less, too.”

And while business may not exactly be booming, managing resources and reacting quickly to problems aren’t a concern for the company. “We’ve got bigger fish to fry with all these server issues we have. Look, we’ve got a lot of computers around here. And we’re counting on those computers to help us get more done. Everything else should work itself out. If not, well, then I guess we’ve got problems. But we’ll cross that bridge when we get to it.” Thanks to the high maintenance costs and licensing fees, many poor performers seem to

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4/28/09 9:38:58 AM

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on the country’s more populous states – especially California and New York – and had very few branches in the Southeast and the sparsely populated areas of the West. When business was booming, a fouryear acquisition spree had more than tripled the bank’s value. But nine months into 2008, the executives had faced $36 billion in write-downs and a 94% collapse in stock value. New businesses and existing lines had both suffered dramatic losses; the board had directed Ben to cut jobs and close branches. Though not a part of the original Troubled Asset Relief Program, the bank had lobbied for $5 billion to shore up its capital after a substantial number of its loans had gone into default. Ben and five other bank CEOs had made their cases in February 2009 to a senate finance subcommittee headed by Billy Talos, an ambitious two-term senator from the South. A state-school graduate, Talos clearly relished the opportunity to deep-fry the Ivy League MBAs in front of him. Predictably, the hearing was more about grandstanding than about substance. “Where I grew up, Mr. Marshall,” Talos began, playing up his trademark drawl, “you didn’t throw good money after bad. Seems to me you’ve already poured plenty of folks’ cash down the drain. Perhaps you can explain why we should be pourin’ more in after it.” It went downhill from there. Eventually, Ben threw up his hands in frustration at the senator’s ignorance of basic economics, forgetting that the television cameras lay in wait for a shot like that. The image hit every major news outlet in prime time, and Ben’s “befuddled” profile reappeared with many stories about the arrogance and ignorance of bank CEOs. That was ReliantShare’s second PR hit in three months. The first had occurred after reporters discovered the bank’s $2 million, prerecession purchase of the very Connecticut house in which the team now sat. The Sunday news supplements had reveled in their descriptions

of the 1830s-era home, its tall stone fireplace in the huge living room and its teak deck overlooking the neighboring 1,700-acre Devil’s Den Preserve. Better still, the bank had put in $500,000 of “updates” to make the home as comfortable as any luxury conference space. When not being used for official events, it was available to executive team members on a “first come” basis. USA Today called the purchase “another example of today’s corporate culture of entitlement.” The New York Times said it was “irresponsible” and “more evidence that they believe they are ‘too big to fail.’” The Wall Street Journal offered the least scathing criticism but noted that the bank could have instead helped one of its customers by “buying a troubled property.” What nobody said was that the bank had purchased the estate partly to save on hotel and travel fees: Because it was only 45 miles from ReliantShare’s New York corporate office, executives could drive their own cars or take the train. Annual upkeep cost less than a week’s stay at a luxury resort. As a result of these hits, the team was especially sensitive to any public perception of self-indulgence or wastefulness. Ben was acutely so, not just because it was his face in the media but also because the idea to purchase the house had been his. And look where that got us, he thought ruefully.

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The “Camp Ben” Debate After Vernon’s outburst and Ammon’s riposte, the team sat quietly for a few minutes. Corporate counsel Arthur Burns, who had been with Ben on that fateful trip to DC, eventually broke the silence, reminding the group that the senators had emphasized banks’ responsibility to help homeowners stay in their houses and to keep companies’ employees in their jobs. “Ammon’s got a point,” he said. “People are asking why we haven’t immediately loaned out the money or given concessions to those in or near foreclosure.” There was another silence in the room as the executives pondered the Because it’s everybody’s___business

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HBR Case Study Do You Thank the Taxpayer for Your Bailout?

a caring company trying to help people.” Turning to Carole Clark, CEO of the retail banking division, Ammon said, “If we show our gratitude, our current customers may be more willing to stick with us, and others may be more likely to switch.” Ben was impressed by her enthusiasm. “Go on,” he said, leaning forward. “If you think about it, we can tie it all together: Because of taxpayers’ investment in us, we can loan out money.

fact that ReliantShare, like any other bank that took funds, needed the infusion because it didn’t have the hard assets to make up for likely defaults on its existing loans. “If we don’t respect the ratios,” Ben eventually said to no one in particular, “then we’ll be out of business. So we’ve got to be conservative with the money, or we’ll just be back again asking for more.” “But wouldn’t we be better off at least expressing gratitude for the funds if

“Talking about the bailout can only hurt. People want to see that we’re moving forward.” We can offer assistance to homeowners and businesses so people can keep their houses and their jobs. And we may even be able to create a new branded consumer-credit product – something like a Thank-You Card.” Wondering if she had gone too far, she said, “I guess it’s not just about receiving the funds; it’s about using them. Gratitude in action. That kind of thing.” Vernon broke in again. “We already had to kiss their asses to get the money. I don’t think we should be paying to kiss them again.” Good point, thought Ben. “Besides,” Vernon added, “it would only remind people of the circus on Capitol Hill, and we can’t afford any more bad PR.” Ben called a lunch break. It was past noon, and the hot trays that had arrived from Bobby Q’s were making it difficult to concentrate. The retreat ended that afternoon without a definite plan of action, but that was by design. Ben knew that a lag between the initial presentations and the final evaluation would give people time to figure out which hills they were willing to die on and which they were willing to abandon.

we’re not actually going to be loaning them out?” asked Ammon. “Isn’t that the right thing to do?” Vernon, the CFO, jumped in again, “I couldn’t disagree more. We need to focus the attention on our recapitalized balance sheet and link that with our future growth and economic development.” If the banks weren’t talking to the opinion makers in the media, he argued, then what the politicians said was all that would be heard. “ABC News, Microsoft, the Olympics – they’ve all run thank-you ads in the past few years, and they were just thanking viewers and sponsors who actually got something out of their involvement,” Ammon persisted. She turned to Ben. “Didn’t you say the ‘Louisiana Thanks You!’ billboard you saw in North Carolina after Hurricane Katrina was a nice touch? Well, a lot of what Louisiana got was public money, just like we’re getting. Research shows that campaigns like this can have positive ROI effects. We’re talking about one one-hundredth of one percent of the funds to pull off the initial campaign.” She added carefully, “We’ve got a chance to offset the images of angry senators and greedy CEOs with one of

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A Vote from Mom Two mornings later, arriving a little earlier than usual, Ammon briskly walked the four blocks from the parking garage to the corporate office and then repeatedly punched the 27th floor button in the elevator. She knew that the person she most needed to convince was Vernon Scott. Although she had disagreed with him, she personally had nothing against him. She respected his ability to understand complex financial instruments and his intuitive feel for the markets, which had made him one of Ben’s most trusted deputies. If the team was split, she presumed Ben would side with Vernon. With that in mind, Ammon had asked Vernon to sit in on the agency’s presentation the day before and read its brief. Since a new consumer-credit product was potentially part of the plan, she knew that the bank would have to move quickly, and she wanted him on board from the beginning. After listening to the presentation and reading the materials, Vernon had softened somewhat. He conceded that the plan was unlike anything else in the market – but he was still skeptical. His take was that retail customers wanted higher rates on their investments or lower rates on their loans, not public displays of gratitude. Besides, the “good government” types were certain to go ballistic when they found out that ReliantShare was using public money for advertising. But he agreed to think about the idea some more and suggested taking up the debate with Ammon again this morning. As she neared his office, a one-sided conversation flowed through the open door. “Great, thanks, Mom,” she heard him say. “Anne and I could really use a night out.” Ammon peeked around the corner and saw Vernon on the phone. He waved her in, and she took a seat by the desk. “Hey, Mom, one last thing,” he said, nodding to Ammon. He quickly explained the $5 billion and the thank-you idea. “So, what do you think?”

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5/1/09 4:21:19 PM

Vernon hung up after getting an impassioned response. He said, “You’ve got one vote. My midwestern mother is in.” Handing Ammon a newspaper, he pointed to an editorial and asked, “You see this?” The writer called ReliantShare “her bank,” not because she had an account but because she and other “working folks paid for it.” Ammon quickly scanned the article. It included a David Letterman–like list of the top 10 things the bank should do with the cash. The list ended with, “And since nothing is likely to save this bank or any of the other irresponsible companies that have received bailout funds, the number one thing

ReliantShare should do with its $5 billion to show its appreciation is…throw a toga party!” Images of Paul Shaffer and his band kicking up a riff filled her mind. She grinned, “Well, the number one recommendation does include the word ‘appreciation.’” “Cute, isn’t it?” Vernon agreed. “But seriously, I think it’s the sort of association we should be fighting, not going along with. We’re not in the entertainment business. People come to us when they want to save money, buy houses, finance the kids’ education. They’d feel more secure doing that if we didn’t roll over and give them all this humility. We’ve got to

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look forward, not backward, and we’ve got to restore their confidence in our ability to help them get to the future.” “I take your point, Vernon. But I can’t help feeling we need to give people some closure on the past before we can get them thinking about the future.” What kind of message should ReliantShare send to restore public confi dence? Three commentators offer expert advice. Randle D. Raggio ([email protected]) is an assistant professor of marketing at Louisiana State University in Baton Rouge.

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HBR Case Commentary What Kind of Message Would Restore the Public’s Confidence?

NO WONDER Ben Marshall’s stomach is in knots. If Ammon Rodriguez’s idea of expressing gratitude for the taxpayers’ $5 billion lifeline is successful, it could increase customers’ loyalty and reduce their bitterness about the money the government took out of their pockets to help the bank. If it fails, ReliantShare could come off looking more ham-handed, self-serving, and irresponsible than ever. Ben can improve his odds of making the right decision by asking why humans possess

patrons in a restaurant, who have already paid part of the server’s wages by dining there in the first place, increase their tip by 11% just because the server writes “thank you” on the check, but they do. Natural selection doesn’t care one way or the other about rationality. Nor is natural selection in the business of building suckers who allow their debtors to defer payment indefinitely. Humans actively seek evidence that others are trying to take advantage of them in exchange relationships.

Michael McCullough

([email protected]) is a professor of psychology at the University of Miami in Coral Gables, Florida, where he directs the Laboratory for Social and Clinical Psychology. His latest book is Beyond Revenge: The Evolution of the Forgiveness Instinct (Jossey-Bass, 2008).

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the capacity to feel gratitude in the first place. Evolutionary psychologists think that gratitude became a universal feature of humans’ emotional palette because it makes cooperation happen: You help me today, and my private experience of gratitude motivates me to repay you in the future, and when I do, your gratitude motivates you to return the favor to me, and so on. As the great Adam Smith explained exactly 250 years ago, “The sentiment which most immediately and directly prompts us to reward, is gratitude.” But to explain people’s compulsion to express gratitude, you need stronger stuff than Smith: You need Darwin. Humans wouldn’t have evolved a tendency to express gratitude if its only effect was to put their indebtedness up in lights for their creditors to see. Natural selection doesn’t keep cognitive mechanisms around that aren’t paying their way. People who developed a mechanism solely so they would settle their debts more quickly would have been outcompeted aeons ago by those willing to let their debts pile up. There must be some benefit to expressing your gratitude that, on average, outweighs the cost. I think it’s this: If thanking you reassures you that I will indeed repay you in the future, then perhaps I can get a second favor out of you even before I have had the chance to repay you for the first one. It’s irrational that

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So for gratitude to continue as a hue in the human emotional palette (which it has) and for expressions of gratitude to encourage helpers to offer even more help (which they do), there must be a set of additional calculations that people make – probably subconsciously – to evaluate the likelihood that a grateful benefi ciary really is, eventually, going to make good on the debts he or she is racking up. Although the thank-you campaign is Ammon’s idea, Vernon Scott seems to have a better sense of what it needs to contain – a clear statement of ReliantShare’s intention to translate the $5 billion into increased capacity to serve the public in tangible ways. Here’s a first draft: “We know that you’ve been experiencing your own economic pain, and we didn’t ask for your financial help lightly. We are rebuilding how we do business so that we can begin, as soon as possible, to provide you with the credit you need to grow your business, buy a home or a car, or send your kids to college. When we’ve finished reorganizing, we’re going to have a stronger and smarter bank. And we’re going to pay back every cent of the $5 billion that you sacrificed for us.” If Ben doesn’t have the stomach for eating a little crow and communicating a message like that, then Vernon’s right that they’d be better off keeping their gratitude to themselves and quietly rebuilding their business.

Wendy Wray

If Ben won’t eat a little crow, then expressing gratitude won’t help.

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5/1/09 4:28:48 PM

THE GRATITUDE campaign is really a way of saying sorry, and apologizing is usually quite hard for executives, in part because of legal risks in a litigious environment. Executives who take blame for something may not live to fight another day, since they nearly always lose their jobs soon afterward. This is one reason why expressions of regret that emanate from corporate corner offi ces are carefully worded. The former chairman of the struggling British bank HBOS, Lord Stevenson, provided an elegant example of such a statement at the UK parliamentary hearings on the banking crisis. He was careful to express regret about the “turn of events” rather than about the behavior and decisions of his bank and its senior executives. Bankers now have to stand on the front lines when fault is being attributed but are understandably reluctant to carry all the blame for the collapse of the financial system. They were acting within the law and within the applicable regulatory framework. The practices of the banking sector, on both sides of the Atlantic, met with approval from customers, regulators, the media, and shareholders, who were generally lobbying for higher returns. The bankers’ transformation from creators of

gage from the congressional hearings and from the exposés about the house in Connecticut. The fact that he has been misrepresented and that the decision to buy Camp Ben made economic sense is simply going to get lost. All that said, I am not sure thank-you ads will be effective. The government money is not a gift. This is the problem with using the term “bailout” to describe such assistance in the United States and other countries. It implies that governments feel that the banks and the people working in them are worth rescuing for their own sake. That may be true for some of the assistance being provided in other industries. U.S. automakers, for example, really are being bailed out to save people’s jobs and sustain an independent car industry in the United States. But in the banking situation, what the U.S. and other governments want is to get the credit markets moving and inject liquidity into the system. If Ben accepts that his departure may ultimately be required for the bank to regain the trust of its stakeholders, he should get ahead of events and orchestrate a clean, orderly exit. He could do this by publicly acknowledging his regret for the enormous losses that

Alan Parker is the chairman of Brunswick Group, a corporate communications consulting firm with 15 offices around the world. He is based in London.

To rebuild trust, Ben should get ahead of events and orchestrate his own exit. capital and wealth to the whipping boys of a potential depression has been so swift that those involved cannot have found it easy to adjust. But to move ahead in a crisis like this, you have to be prepared to show real contrition and in some way acknowledge your role in the decisions that got you to this point. Even so, I doubt if that would be enough to draw a line under the affair for ReliantShare. Most of the banks that have taken government money have also changed their CEOs. To get a clean slate, ReliantShare will probably need new leadership, especially given Ben’s bag-

shareholders have suffered, ensuring that he and none of his executives can be accused of walking off with any of that money personally through large bonuses or generous early-retirement packages, and presenting his resignation. Some of the bank’s other leading executives should probably also resign – perhaps including Vernon, who, as the CFO and Ben’s confi dant, was presumably involved in many of the key decisions related to the bank’s risk strategy. Only with fresh faces at the top can ReliantShare credibly re-engage with investors and stakeholders about the future.

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HBR Case Commentary What Kind of Message Would Restore the Public’s Confidence?

The campaign needs to be about stewardship and transparency.

C. William Pollard, former chairman and CEO of ServiceMaster, is the author of the book The Soul of the Firm (Zondervan, 2000).

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I AG R E E with Ammon that ReliantShare needs to develop a strategy for communicating with the public. Many people are under the impression that the government is bailing out the banks just to get them lending again, but in reality the money is also meant to help small business owners – who struggle to get enough credit to keep their companies going, let alone secure reasonable terms. Then they look at the media reports and see these same banks paying out millions in retention bonuses and golden parachutes. However, I am more inclined to side with Vernon than with Ammon about the content of the messages ReliantShare should be sending out. The campaign needs to be about stewardship, transparency, and the restoration of trust. ReliantShare must explain exactly what the funds are going to be used for and how they will enable the bank to recommence lending and become a safer place to deposit money. The bank should also be explicit about how its policies and practices translate into the kinds of decisions that will strengthen the business. A thank-you campaign would not tell me that ReliantShare’s executives are necessarily good stewards of my tax dollars, even if it indicated that they are nice folks. Like any public company, ReliantShare already makes fairly full disclosures about its fi nances and strategy. The trouble is that most of these communications target analysts and professional investors. They get fed to the public through the news media, whose primary interest is in exposing wrongdoing and getting stories. The challenge for ReliantShare – and pretty much any large bank receiving government help – is to get used to talking with a general audience about its balance sheet, management, and strategy. What sort of communication would be most effective? ReliantShare could certainly place ads in the major newspapers and in the local papers of communities where it has a

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strong presence, but even full-page ads aren’t usually well read. I would go further and have the bank’s senior managers take their message to national and local television and radio stations. They should contribute to web forums and issue podcasts. They should create a website dedicated to informing the public about the funds and ReliantShare’s strategy. And they should hold town hall–style meetings and “coffee mornings” in the bank’s branches, making themselves available to answer people’s questions. ReliantShare needs to be very careful about who gets involved in the campaign. Ben’s irritation in the senate hearing suggests that he may not be the bank’s best public face. Both Ammon and Vernon have potential for the role. Both have communication skills and an understanding of the public’s worries. Whomever ReliantShare picks will need to talk in simple language about complicated stuff, and no one should underestimate how difficult that is. I don’t think Ben should resign. Unless his performance was egregiously bad (and despite the acquisition spree, there’s no indication that it was), a “noble” gesture like that would only make the bad situation worse. Even if there’s leadership talent waiting in the wings, a new team would need some time to settle in and work out what to do, time that ReliantShare doesn’t have. And if Ben’s departure is necessary – not just as a symbolic sacrifice but as a matter of improving the bank’s performance and leadership – then that’s for the board to decide, not him. Since the board is ultimately accountable for the bank’s results, the most pressing question may be whether its present membership has the competency to assume this responsibility for the future.

Reprint R0906B Reprint Case only R0906X Reprint Commentary only R0906Z To order, see page 115.

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Big Picture BY MICHAEL D. WATKINS

Obama’s First 90 Days Early wins and a strong team mean a successful start for the U.S. president. momentum game – which is why there’s such incredible pressure on business executives in new roles to get it “just right” in their first few months. The senior leader’s early actions end up having a disproportionate impact on everything that follows. Stakeholders parse every word, gesture, and decision, straining to discern intent and assess credibility. Feedback loops, both positive and negative, are established. Momentum for organizational change builds – or doesn’t. This complex transition dynamic is no different – and no easier to manage – in government. What Barack Obama achieved in his first 90 days won’t guarantee him wild success for the rest of his four-year term; nor will it necessarily doom him to failure. But how he has handled the transition matters a great deal, especially given the national turnaround he’s facing. As a result of my decades-long research in the area of executive transitions, I find it most useful to evaluate the effectiveness of new leaders along three critical dimensions: Securing early wins. Did the new leader build credibility by scoring early victories while avoiding or mitigating losses? Laying a foundation. Did the new leader lay the groundwork for accomplishing top priorities within his first year? Articulating a vision. Did the new leader begin to clearly express an inspiring vision for what he will accomplish during his tenure? A weakness in any one of these dimensions can signal trouble ahead, and serious problems in all three are a sure sign that the transition is going off the rails. So, how did President Obama fare in his first 90 days?

Securing Early Wins The first goal for a new leader is to build credibility and create a general sense among employees (or, in this case, citizens) that momentum is building for positive change. That means making the right symbolic gestures, identifying and securing

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SECURING EARLY WINS

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early substantive wins, and avoiding Laying a Foundation hasn’t fared very well in this early losses. dimension. Although he laid Solid early wins (and just a LAYING A Obama accomplished all that and out a broad agenda during the few losses) constitute a good FOUNDATION more in his first 90 days. Once in the Oval campaign, the financial crisis start. But new leaders must Office, he ordered the Guantánamo Bay has largely erased it from the also lay the groundwork for detention center closed, removed restricpublic’s consciousness. changes in the first year. ARTICULATING tions on funding stem-cell research, estabMore recently, Obama anA strong team is critical to A VISION lished a time frame for ending the war in nounced his intent to pursue that foundation. Even before Iraq, and released documents outlining complex initiatives in five the inauguration, Obama policy on the interrogation of suspected policy areas, including health surrounded himself with terrorists – all symbolic moves aimed care reform and investments in educawell qualified and respected officials at solidifying his Democratic base and tion and renewable energy. In a speech (including Robert M. Gates as secretary restoring the United States’ reputation at Georgetown University in April, the of defense, a holdover from the Bush worldwide. president said he wanted every Ameriadministration). In April 2009 Obama took his first can to know that “each action we take It wasn’t all smooth sailing: Several sebows on the global stage, bolstering his and each policy we pursue is driven by a nior appointees withdrew because of tax credibility with a strong performance at larger vision of America’s future – a futroubles, and other important appointthe G-20 summit meeting, his outreach ture where sustained economic growth ments at Treasury came slowly – a result to Iran, and his efforts to win modest creates good jobs and rising incomes.” of the strict vetting process Obama had additional sanctions against North KoBut his pronouncements have lacked established. But Geithner’s Q rating rerea for defying UN security resolutions the power (and the details) to motivate bounded; Gates is using his credibility and launching a long-range missile. And and unite a public confused and frightto push for reform at the Department of when he approved the use of force to ened by the market collapse. As a result, Defense; and Secretary of State Hillary free a U.S. ship captain who had been he earns a B− for the vision thing. Clinton is helping the president estab••• captured by Somali pirates, he stifled lish his international agenda with her those of his critics who said he was too valuable political capital and expertise Some significant early wins, successsoft and naive when it came to internaon the issues. Supportive alliances are ful responses to a few early losses, and tional security. also critical. These, unfortunately, have a smart, supportive team add up to a The president has managed to conbeen slower to develop – in part besolid start for the Obama administratain, if not extinguish, the “forest fire” cause of the time pressures of managing tion – particularly given the magnitude engulfing the entire U.S. financial sysa turnaround. Obama quickly won pasof the challenges confronting the countem. Of course, he has also experienced sage of a $787 billion stimulus package try and the speed with which Obama a few minor losses, courtesy of the failand advanced his budget largely on the has been forced to act. So my overall ing markets. The negative reaction to strength of Democratic control of Congrade for him is A−. But I’ll be watching Treasury Secretary Timothy Geithner’s gress. But the bloat associated with the with interest to see if our new president skeletal bank-rescue plan in January, bill opened him up to attacks from fiscal can articulate a more compelling vision, plus the AIG bonus debacle, raised the conservatives. define the balanced policies to achieve it, frightening possibility that the new adGiven his ambitious policy agenda, and build the moderate coalitions necesministration wasn’t focused or compeespecially in education, health care, and sary to turn vision into reality. tent enough to deal with the nation’s energy, Obama cannot hope to move most pressing concerns. Obama reacted things forward without building a stronMichael D. Watkins (mwatkins@genesis quickly, however, expressing the right deger coalition at the center. In this second advisers.com) is the cofounder of Genesis gree of outrage at the bonuses, working dimension he earns a solid B+. Advisers, a leadership development firm to claw back the payments, developing specializing in transition acceleration and marketing a more detailed financial programs and coaching. He is the author Articulating a Vision rescue plan – and deftly switching meof The First 90 Days: Critical Success Finally, new leaders must immediately dia attention to the conservative comStrategies for New Leaders at All Levels communicate a compelling vision for mentator Rush Limbaugh (Harvard Business Press, 2003) and Your what they will do during their and his detrimental effects Next Move, forthcoming from Harvard tenure. It must pull people hbr.org on bipartisanship in WashBusiness Press. forward and energize them to Comprehensive analysis of Barack ington. In this first dimenmake sacrifices for the greatObama’s first 90 Reprint R0906C sion of executive transition er good. Surprisingly, given days as U.S. presiTo order, see page 115. dent can be found at Obama gets an A. his rhetorical skills, Obama

B+ B-

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Different Voice A CONVERSATION WITH RENOWNED RESTAURATEUR ALICE WATERS

Relentless Idealism for Tough Times the highest-end restaurants were still using frozen meat and produce in 1971, the year that Alice Waters founded Chez Panisse, in Berkeley, California. It was the perfect moment to break culinary ground with her fresh, simply prepared food. Influenced by dishes she had tasted in Europe and Turkey, and featuring local ingredients, her style of cooking became known as California cuisine. Waters went on to launch a sociopolitical movement based on her ideas about food and community, fueling her own commercial success and making room for others in the industry to follow her example. These days her support of organic practices and her close relationships with area farmers and other suppliers have put her in sync with the business world’s focus on sustainability. Even so, her critics wonder whether her expectations for consumers and for the food industry as a whole are realistic, given the state of the economy. Indeed, Waters’s

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CHEFS AT EVEN

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unwavering commitment to quality presented some steep business challenges in the past. She often gave management authority to people who were more financially minded than she, only to veto them when they tried to prevent her from spending so extravagantly on, say, the perfect cardoon. Bankruptcy was right around the corner more than a few times. How, then, has Chez Panisse managed not only to stay afloat but to become regarded as one of the best restaurants in the world? And what are its prospects for survival in and beyond the current recession? Waters shares her thoughts about these and other questions in this edited interview with HBR. You’ve always given top priority to high-quality ingredients. Have you had to change your mind-set now that we’re in a full-blown recession?

Not one bit. I believe more than ever that we need to buy real food from those who are taking care of the land. We need to support them and to feed ourselves in a wholesome, delicious way. I think that’s going to be the basis for rebuilding an economy that takes care of the land for the next generation of people, who will be making their own decisions. And I hope they will decide it’s more important to nourish their families than to buy extra cell phones and pairs of gym shoes. Many people would call Chez Panisse a luxury business. What sorts of things are you doing to survive the downturn?

We’ve been in business nearly 38 years. We have customers who consider us family, and we consider them family. I hope they will continue to support us. So far, they have. For our own financial protection, we’ve tightened up in ways that are very good for the running of the restaurant. When a person leaves the staff, we’re trying not to hire somebody else – we’re trying to make it work with fewer people. We’re thinking about every little thing that we have ever used in

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It’s good that a recession forces businesses to operate more efficiently, but many panic and make damaging trade-offs. Alice Waters runs a thriftier kitchen these days at Chez Panisse, but she still gives top priority to quality and sustainability, both indispensable to the brand.

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In contrast to the many business owners who are cutting investments in staff, Waters continues to devote resources to employee engagement, which has long been critical to the restaurant’s survival. For instance, Chez Panisse has job-sharing chefs who use their extra days off to visit markets, create menus, and maintain work/life balance.

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Why did Chez Panisse succeed against financial odds in the past?

Well, I think it was about quality. I wanted people to like it, and I was not willing to compromise that under any circumstances. I’ve been like that all along. If it takes that much olive oil, it takes that much olive oil. Another thing that helped was that we went right to the doors of the people who were taking care of the land. We met them and became friends with them, and we knew we couldn’t live without them. We needed their food, and they needed our money. I’ve never argued over price. They do the hardest work, and they need to be paid, whatever it costs. It’s quicker and easier if I use a computer and get the vegetables delivered to the back door of the restaurant, but I like talking to Bob Canard. He’s an eccentric farmer up in Sonoma, and his wife used to be a cook at Chez Panisse. I want to hear what they think I should cook from their farm. I want their opinion about what is best. It’s not a waste of my time. We have a lot of customers who trust us to have this engagement.

The economy won’t matter if we can’t feed ourselves. Supporting local farmers is critical, Waters says, because they’re taking care of the land for the next generation.

excess. We’re becoming a thrifty kitchen, which we always should have been. It’s also about recycling – we’ve always done it, but we’re doing it with more energy and enthusiasm right now. So you’re responding mostly by becoming more efficient and cutting here and there?

That’s really the main thing we’re doing. We need to support our suppliers – we’re continuing to do that. Fortunately, the numbers at the restaurant aren’t really down. We are still successful in that sense, knock on wood. What were some of the business challenges you faced when you started the restaurant?

You’ve mentioned some ways that sustainability might help you with the bottom line. Are there also ways it’s making profitability more difficult?

I wasn’t professionally trained at all. I’d just been a waitress during college. I didn’t have any framework, so I was shooting from the hip. But I was empowered, certainly, by the Free Speech movement in Berkeley. There was a change in

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the world. It wasn’t only about stopping the Vietnam War but about big, big vision. I was very idealistic. I completely believed that if I opened a restaurant that was good enough, people would just come. And I thought I didn’t need to know anything more. I didn’t want to borrow money from the bank, because I didn’t want to be beholden to that institution. I borrowed from my friends. My parents mortgaged their house. I paid the bills, but I still never paid any attention to money. It absolutely wasn’t about that – it still isn’t. But fortunately we made some along the way.

IDEA IN BRIEF

I can’t imagine doing things any other way. It’s a pleasure to do business with

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Different Voice Relentless Idealism for Tough Times

I was simply not willing to compromise. If it takes that much olive oil, it takes that much olive oil. time of the year, and maybe it continues to bring them during this recession. But I think that people who want to feel that they’re part of this bigger movement know that we’re connected to it and for that reason want to support us. The work I’ve done in the public schools in Berkeley through the Edible Schoolyard lunch program has not necessarily brought more people into the restaurant, but it has brought people into the ideas of the restaurant, into its philosophy. So it’s all part of a big picture of what I would like to call success.

people who care about the same things you do. We and our suppliers are a good extended family, and customers get that. We’ve never done any advertising, but I’ve been out there talking the talk and writing about it and thinking about it for many, many years, and that has encouraged people to come and taste. And once they taste, they seem to come back. How has your role in the Slow Food movement affected the restaurant’s performance?

It’s really hard to say, because we have a very small place that’s pretty much been full since the beginning. We serve 500 people a day. Maybe my social involvement brings in more customers at an off

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How do you keep your staff motivated and loyal?

I’ve done some really unorthodox things. We have two chefs I wanted to

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have work at Chez Panisse who have other interests. I thought that maybe I could persuade them to join us if I let them share the job. The main chefs downstairs each work six months on and six months off, but I pay them for the whole year. Not as much as a superstar chef, but pretty well. When they’re not working at Chez Panisse, they’re in France. One teaches in Bordeaux, and the other goes to Paris. They travel and then come back to the restaurant. I also have the chefs upstairs, in the café, sharing a job. We’re open six days a week. Well, there are always at least two days you don’t have any ideas – that’s human nature. So I hired the two café chefs. They each come to work three days a week but get paid for five. On the other two days they go to the markets, they work on their meals, they do whatever they do. They stay with the restaurant for a very long time, because they have time to have a life with their families.

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How to Be a

S S O B GOOD in a Bad Economy BY ROBERT I. SUTTON

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hese are tough times for every boss I know. Fear and paranoia are running wild, not just in financial markets but in workplaces, too. A few weeks back a weary executive at a professional services firm told me how painful it had been to lay off 10% of his people and how he was struggling to comfort and inspire those who remained. When I asked a mutual friend, the CEO of a manufacturing firm, to “show some love” to this distressed executive, he jumped in to help – but admitted that he was wrestling with his own demons, having just implemented a 20% workforce reduction. It was not a coincidence to find two friends in such similar straits; few organizations seem to have avoided them. Even in businesses renowned for having heart, bosses have been forced to wield the ax. NetApp, declared number one in Fortune’s “100 Best Companies to Work For” for 2009, announced it was cutting loose 6% of its employees

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How to Be a Good Boss in a Bad Economy

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less than a month after the ranking apThe Toxic Tandem IN BRIEF peared. Google, top-rated by Fortune in Let’s be clear: It’s never easy to be a 2008, has shed hundreds of full-time emgreat boss, even in good economic times. » It’s not easy being the boss during ployees. And layoffs aren’t the only reaIt’s challenging in part because of an a downturn. Your natural impulse is son it’s a miserable time to be the boss. unfortunate dynamic that naturally to focus on your own well-justified Where cuts haven’t occurred, people susarises in relationships of unequal power. concerns, but your people are pect they will, and the lingering dread Research confirms what many of us watching your every move for creates its own challenges. One techhave long suspected: People who gain clues to their fate. nology sector CEO I’ve worked with for authority over others tend to become » You need to rethink your responyears felt compelled to inform his peomore self-centered and less mindful sibilities in terms of what your ple in writing that not only were no layof what others need, do, and say. That people may lack most in unsettling offs planned but the company would be would be bad enough, but the problem times: predictability, understandhiring a lot more people in the coming is compounded because a boss’s selfing, control, and compassion. year. Yet, he said, “no matter how much I absorbed words and deeds are scruti» By making tough times less traushare about how safe we are, people still nized so closely by his or her followers. matic, you’ll equip your organizaask, When are the layoffs coming?” Even Combined, these tendencies make for a tion to thrive when conditions where jobs are demonstrably safe, lesser toxic tandem that deserves closer study. improve – and earn the loyalty of but real disappointments occur: Salaries To appreciate the first half of the dyindividuals who will remain in your network for years to come. are cut, budgets are pared, projects are namic – that bosses tend to be oblivious back-burnered. to their followers’ perspectives – conAs a result, most bosses – like you, persider the “cookie experiment” reported haps – are operating in difficult and someby the psychologists Dacher Keltner, times unfamiliar territory. Equipped Deborah H. Gruenfeld, and Cameron with skills and approaches honed over Anderson in 2003. In this study, teams long years of business growth, they now find their roles defined of three students each were instructed to produce a short by an unexpected question: How should people be managed policy paper. Two members of each team were randomly aswhen fear is in the air, confidence is slipping, and it looks as signed to write the paper. The third member evaluated it and if the road ahead will remain rough for many miles? This isn’t determined how much the other two would be paid, in effect the job most executives and managers signed on for, and not making them subordinates. About 30 minutes into the meeteveryone will rise to the occasion. This article is designed to ing, the experimenter brought in a plate of five cookies – a help those who want to do so – first by clarifying why it’s so welcome break that was in fact the focus of the experiment. hard to be a good boss, and then by sharing the essence of what No one was expected to reach for the last cookie on the plate, the best bosses do during tough times. and no one did. Basic manners dictate such restraint. But what of the fourth cookie – the extra one that could be taken without negotiation or an awkward moment? It turns out that a little taste of power has a substantial effect. The “bosses” not only tended to take the fourth cookie but also displayed signs of “disinhibited” eating, chewing with their mouths open and scattering crumbs widely. It’s a cute little experiment, but it beautifully illustrates a finding consistent across many studies. When people – independent of personality – wield power, their ability to lord it over others causes them to (1) become more focused on their own needs and wants; (2) become less focused on others’ needs, wants, and actions; and (3) act as if written and unwritten rules that others are expected to follow don’t apply to them. To make matters worse, many bosses suffer a related form of power poisoning: They believe that they are aware of every important development in the organization (even when they are remarkably ignorant of key facts). This affliction is called “the fallacy of centrality” – the assumption that because one holds a central position, one automatically knows everything necessary to exercise effective leadership.

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PRACTICE Now let’s look at the other half of the dynamic – that followers devote imSOME YEARS AGO Robert Sutton led a workshop with the senior managers of mense energy to watching, interpreting, Procter & Gamble that touched on the importance of providing workers with and worrying about even the smallest predictability, understanding, control, and compassion. It turned out that his frameand most innocent moves their superiwork aligned with what they’d already learned in the context of plant closings. ors make. This is something we’ve long John E. Pepper, Jr., who was then P&G’s chairman, explained an internal analysis known about animals; studies of baboon of the effects that management’s actions had on productivity, retention of employees who were offered jobs elsewhere in the company, and sales in the cities troops show that the typical member where the closings occurred. Plant closings did far less damage when leaders: glances at the alpha male every 20 or 30 seconds to see what he is doing. And Announced the closing Gave affected employees although people don’t check what their date and key milestones options for finding other boss is doing two or three times a minwell in advance and jobs inside the company or ute, this tendency is well documented in described how events would unfold resources to job hunt outside. human groups, too. As the psychologist both for employees and for members Susan Fiske puts it,“Attention is directed of the affected community. Expressed human up the hierarchy. Secretaries know more concern – in public and in private – to affected Explained in detail to about their bosses than vice versa; grademployees and community officials. employees and the uate students know more about their community the business advisors than vice versa.” Fiske explains: case for closing the plant. “People pay attention to those who control their outcomes. In an effort to preIn other words, P&G executives saw the value of predictability, understanding, dict and possibly influence what is going control, and compassion in times of distressing organizational change. to happen to them, people gather information about those with power.” Further, people tend to interpret what they see the boss do in a negative light. Keltner and his colleagues report that when the top dog makes an ambiguous move who do so will find that in stressful times people have an (one that isn’t clearly good or bad for followers), followers are acute – and often unmet – need for four remedies: predictmost likely to construe it as a sign that something bad is going ability, understanding, control, and compassion. My mentor to happen to them. Related studies also show that when people Robert Kahn and I outlined the first three in a 1987 paper down the pecking order feel threatened by their superiors, they that was inspired by the great and lousy bosses we had obbecome distracted from their work. They redirect their efforts served during a deep recession in the midwestern United to trying to figure out what is going on and to coping with States. Some years later my colleague Jeffrey Pfeffer helped their fear and anxiety – perhaps searching the web for insight me recognize the fourth as a distinct and equally crucial or huddling with their peers to gossip, complain, and exchange antidote to organizational stress. emotional support. As a result, performance suffers. Even in the best of times, bosses fall prey to this toxic tandem. In a crisis, however, both sides of the dynamic are ampliProviding Predictability fied. So it’s not your imagination; it is harder to be a good boss The importance of predictability in people’s lives is hard to in a bad economy. Your own stress presses you to shut down overstate, and has been demonstrated in numerous studies. emotionally, to focus attention on what your superiors are up The most famous is Martin Seligman’s research on the signal/ to, to turn inward and wrestle with your fears. The heightened safety hypothesis. Seligman observed that when a stressful threat causes your followers to watch your moves even more event can be predicted, the absence of a stressful event can closely, searching for clues about what is likely to happen to also be predicted. Thus a person knows when he or she need them and what they can do about it. The threats that arise in not maintain a state of vigilance or anxiety. Seligman cites tough times are also more likely to be real than imagined, and the function of air-raid sirens during the bombing of London to hit with greater frequency. Everyone involved is only human, in World War II. They were so reliable a signal that people with the usual foibles, quirks, and blind spots. The equipment felt free to go about their business when the sirens were siremains the same, and it’s being put to an unusually hard test. lent. The hypothesis was bolstered by studies in which some How can well-intentioned bosses avoid the toxic tandem? animals and not others were given a warning in advance of a By mindfully taking attention from themselves in order shock. Those that were never warned lived in a constant state to give it to their people’s challenges and worries. Bosses of anxiety.

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How to Be a Good Boss in a Bad Economy

The same holds true for organizational shocks like layoffs. If you give people as much information as you can about what will happen (to them as individuals, to their work groups, and to the organization as a whole) and when it will happen, they will prepare to the extent they can and suffer less. Just as important, they can learn to relax in the absence of such a warning. This was the thinking behind one CEO’s decision to issue a heads-up memo to the staff of his nonprofit organization. In it he laid out in detail the worst-case scenario that would result if the stock market and donations failed to rebound over a certain time period. But while preparing people for a future that might well involve job losses, he also made a firm commitment: No one would be asked to leave for at least three months. At another company I know, managers opted for a deeper staff cut than was immediately necessary, because they were determined not to inflict a second one right away and thus create a distracting fear of still more to come. They followed that cut with the message that although more might be needed in the future, none would be made for at least six months. Providing more predictability is in large part a function of reducing the seemingly random. Certainly there are times when people seek out surprise and novelty. Most of us come to points in our lives when, in the words of Arthur Conan Doyle, we abhor the dull routine of existence. This is not one of them. It is also important to realize that what will be seen as surprising or routine, as fair or unfair, is dictated by the quirks of your organization’s history. Unfortunately, the better you have treated your

dian workplaces by Christopher Zatzick and Roderick Iverson showed that layoffs had the most negative effect on productivity in “high involvement” organizations – places where employees have greater responsibility and decision-making authority, and where more emphasis is put on treating people well than in traditional workplaces. Zatzick and Iverson also found that productivity dropped most sharply in once-enlightened workplaces that had shattered employee expectations with a one-two punch: They did deep layoffs and abandoned high-involvement work practices. The effort that people are willing to expend and the anger and anxiety that they suffer don’t simply result from their objective fate; their reactions are shaped by the difference between what they expect and what they get.

Increasing Understanding If predictability is about what will happen and when, understanding is about why and how. The chief advice here is to accompany any major change with an explanation of what makes it necessary and what effect it will have – in as much detail as possible. This advice, too, is rooted in psychological research: Human beings consistently react negatively to unexplained events. The effect is so strong that it is better to give an explanation they dislike than no explanation at all, provided the explanation is credible. Good bosses also know that more than a single communication is needed to bring a large group to a point of real understanding. I mentioned above the technology CEO whose people persisted in expecting job losses even though the business was growing. Rather than assuming that his “no layoffs” message would suffice until further notice, he knew he would have to keep repeating himself and looked for other ways to help employees comprehend the reality. “We shared our bank statements with everyone,” he told me, “so that they could understand where our assets are and how safe they are.” When operations are going haywire and people are rattled, it’s especially hard to get new ideas to take root or to teach new behaviors of any complexity. Your job as boss is to design messages that will get through to people who are distracted, upset, and apt to think negatively given any ambiguity. When it comes to internal communications, your mantra should be “Simple, concrete, and repetitive.” Think of the attendants on Flight 1549, in what has been called the Miracle on the Hudson. As the plane plummeted down, they chanted in unison, “Brace, brace, heads down, stay down.” Bosses who lead people through crises need to provide the same kind of clear and emphatic direction. For many scientific reasons, as Chip and Dan Heath show in their book Made to Stick, people are more likely to act on such messages. The best bosses I know have usually arrived at the same conclusion on the basis of experience. A.G. Lafley, the effective, humane, and wise CEO of Procter & Gamble, falls

The effort that people are willing to expend and the anger and anxiety that they suffer are shaped by the difference between what they expect and what they get. ■ ■ ■ ■

people in the past, the more bruised they will be by layoffs, pay cuts, and other blows. When Advanced Micro Devices, which once touted its no-layoffs policy and called other firms that used layoffs “myopic as well as misanthropic,” had to resort to staff cuts in 1986, the resulting anger and despair struck many as disproportionate. The same intensity of reaction was seen when other historically humane companies – Levi Strauss and Hewlett-Packard come to mind – were forced to lay off employees. Meanwhile, companies with a history of treating people as mere expenses and tossing surplus bodies out the door at the first whiff of bad times seem scarcely to miss a beat. After all, that is what their people expect. A 2006 study of 3,080 Cana-

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Beware the Cone of Silence

F

ROM AN employee’s perspective, when to

BE DISCREET. To be sure, the

passengers could not help overhearing

answer cannot be that senior managers

that the firm was planning deep staff

get nervous is often

should spend less time conferring. In a

cuts in March, and at least one person

obvious: Bosses start

downturn the pressure is immense to

deduced what firm the partner was

huddling behind

make decisions that demand a shared

with after he rattled off the names of

closed doors, decid-

understanding of rapidly evolving

two dozen candidates for dismissal.

ing God knows what,

financials, scenarios and options, and

That passenger promptly posted the

and betraying as little as possible. As a

constraints. Often it is impossible to

news in a blog, and the story spread like

boss, you might find some such “back-

open up this messy decision process

wildfire. (To its credit, the firm quickly

stage work” unavoidable – but be aware

to broader involvement and scrutiny,

apologized for the indiscretion and ac-

that it can reinforce feelings of unpre-

which might not only threaten legal and

knowledged that the news was true.)

dictability, misunderstanding, lack of

ethical requirements for confidential-

control, and management’s indiffer-

ity but could lead to worse decisions.

closed-door mystery is clearly inevi-

ence, which will ultimately make things

(As the psychologist Philip Tetlock has

table. And even the hardiest of bosses

harder on everyone.

shown, decision makers operating

need some time away from the fray to

DON’T HIDE. In the worst cases I’ve seen, bosses have even hidden

RELY ON YOUR PEERS. Some

under excessive scrutiny tend to make

recharge. But don’t let such absences go

the choices that are easiest to justify

unexplained. Your employees can appreciate the stress you are under, and won’t

from their people: Knowing what they

rather than those they think are best.)

knew about impending cost cutting,

Information leaks can also hurt people

begrudge you an occasional break. You

they couldn’t look subordinates in the

or be downright embarrassing. Witness

won’t want to burden them with your

eye. Years ago, when colleagues and I

the chagrin of a major law firm in Febru-

troubles when they have their own – but

studied the collapse of the video game

ary 2009 after one of its partners had a

you and your management team can

company Atari, we learned that top ex-

sensitive phone conversation with the

support one another, and you’ll be avail-

ecutives were using a back door rather

firm’s COO while riding on a train from

able to talk about the team’s fears and

than the front entrance to come and go,

Washington, DC, to New York. Fellow

problems along the way.

so determined were they to avoid con-

The key is to be deeply sensitive

tact with the rank and file. That study

to people’s interpretations. Follow

came to mind when, quite recently, a

long closed-door meetings with longer

boss I know disappeared from his office

open-door periods. Communicate

for weeks after a layoff. In each case

everything that can be communicated,

employees interpreted leadership’s

both in writing and face-to-face. Be

absence as a sign that something truly

present and visibly on top of the situa-

horrible was going to happen. The

tion. Express warmth and concern, but

rumor mill sped up, and even less effort

also whatever optimism is warranted.

went into the work at hand.

Above all, look your people in the eye.

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How to Be a Good Boss in a Bad Economy

into that camp. One of his favorite pieces of advice is to keep it “Sesame Street simple.” Remember: You may have spent an hour carefully crafting an e-mail and many hours making sure that all your direct reports know what is happening and what they can do – but even so, any one of them may have just glanced at the e-mail and become so agitated when you spoke that the message simply didn’t stick. I suspect that Lafley has repeated some of his Sesame Street–simple messages so often that they bore him silly. But he is smart enough to know that there is always someone in the room who hasn’t absorbed the point before – and that those hearing it for the tenth time can only conclude he really means it. If you aren’t saying the same things over and over again, and aren’t a bit bored with yourself, it may be that you aren’t repeating yourself enough or your messages are overly complex.

Affording Control People don’t embark on careers to feel powerless. The whole point of work is to achieve outcomes and have impact. That’s why people are so deeply frustrated when events seem to render them helpless. As a boss in a bad economy, you may not be able to give people much control over what happens, but it’s important that they have as much say as possible in how and when it happens.

A boss delivering bad news to a subordinate is, by definition, at a later point in the emotional cycle of reacting to it. ■ ■ ■ ■

During overwhelming times, a good boss finds ways to keep up a drumbeat of accomplishments, however minor. The organizational theorist Karl Weick shows in his classic article “Small Wins” that when an obstacle is framed as too big, too complex, or too difficult, people are overwhelmed and freeze in their tracks. Yet when the same challenge is broken down into less daunting components, people proceed with confidence to overcome it. One boss I know at a troubled company recently launched a crucial sales campaign that in the best case may enable the company to raise everyone’s pay and in the worst case may result in huge layoffs and possibly even the company’s demise. It was a bet-the-farm move that had every chance of paralyzing his already spooked people. But rather than allowing them to fret about the scale of the effort, he kicked it off by asking the team to jot down on sticky notes

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every discrete task required to do the campaign right. Then he sorted the notes on a whiteboard according to whether each task was “easy” or “hard” in the team’s opinion. It turned out that more than half were easy and could be accomplished within a few days. He then asked for a volunteer to take responsibility for each of the easy tasks and requested that when a task had been accomplished, its owner report back to the entire group via e-mail. Not only was a lot of progress made in the following week, but the flurry of “got it done” e-mails dramatically lowered people’s collective anxiety, enhanced their collective energy, and gave them confidence that the hard tasks, too, could be handled.

Showing Compassion Jerald Greenberg, a management professor at The Ohio State University, provides compelling evidence that compassion affects the bottom line in tough times. Greenberg studied three nearly identical manufacturing plants in the Midwest that were all part of the same company; two of them (which management chose at random) instituted a temporary 10-week pay cut of 15% after the firm had lost a major contract. At one of the two, the executive who conveyed the news did so curtly, announcing, “I’ll answer one or two questions, but then I have to catch a plane for another meeting.” At the other one, the executive who broke the news gave a detailed and compassionate explanation, along with apologies and multiple expressions of remorse. He also spent a full hour answering questions about why the cost cutting was necessary, who would be affected, and what steps workers could take to help themselves and the plant. Greenberg found fascinating effects on employee theft rates. At the plant where the curt explanation was given, the rate rose to more than 9%. But at the plant where management’s explanation was detailed and compassionate, it rose only to 6%. (At the third plant, where no pay cuts were made, the rate held steady at about 4% during the 10-week period.) After pay was restored at the two plants, theft rates at both returned to the original level of about 4%. Greenberg’s interpretation is that employees stole more at the two plants where cuts were made to “get even” with their employer, and stole the most at the plant where managers exhibited a lack of compassion because they had more to get even for. This suggests that compassion from a boss adds corporate value – in good times and in bad. What’s more, it’s free. Compassion can and does take many forms. At its heart it is as simple as adopting the other person’s point of view, understanding his anxiety, and making a sincere effort to soothe it. A manager who had just completed a second round of layoffs shared with me a valuable lesson she had learned about empathy: A boss delivering bad news to a subordinate is, by definition, at a later point in the emotional cycle of reacting

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■ ■ ■ ■

Making the Best of a Bad Situation

this stage of its life if we aspire to become to it. By the time they talk, the boss has one of the great car companies of the 21st already worked through the shock, anger, century.” and embarrassment; gone through all the Musk’s statement was interpreted both scenarios in her head; made decisions; and inside and outside the company as miscome to terms with them. “You need to reguided and destructive. But it teaches us mind yourself,” this manager said, “that the a valuable lesson: Before making a stateperson across the table is hearing the news Whether you oversee just a few ment, stop to consider how it will sound to for the first time and is just starting that prodirect reports or are the CEO of an upset and touchy person. cess.” Not only will that person be unready a big company, these frightento engage with the considerations the boss ing times mean that you need to is outlining, but he may be appalled at how rethink your responsibilities as the The Sign of a Great Boss dispassionately they are presented. And as boss. More than anything, people Bosses who increase predictability, undera boss, don’t assume that an employee’s standing, control, and compassion for their now need you to address deficits initial reaction will persist. This manager people will allow employees to accomplish in four areas: told me that employees who had hugged the most in a time of anxiety – and will earn her and thanked her sometimes came back their deep loyalty. A manager who provides PREDICTABILITY Give people to scream at her a few days later, after the all four will be perceived as “having people’s as much information as you can shock wore off. Others, who had reacted backs. ” That’s a good phrase to keep in mind about what will happen and when. angrily, came back to apologize and then when you know your people are feeling If shocks are preceded by fair hugged and thanked her. vulnerable, because it will inform all your warnings, people not only have Compassion is most important when it actions, big and small. Years ago, during a time to brace themselves but also helps people retain their dignity. When laydownturn, I was a consultant to a supplyget chances to breathe easy. offs and closings are unavoidable, tending to chain group within Hewlett-Packard called the emotional needs of people who are let SPaM. The company was struggling to cut UNDERSTANDING Explain why go is essential both for them and for those costs and had eliminated free doughnuts the changes you’re implementing who survive the cuts. One of the worst things in the morning – a long-standing tradition. are necessary – and don’t assume a boss can do after a layoff is to bad-mouth At the time, people at SPaM were working you need to do so only once. or in any other way demean those who have very long hours and bringing in quite a bit departed. Even if you believe that you’ve cut of money. They were remarkably annoyed CONTROL Take a bewildering out the deadwood, saying so will anger and the day the doughnuts disappeared, and challenge and break it down into demoralize your remaining employees and “small win” opportunities. In situaremarkably happy, proud, and motivated may drive the best of them to jump ship. Ray when their boss, Corey Billington, found tions where you can’t give people Kassar, the former CEO of Atari, generated a some internal SPaM funds to bring the much influence over what happens, lot of anger in the 1980s when, after a deep doughnuts back. I remember sitting in the at least give them a say in how it layoff, he told survivors that the weak people coff ee room one morning right after their happens. were gone and only good people were left. return. One of the first employees to come Many survivors we interviewed perceived in, who barely recognized me, couldn’t help COMPASSION Put yourself in the layoffs as purely political and believed commenting when he saw the spread: “Isn’t the other person’s shoes. Express that some great people had been let go. it great to have your boss in your corner?” empathy and – when appropriUnfortunately, not every executive has Bosses who do this sort of thing usually ate – sorrow for any painful learned from Kassar’s blunder. Elon Musk, do it on many levels. I still hear stories about actions that have to be taken. the CEO of Tesla Motors, which makes and Bill Campbell’s leading the senior team of sells electric sports cars that cost about Go, a troubled pen-based computing com$100,000 each, cut some 10% of his workforce in late 2008. pany, in the early 1990s. Campbell is affectionately known as “the coach,” because he was head coach of the Columbia football Although he was more subtle than Kassar, Musk made pretty team in the 1970s, and is widely respected in Silicon Valley. (He clear that he was getting rid of the weakest people. “One of is known to be one of Steve Jobs’s most trusted advisers.) He the steps I will be taking,” he wrote that October, “is raising played a major role in growing many companies and mentoring the performance bar at Tesla to a very high level, which will dozens of bosses, from Google’s executive team to the Netscape result in a modest reduction in near term headcount. To be cofounder Marc Andreessen to the entrepreneur and venture clear, this doesn’t mean that the people that depart Tesla capitalist Randy Komisar. I’ve talked extensively with Komisar for this reason wouldn’t be considered good performers at about how Campbell fought to save Go during those tough most companies – almost all would. However, I believe Tesla times and why not a single member of its top team left, even must adhere more closely to a special forces philosophy at

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How to Be a Good Boss in a Bad Economy

The venture capitalist John Doerr told Fortune, “Bill was at his finest when we were winding down Go. His most important thing was that we take care of the people, that they leave that venture with dignity.” Many members of the team went on to successfully lead other companies such as VeriSign, Netscape, and LucasArts Entertainment. Not only did people remain loyal to Campbell throughout the struggle to save Go, but most alums, including Komisar, look back on those days as one of the finest periods of their lives. Bill Campell’s story contains a lesson that bosses often forget, given the tunnel vision and desperation provoked by tough economic times: Win or lose, if your people believe that you are always on their side, it will come back to help you – but if they believe you are willing to sell them out at the drop of a hat, it can haunt you down the road. Robert I. Sutton ([email protected]) is a professor of management science and engineering at Stanford University, where he cofounded the Hasso Plattner Institute of Design and the Stanford Technology Ventures Program. He is the author of The No Asshole Rule (Business Plus, 2007) and is currently writing a book on great bosses. Reprint R0906E

“Ms. Green, send in someone to curb my optimism.”

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To order, see page 115.

Roy Delgado

though things kept looking worse and worse. When I asked Komisar to explain exactly how Campbell made people feel so loyal and invested in saving the company, he pounded out this impressive list: ■ He would hug people when he happened upon them. ■ He would always make some hackneyed joke that each of us could have stepped in and completed after a short while, but it showed genuine warmth. ■ His door was open and he would have one-on-ones at all levels of the company, being careful not to undermine his managers. ■ He explicitly rewarded loyalty, singling people out in company presentations and building up those who showed real commitment. ■ He punished disloyalty and lack of dedication by withdrawing his attention and warmth. Everyone could feel it. ■ He insisted on excellence and held people accountable. He rewarded performance not with money but with responsibility and the status that came with his attention. ■ He made himself visible. ■ He would stand up for his people and organization with others (investors, partners, competitors), and everyone knew the stories and retold them until they became legendary.

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SPOTLIGHT ON

TRUST

Rebuilding

Trust

FROM THE MOMENT you tell your six-year-old that a savings account is as good as a piggy bank, you’re teaching her a larger lesson: that the world of commerce is predictable, rule-based, and sensible. (Not perfect, and not always fair, but fundamentally sound.) It’s an important lesson. A modern economy simply can’t function if people don’t have faith that the hbr.org institutions around them actually work. For the latest thinkYet this year many, many people stopped believing ing on what needs to that our financial institutions – and to some extent be done to restore trust in business, go the companies in the broader economy – were trustto hbr.org. worthy. Rebuilding confidence in those institutions will take a long time. The articles in this special spotlight package look at trust from some surprising angles – including whether MBA programs have failed to develop honest, decent managers and whether people are hardwired to trust too quickly.

54

What’s Needed Next: A Culture of Candor by James O’Toole and Warren Bennis

68 Rethinking Trust by Roderick M. Kramer

TIMELINE Highlights – and Lowlights – in the Public’s Trust of Business

72

62

The Buck Stops (and Starts) at Business School by Joel M. Podolny

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SPOTLIGHT ON

TRUST

What’s Needed Next:

A Culture

of Candor

We won’t be able to rebuild trust in institutions until leaders learn how to communicate honestly – and create organizations where that’s the norm. by James O’Toole and Warren Bennis

U

mance of American corporate leaders was relatively simple: the extent to which they created wealth for investors. But that was then. Now the forces of globalization and technology have conspired to complicate the competitive arena, creating a need for leaders who can manage rapid innovation. Expectations about the corporation’s role in social issues such as environmental degradation, domestic job creation, and even poverty in the developing world have risen sharply as well. And the expedient, short-term thinking that Wall Street rewarded only yesterday has fallen out of fashion in the wake of

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Daniel Bejar

UNTIL RECENTLY, the yardstick used to evaluate the perfor-

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SPOTLIGHT ON

TRUST

What’s Needed Next: A Culture of Candor

IDEA

ton examined NASA’s findings on the the latest round of business busts and human factors involved in airline acscandals. IN BRIEF cidents. NASA researchers had placed It’s clear we need a better way to » No organization can be honest existing cockpit crews – pilot, copilot, evaluate business leaders. Moving forwith the public if it’s not honest navigator – in flight simulators and ward, it appears that the new metric of with itself. But being honest inside tested them to see how they would recorporate leadership will be closer to an organization is more difficult than spond during the crucial 30 to 45 secthis: the extent to which executives create it sounds. People hoard information, onds between the first sign of a potenorganizations that are economically, ethiengage in groupthink, tell their boss tial accident and the moment it would cally, and socially sustainable. only what they think he wants to occur. The stereotypical take-charge How can leaders accomplish such hear, and ignore facts that are star“fl yboy” pilots, who acted immediately an ambitious task? Their action plans ing them in the face. on their gut instincts, made the wrong will vary, of course, depending on the » To counter these natural tendecisions far more often than the more nature of their industries, the peculiaridencies, leaders need to make open, inclusive pilots who said to their ties of their companies, and the unique a conscious decision to support crews, in effect, “We’ve got a problem. challenges they face. But whatever their transparency and create a culture How do you read it?” before choosing strategies and tactics, we believe prudent of candor. a course of action. leaders will see that increased transpar» Organizations that fail to achieve At one level, the lesson of the NASA ency is a fundamental first step. transparency will have it forced fi ndings is simple: Leaders are far likeWhen we speak of “transparency,” upon them. There’s just no way to lier to make mistakes when they act on we mean much more than the standard keep a lot of secrets in the age of too little information than when they business definition of the term – full the internet. wait to learn more. But Blake and Moudisclosure of financial information to ton went deeper, demonstrating that investors. While such honesty is obvithe pilots’ habitual style of interacting ously necessary, that narrow interprewith their crews determined whether tation produces an unhealthy focus on crew members would provide them with essential informalegal compliance to the exclusion of equally important ethical tion during an in-air crisis. The pilots who’d made the right concerns, and on the needs of shareholders to the exclusion choices routinely had open exchanges with their crew memof the needs of other constituencies. Worse, it’s predicated on bers. The study also showed that crew members who had the blinkered assumption that a company can be transparent regularly worked with the “decisive” pilots were unwilling to to shareholders without first being transparent to the people intervene – even when they had information that might save who work inside it. Because no organization can be honest the plane. with the public if it’s not honest with itself, we define transparThat kind of silence has a tremendous price. In his recent ency broadly, as the degree to which information flows freely book Outliers, Malcolm Gladwell reviewed data from numerwithin an organization, among managers and employees, and ous airline accidents. “The kinds of errors that cause plane outward to stakeholders. crashes are invariably errors of teamwork and communicaCompanies can’t innovate, respond to changing stakeholder tion,” he concluded. “One pilot knows something important needs, or function efficiently unless people have access to reland somehow doesn’t tell the other pilot.” Hence, in an emerevant, timely, and valid information. It’s thus the leader’s job to gency pilots need to “communicate not just in the sense of iscreate systems and norms that lead to a culture of candor. suing commands but also in the sense of…sharing information in the clearest and most transparent manner possible.” How Candor Improves Performance Transparency problems don’t always involve a leader who Admittedly, the relationship between organizational candor won’t listen to followers (or followers who won’t speak up). and performance is complex, but it’s worth examining from a They also arise when members of a team suffer from groupnumber of angles: whether people who need to communicate think – they don’t know how to disagree with one another. upward are able to do so honestly; whether teams are able to This second type of problem has been written about a lot, but challenge their own assumptions openly; and whether boards we’re sorry to report that from what we’ve observed, it’s very of directors are able to communicate important messages to much alive in the executive meeting rooms of large corpothe company’s leadership. rations. Shared values and assumptions play a positive and We’ll tackle upward communication first. Consider the renecessary role in holding any group together. But when a sults of an intriguing, relatively obscure study from the 1980s, team of senior managers suffer from collective denial and in which organizational theorists Robert Blake and Jane Mou-

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IDEA IN

PRACTICE » Practice having unpleasant con-

If you want to develop a culture of

self-deception – when they can’t uncandor, start with your own behavversations. The best leaders learn earth and question their shared asior and then work outward – and how to deliver bad news kindly so sumptions – they can’t innovate or keep these recommendations in that people don’t get unnecessarily make course corrections effectively. mind. hurt. That’s not easy – so find a safe That often leads to business and ethical place to practice. » Tell the truth. We all have an disasters. impulse to tell people what they » Diversify your sources of inforWe’ve argued for more transparwant to hear. Wise executives tell mation. Everyone’s biased. Make ency for a long time – but the truth is, everyone the same unvarnished sure you communicate regularly we haven’t seen much progress. In the story. Once you develop a reputation with different groups of employees, combined fourscore and 10 years we’ve for straight talk, people will return customers, and competitors, so that the favor. your own understanding is nuanced been studying organizations, the most and multifaceted. common metaphor we’ve heard manag» Encourage people to speak ers use to describe their own cultures truth to power. It’s extraordinarily » Admit your mistakes. This gives is “a mushroom farm” – as in, “People difficult for people lower in a everyone around you permission to around here are kept in the dark and fed hierarchy to tell higher-ups unpalatdo the same. able truths – but that’s what the manure.” When we recently polled 154 » Build organizational support for higher-ups need to know, because executives, 63% of them described their transparency. Start with protection often their employees have access own company culture as opaque. And for whistle-blowers, but don’t stop to information about problems that the remaining 37% were more likely to there. Hire people because they crethey don’t. Create the conditions for choose clouds over bright sunshine to ated a culture of candor elsewhere people to be courageous. (not because they can outcompete describe the communication practices » Reward contrarians. Your comtheir peers). at their firms. pany won’t innovate successfully Organizational transparency makes » Set information free. Most orgaif you don’t learn to recognize, then sense rationally and ethically, and it nizations default to keeping informachallenge, your own assumptions. makes businesses run more efficiently tion confidential when it might be Find colleagues who can help you strategic or private. Default, instead, and effectively. But leaders resist it do that. Promote the best of them. to sharing information – unless even so, because it goes against the Thank all of them. there’s a clear reason not to. grain of group behavior and, in some ways, even against human nature. In all groups leaders try to hoard and control information because they believe it’s a source of power. Managers sometimes awe that it simply did not provide prudent oversight. What believe that access to information is a perquisite of power, Black and his board failed to factor into their pact of silence is a benefit that separates their privileged caste from the unthat truth has a way of ultimately surfacing. washed hoi polloi. Such leaders apparently feel that they’re smarter than their followers, and thus only they need, or would know how to use, sensitive and complex information. Why Transparency Is Inevitable Today Some even like opacity because it allows them to hide embarWhat executives are learning, often the hard way, is that their rassing mistakes. ability to keep secrets is vanishing – in large part because of A third type of transparency problem occurs when the the internet. This is true not just in open democracies but in board of directors abdicates its responsibility to provide genuauthoritarian states as well. For example, in 2007 blogger Lian ine oversight. An alarming number of board members today Yue warned residents of Xiamen, China, of plans to build a seem to succumb to the “shimmer effect” – they let charischemical plant in their beautiful coastal city. Even a decade matic CEOs get away with murder (or outrageous greed, at earlier, the factory would have been built before local citiany rate). Witness the behavior of Hollinger International’s zens were the wiser. But urged on by Lian, opposition spread former CEO Conrad Black, who spent some $8 million of his quickly in Xiamen, via e-mail, blogs, and text messages. Proshareholders’ funds to treat himself to a private collection of testers organized a march on the town’s city hall to demand Franklin D. Roosevelt memorabilia. Worse, Black was found the cancellation of the project. Although government censors guilty of taking millions in illegal payments for agreeing not promptly shut down their websites, the protesters took photos to compete with Hollinger’s own subsidiaries. The company’s of the demonstration with their cell phones and sent them to board, which included Henry Kissinger, held Black in such journalists. A million messages opposing the plant reportedly

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were circulated. The government ultimately agreed to do an environmental impact study, and the plant was moved 30 miles out of town. If this can happen in China, it can happen anywhere. Today anyone with a cell phone and access to a computer could conceivably bring down a billion-dollar corporation. Trying to restrict the free flow of information doesn’t work for corporate executives any more than it did for government officials in Xiamen. An instructive example is the decision of Guidant not to publicize a defect it discovered in some models of its defibrillators. The flaw caused a small number of the implanted heart regulators to short-circuit and malfunction, but according to reports in the New York Times, Guidant executives didn’t tell doctors about it for three years. They remained silent until the spring of 2005, when one of the devices was implicated in the death of a college student, whose physicians contacted the Times. Though it was under

Creating Transparency A culture of candor doesn’t just develop on its own – the hoarding of information is far too persistent in organizations of all kinds. That said, leaders can take steps to create and nurture transparency. The bottom line with each of these recommendations is that leaders need to be role models: They must share more information, look for counterarguments, admit their own errors, and behave as they want others to behave. Tell the truth. When followers are asked to rank what they need from their leaders, trustworthiness almost always tops the list. Leaders who are candid and predictable – they tell everyone the same thing and don’t continually revise their stories – signal to followers that the rules of the game aren’t changing and that decisions won’t be made arbitrarily. Given that assurance, followers become more willing to stick their necks out, make an extra effort, and put themselves on the line to help their leaders achieve goals.

As one manager told us, “The only messenger I would ever shoot is one who arrived too late.” fire, Guidant didn’t recall the defibrillators for almost another month – and not until another death had been connected to its product. Eventually, the Guidant devices were implicated in at least five more deaths, and the result was a catastrophic trust problem with the company’s primary customers: physicians. Guidant’s share of the defibrillator market dropped from 35% to about 24% after the recall, apparently because of the disgust many doctors felt over the company’s decision to conceal the truth. In stark contrast to Guidant, some farsighted leaders institute a “no secrets” policy designed to build trust among all corporate stakeholders. Kent Thiry, CEO of DaVita, a dialysistreatment operator, systematically collects data and solicits candid feedback from his employees, ex-employees, customers, and suppliers in order to avoid making mistakes. Thiry actively seeks out bad news and rewards employees who give it to him. To reinforce trust, he and his top managers act promptly to correct practices that employees have identified as problematic – issues that, if left unchecked, could come back to haunt the company. And historical examples of unusual displays of candor that created public trust are the stuff of legend at such diverse companies as Honeywell, Continental Airlines, Johnson & Johnson, Nordstrom, Whole Foods, and Xilinx.

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Encourage people to speak truth to power. Building trust takes time and consistency, and the reward is an unimpeded flow of intelligence. Sometimes that includes news and information that executives don’t want to hear. Clearheaded managers appreciate such openness. As one told us, “The only messenger I would ever shoot is one who arrived too late.” Many executives are not that enlightened, however. What they fail to understand is that trust is a symbiotic relationship: Leaders first must trust others before others will trust them. It’s never easy for employees to be honest with their bosses. After a string of box office flops, movie mogul Samuel Goldwyn was said to have told a meeting of his top staff, “I don’t want any yes-men around me. I want everybody to tell me the truth even if it costs them their jobs.” The story illustrates that speaking truth to power requires both a willing listener and a courageous speaker. In all organizations – families, sports teams, schools, businesses, and government agencies – those lower down the pecking order may experience, from time to time, the terror involved in having to tell unpalatable truths to those above them. Daring to speak truth to power often entails considerable risk – whether at the hands of an irate parent, a neighborhood bully, or an incensed movie studio boss. Imagine the courage it would have taken for an Enron employee to confront Jeffrey Skilling with the facts of the

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Why Good People Do Bad Things

T

HE BIZARRE and terrible events at the Abu Ghraib prison in Iraq caused social psychologist Philip Zimbardo to reexamine the famous and controversial prison experiment he conducted at Stanford in 1971. In The Lucifer Effect, he reviews how the experiment got out of hand:

Young men had been assigned to play the roles of guards and inmates in an ersatz jail in the basement of a campus building, but the participants took their playacting so seriously that the scheduled two-week experiment had to be aborted at midpoint, after the student guards had begun to psychologically and physically abuse the student prisoners. Zimbardo reanalyzes the experiment, along with the horrors that occurred in Nazi concentration camps, My Lai, Jonestown, and Rwanda (and currently are happening in Darfur), in light of two decades of social psychological research. He concludes that almost all of us are susceptible to being drawn over to the dark side, because human behavior is determined more by situational forces and group dynamics than by our inherent nature. Thus it is horribly easy to create situations and systems in which good people cannot resist the temptation to do bad things.

reluctance to speak truth to power. In all groups, there’s

But, on a more hopeful note, we can just as readily design

a powerful desire to belong. Everybody wants to be liked,

systems that lead to virtuous behavior. Zimbardo’s conclusion illuminates the roots of unethical

to be part of the “family.” Hence, the pressure to conform in organizations is almost irresistible. And nobody wants

corporate behavior better than most published analyses

to be the skunk at the party, the one who tells the boss that

of that topic. He demonstrates that ethical problems in

his fly is open or that she has peanut butter on her chin.

organizations originate not with “a few bad apples” but

These same organizational forces hamper a company’s

with the “barrel makers” – the leaders who, wittingly or

capacity to innovate, solve problems, achieve goals, meet

not, create and maintain the systems in which participants

challenges, and compete.

are encouraged to do wrong. The managerial implications are enormous. Instead of wasting millions of dollars on

The only effective antidote is to create an unimpeded flow of information and an organizational climate in which

ethics courses designed to exhort employees to be good, it

no one fears the consequences of speaking up. By broad-

would be far more effective to create corporate cultures in

ening the perspectives that leaders consider, transparency

which people are rewarded for doing good things.

deters groupthink. But its real value is that it keeps the

What’s more, Zimbardo’s findings shed light on the common organizational problems of peer pressure and the

leaders of organizations honest with others and, perhaps more important, honest with themselves.

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company’s financial deception. Or, even the courage required by a GE employee simply to question the company’s former CEO Jack Welch. According to Fortune, former GE employees reported that “Welch conducts meetings so aggressively that people tremble. He attacks almost physically with his intellect – criticizing, demeaning, ridiculing, humiliating.” In the early 1970s, Albert O. Hirschman posited that employees who disagree with company policy have only three options: exit, voice, or loyalty. That is, they can offer a principled resignation (exit), try to change the policy (voice truth to power), or remain team players despite their opposition (loyalty). Most people choose option three, the path of least resistance. They swallow whatever objections they may have to questionable dictates from above, concluding that they lack the power to change things or, worse, will be punished if they try. Most executives expect their people to be good soldiers and not question company policy, but a great leader will welcome alternative viewpoints. Reward contrarians. Companies with healthy cultures continually challenge their assumptions. That work can seldom be done by one person sitting alone in a room; it requires leaders who listen to others. An oft-told story about Motorola during its heyday in the 1980s concerns a young middle manager who approached then-CEO Robert Galvin and said: “Bob, I heard that point you made this morning, and I think you’re dead wrong. I’m going to prove it: I’m going to shoot you down.” When the young man stormed off, Galvin, beaming proudly, turned to a companion and said, “That’s how we’ve overcome Texas Instruments’ lead in semiconductors!” During that period, there were no rewards at Motorola for people who supported the status quo; managers got ahead by challenging existing assumptions and by pointing out imperial nakedness. In later decades the company lost those good habits. Alas, sustaining a culture of candor is even harder than creating one. Practice having unpleasant conversations. Beneficial as candor may be, great unintentional harm can be done when people speak honestly about difficult subjects. That’s why managers find it so hard to give performance appraisals to subordinates whose work is not up to par. And since offering negative feedback upward – to one’s boss – is even harder, that occurs even more rarely. There is no way to make giving feedback fun for the bearer of a bad assessment or for the recipient. But Northrop Grumman found a way to teach executives to handle it gracefully. The company’s recently retired chief ethics officer, Frank Daly, established a program wherein managers can practice having unpleasant conversations. It helps them learn how to deliver negative messages constructively, without being hurtful. The good news is that such exercises appear to be increasingly common in large corporations. Diversify your sources of information. Leaders have to work hard to overcome the tendency to lock themselves up,

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The Challenges of Transparency COMPLETE TRANSPARENCY is not possible, nor is it desirable. Corporations have a legitimate interest in holding competitive information close: The imperative for transparency doesn’t mean that Coca-Cola should reveal its secret recipe or that Microsoft should let its competitors in on the specs of its next generation of software. Strategic secrets are necessary and reasonable, as is protecting the privacy of individual employees and customers. Where to draw the line between what information must be revealed and what should be withheld is one of the most important judgments leaders make. Unfortunately, the reflex reaction in most companies is to treat all potentially embarrassing information as the equivalent of a state secret. The alternative, and we believe more prudent, default position is “When in doubt, let it out.” An emerging challenge in the age of the internet and corporate intranets is the increasing risk of misinformation, those unsubstantiated accusations that spread like wildfire. Hence, managers today need to learn how to use technology to counter misinformation with facts and to convey honest corporate messages. Internal corporate blogs can especially be thorns in the sides of executives, but technology-savvy managers know how to use the medium to defuse false rumors. The wisest executives view even nasty online critiques of top management as a mechanism that prevents tunnel vision and reminds the powers that be that they don’t have a lock on all useful information. Used proactively, technology can harness expertise from the bottom of organizations. There is always someone buried down the hierarchy who has information or insights needed by those at the top, and the new technology is the best way to tap that knowledge. All in all, there are some unpleasant things about transparency that managers simply have to learn to live with but can turn into opportunities.

figuratively speaking, in hermetically sealed C-suites. They should remind themselves of the secret that all well-trained journalists, consultants, and anthropologists learn: When you’re setting out to understand a culture, it’s best to seek diverse sources of information that demonstrate a variety of biases. This is a simple and obvious point, but rare is the leader who regularly meets with – and listens to – employ-

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ees, reporters, shareholders, regulators, and even annoying critics. Admit your mistakes. Wise leaders do this. It once was said about Gandhi, “He makes no compromise to admit having been in the wrong.” And President Obama’s admission during his third week in office – that he’d “screwed up” by appointing top officials who had played fast and loose with the IRS – sets the contemporary standard for how executives should right their mistakes. Admitting that you’ve goofed not only disarms your critics but also makes your employees more apt to own up to their own failings. Build an organizational architecture that supports candor. This task begins with creating norms and structures that sanction truth telling. Such organizational practices as opendoor policies, ombudsmen, protection for whistle-blowers, and

ethics was just one factor the board had considered. Boards are the last line of defense against ruinous self-deception and the suppression of vital truths. If they’re not vigilant in the pursuit of honesty, the organizations they serve are unlikely to have a free internal or external flow of information. Set information free. Corporate managers tend to keep a great deal of information private that could easily – and usefully – be shared widely. For the past 20 years every employee at SRC Holdings, a diversified remanufacturing company based in Springfield, Missouri, has had access to all financial and managerial information, and each is taught how to interpret and apply it. The net effect, in the words of the company’s CFO, “is like having 700 internal auditors out there in every function of the company.” The firm has extremely high ethical standards and has been a financial marvel, generating impressive profits,

Admitting that you’ve goofed disarms critics and makes employees more apt to own up to mistakes. internal blogs that give voice to those at the bottom of the hierarchy can help. Ethics training can also be useful, although too much of it in corporations is “CYA” legal compliance. The executive selection process is potentially the most powerful institutional lever for cultural change because the tone is set by those at the top. As we have seen, transparent behavior is unnatural among those in positions of power. In fact, executives are seldom chosen for their ability to create a culture of candor. (The habit of listening to contrarians is not a trait that most companies or executive recruiters seek in future leaders.) Most of the time, they’re selected not for their demonstrated teamwork but for their ability to compete successfully against their colleagues in the executive suite, which only encourages the hoarding of information. Changing that system is the responsibility of boards of directors. Truly independent boards would go a long way toward providing a needed check on executive ego and a source of objective truth telling. Errant executives will not begin to act virtuously so long as boards continue to reward their misbehavior. Raytheon’s board, for example, recently claimed that promoting ethical behavior was a criterion it used in setting executive bonuses. Yet shortly after the company’s CEO admitted that he had plagiarized large parts of a book he claimed to have written himself, the board voted him a $2.8 million bonus. When pressed, a Raytheon spokesman explained that

creating jobs, and spinning off new businesses sustainably year after year. As this example illustrates, extensive sharing of information is critical to both organizational effectiveness and ethics. That’s why exemplary leaders encourage, and even reward, openness and dissent. They understand that whatever momentary discomfort they may experience is more than offset by the fact that better information helps them make better decisions. Unfortunately, there is no easy way to institutionalize candor. Honesty at the top is the first step, but true transparency, like a healthy balance sheet, requires ongoing effort, sustained attention, and constant vigilance. James O’Toole ([email protected]) is the Daniels

Distinguished Professor of Business Ethics at the University of Denver’s Daniels College of Business and the author of 16 books. Warren Bennis ([email protected]) is University Professor at the University of Southern California and the author of numerous books on leadership, including the 1989 classic On Becoming a Leader (reissued by Basic Books in 2009). O’Toole and Bennis are coauthors (with Daniel Goleman and Patricia Ward Biederman) of Transparency: How Leaders Create a Culture of Candor (Jossey-Bass, 2008). Reprint R0906F

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Title

The Buck Stops (and Starts) at Business School

squib

Unless America’s business schools make radical changes, society will become convinced that MBAs work to serve only their own selfish interests.

by Author Name

I

by Joel M. Podolny

the American politician and gay rights activist, during a 1977 protest against the repeal of an antidiscrimination law. Today, we find ourselves in an economic quagmire where people around the world feel that same kind of intense rage – this time, against big business. Society has lost confidence in many economic institutions – investment banks, credit-rating agencies, and central banks, for instance – and prominent among them is one to which I devoted most of my professional life: business schools.

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Art Credit Jesse Lefkowitz

“I KNOW YOU’RE ANGRY. I’M ANGRY!” declared Harvey Milk,

5/1/09 5:22:44 PM

ecutives and companies seems small The resentment against the MBA is compared with the magnitude of the ofvisible everywhere. The New York Times IN BRIEF fense. To reprise the line: I know you’re printed several letters on March 3, 2009, » Many people believe that manangry. I’m angry too. reacting to a news story about the presagement education has contributed I’m angry about the inattention to sure these trying economic times have to the systemic failure of leadership ethics and values-based leadership in exerted on the teaching of the humanithat led to the current financial crisis. business schools. We didn’t need the ties. The letter writers alluded to the current meltdown to tell us that; the fact that by studying the arts, cultural » That may be so because, one, a focus on values-based leadership Enron and WorldCom scandals proved history, literature, philosophy, and reand ethics has not been central it more than seven years ago. ligion, people develop their powers of to management education. And, I’m angry about the disciplinary critical thinking and moral reasoning. two, even when B schools teach silos in which business schools teach Business schools don’t develop those leadership, they foster the belief management. I obviously didn’t realize skills, they argued, which is why MBAs that CEOs should focus on the big that balkanization had affected my unmade the shortsighted and self-serving picture – not the practical details. derstanding of the Royal Bank of Scotdecisions that resulted in the current » Business schools can regain soland, but many years ago, I did become financial crisis. ciety’s trust by emphasizing values aware that carving up management Two days earlier, a former student as much as they do analytics and challenges by function would leave acaof mine, Philip Delves Broughton, auby encouraging students to adopt a demics without a holistic appreciation thored an opinion piece in the Times holistic approach to business probof the challenges MBAs face. of London. I recall Philip as one of the lems. As professional schools, they I’m angry that many academics better students I taught at Harvard must stop competing for students aren’t curious about what really goes Business School, and it is evident from only by advertising rankings – a on inside companies. They prefer to dethe article that Philip remembers me. practice that reinforces the idea that velop theoretical models that obscure He wrote that I “trumpeted” organizatheir only goal is to teach students how to make a lot of money. rather than clarify the way organization design work I had done in 2000 tions work. Many also believe that a with the now-troubled Royal Bank of » The time has also come for busitheory’s relevance is enough to justify Scotland and that other HBS profesness schools to develop codes of teaching it. That’s a low bar; almost no sors had written case studies on the conduct for MBAs and to withdraw theory is entirely irrelevant to business, bank’s mergers and acquisitions, custhe degrees of those who break the manager’s code. but only a few are truly important. tomer service, and employee retenThese concerns prompted me to take tion strategies. “Every trendy business the position of dean of the Yale School school idea was being implemented, it of Management in 2005, where I could seemed, while what really mattered – tackle the problems I had observed. The the bank’s risk assessment, cash flow, changes that my colleagues and I implemented at Yale over and capital structure – was going to hell,” he pointed out. the next four years are widely regarded as an improvement Philip saved his sharpest criticism for what he perceived as on the traditional curriculum. However, I quickly realized Harvard Business School’s indifference to the role that some that the failings of today’s MBA education can’t be solved by of its graduates have played in recent business scandals. changes at one, or even a few, business schools. I would quibble with a few of the details in Philip’s account Fact is, so deep and widespread are the problems afflictand, having worked for several years at HBS, disagree with his ing management education that people have come to believe assessment that the school suffers from complete apathy. Five that business schools are harmful to society, fostering selfyears ago, HBS introduced a compulsory course on leadership interested, unethical, and even illegal behavior by their graduand corporate accountability as a response to the collapse of ates. How did we get into a situation in which MBAs are part Enron. In addition, some members of the faculty have taken of the problem rather than the solution? the current crisis as proof that they haven’t done enough to equip students to make good judgments, and they’re thinking about introducing more changes to the school’s curriculum What They Don’t Teach You at Business School and teaching methods. Fifty years ago, the Ford Foundation and the Carnegie FounAt the same time, I share Philip’s frustration. The degree dation each commissioned a study of U.S. business education. of contrition not just at business schools but also among exBoth concluded that the quality of scholarship was terrible

IDEA

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and suggested that business schools hire people trained in traditional academic disciplines that emphasize quantitative methods like economics, statistics, and operations research. The shadows of those reports, whose recommendations were largely adopted, linger to this day. Faculty members who rely on quantitative methods and mathematical models vastly outnumber those who emphasize qualitative techniques and inductive approaches. The emphasis on quantitative approaches created greater rigor in business schools, but the study of management challenges became fragmented, as academics in those disciplines carved up managerial problems to fit their areas of expertise. This has led to two unintended consequences. First, business schools have largely ignored the teaching of values and ethics because those aren’t subjects of inquiry for traditional business school academic disciplines. The consequences have been disastrous. For instance, when HBS professor Scott Snook recently surveyed MBA students, he found that a third regarded right and wrong as defined by the norm. That is, if several people were following a course of action, the students felt it was OK for them to do the same. Even when business schools teach ethics courses, as some of them started doing in the wake of the Enron fiasco, they do so in a vacuum. Teaching one ethics course doesn’t ensure that a marketing professor will, for instance, discuss privacy-related issues while describing the Net’s use as a marketing medium. On the contrary, because of a lack of interest, perhaps, or a fear of leading a discussion in an area outside their expertise, faculty members often stay away from teaching the normative aspects of business. Second, those leadership and ethics courses that are taught are flawed, as the recent collapse of Wall Street firms suggests.

Many faculty members and students believe that such courses are soft, in the sense that they don’t require detailed analysis of data as other courses do. What’s more, the business schools seem to have convinced MBAs that once they rise to positions of prominence, they’re responsible only for setting the vision, fashioning a strategy, and developing an agenda. Their subordinates will sweat the details. Leaders don’t need to worry unless the numbers come in worse than expected and change is required. They also feel they don’t have to consider what it might imply if the results are better than imaginable: Leadership, MBAs have been led to believe, doesn’t entail investigating whether there might be huge risks attached to those high returns. Does the case method, with its emphasis on context, help overcome these problems? I have written and taught cases for years, but my answer is no. Cases can be a source of interdisciplinary integration, and a way to focus on the various dimensions of leadership, but they rarely are. Faculty members from the same discipline usually write a case, which ends up being function specific. In addition, when students must read a dozen cases a week, they tend to assume that each one deals with an entirely separate issue. The case method doesn’t enable students to learn that being consistent in various situations and continually paying the right amount of attention to detail are among the most challenging aspects of leadership.

What’s Wrong with Rankings It’s no secret that rankings drive the competition for business school students. That’s not a bad thing per se; market pressure should force deans to keep improving curricula and teaching methods. The trouble is, deans who experiment with new courses can influence rankings only in the long run. Curricular

How Trust Has Eroded Since last year, do you have more or less trust in… HBR SURVEYED readers

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to gauge their level of trust

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in business relationships and found a tremen-

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Harvard Business Review Advisory Council survey, January 2009: 40% of the 1,024 respondents were U.S.based; 60% were non-U.S.-based.

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The degree of contrition at business schools seems small compared with the magnitude of the offense. changes are difficult beasts; they require the cooperation of every faculty member and take time to show results. In fact, such changes often incur students’ ire until professors iron out the wrinkles. Many deans therefore focus on influencing measures that can move their schools up the charts quickly. For instance, seasoned MBAs command higher starting salaries, so if a business school admits students with more experience to begin with, its ranking will automatically rise. Not coincidentally, the average age of students entering business school increased throughout the 1990s, as the schools chased candidates with more work experience. Rankings also rise if more students from a business school go into higher-paying industries. This has created an incentive to gear curricula toward students who want to work in sectors like consulting and financial services. Finally, instead of investing money in training faculty, deans can bring in consultants to help students perform better in interviews, which often boosts the number of offers each receives and thus improves rankings. On the surface, there’s nothing wrong with admitting students with more experience or helping graduates get higher starting salaries. However, when business schools invest in improving only those short-term performance drivers, they in-

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variably use rankings and starting salaries as central elements of their marketing. In the process, they lend credibility to those measures and endow them with too much significance. They also lend legitimacy to students’ claims that a school’s primary goal is to get them a high-paying job. I have no objection to anyone’s pursuing a career with a large salary, but I do object to the manner in which rankings have legitimized most business schools’ myopic focus on the short term. What’s worse, the rankings have undermined the focus on professionalization. An occupation earns the right to be a profession only when some ideals, such as being an impartial counsel, doing no harm, or serving the greater good, are infused into the conduct of people in that occupation. In like vein, a school becomes a professional school only when it infuses those ideals into its graduates. A business school does that effectively when it forces its students to ask, “How do I want to change the world for the better?” and provides them with the skills, tools, and values to bring that about in a responsible manner. The school should also make students realize that the task isn’t easy and will require learning, sacrifice, and determination. If MBAs can also earn large sums of money in the process, that’s cause for additional celebration. However, the way business schools today compete leads students to ask, “What can I do to make the most money?”

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and the manner in which faculty members teach allows students to regard the moral consequences of their actions as mere afterthoughts. Business schools are then no more than trade schools. There’s nothing wrong with trade schools. But, since MBAs occupy positions with enormous responsibility that have a huge impact on society, their ability to do harm is very great – greater than the damage that people trained by trade schools can cause. That’s why society should be concerned if business schools teach in a way that leaves MBAs

greater emphasis on leadership’s responsibilities – not just its rewards. There are no easy fixes, but let me suggest a handful of starting points. Foster greater integration. Business schools need to redefine what they teach and how they teach it. Thankfully, a number of schools, such as Ivey, Rotman, Stanford GSB, and, of course, Yale SOM, have taken the first steps by moving away from teaching in functional silos and emphasizing the integration of several disciplines.

In order to reduce people’s distrust, business schools need to show that they value what society values. believing they can do their jobs without caring about the ethical bases of decisions or can lead without paying attention to details. Society grants professionals a lot of discretion for selfgovernance, but it imposes regulations and controls if it doesn’t think they’re living up to their responsibilities and obligations. For example, in the 1970s, as parents in the United States came to view unions as more interested in promoting teachers’ interests than in improving education, government stepped in with regulations that limited teachers’ discretion. Although micromanagement of business by the U.S. government seems inevitable today, it may not be beneficial in the current situation.

How Business Schools Must Deal with Distrust People don’t simply lack trust in business schools; they actively distrust them. We tend to equate the two, but social scientists such as Sim B. Sitkin and Nancy L. Roth argue that there’s an important difference. A lack of trust results when your expectations about how a person should behave aren’t met. As Sitkin and Roth point out, laws and regulations help address those situations by acting as effective deterrents. In contrast, distrust arises when you believe that another person’s value system is different from your own. In those situations, legal remedies, which are impersonal and binding, only exacerbate the problem. In order to reduce people’s distrust, hbr.org business schools need to show that they Are business schools to blame for the value what society values. They need to global financial teach that principles, ethics, and attencrisis? Check out the debate at mbation to detail are essential components ethics.hbr.org of leadership, and they need to place a

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However, my sense is that these business schools do a better job of mixing academic disciplines than of linking analytics with values. Moreover, the teaching of leadership is still about the big picture – not about the details, where such key challenges as the ability to stick to values and make ethical decisions come into play. HBS’s course on leadership and accountability does integrate numbers-based reasoning with ethical issues to a degree, but to change students’ mind-sets, business schools must infuse that emphasis into more than a single course. Appoint teaching teams. Much is made of the fact that business school faculty are academics rather than experienced managers. After working at several leading business schools, I believe the concern is misplaced. In academia, as in corporations, technical expertise matters. However, in a company, a technical expert can contribute to the success of a product or service only if he or she works with other experts to create and deliver it. The same holds true for business schools. Team teaching – where faculty from both “hard” and “soft” disciplines develop material and present it in the same classroom – needs to become the rule. That will give students a more holistic understanding of business problems and their solutions. Sure, this is costly because it is faculty intensive, but it is a critical element in eliminating the dichotomy between the classroom and the real world. Encourage qualitative research. Academics capable of teaching soft skills such as leadership, values, and ethics are in a distinct minority at most business schools. Without more faculty members in those areas, schools can’t weave such disciplines effectively into the fabric of MBA education. However, these experts often conduct research in ways that are different from those that faculty in quantitative disciplines use, and

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they publish papers in different ior and withdraws credentials for kinds of journals. Building such violations. For instance, bar counWhat Must Business Schools faculty will therefore require a cils and medical review panels Do to Regain Trust? more eclectic taste for research enforce standards that are higher than currently exists in most than the legal standard. FOSTER GREATER STOP COMPETING INTEGRATION ON RANKINGS schools. Managers can learn from docCourses must refl ect Schools should stop tors and lawyers. Before those Stop competing on rankings. a mix of academic pandering to rankings. professions had strong national Business schools won’t regain disciplines and link They need to comassociations, they created governtheir professional focus as long analytics to values. municate that money ing groups, usually connected to as they implicitly endorse rankis not the only reason universities, which certified indiings fostering the belief that their APPOINT to get an MBA. viduals as worthy of practice. In raison d’être is to enable their TEACHING TEAMS the same way, a business school, students to earn more money. Faculty from both WITHDRAW DEGREES FOR “hard” and “soft” disits faculty, and its graduates can The Association to Advance ColVIOLATING CODES ciplines must discuss constitute a governing group. legiate Schools of Business could OF CONDUCT material in the same This group can set up a commithelp delegitimize such rankings To be a true profesclassroom. tee that draws up a code of conby prescribing, and auditing, how sion, schools must duct and monitors MBAs’ adherthe schools use the data in their ENCOURAGE not just establish but ence to it. The committee could, communications. For instance, it QUALITATIVE also enforce a code of for instance, revoke the degrees could forbid business schools from RESEARCH conduct, as doctors of graduates who break the code. touting in their advertising how B schools need to culand lawyers do. tivate a more eclectic The ex-MBAs might still be able much their degrees will augment approach to research. to manage businesses, but they graduates’ incomes. The AACSB wouldn’t be allowed to list the could also insist on compliance as degree on their résumés, remain a criterion for accreditation. The members of the school commurankings would still be available nity, or be invited to reunions. to potential applicants through They would, hopefully, be shunned by those who do adhere to the media, but the official guidelines could force business the school’s code of conduct. Most important, the governing schools to articulate their goals in ways that don’t boil down groups would provide business schools with a mechanism by to a single number. That would change would-be students’ which they could communicate to the public their disapproval expectations of the MBA degree. of MBAs who break their code and so demonstrate that the Critics will say that imposing constraints on advertising schools’ values do accord with those of society. isn’t consistent with a free market. It isn’t – but then, one of ••• the hallmarks of a profession is that it voluntarily accepts constraints. Lawyers, doctors, and accountants, as well as the Great leaders have come out of business schools, and their schools that train them, abide by several restrictions – particufaculty members have published great research. However, larly on how they can advertise their services – because they in a world where MBAs have been directly or indirectly reare members of professions. In the same way, business schools sponsible for destroying so much value, business schools can’t must be prepared to abide by norms that govern how they point to isolated examples of leadership and scholarship as compete for students if they want society to continue regardjustifications for their existence. They must be able to say that ing them as professional schools. they promote behavior that is consistent with society’s values. Business schools can never do that unless they reinvent Withdraw degrees for violating codes of conduct. Some themselves. experts have recently argued in the pages of this magazine that business schools need to develop the equivalent of a Hippocratic oath, as well as a code of conduct for MBAs (see, for Joel M. Podolny ([email protected]) is the dean and vice example, Rakesh Khurana and Nitin Nohria’s October 2008 president of Apple University in Cupertino, California. The HBR article, “It’s Time to Make Management a True Profesformer dean of the Yale School of Management, Podolny was sion.”) In fact, Thunderbird School of Global Management a professor at Harvard Business School and the Stanford Gradalready administers an oath when its students graduate. It uate School of Business. may be a step in the right direction, but oaths and codes of Reprint R0906G To order, see page 115. conduct work only when a professional body monitors behav-

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SPOTLIGHT ON

TRUST Despite deceit, greed, and incompetence on a previously unimaginable scale, people are still trusting too much. by Roderick M. Kramer

Rethinking

Pete McArthur

Trust

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F

FOR THE PAST TWO DECADES, trust has been touted as the all-powerful lubricant that keeps the economic wheels turning and greases the right connections – all to our collective benefit. Popular business books proclaim the power and virtue of trust. Academics have enthusiastically piled up study after study showing the varied benefits of trust, especially when it is based on a clear track record, credible expertise, and prominence in the right networks. Then along came Bernie. There was “something about this person, pedigree, and reputation that inspired trust,” mused one broker taken in by Bernard Madoff, who confessed to a $65 billion Ponzi scheme – one of the largest and most successful in history. On the surface, Madoff possessed all the bona fides – the record, the résumé, the expertise, and the social connections. But the fact that so many people, including some sophisticated financial experts and business leaders, were lulled into a false sense of security when dealing with Madoff should give us pause. Why are we so prone to trusting?

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Rethinking Trust

largely about. That has been an advanMadoff is hardly the first to pull the tage in our struggle for survival. As sowool over so many eyes. What about EnIN BRIEF cial psychologist Shelley Taylor noted in ron, WorldCom, Tyco, and all the other » Trust is essential for business her summary of the scientific evidence, corporate scandals of the past decade? and economic success. But recent “Scientists now consider the nurturant Is there perhaps a problem with how financial scandals suggest that qualities of life – the parent-child bond, we trust? people aren’t always very smart cooperation, and other benign social I have been grappling with this about whom they trust. Bernard ties – to be critical attributes that drove question for most of my 30 years as a Madoff took in some of the world’s brain development…accounting for social psychologist, exploring both the cleverest people. our success as a species.” The tendency strengths and the weaknesses of trust. » In evolution, trust served humans to trust made sense in our evolutionary In the wake of the recent massive and well because it increased the history. pervasive abuses – and with evidence chances that vulnerable infants Research has shown that the brain of more scandals surfacing each day – would survive. Our body chemistry chemistry governing our emotions I think it’s worth taking another look at rewards us for trusting, and we also plays a role in trust. Paul Zak, a why we trust so readily, why we somequickly decide to trust others on the researcher on the cutting edge of the times trust poorly, and what we can basis of simple surface cues such new field of neuroeconomics, has demdo about it. In the following pages, I as their physical similarity to us. onstrated, for instance, that oxytocin, a present the thesis that human beings » Our readiness to trust makes powerful natural chemical found in our are naturally predisposed to trust – it’s us likely to make mistakes. At a bodies (which plays a role in a mother’s in our genes and our childhood learnspecies level, that doesn’t matter labor and milk production) can boost ing – and by and large it’s a survival so long as more people are trustboth trust and trustworthiness between mechanism that has served our species worthy than not. At the individual people playing experimental trust well. That said, our willingness to trust level, though, misplaced trust can get us into trouble. To survive as games. (Even a squirt of oxytocin-laden often gets us into trouble. Moreover, we individuals, we’ll have to learn to nasal spray is enough to do it.) Other sometimes have difficulty distinguishtemper our trust. research has also shown how intimately ing trustworthy people from untrustoxytocin is connected with positive worthy ones. At a species level, that emotional states and the creation of sodoesn’t matter very much so long as cial connections. It’s well documented more people are trustworthy than not. that animals become calmer, more seAt the individual level, though, it can be date, and less anxious when injected with oxytocin. a real problem. To survive as individuals, we’ll have to learn Trust kicks in on remarkably simple cues. We’re far more to trust wisely and well. That kind of trust – I call it tempered likely, for example, to trust people who are similar to us in trust – doesn’t come easily, but if you diligently ask yourself some dimension. Perhaps the most compelling evidence of the right questions, you can develop it. this comes from a study by researcher Lisa DeBruine. She Let’s begin by looking at why we’re so prone to trust. developed a clever technique for creating an image of another person that could be morphed to look more and more (or To Trust Is Human less and less) like a study participant’s face. The greater the It all starts with the brain. Thanks to our large brains, humans similarity, DeBruine found, the more the participant trusted are born physically premature and highly dependent on carethe person in the image. This tendency to trust people who takers. Because of this need, we enter the world “hardwired” resemble us may be rooted in the possibility that such people to make social connections. The evidence is impressive: Within might be related to us. Other studies have shown that we like one hour of birth, a human infant will draw her head back to and trust people who are members of our own social group look into the eyes and face of the person gazing at her. Within a more than we like outsiders or strangers. This in-group effect few more hours, the infant will orient her head in the direction is so powerful that even random assignment into small groups of her mother’s voice. And, unbelievable as it may seem, it’s is sufficient to create a sense of solidarity. only a matter of hours before the infant can actually mimic a As psychologist Dacher Keltner and others have shown, caretaker’s expressions. A baby’s mother, in turn, responds and physical touch also has a strong connection to the experience mimics her child’s expression and emotions within seconds. of trust. In one experiment involving a game widely used to In short, we’re social beings from the get-go: We’re born study decisions to trust, an experimenter made it a point, while to be engaged and to engage others, which is what trust is

IDEA

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IDEA IN

PRACTICE TO TRUST WISELY, we need to readjust our mind-set and behaviorial habits, following seven basic rules.

ally need to signal it more clearly. By the same token, we have to retaliate strongly when our trust is abused. Sending weak signals about our willingness to engage in trust or punish abuse of it makes us more vulnerable to exploitation.

describing the task, to ever so lightly touch the backs of individuals as they » Rule 1 Know yourself. If you tend were about to play the game. People to trust the wrong people, you must who received a quick and unobtrusive work on interpreting the cues you touch were more likely to cooperate receive. If you’re good at recognizwith, rather than compete against, their ing cues but have difficulty forging » Rule 5 Recognize the other partner. It’s no coincidence, Keltner trusting relationships, then you’ll person’s dilemma. Because we noted, that greeting rituals throughout have to expand your repertoire of worry so much about protecting the world involve touching – witness trust-building behaviors. ourselves, we often forget that the people we’re dealing with confront the firm, all-American handshake. » Rule 2 Start small. Measured their own trust dilemmas and need So what does all this research add up trust begins with small acts that reassurance about whether (or how to? It shows that it often doesn’t take foster reciprocity. A good example much) they should trust us. Good much to tip us toward trust. People may of the dynamic was displayed by relationship builders are proactive at say they don’t have a lot of trust in othHewlett-Packard in the early 1980s. decreasing the anxiety and allaying Management allowed engineers to ers, but their behavior tells a very differthe concerns of others. take equipment home whenever ent story. In fact, in many ways, trust is they needed to, without having to go » Rule 6 Look at roles as well as our default position; we trust routinely, through a lot of red tape. That sent people. A person’s role or posireflexively, and somewhat mindlessly a strong signal that the company tion can provide a guarantee of his across a broad range of social situations. trusted employees, yet it involved expertise and motivation. But be As clinical psychologist Doris Brothers relatively little risk, because the careful; people on Main Street USA succinctly put it, “Trust rarely occupies policy was tied to employees’ not trusted people on Wall Street for the foreground of conscious awareness. abusing the trust. a long time because the financial We are no more likely to ask ourselves system seemed to be producing » Rule 3 Write an escape clause. how trusting we are at any given moreliable results that were the envy of With a clearly articulated plan for disment than to inquire if gravity is still the world. engagement, people can trust more keeping the planets in orbit.” I call this fully and with more commitment. » Rule 7 Remain vigilant and tendency presumptive trust to capture In Hollywood, scriptwriters register always question. Many people the idea that we approach many situtheir pitches with the Writers Guild – whose trust is abused do conduct ations without any suspicion. Much a simple act that hedges against the their due diligence initially. The of the time this predisposition serves risk that others will claim a story as trouble is that they don’t keep the their own. due diligence up-to-date, because us well. Unless we’ve been unfortuthey find that being vigilant and amnate enough to be victims of a major » Rule 4 Send strong signals. bivalent about the people they trust violation of trust, most of us have had Most of us mistakenly believe our is psychologically uncomfortable. years of experiences that affirm the batrustworthiness is obvious. We actusic trustworthiness of the people and institutions around us by the time we become adults. Things seldom go catastrophically wrong when we trust, so it’s not entirely irrational that we have a bias toward trust. confirmation bias. Because of it we pay more attention to, and overweight in importance, evidence supporting our hypotheses about the world, while downplaying or discounting But Our Judgment Is Sometimes Poor discrepancies or evidence to the contrary. In one laboratory If it’s human to trust, perhaps it’s just as human to err. Indeed, game I conducted, individuals who were primed to expect a lot of research confirms it. Our exquisitely adapted, cuea possible abuse of trust looked more carefully for signs of driven brains may help us forge trust connections in the first untrustworthy behavior from prospective partners. In conplace, but they also make us vulnerable to exploitation. In trast, those primed with more positive social expectations particular, our tendency to judge trustworthiness on the basis paid more attention to evidence of others’ trustworthiness. of physical similarities and other surface cues can prove disasMost important, individuals’ subsequent decisions about how trous when combined with the way we process information. much to trust the prospective partners were swayed by those One tendency that skews our judgment is our proclivexpectations. ity to see what we want to see. Psychologists call this the

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Rethinking Trust

A confirmation bias wouldn’t be so bad if we weren’t heavily influenced by the social stereotypes that most of us carry around in our heads. These stereotypes reflect (often false) beliefs that correlate observable cues (facial characteristics, age, gender, race, and so on) with underlying psychological traits (honesty, reliability, likability, or trustworthiness). Psychologists call these beliefs implicit theories, and the evidence is overwhelming that we aren’t conscious of how they affect our judgment. Most of the time our implicit personality theories are pretty harmless; they simply help us categorize people more quickly and render social judgments more swiftly. But they can cause us to overestimate someone’s trustworthiness in situations where a lot is at stake (for instance, our physical safety or financial security). To make matters worse, people tend to think their own judgment is better than average – including their judgment about whom to trust. In a negotiation class I teach, I routinely find that about 95% of MBA students place themselves in the upper half of the distribution when it comes to their ability to “size up” other people accurately, including how trustworthy, reliable, honest, and fair their classmates are. In fact, more than 77% of my students put themselves in the top 25% of their class, and about 20% put themselves in the top 10%. This inflated sense of our own judgment makes us vulnerable to people who can fake outward signs of trustworthiness.

It’s not just biases inside our heads that skew our judgment. We often rely on trusted third parties to verify the character or reliability of other people. These third parties, in effect, help us “roll over” our positive expectations from one known and trusted party to another who is less known and trusted. In such situations, trust becomes, quite literally, transitive. Unfortunately, as the Bernie Madoff case illustrates, transitive trust can lull people into a false sense of security. The evidence suggests that Madoff was a master at cultivating and exploiting social connections. One of his hunting grounds was the Orthodox Jewish community, a tight-knit social group. The biases described thus far contribute to errors in deciding whom to trust. Unfortunately, the wiring in our brains can also hinder our ability to make good decisions about how much risk to assume in our relationships. In particular, researchers have identified two cognitive illusions that increase our propensity to trust too readily, too much, and for too long. The first illusion causes us to underestimate the likelihood that bad things will happen to us. Research on this illusion of personal invulnerability has demonstrated that we think we’re not very likely to experience some of life’s misfortunes, even though we realize objectively that such risk exists. Thus, although we know intellectually that street crime is a major problem in most cities, we underestimate the chances that we will become victims of it. One reason for this illusion, it’s

Highlights – and lowlights – PEOPLE’S TRUST IN BUSINESS takes a hard hit during scandals and financial crises; nevertheless, trust hasn’t always been low. A scheme to corner the market in the stock of United Copper causes the collapse of Knickerbocker Trust and a financial panic. At one point J.P. Morgan locks leading bankers in a room until they agree to bail out weaker institutions.

Government agencies, consumer groups, and businesses themselves have helped build confidence over time by acting as watchdogs and establishing safeguards. Still, the recent round of abuses reminds us that the system is far from failproof and raises the question: Are we trusting business too much? – The HBR Editors

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1909

1912

Moody’s publishes an analysis of the stocks and bonds of U.S. railroads, becoming the first to rate public-market securities. The growth of creditratings agencies fosters trust by helping investors assess the riskiness of various assets.

After the U.S. Attorney takes Coca-Cola to court for false advertising, the ad industry falls into public disfavor. A group of U.S. executives forms the National Vigilance Committee to police truth in advertising. Its subsidiaries, which resolve cases at the local level, become the Better

Business Bureaus.

1913

The U.S. Congress founds the Federal

Reserve System, as the fallout from the Panic of 1907 finally breaks the political resistance to creating a strong central bank to avert monetary shortages.

Getty Images, iStockphoto, AP Images

1907

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been argued, is the ease with which we engage in a kind of compensatory calculus and call up from memory all the steps we’ve taken to mitigate such risks (for instance, avoiding dark alleys or making it a habit to cross the street when we see an ominous stranger approaching). The second and closely related illusion is unrealistic optimism. Numerous studies have shown that people often overestimate the likelihood that good things will happen to them – that they will marry well, have a successful career, live a long life, and so on. Even when people are given accurate information regarding the true odds of such outcomes, they still tend to think they will do better than average. As if all these biases and illusions weren’t enough, we also have to contend with the fact that the very simplicity of our trust cues leaves us vulnerable to abuse. Unfortunately for us, virtually any indicator of trustworthiness can be manipulated or faked. A number of studies indicate that detecting the cheaters among us is not as easy as one might think. I have been studying deceptive behavior in my lab experiments – and teach about it in my business school courses on power and negotiation. In one exercise, I instruct some participants to do everything they can to “fake” trustworthiness during an upcoming negotiation exercise. I tell them to draw freely on all their intuitive theories regarding behaviors that signal trustworthiness. So what do these short-term sociopaths say and

do? Usually, they make it a point to smile a lot; to maintain strong eye contact; to occasionally touch the other person’s hand or arm gently. (Women mention touching as a strategy more than men do and, in their post-exercise debriefs, also report using it more than men do.) They engage in cheery banter to relax the other person, and they feign openness during their actual negotiation by saying things like “Let’s agree to be honest and we can probably do better at this exercise” and “I always like to put all my cards on the table.” Their efforts turn out to be pretty successful. Most find it fairly easy to get the other person to think they are behaving in a trustworthy, open, cooperative fashion (according to their negotiation partners’ ratings of these traits). Additionally, even when students on the other side of the bargaining table were (secretly) forewarned that half the students they might encounter had been instructed to try to fool them and take advantage of them, their ability to detect fakers did not improve: They didn’t identify fakers any more accurately than a coin flip would have. Perhaps most interesting, those who had been forewarned actually felt they’d done a better job of detecting fakery than did the other students. We’ve seen why we trust and also why we sometimes trust poorly. Now it’s time to consider how to get trust back on track. If we are to harvest its genuine benefits, we need to trust more prudently.

in the public’s trust of business 1922–1929 As confidence in the prospects of big industrial companies rises, ordinary investors start purchasing stocks, not just bonds. The U.S.

stock market soars. In October 1929, it crashes to earth.

1930s

1941

1950s

1970s

1960s

The U.S. government creates several

Mutual funds,

During the Great Depression, the Pecora Commission investigates the causes of the crash, uncovering a wide range of misdeeds in banking. The U.S. government helps rebuild trust in business, by establishing

Unprecedented government spending for World War II leads to abuses by contractors, especially in the United States. Harry

developed in the 1920s, take off as investors cautiously begin to give money to large intermediaries in order to distribute and manage their risks.

regulatory agencies to ensure that

Truman forms a special Senate committee to investigate.

Ralph Nader’s

businesses act in the public interest.

Unsafe at Any Speed heightens

Securitization of loans begins, allow-

awareness that business and consumer interests often clash. Congress passes a flurry of consumer safety and environmental protection laws.

ing home buyers to borrow from far-off lenders.

regulatory bodies such as the FDIC and the SEC.

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Temper Your Trust We can never be certain of another’s motivations, intentions, character, or future actions. We simply have to choose between trust (opening ourselves to the prospect of abuse if we’re dealing with an exploiter) or distrust (which means missing out on all the benefits if the other person happens to be honest). The shadow of doubt lingers over every decision to trust. That said, there is much that you can do to reduce the doubt – in particular, by adjusting your mind-set and behavioral habits. Here are some preliminary rules for tempering trust.

RULE 1 | Know yourself. People generally fall into one of two buckets when it comes to their disposition toward trust. Some trust too much and too readily. They tend to take an overly rosy view, assuming that most people are decent and would never harm them. Thus they disclose personal secrets too early in relationships or share sensitive information in the workplace too indiscriminately, before prudent, incremental foundations of trust have been laid. They talk too freely about their beliefs and impressions of others, without determining whether the person they’re conversing with is a friend or a foe. Their overly trusting behavior sets them up for potential grief. In the other bucket are people who are too mistrustful when venturing into relation-

ships. They assume the worst about other people’s motivations, intentions, and future actions and thus hold back, avoiding disclosing anything about themselves that might help create a social connection. They’re reluctant to reciprocate fully because they fear they’ll trust the wrong people. They may make fewer mistakes than their more trusting counterparts do, but they have fewer positive experiences because they keep others at a distance. The first rule, therefore, is to figure out which of the buckets you fall into, because that will determine what you need to work on. If you’re good at trusting but are prone to trust the wrong people, you must get better at interpreting the cues that you receive. If you’re good at recognizing cues but have difficulty forging trusting relationships, then you’ll have to expand your repertoire of behaviors.

RULE 2 | Start small. Trust entails risk. There’s no way to avoid that. But you can keep the risks sensible – and sensible means small, especially in the early phases of a relationship. Social psychologist David Messick and I coined the term shallow trust to describe the kinds of small but productive behaviors through which we can communicate our own willingness to trust. A good example of this is a gesture made by Hewlett-Packard in the 1980s. HP’s management allowed engineers to take

Highlights – and lowlights – in the public’s trust of business 1978 Drexel Burnham Lambert uses riskanalysis tools to build a market for junk bonds that finance entrepreneurial companies and corporate takeovers. Junk bonds’ popularity dips after a trading scandal but resurges in the 1990s. By 2000, the use of junk bonds will become pervasive in corporate finance.

1984

The open-book management movement is born when Jack Stack, the new CEO of Springfield Remanufacturing Corporation, begins sharing financial information with all 119 employees and teaching them how to interpret it.

Western governments start a farreaching program of deregulation under Ronald Reagan and other leaders as people start trusting business more than government.

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1983

1981

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A Union Carbide chemical gas spill in Bhopal, India, the

worst industrial disaster in history, leads to greater skepticism about multinationals in developing countries.

1990s Executive pay soars as U.S. companies experience a resurgence in competitiveness. The cult of the CEO grows, and global companies increasingly imitate the American approach to business.

1995

Excitement about

the internet kicks off a period of “irrational exuberance,” in which investors bid up the stock prices of dot-com companies that have little or no profit.

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The shadow of doubt lingers over every decision to trust. But you can do a lot to reduce that doubt. RULE 3 | Write an escape clause.

equipment home whenever they needed to, including weekends, without having to go through a lot of formal paperwork or red tape. That sent a strong message that the employees taking it off-site could be trusted. The fact that the equipment was subsequently returned validated that trust and, over time, cemented it. Imaginative acts of trust of this sort breed trustworthiness in return. They don’t involve much risk, but they broadcast that you’re willing to meet people halfway. Salting your world with lots of small trusting acts sends a signal to others who are themselves interested in building good relationships, and decades of research by social psychologist Svenn Lindskold and others have proved that it leads to more positive interactions. It works because it’s incremental (and thus manages the risks intelligently) and contingent (that is, tied to reciprocity). By taking turns with gradually increasing risks, you build a strong and tempered trust with the other person.

In our study of trust dynamics in high-stakes situations, Debra Meyerson, Karl Weick, and I found that if people have a clearly articulated plan for disengagement, they can engage more fully and with more commitment. Hedging one’s bets in this way may seem as if it would undermine rather than reinforce trust. (After all, how can you expect me to trust you completely if I know you don’t trust me completely?) Yet, paradoxically, hedges allow everyone in an organization to trust more easily and comfortably – and even to take larger risks. Because I know your dependence on me is hedged a bit (you have a good backup plan), I have more breathing room as well. All of us know the system will survive the occasional, unavoidable mistakes that permeate any complex organization or social system. A study I did of novice screenwriters trying to break into the entertainment industry, a domain where betrayals of

1997

2000

2006

2008

2009

eBay institutes its feedback stars rat-

The technology heavy NASDAQ Composite Index reaches a peak of 5048.62 in March – and only a few weeks later falls 25%. The

Grameen Bank and its founder, Muhammad Yunus, jointly receive the Nobel Peace Prize,

Excessive leveraging from securitization, combined with the bursting of the housing bubble, leads to a severe credit crunch,

After suffering a historic loss, AIG uses

ing system, allowing buyers to rate the trustworthiness of sellers. The following year, its registered user base rises from 341,000 to 2.1 million.

internet bubble bursts.

2001

Enron collapses into bankruptcy, followed by WorldCom and other companies rife with fraud.

making Grameen Bank the first business awarded this honor.

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where banks stop trusting companies with loans, and investors stop trusting banks. The world plunges into a severe recession.

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its government bailout – more than $170 billion – to pay employees millions in bonuses. President Obama calls it an “outrage” and asks the Treasury Department to “pursue every single legal avenue” to recoup the bonuses.

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trust are commonplace, provides a good example of how this works. To get a chance to develop their original ideas for movies or television shows, screenwriters first have to pitch them to agents, independent producers, and studio executives. Once they’ve done so, however, their ideas are out there – and always at risk of being stolen. (And it’s a real prospect: No less a writer than Art Buchwald had this experience when pitching an idea for a movie about an African prince visiting America – an idea that suddenly showed up on the screen a few years later as Coming to America, with Eddie Murphy in the starring role. In 1988, Buchwald sued Paramount, claiming the idea was his, and won.) One way to hedge the risk is to write up the treatment and register it first with the Writers Guild of America, which prevents others from claiming it as their own. A second important hedge in Hollywood is to have an agent who can pitch the idea so widely that its authorship becomes well known. Hollywood is a small world, and making something common knowledge in a small world is a good hedging strategy.

RULE 4 | Send strong signals. To ensure that trust builds from small initial acts to deeper and broader commitments, it’s important to send loud, clear, and consistent signals. Some of the social signals we send are too subtle, though we don’t realize it. In one study I did exploring perceptions of reciprocal trust, I found that both managers and subordinates overestimated how much they were trusted by the people in the other category. This discrepancy in selfother perception – a trust gap – has an important implication: Most of us tend to underinvest in communicating our trustworthiness to others, because we take it for granted that they know or can readily discern our wonderful qualities of fairness, honesty, and integrity. Sending strong and clear signals not only attracts other tempered trusters but also deters potential predators, who are on the lookout for easy victims sending weak and inconsistent cues. That’s why having a reputation for toughness is critical; reputation is among the most powerful ways we communicate who we are and what kinds of relationships we seek. Robert Axelrod, a pioneer in this stream of research, used the colorful term provocability to capture this idea: In order to keep your trust relations on an even keel, and the playing field level,

you have to be willing not only to take chances by initially trusting a bit (signaling the willingness to cooperate) but also to retaliate strongly, quickly, and proportionately (signaling that you will strike back when your trust is abused). His research showed that you can be nice and not finish last – but only if you are firm and consistent with respect to punishing offenses.

RULE 5 | Recognize the other person’s dilemma. It’s easy for our self-absorbed brains to fall into the trap of thinking only from our own point of view: After all, it’s our own trust dilemmas that we find so anxiety provoking and attention getting. (Whom should I invest my money with? Whom should I allow to operate on me?) We often forget that the people we’re dealing with confront their own trust dilemmas and need reassurance when wondering whether (or how much) they should trust us. Some of the best trust builders I’ve studied display great attention to, and empathy for, the perspective of the other party. They are good mind readers, know what steps to take to reassure people, and proactively allay the anxiety and concerns of others. A good example is President John F. Kennedy in his famous commencement address at American University in 1963, in which he praised the admirable qualities of the Soviet people and declared his willingness to work toward mutual nuclear disarmament with Soviet leaders. We know from Soviet memoirs that Premier Nikita Khrushchev was impressed, believing that Kennedy was sincere in trying to break from the past and could be trusted to work on this issue.

RULE 6 | Look at roles as well as people. Many studies highlight the central importance of personal connections in the trust-building process – and appropriately so. This finding does not necessarily mean, however, that your trust in leaders or persons of power must be based on a history of sustained personal contact. Research that Debra Meyerson, Karl Weick, and I did on what we call swift trust showed that high levels of trust often come from very depersonalized interactions; in fact, personal relations sometimes get in the way of trust. An important element of swift trust is the presence of clear and compelling roles. Deep trust in a role, we found, can be

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a substitute for personal experience with an individual. Rolebased trust is trust in the system that selects and trains the individual. Robyn Dawes, a psychologist who specializes in human judgment, once observed, “We trust engineers because we trust engineering and that engineers [as individuals] have been taught to apply valid principles of engineering.” Thus, the role is a proxy for personal experience and guarantees expertise and motivation – in short, trustworthiness. Of course, role-based trust isn’t foolproof. People on Main Street trusted people on Wall Street for a long time precisely because the U.S. financial system seemed to be producing reliable results that were the envy of the rest of the world. But flawed or not, in deciding whom to trust we still need to take the roles people play into account.

RULE 7 | Remain vigilant and always question. When we’re hungry, we think about food until we’ve satisfied our hunger; then our minds move on to the next task confronting us. Human beings seek closure – and that’s true of our decisions in trust dilemmas as well. We worry about the trustworthiness of a prospective financial adviser, so we do our due diligence. Once we’ve made a decision, however, we tend not to revisit it so long as nothing seems to have changed. That’s dangerous. In analyzing accounts of formative trust experiences, I’ve found that people whose trust was abused were often in situations where they discovered – too late – that the landscape had changed, but they failed to notice because they thought they had already long ago figured out the situation. Despite the fact that a boss’s attitude toward them had shifted or someone in the organization was poisoning their reputation, they were living with a false sense of security. They let their vigilance lapse.

The Madoff scandal is a good example. Many people who invested their life savings with Bernie Madoff initially did their due diligence. But once they’d made their decision, their attention turned elsewhere. They were too busy making their money to manage it – which they often didn’t feel comfortable doing anyway, because they didn’t think of themselves as financial experts. As Holocaust survivor and Nobel Peace Prize winner Elie Wiesel, one of Madoff ’s many victims, stated, “We checked the people who have business with him, and they were among the best minds on Wall Street, the geniuses of finance. I teach philosophy and literature – and so it happened.” The challenge in revisiting trust is that it requires questioning the people we trust, which is psychologically uncomfortable. But when it comes to situations in which our physical, mental, or financial security is on the line, our trust must be tempered by a sustained, disciplined ambivalence. Our predisposition to trust has been an important survival skill for young children and, indeed, for us as a species. Recent evidence, moreover, shows that trust plays a critical role in the economic and social vitality of nations, further affirming its fundamental value. But what helps humanity survive doesn’t always help the human, and our propensity to trust makes us vulnerable as individuals. To safely reap the full benefits of trust, therefore, we must learn to temper it. The seven rules I offer here by no means represent a complete primer on how to trust judiciously. The science of trust is also much less complete than we would like, although it is growing rapidly as neuroeconomists, behavioral economists, and psychologists use powerful new techniques such as brain imaging and agent modeling to discover more about how we make judgments about whom to trust and when. But for all their shortcomings, these rules will help you make a good start on what will be a lifelong process of learning how to trust wisely and well. Roderick M. Kramer ([email protected]) is a social psychologist and the William R. Kimball Professor of Organizational Behavior at the Stanford Graduate School of Business in Palo Alto, California. His most recent books are Organizational Trust (Oxford University Press, 2006) and, with Karen Cook, Trust and Distrust in Organizations (Russell Sage Foundation, 2004). Reprint R0906H

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SPOTLIGHT ON

TRUST

Rethinking Trust

A confirmation bias wouldn’t be so bad if we weren’t heavily influenced by the social stereotypes that most of us carry around in our heads. These stereotypes reflect (often false) beliefs that correlate observable cues (facial characteristics, age, gender, race, and so on) with underlying psychological traits (honesty, reliability, likability, or trustworthiness). Psychologists call these beliefs implicit theories, and the evidence is overwhelming that we aren’t conscious of how they affect our judgment. Most of the time our implicit personality theories are pretty harmless; they simply help us categorize people more quickly and render social judgments more swiftly. But they can cause us to overestimate someone’s trustworthiness in situations where a lot is at stake (for instance, our physical safety or financial security). To make matters worse, people tend to think their own judgment is better than average – including their judgment about whom to trust. In a negotiation class I teach, I routinely find that about 95% of MBA students place themselves in the upper half of the distribution when it comes to their ability to “size up” other people accurately, including how trustworthy, reliable, honest, and fair their classmates are. In fact, more than 77% of my students put themselves in the top 25% of their class, and about 20% put themselves in the top 10%. This inflated sense of our own judgment makes us vulnerable to people who can fake outward signs of trustworthiness.

It’s not just biases inside our heads that skew our judgment. We often rely on trusted third parties to verify the character or reliability of other people. These third parties, in effect, help us “roll over” our positive expectations from one known and trusted party to another who is less known and trusted. In such situations, trust becomes, quite literally, transitive. Unfortunately, as the Bernie Madoff case illustrates, transitive trust can lull people into a false sense of security. The evidence suggests that Madoff was a master at cultivating and exploiting social connections. One of his hunting grounds was the Orthodox Jewish community, a tight-knit social group. The biases described thus far contribute to errors in deciding whom to trust. Unfortunately, the wiring in our brains can also hinder our ability to make good decisions about how much risk to assume in our relationships. In particular, researchers have identified two cognitive illusions that increase our propensity to trust too readily, too much, and for too long. The first illusion causes us to underestimate the likelihood that bad things will happen to us. Research on this illusion of personal invulnerability has demonstrated that we think we’re not very likely to experience some of life’s misfortunes, even though we realize objectively that such risk exists. Thus, although we know intellectually that street crime is a major problem in most cities, we underestimate the chances that we will become victims of it. One reason for this illusion, it’s

Highlights – and lowlights – PEOPLE’S TRUST IN BUSINESS takes a hard hit during scandals and financial crises; nevertheless, trust hasn’t always been low. A scheme to corner the market in the stock of United Copper causes the collapse of Knickerbocker Trust and a financial panic. At one point J.P. Morgan locks leading bankers in a room until they agree to bail out weaker institutions.

Government agencies, consumer groups, and businesses themselves have helped build confidence over time by acting as watchdogs and establishing safeguards. Still, the recent round of abuses reminds us that the system is far from failproof and raises the question: Are we trusting business too much? – The HBR Editors

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1909

1912

Moody’s publishes an analysis of the stocks and bonds of U.S. railroads, becoming the first to rate public-market securities. The growth of creditratings agencies fosters trust by helping investors assess the riskiness of various assets.

After the U.S. Attorney takes Coca-Cola to court for false advertising, the ad industry falls into public disfavor. A group of U.S. executives forms the National Vigilance Committee to police truth in advertising. Its subsidiaries, which resolve cases at the local level, become the Better

Business Bureaus.

1913

The U.S. Congress founds the Federal

Reserve System, as the fallout from the Panic of 1907 finally breaks the political resistance to creating a strong central bank to avert monetary shortages.

Getty Images, iStockphoto, AP Images

1907

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been argued, is the ease with which we engage in a kind of compensatory calculus and call up from memory all the steps we’ve taken to mitigate such risks (for instance, avoiding dark alleys or making it a habit to cross the street when we see an ominous stranger approaching). The second and closely related illusion is unrealistic optimism. Numerous studies have shown that people often overestimate the likelihood that good things will happen to them – that they will marry well, have a successful career, live a long life, and so on. Even when people are given accurate information regarding the true odds of such outcomes, they still tend to think they will do better than average. As if all these biases and illusions weren’t enough, we also have to contend with the fact that the very simplicity of our trust cues leaves us vulnerable to abuse. Unfortunately for us, virtually any indicator of trustworthiness can be manipulated or faked. A number of studies indicate that detecting the cheaters among us is not as easy as one might think. I have been studying deceptive behavior in my lab experiments – and teach about it in my business school courses on power and negotiation. In one exercise, I instruct some participants to do everything they can to “fake” trustworthiness during an upcoming negotiation exercise. I tell them to draw freely on all their intuitive theories regarding behaviors that signal trustworthiness. So what do these short-term sociopaths say and

do? Usually, they make it a point to smile a lot; to maintain strong eye contact; to occasionally touch the other person’s hand or arm gently. (Women mention touching as a strategy more than men do and, in their post-exercise debriefs, also report using it more than men do.) They engage in cheery banter to relax the other person, and they feign openness during their actual negotiation by saying things like “Let’s agree to be honest and we can probably do better at this exercise” and “I always like to put all my cards on the table.” Their efforts turn out to be pretty successful. Most find it fairly easy to get the other person to think they are behaving in a trustworthy, open, cooperative fashion (according to their negotiation partners’ ratings of these traits). Additionally, even when students on the other side of the bargaining table were (secretly) forewarned that half the students they might encounter had been instructed to try to fool them and take advantage of them, their ability to detect fakers did not improve: They didn’t identify fakers any more accurately than a coin flip would have. Perhaps most interesting, those who had been forewarned actually felt they’d done a better job of detecting fakery than did the other students. We’ve seen why we trust and also why we sometimes trust poorly. Now it’s time to consider how to get trust back on track. If we are to harvest its genuine benefits, we need to trust more prudently.

in the public’s trust of business 1922–1929 As confidence in the prospects of big industrial companies rises, ordinary investors start purchasing stocks, not just bonds. The U.S.

stock market soars. In October 1929, it crashes to earth.

1930s

1941

1950s

1970s

1960s

The U.S. government creates several

Mutual funds,

During the Great Depression, the Pecora Commission investigates the causes of the crash, uncovering a wide range of misdeeds in banking. The U.S. government helps rebuild trust in business, by establishing

Unprecedented government spending for World War II leads to abuses by contractors, especially in the United States. Harry

developed in the 1920s, take off as investors cautiously begin to give money to large intermediaries in order to distribute and manage their risks.

regulatory agencies to ensure that

Truman forms a special Senate committee to investigate.

Ralph Nader’s

businesses act in the public interest.

Unsafe at Any Speed heightens

Securitization of loans begins, allow-

awareness that business and consumer interests often clash. Congress passes a flurry of consumer safety and environmental protection laws.

ing home buyers to borrow from far-off lenders.

regulatory bodies such as the FDIC and the SEC.

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SPOTLIGHT ON

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Rethinking Trust

Temper Your Trust We can never be certain of another’s motivations, intentions, character, or future actions. We simply have to choose between trust (opening ourselves to the prospect of abuse if we’re dealing with an exploiter) or distrust (which means missing out on all the benefits if the other person happens to be honest). The shadow of doubt lingers over every decision to trust. That said, there is much that you can do to reduce the doubt – in particular, by adjusting your mind-set and behavioral habits. Here are some preliminary rules for tempering trust.

RULE 1 | Know yourself. People generally fall into one of two buckets when it comes to their disposition toward trust. Some trust too much and too readily. They tend to take an overly rosy view, assuming that most people are decent and would never harm them. Thus they disclose personal secrets too early in relationships or share sensitive information in the workplace too indiscriminately, before prudent, incremental foundations of trust have been laid. They talk too freely about their beliefs and impressions of others, without determining whether the person they’re conversing with is a friend or a foe. Their overly trusting behavior sets them up for potential grief. In the other bucket are people who are too mistrustful when venturing into relation-

ships. They assume the worst about other people’s motivations, intentions, and future actions and thus hold back, avoiding disclosing anything about themselves that might help create a social connection. They’re reluctant to reciprocate fully because they fear they’ll trust the wrong people. They may make fewer mistakes than their more trusting counterparts do, but they have fewer positive experiences because they keep others at a distance. The first rule, therefore, is to figure out which of the buckets you fall into, because that will determine what you need to work on. If you’re good at trusting but are prone to trust the wrong people, you must get better at interpreting the cues that you receive. If you’re good at recognizing cues but have difficulty forging trusting relationships, then you’ll have to expand your repertoire of behaviors.

RULE 2 | Start small. Trust entails risk. There’s no way to avoid that. But you can keep the risks sensible – and sensible means small, especially in the early phases of a relationship. Social psychologist David Messick and I coined the term shallow trust to describe the kinds of small but productive behaviors through which we can communicate our own willingness to trust. A good example of this is a gesture made by Hewlett-Packard in the 1980s. HP’s management allowed engineers to take

Highlights – and lowlights – in the public’s trust of business 1978 Drexel Burnham Lambert uses riskanalysis tools to build a market for junk bonds that finance entrepreneurial companies and corporate takeovers. Junk bonds’ popularity dips after a trading scandal but resurges in the 1990s. By 2000, the use of junk bonds will become pervasive in corporate finance.

1984

The open-book management movement is born when Jack Stack, the new CEO of Springfield Remanufacturing Corporation, begins sharing financial information with all 119 employees and teaching them how to interpret it.

Western governments start a farreaching program of deregulation under Ronald Reagan and other leaders as people start trusting business more than government.

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1983

1981

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A Union Carbide chemical gas spill in Bhopal, India, the

worst industrial disaster in history, leads to greater skepticism about multinationals in developing countries.

1990s Executive pay soars as U.S. companies experience a resurgence in competitiveness. The cult of the CEO grows, and global companies increasingly imitate the American approach to business.

1995

Excitement about

the internet kicks off a period of “irrational exuberance,” in which investors bid up the stock prices of dot-com companies that have little or no profit.

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The shadow of doubt lingers over every decision to trust. But you can do a lot to reduce that doubt. RULE 3 | Write an escape clause.

equipment home whenever they needed to, including weekends, without having to go through a lot of formal paperwork or red tape. That sent a strong message that the employees taking it off-site could be trusted. The fact that the equipment was subsequently returned validated that trust and, over time, cemented it. Imaginative acts of trust of this sort breed trustworthiness in return. They don’t involve much risk, but they broadcast that you’re willing to meet people halfway. Salting your world with lots of small trusting acts sends a signal to others who are themselves interested in building good relationships, and decades of research by social psychologist Svenn Lindskold and others have proved that it leads to more positive interactions. It works because it’s incremental (and thus manages the risks intelligently) and contingent (that is, tied to reciprocity). By taking turns with gradually increasing risks, you build a strong and tempered trust with the other person.

In our study of trust dynamics in high-stakes situations, Debra Meyerson, Karl Weick, and I found that if people have a clearly articulated plan for disengagement, they can engage more fully and with more commitment. Hedging one’s bets in this way may seem as if it would undermine rather than reinforce trust. (After all, how can you expect me to trust you completely if I know you don’t trust me completely?) Yet, paradoxically, hedges allow everyone in an organization to trust more easily and comfortably – and even to take larger risks. Because I know your dependence on me is hedged a bit (you have a good backup plan), I have more breathing room as well. All of us know the system will survive the occasional, unavoidable mistakes that permeate any complex organization or social system. A study I did of novice screenwriters trying to break into the entertainment industry, a domain where betrayals of

1997

2000

2006

2008

2009

eBay institutes its feedback stars rat-

The technology heavy NASDAQ Composite Index reaches a peak of 5048.62 in March – and only a few weeks later falls 25%. The

Grameen Bank and its founder, Muhammad Yunus, jointly receive the Nobel Peace Prize,

Excessive leveraging from securitization, combined with the bursting of the housing bubble, leads to a severe credit crunch,

After suffering a historic loss, AIG uses

ing system, allowing buyers to rate the trustworthiness of sellers. The following year, its registered user base rises from 341,000 to 2.1 million.

internet bubble bursts.

2001

Enron collapses into bankruptcy, followed by WorldCom and other companies rife with fraud.

making Grameen Bank the first business awarded this honor.

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where banks stop trusting companies with loans, and investors stop trusting banks. The world plunges into a severe recession.

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its government bailout – more than $170 billion – to pay employees millions in bonuses. President Obama calls it an “outrage” and asks the Treasury Department to “pursue every single legal avenue” to recoup the bonuses.

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Innovation in Turbulent Times by Darrell K. Rigby, Kara Gruver, and James Allen

Shonagh Rae

When resources are constrained, the key to growth is pairing an analytic left-brain thinker with an imaginative right-brain partner.

INNOVATION IS A MESSY PROCESS – hard to measure and hard to manage. Most people recognize it only when it generates a surge in growth. When revenues and earnings decline during a recession, executives often conclude that their innovation efforts just aren’t worth it. Maybe innovation isn’t so important after all, they think. Maybe our teams have lost their touch. Better to focus on the tried and true than to waste money on untested ideas. The contrary view, of course, is that innovation is both a vaccine against market slowdowns and an elixir that rejuvenates growth. Imagine how much better off General Motors might be today if the company had matched the pace of innovation set by Honda or Toyota. Imagine how much worse off Apple would be had it not created the iPod, iTunes, and the iPhone. But when times are hard, companies grow

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Innovation in Turbulent Times

IDEA

Knight, handled manufacturing, finance, disillusioned with their innovation efIN BRIEF and sales. Howard Schultz conceived forts for a reason: Those efforts weren’t the iconic Starbucks coffeehouse forvery effective to begin with. Innovation Too few businesses have creative, mat, and CEO Orin Smith oversaw the isn’t integral to the workings of many right-brain types in leadership chain’s rapid growth. Apple may have organizations. The creativity that leads positions. That leaves innovation the best-known both-brain partnerto game-changing ideas is missing or stiespecially vulnerable to unwise cost ship. CEO Steve Jobs has always acted fled. Why would any company gamble cutting during hard times. Decisions as the creative director and has helped on a process that seems risky and unpreabout slashing versus retaining projects are made by analytic, leftto shape everything from product dedictable even in good times? brain leaders unsuited to evaluating sign and user interfaces to the customer In talking with executives about ininnovation portfolios. experience at Apple’s stores. COO Tim novation, we often point to the fashion Cook has long handled the day-to-day industry as a model. Every successful The fashion industry is worth running of the business. (It remains to fashion company essentially reinvents emulating: be seen, of course, how Apple will fare its product line and thus its brand ev» Its businesses are “both-brain,” given Jobs’s current leave of absence.) ery season. It repeatedly brings out run by pairs of powerful executives No industry has gone further than products that consumers didn’t know with complementary – creative and fashion, however, to incorporate boththey needed, often sparking such high analytic – styles. brain partnerships in its organizational demand that the previous year’s fash» They are structured to support leftmodel. Of course it makes no sense for ions are suddenly obsolete. A fashion brain–right-brain partnerships; hiring other kinds of companies to copy the company that fails to innovate at this at all levels seeks a mix of cognitive fashion template exactly. But Procter pace faces certain death. Understanding styles. & Gamble, Pixar, and BMW are among that, fashion companies have refined » Innovation becomes a way of busithose that have borrowed heavily from an organizational model that ensures a ness life, not a marginal activity. fashion’s approach and enjoyed remarkconstant stream of innovation whatever Both-brain pairs have been found able results. the state of the economy. elsewhere: Apple CEO Steve Jobs At the top of virtually every fashion and COO Tim Cook; Procter & brand is a distinctive kind of partnerThe Fashion Model Gamble’s chief of global design, ship. One partner, usually called the creFashion companies understand one funClaudia Kotchka, and CEO A.G. ative director, is an imaginative, rightdamental truth about human beings, Lafley; high-tech engineer Bill Hewbrain individual who spins out new a truth overlooked by all the organizalett and business leader David Packideas every day and seems able to chantions that try to teach their left-brain ard. Such partnerships could help nel the future wants and needs of the accountants and analysts to be more innovation thrive in your business. company’s target customers. The other creative: Creativity is a distinct personpartner, the brand manager or brand ality trait. Many people have very little CEO, is invariably left-brain and adept of it, accomplished though they may be at business, someone comfortable with in other areas, and they won’t learn it decisions based on hard-nosed analysis. In keeping with this from corporate creativity programs. Other people are inordiright-brain–left-brain shorthand, we refer to such companies nately creative, both by nature and by long training. They are as “both-brain.” They successfully generate and commercialright-brain dominant. Innovation comes as naturally to them ize creative new concepts year in and year out. (See the sideas music did to Mozart, and like Mozart, they have cultivated bar “Hemispheric Conditions.”) When nonfashion executives their skills over the years. The first lesson from fashion is this: pause and reflect, they often realize that similar partnerships If you don’t have highly creative people in positions of real were behind many innovations in their own companies or authority, you won’t get innovation. Most companies in other industries. industries ignore this lesson. The world’s most innovative companies often operate under It isn’t just innovation in the usual sense of products and some variation of a both-brain partnership. In technology the patents that fashion companies pursue. Their creative people creative partner might be a brilliant engineer like Bill Hewlett typically imagine a whole picture and see every innovation and the business executive a savvy manager like David Packas a part that has to fit that whole. They are less concerned ard. In the auto industry the team might be a “car guy” like with perfecting any one component than with creating a Hal Sperlich – a major creative force behind both the original brand statement that enhances the entire customer experiFord Mustang and the first Chrysler minivan – and a manageence. At Gucci Group, for example, creative directors concern ment wizard like Lee Iacocca. The former track coach Bill themselves with anything that affects the customer – the Bowerman developed Nike’s running shoes; his partner, Phil look and feel of retail stores, the typography of ads, and the

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IDEA IN

PRACTICE quality of postsale service as well as the design of new products. Not every facet TRADITIONAL , left-brain-dominant business leaders typically can’t tell the of the brand has to meet the narrow difference between good and bad innovations. Nor do they appreciate the skills profit-and-loss test that many nonfashion needed to build and sustain a culture of creativity and constant reinvention. companies require of their innovations. A leadership duo that unites right-brain creative skills and left-brain management Gucci may only break even on its latest skills offers the best way of ingraining innovation in a business, making it valued runway apparel, but those designs genin all economic climates. But there’s more to the formula than throwing two people together. What erate excitement among shoppers, who makes for a superlative “both-brain” team? In many ways such a partnership feel that they are sharing in the glamour is “truly like a marriage,” says Gucci Group CEO Robert Polet. “It has ups and of high fashion when they buy a Gucci downs, and you have disagreement, [but] with a common purpose and within item. Similarly, Starbucks doesn’t maxia common framework.” mize sales per square foot in its cafés The authors have studied a number of creative-commercial partnerships, (heresy to many competitors), because both successful and unsuccessful, and identified seven characteristics common it allows – even encourages – customers to success: to linger for hours over a cup or two of » Awareness of strengths and » Raw intelligence. Partners bring coffee. Yet that innovative, homelike enweaknesses. Partners realistiinsightful observations and good vironment is precisely what distinguishes cally assess what they do well judgment to the team’s decisions. the chain from other coffee shops in the and where they need help. They » Relevant knowledge. Partners eyes of the customer. often joke openly about their own bring experience that applies diConventional companies look at inshortcomings to help others see rectly to the challenges they face. novation differently, and wrongly. Withthe value of partnership. Strong communication chanout creative people in top positions, they » Complementary cognitive skills. » nels. Partners speak to each other typically focus on innovations that can be Partners seek those who balance frequently and directly. They often divided and conquered rather than those their own working styles and work in the same or adjacent that must be integrated and harmonized. decision-making approaches. They spaces. They break their innovations into smaller learn to draw on each other’s capa» Motivation. Partners are highly and smaller components and then pass bilities to the proper degree and at committed to the success of the the right times. them from function to function to be opbusiness and each other. timized in sequence. The logic is simple: » Trust. Partners trust each other Improving the most important pieces of and are willing to put each other’s the most important processes will creinterests ahead of their own. ate the best results. But breakthrough innovation doesn’t work that way. What if a movie studio hired the best actors, between creative people and numbers-oriented people. They scriptwriters, cinematographers, and so on, but neglected to structure the business so that the partners can run it effecengage a director? The manufacturers of several portable mutively, and they ensure that each is clear about what decisions sic players tout technical specifications that are apparently are his or hers to make. These companies have also learned to superior to those of Apple’s iPod. Yet they continue to lose foster right-brain–left-brain collaboration at every level, and sales and profits to Apple, because the iPod offers an overall so continue to attract the kind of talent on which their surexperience – including shopping, training, downloading, lisvival depends. tening, and servicing – that the others have not yet matched. Little wonder that many companies may increase their patPeople: building effective partnerships. To anyone outent portfolios yet grow disillusioned with their innovation side the fashion industry, it’s astonishing how commonly deefforts. signers team up with talented business executives. Until 2003 What is required to harness this kind of creativity and apCalvin Klein’s business alter ego was Barry Schwartz. The pair ply it to the needs of a business? Creative people can’t do it grew up together in the same New York City neighborhood alone: They’re likely to fall in love with an idea and never and had been partners since the beginning of the Calvin Klein know when to quit. But conventional businesspeople can’t do label. Marc Jacobs, the creative director of Louis Vuitton and it alone either; they rarely even know where to start. And a Marc Jacobs International, relies on his longtime partner, Robtrue both-brain individual – a Leonardo da Vinci, say, who is ert Duffy, to manage the business. “Marc Jacobs is not Marc equally adept at artistic and analytic pursuits – is exceedingly Jacobs,” he told Fortune magazine. “Marc Jacobs is Marc Jacobs rare. So innovation requires teamwork. Fashion companies and Robert Duffy, or Robert Duffy and Marc Jacobs, whichever have learned to establish and maintain effective partnerships way you want to put it.” Yves Saint Laurent partnered with

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Innovation in Turbulent Times

Pierre Bergé, Miuccia Prada with Patrizio Bertelli, Valentino Garavani with Giancarlo Giammetti. Most of these well-known teams date back years. But a partnership may not work out, or one of the duo may move on, so creating new partnerships is among a leader’s chief tasks. Soon after the Unilever veteran Robert Polet became the chief executive of Gucci Group, in 2004, he replaced the CEO of the flagship brand and eliminated two of the three creative directorships attached to it. His new appointments were controversial. Mark Lee, who had been heading the money-losing Yves Saint Laurent brand, became the Gucci brand’s CEO. Frida Giannini, in her early thirties at the time, became its sole

famously successful designer-executive team of Tom Ford and Domenico De Sole. Ford had served as creative director for all the group’s brands, including Yves Saint Laurent and Bottega Veneta. Polet thought this centralized structure stretched Ford’s creative genius too thin. “The business model – I call it one size fits all – hasn’t worked for all the brands,” he said in 2004. “They have the same target consumer, the same retail strategy, and a central creative direction I’m not sure has worked well for all.” Polet made each brand a unit of innovation, established a creative-commercial partnership at the top of it, and asked the partners to focus on the needs of a distinct group of consumers.

Many companies allow left-brain analytic types to approve ideas at various stages of the innovation process. This is a cardinal error. creative director. Innovation flourished, and the Gucci brand’s revenues grew by 46% during the four years of the partnership (Lee has since decided to leave Gucci). Building a strong partnership isn’t simply a matter of throwing two individuals together, of course. “It’s truly like a marriage,” Polet told Time magazine in 2006. “It has ups and downs, and you have disagreement, [but] with a common purpose and within a common framework.” Polet may be understating the contentiousness that often characterizes these relationships. Some – like some marriages – don’t work at all. (Think of Steve Jobs and his earlier partner at Apple, John Sculley.) Many others are punctuated by shouting matches, temporary separations, and similar signs of intense discord. Marc Jacobs sometimes infuriated Robert Duffy. The Pixar director Brad Bird and the producer John Walker are “famous for fighting openly,” Bird has been quoted as saying, “because he’s got to get it done and I’ve got to make it as good as it can be before it gets done.” Some of the tension between partners is productive. (“Our movies aren’t cheap, but the money gets on the screen because we’re open in our conflict,” says Bird, the Oscar-winning director of The Incredibles and Ratatouille.) And some of it is destructive, dooming the relationship. The executive who oversees a brand should have finely honed matchmaking skills – but should also be ready to order a divorce when required. You can improve the chances that a partnership will work. Here’s how: Define a partnership-friendly structure. What should the partners be in charge of? The scale and scope of an innovation unit depend on both the company and the industry. Robert Polet’s arrival at Gucci Group followed the departure of the

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Such decentralization usually deepens insights into customer opportunities and competitor vulnerabilities and allows greater creative freedom. It’s vital, however, to have an organizational structure that balances the benefits of decentralization with the efficiency of centralization. Otherwise a company will go through repeated cycles of spawning lots of local innovations to keep growing revenues in good times and then reversing course to achieve efficiencies in downturns. Danone’s dairy division found that balance recently by shifting more innovation responsibilities from regional offices to a centralized team made up of both creative and commercial people. The regional groups had developed several great products, including the popular “probiotic” drink Actimel. But Danone’s new-product portfolio came to contain too many regional products with limited scale and poor financial returns. The centralized team conducted global research to assess opportunities and make the necessary trade-offs. It was able to invest enough marketing dollars to turn Actimel into one of the company’s fastest-growing global brands. Executives at conventional companies often hamper innovation by failing to distinguish between innovation units and capability platforms. Innovation units are profit centers – similar to business units. They may be defined by brands, product lines, customer segments, geographic regions, or other boundaries. Their work involves choosing which customers to serve, which products and services to offer, which competitors to challenge, and which capabilities to draw upon. What they have in common is that the innovation buck stops there. The units’ leaders have to balance creative aspirations with commercial realities, which is why a partnership at this level is so important.

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Hemispheric Conditions

s

O-CALLED left-brain or right-brain

sequential ordering, and linear functions.

capabilities don’t always reside

It does well in mathematics, reading, plan-

they do so in different ways, and people’s

purely in the eponymous regions

ning, scheduling, and organizing. The right

cognitive preferences exhibit significant

of the cerebral cortex. But most of us have

brain specializes in nonverbal ideation and

differences. That may stem from a kind of

strongly preferred approaches for drawing

holistic synthesizing. It is better at handling

bodily winner-take-all phenomenon. “We

on our brains to solve problems, and few of

images, music, colors, and patterns. Right-

use the best of what we have,” explains the

us are extraordinarily skilled at drawing on

brain processing happens quickly, in non-

psychologist Robert Ornstein, a professor

all regions of the brain.

sequential fashion.

at Stanford and the chairman of the Insti-

Roger Sperry earned the Nobel Prize for Medicine in 1981 for his work with

both contribute to nearly everything. But

Almost nothing in people’s heads is

tute for the Study of Human Knowledge.

processed solely by one hemisphere;

“The left and right hands aren’t completely

epileptic patients whose

different in writing ability, but

corpora callosa – the bundles

a right-hander would never use

of nerves connecting their left

the left if she didn’t have to. So

and right hemispheres – had

even if one hemisphere is only

been severed. When the two

20 percent better than the other,

hemispheres could no longer

there will be a big difference in

communicate with each other,

how it’s used in normal prac-

their differences became more

tice.” Just as there are right-

obvious.

handers and left-handers, most

For most people, the left

people tend to think in ways that

hemisphere is better at process-

we can reasonably characterize

ing language, logic, numbers,

as right brain and left brain.

Capability platforms, on the other hand, are cost centers. They build competencies that innovation units can share. Shared platforms create economies of scale, allowing a company to make investments that individual businesses could not afford and to take risks that smaller units could not tolerate. Like innovation units, capability platforms should also be sources of competitive advantage. In a fashion house they might include distribution and logistics facilities, color and fabric libraries, and advertising-media purchasing services. A company should create capability platforms only when its innovation units will choose to “buy” from them rather than to develop the capabilities independently or acquire them from outsiders. Innovation units own their final results, so they must also own as many capability-sourcing decisions as possible. Protectionist policies that force them to use substandard corporate resources hamper innovation. Establish roles and decision rights. Some years ago two psychologists at Cornell University wrote an article titled “Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments.” The title alone captures a pitfall for left-brainers: Unskilled at coming up with breakthrough innovations, they may nevertheless believe they are good at evaluating them. They are usually wrong. Joseph Stalin allegedly denounced a Dmitri Shos-

takovich composition as “chaos instead of music,” banning for almost 30 years a work by the man many music critics have called the most talented Soviet composer of his generation. Many companies nevertheless give left-brain analytic types an opportunity to approve ideas at various stages of the innovation process. This is a cardinal error. Uncreative people have an annoying tendency to kill good ideas, encourage bad ones, and – if they don’t see something they like – demand multiple rounds of “improvements.” They add time, cost, and frustration to the innovation process even in a boom. In a downturn the effect is magnified. Financial analysts are sent in to prune the new-product portfolio. Charged with reducing costs, they often clumsily break up whatever partnerships exist and get rid of the creative people who were essential to them. A better approach, in any economic environment, is what Polet has called “freedom within the framework” – a welldefined division of responsibility that plays to both partners’ strengths. At Gucci the CEO and creative director of each of the group’s 10 businesses work together to craft a sentence that captures the essence of the brand. Then each brand’s CEO establishes the framework within which creative decisions will be made: objectives, methods for accomplishing them, budget constraints, and so on. He or she maps out a three-year plan showing the brand’s strategic direction and projected

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Innovation in Turbulent Times

Paired for Innovation LEFT BRAIN

Rational, logical, linear ■ Sequential analytic processing ■ Language, grammar, verbal ■ Literal ■ Objective ■ Time-sensitive ■ Accuracy ■

HEWLETT-PACKARD BILL HEWLETT

Both trained as engineers, but Packard became the executive leader and Hewlett supplied the engineering spark.

financial performance. During tough times the financial resources may be limited, but the CEO and the creative director decide together how to deal with those constraints. Product development occurs within this context. Merchandisers working under the brand’s chief executive develop market grids showing customer segments, competitive products, and price ranges. If there’s an opening on the grid, it becomes the target for a new product: a handbag, say, for a specific niche, with a particular price point and a particular margin. Product specialists offer options for materials and manufacturing processes. The creative director then takes over, with full freedom to create a product that meets those specifications. If trade-offs have to be made, the creative director calls the shots, so long as the specs aren’t violated. The ultimate judge of the innovation is the marketplace, not a higher-ranking individual or committee within the organization. Foster talent and nurture collaboration. The partnerships at the top of fashion companies are the most visible. But bothbrain organizations like Gucci understand the importance of replicating these partnerships at all levels of the company. They hire both right-brain and left-brain people. They make sure that both types have strong mentors and career paths that suit their aspirations. They seek to extend and capitalize on individuals’ distinctive strengths rather than constantly struggling against deeply ingrained cognitive preferences. When the organizations find partnerships that work well, they create opportunities for those people to work together as frequently as possible. The particulars, of course, will vary from one company to another. At Gucci the creative directors are responsible for hiring other creative people who, the directors believe, will live and breathe the values of a particular brand. Gucci’s hu-

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PARFUMS CHANEL PIERRE WERTHEIMER

COCO CHANEL

Perfume legend Coco Chanel teamed up with Wertheimer to provide business discipline to her fledgling enterprise.

man resources director, Karen Lombardo, says she looks for competencies and personality traits that foster teamwork. Are job candidates comfortable with ambiguity? Can they accept the fact that they don’t have control over the final product? Can they function well in an environment without detailed job descriptions? Gucci also runs a program to develop leaders on the commercial side. One of its goals is to make leaders more aware of different styles of thinking and communicating, including their own. Chris Bangle, until 2009 the design head and de facto creative director at BMW, described his job as “balancing art and commerce” – which, he said, required that he “protect the creative team” and “safeguard the artistic process.” That meant knowing his designers well enough to let them wrestle with the fuzzy front end in ways that improved ideas rather than killing them prematurely. It also meant knowing the right moment to intercede and shift the focus of product development from design to engineering, so that designers didn’t “tweak and tinker forever.” Bangle made a point of fighting to preserve the integrity of designers’ creations, thus gaining their trust, even though he might eventually decide to kill a particular concept. (See “The Ultimate Creativity Machine: How BMW Turns Art into Profit,” HBR, January 2001).

Transferring the Model to Other Industries Maintaining the balance in a creative-commercial partnership is always difficult. When Polet joined Gucci, he found a company with a strong design culture. What its people needed, he believed, was an equally powerful appreciation for the commercial aspects of the business. He started the rebalancing process by setting ambitious targets for sales and earnings growth: The Gucci brand, which ac-

Monica Hellström

DAVID PACKARD

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RIGHT BRAIN

Imaginative, intuitive, whimsical ■ Holistic framing, pattern synthesis ■ Visualization, pictures, gestures ■ Perceptual, metaphorical ■ Subjective ■ Time-free ■ Ambiguity, paradox ■

PIXAR JOHN WALKER

BRAD BIRD

Creative tension between the producer Walker and the director Bird sharpens the resulting movies.

counted for 60% of revenues and most of the group’s operating profits, would double sales within seven years, and almost all the money-losing brands would turn profitable within three years. To reach these objectives, Polet moved the organization’s focus away from personalities and toward the brands themselves. Its advertising messages abandoned heady runway fashions in favor of products that core customers actually bought. He spoke frequently about making the brand, not the talent, the star. He selected creative directors who shared his philosophy and were more passionate about the product than about potential celebrity. He stressed teamwork over one-man or one-woman shows, encouraging a “culture of interchange” among brands, geographies, and management levels. He established quarterly management committee meetings, annual leadership conferences for the top 200 managers, and a variety of experience-sharing meetings for other functional experts. Polet also challenged the conventional wisdom that customer research was irrelevant to luxury goods; he commissioned an international focus group of 600 Gucci customers along with regular reviews of the customer feedback by Gucci executives. He encouraged his managers to learn from successful competitors – among them Zara, a Spanish apparel retailer that produces inexpensive interpretations of designer goods in cycles as short as two weeks rather than the traditional six to eight months. (The suggestion that an eight-month production cycle was unnecessarily long reportedly so angered one senior executive that he stormed out of the meeting.) Though Polet’s changes were often controversial, they worked. All but one of the brands met their three-year plans, several ahead of schedule. Results were so impressive that Fortune named Robert Polet Europe Businessman of the Year for 2007.

Can the rebalancing process work in the opposite direction – that is, can nonfashion companies boost their rightbrain potential by learning fashion’s lessons? The experience of Procter & Gamble under A.G. Lafley suggests that they can. Lafley became CEO of P&G in June 2000. From the beginning he believed that creativity was a missing ingredient in the company’s innovation strategy. P&G’s technical innovations lacked the design elements that create holistic, emotional experiences for consumers and build their passion for brands. Believing that design could become a game changer for the company, Lafley set out to shake up the culture by increasing the flow of creativity. He proclaimed, “P&G’s ambition is to become a top design company as part of becoming the innovation leader in its industry.” In 2001 Lafley tapped Claudia Kotchka from the package design department to create P&G’s first global design division. Kotchka reported directly to him, which sent a strong signal to the organization. The company hired about 150 midcareer designers over five years – another powerful signal. Lafley established a design advisory board, bringing in outside experts at least three times a year to examine and shape innovations. Kotchka and Lafley also launched Design Thinking, an initiative to teach new ways of listening, learning, visualizing, and prototyping. They redesigned corporate offices and other venues to open up work spaces and encourage collaboration. They built innovation centers around the world, replicating home and shopping environments to encourage cocreation insights with consumers and retail partners. Realizing that designers tend to “listen with their eyes,” Lafley encouraged research that focused less on what customers said than on what drove their emotions, beliefs, and behaviors.

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Innovation in Turbulent Times

Uncreative people have an annoying tendency to kill good ideas, encourage bad ones, and demand multiple rounds of “improvements.” Inside a converted brewery on Cincinnati’s Clay Street, P&G built an innovation design studio. Conference rooms there are filled with whiteboards, chalkboards, toys, and crayons. When a significant opportunity or challenge surfaces at P&G, team members from a variety of functions are released from their regular responsibilities for several weeks to immerse themselves in creative problem solving at Clay Street. Skilled facilitators train and guide the group. Experts from both inside and outside P&G are called in to provide opinions. The studio seeks to create “Eureka!” moments, and Lafley claims that every team that has gone to Clay Street has had one. Under Lafley, P&G’s organic growth has averaged 6% – twice the average for the categories in which it competes – and its stock reached record highs before the current downturn. Its cultural transformation has produced such positive results that Chief Executive magazine named Lafley CEO of the Year in 2006. Both Polet and Lafley launched their transformation programs as new CEOs (Polet came from outside Gucci; Lafley had spent 23 years at P&G). They both set compelling and credible objectives, making it clear that the goal was to accelerate profitable growth as well as to increase creativity. Both focused on the need for greater collaboration and teamwork, increasing respect for the unique talents of all cognitive styles in the organization and emphasizing simultaneous cooperation rather than development processes that passed innovation decisions from one function to another. Both also strengthened mechanisms for listening to customers, though in somewhat different ways. And both started by building on legendary cultural strengths – Gucci’s design talents and P&G’s brand-management skills. The difference, of course, lay in the starting points of their organizations and, therefore, in the priorities and specific techniques each relied on. They used hiring, development, and talent management programs to rebalance their cultures – more left brain here, more right brain there. •••

Any executive with half a brain knows that innovation is essential to success. The problem is that it takes both halves of a brain to make it happen – the imaginative, holistic right brain and the rational, analytic left brain. Consider the wide range of activities that might be necessary to improve innovation significantly. Management might

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need better visioning skills to foster a culture of curiosity and greater risk taking – primarily right-brain activities. Left-brain analytic tools might be needed to steer innovation investments toward the most promising areas. The business might need more creativity to generate ideas, but also analytics to constrain unprofitable projects. The right-brain design process might not be strong enough to transform intriguing ideas into practical products. Or the analytic left brains might need to fund the product pipeline to favor a different mix of large and small bets. Sometimes the products are fine but marketing needs to create stronger, more emotional bonds with customers, or engineers need to boost efficiency and profitability through improvements in cost or quality. Both-brain organizations recognize that such changes won’t necessarily happen all at once. They put together people with the necessary brain orientation in the right places and at the right times. Indeed, we frequently find both-brain principles flourishing and innovation thriving in some parts of an organization even as other parts languish. Many executives have struggled to recognize and replicate the patterns of success – a decidedly right-brain task. But with both-brain hypotheses firmly in mind, you can apply left-brain scientific testing methods. One way to get started is to pick two or three business areas in which substantial innovations feel important and achievable, despite today’s sluggish economy. Build creativecommercial partnerships with exceptional leaders, even if that means moving key team members around. Give them bold challenges and freedom within a framework. Create a strong capability platform or two. Then track the results, including innovation levels, customer behaviors, financial performance, and cultural health. We suspect you’ll say what Robert Polet told us: “I could never go back to the conventional way of doing business.” Darrell K. Rigby is the head of Bain’s global practices in innovation and retail and the author of the forthcoming Harvard Business Press book Winning in Turbulence. Kara Gruver leads Bain’s North American consumer products practice. James Allen is a cohead of Bain’s global strategy practice. All three are partners with Bain & Company (and can be reached at [email protected]). Reprint R0906J

To order, see page 115.

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Dept Name

Tool Kit

BY BYLINE

BY H. DAVID SHERMAN, DENNIS CAREY, AND ROBERT BRUST

Title squib

The Audit Committee’s New Agenda It’s not all about compliance anymore. Board audit teams are refocusing on risk, supporting strategy, and restoring public confidence. of directors? Yes. The audit committee? No. That’s been the typical response from executives the world over when approached about board service – particularly in the past few years. After all, who in their right mind would want to trade sailing, golf, and exotic travel for the increasingly complex (not to mention high-profile) new world of financial disclosure and reporting? Since the passage of Sarbanes-Oxley (SOX) legislation in 2002, audit team members have had to adapt to new constraints on operating frameworks and committee composition and endure longer and more frequent meetings filled with all manner of compliance minutiae, while putting their own reputations on the line. It’s a vital subset of the board, of course, typically charged with a variety of monitoring functions. These include overseeing the principles and processes by which a company’s financials are recorded and disseminated; hiring and monitoring external auditors (that is, public accounting firms); ensuring regulatory compliance; assessing and managing a company’s internal financial controls; and reviewing risks with the senior management team. But the increasingly negative perception of audit committee work, propagated by front-page dissections of vari-

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Ryan Snook

JOIN THE BOARD

5/1/09 3:38:43 PM

ous accounting scandals, has made it difficult for businesses to attract the strongest candidates to serve in this corporate capacity. Research suggests that the percentage of new hires to U.S. corporate boards who are experienced CEOs has dropped from 53% in 2000 to under 20% today. Brilliant, curious individuals are what these groups desperately need – especially now. Generally speaking, audit teams have done the job of incorporating SOX mandates into their practices. Today, their focus is swinging away from basic compliance and back toward increasing the value of the business. Accordingly, they’re addressing such challenges as reining in hyperactive M&A decisions, understanding the strategic effects of different accounting methods, and mitigating a spectrum of risks. In the following pages, we’ll describe what the audit committee’s new agenda should look like. Our suggestions are based on decades of experience serving on, recruiting, and studying boards and audit teams. While this committee’s role and rules may be changing, and the scrutiny still intensifying, one thing remains constant: Its members are the last line of defense when it comes to managing risk and maintaining corporate integrity. They are the final arbiters of the information that appears in shareholder reports. And they have uniquely direct access to all the key players in the C-suite, to critical audit partners, and to other experts. Those executives who answer the call have a great opportunity not just to help ensure the viability of the companies they serve but also to restore public confidence in corporations in general.

The SOX Effect The Sarbanes-Oxley Act of 2002 was designed to protect investors’ interests by reforming accounting practices in large public companies. Many of its advocates pointed to the rise in stock market indexes from 2002 through 2006 as a sure sign of the legislation’s effectiveness. But what would they say today, as the same

IDEA IN BRIEF ■

Now that audit teams are getting a better handle on the intricacies of Sarbanes-Oxley, they can devote precious meeting time to broader agenda items.

■

These include exerting control over hyperactive M&A decisions, understanding the strategic effects of different accounting methods, and monitoring a spectrum of new risks.

■

Executives who answer the call have a great opportunity not just to help ensure the viability of the companies they serve but also to restore public confidence in corporations in general.

New Minds, New Priorities As the audit committee’s priorities change, its composition will have to reflect the shift. Members will still need extensive experience with financial controls and accounting, of course, but the team will also benefit from different voices, skills, and experience from a range of industries and functions – the very people and talents that SarbanesOxley may have helped drive away. If you’re a CEO or CFO who is perhaps considering joining an audit committee, here’s why it needs you, particularly now. Someone has to reliably decipher financial guesstimates. This issue has to be at the top of a revitalized audit team’s agenda, for somewhat obvious reasons. The audit committee’s first priority should be to make sure financial projections are sound. To do that, it needs to examine the host of assumptions underlying the measures companies use to estimate income and earnings, many of which are based on management’s, outside auditors’, and other experts’ judgments and agendas – some clearly outlined and others not so transparent. Things might have gone differently, for instance, for General Motors last winter had its audit committee been able to do this back in 2006. In the second quarter, GM reported a loss of more than $3 billion and simultaneously issued a report stating that onetime adjustments would transform this loss into a profit of about $1 billion (using a pro forma earnings measurement that management had developed to shed light on the “true” financial picture of the company).

indexes slip well below 2001 levels? Indeed, SOX has ended up raising as many issues as it addressed. Consider that each year, large public companies in the United States continue to spend in the tens of millions of dollars on compliance. The high costs and added regulations imposed by SOX are two reasons why there’s been such a drop in the number of initial public offerings in the United States – and why more and more of that IPO activity is being diverted to European stock markets. In 2005, for the first time, IPO volume on the London Stock Exchange exceeded that on the New York Stock Exchange, by about 20%. Until recently boards – and audit committees in particular – were spending disproportionate amounts of time on compliance relative to strategy and other matters. One audit team chair told us that immediately after SOX compliance became a critical issue, the group’s meetings expanded to eight hours, but its discussion of strategic concerns was reduced to one. Today, though, that team’s meetings last about four hours, and its discussion is now dominated by strategic concerns. That’s because this audit committee, like most, has generally made it over the steepest part of the learning curve, altering its practices, information systems,

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and policies to meet the demands of Sarbanes-Oxley. Now that audit teams have endured and mastered the onerous drudgery of public company compliance, they can (and need to) move on to more critical, and more interesting, business issues – namely, restoring strategy, business development, and risk management to their proper places at the top of the agenda.

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Tool Kit The Audit Committee’s New Agenda

This $4 billion adjustment contained a substantial number of estimates and assumptions about operating profits, none of which were disclosed in the company’s SEC filings. So, did company executives paint the correct financial picture, or were they just trying to boost shareholder confidence at the expense of some accuracy? We would not begin to speculate. The point is, that’s now the kind of question the audit committee should be raising. There are still plenty of opportunities. In 2008, for example, GM’s management turned a net loss of $30.8 billion into a pro forma loss of only $16.8 billion. Why was that? It is the responsibility of the audit committee to know – and to concur, or not. The audit team’s role as the gatekeeper of shareholder communications has always been critical, but perhaps never more so than during these times of economic turmoil. In the wake of the recent revaluation of mortgage-backed securities and collateralized debt obligations, Merrill Lynch initially reported a write-down in value of $7.9 billion for the third quarter of fiscal 2007. This was notably higher than the company’s earlier estimates of $4.5 billion in writedowns. What’s more, Merrill Lynch reported an additional write-down of $11.5 billion the following quarter. What do these figures signify? Was the original $4.5 billion estimate the low end of a range? Was the subsequent $7.9 billion the higher end? Was the additional $11.5 billion a result of deteriorating market conditions, poor forecasting, or biased estimates? Before any such information is released to the public, the audit committee needs to probe the range and timing of significant write-downs and impairments like these and evaluate the wisdom of selecting the amounts stated rather than any other possibilities – and even whether it would be better to offer a range to shareholders at the outset, rather than keep changing the estimates from quarter to quarter. The committee should ask itself, What would the implications be if a subse-

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Beyond Sarbanes-Oxley

The Road Ahead for Audit Committees It’s time for audit committees to turn their attention to a new, far wider – and arguably far more exciting – range of responsibilities. Here is a systematic series of questions you can use to guide you in creating that new agenda.

Judging the accuracy of financial guesstimates Should estimates of financial performance be presented to the public as ranges (rather than as single-point predictions)? Do pro forma adjusted (non-GAAP) earnings seem accurate when compared with past performance and competitors’ reports? Is the pro forma earnings presentation warranted? Is it superior to the adjustments that will be made by savvy securities analysts and bond raters? Are these financial estimates distorted by any hidden agendas management may have involving meeting short-term goals, avoiding takeovers, or bolstering the case to trim key business segments? If estimates have been restated, are we prepared to restate non-GAAP measures as well? Is our impairment test devoid of influences by managers whose compensation could be diminished if impairments were recognized?

Testing the merits of structured acquisitions earnings Is the structure of the acquisition consistent with the reporting strategy of the business? Are we aware of the range, and implications, of management’s estimates of the acquired business’s future earnings and the fair values assigned to its assets? Why are the judgments management has made considered to be the best ones that could have been made?

|

Defining the scope of risk management Have all critical business, financial, and security risks been reviewed by the audit committee? Which areas of exposure require immediate or near-term improvement?

Analyzing the implications of competitors’ performance Do we know how our business’s performance compares with that of key competitors around the world? Why are management’s accounting choices different from those of competitors? What are the implications of those differences for the company’s reported financial performance? Is the compensation committee aware of accounting differences between our business and competitors? Do our compensation consultants understand the implications of the different accounting methods (GAAP versus IFRS) our competitors use?

Ensuring the reliability of audit committee oversight What are the critical accounting estimates we’re using to present an accurate picture of the company’s financial performance? Are they the ones disclosed in the SEC reports? Where the business owns significant assets or generates substantial revenues abroad, have we evaluated the capabilities of the corresponding local audit teams?

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Tapping the right expertise

Have we allowed ourselves to identify our blind spots, and have we made sure that we have obtained adequate advice in those areas? Do we have at least two financial experts among our ranks, one of whom is currently grappling with new reporting and technical developments in his or her own business? When will our financial experts need to be conversant in IFRS? Should we hire an independent auditor or adviser to offer a second opinion on any matters?

Maintaining rapport with the compensation committee What is the relationship between the audit and compensation committees, and has that been reviewed and updated? Does the compensation committee understand the implications of the full range of possible financial results represented in the reported earnings well enough to evaluate the impact on their recommendations? Should a financial expert from the audit committee also serve on the compensation committee? Are the recommendations of the compensation committee’s consultants based on performance measures published in shareholder reports, and if so, have they been adjusted for differences in competitors’ reporting methods and guesstimates?

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ment has made is the accurate picture of the value of the acquisition? What assumptions were managers using to make these estimates? Why was management’s choice of accounting options preferred over other approaches? How much of the future performance of the venture has been built into this set of assumptions? As time goes by and the results become clear, the audit committee should stay on the case, asking: Are reported results consistent with the intended impact of the acquisition? Does the compensation committee understand the implications of management’s original choices on its evaluations of executive performance? Did, for instance, the senior management team project an unwarranted earnings stream to ensure its members’ bonuses? Someone has to objectively analyze the myriad risks facing businesses today. Imagine how different the current climate might be if Merrill Lynch, Lehman Brothers, and other financial institutions had decided years ago to limit their investments in mortgage-backed securities or if AIG had decided not to issue insurance in the form of credit default swaps. Risk management has always been a critical task of the audit committee, so this is not a new agenda item. But for many years now, the committee’s attention has been trained on only a particular area of risk – compliance with SOX regulations. Even those audit teams that continued to make risk management a priority during the SOX era often found themselves hampered by a lack of wider risk management expertise. Even after clearing the SOX hurdle, audit committee members still have limited time and attention with which to conduct in-depth risk analysis. So they must carefully target the most important risk categories. Financial and technology risks clearly must be under the committee’s purview. Performance assessments (whether the company is achieving expected returns) should be as well. But – depending on their

quent audit determines that the amount should be much higher or lower? Some have speculated that Merrill Lynch selected the top end of its estimated write-down range, when it moved from the $4.5 billion to the $7.9 billion figure, to enhance future earnings. Others say the company initially selected the lowend $4.5 billion figure to maximize the perceived market value of its equity. In either case, the audit committee was in the best position to evaluate these judgments on behalf of shareholders by examining management’s analysis, internal audit reports, and external auditor findings, and when necessary even bringing in an independent adviser. Someone has to keep an eye on the “structure” in structured acquisition earnings. Studies show that about half of mergers and acquisitions fail to add value to the parent company because the prices paid in these deals are excessive. Why does this keep happening? These days, the senior management team incorporates estimates of the “fair market value” of the assets and liabilities purchased into its reporting of acquisitions. That certainly gives managers who are so inclined opportunities to “manage” the presentation of earnings to shareholders in ways that will show results in the most optimistic light. Specifically, earnings statements and balance sheets are structured to include (or exclude) things like the estimated value of R&D, customer lists, capital assets, trademarks, and patents. Management also has discretion when it comes to the timing of bonuses and other merger-related expenses. The range of reported earnings and growth estimates of the resulting merger can be dramatic, depending on how the original value of the acquisition was presented. The audit committee is the only group that can, if it chooses, objectively determine whether management’s decisions are built on an artificial picture of growth or are otherwise flawed. To do so, the committee should ask a series of questions: Where in the wide range of reporting choices that manage-

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Tool Kit The Audit Committee’s New Agenda

tion of your annual 10-K report and consider whether it tells the full story.) Does the audit committee understand and agree with management’s initiatives for mitigating financial risks? For instance, numerous financial institutions and financing divisions of major companies – think Fannie Mae, Bank of America, GE Capital, and Ford – have used interest rate swaps, a derivative designed to minimize the impact of fluctuations in interest rates. And as a result, many such financial institutions have filed restatements. Technically, in accounting for these swaps, these companies may have violated accounting rules. But the situation is not black-and-white. Often,

relevance to the particular industry or country – strategy, product, legal, and other risks may or may not rise to a level that would warrant regular supervision by the audit committee in particular. It should go without saying, of course, that in those categories the audit committee does address, the team should conduct a thorough review of all possible associated risks. Then as an ongoing practice, the chairperson should be prepared to lead discussions with the following issues in mind: Business development, reputational, and operational risk. Are the benefits intended from the organization’s investments materializing as planned? If not,

Before 2000, you could hardly find 50 restatements a year. Between 2005 and 2007, more than 3,000 were filed. these violations are not serious enough to threaten the economic soundness of the business. In fact, using this type of derivative to reduce risk is generally considered good management practice. The point is, it needs to be the audit team’s responsibility to understand, and sign off (or not), on management’s approach because the committee is uniquely situated to distinguish economic risk from technical accounting issues and to ensure that this understanding is communicated to shareholders. Data risk. When you consider the credit information breaches at TJX and other companies, it’s clear that IT has to be a critical piece of the audit committee’s risk analysis. (A few small businesses delegate oversight of this risk category to a separate committee, but that’s generally the exception rather than the rule.) To oversee this risk, audit committees need to ask: What plans are in place to protect critical databases and other information systems from terrorist attacks, pandemics, and natural disasters? Answering that question may involve

why not? A strategy-focused audit committee could have helped any number of financial services firms vet the risks inherent in expanding their products and services to include such infamous toxic assets as collateralized debt obligations and their underlying mortgage-backed securities. The audit team can help management think through risks involved in the development and marketing of a host of new products – from the relatively mundane (vitamin-enhanced bottled water) to the exotic or revolutionary (a car that can sell for less than $3,000 or an electronic device for downloading and reading books). Financial risk. What are the critical areas of exposure when it comes to currency, interest rates, and commodity input prices? To answer this question, reliable experts who understand each of these areas should provide assessments, in a comprehensible way, directly to the audit committee. (This may require three separate expert advisers.) Is the disclosure to shareholders understandable? (Try reading the market risk sec-

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some independent verification, since company executives may not know the true state of their data security. One audit committee member we spoke with recalled a session in which senior management’s data protection efforts were described in detail to the committee. Members were assured that entry codes were required for all basic systems, that password distribution was limited, and that passwords were not saved or embedded in the information systems. But the very next day, at the full board meeting, someone from one of the departments opened up a data file, and in plain view of the committee the system automatically filled in the stored password – vividly demonstrating how poorly implemented the plans really were. International risk. When it comes to international transactions, the audit committee can defer some recurring issues to the full board – for instance, complying with local regulations and protecting some intellectual and physical assets. There are times, however, when the risks are so great that they become part of the committee’s responsibility for the fidelity of the company’s financial reporting. Blockbuster, for instance, had to close stores in Hong Kong in 2004 and Spain in 2006 because competition from bootleg videos was so intense it rendered the retail operations unviable. When international risks threaten to rise to that level, it’s incumbent upon audit committees to take a close look at cultural norms, the role of bribes, local laws, and so on. It may not be feasible for businesses to avoid countries such as China, Russia, Brazil, and India, where counterfeit trade is widespread, since they also represent some of the most attractive markets. Here’s where a revitalized audit committee, no longer distracted by SOX compliance, can take a strong hand in evaluating risks and suggesting precautionary measures to minimize the cost of intellectual property theft while maintaining access to valuable markets. Related-party transactions represent another significant, continuing, and un-

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various countries have adopted IFRS with their own modificaThe Difference Accounting tions. Meanwhile, even competiStandards Can Make tors that use GAAP may make How much did Air France earn in net different accounting choices income from 2005 through 2007? The within the framework. Consider answer is radically different depending on that over a 10-year period, Delta whether it’s determined using Generally increased the depreciable life of Accepted Accounting Principles or the Inits aircraft twice – from 15 to 20 ternational Financial Reporting Standards. years the first time and then from 20 to 25 years. It’s now using 30 1,800 years, as the company emerges from bankruptcy reorganization. 1,600 Each year’s depreciation charge, therefore, went down accord1,400 ingly, boosting stated earnings. Other airlines did not make this 1,200 change. So if you were on the audit committee of Singapore Airlines, which uses a 15-year depre1,000 ciable life, you would probably IFRS want to know why management GAAP 800 believes that a shorter depreciation schedule is more appropri600 ate. You might want to disclose 2005 2006 2007 this logic to shareholders and perhaps eliminate the accounting differences related to depreciation the need for a renewed focus on reliabilwhere they artificially over- or underity within the audit process. state relative earnings and performance. Accounting debacles in the United States have received a lot of attention and scrutiny, but plenty of them are unInside the Boardroom folding in other countries as well. In one Audit committee members are not just case, UK-based Allied Carpets was forced concerned with keeping their organito restate its earnings when it was found zation on the straight and narrow and to be recording revenues prematurely. fulfilling their responsibilities to shareThe stock price nose-dived, executives holders. They are also concerned, of were fired, and a round of news arcourse, with preserving their own repticles couldn’t resist reporting that the utations. After all, no one looks good company was in a “deep pile of trouble” when problems arise that the audit and “not as good at solving problems as team should have recognized in early sweeping them under the carpet.” stages or when the committee is found Any number of U.S.-based businesses to have relied on inaccurate informahave had problems with their Asian tion from senior managers, external auand European operations that were ditors, or other experts. With that end not identified by international auditin mind, here are several additional ing firms’ local offices. These problems items that also need to be high on the are often due to the complexity (many committee’s agenda. would say the excessive complexity) Audit reliability. Before 2000, you and differing interpretations of GAAP could hardly find 50 corporate restateby different auditors (sometimes in the ments a year. Between 2005 and 2007, same company), so this is not a problem more than 3,000 revised earnings statethat audit committees can directly fix, ments were filed – powerful evidence of Net Income (€ Millions)

derappreciated risk of doing business in many different cultures and business environments. Post-SOX practices requiring financial managers and sales representatives around the world to sign statements stipulating that there exist no side letters or other conflicts of interest are simply not enough and can create a false sense of security. If there were a sure remedy for this pervasive issue, businesses would already have implemented it. In the meantime, management needs to be vigilant in its monitoring of related-party transactions, and the audit committee needs to be equally vigilant in its oversight of management’s monitoring efforts. Someone has to accurately assess rivals’ performance worldwide. All public companies and many private businesses in the 27 European Union countries have adopted International Financial Reporting Standards (IFRS), the dominant alternative to the Generally Accepted Accounting Principles (GAAP), and others outside the EU are in the process of doing so. U.S. businesses that want to meaningfully evaluate their performance against global competitors, which are likely to be using IFRS, will therefore need to understand the differences between these reporting approaches. (See the sidebar “A Tale of Two Accounting Standards.”) Air France offers one example of the dramatic differences that can exist between IFRS and GAAP earnings, equity, and other critical performance ratios. As the exhibit “The Difference Accounting Standards Can Make” shows, the net income figures using GAAP versus IFRS were quite far apart in 2005 and yet were much closer together in 2006. What’s more, the GAAP report suggests a decline in the next year, whereas the IFRS accounting shows a more modest, almost flat, earnings trend. IFRS is likely to become the required set of accounting principles in the United States, replacing GAAP as early as 2014. Still, comparisons of financial statements will always need to take into account differences in standards, since

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Tool Kit The Audit Committee’s New Agenda

no one cottoned on to accounting irregularities that had been going on for years. Satyam Computer Services, an IT outsourcer based in India, recently announced that its CEO was allegedly involved in a multiyear fraud having to do with an overstatement of the amount of cash in the business and substantial payments to nonexistent employees. The audit committee, which did not identify any member as a financial expert, has since come under significant scrutiny: Did its members have the background to evaluate and protect assets, judge the qualifications of internal and external auditors, and inquire into the scope of work done by these auditors? If there is only one financial expert on the audit committee, that individual

since they don’t oversee the audit industry. Instead, the group needs to concentrate on protecting shareholders from misleading accounting and outright fraud. The audit team and its partners won’t be able to eliminate all criminal activity, obviously, but oversight that is squarely focused on shareholders’ interests can help limit some of the losses, as well as preserve committee members’ reputations. In this effort, the audit team should get help. A prominent SEC lawyer speaking to corporate counsels and secretaries several years ago at a meeting of the U.S. National Association of Corporate Directors predicted that, by the end of this decade, it would become common practice for audit committees to employ independent advisers. This is essentially the way GAAP accounting violations were identified at Fannie Mae. The Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae, hired a second Big Four global-accounting firm to evaluate how derivatives had for years been represented as GAAP compliant by Fannie Mae’s external auditors. This second opinion reported technical GAAP violations. The SEC was asked to review the arguments of the two accounting firms to determine whether Fannie Mae was or was not in compliance. The SEC concluded that it was not, in effect agreeing with the second opinion. This triggered a restatement, as well as a replacement of management (and of several audit committee members). The cost of getting a second opinion may have seemed excessive to some – but not as exorbitant as the more than $1 billion it reportedly cost Fannie Mae to fix the problems, implement new information systems, and re-audit and restate several years’ worth of financial statements. Expertise. Single-handedly keeping up with the volume and breadth of issues involved in shareholder reporting is probably beyond the ability of even the most expert accountant or financial analyst. Fannie Mae’s audit committee had two financial experts, and even so

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is likely to bear most of the burden of assessing new or existing accounting policies. Other board members, generally appointed for different areas of expertise like industry, political, or functional intelligence, are likely to find technical financial-reporting issues less interesting. If there were a problem with, say, derivatives accounting, where the basic guidelines exceed 800 pages, would the nonfinancial experts invest the time needed to seriously evaluate the business’s activities? Not likely. They would naturally defer to the financial expert and would not be able to contribute to any analysis or otherwise take responsibility for the problem. On one audit team, reporting requirements regarding tax estimates had a numbing effect

A Tale of Two Accounting Standards

A

LL MAJOR INDUSTRIAL countries have converted to or are planning to adopt the International Financial Reporting Standards. The European Union has been using IFRS since 2005, and so have South Africa and Australia. The United States is the only country that exclusively uses the Generally Accepted Accounting Principles (GAAP) for public company reports. But even U.S. corporations may be required by the Securities and Exchange Commission to convert to IFRS within the next five years. Until a single accounting system is adopted internationally, U.S. companies using GAAP will be reporting earnings and balance sheet values differently from their competitors outside the States. If financial statements are being used to compare corporate performance, establish executive compensation, or estimate the value of an acquisition target, they will need to be adjusted to account for differences in the reporting standards. Otherwise, boards and managers can come to misleading, and possibly quite costly, conclusions.

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The differences between IFRS and GAAP are numerous. Some are straightforward and easy to accommodate. For instance, both IFRS and GAAP require auditors to write down inventory if its market value declines below what the company paid for it. Under IFRS, the inventory value could also be written back up to the higher initial figure if its market value increases, whereas GAAP does not allow that. As another example, IFRS doesn’t let companies segregate onetime events from normal income and designate them as extraordinary, as the GAAP income statement does. That means a company’s losses stemming from, say, the attacks of September 11, 2001, are included in the regular income statement under IFRS rules. Other differences are much more difficult to identify. The two systems differ, for example, in their underlying philosophies about how to measure revenues and expenses. GAAP is a rule-based system (governed by principles); very specific accounting guidelines cover the entire range of business transactions. By contrast, IFRS is a

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on some of the nonfinancial members. Stock option valuation, derivatives, cash flow classifications, and asset valuations evoke similar reactions. Even the financial experts that come out of investment banking, lending, or technology businesses can find some of these discussion points distant, unfamiliar, and tedious. Conversely, audit committee members who come from professional backgrounds – former partners in CPA firms, investment managers, and securities analysts – may have a myopic focus or insufficient expertise in some broader financial areas that may become critical. That’s why it’s so important that there be at least two financial experts on the audit committee to share the burden and to offer a broader set of technical exper-

tise. One of these can be a seasoned retired executive, but the other should be someone who is still grappling with new reporting and technical developments in his or her own business. And for global corporations, one should be conversant in IFRS as well as GAAP. Above all, these committee members need to be willing to recognize their blind spots and access additional independent technical advice to complement their expertise. Rapport with the compensation committee. Because of the streams of data and the leaders it has access to, the audit committee is in the perfect position to judge whether the facts and figures used in the compensation committee’s performance analyses are correct and whether the budgets used to

set management targets and bonuses are fair. To be most constructive, the committee should ask: Is the compensation group aware of the judgments underlying the company’s reported earnings and of possible alternative ways to calculate them? Does it have this information in a format that will allow it to factor these judgments into its own recommendations? Expanded SEC disclosure requirements for individual executives and highly compensated employees will increase the need for the audit and compensation committees to jointly evaluate performance. Furthermore, the audit team will need to reassess and revise compensation-reporting practices as those requirements are clarified over the next few years. So it’s essential to assign one of the audit committee’s financial experts to serve on the compensation committee as well. •••

principle-based system (with far fewer rules than GAAP); management and auditors are given leeway to consider what constitutes a fair representation of revenues and expenses within a broad set of guidelines. Say a company sells software with guaranteed future upgrades, and the value of the upgrades is not yet known. GAAP standards mandate that no revenue at all be recorded in the income statement until the upgrades are developed and provided to the customer or until the cost and value of the upgrades are known and verifiable. Under IFRS, though, senior managers could make an educated estimate of the cost and value of the upgrades based on historical or other evidence, and they could then record revenues directly resulting from the initial product while deferring revenues related to future upgrades. Consequently, although total revenues would ultimately be the same in both systems, GAAP revenues would be lower than IFRS revenues in the initial accounting period and then higher in the period when the upgrades were

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The audit committee is uniquely suited to assess risk, judge the valuation and results of mergers and acquisitions, and ensure that company strategy and finances are aligned. All the accounting scandals of the past decade and Sarbanes-Oxley are in its rearview mirror, so to speak. It’s time for this committee to assert its unique role as messenger to the rest of the board of directors on all matters of risk management and financial-reporting judgments and to bolster trust among corporate constituencies – especially shareholders.

delivered. This raises the question, If the business will appear less favorable under GAAP than IFRS in the short term, should it voluntarily provide an estimate of IFRS earnings, revenues, assets, and liabilities as well? Two background issues are likely to affect the relative use and usefulness of these two reporting standards for U.S. companies. First, one of the strongest arguments for using GAAP is that it has been tested and subjected to extensive scrutiny and interpretation in the U.S. legal system. By contrast, disputes involving IFRS-based shareholder reports may have to establish new legal precedents – with all the uncertainty and higher litigation costs that come with them. Second, different companies and their auditors can apply IFRS standards differently, making it difficult to compare one company with another or judge the quality of audits. What’s more, if you’re joining an audit committee that uses IFRS, you can expect to see more and expanded footnotes – and you’ll shoulder increased liability for the content of those footnotes.

H. David Sherman (h.sherman@ neu.edu) is a professor of accounting at Northeastern University in Boston, principal adviser on IFRS to CCH, and a coauthor of “Tread Lightly Through These Accounting Minefields” (HBR July–August 2001). Dennis Carey is a senior partner at Korn/Ferry International in Philadelphia and a coauthor of CEO Succession (Oxford University Press, 2000). Robert Brust is the chief financial officer at Sprint in Overland Park, Kansas. Reprint R0906K To order, see page 115.

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Managing Yourself BY JOHN BEESON

Why You Didn’t Get That Promotion Decoding the unwritten rules of corporate advancement over for a key promotion despite stellar results and glowing reviews. You’ve asked where you’re falling short, but the responses have been vague and unsatisfying, leaving you angry, frustrated, and unsure of how to get ahead. Promotion decisions seem arbitrary and political. What’s going on? In most organizations, promotions are governed by unwritten rules – the often fuzzy, intuitive, and poorly expressed feelings of senior executives regarding individuals’ ability to succeed in C-suite positions. As an aspiring executive, you might not know those rules, much less the specific skills you need to develop or demonstrate to follow them. The bottom line: You’re left to your own devices in interpreting feedback and finding a way to achieve your career goals.

Luci Gutiérrez

YOU’VE BEEN PASSED

That’s what happened to Ralph Thomas, the vice president of operations for Smith & Mullins’s industrial products division, the company’s largest operating group. (All names and identifying details in this article are disguised.) He wasn’t blindsided by the announcement that Kelly Ferguson had been promoted to senior vice president and general manager for corporate markets – he’d been informed the week before. But Ralph had been a contender, and this was the second time in four years he’d missed out on a division GM job. The first time, Smith & Mullins had hired an outsider who later left the position for a major role at a rival firm. Ralph always had excellent performance reviews. His 360 results indicated that people loved working for him, and as far as he could tell, managers across the company were

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Managing Yourself Why You Didn’t Get That Promotion

beating down the doors to join his group. In terms of execution, his track record was flawless: He and his team had met or surpassed their numbers in each of the past five years. Additionally, they had successfully implemented every major corporate program during that time, and his division had recently been selected to serve as the pilot site for an SAP installation. When he’d learned of these last two GM assignments, he’d also been told that he had a great future with the company and that with a little “seasoning,” he’d be ready for advancement. He’d tried several times to get the real scoop on why he hadn’t been promoted, only to hear vague comments about improving his “communication skills” and demonstrating more “executive presence” and “leadership.” It seemed to him that the company valued people who could look and sound good in the boardroom more than it cared about the year-over-year results of proven performers like himself. As for Kelly? She’d hired some top people in the past couple of years, but Ralph knew that she had a reputation for being tough on her reports and having “sharp elbows.” To Ralph, the promotion wasn’t much of an expression of the company’s leadership competency model, posted on his office wall: “Display ethics and integrity, envision the future, deliver results, focus on customers, engage in teamwork and collaboration, and develop talent.” Ralph bore Kelly no ill will, but it looked as though it was time to update his résumé and rekindle some relationships in his network. Distasteful as it was, testing the job market seemed to be the only way to advance.

IDEA IN BRIEF ■

Decisions about who gets promoted can seem mysterious and arbitrary. Stellar performance reviews and a strong track record – and you still get passed over. What’s going on?

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In most companies feedback is vague and confusing – sometimes intentionally, so as not to demoralize. It’s up to you to ferret out the real reasons you’re not getting the job.

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For example, think twice when you’re told you need to work on “leadership” or gain more “seasoning.” These can be code words masking more specific concerns, like a failure to demonstrate strategic thinking or an inability to delegate.

about his communication skills actually alluded to tensions with peers in other units: He could be overly competitive and slow to resolve conflict, whereas Kelly’s powers of persuasion allowed her to manage discord and achieve superior results. She was also known for developing talent. Working for her was not for the faint of heart, but she challenged her staff members, and they grew in the process. Ralph didn’t recognize that his

Managers may provide vague feedback to avoid losing a good employee.

The Unwritten Rules Ralph’s situation is surprisingly common, especially among people who aren’t politically inclined. Few organizations spell out the criteria for advancement. Though Ralph had been considered for the GM role both times, in each instance there were bona fide concerns about his readiness. The vague feedback

popularity reflected, in part, his reputation for being a little easy on people – he didn’t stretch them to grow and develop. Managers flocking to his unit were often B players who knew he’d cut them some slack. He was luring talent that was good but not great; Kelly was attracting A players who wanted a push. The company’s competency model included “develop talent” but didn’t specify that having a track record for doing so was nonnegotiable for anyone who wanted to rise beyond Ralph’s level.

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Under the heading of “leadership” lurked questions regarding Ralph’s strategic thinking. He was a go-to guy for implementing corporate initiatives, a master of continuous improvement. But senior management had seen no evidence of his ability to conceive a largescale change that would produce a quantum leap in performance. Can strategic thinking be developed? That’s open to debate, but the fact was that Ralph had always worked for visionaries who never gave him the chance to flex his own strategic muscles, a problem everyone had overlooked. The information void wasn’t a matter of malice; rather, it was due to assumptions that nobody thought to make explicit and an all-too-human reluctance to deliver bad news. Managers and HR professionals often provide intentionally vague feedback for fear of losing a good employee. Further, although most leadership competency models refer in some way to important management skills and attributes, they typically fail to distinguish nice-to-have from nonnegotiable skills. What’s more, such models usually don’t spell out how leadership skills should be demonstrated at different levels or how the relative importance of those qualities will change as you rise

in the hierarchy. For example, in middle management, teamwork – defined as the ability to maintain cohesion and morale within one’s group – is a vital competency. At higher levels, where Ralph hopes to play, it matters less. In fact, at most companies, cohesion tends to fall short at senior levels thanks to rivalry and ego, but teams function pretty well nonetheless. Acquiring and developing talent is the executive’s imperative, and teamwork becomes a niceto-have. Ralph’s ability to orchestrate

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well-functioning teams to complete complex projects, among other skills, had singled him out for previous promotions. But when he was being considered for the GM jobs, strategic thinking became a much higher priority. Many of the unwritten rules are especially hard to nail down because they don’t pertain to technical ability, industry experience, or business knowledge. Rather, they relate to the “soft” skills that combine to give decision makers an intuitive sense of whether a candidate will succeed at the senior level. And, as predictable career paths become more or less extinct, the confusion for people seeking advancement just gets worse. In my 30 years of experience in and observation of succession planning and executive development at large companies, I’ve found that the unwritten rules of C-suite placement decisions fall into three categories. Nonnegotiables are the fundamental factors without which an executive will not be considered for promotion. Deselection factors are characteristics that eliminate an otherwise qualified candidate from consideration. Core selection factors are what ultimately dictate promotion decisions. The exhibit “Key Factors in Executive Career Advancement” shows the model I’ve developed for senior managers. The factors may differ at your company, but the ones highlighted in the exhibit are pretty typical. Ralph passes the test on the nonnegotiables and the deselection factors but falls short on several core selection factors, like thinking strategically, building a strong executive team, and having the organization savvy to work effectively across internal boundaries. If Smith & Mullins made a list of such factors available to its executives, along with a dose of constructive feedback, Ralph would probably be able to see where he needs to devote his energies. But since it doesn’t, Ralph has to tease out the underlying issues. Although he periodically gets feedback from 360s, such reviews – unless combined with confidential face-to-face interviews by a

third party – are rarely sufficient to illuminate the core reasons behind a stalled career. One obvious way to get insight is to approach your boss and colleagues directly for their opinions, though their input might be of limited use. They may not be straight with you, and their perspectives may differ from those of the

Key Factors in Executive Career Advancement Nonnegotiables Factors that are absolutely necessary for you to be a contender ■

Demonstrating consistently strong performance

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Displaying ethics, integrity, and character

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Being driven to lead and to assume higher levels of responsibility

Deselection Factors Characteristics that prevent you from being considered as a serious candidate ■

Having weak interpersonal skills

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Treating others with insensitivity or abrasiveness

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Putting self-interest above company good

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Holding a narrow, parochial perspective on the business and the organization

Core Selection Factors Capabilities that breed others’ confidence in your ability to succeed at the senior executive level ■

Setting direction and thinking strategically; spotting marketplace trends and developing a winning strategy that differentiates the company

■

Building and continually upgrading a strong executive team; having a “nose for talent”; establishing an adequate level of team cohesion

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Managing implementation without getting involved at too low a level of detail; defining a set of roles, processes, and measures to ensure that things get done reliably

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Building the capacity for innovation and change; knowing when new ways of doing business are required; having the courage, tolerance for risk, and change-management skills to bring new ideas to fruition

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Getting things done across internal boundaries (lateral management); demonstrating organization savvy; influencing and persuading colleagues; dealing well with conflict

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Growing and developing as an executive; soliciting and responding to feedback; adjusting leadership style in light of experience

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most senior decision makers. For additional information, you might have a conversation with your former manager or your boss’s boss. Try to contact the highest-level manager who is knowledgeable about your work and with whom you have a positive relationship, so your approach seems natural and appropriate. (Caveat: Don’t go behind

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Managing Yourself Why You Didn’t Get That Promotion

Changing deep-seated perceptions of you takes visible and consistent effort.

How to Ask, How to Listen Getting past executives’ reluctance to provide direct and difficult feedback is tricky. When asking for input, project a sincere desire to understand what’s holding you back – and avoid appearing to lobby or argue. Your core question should be “What skills and capabilities do I need to demonstrate in order to be a strong candidate for higher levels of responsibility at some point in the future?”

Get into active-listening mode. Any comment or body language that conveys defensiveness will most likely cause the other person to either clam up or move the conversation to easier (and vaguer) territory – such as the need for more “seasoning” that Ralph kept hearing about. Ask clarifying questions, but don’t challenge the content. (You can attempt to correct factual errors with the right person later; this isn’t the time.) Be alert to code words and phrases masking fundamental issues – general observations about the need for “increased leadership ability” or “better teamwork” or “improved communication.” For instance, a manager I’ll call Terry was told by her boss that she needed to improve her leadership skills before she’d be eligible for her next promotion. She was managing multiple initia-

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your boss’s back. He or she should know about any contact with other executives and what your intentions are.) For the reasons stated above, you’ll probably have to dig a little to get useful information. That’s not easy, so let’s take a closer look at how you can go about having a truly constructive conversation.

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tives, and her teams were functioning effectively; she didn’t see how to improve her leadership except by taking on more projects. Fortunately, she had worked for her boss’s manager earlier in her career and could set up a meeting. In a series of probing questions, she asked the manager to help her define what “better leadership” would be in her case. She discovered that in her dedication she in fact had been doing herself a disservice. She’d been given an ever-increasing number of projects because of her superior organizational and people-management skills and her ability to stay on top of details. However, senior managers were concerned that she was maxed out by her personal involvement in every initiative and wanted to see that she could delegate more and create processes and systems that would ensure flawless execution without so much direct supervision. In response she put considerable effort into rethinking how she spent her time: which issues she should be involved in personally, which she could – with some coaching – learn to delegate to others, and what kinds of meetings and reports would allow her to stay as close to projects as was needed. She revamped her team’s staff meeting and the level of preparation required. She also designated a direct report as chief of staff to follow up on deadlines and alert her to situations that required her intervention. Terry admits that it was initially difficult to extricate herself from the details on some projects and confesses to poring over the status reports submitted by the staff. But with practice she got better at letting go. A year later she was promoted to lead a large operational unit. Things don’t always work out so well. Ed, a highly proficient finance manager, had advanced quickly because of his technical knowledge but recently missed out on several key promotions. His boss told him not to worry, everything was fine. Still, Ed met with his unit’s HR manager, who advised him to improve his communication skills. This confused him;

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suddenly felt vulnerable. Using his extensive industry network, he quickly found another position with a well-regarded firm but ended up leaving his new job after only nine months. The official reason was that Ed was not a cultural fit in a highly collaborative environment. In reality Ed’s peers at the new company complained that he was a know-it-all who tried to sell major initiatives to his boss without taking the time to understand how the organization worked and what internal customers needed. •••

If you are having trouble decoding the feedback you receive, try asking at the end of each session, “What one or two things – above all others – would most build confidence in my ability to succeed at higher levels within the organization?” As long as the other person answers honestly, this question tends to circumvent vagueness and separate the wheat from the chaff. Keep in mind that changing deepseated perceptions about you, formed over years, requires visible and consistent effort – which is why it is typically

best to focus on one or two key areas of development. Think through whether your current position provides you with a platform to demonstrate needed skills. Ralph, for instance, may need to move to a position where his breakthrough thinking isn’t preempted by a visionary boss. Alternatively, he may find ample opportunities to exhibit strategic thinking in his current role – if he is aggressive and creative in pursuing them and his boss gives him room to experiment. Although this type of development isn’t easy, the payoff can be huge for both the individual and the organization. Employees like Ralph learn what’s really holding them back, and companies like Smith & Mullins get a deeper and better bench. John Beeson ([email protected])

is the principal of Beeson Consulting, which specializes in succession planning, executive development, and organization design. He is based in New York. Reprint R0906L To order, see page 115.

Paul Wood

he took pride in his ability to write and speak clearly and devoted a lot of time to communicating with his staff. At the suggestion of the HR manager, he met with three peers to get their opinions. All three were hesitant to offer their opinions until Ed probed specifically for examples of poor communication on his part. It turned out that he was right; his basic communication skills were fine. Rather, the underlying issue lay with his ability to listen and to be flexible. Colleagues complained that he tended to get locked into his own opinions, that he lacked openness to other perspectives and shut down creative alternatives. Some considered him arrogant. Overall, his peers recommended that Ed spend more time discussing his plans with them and soliciting input. Unfortunately, Ed saw this as “politics” and energy that would be diverted from getting things done. Exacerbating the situation was the fact that Ed’s boss was encouraging him to drive the implementation of a new corporate policy that Ed’s peers found onerous. When his boss took a new position within the company, Ed

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Letters to the Editor Moon Shots for Management

■

rather live their lives in a more autonomous and less restrictive manner, are not motivated to become leaders. We propose that reinventing the structure of work must be at the heart of Management 2.0.

We agree with Gary Hamel’s Renegade Brigade: Our conventional models of management and leadership have reached the point of diminishing returns (“Moon Shots for Management,” February 2009). We also concur that the time is right for a paradigm shift, and we find the 25 proposed moon shots compelling. But there is one blatant omission from the list.

w

The HBR Debate

Herminia Ibarra The Cora Chaired Professor of Leadership & Learning

Are Business Schools to Blame? HAVE A FEW BAD-APPLE business

school alumni spoiled the economic barrel? Or is the problem more systemic: Have schools themselves contributed to the global financial

Insead

crisis by selecting the wrong kinds

Fontainebleau, France

of students and teaching them the wrong things? Business schools,

Sylvia Ann Hewlett HBR at Large

President

BY GARY HAMEL

Center for Work-Life Policy New York

including Harvard’s, are in a selfreflective mood these days. That’s why HBR conducted a weeks-long online forum to foster discussion among business school professors,

In his analysis of management’s grand challenges, Hamel poses some provocative “how” questions: How do you create organizations that are resilient and adaptable? How do you inspire employees to bring their gifts to work every day? How do you encourage executives to fulfill their responsibilities to all stakeholders? He also highlights one of the most important underlying issues: that the technology of management frequently drains organizations of the very qualities they aspire to achieve. Yet Hamel’s proposed remedies – such as reinventing strategy, eliminating the pathologies of formal hierarchy, and retooling management – also have a distinct technological bent. His moon shots all depend on people changing the way they view themselves, their responsibilities, and others – and he offers no hint on how to accomplish this. We believe the key is to embrace a fundamental shift in orientation. Operating under the assumption that each person

Moon Shots for Management

Jonathan Bartlett

What great challenges must we tackle to reinvent management and make it more relevant to a volatile world? MANAGEMENT IS UNDOUBTEDLY one of humankind’s most important inventions. For more than a hundred years, advances in management – the structures, processes, and techniques used to compound human effort – have helped to power economic progress. Problem is, most of the fundamental breakthroughs in management occurred decades ago. Work flow design, annual budgeting, return-oninvestment analysis, project management, divisionalization, brand management – these and a host of other indispensable tools have been around since the early 1900s. In fact, the foundations of “modern” management were laid by people like Daniel McCallum, Frederick Taylor, and Henry Ford, all of whom were born before the end of the American Civil War in 1865.

The evolution of management has traced a classic S-curve. After a fast start in the early twentieth century, the pace of innovation gradually decelerated and in recent years has slowed to a crawl. Management, like the combustion engine, is a mature technology that must now be reinvented for a new age. With this in mind, a group of scholars and business leaders assembled in May 2008 to lay out a road map for reinventing management. (For a list of attendees, see the sidebar “Building an Agenda for Management Innovation.”) The group’s immediate goal was to create a roster of makeor-break challenges – management moon shots – that would focus the energies of management innovators everywhere. The participants were inspired in part by the U.S. National Academy

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February 2009

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Management 1.0 is built on limiting assumptions about how work is carried out – from where it is done, what time of day it is done, and how it is distributed throughout the year (long stretches of work with short bursts of vacation) to the perspective that a career consists of an uninterrupted, lockstep progression of ever-ascending responsibility (witness the January 2009 cover of HBR, where a ladder serves as the metaphor for leadership development). We know that those factors alienate Millennials and systematically keep women from attaining senior posts. We also believe that they are the reason a wide spectrum of managers, who would

business leaders, MBAs, authors, HBR readers, and the public at large. By mid-April, the debate site had attracted more than 30,000 unique visitors from many countries. Eleven blogs in the debate series, with many more planned, garnered more than 170 comments. In an unscientific survey conducted on the site, a majority of respondents – 67% – felt that business schools were at least partly responsible for the ethical and strategic lapses of their graduates, who spawned the economic crisis. The debate panels offered a pointcounterpoint exchange of opinions on questions such as: Do business schools fail to foster accountability among their students? Is it fair to blame schools for the problems on Wall Street? Is the assumption that an MBA offers a foundation for the practice of management itself flawed? What is the role of business schools vis-à-vis society at large? Should business school students be

We welcome letters from all readers wishing to comment on articles in this issue. Early responses have the best chance of being published. Please be concise and include your title, company affiliation, location, and phone number. E-mail us at hbr_letters@harvardbusiness. org; send faxes to 617-783-7493; or write to The Editor, Harvard Business Review, 60 Harvard Way, Boston, MA 02163. HBR reserves the right to solicit and edit letters and to republish letters as reprints.

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forced to adhere to a code of ethics? What should the business school of the future look like?

hbr.org

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Business schools teach leadership as a soft, big picture–oriented course, distinct from the details on which hard, quantitative courses focus. Leadership, they imply, is about setting the vision and framing an agenda, but it isn’t about focusing on details. Because of this distinction, students are convinced that nitty-gritty work can be done without consciously considering factors such as values and ethics. Joel M. Podolny Dean Apple University

We must be careful not to generalize too broadly that this is an MBA-bred crisis. Furthermore, the failed leaders in this crisis are products of MBA curriculums offered 20 or 30 years ago. Much has changed since then.

bring out the worst in human beings. In particular, the logic and discipline of economics usually rule the roost at business schools. Robert I. Sutton Professor of Management Science and Engineering Stanford University

The world economy is strikingly better off today than it was 20 or 30 years ago. World GDP per capita has grown substantially and in virtually every region of the world. Life expectancy and education have also increased similarly. And poverty has declined. These will remain true even after the current recession ends.

When I went through a competitive business degree program at Harvard… I never saw a single person cheat. For the most part, I think that was because MBAs are hard-working, honest people who actually love what they do….We want to expand our knowledge and skills. That’s why we all spent $100,000 on a degree when we could all have stayed in our previous jobs, advanced more quickly, and kept our paychecks and dental. MBAs like to learn. Daisy Wademan Dowling Author, Remember Who You Are

Entrepreneurship and Finance

The faculty needs to increase collaboration and bring real-world skills into the curriculum. The boundaries between finance and corporate ethics need to be erased and aligned to support each other.

W. Carl Kester

The University of Chicago

Akshay M.

Deputy Dean for Academic Affairs

Booth School of Business

Steve Kaplan Neubauer Family Professor of

Harvard Business School

The notion that management education has such a massive influence upon its students that it can be blamed for today’s financial and economic crisis is absurd. If you don’t agree, did you remember to thank your local MBA director for the largely uninterrupted booming economy we all enjoyed from the early 1990s until last year? Or, like Darth Vader, is the power of management education only for evil, not for good? Steve Kerr Senior Adviser, Goldman Sachs Member of the Board of Directors for Harvard Business School Publishing

One of the root problems with business schools is that too many are infected with assumptions that reinforce and

The

HBR DEBATE

Here’s a sampling of opinions from the debate. The full HBR Debate will remain online at www.mbafuture.hbr.org.

I see the current financial crisis littered with models applied aggressively, confidently, and to their fullest. Because so many senior executives have MBAs, I attribute a portion of the current crisis to the fact that many MBAs are owned by their models.

Aine Donovan

Roger Martin

Adjunct Associate Professor of

Dean

Business Administration

University of Toronto’s

Executive Director of the Institute for the

Rotman School of Management

Study of Applied and Professional Ethics Tuck School of Business at Dartmouth

I believe the biggest issue is the get-itdone, damn-the-torpedoes, succeed-atall-costs mentality that many business students bring to the game….According to my research, the mind-set of most MBAs – the bottom line – is to get the highest GPA possible, regardless of the means. After all, the students with the highest GPAs get the best shot at the six-figure jobs in pharmaceuticals, high tech, and, yes, finance. Donald L. McCabe Professor and author of numerous studies, including one showing that MBAs cheat more than other graduate students in the United States and Canada (2006) Rutgers Business School

hbr.org

1220 Jun09 Letters.indd 107

Is it the responsibility of schools to teach ethics? I think it is – but only if it’s done the right way. MBA students…need a simple values tool kit that they can understand and have at the ready, not an impression that all ethics are relative or just intellectual chewing gum.

|

The all-too-commonplace business practice of setting strategic goals, business unit objectives, quotas, quarterly targets, bonuses, and incentives for performance assessments can lead to behaviors that are very destructive….Our current management system is broken and needs reinvention – now! Forrest Breyfogle

If we are serious about teaching responsibility in business education, we need a curriculum that reflects the real-world context in which business operates, including its social and environmental consequences and the necessity of reg-

June 2009

|

Harvard Business Review 107

5/1/09 5:24:33 PM

Business schools teach leadership as a soft, big picture–oriented course, distinct from the details on which hard, quantitative courses focus. Leadership, they imply, is about setting the vision and framing an agenda, but it isn’t about focusing on details. Because of this distinction, students are convinced that nitty-gritty work can be done without consciously considering factors such as values and ethics. Joel M. Podolny Dean Apple University

We must be careful not to generalize too broadly that this is an MBA-bred crisis. Furthermore, the failed leaders in this crisis are products of MBA curriculums offered 20 or 30 years ago. Much has changed since then.

bring out the worst in human beings. In particular, the logic and discipline of economics usually rule the roost at business schools. Robert I. Sutton Professor of Management Science and Engineering Stanford University

The world economy is strikingly better off today than it was 20 or 30 years ago. World GDP per capita has grown substantially and in virtually every region of the world. Life expectancy and education have also increased similarly. And poverty has declined. These will remain true even after the current recession ends.

When I went through a competitive business degree program at Harvard… I never saw a single person cheat. For the most part, I think that was because MBAs are hard-working, honest people who actually love what they do….We want to expand our knowledge and skills. That’s why we all spent $100,000 on a degree when we could all have stayed in our previous jobs, advanced more quickly, and kept our paychecks and dental. MBAs like to learn. Daisy Wademan Dowling Author, Remember Who You Are

Entrepreneurship and Finance

The faculty needs to increase collaboration and bring real-world skills into the curriculum. The boundaries between finance and corporate ethics need to be erased and aligned to support each other.

W. Carl Kester

The University of Chicago

Akshay M.

Deputy Dean for Academic Affairs

Booth School of Business

Steve Kaplan Neubauer Family Professor of

Harvard Business School

The notion that management education has such a massive influence upon its students that it can be blamed for today’s financial and economic crisis is absurd. If you don’t agree, did you remember to thank your local MBA director for the largely uninterrupted booming economy we all enjoyed from the early 1990s until last year? Or, like Darth Vader, is the power of management education only for evil, not for good? Steve Kerr Senior Adviser, Goldman Sachs Member of the Board of Directors for Harvard Business School Publishing

One of the root problems with business schools is that too many are infected with assumptions that reinforce and

The

HBR DEBATE

Here’s a sampling of opinions from the debate. The full HBR Debate will remain online at www.mbafuture.hbr.org.

I see the current financial crisis littered with models applied aggressively, confidently, and to their fullest. Because so many senior executives have MBAs, I attribute a portion of the current crisis to the fact that many MBAs are owned by their models.

Aine Donovan

Roger Martin

Adjunct Associate Professor of

Dean

Business Administration

University of Toronto’s

Executive Director of the Institute for the

Rotman School of Management

Study of Applied and Professional Ethics Tuck School of Business at Dartmouth

I believe the biggest issue is the get-itdone, damn-the-torpedoes, succeed-atall-costs mentality that many business students bring to the game….According to my research, the mind-set of most MBAs – the bottom line – is to get the highest GPA possible, regardless of the means. After all, the students with the highest GPAs get the best shot at the six-figure jobs in pharmaceuticals, high tech, and, yes, finance. Donald L. McCabe Professor and author of numerous studies, including one showing that MBAs cheat more than other graduate students in the United States and Canada (2006) Rutgers Business School

hbr.org

1220 Jun09 Letters.indd 107

Is it the responsibility of schools to teach ethics? I think it is – but only if it’s done the right way. MBA students…need a simple values tool kit that they can understand and have at the ready, not an impression that all ethics are relative or just intellectual chewing gum.

|

The all-too-commonplace business practice of setting strategic goals, business unit objectives, quotas, quarterly targets, bonuses, and incentives for performance assessments can lead to behaviors that are very destructive….Our current management system is broken and needs reinvention – now! Forrest Breyfogle

If we are serious about teaching responsibility in business education, we need a curriculum that reflects the real-world context in which business operates, including its social and environmental consequences and the necessity of reg-

June 2009

|

Harvard Business Review 107

5/1/09 5:24:33 PM

LETTERS TO THE EDITOR

The HBR Debate

Are Business Schools to Blame? ulation for maintaining competitive and transparent markets. Instead of training MBAs to lead in a hypothetical world of simplistic economic theory, let’s train them to lead in our world. It’s time to get real. Aaron James

How much is enough? How will you measure success? Until we answer these questions differently than we have, what we see in business school education and what we see in the world of business merely reflects our desires and expectations from education and… business – a world of sales(wo)men, not states(wo)men.

be convenient scapegoats for today’s financial problems. Sir Andrew Likierman Dean London Business School

Lorne Armstrong

I find it striking how an academic economist is able to look at GDP growth and speak glowingly of the eternal prosperity and progress brought by business and capitalism while making no mention about growing inequality, the stagnation of wages, the bubble economy, growing household and international debt, peak oil…. David C. Korten Author, Agenda for a New Economy

Mark Albion

Is business management a profession? It may not be a traditional profession, like law or medicine, but it is a high calling. Management, in all its forms, is a critical activity of modern societies, deeply and inevitably shaping the livelihoods and lives of most people on earth. The best MBA programs and MBA teachers…will make sure their students understand this extraordinary responsibility and opportunity.

Business schools need to recognize the professional duties of managers toward society at large and revise their very core narratives about what management is and what society expects of it. As of today, 222 business schools from around the world have endorsed the UN’s Principles for Responsible Management Education, a sign that business schools may be willing to listen and learn from past mistakes. Ángel Cabrera

Joseph L. Badaracco

President

John Shad Professor of Business Ethics

Thunderbird School of

Harvard Business School

Global Management

When things go wrong, there is a natural tendency to look for people and organizations to blame. And when things go as spectacularly wrong as they have in the global financial system, the search for scapegoats is particularly intense, passionate, and wide-ranging. Business schools will continue to attract talent…and train people to be better managers. They will continue to be places where a wide variety of ideas are generated. They should not

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acts separately, as an individual, lays the groundwork for a dynamic of opposition – against other ideas, people, even departments in one’s own organization. Authentic collaboration, a critical agent of change, simply can’t thrive in such an environment. The real rocket fuel for Hamel’s moon shots consists of learning not to take things personally, giving up the right to be offended, and developing our innate talents and strengths.

Educators should focus on delivering great skills and knowledge; practitioners should focus on great practice. And all of us…should think about the behaviors, practices, and cultures that are important to us and our communities; find others who cherish the same set of behaviors and practices; incent, reward, and appreciate them when they do; regulate and reprimand them when they don’t. This is all we can do. Murthy

|

President Armstrong Consulting Group Surrey, British Columbia Gail Cantor CEO Contegrity Program Designs Dallas

I was intrigued when I first encountered Hamel’s article and became even more so upon seeing the credentials of the team that assembled the 25 challenges for management. But now that I’ve read the piece, I am disappointed with what is essentially a reformulation of Theory Y (human relations management) coupled with variously phrased admonitions to think creatively. I, too, am an adherent of Theory Y by predilection, but certainly there are times when a Theory X approach (hierarchical, directive management) is necessary. Moreover, while creative thinking is generally a good thing, it’s worth noting that much of the current economic crisis has been generated by the “creative thinking” of ostensibly bright, passionate people – the kind that Hamel et al apparently seek to further empower. The businesses that are doing the best today, particularly in the financial sector, are those that have stuck to their knitting. Mark P. Gaige Principal Gaige Consulting and Writing New York

Hamel responds: Herminia Ibarra and Sylvia Ann Hewlett make a great suggestion! I’ve written about the challenge of

hbr.org

5/1/09 5:24:39 PM

reinventing work in my blog for the Wall Street Journal and will make sure that it gets added to the “official” list of moon shots for management. I agree with Lorne Armstrong and Gail Cantor as well. The challenge in reinventing management is to create systems and processes that encourage employees to bring their very best to work. The goal is to make organizations that are as adaptable, innovative, and engaging as the people who work within them, and accomplishing that will require making organizations feel like genuine communities instead of hierarchically structured bureaucracies. Bureaucracies tend to pit individuals, departments, and functions against one another – communities do not. (For a practical example of how to build an organization based on the principle of interdependence rather than independence, please see The Future of Management, which I coauthored with Bill Breen.) Finally, Mark P. Gaige is also right. Many of the management moon shots reflect ideas first expressed by Douglas McGregor in his landmark book, The Human Side of Enterprise. The dilemma: Here we are nearly 60 years later, and we’re still struggling to build organizations that don’t treat human beings as semiprogrammable robots. The logic for bringing 35 “big thinkers” together was to rejuvenate the heft and urgency of McGregor’s plea for a fundamental rethinking of management. In addition, the group highlighted many challenges that go far beyond McGregor’s original thesis – such as fundamentally reinventing the process of strategy development, embracing the responsibilities of citizenship, and substituting internal markets for hierarchical decision-making. McGregor was ahead of his time. We’re not. In the twenty-first century, new challenges (such as accelerating change), new tools (that facilitate mass collaboration), and new expectations (on the part of tomorrow’s internet-savvy employees) have created both the imperative and the possibility of deep-seated management innovation.

1220 Jun09 Letters.indd 109

Seven Ways to Fail Big Paul B. Carroll and Chunka Mui’s description of Ames Department Stores (“Seven Ways to Fail Big,” September 2008) addresses the aftermath of Ames’s acquisition of G.C. Murphy in 1985. According to the article, “[d]isgruntled Murphy’s employees were reportedly stealing goods off delivery trucks,” and “[i]n 1987 Ames lost $20 million worth of merchandise and couldn’t tell why.” The article erroneously and unfairly attacks the integrity of the 18,000 Murphy employees. Let me provide some background. On acquiring Murphy, Ames immediately removed Murphy’s own inventory control system and began implementing its own system. It also transferred large quantities of inventory between stores and conducted extensive inventory reduction sales as it attempted to quickly install its own merchandise and operating practices. Such activities very often increase the risk of shrinkage in ways that have nothing to do with theft. Indeed, the $20 million loss involved the entire Ames operation, not just the former Murphy stores. Extensive investigation by Ames of the loss never pinpointed theft or any other specific source as the major cause. Thomas F. Hudak Former Chairman of the Board G.C. Murphy

“ROTMAN MAGAZINE TACKLES REAL IDEAS WITH A VERVE AND STYLE THAT I HAVE NOT ENCOUNTERED ANYWHERE ELSE.“ – Peter Day BBC Radio Presenter, “In Business” and “Global Business” (March, 2009)

Try a risk-free issue: rotman.utoronto.ca/must-read

Former Director Ames Department Stores Naples, Florida

Carroll and Mui respond: We disagree that we were erroneous or unfair to Murphy employees. Newspapers and securities analysts reported suspicions about theft, and we didn’t say that Ames’s $20 million problem was limited to Murphy stores. More important, we blamed Ames management, not Murphy employees, for the bungled Murphy acquisition, as well as for the two later, larger acquisitions that doomed the company. It was Ames’s failed consolidation strategy that stands as the billiondollar lesson for future managers.

4/28/09 9:40:25 AM

| LEADERSHIP | COVER ARTICLE

42 | How to Be a Good Boss in a Bad Economy Robert I. Sutton

Executive Summaries JUNE 2009

HOW OBAMA IS DOING AS A LEADER…page 34

www.hbr.org

June 2009

How to Be a Good Boss in a Bad Economy Robert I. Sutton

REBUILDING

TRUST What’s Needed Next: A Culture of Candor

The Buck Stops (and Starts) at Business School

The Real Problem with Trust

James O’Toole and Warren Bennis

Joel M. Podolny

Roderick M. Kramer

“

During overwhelming times, a good boss finds ways to keep up a drumbeat of accomplishments, however minor.

”

–page 42

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1220 Jun09 ExecSumms.indd 110

Even in times of economic growth, it’s challenging to be a good boss. Research shows that people placed in positions of authority often become less mindful of others’ feelings and needs. Meanwhile, those in subordinate roles devote immense energy to watching and interpreting the actions of leaders. These tendencies make for a toxic tandem, which is only exacerbated during a crisis. Sutton, a Stanford professor, provides a useful framework to get bosses focused on what their people need from them most. In a situation where people feel threatened, a good boss finds ways to provide more predictability, understanding, control, and compassion. Predictability. Give people as much information as you can about what will happen to them and when. Preparation will reduce their suffering, and they can relax in the meantime – as Londoners during the blitz were able to do when the air-raid sirens were silent. Understanding. Accompany any major change with an explanation of why it’s necessary and how it will affect routines. Internal communication should be simple, concrete, and repetitive. Control. Don’t frame an obstacle as too big, too complex, or too difficult to overcome; people will be overwhelmed and freeze in their tracks. When it’s broken down into less-daunting components, they can tackle it with confidence. Compassion. Tend to the emotional needs of people who are let go, and help them preserve their dignity. This is essential both for them and for their colleagues who survive the cuts. Demeaning those who have left will demoralize those who remain and may drive the best of them to jump ship. A manager who provides all four remedies will be perceived as “having people’s backs” and will reap the rewards of employees’ deep loyalty for years to come. Reprint R0906E

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| hbr.org Month June 2009 2009| hbr.org

5/1/09 5:25:17 PM

| IDEAS & TRENDS | FORETHOUGHT

Ten Fatal Flaws That Derail Leaders

14 | How Concepts Affect

Jack Zenger and Joseph Folkman

Consumption

Poor leadership in good times can be hidden, but poor leadership in bad times is a recipe for disaster. Looking at 360-degree feedback data for more than 11,000 executives, the authors identified 10 leadership shortcomings, among them not walking the talk, failing to learn from mistakes, and lacking clear vision and direction. Reprint F0906E

Dan Ariely and Michael I. Norton Duke behavioral economist Ariely and Harvard Business School professor Norton explore how our consumption of concepts influences physical consumption, both positively and negatively. Reprint F0906A

After Layoffs, Help Survivors Be More Effective Anthony Nyberg and Charlie O. Trevor If your firm has downsized recently, you’re now managing a bunch of survivors – the lucky ones who didn’t get laid off. But good fortune doesn’t make for good performance, at least not in this situation. Chances are, you’re presiding over a heightened level of employee dysfunction, even if you don’t see it yet. Here’s what you can do to limit the damage. Reprint F0906B

Too Big to Fail? How About Too Big to Exist? Duncan Watts Having studied the dynamics of cascades in complex systems, this Columbia sociologist and network scientist argues that the most damaging ones are impossible to anticipate. The solution, therefore, may be to make systems less complex to start with, in order to reduce the chance that any one part can trigger a catastrophic chain of events. In the financial system, this means preventing companies from growing too big to fail in the first place. Reprint F0906C

A Conversation with Paul Krugman Krugman – a professor at Princeton University, the most recent winner of the Nobel Prize in economics, and a columnist for the New York Times – talks about the global financial meltdown: what surprises him, what scares him, and what he’d do to ensure a recovery if he were calling all the shots. Reprint F0906D

Losing (Ownership) Control

Senior Executive Seminar for Retailers and Suppliers August 24–27, 2009

Ken Smith Global industry restructuring is driving a dramatic increase in cross-border acquisitions, and some countries – notably the United States, the United Kingdom, and Canada – are selling a lot more than buying. To remain competitive, they should take action on three levels. Reprint F0906F

Taking Marketing Digital September 9 –12, 2009

Reviews

Consumer Financial Services October 18–23, 2009

Featuring War in the Boardroom: Why Left-Brain Management and Right-Brain Marketing Don’t See Eye-to-Eye – and What to Do About It, by Al and Laura Ries

Leading Professional Service Firms September 20–26, 2009

Changing the Game: Negotiation and Competitive Decision Making November 1–6, 2009 Private Equity and Venture Capital November 1–4, 2009 Corporate Social Responsibility November 4–7, 2009 Achieving Breakthrough Service November 15–18, 2009

Learn more at www.exed.hbs.edu/pgm/hbr/

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| SELF-MANAGEMENT |

| MARKETING |

| LEADERSHIP |

HEALTH & WELL-BEING

HBR CASE STUDY

DIFFERENT VOICE

22 | Good News for Coffee Addicts

25 | Do You Thank the Taxpayer

36 | Relentless Idealism

Thomas H. Lee, MD

for Your Bailout?

for Tough Times

Randle D. Raggio

A Conversation with Renowned Restaurateur Alice Waters

Whether it’s a basic Mr. Coffee or a gadget that sports a snazzy device for grinding beans on demand, the office coffee machine offers a place for serendipitous encounters that can improve the social aspect of work and generate new ideas. What’s more, a steaming cup of joe may be as good for your health as it is for the bottom line, says Lee, a professor of medicine at Harvard Medical School and the CEO of Partners Community HealthCare. Fears of coffee’s carcinogenic effects now appear to be unfounded, and, in fact, the brew might even protect against some types of cancer. What’s more, coffee may guard against Alzheimer’s disease and other forms of dementia and somehow soften the blow of a heart attack. Of course, its role as a pick-me-up is well known. So there’s no need to take your coffee with a dollop of guilt, especially if you ease up on the sugar, cream, double chocolate, and whipped-cream topping. Reprint R0906A

| LEADERSHIP | BIG PICTURE

34 | Obama’s First 90 Days Michael D. Watkins In this article, the author of The First 90 Days assesses Barack Obama's attempts to build momentum for change. Creating substantive early wins is critical for transitioning leaders, and Obama's moves to close the U.S. military detention facility at Guantánamo Bay and reverse longstanding policies on stem-cell research have won him broad support. Laying the foundation for longer-term changes is also important, and Obama scores well here in part because of the strong team he has appointed. Surprisingly, however, Obama’s efforts to articulate an inspiring vision so far haven’t been compelling enough to reach a public frightened by the financial collapse. Reprint R0906C

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ReliantShare Bank is about to receive $5 billion in U.S. federal assistance. After all the negative publicity, CEO Ben Marshall knows he needs to deliver a positive message to customers and the market. His chief customer officer, Ammon Rodriguez, proposes an ad campaign thanking the taxpayers for their “investment.” CFO Vernon Scott argues instead for focusing investors’ and opinion makers’ attention on the bank’s recapitalized balance sheet and future growth prospects. What message should ReliantShare send to restore the public’s confidence? An effective thank-you campaign, says University of Miami professor Michael McCullough, would need to include a clear statement of the bank’s intention to translate the $5 billion into increased capacity to serve the public. But, he adds, if Ben isn’t willing to eat a little crow, then Vernon is right – they’d be better off keeping their gratitude to themselves and quietly rebuilding their business. Brunswick Group chair Alan Parker asserts that ReliantShare must show contrition and acknowledge its role in creating the mess it’s in – though that won’t be enough. The bank will probably also need new leadership. Parker suggests that Ben get ahead of events and orchestrate a clean, orderly departure by publicly expressing his regret for shareholders’ losses, ensuring that ReliantShare executives aren’t walking off with extravagant bonuses, and tendering his resignation. C. William Pollard, former chair and CEO of ServiceMaster, says that Ben would make things worse if he resigned, because a new leadership team would take too much time to get up to speed. But Pollard does think that some heavyduty PR is in order – not a campaign simply expressing gratitude, but one that emphasizes stewardship, transparency, and a restoration of trust. Reprint R0906B Reprint Case only R0906X Reprint Commentary only R0906Z

In 1971, when Alice Waters founded Chez Panisse in Berkeley, California, chefs at even the highest-end restaurants were still using frozen meat and produce. Waters chose to focus on fresh, simply prepared food using organic ingredients. She invented what is now known as California cuisine and went on to launch a sociopolitical movement based on her ideas about food and community. Her unwavering commitment to quality has produced some steep business challenges in the past, but Chez Panisse has survived for nearly 40 years and is now regarded as one of the best restaurants in the world. What does the recession mean for its future? In this conversation with HBR editors, Waters shares her thoughts. She believes more than ever in the importance of buying “real” food from people who are taking care of the land, but the restaurant kitchen is becoming thriftier and is recycling with even greater energy and enthusiasm than before. Waters keeps her staff motivated and loyal in part through an unorthodox form of job sharing: The two chefs in the main restaurant are paid for a full year but work only six months each, spending the rest of the time developing their skills in France. The café chefs are paid for five days a week but come to work only three, using the other two to visit the markets and create their menus. Waters couples her passion for sustainability with a readiness to adapt. She has traveled around the country presenting dinners in collaboration with local people and believes that her restaurant can change with the times. “We could transform ourselves into a soup kitchen or move to a farm,” Waters says. “There’s a lot of flexibility in the big vision of what Chez Panisse is.” Reprint R0906D

| hbr.org Month June 2009 2009| hbr.org

5/7/09 4:11:28 PM

SPOTLIGHT ON

TRUST ORGANIZATION & CULTURE

GENERAL MANAGEMENT

LEADERSHIP

54 | What’s Needed Next:

62 | The Buck Stops (and Starts)

68 | Rethinking Trust Roderick M. Kramer

A Culture of Candor

at Business School

James O’Toole and Warren Bennis

Joel M. Podolny

If there’s one thing that the past decade’s business disasters should teach us, it’s that we need to stop evaluating corporate leaders simply on the basis of how much wealth they create for investors. A healthier yardstick would be this: the extent to which leaders create firms that are economically, ethically, and socially sustainable. The first step toward accomplishing that task is to create a culture of candor. Companies can’t innovate, respond to stakeholder needs, or run efficiently unless the people inside them have access to timely, relevant information, point out professors O’Toole, of the University of Denver’s Daniels College of Business, and Bennis, of the University of Southern California. Increasing transparency can be an uphill battle against human nature, however. The obstacles are numerous: macho executives who don’t listen to their subordinates or punish them for bringing bad news; leaders who believe that information is power and hoard it; groupthink among team members who don’t know how to disagree; boards that fail to question charismatic CEOs. Nevertheless, leaders can take steps to nurture transparency. By being open and candid, admitting their errors, encouraging employees to speak truth to power, and rewarding contrarians, executives can model the kind of conduct they want to see. Training employees to handle unpleasant conversations with grace also will break down barriers to honest communication. To avoid being blinded by biases, leaders can diversify their sources of information – an obvious measure that’s rarely taken. Perhaps the biggest lever for cultural change is the executive selection process – choosing leaders for their transparent behavior, not just their ability to compete. And a few companies have even gone so far as to share all relevant information with every employee. Reprint R0906F

People in America have come to believe that business schools are harmful to society, fostering in their graduates behavior that is self-interested, unethical, and sometimes even illegal. Many are convinced that managers are simply incapable of self-regulation and have called for laws to govern executive compensation and corporate financial reporting. Sure, legislation is cumbersome, but the consequences of self-governance are apparently even worse. How did business schools become part of the problem rather than the solution? It’s their own fault, maintains Apple University dean Podolny, who is in a good position to know (he has been a professor at Harvard and Stanford business schools and a dean of Yale’s School of Management). Fifty years of efforts to increase rigor have left even the best business schools with a bias against teaching qualitative disciplines like ethics and leadership. What’s more, the schools have allowed rankings organizations to drive their admissions policies and curricula, skewing them toward an overweening emphasis on making money. Podolny suggests a multipronged approach to tackling the problem: curriculum changes that emphasize the integration of several disciplines and link analytics with ethics; team teaching that ropes in professors from different fields to give students a holistic approach to business issues; a broader definition of scholarship that can embrace the research practices of less-quantitative academic fields; an end to using rankings to market the effectiveness of schools’ MBA programs; and a willingness to rescind the degrees of individuals who act unethically in the workplace. If that sounds like a tall order, it is. Business schools will never become part of the solution, Podolny insists, until they reinvent themselves. Reprint R0906G

Will we ever learn? We’d barely recovered from Enron and WorldCom before we faced the subprime mortgage meltdown and more scandals that shook our trust in businesspeople. Which raises the question: Do we trust too much? In this article, Stanford professor and social psychologist Kramer explores the reasons we trust so easily – and, often, so unwisely. He explains that genetics and childhood learning make us predisposed to trust and that it’s been a good survival mechanism. That said, our willingness to trust makes us vulnerable. Our sense of trust kicks in on remarkably simple cues, such as when people look like us or are part of our social group. We also rely on third parties to verify the character of others, sometimes to our detriment (as the victims of Bernard Madoff learned). Add in our illusions of invulnerability and our tendencies to see what we want to see and to overestimate our own judgment, and the bottom line is that we’re often easily fooled. We need to develop tempered trust. For those who trust too much, that means reading cues better; for the distrustful, it means developing more receptive behaviors. Everyone should start with small acts of trust that encourage reciprocity and build up. Having a hedge against potential abuses also helps. Hollywood scriptwriters, for instance, register their treatments with the Writers Guild of America to prevent their ideas from being stolen by the executives they pitch. To attract the right relationships, people must strongly signal their own honesty, proactively allay concerns, and, if their trust is abused, retaliate. Trusting individuals in certain roles, which essentially means trusting the system that selects and trains them, also works but isn’t foolproof. And don’t count on due diligence alone for protection; constant vigilance is needed to make sure the landscape hasn’t changed. Reprint R0906H

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| INNOVATION & CREATIVITY |

| GOVERNANCE |

| SELF-MANAGEMENT |

79 | Innovation in Turbulent Times

TOOL KIT

MANAGING YOURSELF

92 | The Audit Committee’s New Agenda

101 | Why You Didn’t Get That Promotion

H. David Sherman, Dennis Carey, and Robert Brust

John Beeson

Darrell K. Rigby, Kara Gruver, and James Allen During a recession, when many companies face declining revenues and earnings, executives often conclude that innovation isn’t so important after all. According to the authors, that’s because it isn’t integral to the workings of most organizations, so the creativity that leads to game-changing ideas is missing or stifled. Rigby, Gruver, and Allen, all partners at Bain & Company, point to the fashion industry as a model. Every season, successful fashion companies must reinvent their product lines – and thus their brands – or face certain death. They manage this constant challenge by creating unusual partnerships at the top that consist of an imaginative, right-brain creative director and a commercially minded, left-brain brand CEO. The authors call these alliances “both-brain” teams. Some famous examples exist outside the fashion industry: Steve Jobs and his COO at Apple, Tim Cook; the creative Bill Hewlett and the savvy David Packard; Bill Bowerman, the former track coach who developed Nike running shoes, and his business partner, Phil Knight. But fashion has gone the furthest to incorporate both-brain partnerships in its organizational model. Gucci Group and others have learned to establish and maintain effective partnerships between creative people and numbers-oriented people; to structure the business so that the partners can run it effectively and are clear about which decisions they own; and to foster left-brain–right-brain collaboration at every level in order to continue attracting talent. What makes these partnerships work? The authors have identified seven characteristics of successful partners: They are aware of their own strengths and weaknesses, have complementary cognitive skills, trust each other, possess raw intelligence, bring relevant knowledge to the team, speak to each other frequently and directly, and are highly committed to the business and each other. Reprint R0906J

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Who would want to join the audit committee of a board of directors? Wouldn’t that just mean slogging through the minutiae of Sarbanes-Oxley compliance? Not anymore. Audit teams have pretty much mastered SOX compliance; they’re now turning their attention to the meaty problems of increasing business value. To do that, say Northeastern University professor Sherman, Korn/Ferry’s Carey, and Sprint CFO Brust, audit teams need a broader range of expertise. Four areas in particular cry out for new blood. Someone, the authors argue, needs to decipher financial guesstimates. GM reported a $3 billion loss in the second quarter of 2006, which it adjusted to a $1 billion profit. Why was that? Things might have gone differently last winter if the company’s audit committee had explored the assumptions that GM’s managers had used to come up with those kinds of disparate figures. Second, someone needs to keep an eye on M&A performance. Managers today have unprecedented discretion in determining estimates of an acquisition’s fair market value, but such calculations clearly warrant greater scrutiny, since fully half of all mergers and acquisitions consistently fail to live up to expectations. Third, someone has to objectively analyze the myriad new risks facing businesses today. Imagine how altered the current economic climate might be if audit committees at Merrill Lynch or Lehman Brothers had recommended limiting their investments in mortgage-backed securities. Last, someone has to make sense of the difference between accounting standards used in Europe and those used in the United States and understand how those standards cloud companies’ abilities to reward executives and accurately assess their own performance relative to rivals’. Reprint R0906K

Promotions to the C-suite are governed by unwritten rules. If you don’t know what they are, you’ll be left to your own devices interpreting vague feedback and finding a way to achieve your career goals. Beeson has created a framework to help you identify and address any issues that may be getting in your way. Executive placement decisions hinge on three categories of skills: nonnegotiables, without which you will not be considered for a promotion; deselection factors, which eliminate you as a candidate even if you’re otherwise qualified; and core selection factors, which ultimately determine who gets the position. Leadership competency models typically fail to make these distinctions, and most don’t spell out how skills should be demonstrated at different levels. In middle management, for instance, teamwork is a vital competency. At more senior levels, the imperatives are to think strategically and to acquire and develop talent. Many unwritten rules are especially elusive because they don’t pertain to technical or business knowledge. Rather, they relate to the soft skills that give decision makers an intuitive sense of your potential for success. Complicating matters further, managers and HR professionals often give intentionally vague feedback – not direct constructive criticism – for fear of losing good employees. You’ll need to dig deep to get useful input from executives and other colleagues: Project a sincere desire to understand what’s holding you back. Ask questions, but don’t lobby or argue. Avoid comments or gestures that convey defensiveness, which could cause the other person to clam up or move the conversation to safer territory. And be alert to code words and phrases – such as general observations about the need for “increased leadership ability” or “better communication” – that may mask fundamental issues. Reprint R0906L

| hbr.org Month June 2009 2009| hbr.org

5/1/09 5:25:35 PM

PANEL DISCUSSION

|

by Don Moyer

T

The Power of Negative Thinking

HE CURRENT economic crisis may turn out to be one of the great catalysts for

action of the twenty-first century. As Dan Ariely points out in his book Predictably Irrational (HarperCollins, 2008), people are far more motivated by the prospect of loss than they are by potential gain. Nothing beats a giant helping of bad news to spur a person, or an organization, into action. But before you finalize your plans, you might want to read “The Quest for Resilience” (HBR September 2003), by Gary Hamel and Liisa Välikangas. The authors argue that to be resilient businesses must learn how to repeatedly “reinvent business models and strategies as circumstances change” instead of just responding to a onetime crisis. Cultivating this ability depends on variety. The authors urge companies to continually explore a wide array of ideas on a small scale. “They should steer clear of grand, imperial strategies and devote themselves instead to launching a swarm of low-risk experiments.” So, plant more seeds. Don Moyer can be reached at [email protected].

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