Wharton Leadership Digest

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The program is offered in English at a resort hotel southwest of Bangkok, and it draws participants from the Asian region, including Australia, Indonesia, Malaysia, Myanmar, New Zealand, Singapore, Thailand, and Vietnam. Wharton and Kellogg faculty provide instruction in economics, finance, leadership, marketing, organizational behavior, information technology & innovation, and strategic management.

While the rapid economic development in China and India has captured the attention of U.S. business leaders, countries in the Persian Gulf region – including, most notably, the United Arab Emirates, home to Dubai – are experiencing their own boom in the energy, financial services, consumer products, infrastructure and other sectors.

The Wharton Leadership Digest caught up with Rehman to discuss business leadership issues in the Gulf states, including questions about the lasting impact of the Dubai Ports World scandal, the emergence of sovereign wealth funds, and whether or not leadership is unique in the Gulf context.

Wharton Leadership Digest: You observe in your book that awareness of the Gulf economies is quite low among business leaders today. Why is this the case, and does this lack of awareness have negative consequences?

Aamir A. Rehman: The low level of “Gulf awareness” amongst business leaders is understandable. The GCC (Gulf Cooperation Council) as a common economic unit has only existed since the early 1980s, and at the time when most senior executives were trained, the region was a far less attractive place to do business. Relatively few top leaders have had much direct exposure to the Gulf.

Today, however, no business can be truly global if it ignores the Gulf opportunity. The GCC region is prosperous and growing some three times faster than the most developed OECD countries, with young populations and rapid deregulation underway. GDP per capita in the Gulf is about five times that of India and three times that of China, and the region’s “economic freedom” ratings are higher than those of both nations. At the same time, the Gulf is a huge exporter of investment dollars. Global firms that overlook the Gulf are often missing out on a substantial opportunity.

WLD: What do corporate leaders and managers need to know when going to the Gulf? Is there a unique style of leadership that works best in the Gulf?

Rehman: Effective leadership and management rely on awareness of one’s context. Leaders entering the Gulf must be mindful of both strategic and tactical components of the local context; too often, executives focus on the tactical elements of doing business (e.g., not calling clients on Fridays or at prayer times) rather than the important strategic elements.

One example of “strategic context” is recognizing the importance of family-owned businesses and the fact that many of these businesses are seeing a new generation of leaders taking the helm. This phenomenon represents a huge opportunity, but could also be a challenge to firms with long-standing client relationships if they take these relationships for granted. In Dubai & Co., I discuss five “deadly misconceptions” about the Gulf business strategic landscape that global managers often have, and that can lead to poor corporate decisions if not rectified.

Expatriate managers should also recognize that Gulf institutions have long sought to import and emulate global best practices in leadership and management. Gulf firms are, after all, part of the same global economy. The core leadership toolkit – having a vision, setting clear targets, inspiring one’s team, delighting clients, building a feedback culture, and so on – is entirely applicable and highly valued in the Gulf. What’s different are the context and the methods of applying that toolkit.

WLD: Is the story of Dubai’s success a leadership one? Has leadership been critical to the emirate’s prosperity?

Rehman: Dubai’s remarkable success – and that of the United Arab Emirates (UAE) overall – is very much a story of visionary leadership. Dubai’s current ruler has built on the legacy of his father and brother to foster an “open-for-business” environment with superb infrastructure, streamlined government services, and business support facilities. Abu Dhabi, the dominant emirate in the UAE, has also benefited from extraordinary leadership. Other Gulf states were blessed with more oil, larger populations, and greater wealth – yet not all have developed and pursued a vision with the same effectiveness as the United Arab Emirates has.

Dubai’s inherent advantages were limited: the emirate has little energy resources and a small indigenous population. Over the decades, however, it has built itself up as trade center through infrastructure excellence and a welcoming business environment. For example, the government reportedly uses “mystery shoppers” to evaluate the quality of service at public agencies like airport immigration and motor vehicle registration. Dubai was short on resources but long on vision, and that has made a huge difference.

Other emerging markets can learn from Dubai’s example not by imitating its practices, but by understanding the approach the emirate took. Its leaders have focused on the emirate’s areas of comparative advantage – most notably location, trade, and legacy of business services – and fostered the “right” industries to capitalize on these areas of advantage, providing government stimulus and developing physical and social infrastructure with amazing vigor.

WLD: The idea of placing economic and political power in the hands of a hereditary leader is contrary to Western ideas about democracy. What do global investors and managers need to understand about the political system in the Gulf?

Rehman: From a business perspective, the most important observation is that the Gulf states are remarkably stable. The hereditary system of leadership has real political drawbacks but also some economic benefits – one of the key benefits is the remarkable stability that it has brought to the Gulf region.

Often, global businesspeople dismiss the Middle East entirely on the basis of “political risk.” In reality, the Middle East is not a monolith. The Levant cluster (Iraq, Jordan, Syria, Lebanon, Israel and the Palestinian Territories) has a high degree of political instability and risk. The Gulf, on the other hand, is far more stable, with reliable systems of governance. Business leaders must recognize this stability – along with the clarity of decision rights and the enforced rule of commercial law – as factors that add to the region’s commercial attractiveness.

WLD: Among the royal families and elites who direct the country’s growth, how much awareness is there about the need for a leadership pipeline? How do these elite families groom the next generation?

Rehman: Leaders in the Gulf are acutely aware of the importance of succession planning and leadership development. Programs like the Alf Yad Venture Capital fund, the Mohammed Bin Rashid Foundation, and overseas scholarship programs are designed specifically to develop young leaders in the region.

The generation of business leaders that has emerged in the last few years is different from the previous generation in several meaningful ways. This new generation grew up after the first oil booms of the 1970s, and many have enjoyed access to education, travel, and global connectivity that their parents did not have.

Today’s leaders are therefore able to bring a level of global perspective, awareness of international best practices, and drive for management sophistication that bode well for private enterprise in the Gulf.

WLD: You note in the book that in half the GCC countries, the indigenous local populations are in the minority. How much focus is there, both among those populations and at the governmental level, about developing local human resources?

Rehman: Throughout the Gulf, there are huge efforts underway to meet the imperative for local talent development. The Gulf populations are remarkably young, with large numbers of locals entering the workforce in the coming years: roughly half of GCC citizens are under 16 years old. This is both an opportunity and a challenge.

Gulf leaders have taken different approaches on how to “localize” the workforce. As I discuss in Dubai & Co., mandatory quotas for local representation in the workforce have been only partly effective. Strategic initiatives to improve the education system – Qatar’s Education City and Dubai’s Knowledge Village are prime examples – enhance the long-term quality of human capital. As Gulf states strive to become “knowledge economies,” human capital is the key to global competitiveness.

WLD: How should firms balance the need for both expatriate and local talent in staffing their Gulf businesses?

Rehman: Multinationals have long relied on expatriate talent – from the Arab world, Asia, and the West – to lead their GCC business units. Expatriates bring global best practices and familiarity with the firm’s norms and systems. These are, and will remain, important.

At the same time, local talent provides in-market expertise and long-term commitment to the region. These are crucial as firms become more serious about building their Gulf businesses.

Savvy firms will manage this balancing act by actively developing the local talent pipeline while attracting expatriates with genuine affinity for the region. The question is not either/or; it’s a matter of blending complementary talent pools.

WLD: Arab cultures – and especially Saudi Arabia – are known for limited women’s leadership opportunities. Do you see this as a problem going forward for the Gulf when it comes to developing local leadership?

Rehman: Gulf states have, like many developing economies, historically underutilized female human capital. Trends today, however, are quite positive, with women more active in the workforce and several in high-profile leadership roles.

Sheikha Lubna al-Qasimi, the UAE’s Minister of Economy, is a prime example. In no way is hers a “token” appointment – she has held pivotal positions in the private sector and is a highly capable leader.

Like everywhere, women in the GCC exert a great deal of economic power, especially when it comes to consumer purchase decisions. Well over half of first-year college students in the Gulf are women – in Qatar and Kuwait, the figure is over two-thirds. These women are entering the workforce and adding a great deal of value to the economy. Analysts say 40 percent of real estate in Saudi Arabia is owned by women.

WLD: The 2006 Dubai Ports scandal in the US stirred up fear and suspicion among Americans about government-owned business entities from the Gulf owning key US assets. Yet the Gulf leadership reacted to these events with remarkable restraint, offering to rescind their bid. What was the view of these events from the Gulf? Was there lasting damage done to US-GCC business ties?

Rehman: The resistance to DP World‘s acquisitions in the US was interpreted by some as a strong signal. Keep in mind that P&O (whom DPW acquired) was a foreign, UK-based firm already operating US ports. The ports controversy, aptly dubbed the “Dubai Ports Debacle” in a Harvard Business School case, sent a message that not all foreign firms are considered equal, and that Arab firms can expect be held to a higher standard than European ones.

One immediate consequence was the suspension of talks that were underway between the US and the UAE about a bilateral trade agreement. Another, more subtle result has been additional focus amongst GCC firms in investing in Asia and the Middle East, where their capital is actively sought and welcomed.

We Americans, and our government, must remember that Gulf capital has choices. There is a role for scrutiny and due diligence on cross-border transactions, but excessive suspicion can drive away capital that could be very helpful to US firms.

WLD: Sovereign wealth funds from countries including the GCC are now making headlines in buying chunks of U.S. financial firms. These funds have been described as secretive. In your view, does the US have anything to fear from these funds?

Rehman: Sovereign wealth funds are certainly less transparent than private sector firms – especially those that are listed on stock exchanges. Regulators and observers, however, need to distinguish between “passive” investments that are made for financial reasons and “active” investments that are more strategic in nature.

The Abu Dhabi Investment Authority’s $7.5 billion investment in Citigroup is clearly “passive.” The Dubai Ports transaction was a strategic acquisition by a foreign firm, and therefore reviewing it was reasonable. A full review would have shown that DPW operates a large number of international facilities around the world (including in Australia, Germany, and Latin America) and has a strong record in security management.

When reviewing an acquisition, one must look at the buyer’s background and intent, as well as the degree to which the buyer will be able exercise control. Often, strategic stakes in the global company or in a specially-created joint venture create more value for all parties involved. In December, for example, the announcement of a joint venture between Dow Chemical at the Kuwait Petroleum Company sent Dow’s shares up 7 percent in one day.

Author’s note: Formerly Global Head of Strategy for HSBC Amanah, Aamir A. Rehman is an expert in global corporate strategy. He has advised Fortune 500 and other leading businesses develop strategies across the globe, including the United States, Europe, the UAE, Saudi Arabia, and the broader Middle East. Previously a consultant with the Boston Consulting Group, he holds an MBA from the Harvard Business School and a master’s degree in Middle Eastern Studies from Harvard University. His commentary can be found at www.rehmaninstitute.com and he can be reached at aamir.rehman@rehmaninstitute.com.

MASTERS OF THE UNIVERSE: Narcissism in the CEO Suite

By Mark Hanna

Observe executives long enough, and one begins to discern two distinct psychological types: Mini-Me and Maxi-Me.

The “Mini-Me” types are self-effacing team leaders who don’t enjoy the limelight and work tirelessly behind the scenes. They enjoy getting input from other people and building consensus when possible. They see the world in terms of “we.” Their organizations tend to be cautious and incremental in their strategic direction, with a consistent emphasis on excellence in execution. Think here of William Whyte’s Organization Man or Sloan Wilson’s Man in the Gray Flannel Suit. In the political realm, think of Dean Rusk, the secretary of state under Presidents Kennedy and Johnson; in the business realm, think of Hewlett-Packard’s co-founder, Dave Packard, or Mark Hurd, company’s current CEO.

By contrast, “Maxi-Me” types have outsized self-images and are possibly narcissistic. By definition, narcissists have inflated self-views and are preoccupied with having those self-views continuously reinforced. Maxi-Me types are bold, colorful, individualistic, and risk-taking. They see the world in terms of “me.” Their organizations tend to be more innovative and fast-moving, with sometimes dizzying changes of direction. The second type is more like the Sherman McCoy character in Tom Wolfe’s 1987 novel The Bonfire of the Vanities, who was also known as the “Master of the Universe.” In the political realm, think of Napoleon Bonaparte or Franklin D. Roosevelt; in the business realm, think of Jean-Marie Messier, former Chairman and CEO of Vivendi, SA, or Oracle’s Larry Ellison.

Given these two psychological types, it is natural to ask how they might affect organizational outcomes. With the Maxi-Me type, for example, how would a narcissistic CEO affect firm behavior? Answers to these questions are found in a September 2007 article in Administrative Science Quarterly, “It’s All about Me: Narcissistic Chief Executive Officers and Their Effects on Company Strategy and Performance,” by Arijit Chatterjee and Donald C. Hambrick, both from the Pennsylvania State University.

Conceptualizing Narcissism

Before they could analyze the effect that narcissism had on company strategy and performance, Chatterjee and Hambrick had to conceptualize narcissism.

Narcissism can be viewed as either a personality dimension (where individuals can be assigned low, medium or high scores along a continuum) or as a discrete clinical disorder, where either individuals have it or they do not. In this study, the authors chose to use the personality dimension approach, basing their work on an article published by R. Emmons in 1987.

Emmons used the 220-item Narcissistic Personality Inventory (NPI), a standard clinical diagnostic tool, and used factor analysis to identify four underlying components. He labeled these factors as (1) Exploitativeness/Entitlement (“I insist on getting the respect due to me”); (2) Leadership/Authority (“I like to be the center of attention”); (3) Superiority/Arrogance (“I am better than others”); and (4) Self-absorption/Self-admiration (“I am preoccupied with how extraordinary and special I am”). Emmons verified statistically that these four factors cohered as a unitary personality construct.

Hypotheses

Chatterjee and Hambrick then developed four hypotheses, two dealing with strategic consequences and two with performance outcomes.

First, they considered the strategic impacts. Based on their background research, they knew that “narcissists need an attentive audience, which in turn means they need drama. Thus narcissistic CEOs will favor strategic flux or dynamism, to deliver a drama that will gain attention in a way strategic stability cannot.” This reasoning gave rise to their first hypothesis:

Hypothesis 1: The greater the narcissistic tendencies, the greater the dynamism of the company’s strategy.

They also realized CEO narcissism could affect acquisitions. Why? Because these CEOs are confident they can perform better than incumbent managers and because acquisitions will bring them the limelight and attention they crave.

Hypothesis 2: The greater the narcissistic tendencies of a CEO, the greater the number and size of acquisitions made by the company.

Second, they considered the performance impacts. The authors knew that these CEOs would tend to deliver extreme performance – big wins or losses – because they prefer grandiose, high-risk, high-reward actions.

Hypothesis 3: The greater the narcissistic tendencies of a CEO, the more extreme the company’s performance.

The authors also conjectured that a narcissistic CEO would tend not to be a consistent high or low performer, but would be prone to wide fluctuations in performance from one period to the next. By contrast, non-narcissistic CEOs would be more likely to take persistent and incremental approaches to strategy, which would lead to more consistent outcomes. Hence their final hypothesis:

Hypothesis 4: The greater the narcissistic tendencies of a CEO, the greater the fluctuation in the company’s performance.

Methodology

To test these hypotheses, Chatterjee and Hambrick analyzed a sample of CEOs in the computer software and hardware industries between 1992 and 2004. They chose U.S. publicly traded firms in these two industries because their CEOs have high discretion and their strategic choices can vary substantially. Given their hypotheses, more variance in the data would be better.

They also knew that they could not administer a 220-item NPI questionnaire to busy executives regarding a sensitive subject, so they chose to use unobtrusive, publicly-available indicators of CEO narcissism. This indirect approach has some plusses and minuses, but given the constraints of the situation, the plusses predominated. The authors looked at these five indicators of narcissism:

· the prominence of the CEO’s photograph in the company’s annual report;

· the CEO’s prominence in the company’s press releases;

· the CEO’s use of first-person singular pronouns in interviews;

· the CEO’s cash compensation divided by that of the second-highest-paid executive in the firm;

· the CEO’s non-cash compensation divided by that of the second-highest paid executive in the firm.

These indictors co-varied substantially in the sample, allowing the authors to combine them into a meaningful 5-item narcissism index.

Next, the authors operationalized the dependent variables: strategic dynamism, acquisitions, performance extremeness, and performance fluctuations.

Strategic dynamism was measured with two indicators. One looked at changes in four key resource allocation indicators over a given period of time. The second indicator measured the extent to which a firm changed its portfolio of businesses from one year to the next, using four-digit Standard Industrial Classification (S.I.C.) codes.

For acquisitions, they also looked at two indicators: the number of acquisitions in a given time period, and a measure of the aggregate size of the acquisitions.

For performance extremeness, they looked at two common measures of firm performance: total shareholder returns (TSR) and return on assets (ROA). For given time periods, they calculated the industry average TSR and ROA, and then looked at the firm’s absolute difference from the industry average. They did not care about the directionality because they were only interested in deviations from average industry performance.

For performance fluctuations, they looked at the absolute difference in the firm’s TSR and ROA between two given time periods. Again, they did not care about directionality because they were only interested in the magnitude of the annual performance swings.

As a final methodological consideration, Chatterjee and Hambrick controlled for potentially confounding factors at three levels: the CEO, the firm, and the industry. They also controlled for other technical factors including endogeneity and sample selection bias.

Results

When Chatterjee and Hambrick ran their generalized estimating equations model using the Stata 9.0 statistical program, they found considerable support for Hypotheses 1, 2, and 3, and partial support for Hypothesis 4. They found that narcissism is positively related to return on assets, but there was no statistically significant association for total shareholder returns.

Some additional and refined analyses found no indication that CEO narcissism was related to the level of company performance generated.

The authors conclude:

Narcissism in CEOs is positively related to strategic dynamism and grandiosity, as well as the number and size of acquisitions, and it engenders extreme and fluctuating organizational performance. The results suggest that narcissistic CEOs favor bold actions that attract attention, resulting in big wins or big losses, but that, in these industries, their firms’ performance is generally no better or worse than firms with non-narcissistic CEOs.

Final Thoughts

The Chatterjee and Hambrick article brings up interesting issues when compared with previous work by Jim Collins. In 2001, Collins published Good to Great, which looked at the distinguishing characteristics of good-to-great companies, that is, companies that showed sustained performance over a fifteen year period. Collins found that these companies were mostly headed by “humble CEOs” who could be described in terms like quiet, modest, reserved, self-effacing, etc. These CEOs could not be described as narcissists by any stretch of the imagination (and perhaps were more like the “Mini-Me” types described earlier). Comparing this data to the present study, something seems awry here.

Chatterjee and Hambrick note that Collins’ sample was small and limited in that he sampled on the dependent variable, sustained performance. They also note that Collins’ good-to-great companies were primarily in relatively stable industries, such as paper, steel, and retailing. A contingency-minded theorist might conjecture that Collins’ CEOs would not have faired as well in a more dynamic industry sector.

The authors also note that their study cannot give the final word on this question, because it only dealt with one industry sector. It may be that CEO narcissism is selectively beneficial or harmful, depending on contextual conditions, they hypothesized.

However, one thing can be stated with certainty. In an interview published the Pittsburg Post-Gazette on July 15, 2007, Hambrick had this to say about those individuals who have to deal with narcissistic CEOs: “You can pretty much bet on a wild ride….It could be up. It could be down. But it’s generally going to be extreme and volatile.”

Author’s Note: Mark Hanna is a freelance business researcher and writer based in Cedar Rapids, Iowa. He can be reached at markhanna@mchsi.com

“IT’S ONLY SEVEN LETTERS:” The Art of Selling Ideas

By G. Richard Shell and Mario Moussa

In their new book, The Art of Woo: Using Strategic Persuasion to Sell Your Ideas, G. Richard Shell and Mario Moussa, two experts in the field of negotiations, demonstrate that winning others over to your cause takes not only solid arguments but emotional and relational know-how. In the first chapter of their book, Shell, a professor of legal studies, business ethics and management at the Wharton School, and Moussa, a principal of the consulting firm CFAR Inc., offer this pithy lesson in persuasion from Wal-Mart’s early history:

When the young Sam Walton was trying to figure out what to call his first large discount store in Rogers, Arkansas, one of his key employees, store manager Bob Bogle, had a great idea for a name – ”Walmart” (the hyphen in Wal-Mart came later in the company’s history). Walton had started out running a Ben Franklin variety store in Bentonville and eventually turned it into “Walton’s Five and Dime.” Now it was time to come up with a name for Sam’s new bigstore concept. Most of the names Walton was considering, like the old Walton’s Five and Dime, had three or four words.

Bob came up with his “Walmart” idea by combining the first syllable from Sam’s last name with a shorthand word for “market.” It was a pretty good idea, but pitching his boss on it was tricky. Bob figured Sam would be flattered to have a store that alluded, however indirectly, to his name. But Sam Walton did not like to parade his ego. So Bogle decided to sell his idea by appealing to one of Sam Walton’s most fundamental core values: saving money. Listen as Bob Bogle tells his simple story (as recounted in Sam Walton’s autobiography Made in America):

I scribbled W-A-L-M-A-R-T on the bottom of [a] card, and said [to Sam] “To begin with, there’s not as many letters to buy.” I had bought the letters that said “Ben Franklin,” and I knew how much it cost to put them up and to light them and repair the neon, so I said, “This is just seven letters.” He didn’t say anything, and I dropped the subject. A few days later I went by to see when we could start setting the fixtures in the building, and I saw that our sign maker ... already had the W-A-L up there and was headed up the ladder with an M.... I just smiled and went on.

Bob Bogle’s sale of the name “Walmart” to his boss is as straightforward as idea selling gets. But even this simple example illustrates some basic principles of effective persuasion.

First, Bob had a specific goal: persuade his boss to adopt the “Walmart” name for the new store.

Second, Bob identified the decision maker – Sam Walton – and presented his idea directly to this person.

Third, Bogle drew on his credibility as one of Walton’s key employees. You don’t need to be a key employee to sell an idea. But you do need to have credibility.

Fourth, Bob Bogle appealed to one of Sam’s core interests – a single-minded focus on cost. Low cost was a value that Sam Walton saluted every day, so pitching the “Walmart” idea in terms of cost was exactly the right way to get Sam’s attention.

Fifth, Bogle used his knowledge of Walton as a person. Sam solved problems as they came up, so Bob picked his moment to pitch his idea. That moment came during a trip the two men were taking together just days before a sign would be needed to go on the front of the new store. And because the sign was something the public would see, Bob wrote it out for Sam to visualize.

Walton also liked to mull things over. So Bogle resisted the temptation to oversell. He put his justification out there and then stopped talking.

Finally, all of this took place as part of a relationship. Bogle and Walton were working together to solve problems. They trusted each other. So Bob “just smiled and went on” when Sam decided to use the Walmart name. And Walton put Bogle’s story his autobiography after he became a billionaire. Both men, in short, did very, very well in this relationship. We will be emphasizing the importance of relationships, communication channels and presentation strategies throughout the book.

With this example in mind, it may be easier to understand what makes selling ideas different. It’s not about tricking people into buying things they do not need. It’s about helping people see things your way – engaging their minds and imaginations, then getting them to take action on the idea you recommend.

Note: This excerpt is reprinted from The Art of Woo: Using Strategic Persuasion to Sell Your Ideas by G. Richard Shell and Mario Moussa with permission of Portfolio, a member of The Penguin Group, Inc. (USA), copyright © G. Richard Shell and Mario Moussa, 2007.