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April, 2009,
Volume 13, Number
6
Wharton Leadership Conference: Leading in a Dynamic and
Unpredictable World, June 16, 2009
Incoming ICICI Bank Chief Chanda Kochhar See Promise for
India, Hope for Banks
India
Knowledge@Wharton
Thinking about the Planet: Eco-Focus to Antarctica
Leadership Venture
By Akihisa Shiozaki
One Former Investment Banker’s Take on Restoring the
“Financial Quality, Integrity, and Soundness of Our
System
Knowledge@Wharton
Learning Program: Leadership and Management in
Southeast Asia
________________________________________________________________________
WHARTON LEADERSHIP CONFERENCE: Leading in a Dynamic and
Unpredictable World, June 16, 2009
The
13th annual Wharton Leadership Conference is scheduled
for June 16 in Philadelphia on “Leading in a Dynamic and
Unpredictable World.”
For
information on the conference, click here,
http://leadershipconference.wharton.upenn.edu/2009/index.shtml.
Speakers including DuPont CEO Ellen Kullman and
presidential historian Richard Norton Smith are
described at
http://leadershipconference.wharton.upenn.edu/2009/speakers.shtml.
For
registration, go to
http://leadershipconference.wharton.upenn.edu/2009/registration.html.
The early bird registration rate of
$775 is available for subscribers to Wharton
Leadership Digest through April 15. Simply indicate
“Leadership Digest” in the “Special Notes” box on the
online registration form to quality for the discount.
India
Knowledge@Wharton
 In
the February 27 edition, India Knowledge@Wharton
published an interview that the editor of the
Wharton
Leadership Digest,
Michael Useem, conducted with K. V. Kamath, CEO of ICICI,
India’s largest private bank. In this companion
interview, Useem speaks with Chanda Kochhar, who will
replace Kamath as ICICI’s CEO on May 1. Both
conversations took place during the recent World
Economic Forum meeting in Davos, Switzerland. Below is
an edited transcript of that interview.
Michael Useem:
As you take over ICICI Bank on May 1, in the middle of a
worldwide financial storm, what will be your priorities?
Chanda Kochhar:
My priorities are going to be to play a very balanced
role in the sense that I have to keep an eye on the
challenges in the environment. At the same time, I have
to keep an eye on the optimism that is there for India.
So I have to take, for some time, smaller steps so that
the bank moves through the challenging times, but at the
same time keep some of our capabilities and abilities
ready. Because I think the opportunity for India will
come back much faster than it comes back for other parts
of the world.
Useem:
One of the mantras at the annual World Economic Forum
this year was to look for opportunity in crisis. Do you
see any special opportunities for the bank in this
crisis?
Kochhar:
Given what is happening to the global financial services
sector, Indian banks have to play a much bigger role in
funding the growth of India. Let’s not forget, we need
to create infrastructure in India. In that sense, it’s
an opportunity. It’s upon us now to gear ourselves up to
make the most of that opportunity.
Useem:
You played a
critical role in building up ICICI’s retail services.
Last time I looked, retail was something like 60% of
your revenue – so it’s a big piece of what the bank has
become. Do you have plans or thoughts about rebalancing
the bank’s priorities? In particular, do you see retail
continuing to play a 60% to 65% role, or are you looking
to add in, maybe strengthen, other services?
Kochhar:
Some rebalancing
will indeed happen. What’s important is that we see each
year what the opportunities are, and make use of the
opportunity. By the end of the year, you’ll get a
resultant mix of what different businesses contribute to
the portfolio.
In the past five to seven
years, the growth of India has moved on the basis of
consumption growth. That is growing the business of
banks in India. The next couple of years, funding
projects, funding infrastructure, funding corporate
could be the next growth opportunity. That will
automatically lead to some amount of rebalancing in the
portfolio.
Useem:
Looking back on your experience in building retail, was
there a secret to your success?
Kochhar:
I think the secret
of success was combining, one, a very big strategic
vision and backing it up with a huge amount of
institutional capabilities. Successful strategic vision
lay in the fact that we visualized the retail business
to be much bigger, ahead of what others thought it to
be. So it was, for the country, a very small business.
But the end result is that this is going to be a big
growth opportunity. So we planned for a large network,
for large back-office operations, because we were
planning for what the business was going to be five
years hence, which many people don’t emphasize.
Useem:
Observers on the topic of leadership often note that to
lead well you need a vision, you need a strategy. But
equally, you need a way to make it happen. Call that
execution. Could you explain how you executed around
building the bank in retail? What were the two or three
most critical aspects of the platform?
Kochhar:
I think one aspect was that we changed the distribution
format in India. We could never have competed with banks
that have a large branch network. So we really have to
bring to India forms of distribution on the basis of
technology, whether it’s ATMs, or Internet banking, or
call centers and so on. So we appointed a lot of agents
who could take the products to the customers. We had our
technology channels, which could reach out to the
customers so that the dependence on branches became less
so.
Second, we relied on user
technology. Because we said, again, this is something
that we can create as our core competitive strength,
which the incumbents may or may not have. We created
scale by use of technology, both in the front-end
channels and in our back-end operations, and made sure
that the cost of technology was minimal.
The third focus was on risk
management. As we were growing retail, and it was a huge
growth phase, it was very important to keep our quality
under control. Therefore, it was not just distribution,
not just back-office operations, but also the
risk-management practices. And these we learned
together, supported by technology.
Useem:
The record of the bank and the record of your own career
are to take on one new area, one new kind of technology,
after another. You’ve gone into areas where you had no
experience. Tell us how you felt about entering into an
area for which you had no experience.
Kochhar:
Well, it was a very challenging decision, even in my
mind, especially in the area of setting up the retail
business for the bank. Because this was about ten years
ago. So we had been in investment or merchant banking
for 15 years, and you don’t find people shifting from
investment banking to retail banking very easily. It was
a new business for me. It was also a new business for
ICICI Bank, because ICICI, until then, had not known
about retail. And in a way, it was at the very recent
stage for India itself, because retail was very small
for the country.
So I think I saw in it, after
a little bit of building, an opportunity to really
expand my horizons and create a perspective which then
made me a total banker. Of course it meant that I
learned everything from scratch. It also meant that
there was a vast experience in the country to learn
from. So one was learning on the basis of what one was
implementing. So what I had to do was to hire a team
that knew more about the retail business than I did.
Though I was their leader, I had to have no ego, but to
accept that I was learning from them, while offering my
perspective. We put together the domain knowledge of the
new retail team with my leadership perspective and
rolled out the business. The thought was to keep
planning and make our strategies, rather than saying,
“Oh, what has somebody else done?” Nobody else had done
what we were attempting to do.
Useem:
Bank stocks all over the world have had a tough quarter.
Many U.S. investment banks have dropped into the single
digits in terms of the value of the shares. ICICI itself
has lost significant market value. Part of this,
worldwide, is the loss of confidence in banks by the
investing public. What are your thoughts about restoring
investor confidence in ICICI and financial services more
generally? What will it take?
Kochhar:
I think it will take two things. One, we, as bankers,
have to continue to focus on performance, because
finally, it will be the performance that will speak. And
there is no shortcut to that. Second, the communication
with your stakeholders has to be even more frequent,
more clear, more transparent, more detailed.
Useem:
How will you get in touch with your various
stakeholders, including, of course, your employees?
Kochhar:
Sometimes you use multiple channels for the same set of
stakeholders. As far as employees are concerned, clearly
I like to communicate with them, since we are more than
40,000 people. I like to communicate either through
e-mail or through video conferencing, which we do very
often, and stream out videos and interviews. But more
than that, I believe in traveling to my branches. We
have more than 1,400 branches in India, and we are
present in 18 countries outside of India. And I believe
going to the branches, chatting with the employees who
are running the branches on a day-to-day basis, because
it keeps me close in contact with what’s happening at
the bank at the ground level, and, second, makes them
feel that here is a person who wants to understand
clearly what’s happening.
As far as investors and
customers are concerned, I make it a point to answer
each and every piece of mail that comes to me. In
today’s environment, no customer hesitates to write to
the CEO if they think they have to communicate
something. So I make it a point to reply to each one of
them. For every one of them I may not have an answer
right away, because if they have an issue, that issue
has to be looked into. But at least the response was for
me to say that we will look into it. And then I have my
office look at these issues or questions or complaints,
or whatever it is, and then get back to them. So I think
they feel that there’s at least some responsiveness.
As far as investors are
concerned, in today’s scenario, any movement or any part
or any humor or any question or any news puts questions
in the minds of investors. Again, whether it’s a phone
call or whether it’s e-mail, you should be prepared to
keep clarifying to them. It’s no use getting irritated
by why they have so many questions. I think when the
environment is so volatile, they do have questions. So
it’s important to be responsive and tell them clearly
what the situation is.
As far as the regulator is
concerned, the most important message should be, in
environments like this: We believe in abiding by the
rules, not just in terms of the letter, but also in
terms of spirit. Because you’re in an environment like
this, I think the regulators want to make sure that the
banks are implementing their strategies as they should
be. And that’s the confidence that you need to build
with the regulator. And that comes, of course, in terms
of contact. You have to be in touch with them.
Useem:
Let me conjure up three moments in which you are
communicating with your stakeholders. I’d like us to
imagine that you are now, let’s say, in New Delhi, and
you’re talking with somebody in the regulatory world of
the nation’s capital, and the regulator says, “We have
confidence in you, but we do worry, after the failures
at Satyam, about the governance of companies. So can we
be confident,” the regulator might say, “that you have
the right board in place to work with you to ensure that
your strategy is being pursued in the best possible
way?” How you would pick up on that kind of question?
Kochhar:
I suppose one way is to tell the regulator that even
before the regulator tells us. We ought to have looked
internally. And if we have done that as an organization,
which we, indeed, have, then I have answers to give to
the regulator. It’s always important for an organization
to be self-regulated, in any case.
You should have some of these
governance practices and other practices coming out on
your own, because beyond that point, laws have been
made. And every time, a regulator cannot be like a
policeman to just start enforcing it. You have to
understand that it’s in your interest to follow that.
And therefore, I think many of these things you ought to
have done yourself before even the regulator asks you to
do it.
Useem:
Along the same lines, you’re now meeting in New Delhi
with an international investor, maybe in Mumbai, maybe
an investment manager from Barclays, or an investment
manager from Fidelity or Vanguard in the U.S. They say,
“Ms Kochhar, when you take over on May 1, should we come
into your stock? Should we hold it? Are you a good,
long-term investment for us?”
Kochhar:
Oh, I say that it’s
a very good long-term investment for you. I’d actually
buy more. Because look at the valuations in India today.
I think the valuations have come up substantially. If
you look at the multiples, whether it’s in terms of
price to earnings, whether it’s in terms of multiples to
book value, our bank’s stock is available at a very good
price. And since there is a long-term story for India,
therefore there’s a long-term story for ICICI Bank. It’s
a good time not just to hold, but to buy.
Useem:
Tell us briefly the
long-term story for India and ICICI’s place in it.
Kochhar:
The long-term story
for India comes back to the two basics that drive
India’s growth. One is consumption, and the second is
investment. India has such a large young population base
that the consumption growth is going to come back. I
think the important factor for bringing that back will
be the correction in interest rates and correction in
inflation. Inflation has already corrected. I think over
three to four months, interest rates should correct
substantially, which will then increase borrowing power.
So, over a period, this story has to come back.
The other is investment. As I
said, India needs infrastructure. Currently, there’s a
fault in this. Indian companies have put their new
projects on hold, because they’re grappling through
their own inventory buildups. But gradually, as domestic
consumption starts, and as capacity utilizations start
improving for the companies, they will find some
stability. And after that, they will start thinking of
new projects. I’m not saying this will happen in two
months or three months. But gradually, as stability
comes back, then the confidence of getting into the
investment mode will come back. So, these are the two
parts of the sum. ICICI Bank [has] a certain role to
play in both these parts. We have a very strong retail
franchise. As consumption comes back, and as interest
rates come down and loans become more affordable, we
will go back to making the retail franchise grow. And as
the investments come back – we have been very large
infrastructure financiers in the country, so we will
start playing that role.
Useem:
I’m going to focus now on your own ascent to the
position of chief executive. Of all the challenges that
you face personally, that the bank faces, that the
company faces now, what worries you most?
Kochhar:
I won’t really [consider] anything as a worry.
Currently, the priority for me, for the bank, would be
risk containment, property conservation and liquidity
management.... We have to be agile enough as a bank to
change course to this mode of operation [during these
times]. In India, we have all been used to very fast
rates of growth. And therefore, to change to this mode
for a certain point in time requires a huge mindset
shift. But I think, as I said right in the beginning,
that we have to recognize that currently, for some time,
for a bank to remain sound, it’s important to focus on
liquidity management, property conservation and risk
management.
But at the same time, I will
not get so bogged down that I make everybody feel that
the world has come to an end. No, it’s not come to an
end. Actually, for India, as I said, things will start
coming back much faster than they [will] come back to
the rest of the world. And we have to keep our retail
franchise, our corporate investment banking franchise
alive with energy during that period, so that when the
opportunity comes, we’re [ready to go] back on the road.
Useem:
Are you taking any specific steps to anticipate becoming
chief executive? Are you initiating, for example,
conversations with top people in the company?
Kochhar:
One important thing is a huge interaction with the
regulators, to understand their mindset, how they think
the environment [is], and therefore, how they would want
to see the banks in this environment – and to [let them
know] that we are here as a responsible bank.
Second is a huge amount of
contact with the employees – as I said, not just the
senior management team, but even at the operating level
– to give them a chance to come forward. We are sitting
on a set of opportunities. And you may not see that
opportunity arising today, tomorrow [without doing
this].
On the other hand, we need to
keep the investors comforted [in terms of] whatever
questions they have. Because, again, they are
[experiencing] a time when they felt that this bank was
in a huge growth pattern, and now they are not seeing
growth. So, again, to tell them that while a balancing
act is currently required, as the growth comes back in
the economy, [they’ll] see this bank bouncing back
faster than most others.
I’m also having detailed
meetings with a lot of the CEOs of the global banks,
especially to learn from them what should be done as a
CEO and what should not be done as a CEO. I’ve had a few
[of these meetings], and I plan to have a few more
before May 1. I must tell you, though, I’m very
overwhelmed by the kind of response I’m getting from
them. These have been big global CEOs running big global
banks at certain points in time, either currently or
recently. And they’re so happy to share their
experiences. And some of them, of course, turn around
and say, “Maybe we can tell you more what not to do than
what to do.” And I think there’s a lot to learn from
them in terms of what to do and what not to do.
I’m finding that is a very valuable experience.
Useem:
I have one final question. ICICI chief executives often
hold that position for a number of years. The current
CEO, Mr. Kamath, has served for more than a decade. The
day will come when you step down as well. And thinking
ahead to that day, what would you like to be, in a
sense, your legacy?
Kochhar:
Of course, I want to
have a long time ahead of me. But what I would like to
do, whenever I look back, is to [ask myself], “Do I have
the sense of satisfaction that, during my tenure, I was
able to make an impact on not just the organization, but
all the banking sector in India? And, I would say, on
the banking sector globally?”
Because, in a way, this is
very important timing. It may be challenging timing.
But, as I said, one has to find an opportunity in every
challenge. And the opportunity that I’m seeing is that,
currently, [regardless of] whatever is happening
globally, India is one of the few countries that’s
growing fast, and one of the fastest-growing countries.
So, this is a time when the world is looking at India,
and India’s growth.
Useem:
It is.
Kochhar:
And ICICI Bank is a very important bank. So I have a big
role to play in that sense – to say, “Can I make an
impact in shaping India’s growth, and therefore, in a
way, impacting the world economy?” And, “Did I play that
role, one, in a proactive manner, and two, in a
responsible manner?”
Note:
This article is reprinted from the February 6, 2009
issue of India Knowledge@Wharton,
http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4257.
Thinking about the Planet:
Eco-Focus to Antarctica Leadership Venture
By
Akihisa Shiozaki 
A herd of chinstrap penguins
stood in shock on the dim midnight coast line
of Antarctica, as they
watched the shadows of Wharton students dance around in
circles, pulling on each other’s ears and chorusing
“la-la-la” to celebrate the arrival of the new year. It
was a very special moment, which at the same time, felt
awkwardly surreal; we were on the coastlines of
Antarctica. But we knew it was the one new year’s eve,
which we would always be bragging to our kids and grand
kids on every new years eve to come.
Last December 28, 45 excited
participants of the Antarctica Leadership Venture landed
on King George Island of the Antarctica Peninsula.
Antarctica is one of the few places on earth that is not
governed by any nation but only by a treaty, and is now
designated primarily to peaceful missions such as
scientific research. As we gathered around a rocky
foothill overlooking the beautiful glacier mountains,
the venture started with an opening address from Rodrigo
Jordan, one of the world’s most renowned mountaineers
and the president of the professional guides from
Vertical S.A., “We govern Antarctica amongst ourselves
protecting the extremely fragile ecosystem here. Let us
remind ourselves to take responsibility for the
planet.”
This year’s Antarctica
Venture was unique from past years in its strong
environmental focus. The ambitious initiative started
when Professor Eric Orts, director of the Initiative for
Global Environmental Leadership (IGEL) program, offered
in fall 2007 to join the Venture along with three of his
hand-picked students from IGEL, Greg, Kate and Anarma
(who became the first Mongolian woman to set foot on the
island), to add a new eco-dimension to the renowned
leadership venture. 142 metric tons of CO2 emissions
were purchased through the Wharton Leadership Program
Office to offset the carbon footprints arising from the
participants’ transportation to and from Antarctica.
Students circled up on the pebble beaches neighboring a
giant penguin colony, or in the shivering shadows of a
collapsing glacier wall, to join a series of
environmental discussions led by Professor Orts and
other environmental specialists invited from nearby
scientific camps.
While the week on the island
was blessed with the best weather in many years,
survival camping in wild Antarctica still posed its
challenges for the urbanized Philly crowd. Clean water
was a delicacy. Leveraging all their OPIM expertise,
teams passionately debated on how best to boil 6 liters
of drinking water with only two small gas stoves.
Cooking in -0C weather without gloves also posed a
significant challenge tempting teams to stick with the
basic oatmeal/risotto combo. However, the situation
helped reveal some hidden cooking talents among
unexpected team members, resulting to legendary dishes
like “Lee Kalowski’s Antarctica Crab Cake” (WG’10).
Perhaps not to the extent of what Earnest Shackleton and
his crew had experienced during their Endurance voyage
but the harsh physical conditions and enormous amount of
routine work were clearly forcing teams to quickly bond
and build trust among each other.
Trekking through the glaciers
was one of the highlights of the venture, but definitely
no picnic. On a descent down the slope of the glacier
dome, Priya Shea (WG’10) suddenly got trapped in a deep
layer of soft mud up to her knees. Walter Czarnecki
(WG’10), and Edyta Szczepankowska (WG’10) immediately
ran to her rescue but found themselves also caught deep
in the mud trap. Realizing the gravity of the situation,
others continued desperate attempts to reach the three,
throwing ropes, building rock bridges and digging out
mud with their pots and pans. Approximately 45 minutes
later with the help of other teams, the three were
finally rescued from the horrible quick sand situation.
Brandi Herman (WG’10) says “the experience was tough,
but really allowed us to see people’s strengths.”
The seven day expedition
served as a great opportunity for us to learn about the
planet and also about ourselves. What really made the
venture so special was the great group of people we were
fortunate to have on this expedition, not only from the
MBA program but also from WEMBA and IGEL and of course
the extraordinary guides from Vertical SA. Through the
constructive feedback exchanged at the day-end debriefs,
during the cozy dinners chats in the yellow triangular
tents, or even just trekking in a single line tied
together with a rope of trust, we were able to
introspectively evaluate while also reflecting on each
others’ experience, values and actions. While Wharton
enjoys the most professionally experienced and
internationally diversified student body among our peer
schools, we (I?) sometimes question ourselves how often
we truly appreciate this greatest asset of our school.
The Antarctica venture, I believe, proposed a powerful
example of the enormous potentials Wharton and its
students could achieve by cherishing further the
personal qualities brought to the community by our
fellow colleagues. Let us echo Rodrigo Jordan’s
principles on mountaineering, “It’s not about where you
go, but who you go with.”
Note:
This article appeared
in the January 26, 2009 issue of The Wharton Journal
(http://media.www.whartonjournal.com/media/storage/paper201/news/2009/01/26/News/Penguins.Leadership.And.Thinking.About.The.Planet-3596112.shtml).
Knowledge@Wharton
 At
the recent World Economic Forum in Davos, Michael Useem
talked with Suzanne Nora Johnson, vice chairman of
Goldman Sachs until 2007, about the global crisis,
executive compensation, the Goldman Sachs culture and
CEO succession, among other topics. Johnson currently
serves on a number of for-profit and non-profit boards,
including AIG, Intuit, Pfizer, Visa, Women’s World
Banking and the American Red Cross. An edited transcript
of the conversation follows.
Michael Useem:
Suzanne, thank you for taking the time to talk with us
today. I’m going to begin with a question about your
background. You worked for Goldman Sachs for 22 years,
but left the company before the crisis really hit in
full force. Goldman has been one of the investment banks
that people thought would survive and yet it has faced
its own meltdown in recent months. When you were there,
did you see any signs in the financial services industry
that we were headed for the type of global disaster we
are experiencing now?
Suzanne Nora Johnson:
Mike, thanks very much for the opportunity to speak with
you today. I think that the most important warning sign
was the fact that if you look back several years ago –
and even as late as 2007 – the only undervalued asset
class that you could find was risk. Literally, you could
go to traditional asset classes, whether it was real
estate, commercial/residential, whether it was emerging
market debt or equities, whether it was private equity
alternatives from venture capital to private equity –
clearly the risk premiums were mispriced.
Why I say they were mispriced,
literally, [is that] there were no differentials from
one very sterling credit to one lousy credit. That was a
warning sign. You also had the warning sign that
volatility was at an historic low. There were, again, no
differentiations on the volatility front. The flipside
of it was that we were going through an extraordinary
period of time when the globalization revolution
actually had created quite [a lot] of profound change –
meaning many countries around the world were part of an
active trading regime. Around the world, you saw many
people pulled out of poverty. The two kinds of macro
trends that were positive were that you were going
through a period of historically low inflation around
the world and also low interest rates – which, again,
for the average man or woman around the world, was a
positive in terms of their standard of living. That
said, this produced profound imbalances. Those
imbalances really were the underpinning of the asset
pricing problem that I referred to when I first answered
your question – which really was kind of a tip off that
something was probably amiss.
Useem:
We have often heard it said that J.P. Morgan Chase and
Goldman Sachs had taken more steps [than others] to
protect themselves, especially from the subprime
mortgage meltdown when it did come. We’ve often heard it
said that at Goldman in particular, a management culture
had developed over many decades which helped people in
the ranks bring bad news up to the top. So therefore the
CFO and CEO at Goldman, in effect, had more early
warnings than might have been the case at other firms.
Johnson:
Goldman Sachs was extraordinarily lucky and fortunate
that, in fact, it had come relatively recently from a
partnership culture. If you remember, the firm went
public in ‘99. But there was still a large number of
people – both in the partnership and non-partnership
ranks – who had grown up with a partnership structure.
That partnership structure meant that there was relative
transparency from one division to another, from one desk
to another. People could ask questions about what was
going on. And you knew the real live individuals there
who had everything on the line. It wasn’t just their own
personal capital, it was the livelihoods of thousands of
employees.
That was a great foundation
going into both the expansionary period at the beginning
of the decade, and then the problems toward the end. You
don’t lose that overnight. Also, there was a view in
[recent] years that we didn’t need to be biggest. We
wanted to be “Best in Class,” and we wanted to be very
good at what we were doing. So there was extraordinary
accountability inside. In terms of – were you good at
what you were doing? What kinds of risks were you taking
to get there? How high-quality were the activities that
you were exercising? I would also say that, just from a
diligence perspective ... it was fortunate that you had
... market share leadership positions in so many
businesses. You didn’t have to stretch everywhere. And,
again, if you look at many people in the financial
services industry, it was clear that they were
stretching very, very far afield.
Useem:
When you joined Goldman, you were the inheritor of a
culture, a way of doing business that had put Goldman on
top for many, many years. But as you rose up through the
ranks – as you became vice chair – you were also the
maker of the culture. So, thinking back about how you
and other executives helped create and sustain a culture
that you just described very tactically – what does it
take to create that kind of ownership, of everybody
taking responsibility, everybody feeling they are a
leader, wherever they may be in the bank? It’s a
cultural statement, but that was the mindset created.
The question is, how do you create and sustain that kind
of a culture of ownership and responsibility?
Johnson:
I know this sounds too simplistic an answer, but at the
end of the day, it comes down to: Do you walk the walk,
not just talk the talk? In an organization as large as
Goldman Sachs – it was several thousand when I joined
and close to 25,000 when I left – when you have that
large an enterprise, everyone who’s in a leadership
position is watched very, very closely to see what their
actions are. So starting with Hank Paulson, he put in
some very formalized what I’ll call “ethics training
programs,” or kind of “true north programs,” that were
cross-firm, cross-divisional, where they were taught by
both Hank and the other members of the management
committee and then other partners. Again, there was
formal training with real live situations discussed. But
also, in everyday business, people felt comfortable
talking about kinds of moral dilemmas – not just
compliance dilemmas or legal dilemmas, but really, “Were
there ethical issues?” I can think of a number of
situations where people celebrated if someone turned
down a piece of business, or decided not to go all the
way on it.... Once you could celebrate or reward
non-revenue generation – or risk-avoidance, is another
way of looking at it – that helped reinforce the
messages.
Useem:
Given that culture, given that mindset, given that
dominance of the markets, the last 12 months have not
been kind to Goldman – along with everybody else. I
realize you have now been gone for a couple of years,
but looking back on the company, what do you think has
happened that led it to become officially, now, a
commercial bank? Just comment on the events of the last
12 months, as Goldman, along with everybody else, has
struggled to get through them. What happened at Goldman?
Johnson:
Again, with the very fair caveat that I haven’t been
there formally in the last two years, the observation I
would make is that, historically, the business’s success
was highly correlated to what global GDP looked like and
how active the capital markets were. As you know, in the
last 12 months, we’ve seen a significant reduction in
global GDP growth, and also a real quieting of the
markets, a lack of market activity. So, that being kind
of the soup, if you will, from which they fed, it being
greatly reduced also made it much more challenging for
them. One, you just have to understand, as a market
participant, that this single issue was the biggest one.
Again, I really credit the leadership, over many years,
of having risk management systems that were quite
thoughtful and rigorous – for example, Goldman Sachs
looked at liquidity VAR [value at risk] as well as VAR
for many, many years to get a feel for what would happen
in the case of a true liquidity crisis. But we’ve had
events now that are at the tail [the unlikely extreme of
a probability distribution]. If you had tried to
probability weight – how likely is it that we would have
the kind of meltdown – most people would have commented
that it would have been a very, very low probability
that you would have this kind of interconnected
meltdown. Did certain commentators absolutely see it
coming? No question. But I think the kind of depth and
magnitude of it was hard for even the best minds, and
the most rigorous risk management systems, to
understand.
Useem:
Arguably, one of the problems that we’re all now working
to overcome is a mindset that did not see the tails,
that did not anticipate the once-in-a-century kind of
event. Other factors, though, we need to be mindful of
as well – which include the relatively short-term
thinking that seemed to dominate many financial
decisions in the financial market. Picking up on all of
the above, as you think about the culture of American
business, not just financial but beyond – do we need a
change in mindset? Do we need a cultural shift? Is it a
matter of tweaking, or should we really be rethinking
our business model? And then, to add one last quick,
final question to that long question, if a culture shift
of some kind is required, who’s going to make that
happen? How difficult is it going to be to push through?
Johnson:
I’ve actually thought a lot about this question because
so many thoughtful people I know have said, “I’ll never
take a management position in a public company. I’ll
only do it in a private company.” When they say that, I
always ask them: “What is it that’s motivating you?” And
they generally come back with something that says, “I
want to be able to do the right thing.” Then I say,
“Well, what does that mean?” And they say, “Well, I want
to be able to balance the need to optimize shareholder
equity with other constituencies, to do it somewhat
under the radar screen.”
And, again, I always look at
the radar screen as a double edged sword. “Are you doing
that because you don’t want to be transparent? Or are
you just doing it because you want to find a way to do
some of the difficult decisions that might be
challenging?” The other element of that which is
relevant is that the U.S. and much of the Western world
– and much of Asia – has a public company model that
still is very short-term focused in terms of what
institutional investors are rewarding. So, as I think
about ways to change a culture, often it revolves around
compensation structures. Again, I think compensation
structures will likely be more transparent, rather than
less, going forward. To the extent that those
compensation structures are more long-term focused, that
isn’t necessarily always in line with what your
shareholders – particularly your more active
shareholders – are demanding. For example, I can see
compensation structures making incentives multi-year.
And I don’t mean stock vesting. I literally mean that
your revenue targets – your earning targets – are
multiple years, not single years. I could see clawbacks.
I could see looking at internal rates of equity –
meaning how much differentiation is there from the top
to the bottom. All those things would have significant
culture changes.
But to go back to the
beginning – of private company versus public company – I
think a lot of people sense that they would have a lot
more flexibility in a private company setting to do some
of those things, which means doing the right thing,
making longer-term incentives, having ... clawbacks,
having the kind of thing that helped justify a culture
of “one for all,” not “all for one.”
Useem:
As a non-executive director at Pfizer, AIG, Intuit and
Visa, you’re in kind of the hot seat on this very
question right now.
Talk through a little bit
what it means to move compensation towards more
long-term. Are we talking three years out? Are we
talking five years out? How would you structure it? Be
as concrete as you can here – to ensure that the top
people, say at Pfizer, Visa, or you name the company –
are ready to look at what those companies need [in
long-term executive compensation].
Johnson:
I actually like seeing kind of multi-year timeframes.
Clearly, you need to have some annual timeframes,
because often budgets and investors are on that
timeframe, at the very least. So you obviously have to
have some annual metrics. But I think two, three,
five-year metrics can be very, very healthy protocols to
go through. It generally lets you live in and out of
business cycles. It gives you a sense of who performs
particularly well in adverse conditions. And hopefully
there’s a high correlation in the longer term of
companies that do this with their shorter-term earnings,
although, again, I think that’s the billion dollar
question. Can you make it somewhat consistent with those
shorter-term expectations of public shareholder growth?
Useem:
Suzanne, you joined the board of AIG, attended your
first meeting, when AIG was really in the process at
that very meeting of deciding it had to be, in effect,
nationalized. What was it like to have joined the board
of AIG at that particular moment?
Johnson:
I would compare it to Ed Liddy’s experience. Ed Liddy –
as people probably know – is the CEO of AIG, who was
brought in by the (U.S. Department of the] Treasury to
replace the then-current CEO. Liddy had been the CEO of
Allstate. When he was asked to take on the job, he was
told, “This is really an act of public service. It’s a
very difficult, challenging situation.” I think that’s
the way that you have to look at these situations – it’s
critically important that we restore the financial
quality, integrity and soundness of our system. Again, I
view our whole economy – both domestically and globally
– being very closely correlated to the strength of our
financial institutions. I view it as, “Can you help make
it right at this point,” recognizing that you’re having
to balance public and private sector constituencies?
Useem:
I’m going to change focus here. Thinking back on your
own career – you were trained as a lawyer, you clerked
for a judge – you’ve seen many law students as they have
come out of law school over these years. You’ve seen
many graduates of business programs as well. Do you
think that the men and women coming out of law schools
and business schools these days should have a different
skill set, so to speak, a different orientation, than
those who came out 20 or 30 years ago? And now, looking
back at the schools themselves, are there some changes
that law schools and business schools ought to be
thinking about?
Johnson:
Mike, it’s a great question. I’ll tell you, I’ve really
seen the recruiting landscape change. When I joined
Goldman Sachs over 20 years ago – and I had practiced
law for a number of years at that point – most of the
questions they asked were very broad, global, macro,
thoughtful questions that would test my insight, my
judgment, my common sense, my ability to deal with
difficult questions. Over the last number of years, I
have found that we gravitated much more toward asking
people, “What was their experience in the business?”
meaning at a summer job or as an analyst. “Why did they
want to be an investment banker?” “Why did they want to
be a trader?” “Why did they want to be an analyst?”
It’s not that I don’t think
those questions are important, but I’m hoping we will
get back to much broader gauged individuals who really
do have extraordinary qualities of accomplishment,
leadership and integrity – that manifest themselves more
broadly. Because I really do think people who understand
the world – no matter what situation they’re in, whether
that means globally or even in a domestic context – are
being more broadly gauged. It’s not that I don’t want
people with quantitative aptitude who can do the rigors
of a financial job. But I think those other qualities
are more important at the end of the day [in terms of]
how successful we will be and how successful your
institution will be by having that cohort of people.
Useem:
Suzanne, to put you on the spot here. If I’m a
newly-minted graduate of a law school, a newly-graduated
MBA holder – I’m in your office, you’re considering me
for a position – let’s say at a Goldman Sachs or a
Pfizer. What would be a question you might pose, now –
to get beyond the more particular issues that you said
are more typical – to gauge my ability to think broadly,
to work effectively, longer-term, within the enterprise?
Johnson:
Well, one very simple question I always ask is, “What’s
the most difficult situation you’ve had in your life,
and how did you overcome it?” Just because I want to try
to understand what level of adversity someone has
actually really had, or how they think about adversity.
Again, what was their game plan for changing it. And
then I always ask people, too, to rank certain personal
attributes, worst to best. If you can imagine all the
very accomplished people I interview, they always answer
it, first, best to worst. Then I force the other way
around. And I find that by having them rank their worst
to their best, in terms of core attributes, I get a lot
more thoughtful answers in terms of how they think about
those personal traits.
Useem:
When you were still with Goldman Sachs, a couple of
years back, the media often described you as one of the
most influential women on The Street. Looking back on
your own career – think about the glass ceiling; you
helped break it along the way – talk a bit, if you
would, about your own experience with the glass ceiling.
Reference what it was like when you began, to what you
think it is now, for women coming into investment
banking.
Johnson:
I think the single biggest change for women is that
generationally, people think about differences more
broadly [and] very differently. The cohort in business
school today thinks about gender differences –
ethnicity, racial differences, global differences – much
differently. They’re much more used to dealing in a very
diverse world and understanding what the benefits of
that are. That has changed in mindset. What hasn’t
changed – and we have to still continue to push – is you
get very different cultural norms and very different
value judgments, depending on how diverse a group you
get. I find that whenever any one group tends to have a
preponderance of influence, or concentration, that
always skews the answer – on questions or on modes of
behavior. For part of my career at Goldman Sachs, I ran
a group in investment banking with another partner – who
was an African American, but of African descent. His
father actually was an African, from an African country.
We had a group that was almost evenly balanced on any
metric – gender, ethnicity, race, nationality. I found
that our group actually got the best and the brightest,
in terms of questions being answered and addressed,
problems being addressed, alternative methods of
marketing, having insights. I really was still taken by
that experience – it clearly had a different cultural
vibe than any other group I had worked with at Goldman
Sachs.
Useem:
[From your vantage point] as an independent,
non-executive director on four major boards – it’s often
said that for non-executive directors, the single most
important decision is picking an executive successor as
CEO. As of today, what would you look for when there is
a succession event – a CEO stepping down. Maybe you
asked the person to step out or maybe that person has
come to the end of their natural tenure. If you wouldn’t
mind walking us through the three or four criteria – in
light of the events of these past 12 months – that you
think would be vital to get the right strategic fit
between the person you’re looking at, and what one of
these companies – or maybe all four of them – would be
looking for, going forward.
Johnson:
Again, not commenting on any individual company, but
just as a general observation, I still find that
companies that do the best are the ones where there is a
very strong sense of succession planning, and there are
multiple internal candidates who could assume the role.
Because I do think understanding the culture, having
been part of it, having paid your dues, having done the
right thing, being rewarded, has incredibly powerful
commercial impact – and also has very powerful
incentives inside, organizationally. That’s not to say
that, at times, you don’t need to go outside and find
the best, because there are circumstances where you need
to do that. But on the margin, where you can go inside,
I think it’s very powerful. In terms of leadership
attributes, first and probably most importantly, are
they someone who has the kind of strategic vision and
articulation – literally, communication capability – to
motivate the troops to deliver to that common vision and
understand that vision. And to external constituencies,
can they make a very compelling enunciation of what the
company is all about.
That, again, is reflected in
their products, services and people – but that is
something that is true north, for both the inside and
the outside.
It almost goes without saying
that [it should be] someone of impeccable integrity.
Related to that is their character. And do they have
judgment? Do they have ability to take very tough
topics, and, again, 99 out of 100 times, come out in the
right place? I say 99 out of 100, because I assume
there’s always some gray areas where you could go either
way. And then do they have courage? Can they do things
that other people can’t?
Useem:
Let’s assume you have three – maybe even more – great
candidates in the ranks. A chief executive working for
you as a non-executive director is about to step down.
Or maybe you’ve got a six-to-12 month notice. People in
the ranks at the senior level – they’re not there if
they’re not very good. But you want to find out who is
the best. It’s often a more difficult challenge than I
think we sometimes appreciate. And let’s assume that, as
a non-executive director, you don’t see them day to day
– could you offer up a couple of thoughts on how, as a
non-executive director, you can cut through the images?
Cut through reputations? Help identify, of three final
candidates, which of those three best exemplifies the
kinds of qualities you’ve identified?
Johnson:
I’d say, first of all, the thing that I don’t like that
a lot of companies do is they set up horse races for
internal candidates where they make it very clear that
two, three or four people are in the running. And
everybody knows it. I actually think that often causes
more damage than it does good. You find that people are
play acting for you more than anything else. But I do
think [it’s important to] find ways to make sure that
your pool of potential candidates gets some face time,
in a formal sense, presenting to boards, so that you see
them over a period of time, [and can] interact in a
formal setting. I’ve also found that, on some boards –
where if you make it a constant practice that every time
you have a formal board meeting, you’re having lunch or
breakfast with a different member of the management
team, getting to know them kind of one on one, or in a
small group with a couple of board members – you get a
very different perspective than seeing them in a smaller
setting. [You see] how they think about the world. Also,
seeing their 360s – and really understanding what the
organization thinks about them, not just what the CEO
thinks about them – is critically important.
Useem:
Suzanne, a final question. As the public looks in on,
not just Wall Street, but large corporate compensation
packages at the very top, there is a public revulsion –
maybe that’s too strong a word – but certainly a strong
public criticism that for too many people at the top –
as their company is going south, their compensation is
going north. Aside from that, aside from the poor
correlation between pay and performance, many people
think that the top people on The Street, the top people
in industry in general, are, simply put, overpaid.
What’s your thinking on that one?
Johnson:
That’s interesting, Mike. I was with Lester Crown, at
the Aspen Institute, maybe 10 or 12 years ago – before
executive compensation became a hot topic. He was saying
how distressing he found it, as a board member, because
clearly the way it was justified is you would look at
employment comps of outsiders. And often when you would
bring outsiders in, it would raise the whole comp level.
He was very disturbed about this practice. I think you
can use internal equity as a good touch point, and what
I mean by internal equity is really looking at the
differentials, from top to bottom, in an organization. I
do think no matter how good somebody is at the top, if
you see that stratification getting too significant, it
is a warning signal to you. It is a red flag. And the
other thing I have found – and there’s a fair amount of
academic literature which absolutely supports this – is
that the more unequal you make your compensation
structures, the more you pay, in total. Because often
people are willing to take lower pay, if they think
there is real equity, parity and fairness. The more they
think there’s unfairness in the system, the more they
are chasing somebody who has a higher comp level who
they are perceived to be a lot like. Again, I think we
do this to ourselves sometimes.
Useem:
I’m going to close with an extra question. The next 12
to 18 months are vital in the U.S., vital in Europe –
really, the world – for getting through this enormous
crisis that we’ve managed to walk ourselves into. It’s
sometimes said now that the private sector has helped
create some of the problems, but many other forces are
responsible, as well. But to dig out of this crisis,
[some say] it is a time for government, for agencies,
such as Treasury, for regulators, such as the SEC and
their equivalents around the world, to not get the upper
hand, but to take a strong hand in the months ahead.
What’s your cut on that one?
Johnson:
It’s clearly important for the government – the public
sector – to provide a substrate for the conditions for
reform and basically for rejuvenation of the system. But
by providing a substrate, I think they need to make a
very healthy, functioning private sector because that is
where you still are going to have job creation over the
longer term. You’re going to have people build
competitive advantage. And you’ll have much healthier
systems. So, again, they provide the substrate, but to
think that they, alone, could solve this problem would
be a mistake. There really does have to be a partnership
with the other sectors of the economy.
Note:
This article is reprinted from the March 18, 2009 issue
of Knowledge@Wharton,
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2180.
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