Wharton Leadership Digest

A newsroom can be a depressing place these days. On the micro level, cut-backs and buy-outs have demoralized staff. On the macro level, this June’s sale of Knight Ridder, followed talk about the possible breakup of the Tribune Co., has made publicly owned newspaper companies look like sinking ships.

The only thing that appears worse than the present is the future: Where will falling ad revenues, stale profit margins and declining circulation lead? Faced with “innovate or die,” some newspaper workers seem to feel a noble death is preferable to the “dumbing down” of traditional newspaper values for the internet world.

Amid this climate of doom and gloom, the American Press Institute last month issued a report on its year-long “Newspaper Next” project with a bracing message for the industry: Innovation is not just necessary, it’s possible, and here’s how.

Collaborating with Innosight LLC, the consulting firm founded by innovation researcher Clayton Christensen, API’s Newspaper Next project worked closely with seven newspaper companies, aiming to help them “migrate from a fixed and monolithic business model to a diverse and growing portfolio of business models, products and services that engage throngs of new consumers and advertisers,” according to the report, released on September 27.

The advice contained in the report draws heavily on Christensen’s research models and draws sometimes surprising conclusions, for example, that industry leaders should work together to exploit new media opportunities. Only with its financial house back in order and “the regular attention of a large majority of the public” can the newspaper industry “fulfill its civic mission of informing the public,” the report concludes.

Situational Analysis: How fundamental changes are reshaping the industry. The world today is experiencing “a fundamental transformation in the connection between people and information,” says the report. Once indispensable, newspapers are now optional; half of all U.S. adults are “non-consumers.”

Traditional newspaper companies are classic “incumbents,” leading the way in incremental improvements (e.g. adding color to newsprint) but poorly positioned to deal with “disruptive innovation” (e.g. craigslist, Monster.com, blogs.) While newspapers are busy doing what they do best – further refining their high-quality product – newcomers are creeping up from the margins with seemingly low-quality products that non-consumers find appealing because they are cheaper or easier to access.

But lots of newspapers now have dynamic websites: Isn’t that enough? Not quite, argues the report. By “cramming” – retrofitting the print product for online consumption – newspapers are missing key opportunities. The solution? Diversify to create a portfolio business model, in which the traditional newspaper is only one product.

The Method: Strategies for spotting opportunities and shaping new products. While pushing to diversify, newspaper companies need to adopt a practical approach; instead of pouring resources into a single new project that might fail, companies should test small projects first. Newspapers can start by asking, “What keeps people from reading our newspaper or buying ads in our paper?” Looking at non-consumers as potential consumers, companies can ask, “What jobs would they hire us to get done?” Opportunities will arise where people are frustrated – for example, trying to locate a reliable contractor for home repairs.

In the process of innovation, newspapers need to fight their perfectionist tendencies, says the report. A free tabloid may be shallow journalism, but it’s also the perfect size for a subway commuter. The successful disruptive innovation is about trade-offs: “The customer may prefer a simpler, cheaper solution with less performance,” says the report. In effect, newspaper companies need to close their eyes for a minute, pretend they don’t have already have millions invested in their current business model and ask themselves, How would we break into new markets?

Armed with an idea, newspapers should develop a product, without worrying too much about long-term financial projections that would probably be inaccurate anyways. The product can be tested in small, quick ways by assessing similar products or by using focus groups. The next step – tough but necessary – is learning from mistakes to refine the product.

The Game Plan: The most promising avenues for growth. If newspapers succeed in seeing threats as opportunities, they may suddenly feel overwhelmed by opportunities; the most crucial decision may be deciding which to pursue. According to the Newspaper Next strategic framework, newspaper companies should strengthen their core product, meaning print and online content sustained by display advertising, while adding more niche products such as ethnic-, youth- or entertainment-oriented publications. That advice may sound comforting to newspaper people, since it means doing more of what they already do well, but companies need to develop higher-risk products simultaneously.

Newspapers must look beyond news to build new audiences. While reliable news is relatively easy to find for most consumers, local information is not: Where can I find a good dentist? What’s the cheapest health club? The good news for newspapers is they can leverage their local expertise and brand recognition to beat competitors in the hyper-local information market, including Google and Yahoo! The scary part for newspaper folks is these new products may require not just collecting and updating mundane details, like movie listings and maps, but also “relinquishing control of content to outsiders, letting them build and shape content as they see fit,” says the report.

For example, the Dallas Morning News launched “MasterMom” to meet the needs of mothers, non-consumers who had little time for newspapers but a strong need for local information on everything from child care options to birthday party venues. The MasterMom website has been designed to easily be accessed by mobile phone, so mothers can use it during small snippets of time, like waiting at the doctor’s office. Through consumer-oriented projects like this, newspapers can offer platforms to “unlock collective wisdom” (think Amazon.com product reviews and Wikipedia) and “facilitate collective conversations” (think Yahoo! groups, MySpace and Flickr.)

Newspapers can use similar thinking to increase ad revenue by finding out what jobs businesses need to get done. Many want to target their ads to very specific audiences. One answer is to create, as the New York Times has done, opt-in e-newsletters on specific subjects that allow for customer-targeted advertising. Other ideas include “self-serve” ad placement for small businesses, “cost-per-action” lead-generation advertising, or ad space next to search results.

To sustain innovation, newspaper companies need to create structures that encourage it. Early this year, for example, Scripps Howard set aside $1 million for an “entrepreneur fund” that will finance small innovative projects that fall outside the usual business model. The Gannett-owned Desert News, in Palm Springs, Calif., has created a new position for an “innovation manager.” Although innovation sometimes requires creative and spontaneous thinking, the innovation process should not be random; rather, companies can develop a specific process, complete with oversight, which allows for “more rigorous, repeatable capability,” advises the report.

Collaboration in the Newspaper Industry: Promising opportunities for joint action. While media companies have merged to exploit the enormous potential of new technology, the newspaper industry has remained fragmented, a pattern established by an era of locally owned printing presses and their resulting rivalries.

Newspaper Next conducted a survey of top industry executives and found strong support for collaborative efforts; many agreed that newspapers were losing out to larger online news aggregators. “Seventy-five percent of the ad dollars are captured by three or four portals, while most digital newspaper properties haven’t attained even ten percent of their parent companies’ revenues,” said Lincoln Millstein, Hearst’s senior VP and director of digital media who serves on Newspaper Next’s 26-person task force.

Executives surveyed were most optimistic about combining forces to improve ad revenue. Although newspapers in the past have tried and failed to standardize national print advertising systems, companies now have a historic opportunity to create a “centralized entity” to sell ads nationally and serve businesses on a “one-order, one-bill” basis, says the report.

Cooperation across industry boundaries will require “wrenching the industry into new behaviors.” But, as one manager surveyed by Newspaper Next said, “The only way to compete in this brave new world is to join forces, put aside petty jealousies and suspicions and make some bold plays.”

Author’s note: Andrea Useem is an independent writer and editor based in Reston, VA. She can be reached at auseem@hotmail.com. A free electronic copy of the report can be requested by clicking here.

Innovation projects in seven newspaper companies: The Newspaper Next project selected seven newspaper organizations to receive free consulting and support from the Newspaper Next project team to help develop innovative products or programs. They are:

The Boston Globe: Engaging small advertisers. How can Boston Globe Media gain a meaningful share of advertising spending from very small businesses by providing effective marketing solutions that are profitable and scalable?

The Dallas Morning News: Capturing the busy mom market. More than 700,000 mothers in the Dallas Fort-Worth (DFW) area are online each month. The Dallas Morning News reaches less than 15 percent of that audience. What solutions engage this attractive market segment by helping busy moms to master the many challenges they face in their lives?

Enterprise NewsMedia/WickedLocal.com: Leveraging the local news brand. What opportunities exist for Enterprise NewsMedia to refine its emerging strategy for WickedLocal.com, a network of hyperlocal Web-sites?

Gannett/The Desert Sun: Creating structures for innovation. How can we develop an organizational structure that will drive and sustain innovation, adaptable to other newspaper units of larger or smaller size?

Media General/Richmond Times-Dispatch: Reaching non-advertisers. What new research approaches can identify the important and unmet “jobs to be done” of non-consuming advertisers (businesses who do not advertise with Media General) in the Richmond market?

North Jersey Media Group: Connecting with non-consumers of news. How can North Jersey Media Group rethink its web strategy to engage a broader audience, including non-consumers of news?

The Oregonian: Increasing readership among young people. How can the Oregonian, a metropolitan daily newspaper, increase readership among the booming population of “young creatives” in the City of Portland?

Andrew “Drew” Davis, president and executive director of the American Press Institute, led the way last year to create Newspaper Next, a project to stimulate innovation in the troubled newspaper industry. Before taking over as head of API in December, 2003, Davis was director of innovation and business development for the Media Management Center at Northwestern University.

A major general in the Marine Corps Reserve, Davis took a leave from Northwestern to serve as director of Marine Corps Public Affairs at the Pentagon from July 2001 to July 2003. Prior to that, Davis was president of Chicago Sun-Times Features, Inc., a division of The Sun-Times Company, and of Performance Media, a custom publishing division he conceived and developed into a multi-million-dollar venture. For 10 years he was group publisher and newspaper operations vice-president of Pioneer Newspapers, a 41-newspaper group based in suburban Chicago.

The Wharton Leadership Digest interviewed Davis at the American Press Institute in Reston, VA., shortly before the Newspaper Next report was released.

Wharton Leadership Digest: What prompted you to start the Newspaper Next project?

Drew Davis: There were two catalysts. First, the institute’s sixtieth anniversary was coming up, and we wanted to mark it with an important contribution to the industry. The second catalyst was pure self-preservation. Without a newspaper industry there is no API. Attendance [at API seminars] correlates exactly with the fortunes of the newspaper industry; the first part of the budget to be cut in a newspaper recession is the training budget.

I got a good picture of how change resistant and risk adverse newspaper companies are when I was on the faculty at Northwestern’s Media Management Center, where my area of concentration was innovation and new product development. I also came across the work of Harvard Business School professor, Clayton Christensen, and his book, The Innovators Dilemma.

When we started thinking about how to remake the industry I remembered his principal of disruptive innovation. I got on an airplane and flew to Harvard to meet with him, and I said, “You have turned your theories and principals of disruptive innovation against individual companies. How would you like to do a similar project for an entire industry?”

WLD: Can you explain how the newspaper business maintains relatively high profit margins – 20 percent and above – and yet it’s a given now that the industry is in crisis?

Davis: It’s not at a crisis stage yet but its future is unknown. Profit margins right now are squeezed. The cost of producing a newspaper is increasing, while the ability to raise advertising prices is not increasing at the same rate. There is unprecedented competition for the advertising dollar from other media that never existed before.

At the same time you have a steady decline of circulation and circulation revenue, as well as the erosion of classified advertising – which is about a third of most newspaper revenue – at the rate of five percent a year. It’s migrating to digital sources, away from print. No matter how robust the profit margins of the legacy newspaper still are, Wall Street and investors are looking at future value, and they can see these trends. Therefore newspaper shareholder value has been declining, and that is of great concern to investors.

Let me add that those robust historic margins are actually an impediment to change.

Davis: We’re very successful at what we do. Why would we change? We’re very efficient at making a newspaper and getting it to market by 6:00 am. We’ve got the press, the people, the trucks.

WLD: I can imagine Kodak saying the same thing: “We’re good at making film cameras. We don’t want to think about digital cameras.” Other industries have faced similar sorts of challenges. What have been your how-to and how-not-to models?

Davis: Kodak is actually a great example of a legacy industry that was able to remake itself. We use two examples from Kodak that really apply to the newspaper industry.

First, Kodak was enthralled with its products of film and cameras without realizing how their customers used them. Customers actually only looked at their pictures on average two times: once in the store and once back at home. After that, the pictures went into a shoebox or album, never to be seen again – except for five or six the customers really wanted to share with family and friends. When Kodak realized that, they had an “a-ha” moment, “Our business can be the sharing of photos.” Kodak Easy Share is the standard now for digital posting and sharing. They were able to make that leap from an inside-out focus to an outside-in focus.

The second principal is the idea that quality is relative, which is very hard for newspaper people to grasp. When the digital camera era came, Kodak saw it coming, they weren’t stupid. They decided to build a digital camera based on the traditional standards of a quality color picture – vividness of color, sharpness of image, depth of field. When they loaded all those features into their digital camera, it cost $30,000.

Newspapers have tended to do the same thing. As the audience erodes, they say, “We’re going to add more features to our legacy product.” I liken it to hanging ornaments on a Christmas tree – adding more and more sections, like women’s news and kid’s news and automotive and real estate and business – it goes on and on. We’ve made the product too complex for the average consumer to easily consume and in many cases too costly. Why? “Because that’s quality journalism.”

If the Washington Post applied those standards to their Express [a free commuter tabloid] they never would’ve done Express. Is Express as good as the Washington Post? No, but if you’re a commuter riding on the Metro for the twenty minutes, Express is better than the Washington Post because you can’t physically juggle a multi-section broadsheet newspaper while you’re riding on the Metro.

Davis: Sony is a good don’t-do example. Sony owned the portable electronic market like the newspapers owned their market; Sony Walkman was the standard. When the digital age came, Sony said, “We’re in the music and sound recording business, not in the hard drive business.” Sony went from owning the portable entertaining market to now only having a one percent share while Apple has a 90-something percent share in a $7 billion-a-year business.

WLD: How do you see that miscalculation playing out in the newspaper industry?

Davis: We have a cultural thrall with the manufacturing and distribution of ink-on-paper products. Newspapers own giant hunks of metal that cost $100 million each, and newspaper people love the daily excitement of producing a once-a-day product on deadline.

Davis: I would say the mindset is two-thirds of the problem. Most senior leaders in the industry know on an intellectual level that they must change but they also are tied to those hunks of iron and advertising sales forces and traditional journalism rules and quality standards – add to that risk aversion and resistance to change, and it’s a deadly mix.

WLD: The Washington Post recently referred to the conflict between L.A. Times editors and the Tribune Company as a “morality play,” pitting “obsession with profits” against “quality journalism.” How do you get beyond those characterizations?

Davis: The Tribune company, at great expense and with great gnashing of teeth, last year closed all its individual newspapers’ Washington bureaus and consolidated everybody in a one-floor partition-less bureau for all of Tribune’s newspaper and electronic media and television media. But if a Baltimore Sun reporter writes a compelling news story that’s relevant to the Los Angeles audience, the L.A. Times will not run it because it wasn’t written by an L.A. Times reporter.

Tell me there aren’t efficiencies to be found by breaking down those balkanized restrictions. Think what the Tribune Company could do if, instead of downsizing by 50 people, it oriented those 50 people to some new, innovative product, like creating a RedEye [Chicago Tribune’s youth-oriented tabloid paper] for the L.A. market.

WLD: But would the skills of those 50 people be transferable? Why not fire them and hire 50 new people who have more relevant skills? That seems to be the fear of many journalists.

Davis: That’s a challenge for the industry. It’s a set of dominoes that goes back to the journalism schools. What skills are people coming out of Medill School of Journalism with today? If newspapers are hiring, do they want a journalist with a capital J or a talented web-designer with digital programming skills? More and more the latter skill is going to be of higher value.

But let me get back to why we did Newspaper Next. We believe that journalism, the process of gathering, editing and distributing news – not just information but news – has a real societal value in a democratic republic. We have an obligation to sustain the media that contribute to having an informed citizenry. The newspaper industry by our rough calculation invests $7 billion a year in the news product in this country, and that’s just for salaries and benefits of reporting staff.

Everything else out there in the media sphere is derivative of that investment. Bloggers are observers and commentators but not journalists. They start their day by reading the work of those newsroom reporters. Television producers begin their day by reading the top newspapers to decide what they’re going to put on the network news. In Chicago the Tribune has probably got 600 people in their newsroom, the Chicago Sun Times has 350 people, and the [suburban] Daily Herald probably has 300. That’s more than 1,000 newspaper reporters. The biggest television network affiliate newsroom is probably 30 people.

WLD: Down in the trenches of the newsrooms, how do you change the attitude that change equals the end of quality journalism?

Davis: We have created a project called “the Learning Newsroom” with a grant from the Knight Foundation. We have gone into ten newspaper newsrooms over the last three years, each for a year, to do just that. First we do a “culture audit” of the newsroom to see what the inclination of that newsroom is to change and innovation. The second step is to build within the senior leadership of the newsroom an understanding that to survive, change must be a reality of daily business. The third step is to create innovation teams that cut across the functional divisions of the newsroom. These innovation teams are charged with developing new processes and new products.

It’s both a bottom-up and a top-down approach. The model is first to communicate a sense of urgency, second to create a guiding coalition of people who can be influencers, and third for senior management to communicate clearly their vision for change and bring people along who are uncomfortable or reluctant to change.

WLD: In addition to being a major general in the Marine Corps Reserve, you were recently director of Marine Corps Public Affairs at the Pentagon. Are there any lessons on innovation that carry over from your military experience?

Davis: I like to say I got my MBA at USMC. Throughout its 228-year history the United States Marine Corps has had to constantly remake itself in order to survive. We’re the smallest of the services. You can make an intellectual argument that the nation doesn’t need a Marine Corps. We have the largest land army; we have the most powerful air force in the skies in the world. Why do you need a sea-going army with light infantry that has its own airplanes?

The Marine Corps has constantly needed to re-examine and remake itself in order to maintain its relevance to the nation and the taxpayer. So we were the innovators of the amphibious warfare doctrine in World War II. We were the innovators of what the Army now embraces called maneuver warfare. We were the innovators of sea basing and maneuver warfare, both of which the Army has now embraced. We invented close air support of troops on the ground. We have an innovation culture, and that’s been an important part of my life for forty years. I think that has colored how I’ve led newspapers and led this organization as well.

WLD: Clayton Christensen argues that companies often respond to innovation by running full speed in the wrong direction. Your Newspaper Next report advises companies to start small and test the product first. Is change going to come fast enough?

Davis: The “invest a little, learn a lot” model is going to be a powerful tool for newspapers to overcome their risk aversion. For eleven ideas of new products only one will succeed. So you have less than a 10 percent chance of success. Are you going want to invest a lot of money in that? No. But there is a way to increase your chances. It doesn’t cost any money to have ideas, and it doesn’t cost much to evaluate those ideas.

In my research I’ve found that in almost 75 percent of cases of failed newspaper products, no business model or marketing research had been done. Newspapers tend to skip the development phase for some reason; we don’t do test marketing. It’s only when you start bringing the idea into development that risk really starts ramping up. If you can weed out the bad ideas in the low-cost analysis phase, you stand a greater chance of success.

WLD: Who are the leaders in the industry right now? Are they writers and editors? Or CEOs and financial managers?

Davis: It’s “yes” to all of the above. By the same token, the Luddites come from all disciplines in the newspaper. There’s no correlation between innovation, leadership, and job position.

This industry is very insular, and that’s an impediment to change. We only promote from within; very few newspaper executives come from outside the industry. You’ll find a few in sales; a few in finance, but most people who are at the senior leadership levels have come up through the newspaper business.

We’re an industry that has de-valued education. Every other industry has an infusion of MBAs. There is not an MBA for newspapers, except at Kellogg and that reaches very few people. We don’t invest in mid-career training. The standard for other industries is about two percent of revenue is invested in personnel development. In the newspaper industry it’s less than one-half of one percent. These challenges for the industry to overcome.

Davis: The Press Institute has evolved to focus solely on leadership development. People don’t come here to learn how to write better headlines; they come here to learn how to be leaders in the newsroom. Because we have a stove-piped industry, our best reporter is suddenly named an editor without ever having led another person. Our institute’s strength is teaching those newly promoted people to be leaders within their functional area. When they’re being groomed for general management, we have capstone courses like strategic leadership.

What we teach in all of these courses is that the best leadership is transformational, not transactional. It shouldn’t be, “If you do this, I will give you a raise.” Effective leaders create an environment where the motivation of the led is intrinsic.

WLD: Looking ahead, what happens if these massive cultural changes and hardware changes don’t take place? What’s the worse-case scenario?

Davis: The implications are terrible for our society. At risk will be that $7 billion investment and the ability to collect raw data and information and distill it into information and wisdom. An informed society requires that, whether it’s on a government level or a personal level. The other risk is that into this void will come an economic force that doesn’t have as part of its culture a root belief in the altruistic value of information.

Right now everybody points to Google as the great democratizer of information. Google is not a news gatherer. Google is an aggregator, and the value of Google ceases to exist if they can’t suck up the news from newspapers around the world.

Davis: The successful survivor newspaper company will evolve into a portfolio of businesses, some news-related, some not news-related, some ink-on-paper, some digital, some advertising and subscription-based and some transactional-based. By transactional-based I mean if you read a news story you got from an aggregator there will be a micro charge on your cable or DSL bill. That revenue will somehow flow back to the newspaper company.

WLD: So the key is figuring out, along with everyone else, how to make money online?

Davis: We have to go from being an inside-out arrogant business that believes it knows what’s best for customers and readers to a more customer-based, outside-in orientation that understands what jobs our customers will hire us to do.

Author’s note: Andrea Useem, an independent writer and editor based in Reston, Va., conducted this interview. The transcript has been edited for clarity, brevity and style.

To most outsiders, the events unfolding at Hewlett-Packard have been a comedy of errors, but to most insiders and some outsiders, they have been a personal and public tragedy. Among the insiders, both current and former, are ex-chairman Patricia Dunn, CEO and current chairman Mark Hurd, former CEO Carly Fiorina, “leaker” ex-board member George A. Keyworth II, slighted and spied upon ex-board member Thomas Perkins, powerful and sometimes misguided H-P outside counsel Larry Sonsini, and low-profile H-P general counsel Ann Baskins (1). Not to be forgotten are the nine or more reporters—including Pui-Wing Tam of The Wall Street Journal, John Markoff of The New York Times, and Dawn Kawamoto of CNET News.com—and various friends and family members of those involved with the H-P saga (2). Especially noteworthy is the legal heavyweight, California Attorney General Bill Lockyer, who believes that crimes were committed and is driving this tragedy to its eventual denouement.

H-P’s leaders have sown the wind and are now reaping a whirlwind. What lessons can be learned from this tale of woe? Here are a few.

Lesson 1: Leaks can be bad, but plugging the leaks can be worse. In the 1972 Watergate scandal, President Nixon employed a White House Special Investigations Unit called “The Plumbers” to plug unwanted leaks. The Plumbers illegally broke into the headquarters of the Democratic National Committee at the posh Watergate Hotel in Washington, D.C. They also broke into the office of the psychiatrist of Daniel Ellsberg, a former employee of the Pentagon and State Department, who leaked the famous Pentagon Papers that increased public opposition to the Vietnam War. The Plumbers were caught, tried, and sentenced to jail. Nixon subsequently resigned on August 9, 1974, the only U.S. president to have resigned from office.

In the “HP-gate” scandal of 2005 and 2006, H-P board chairman Patricia Dunn authorized a probe into unwanted media leaks, and the security and detective firms who did the investigation engaged in pretexting—a form of identify theft to acquire the private records of other individuals—and other possible felonies. Three board members have already resigned, and certain individuals may end up going to jail.

Certainly, using illegal methods to plug leaks is not advisable, but even legal ways to plug leaks can be troublesome. Charles Elson, a professor at the University of Delaware and an expert in corporate governance, says “While leaks can be problematic, investigations into leaks create far more problems, and they should be avoided.” Hiring outsiders to investigate the board can cause board members to be reluctant to talk to anyone except top management. “It makes the board totally dependent on management for information,” Elson says (3).

Lesson 2: Avoid witch-hunts. In a recent op-ed piece, Douglas Branson, a professor of business law at the University of Pittsburgh School of Law, stated “Directors should never spy on or conduct any form of witch hunt regarding fellow directors.” He goes on to say that “Directors have no power to remove other directors, so sanctions and witch hunts tend to be idle gestures, or end up in nasty fights.”

Branson further notes that shareholders elect directors and, usually, they also have power to remove directors, by majority vote and with or without cause. Most courts have ruled that directors’ attempts to remove fellow directors are nullities.

What to do? Branson suggests that if a critical mass of directors agrees that a fellow board member lacks integrity, and that fellow member has less than a year to serve, they should just “bite their tongues” and management should not re-nominate that person for re-election. A special shareholder meeting could be called to remove the offending director, but the cost could be substantial for such a short-term situation, perhaps a million dollars or more. Frequently the offending board member will get the message and resign.

In the case of a classified or staggered board, members of each class could have two or three year terms. It is conceivable that a board member suspected of misconduct could have thirty-five months left in his or her term. In that case, and if the member refuses to resign, a general or special shareholder’s meeting to remove the individual might be the only good alternative (4).

Lesson 3: Nip the problem in the bud. On the legal side, a corporate leader must convey expectations to new board members about discretion and confidentiality, and then clinch the understanding with a well-crafted non-disclosure agreement. Patrick McGurn, executive vice president of Institutional Shareholder Services, a corporate governance advisory firm, says “This is a cautionary tale that directors should set well-defined ground rules and rules of engagement in the boardroom” (5).

On the psychological side, a leader must be discerning and know when to take pre-emptive corrective action. Could there have been a gentler intervention before things got to the dysfunctional cloak and dagger stage? What were the inner drives of these board members, their goals and ambitions, hurts and passions, fears and anxieties? Identifying the psychological “itch” might have made the leaks go away.

Lesson 4: Actively make value trade-offs, keeping ethics uppermost in mind. Key H-P board members were fixated on stopping the leaks, but when developing a solution they failed to make the appropriate value trade-offs (6). What was it worth to fix a leak? Invading board members’ privacy by going through their garbage? Stealing someone’s identity to secure their phone records? Sending spy-tracer e-mails to unwitting reporters? Having one’s e-mails spread all over the front pages of The Wall Street Journal and The Washington Post? Losing one’s place on the board? Having an indelible scarlet “L” for Leaker or “S” for Spy placed on one’s chest? Was it really worth it?

Supporters of H-P can argue that the critics are sounding off with the benefit of 20-20 hindsight. How could Patricia Dunn have known that things would turn out so wrong? Even if one acknowledges that hindsight is not equal to foresight, paying attention to ethics could have prevented this situation (7). When in doubt about a proposed action, Dunn could have used the simple test of reversibility: “How would you like it if this action were done to you?”

In conclusion, what should one do in a similar situation? Before hiring an army of pretexting Inspector Clouseaus, consider these prescriptions. In one’s imagination, walk around the problem and look at it from all perspectives—the 360 degree point-of-view. When considering conflicting corporate values—and they often do conflict—carefully reflect, discern, weigh, sift, evaluate (8). Actively and consciously make value trade-offs, always keeping an eye on ethics and the law. Then decide and move on.

1. For those wishing to know more specifics, The Wall Street Journal has an ongoing collection of articles called H-P’s Boardroom Battle, which can be found here.

2. Wall Street Journal Staff Reporter (2006, September 8). Nine journalists’ phone records targeted in H-P probe of leaks. The Wall Street Journal, A13.

3. Loren Steffy (2006, September 12) How not to deal with leaks. The Houston Chronicle. See the article online here.

4. Douglas Branson (2006, September 18) Built to last? Corporate governance at Hewlett-Packard. The Jurist. See article here.

5. Jordon Robertson (2006, September 13). Next in Hewlett-Packard scandal: Criminal charges. Associated Press. See the article online here.

6. Ralph L. Keeney (2002, November-December). Common mistakes in making value trade-offs. Operations Research, 50(6), 935-945.

7. B. Fischhoff (1975). Hindsight ≠ foresight: The effect of outcome knowledge on judgment under uncertainty. Journal of Experimental Psychology: Human Perception and Performance, 1, 288-299.

8. For an example of how officially-espoused values can conflict with reality, see H-P chief privacy officer Scott Taylor’s June 20, 2006, congressional testimony on the importance of protecting privacy (here). For more insight on authentic H-P values and culture, see David Packard (1995). The HP Way: How Bill Hewlett and I Built Our Company. New York: Harper Business.

For those aspiring to be a CEO or industry titan, a high-powered university degree is no guarantee of success. Ask any top-tier business school dean in private how their graduates fare, and most will confess, probably in hushed tones, that success is not achieved by all. By comparison, a degree from a less noted but academically solid school is not necessarily a hindrance. Ask Berkshire Hathaway CEO Warren Buffett, who attended the University of Nebraska-Lincoln, or Disney CEO Robert Iger, who attended Ithaca College. Effective leadership requires not only highly-honed knowledge, but also drive, courage, resilience, and vision—intangibles not easily conferred with a degree.

For those aspiring to the boardroom, the road to success is also filled with intangibles. What would those mysterious personal attributes be? Some might say a membership in an exclusive social club is necessary, or perhaps attendance at a highly selective prep school, or the possession of an elite MBA, or a listing in the Social Register. These things do not hurt, but individuals lacking these attributes need not pack up their curricula vitae and go home. In the June 2006 issue of Administrative Science Quarterly, James D. Westphal (University of Texas at Austin) and Ithai Stern (Northwestern University) explored how individuals—especially those lacking privileged backgrounds—get into the boardroom. They concluded that an alternative pathway exists that may surprise some (and others not at all): ingratiating behavior toward the CEO and others who control access to powerful positions.

Westphal and Stern looked at survey data on the interpersonal influence behavior from a large sample of managers and CEOs at Forbes 500 companies. They found that top managers who engaged in “ingratiatory behavior toward their CEO, with ingratiation comprising flattery, opinion conformity, and favor-rendering [emphasis added], will be more likely to receive board appointments at other firms where their CEO serves as director and at boards to which the CEO is indirectly connected to the board interlock network. Further results suggest that interpersonal influence behavior substitutes to some degree for the advantages of an elite background or demographic majority.”

Westphal and Stern’s work may help elucidate why increased demographic diversity on boards has not necessarily decreased norms of deference toward the CEO. (Here one thinks of Irving L. Janis’s early work in the 1970’s on groupthink, defined as the tendency in cohesive groups to seek agreement about an issue at the expense of realistically appraising the situation.) Their work also suggests that individuals who lack a privileged background “face a subtle and perhaps unexpected form of social discrimination, in that they must engage in a higher level of interpersonal influence behavior in order to have the same chance of obtaining a board appointment.”

One might wonder if the ingratiation required to get into the boardroom might interfere with a board member’s judgment and counsel once admittance is gained. Not necessarily, though for some individuals ingratiating behavior may be a tough habit to break.

Here is a balancing act to strive for: debate, though offered in harmony, must be honest and constructive, and points made, though frank, must be delivered with tact. And what is tact but the ability to make a point without making an enemy?

Note: Mark Hanna can be reached at markhanna@mchsi.com. The article: James D. Westphal and Ithai Stern, “The Other Pathway to the Boardroom: Interpersonal Influence Behavior as a Substitute for Elite Credentials and Majority Status in Obtaining Board Appointments,” Administrative Science Quarterly, 51, June, 2006, pp. 169-204. Also see Carol Hymowitz. “Any College Will Do,” The Wall Street Journal, September 18, 2006; page B1.

Michael Useem, editor of the Wharton Leadership Digest, has just published a new book entitled The Go Point: When It’s Time to Decide (Crown Business/Random House, 2006; http://www.thegopoint.com/). An excerpt from The Go Point’s Preface follows, and the book’s Introduction is available here.

Imagine for a moment that you are taken out of your normal day-to-day life and thrust as a wildland firefighter into the midst of a raging Colorado fire, becoming the de facto leader of a crew whose goal is to stop it from spreading. With scant information available about weather conditions you urgently have to decide where your crew should go – up the mountain or down – and your forced choice has potential life and death consequences.

Or you are now on the bond trading floor at Lehman Brothers and you have to make multi-million dollar buy or sell decisions that will have huge consequences not only for the profitability of your firm but also your year-end bonus.

Or perhaps you are the new chief executive of Hewlett-Packard forced to clean up the mess left by your predecessor who pushed through a decision to merge Compaq Computer company with your own struggling computer operation. Jobs are going to be cut, perhaps entire divisions dissolved. How do you decide who goes and what stays?

All of these are go points, times to decide, moments for saying yes or no, instants for jumping one direction or another when the fate of others depends on it. When should you do it, and how should you do it?

To master the art and practice of being decisive, our account will take you to some of the most daunting terrains on earth – from a burning mountain in Montana to the highest mountain in the Himalaya, from a corporate boardroom to a Civil War battlefield, from a troubled Tyco to surging Lenovo. We will combat a forest fire, climb Mt. Everest, peer into a boardroom, and see for ourselves how Confederate General Robert E. Lee decided to launch Pickett’s Charge. But we will also witness people making less time-bound or momentous decisions: training astronauts, writing poetry, prepping a quarterback, leading a church, taking a job. And we will make four decisions of our own by applying what we have learned from those who have staked their companies, their careers, their countries on reaching the right decision.

The Go Point takes you inside the heart and head of people at their go point. And from their experience and that of our own we will build a decision-making template, the principles and tools for being decisive at times when it really counts: Using small steps to make hard decisions, building a network of counselors and oracles for testing ideas, keeping options open until they must be closed.

This book is built on more than a hundred interviews and observations of leading decision makers, mostly conducted between 2002 and 2006. For the interviews, my approach has been to ask the individuals to describe and analyze decisions they have made with consequences for those around and dependent upon them. What were their best and worst decisions, their most challenging ones? How did they reach them? What factors brought them to their individual go-points? What would they change and what have they learned? During the interviews, generally sixty minutes in length but sometimes shorter and other times far longer, I kept detailed notes and often a digital recording.

I sought interviews with people from a broad cross-section of professions and callings: a NASA astronaut, a Marine colonel and a thoracic surgeon, an Episcopal Bishop; school teachers, corporate executives, Chinese entrepreneurs. Many are not explicitly referenced in the book’s text, but their experience and thinking is reflected throughout the book. The settings for the interviews ranged from executives suites to classrooms, trail sides, and training centers. I accompanied a wildland fire team as it fought a blaze in California, spent hours on a trading floor of an investment bank, and joined a day-long briefing by those who run the training program for astronauts at Houston’s Johnson Space Center.

At times, I have also observed decision makers as they described, analyzed or even engaged in decisions with consequences for others. And in some cases I was able to both observe and interview the individuals in question, sometimes on multiple occasions. All moments of observation were accompanied by detailed note taking and in some instances audio and even video recording.

High profile figures such as Cisco Systems CEO John Chambers; General Peter Pace, chairman of the U.S. Joint Chiefs of Staff; former Hewlett-Packard CEO Carly Fiorina; Pakistan’s President Pervez Musharraf; and New York Times chairman Arthur O. Sulzberger Jr. have shared or conveyed their decision-making experiences, but I have also looked in more out of the way corners, where the decisions taken or avoided had dramatic consequences for those involved. I hiked a fire zone on Colorado’s Storm King Mountain with seventeen professional fire fighters, seeking to understand the chain of go-points that had led an earlier group to be engulfed by a lethal blow-up in 1994, and I talked with a survivor of a well-known airplane crash in the Andes.

In addition to the interviews, I have devoted more than forty days to the study of decision making by the Civil War commanders who fought at Gettysburg. Time and again I have walked that hallowed battlefield with managers and MBA students accompanied by U.S. National Park Service licensed battlefield guides William Bowling, Hans Henzel, and Charles Fennell and, during one of those days, Civil War historian James M. McPherson.

As part of the Wharton Leadership Ventures, I have also observed managers and MBA students making hundreds of decisions on everything from route finding to program restructuring in venues as far-flung as Patagonia and even Antarctica. In conjunction with a leadership development program for the Philadelphia public-school system, I have informally discussed with teachers and administrators how they go about making decisions. Lessons in decision making, in go-pointing, can be found literally everywhere.