Wharton Leadership Digest

Russia's Best-Known Investment Banker: Ruben Vardanian on Building Trust in a Fast-moving World

Q+A by Michael Useem and Valery Yakubovich

Leadership Learning in Mexico: How the University of Monterrey is Transforming Students through Experiential Learning

By Chris Maxwell

The Arts of Nudging: Helping People Make Better Choices

By Mark Hanna

Insights Across the Disciplines: New Research Trends from Wharton/INSEAD

By Andrew Cohen and Katherine Klein

Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns

By Clayton Christensen, Michael Horn and Curtis Johnson

Leadership is not necessarily about smartness or genius or some other specific trait. That’s not only what I heard from speakers at the 12th Annual Wharton Leadership Conference on June 18, but what I observed as each speaker – a leader in his or her own right – displayed unique insights and styles. That people with different talents and abilities can be great leaders is an inspiring thought for those of us who underestimate our own ability to lead. Many of us suffer from the misconception that leadership requires superhuman talents. In fact, as I learned at the conference, the best leaders are often the most humane.

I was touched by the humility of Colleen Barrett, president of Southwest Airlines, who attributed her strength to her exuberant love for people and an emotional connection to her work. “We like people who take the business very seriously, but not themselves very seriously,” was how she summed up the culture in her company.

S.A. Ibrahim, CEO of the credit-risk management firm Radian Group, seemed to share a similar sense of passion for his work when he said, “You could do seemingly impossible things if you assumed that you had no choice but to do them.” At a personal level, I understood this statement as a deep commitment to excellence, where no half-hearted effort is considered satisfying. Ibrahim recalled at time when his company was forced to work with limited choices, and he told his employees: “Just because [our competitors] have the same paint brush and paper does not mean they can paint as well as us. We’re in the business of painting masterpieces.”

William Weldon, CEO and director of the board of Johnson & Johnson, highlighted the importance of flexibility in moving employees around so that they can find the place where they best learn and grow. In continuation of an idea mentioned earlier in the conference, he said that a leader doesn’t think of his task as being about him or her, but about the success of the larger group.

Amidst multiple challenges and external forces, however, a leader can easily lose touch with the larger perspectives of life. Wharton professor Stew Friedman, author of the new book Total Leadership, argued that each individual is a leader, charged with the task of identifying values and priorities and then aligning actions to reach those goals. Friedman advised individuals to take the sometimes difficult step of sitting down with important “stakeholders” in one’s life – whether co-workers, bosses or family members – to understand their expectations of one’s performance. The result, he said, is often surprising: We tend to expect more from ourselves than other people do, said Friedman. Having a clear and realistic sense of others’ expectations, then, can help focus our personal and professional lives.

New York Times business columnist Joe Nocera argued that a good leader cannot afford to be unreasonable and irritable, especially when working with bright people who have other opportunities. Citing several examples (and using some colorful language about Apple CEO Steve Jobs in particular), he read passages from his new book, Good Guys and Bad Guys, to make the point that leaders depend for their success on support from those who work for them.

Peter Cappelli, director of Wharton’s Center for Human Resources, asked the audience to think about their best developmental experience and whether or not it took place as part of a training course. Surprisingly for the audience – though perhaps not for Cappelli – most people’s most defining moments did not come as the result of a pre-planned course of action; rather, it happened on the fly, as a result of circumstance or chance. Cappelli encouraged leaders to create similar learning circumstances, and, sharing research from his new book, Talent on Demand, he showed how on-the-job training makes more strategic sense than formal coursework for companies in an era of high employee turnover.

Echoing this theme, Ken Chenault, CEO of American Express, explained how crisis can be a platform for constructive change. Chenault shared the story of the many challenges his company faced after 9/11 – including large layoffs – and how these painful transformations laid the groundwork for company cohesion and future financial progress. He defined leadership by paraphrasing Napolean: “A leader is someone who defines reality, and gives hope.” Chenault encouraged every person – regardless of title – to create his or her own brand of leadership based on personal core values.

Earlier in the day, former presidential adviser David Gergen shared his reflections on the leadership qualities of the US presidents. He identified leadership as a three-legged stool based on intelligence, character and ambition. A good leader’s ambition grows beyond the self to the greater good of their organization or country, he said. Gergen cautioned that intelligence alone is not sufficient for true leadership, since a critical balance of humility and toughness is required to compliment good judgment.

All these speakers, as well as questions from the audience, provided inspiration, but the words of T.S. Eliot words, quoted by speaker S. A. Ibrahim, have stayed with me: “Only those who will risk going too far can possibly find out how far one can go.”

Author’s Note: Saurabh Madaan is a graduate student in material sciences and engineering at the University of Pennsylvania. Originally from Amritsar, India, Madaan graduated from the Indian Institute of Technology Madras (IIT) in 2006. He publishes his poetry and reflections on his American experience at his personal blog; he can also be reached at: saurabhmadaan@gmail.com.

For further reflections on the conference, see these articles and blog postings:

Southwest Airlines’ Colleen Barrett Flies High on Fuel Hedging and ‘Servant Leadership’

By Knowledge@Wharton

At a time when the airline industry is under assault from skyrocketing fuel prices and a sluggish U.S. economy, it's hard to imagine that a talk by the president of the leading American carrier would not be dominated by discussions of job cutbacks, reduced routes, higher fares and a difficult future ahead.

But then there aren't too many major airline executives quite like Southwest Airlines' Colleen Barrett, 63, who rose from legal secretary to the front of the corporate suite over a span of 23 years. It was Barrett, working closely with mentor and company co-founder Herb Kelleher, who pioneered Southwest's unusual and now legendary approach to customer service, which aims to treat the company's 35,000 employees like family, to make the workplace fun – and then to carry that upbeat attitude to consumers. It's a strategy that has made an upstart discount carrier into America's busiest airline by passenger volume.

"Our mission statement is posted every three feet, all over every location that we have, so if you're a customer, you've seen it," Barrett noted in her recent talk at the 12^th Annual Wharton Leadership Conference, sponsored by Wharton's Center for Leadership and Change Management and Center for Human Resources. "It's to follow the Golden Rule -- to treat people the way that you want to be treated, and pretty much everything will fall into place."

For the video cast and write-up of Michael Useem’s interview with Colleen Barrett, which was originally published on July 9, 2008, please click here.

Johnson & Johnson CEO William Weldon: Leadership in a Decentralized Company

By Knowledge@Wharton

Consumers tend to associate Johnson & Johnson with Band-Aids and baby shampoo, but those well-known products are only part of a much larger picture, according to William Weldon, chairman and CEO of the New Brunswick, N.J.-based firm. In fact, Weldon has the mind-boggling task of overseeing more than 200 operating companies across three sectors, including the consumer products that have made Johnson & Johnson a household name; pharmaceuticals like Tylenol; and medical devices. On June 18, Weldon spoke at the 2008 Wharton Leadership Conference about the challenges of running the Johnson & Johnson family of companies. In an interview with Knowledge@Wharton, he elaborated on how J&J's decentralized structure informs his leadership style and what he sees as key issues for the health care industry in the coming decade, among other topics.

For the video cast and written transcript of the interview, which was originally published on June 25, 2008, please click here.

Judgment, Character and Ambition: David Gergen on Leadership in the 2008 Presidential Race

David Gergen, an advisor to four U.S. presidents and currently director of the Center for Public Leadership at Harvard’s John F. Kennedy School of Government, doesn’t care as much about who wins the U.S. presidential election in November as much as he does about whether “the winner can be an effective leader.”

The nominees, Republican Sen. John McCain and Democrat Sen. Barack Obama, each has strengths that he finds encouraging, and both have weaknesses that worry him, Gergen told his audience at the 12th annual Wharton Leadership Conference, sponsored by the Center for Leadership and Change Management, and the Center for Human Resources. For this election in particular, Gergen said, the winner must handle some of the roughest terrain – foreign and domestic – since Franklin D. Roosevelt in the early 1930s.

“In my judgment, the challenges facing the next president will be the most daunting facing any president of our lifetime. There have been immense problems building up for a long time and crying out for solutions, and time is not on our side,” Gergen said, adding that “context is important” when considering the leadership traits that we as a nation “ask of our presidents. You have to distinguish between the timeless qualities of leadership and the ones that are unique to the time.”

For the complete article, which was originally published on June 25, 2008, please click here.

RUSSIA'S BEST-KNOWN INVESTMENT BANKER: Ruben Vardanian, on Building Trust in a Fast-moving World

Q+A by Michael Useem and Valery Yakubovich

Troika Dialog is the oldest and largest private investment bank in Russia, with core lines of business in capital markets, investment banking, asset management and alternative investments. Ruben Vardanian became General Director of the company in 1992, president in 1996, CEO in 1997 and chairman of the board in 2004. The company was founded in 1991. Born in Yerevan, the capital of Armenia, Vardanian graduated from Moscow State University in 1992, and completed post-graduate training with BANCA CRT in Turin, Italy, and Merrill Lynch's Emerging Markets Training Program in New York City. In 2006, he became the founding president of Moscow School of Management Skolkovo. Wharton management professors Valery Yakubovich and Michael Useem spoke with Vardanian about entrepreneurship and education in Russia. An edited version of the conversation follows.

Ruben Vardanian: I was a student in Moscow University's economics department in 1990 when everybody realized something was going to change in our country. I said to myself, "We are changing from one system to another system. Which element are we missing?" That's when the government planning system was replaced by the financial system's markets. I said, "It's a new industry, and nobody knows what will happen and how the markets will develop, but the Russian financial industry will be like a normal international industry."

I wanted to do something around this, and my vision was very simple: Russia will become part of the global world. Foreign investors will invest in Russia. We need to find out how to provide services to them, because they need us to understand what's going on in Russia, and there are not so many people who can do that. It was not just a question of knowing English. There was also a mental difference [to explain to clients], especially in Russia in the 1990s.

I was young, and I saw I had a unique opportunity, because international businesses are built around reputation and professional skills, not around your political assets or capital assets, which I didn't have any access to at that time. I said to myself, "I can build the right company with the right vendors." This is one of the basic principles I used in the beginning.

Vardanian: We put forward three principles in 1991, which continue today in our business. They are all very simple, nothing scientific. First, we said we are long-term oriented, which was quite unusual in Russia, especially at that time. For example, we are the only ones in Russia who hired Coopers & Lybrand [now PricewaterhouseCoopers] in 1991 to perform an international audit confirming our losses in the first year. That was the kind of long-term commitment we made to ourselves and our industry. We did lots of things people did not usually do in Russia in the 1990s. We ran the company using international standards, not benchmarking ourselves against [companies] around us in Russia.

The second principle says we are a client-service company. It's unusual to explain in Russia that you are a client-service company, because client service was never a key aspect of our country; industrial production was the key.... Our proprietary position was very small [at that time], and I continued telling my people, "We are servicing the client." It's a very important point, which again, in the 1990s, was not so obvious when everything was unstable, and nobody cared about the client.

The third principle was this: I said to myself, "I want to respect myself, and I want to respect my people, my country, my competitors, my clients." So I want to build this respect, and I want people to enjoy working together. It took us a lot of effort to convince people to trust each other in business, because the level of trust in Russia in the 1990s was very low, when the old system collapsed. Building a partnership in Russia, where nobody believed in partnership, was a challenge.

I wanted to change that perception, that you can trust a 24-year-old Armenian guy and operate in a professional, international way. I think it was good motivation for all of us to try to convince people this was possible.

Useem: So having built Troika Dialog from the start, you created a skill set, but when you took over the former Soviet insurance company, Rosgosstrakh, presumably you needed a different set of leadership tools. What were the similarities and differences in the leadership styles you used for both organizations?

Vardanian: It was a very unique experience for me. This former Soviet company had 30 million clients and 100,000 employees, and the average age [of employees] was 53. The company had basically lost its market; it was close to bankruptcy and it was alive only because the government allowed it to be. It was a challenge for us, saying to ourselves and others, "We believe it can be recovered," while other people said, "There is no chance." So we had to change perceptions.

It was important to say, from the first day, what is the goal? What will be our rules of internal relationships? What will be our channels of communication? What will be our motivation and compensation system? It was very different from Troika. I will be honest; it was challenging for me to understand that the system of partnership [we used in Troika], the system of collegial consent, didn't work [in Rosgosstrakh.] It was organized much more like an army or a bureaucratic system. At Troika I have a meeting every Monday morning with all my colleagues, and we know everybody personally. At Rosgosstrakh, it was different. People worked in other regions of Russia, and they didn't know each other at all.

But what I did was the same. I traveled a lot, and I remember I went to one of the biggest cities in Siberia, Krasnoyarsk. The director there said it was the first time in the 85-year history of the company that the general director came to that office, and it was not a small city.

I took the whole management team to travel around all of Russia's regions, trying to explain what we were doing and how we would do it. I remember the business planning process: It took me two months, with my management committee members spending all weekend with each region, going line by line with them. They were shocked when they saw the level of communication and commitment from our side.

The key element was committing ourselves fully to the ambition of being number one. And it happened very quickly. When I came to work with Rosgosstrakh, it had $200 million in premium collections a year, for a company with 30 million clients. When I left in two-and-a-half years' time, it was $1.3 billion in premium collection. Of course the market was much more favorable then; it was a good market. But it was interesting for me to learn that even with a different system and different people, you can continue if you have a clear goal and a clear vision, and you are constantly delivering what you promised.

It is a long process: It's still not over. My partner who worked with me at the time has continued struggling to change the company, and I think he's doing great. But I see what is possible to achieve even in old Soviet-system institutions, just by building trust and constantly delivering on that trust.

Yakubovich: You said you wanted to build Troika Dialog as a clean, trust-based business, and it seems like that effort was recognized pretty quickly.

Yakubovich: Maybe for Russian standards that is a long period, but here I think it is very fast in terms of how you managed to establish yourself. To many observers, you proved that a businessman in Russia doesn't need to be a criminal; at least, here in the West, that stereotype exists. Did you face pressure to become a criminal, and if so, what skills did you use to deal with those pressures?

Vardanian: First of all, I want to say I'm not an angel, and I live in Russia, where everything is transforming, and I have not done everything perfectly. But I am proud I have continued to live, all 17 years, without bodyguards, never fearing that my life or my family's lives are in danger. I always know I can become more transparent, more public; for example, I always pay my taxes immediately. In the 1990s that was difficult because you paid cash salaries to people. Otherwise you'd be out of the market.

What standards you set is always your choice. I remember in 1993, we didn't have too much revenue, and one of my sales people came to my office and said, "Ruben, we have a couple of clients who want to get from us a guaranteed return, around 50%." Other banks were providing 300% or 600% return at that time because there was huge inflation and everybody was promising that. But these clients were asking for only 50%. I said, "We can never guarantee a return -- even at 50%."

Looking back today, that seems easy to say, but at the time it was quite tough. We didn't know if we would have money to pay salaries at that time. But I knew it would be wrong, and I knew sooner or later we would be paid back for it. This is why you need to have a dream. You need to have a vision. You need to understand why you're saying "no." You need to understand what kind of things you will do and what kind of things you will not do.

It's very important to be honest with yourself and with your colleagues. Again, people ask me often about the mafia or the government. I can tell you: Seventeen years I've been in business in Russia, dealing with lots of cash, and we never had any people who came to us with crime, and we never had any tax police problems. Part of it is, in the early days, we didn't make too much money. Honestly, if you compare us with some of our competitors in that period, we were not very well known; we were not even number two. I think we've always looked like strange people doing strange things at the wrong time. A client once told me, "Ruben, you're a smart person, but you're doing the wrong things. Now is the time to take assets, not plan for the long-term."

It's very important to believe inside yourself that ethical behavior will pay you back. The 1998 default was very difficult for me, not because we lost money, but because I realized how it would impact society, how people would leave Russia. You can't screw everybody and not think about the long run. It was a very difficult time for me to manage.

Useem: When you joined Troika back in 1991, you were age 22, so you did not have a lot of experience, either in Russian industry or in banking. In major Russian companies these days, I understand there is still a tendency to avoid hiring managers over age 40 because they had come of age in the state-run economy and couldn't adjust to the demands of the free market. Yet last year you hired a new bank executive director, Andrei Sharonov, who was in his 40s and had worked for most of his life for the government. Could you talk about these generation gaps and how you put people of different ages to work at Troika?

Vardanian: I started working at Troika when I was 22, and I was one of the youngest people; I think the average age then was 27, 28. Now Troika has 1,500 people working for it, but the average age continues to be 27, 28, and I am now one of the older people, close to 40.

But I believe the Troika model is still correct. I've always hired people with a high experience level. I was very lucky to get good managers. I got people who trusted me, who liked my ideas and who then brought in much more experience than I had. They came from Wall Street and McKinsey and different industries, and they have been my mentors and partners. I learned a lot by working with people with gray hair: In fact, it's a very good combination.

One of the elements of Troika's success has been multiculturalism. We always have 30 to 40 nationalities working in the local company. So we've always worked with people of different ages and cultures. One of my biggest challenges has been how to bridge the culture differences so we can accept each other and work together. Because we always had two models. One was the Russian company saying, "These Westerners don't know anything about Russia." And Westerners came to Russia saying, "We're trying to teach them, and they don't want to listen." So I would say it's not just the generation or age issue, it's more about cultures and nationality and experience.

But back to your question. Our basic model is, "Bring young people." We just started our summer class for trainees with 170 people, of which I assume about 60% will stay and work in Troika. Most of our partners started at a young age. We have a guy running a key business who is 28, and that is fine with us, absolutely.

Yakubovich: What's interesting about your hiring of Andrei Sharonov is that he's coming from the government and, to the best of my knowledge, he worked for the government all his life.

Yakubovich: What does he bring from that government experience? The perception is your bank is different and doesn't want people with a lot of baggage from the old system or bureaucracy. Could you clarify?

Vardanian: The first time we hired a person from government, which was quite unusual, was Oleg Vyugin, who was the deputy minister of finance, the best chief economist. We have been lucky to hire the best professional people -- who are honest and have high ethical standards and are well-known in the market.

Hiring Andrei Sharonov was a big advantage for us because he was one of the most dynamic ministers trying to reform our country. He brings a systematic view about the government and how it is trying to convert the country to a more open market economy. He's also experienced at managing many projects and different groups of clients. We choose people not always by the position they hold, but also by their personal chemistry, so we find people who accept Troika's way of doing things.

I remember I had to fire one of the most professional people we had in our office, because she was not accepting that culture. She told me [that on] the Chicago Bulls basketball team, people hate each other, that Michael Jordan and Dennis Rodman never spoke to each other, and they still win games. To be honest, I would prefer not to win, if it meant souring relationships. So people like Oleg Vyugin and a couple others are unique. We all knew they were Troika people -- very professional with a lot of loyalty. Not so many Russian government officials are like that.

One of my goals has always been to bring different parts of the elite together, to interconnect the government elite and the industry elite in Russia, because right now, it's very badly organized. The same with the educational elite and the cultural elite. I think we've been isolated from one another for the last 15 years. A lot of obstacles and slowing down of good opportunities for Russia comes because of not knowing each other, or not trusting each other. We have these perceptions: Every government official is corrupt, and every business person is a jerk. These perceptions are very difficult to change if you don't know each other. I let people know: You can come and work at Troika, and maybe five or 10 years later, you can go back and work for the government; there will be no problem for you.

Yakubovich: You also have an ambitious vision to build a premier Russian business school. You want Skolkovo, the Moscow School of Management, to become one of the top 20 business schools within 10 years, and you want to establish very high standards for students and faculty. Of course there are many Russian students at business schools here in the U.S. now. How would you convince a Russian student to study at Skolkovo instead of the top business schools in the U.S. or Europe?

Vardanian: The people who want to go to America for their studies are not the people we want to attract, because we're trying to send a message that the world is changing. Before, the model was very simple. All the best people in the world wanted to study in America or Europe because they wanted to study at top schools and get the opportunity to stay and work in those countries.

Now what's happened during last five years, the schools that attract our people realize they are attracting people who want to get rich on the down side, not the people who want to take a risk and build something. Secondly, most of those people now want to come back, and the key measure is they are sending, not just Russian students, but [all kinds of] business students. If you want to learn how to operate in emerging markets, like China, India or Russia, it does not makes sense for you to go to Stanford or Chicago, because you will never learn it there: Less than 10% of the cases in those schools involve emerging markets. If you go overseas to study, you will not be ready when you come back, because the country is changing, transforming.

So if you want to build your career in the emerging markets, come to Moscow, or spend time in China or India. You will learn how to live in an environment where not everything is clear and clean and ethical. You will learn how to operate on a day-to-day basis, not only in your classes but in the projects you work on. It's an option for people who want to take risks ... who are 20 years old, who say, "I want to do something." This is why we are more entrepreneurial.

I am a very strong believer in this school. Business schools will change in the next 20 years dramatically because of the changes in demand and the changes in the infrastructure. People are not scared anymore to go to Singapore or live in India. Before, people wanted to go to America and Europe because it was safer, and the job opportunities were higher, and because of the professors those schools could hire. Now people can easily be hired to teach in Kuwait or Dubai or other places.

And then there is the interactivity of the Internet. Before, information was collected exclusively in a library in Harvard, but not anymore. The question now is not about getting information, but about how to use it, how to make judgments about risk, and how to work with cultural differences. So it's a unique time, because Russia is changing and the industry is changing worldwide. Sometimes I think we are at an advantage building from zero.

Useem: Looking ahead to the next decade or so, what are the key leadership capabilities companies will need to operate within the Russian context? Can one now begin to talk about an emerging Russian model of business leadership?

Vardanian: One thing we are facing is everything in the world is changing faster and with more intensity. The price of some materials goes up or down much more extremely. This is why leaders of the new age need to have a model for making sound decisions and adapting quickly in a world where everything around you changes everyday. Who would have believed the subprime debt crisis would hit America so hard, allowing Chinese companies to buy that debt? Such changes create new opportunities.

I think leaders of today need to be more open minded and ready to learn and have a global vision. Being able to accept cultural differences is crucial to operating in countries like Russia. For example, many people come here not even knowing the Russian holidays. So operating in a country with a different culture, and accepting that, is one of the key challenges for a leader today.

In Russia, I think, the value system is also a key problem. People live in a difficult world, and money becomes the measure of success. But everybody is lost, because the religion is gone, the government is not in control so strongly anymore. So you have to build a company with strong values, with a strong model for decision making and motivation and compensation. This is crucial for success because in some ways the company is replacing other institutions we had before. Working 14 or 16 hours a day, you don't have much time to go to church or to spend time with some political party. So having a company with its own internal conscience becomes a crucial element for a person, not only for their earnings but in their decision of how they will live, and what is right and wrong.

The question for leaders is how we can create a system to attract the best people, because the main fight of the 21st century is not about assets. The main struggle in the 19th century was about the land. In the 20th century, it was about industrial assets and natural resources. In 21st century, the main fight will be for the best people. Because people need to believe they want to work for you, that they can realize themselves in your company. To attract them, we need to have the right system in place and develop them for the long term. Many companies are not ready to do this because they hire people, but they don't spend enough time or effort in developing them. I think leaders need to be very, very committed to these types of things.

Interviewers’ Notes: Michael Useem edits the Wharton Leadership Digest. Valery Yakubovich is a management professor at the Wharton School. This interview was first published in Knowledge@Wharton on June 11, 2008.

The University of Monterrey (UDEM), a private university founded 38 years ago in Monterrey, Mexico’s third largest city, now boasts 6,000 undergraduate and 3,000 graduate students, 32 majors, and three affiliated high schools. In April 2008, UDEM celebrated the opening of The Leadership and Challenge Center, ¡Lánzate!, designed to house the university’s leadership program and to serve as the base of operations for its spectacular new on-campus challenge course. ¡Lánzate! , a Spanish expression drawn from the popular teambuilding ‘trust fall’ exercise, means “dive in” or “ let yourself go.”

Located at the base of the Sierra Madre mountains, UDEM now offers its students an integrated program that includes a co-curricular leadership course, experiential learning on the challenge course, and an expanding series of international leadership treks. UDEM is also forging a new relationship with Outward Bound Mexico designed to court the corporate market. All of this recent activity is placing UDEM and its leadership program staff, headed by Mónica L. Pugh, at the forefront of experiential leadership education in Mexico.

Because approximately half of Mexico’s population is now under 25, and that proportion is expected to continue to increase, UDEM takes its mission for developing young leaders seriously. By aiming to develop competencies such as emotional intelligence, teamwork, and problem solving through personal growth, active learning, and feedback, Pugh has developed an innovative model that fosters transformative experiences. Because every UDEM student must accumulate twelve co-curricular credits, the co-curricular leadership course has become an attractive option for almost every undergraduate.

The course extends over a full 15-week semester, and includes two and a half hours of class time per week focused on skill-building simulations, exercises, and reflective journaling – with the added attraction of a group teambuilding session on the challenge course. To round out the experience, each class of thirty students selects a “transformation” project to tackle as a group, for example, helping a local community set up a playground or promoting environmental awareness on campus.

Pugh notes that her construct, which focuses on enhancing students’ self-awareness, ability to build relationships, and promote change, aligns very closely with the social change model applied by many university leadership development programs in the U.S., which views leadership as a process rather than as a position, and promotes self-knowledge, collaborative leadership competencies, and social change through service.

Pugh’s years spent working with at-risk students, and later with highly motivated students, led her to push for expansion of the leadership center, with the goal of every UDEM student having the opportunity to experience self-discovery on the challenge course. After visiting several leadership programs in the U.S., and examining the credentialing process of the Association for Experiential Education, Pugh and her team set about designing the new center and working with ropes course experts and vendors. An enthusiastic university president and board members, and significant backing from a donor, made the construction of the new leadership center possible.

Pugh has now attracted and trained a cadre of instructors, some of whom focus on teaching the basic course and some who specialize in leading teambuilding programs on the challenge course. The international leadership treks are expanding, too, with programs in Ecuador, Peru, Patagonia, Arizona, and Alaska. The Alaska leadership trek, which includes an intensive training and team-building program in the semester before departure, is led by well-known Mexican high-altitude mountaineer, Alex Villarreal. Villarreal and his Sherpa climbing partner reached the summit of Mt. Everest from the north side in 2002.

Pugh reflects back on the development of the leadership center at UDEM, saying, “You have to learn to walk in an uncertain field and to deal with unexpected issues, like finding a vendor brave enough to come to Mexico and build the course, deal with customs and immigration, and the weather. Then, you have to be honest with yourself and admit that you don’t know everything, and that you have a lot to learn. You need humildad – humility – and you have to take the time to learn, to define the stages, to build trust and support in your team, and give them the opportunity to do what they know how to do.” And, as shown by Pugh in her efforts to build an integrated leadership program, to simply have the courage to “dive in, to let yourself go” – ¡Lánzate!

Author’s Note: Chris Maxwell is Associate Director of Wharton’s Undergraduate Leadership Program, and can be reached at maxwellc@wharton.upenn.edu. Mónica L. Pugh, Director of UDEM’s Center for Student Leadership, can be reached at mpugh@udem.edu.mx.

Within each of our brains exists a conscious, reflective function and an unconscious, automatic function. The first process is slow and analytical, representing conscious thought, while the second is rapid and intuitive, representing “gut feelings.” If one function is our own highly rational Spock, then the other is our impulsive Homer Simpson.

For the majority of our daily routines we operate on autopilot, and thus Homer Simpson predominates. That’s fine most of the time, but when we face major decisions like signing a big mortgage or changing careers, remaining on autopilot could mean danger. The good news is that a simple nudge – a figurative poke or prod – can save us from our inner Homer Simpson.

That’s what University of Chicago scholars Richard Thaler and Cass Sunstein argue in their new book, Nudge: Improving Decisions About Health, Wealth, and Happiness. Thaler, a pioneer in behavioral economics and finance, and Sunstein, a legal scholar at the University of Chicago Law School (who joins the Harvard Law faculty this fall), argue that for decisions with serious consequences, public and private institutions should consciously guide people towards more prudent choices, while simultaneously preserving their individual liberty.

Thaler and Sunstein begin their book with the story of Carolyn, the director of food services in a large public school system. Carolyn was interested in testing whether the way food was displayed in her school cafeterias would affect students’ choices, so she conducted an experiment. In some schools, the desserts were placed first, in others last. Sometimes the fries were placed at eye level, sometimes the carrot sticks. What she found amazed her. Just by rearranging the food placement, she was able to increase or decrease the consumption of many food items by as much as 25 percent. She concluded that school children can be greatly influenced by small changes in context.

This example has two interesting features. First, at no time were students told what they could or could not eat. There were no mandates. Second, it was quite easy for the students to overcome the food arrangements by changing where they looked, going further down the line, or going to another line. There was no coercion involved. Thus, the decision context of this situation was liberty-preserving.

As the “choice architect” in this situation, Carolyn can clearly organize the context of the students’ decisions. Her placement of food constitutes a nudge. A nudge is “any aspect of the choice architecture that alters people’s behaviors in a predictable way without forbidding any options or significantly changing their economic incentives,” the authors write. “To count as a nudge, the intervention must be easy and cheap to avoid.”

Carolyn can also make the students’ health better or worse off. Thaler and Sunstein argue that Carolyn, as a responsible choice architect, ought to improve their health. She should adopt a paternalistic policy, that is, she should try to “influence choices in a way that will make the choosers better off, as judged by themselves.” When asked about the healthfulness of apples versus chocolate cake, most teenagers would readily admit that an apple is more nutritious. They might actually choose the cake, but in their heart of hearts, they know the difference.

For those who bridle at the idea of paternalism, which has negative connotations, the authors point out one false assumption and two misconceptions. The false assumption is that “almost all people, almost all of the time, make choices that are in their best interest or at the very least are better than the choices that would be made by someone else.” Thaler and Sunstein argue that this assumption is obviously false, and that no one would really believe it upon reflection. It is clearly false when the choosers are operating in contexts in which they are “inexperienced and poorly informed, and in which feedback is slow or infrequent.”

Then there are two misconceptions. One is that it is possible to avoid influencing people’s choices. “In many situations, some organization or agent must make a choice that will affect the behavior of some other people,” write the authors.

The second misconception is that paternalism always involves coercion. As the Carolyn example clearly shows, however, this is not the case. “Some types of paternalism should be acceptable even to those who most embrace freedom of choice,” the authors argue. The responsibility of the choice architects is to preserve freedom of choice while “offer[ing] nudges that are most likely to help and least likely to harm.”

Throughout the book, Thaler and Sunstein are offering up the philosophy of libertarian paternalism. This phrase may sound oxymoronic (like “liberal conservatism” or “heretical orthodoxy,” as one wry Boston Globe reviewer put it), but on closer inspection it seems fitting, at least as Thaler and Sunstein have defined it. Perhaps a less academic way of phrasing it would be “helpful guidance with a light touch.”

Most of us could use a nudge in situations where we are unknowledgeable and inexperienced, where feedback is difficult or infrequent, or where the relation between choice and experience is ambiguous. Not surprisingly, perhaps, these characteristics describe many of our major life choices about wealth, health, and happiness. Being a leader in many cases, then, means becoming the “choice architect” for one’s followers.

Thaler and Sunstein offer some practical tips for being an effective choice architect:

To illustrate their arguments, Thaler and Sunstein discuss how structural nudges can help move Americans toward higher personal savings rates.

“In 2005 the personal savings rate for Americans was negative for the first time since 1932 and 1933—the Great Depression years,” write the authors. Coupled with this disturbing trend is the fact that for many Americans, retirement savings are “woefully low, if not zero.” To fix this dismal situation, Thaler and Sunstein suggest two nudges: (1) automatic enrollment in company savings plans, and (2) a unique “Save More Tomorrow” program that counteracts the natural human tendency to spend more and save less when pay raises are received.

Automatic Enrollment Program: The authors note that for many company savings and retirement plans, the default option is non-enrollment. Thus, people have to do a little work to get enrolled and think about their asset allocations. Thaler and Sunstein recommend making the default choice an automatic enrollment that can be easily waived if desired. “When an employee first becomes eligible, she receives a form indicating that she will be enrolled in the plan (at a specified savings rate and asset allocation), unless she actively fills out a form asking to opt out,” they write.

How effective is this automatic enrollment approach? One study done by Brigitte Madrian and Dennis Shea in 2001 answered this question. In one plan using the old manual “opt-in” approach, participation rates were “barely 20 percent after three months of employment, gradually increasing to 65 percent after thirty-six months.” However, when automatic enrollment was instituted “enrollment of new employees jumped to 90 percent immediately and increase to more than 98 percent within thirty-six months.” The authors point out that “automatic enrollment thus has two effects: participants join sooner, and more participants join eventually.”

Save More Tomorrow: This program encourages participants “to commit themselves, in advance, to a series of contribution increases timed to coincide with pay raises.” The beauty of this approach is that “participants never see their take-home amounts go down, and they don’t view their increased retirement contributions as losses.”

Thaler and Sunstein note that this program has been highly successful. Adopters of the Save More Tomorrow plan include “Vanguard, T. Rowe Price, TIAA-CREF, Fidelity, and Hewitt Associates.” Furthermore, the Profit Sharing Council of America reports that “as of 2007, 39 percent of large employers in the United States have adopted some type of automatic escalation plan,” the authors write. The Save More Tomorrow plan, the authors note, is especially effective when it is combined with automatic enrollment.

This book breaks some new ground. For the study of human motivation, we can now go beyond the traditional “carrot and stick” techniques to a more subtle and effective approach, at least in certain contexts. One can easily imagine a new vista of research opening up in the fields of leadership and decision-making.

In the realm of politics, where debates between promoters of government mandates and advocates of laissez-faire approaches seem intractable, Thaler and Sunstein appear to offer a “real third way,” the humble nudge. Coming from the Chicago school of thought, the authors clearly are not for bigger governments, just better governance. Though this political debate will likely continue into the indefinite future, Thaler and Sunstein have clearly nudged the conversation in a positive direction.

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

Like most important topics, leadership is not easily confined to a single academic field. Researchers across a broad spectrum of disciplines seek to understand causes and effects of good leadership. While this diversity of approaches is positive, the unintended result can be a lack of communication among scholars.

Aiming to bridge such gaps, the Wharton/INSEAD Alliance, a seven-year-old partnership between the two business schools, hosted a conference in late June, bringing together researchers who study leadership from the vantage points of psychology, sociology, strategy, corporate governance, and organizational behavior. Participants, who hailed from academic institutions ranging from Harvard to Hebrew University, gathered for a day-and-a-half of insight-sharing at the Fontainebleau, France, campus of INSEAD.

Drawing on research from their wide variety of academic backgrounds, participants identified six key themes focusing their current thinking and research on leadership.

Gender and Leadership: In recent decades, women have gained an increasing proportion of senior leadership roles. Nevertheless women’s experiences in these roles have been more turbulent and challenging than those of men, a development that was not always anticipated. Conference participants are engaged in research targeted at understanding the drivers of women’s success or failure in the executive suite and the steps that can be taken to improve the collective view of women in leadership roles.

Personal Identity and Leadership: Increasingly, researchers are finding that the role of leadership requires and stimulates changes in individuals’ identities – the way we describe and categorize our defining characteristics, our abilities, strengths, and tendencies. Leadership development, then, becomes a journey of self construction and reconstruction. Conference participants are heavily engaged in understanding the processes that individuals use to transition into leadership roles both publicly and personally, and the mechanisms that organizations may put in place to make the transitions possible.

Leaders and Social Networks: Social networks are a hot topic in the “real world” these days; witness the fascination with online networks like Facebook and LinkedIn, for example. Increasingly, though, researchers have found that the structure of social networks – the informal connections between individuals between and within organizations – is critical to the effective exercise of leadership. Conference participants discussed the role that leaders play in shaping their organization’s social networks and the effects of social network position on a leader’s effectiveness.

Team Leadership: Organization structures have been reinvented over the past three decades with a tremendous emphasis on the work team. Conference participants are studying how team leaders interact with team members to create optimal performance. A team’s age may shape its need for leadership; some leader behaviors and strategies may be effective when a team has just been formed while other strategies may be appropriate when a team has more highly established routines and norms. Further, the membership of the team may determine the type of leadership that’s needed. Teams whose members vary in their values and views present different challenges than those that are more homogeneous.

Leadership, Ethics, and Employee Voice: The explosion of corporate scandals, criminal trials, and bankruptcies is shining a light on the factors that contribute to undesirable behaviors by leaders and their organizations. Conference participants discussed the roots of unethical behavior in organizations and the factors that encourage “employee voice,” the phenomenon of employees speaking up to improve conditions within and between organizations.

The continued fascination with the CEO: CEOs continue to garner praise for the success of their organizations and criticism for their failures. Yet research is mixed as to whether CEOs are truly as effective and powerful as is commonly thought. Conference participants are engaged in untangling this question and, more specifically, in understanding where and under what circumstances the CEO has impact. Conference participants also discussed the effects of perceived CEO effectiveness on CEO pay and other outcomes. When a CEO is hailed in the popular business media as a one of the best, what are the consequences? Recent research suggests that the CEO and his or her immediate subordinates stand to make significant gains in compensation, provided the company continues to perform well. If the company’s performance turns south, so does the CEO’s compensation – and faster than if he or she were not a publicly acclaimed, award-winning CEO.

Overall, the conference provided a tremendous opportunity for leadership scholars to meet, learn about each other’s work, and build bridges for further collaboration in the future. Wharton looks forward to hosting a follow-up conference in Philadelphia in 2010.

Authors’ Note: Andrew Cohen is a Wharton management doctoral student who researches organizational behavior, leadership, and social networks; he can be reached at cohenand@wharton.upenn.edu. Katherine Klein, a co-host of the conference, is a Wharton management professor who researches team dynamics, organizational behavior and leadership; she can be reached at kleink@wharton.upenn.edu.

Harvard Business School professor Clayton Christensen is best-known for his book, The Innovator’s Dilemma, first published in 1997, which conceptualized the powerful force of innovation for disrupting business life. In a new book with collaborators Michael Horn and Curtis Johnson, Christensen applies and extends his thinking to the dilemma of how to improve public education. In Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns, the authors suggest that current methods of teaching no longer match what we know about learning, and how student-centric, technology-assisted teaching can lead to successful education in a globalized world.

Once leaders and managers know the direction toward which they want to steer their organization, they need to convince their employees, suppliers, distributors, and customers to work together to get there. There are a variety of tools, ranging from motivational, visionary speeches to outright threats that managers can draw upon to elicit cooperative behavior. We call these the “tools of cooperation.” Most of these tools, though commonly used, don’t work most of the time. As a result, managers often fail when trying to manage change as the tools they use waste credibility, energy, and resources.

Each cooperation tool’s effectiveness depends on the circumstance the organization is in, as depicted in Figure 8.1. Its vertical axis measures the extent to which the people involved agree on what they want—the results they seek from their participation in the enterprise; what their values and priorities are; and which trade-offs they are willing to make to achieve those results. The extent of agreement can range from none (at the bottom) to complete agreement (at the top). The second dimension is the extent to which they agree on cause and effect—which actions will lead to the desired result. Strong agreement on cause and effect implies a shared view of the processes that should be used to get the outcomes of interest.

Employees in organizations in the upper-left domain of Figure 8.1 share common hopes for what they will gain from being part of the organization, even though each might have a different view of what actions will be required to fulfill those hopes. Microsoft was in this situation in 1995 when Netscape threatened to become the primary “window” through which people would use its computers. Most Microsoft employees and managers wanted the same thing—to preserve the company’s desktop domination—but initially there was little consensus about how to do that.

Many companies that employ independent contractors and unionized workers, in contrast, are in the lower-right corner. These workers may have little passion for a company’s goals but are willing to follow prescribed procedures if they agree that those actions will produce the needed results.

Companies in the upper-right quadrant have employees who agree on what they want and how to get there. Clear consensus on both dimensions makes these organizations’ cultures resistant to change: People are satisfied with what they get out of working in the organization and agree about how to maintain that status quo. Apple Computer sits in this quadrant—the saying in Silicon Valley is that, “Apple put the ‘cult’ in culture.”

Finally, companies sitting in the lower-left quadrant have employees who agree neither on what they want nor on how the world works. The perpetually warring nation-states in the Balkan Peninsula exemplify this.

There are instances in which there is such fundamental disagreement among the parties from whom you’d like to have cooperative behavior that it is simply impossible to reach consensus on a course of action—and yet no one has amassed the power to coerce cooperation. In such instances there is a trump card to play when all other tools have failed, and it does not reside within the agreement matrix. We call it separation— dividing the conflicted parties into separate groups so that they can be in strong agreement with others inside their own group, and yet they don’t need to agree with those in other groups. In the post-Tito Balkans, by illustration, no one could amass and wield the requisite power to maintain peace, as Tito had done. So we tried the charisma of Clinton and sales skills of Blair. We tried democracy and negotiation. We used economic sanctions and incentives. Nothing worked—except separation. Peace came to the Balkans when the need for cooperation across antagonistic ethnic divides was obviated by dividing the peninsula into nations and regions for each ethnic group.

Where do school systems fit into the agreement matrix? For the most part, they are in the lower-left corner of the diagram, with occasional traces in the upper-left quadrant. Teachers, taxpayers, administrators, parents, students, and politicians have divergent priorities and disagree strongly about how to improve. Recall from Chapter 2 the many jobs that society has assigned to schools, from socializing students to live in a democracy to alleviating poverty. Different stakeholders prioritize each of these differently. And all the constituent groups have different ideas of what will cause schools to improve—from more money to more computers; from better teachers to smaller class sizes; from more autonomy to less autonomy; and many more.

The fact that schools are in the lower-left world of disagreement helps us understand why certain remedies that reformers have experimented with in the past have not worked. The model asserts, for example, that financial incentives, like pay-for-performance schemes for teachers, will not work. This tool has been used in a variety of formats in various districts over several decades. Most of these schemes have failed because their efficacy is predicated upon a modicum of agreement on what is wanted and how to get there. The board of almost every school district has a vision statement and strategic plan for how to achieve its vision. But the boards find that these rarely cause their diverse constituents to line up and cooperate in pursuit of those plans. Instead, they get caught up in the daily conflict and compromise that are inherent in the lower-left realm of disagreement.

The scary thing about this situation is that democracy—the primary tool that the law allows—is effective only in the upper-right circumstance, when there already is broad, preexisting consensus on what is wanted and how the world works. And what is worse, like all the tools in the matrix’s culture quadrant, democracy is not an effective tool for radical change. So is it possible that changing public schools is impossible?

We believe change is possible. We wrote this chapter, however, to warn reformers to be wise and realistic. We hope that this book can serve as a roadmap to the future of public education. But knowing what must be done is only a start. Eliciting the requisite cooperation will be tricky. People have tried democracy, folklore, charisma, salesmanship, measurement systems, training, negotiation, and financial incentives. All have failed. We see only three possibilities: common language, power, and separation.

Southwest Airlines’ Colleen Barrett Flies High on Fuel Hedging and ‘Servant Leadership’

By Knowledge@Wharton

Southwest Airlines’ Colleen Barrett Flies High on Fuel Hedging and ‘Servant Leadership’

By Knowledge@Wharton

Johnson & Johnson CEO William Weldon: Leadership in a Decentralized Company

By Knowledge@Wharton

Judgment, Character and Ambition: David Gergen on Leadership in the 2008 Presidential Race

RUSSIA'S BEST-KNOWN INVESTMENT BANKER: Ruben Vardanian, on Building Trust in a Fast-moving World

Q+A by Michael Useem and Valery Yakubovich

Interviewers’ Notes: Michael Useem edits the Wharton Leadership Digest. Valery Yakubovich is a management professor at the Wharton School. This interview was first published in Knowledge@Wharton on June 11, 2008.