September-October, 2009, Volume 13, Numbers 11-12

Real Leadership from Basics to Practice
By Eugenio Guzman 

How Successful is the President’s Leadership Style
By Knowledge@Wharton 

Learning Leadership from the Crucible Experience
By Wendy Parsons 

Former Infosys CEO Nandan Nilekani: “We Are on the Razor’s Edge”
By Knowledge@Wharton 

Channeling the “Animal Spirit"
By Benjamin W. Heineman, Jr.; Published in the Washington Post’s forum, “On Leadership”

“Real Leadership” From Basics to Practice 

By Eugenio Guzman

Eugenio Guzman, director of Operations at Vertical S.A. and an expedition leader for Wharton’s Leadership Ventures, provides an overview of a new book, Real Leadership, by Rodrigo Jordan and Marcelino Garay.  

Eugenio Guzman has served as a guest lecturer for the MBA program of Universidad Catolica in Santiago, Chile, and for an executive program on “Creating and Leading High Performance Teams” at the Wharton School.  He is an active mountaineer and has summitted  Mt. Everest and Lhotse, two of the world’s five highest mountains.

Real Leadership (Liderazgo Real) is the first Spanish publication on leadership to provide an overview of both how it has been has studied and how it can be personally and organizationally improved.  The authors of Real Leadership, Rodrigo Jordan and Marcelino Garay, present and explain the leading models of leadership that are promoted and practiced across a broad range of organizations and countries, and they provide a host of suggestions on how to do so.     

Jordan, who in 1995 was named one of the top 100 leaders for the next century by TIME magazine, is the president of Vertical S.A., a human resources consulting firm in Chile.  He also serves as the chairman of Fundación Superación de la Pobreza for the past five years, Chile´s largest not-for-profit dedicated to overcoming poverty.  He has led three large expeditions to the Himalayas – each resulting in the summit of an 8,000 meter peak, including K2 and Everest.  Garay is a professor of leadership in Chile’s leading MBA program at the Universidad Católica de Chile, where Jordan also teaches leadership.

The authors draw leadership examples from a broad range of sources – ranging from their own extensive experience to history, literature, and film (Dead Poets Society, Erin Brokovich, and The Devil Wears Prada) – and they stress the importance of not only appreciating the major models of leadership but also designing methods to build the skills stressed by those models.  The models range from Paul Hersey and Ken Blanchard’s focus on “situational leadership” to Daniel Goldman’s focus on “emotional intelligence. 

After appreciating the core concepts of a number of leadership frameworks, Jordan and Garay develop their own “Delta Model” of leadership.  It draws on three key principals:

1. A leader should devote approximately half of his or her time to establishing objectives that are clear, shared, common and challenging, and then generating deep and widespread commitment to those objectives.  

2. Following in the footsteps of Jim Collins, a leader should then focus on team selection, getting the right people on the bus.   The team members should bring a range of technical skills; personal skills such as perseverance, initiative, emotional intelligence, and creativity; and social skills such as conflict management, empathy, negotiation skills, and effective communication.

3. Finally, a leader should actively work to promote a set of values with an overriding  emphasis on excellence.

The Delta leadership model is intended to get the right people committed to doing the right thing in the right way.  It has been created to assist those leading a variety of organizations, from corporate executives and national leaders to non-profit directors and even those managing a household.  It stresses the importance of bringing leadership to all aspects of our lives, whether organizational change, personal development, or social improvement.  As Google’s director of leadership development, Evan Wittenberg, has noted, “This book is not for those who simply want to be on top of everything; it is for those who are driven by the desire to have a positive impact on the world.”

How Successful is the President’s Leadership Style 

By Knowledge@Wharton 

With many of President Obama’s key agenda items still unresolved midway through his first year in office, a debate has started to brew over the effectiveness of his leadership strategy and style. Critics say his agenda is too broad and that he is yielding too much authority to Congress. But leadership experts at Wharton suggest that this approach may be necessary, given the multitude of challenges the President inherited when he took the oath of office.   

By seeking major overhauls of health care and financial regulation, spending billions to stimulate the economy while reducing its impact on the environment, and unwinding one war while escalating another, some critics question whether Obama is trying to tackle too many problems at once. By doing so, they argue, Obama ignores the legacy of past presidents who maintained a more steady focus – such as Ronald Reagan, whose first year in office was devoted almost solely to his tax-cut plan and related measures, while Cold War diplomacy and other issues were placed on the back burner.

Among those well-known voices who argue that Obama’s first year should be focused on the economic meltdown – while other key issues can wait – is billionaire investment guru Warren Buffett, an Obama supporter, who has been quoted as saying that “[you] can’t expect people to unite behind you if you’re trying to jam a whole bunch of things down their throat.” Not surprisingly, Obama and his aides disagree, contending that an economic crisis presents a rare opportunity for accomplishing major changes in the body politic. “We don’t have the luxury of choosing between getting our economy moving now and rebuilding it over the long term,” the President said earlier this year.

Short Attention Spans

“We’ve known for a long time that attention spans are limited; as soon as we focus on one issue [our attention is taken away] from other goals or issues,” says Wharton management professor Adam M. Grant. “But leaders can get around that by developing a broad, unifying concept,” and then showing how each part of his or her program fits that well-understood goal.

Michael Useem, Wharton management professor and director of the Center for Leadership and Change Management, argues that a key criterion of presidential leadership is boldness in taking on the most challenging problems – and he gives Obama high marks for now. Anyone who wants to succeed in the nation’s highest office, he adds, “needs to embrace a willingness to make big decisions, to get into the game, to take on these wrenching issues that often have extreme conflict and pressure, with all kinds of advice coming in. But it’s also critical that he doesn’t shoot too much from the hip or give in to absolute paralysis.”

Useem says Obama’s approach to health care – ceding Congress a critical role in designing the plan and adopting a less than rigid stance on the specifics – is an example of another of the new President’s important leadership traits: Pragmatism. “If you go back and look at the election, health care was a huge, animating force in many of the states where he got a majority [of the votes], and he hasn’t forgotten that. But he is short on ideology and long on pragmatism.” Useem suggests that Obama’s management style is almost military in nature, comparable to calling on the knowledge and expertise of field commanders closest to the front lines to develop the tactics needed to achieve the broader strategy.

Stewart D. Friedman, a Wharton management professor who directs the Wharton Work/Life Integration Project, suggests that those who say Obama is taking on too many issues ignore the realities of the complex array of problems – not just the economy, but also ongoing wars in Afghanistan and Iraq – that he confronted from the moment he took the oath of office. “The short answer is that he didn’t have a choice when you look at the scope of the challenges we face as a country. How can you not deal with any of these? How can you not deal with health care or foreign affairs? I think the challenge for him is to have each piece of his leadership agenda cohere as a unified package.”

Obama himself has cited two former presidents as role models for leadership: Abraham Lincoln, who forged ahead with the transcontinental railroad project even as he waged the Civil War, and Franklin Delano Roosevelt, who, under the rubric of fighting the Depression, addressed everything from the electric grid (establishing the Tennessee Valley Authority) to problems facing senior citizens (setting up Social Security).

Lacking a Clear Vision

But Alvin Felzenberg, a lecturer at the University of Pennsylvania’s Annenberg School of Communications and author of a book on the presidency, The Leaders We Deserved (and a Few We Didn’t), says Obama has so far fallen short of those presidents who are most admired for leadership, and he argues that the lack of a clear overriding vision for his administration has been the main reason why.

Felzenberg – who worked as an aide to several moderate Republicans, including former New Jersey governor Tom Kean – says Obama’s decision to give Congress such a powerful role in drafting and debating key ingredients of his health care plan has resulted in a muddled vision that will be very difficult to sell to skeptical American taxpayers. “The President needs to take a long vacation, and he needs to take a legal pad and sit down, out of the public view, and ask himself how ... he wants history to remember his presidency after four years, or after eight years.” Noting that President Dwight Eisenhower is still hailed for spearheading America’s interstate highway system in the 1950s, Felzenberg points out that Obama’s $787 billion stimulus package allocated just 11% of its funding for projects like roads and bridges, with the rest for tax cuts, local governments and other purposes.

Still, Wharton’s Grant sees a lot of opportunity for Obama – but only if the President does more to show how issues like health care and the economy are interrelated, and how the programs stem from broader values that he shares with the American public. “It’s very difficult to change people’s values and attitudes,” Grant says, “but it’s much more feasible to get change by connecting it to values and attitudes that people already have.”

Grant adds a caveat: It’s easier to tap into those abstract values – notions of freedom and fairness, for example – by using very concrete examples from everyday life that Americans can relate to. Indeed, this was an area in which Reagan was a pioneer, with his practice of inviting soldiers or homeless advocates to attend the State of the Union Address, during which he would call attention to their achievements.

Outsourcing Leadership

Grant suggests that Obama should work publicly with experts to win confidence for his programs – perhaps a general to speak about the situation in Afghanistan or respected doctors who back his health care plan. “There are studies showing that leadership can be outsourced,” Grant notes, adding that Americans have indicated they respond better to messages from people who have “first-hand experience, expertise and knowledge about the issues.”

However, outsourcing might also take away from what some experts consider to be one of Obama’s strongest points as a leader – his own ability to speak at length about complex issues in a way that is intelligent, rational and even calming. Wharton’s Friedman, for one, believes Obama’s soothing nature as a speaker may explain his appeal more than any ability to simplify his message. “His sense of competence and calm, and the pragmatic way that he’s been able to get things done to date, have given people a lot of confidence,” says Friedman, describing Obama as “unflappable.”

Useem notes that according to David Gergen, who has advised four presidents, one of the most important elements of presidential leadership is ambition – not the personal kind, but an ambition for the country. “As President, Barack Obama is very ambitious. We know the list – the litany of objectives like health care, economic recovery, ending two wars and changing the way that the court system and Congress operate.”

Aiming to tackle so many issues in his first term is emblematic of another essential leadership quality – risk-taking, according to Useem. While Obama has made it clear that he has studied former leaders – especially Roosevelt and Lincoln – he needs to be careful not to be perceived as trying too hard to copy or imitate any one or two specific past presidents. ”If it looks like he’s trying to emulate someone else, people are not going to like that.”

But both Useem and Friedman say they believe that authenticity – and Obama’s appearance of being comfortable with who he is – have so far been one of his strong points.

Friedman – the author of Total Leadership, a book about integrating work and family life – has also been impressed with the way that Obama presents himself as a normal dad and a husband who still takes his wife Michelle out for “date night.” That image of a real-life family man could help him sway public opinion, Friedman believes. “He has a kind of humanity – he’s able to laugh at himself. That is a critical feature in building trust, because the way that a leader does that is by conveying authenticity.”  
 

Learning Leadership from the Crucible Experience  

By Wendy Parsons 

How you define yourself as a leader emerges from your own life story, according to Nick Craig, co-author of Finding Your True North, president of the Authentic Leadership Institute, and faculty member of Wharton Executive Education’s Advanced Management Program (AMP). “Authentic leadership is defined by who you are at your core, based on the values and principles that guide your life,” Craig says. “And, it manifests in times of crisis – ‘crucible’ experiences that test your mettle and reveal what your purpose as a leader is really all about.”   

One executive recently shared a crucible account in the Advanced Management Program about how his leadership was tested in several life-and-death moments – not just his own but also those of the 3,000 people who worked for him.   

Dolf van den Brink served as commercial director for Heineken in one of the world’s most extreme business environments – the war-ravaged Democratic Republic of the Congo.  According to the United Nations Human Development Index, this region of Africa ranks in the bottom five for poverty and the top five for corruption.  It is considered the worst place in the world to work, according to an assessment by the IFC and World Bank.  

In this rock-bottom business environment, van den Brink was often called upon to make split-second decisions with critical consequences. “I’ve been in situations where people have tried to hijack me for ransom, and where I’ve had to physically fight to get free,” he recalled.  

At other times, the fate of his employees and the brewery had rested upon van den Brink’s decisions. “When serious fighting erupted in the center of Kinshasa close to the brewery,” he said, “I had to make tough choices that would not normally be within the scope of a business manager.” 

With missiles falling on the brewery during the conflict, van den Brink had 250 people inside the brewery with fighting just outside the gates.  Cut off from television or radio, employees in the surrounding area were unaware of the danger awaiting them as they made their way to work.  When they arrived, they found themselves caught in the crossfire, but they could not enter the brewery since the gate had been locked against the violence.  

Their fate rested with van den Brink.  Should he risk the lives of those in the brewery by allowing in the 15 or so employees seeking access?  He worried that there may be hostile militia right behind them, ready to storm the complex in if the gate were opened.  Van den Brink first turned to his security manager for his recommendation, but the security manager reported that he could not rule out the possibility that there was half an army waiting to storm the place if the gate opened.  

“The lives of the employees outside the gate were in jeopardy, and I had about 10 seconds to make a decision,” van den Brink explained. “This was not your typical business decision!  Nobody prepares you for this.”  

Van den Brink decided not to open the gate.  Instead, he ordered another gate opened to another area in which nobody was located.  Still, several hundred meters separated the two gates, and in making their way to the second gate, half of the outside employees were captured by the fighting militia and forced to assist them in moving crates of grenades, The other half did successfully reach the gate.  Eventually, all were able to enter with no militia behind them.  “Nobody got killed, and there were no serious injuries,” he said.  “But I asked myself later, what if someone had been killed?”  

These moments of great consequence, what Nick Craig calls being in the “crucible,” bring into high relief a leader’s deepest values and principles.  Van den Brink had made the very difficult decision to safeguard the 250 people already in the brewery and, in doing so, placed those outside the gate at risk.  For van den Brink, the Congo experience – his crucible – helped him to more sharply appreciate his bedrock leadership principle of making fast decisions that optimize collective welfare.  

Leadership, in the view of Craig, requires first understanding one’s own values and principles, and he believes that personally challenging moments can be especially instructive.  “It is through looking at our crucible stories and pulling out the gifts in them that we best appreciate our leadership values and principles,” Craig says.  As wrenching as such moments can be, they can also serve as a powerful learning experience. For van den Brink, his crucible experience and what he has learned from it will serve him well in his new role as president and CEO of Heineken USA.
 

Former Infosys CEO Nandan Nilekani: “We Are on the Razor’s Edge”

By Knowledge@Wharton

When Nandan Nilekani was the CEO of Infosys, one of India’s top IT and outsourcing firms, he often found himself being forced to answer questions not just about his company but also his country. Sometimes, global business executives who visited the company’s sprawling campus in Bangalore would raise issues to which Nilekani had no answer – such as, “Why does Infosys have such a beautiful campus, but also large slums in other parts of the city?”

So when Nilekani decided to write a book, unlike other CEOs who write about their favorite leadership or management theories, he chose India as his subject. In Imagining India: The Idea of a Renewed Nation, Nilekani tackles themes ranging from education and demographics to investment and infrastructure. Nilekani, who was recently recruited by Indian Prime Minister Manmohan Singh to head a project to create a national identification card for the country, spoke with India Knowledge@Wharton about the book at the recent Wharton India Economic Forum in Philadelphia.  An edited excerpt of the interview follows:

India Knowledge@Wharton: Normally when corporate CEOs write books, they tend to write either about their biggest deals or about their perspective on management theory or philosophy. You wrote a book about India. Why?

Nandan Nilekani: Well, you know, I wanted to do something different. My role in the last several years has been going around the world and projecting India in global forums and all that, and I was not able to answer a lot of questions that people would ask me. They would ask me, “Why is it that you have such beautiful campuses like Infosys and such large slums? Why is it that there are so many billionaires and so many poor people? Why is it that you have all the educated people in technology and the world’s largest illiterate population? Why is it that you guys seem to coexist in the 17th Century and the 21st Century at the same time?” When asked questions like these, I was not able to give very convincing answers, so I felt the need to get down to the bottom of, “Why are we the way we are?”

The other important thing, I felt, was that India had a very small window of opportunity. It had this huge demographic dividend and this young population, but that demographic dividend could well become a demographic disaster if we did not make the right investments in our human capital. I felt that window of opportunity was passing by, so I thought it would be good to write it down and say, “Hey guys, we have this beautiful opportunity, let us not mess [it up].”

Also I found that a lot books on India were written from a particular perspective, an economist’s view or a sociologist’s view. I felt that to really give India its due you had to take a much more holistic look at it – which is why I looked at the country from all these angles. I interviewed 126 people, and it is a sort of a composite of all that.

India Knowledge@Wharton: In the introduction you say that the most important driver of growth lies in expanding access to resources and opportunity. What are the major barriers that block this access for millions of Indians, and how can they be removed?

Nilekani: One clear barrier to access is education. The opportunities for somebody, say, who lives in Bangalore and goes to an English medium school and goes to the Indian Institute of Technology [are] dramatically different from a young child in Bihar who does not have a school in his village. And, therefore, access to education and providing good education in the public space is very important.

Second is access to English. We have really practiced very hypocritical policies on English. We have denied English to our people and, therefore, they have not learned the language. English has become the language to participate in the global economy.

Or consider access to roads. If you live in a village and need to go to school, you need to have a road to go to school or you need lights at night to study. These are very simple things. If you deny people these basic instruments–of education, health, infrastructure, jobs – then you are bound to deny them access to building a better life.

India Knowledge@Wharton: Let’s go back to the phrase you used a little earlier, the “demographic dividend.” In the 1960s, India’s population was seen as a burden but now you use the term “human capital” to describe India’s population. How do you think that the demographic dividend divides across the country? Is it growing at the same pace or are there regional differences?

Nilekani: There are three or four things here. A demographic dividend is typically a point in the country’s history when the bulk of its population is in the working age of 15 to 65. And, therefore, the country has a low dependency ratio. In other words, they support fewer retired people and have more people to work – and that is typically the Golden Age of any nation. Since you have more people working, you have more creativity and so on. India is very fortunate to be having its demographic dividend now; it is the only country in the world which is having its demographic dividend. So it is not only a young country with a dividend, it is a young country in an ageing world – and this opens up even more strategic possibilities.

India’s demographic dividend is not one curve; there are two curves. There is one curve, which is in the south and the west of India, which is almost fully absorbed. By 2015, the south and the west will start ageing. There is a second curve–which is in Middle India, which includes the central states of UP, Bihar, Chhattisgarh, Orissa, Madhya Pradesh–and that is going to be the next demographic bubble. Unless we address very fundamental issues in that region – of education and access and all that – that is really going to be a big challenge. Today you see, for example, many problems of migrant workers coming to Mumbai, and the [hostile] reactions to them. What you see is really a small part of what will happen if we do not address this very quickly, because in the years from 2001 to 2025, only 12.6% of the new population in India is going to be in the south; 50% is going to be in the northern states. There is a huge difference because fertility rates in states like Kerala today are like a West European country; it is one-third of what it is in Uttar Pradesh. We have to understand these nuances of what is happening, to really think through what we need to do.

India Knowledge@Wharton: How should India deal with this second bubble?

Nilekani: It has to be addressed by expanding access [for] that young population. It is about improving the quality of schooling; it is about better infrastructure; it is about job creation there as opposed to job creation by migration. For all these things, we do not have much of a window. We have maybe four or five years to pull it off…because, otherwise, the pressure of the disparities will go up even further.

India Knowledge@Wharton: Much like the issue of India’s population, there is another area where the country has seen a sea change in its thinking. Soon after independence in 1947, it was assumed that India needed democratic socialism. You point out in your book that there has been a transformation in this way of thinking, with much greater acceptance of business-friendly, capitalist policies. But now, when you come to the U.S., and see what a mess the subprime crisis has made of this economy, is this the kind of economic system that India needs? What kind of capitalism does India need?

Nilekani: I think the message is that we need to find the right balance between markets and regulated society. If you have markets that are unregulated and untrammeled, they can lead to a situation where they create the kind of challenges we have in the U.S. And then you have the reaction to that, which you are seeing today.

The challenge is to find the right balance. India has the opportunity to find the right balance, because we had veered too much to one side. [That] does not mean that we have veered too much to the other side. But [we need to] strike the right juxtaposition of entrepreneurship, business and the markets. I know that you need market forces and entrepreneurs to create jobs, to create innovation, to create new products and services, to improve productivity, to improve the quality of life and so on. You cannot do that [via] the state. But you need the state to create a regulatory and other frameworks, and rule of law to ensure that businesses play within the same playpen. I think that is the message from what is happening here. India is very fortunate that it has, I believe, the largest array of entrepreneurs anywhere in the world, except the U.S. We have large companies in the family sector; we have large companies in the public sector; we have large global companies; and we have thousands of young entrepreneurs. It is a diverse and rich base that we need to take advantage of.

India Knowledge@Wharton: Your book also talks about the impact of technology in transforming different industries. You also write about the success of India’s IT sector in providing IT services and BPO services to the world. Alongside this success story, though, along comes the Satyam scandal. (In January 2009, Satyam Computer Systems chairman Ramalinga Raju resigned over the falsification of the company’s accounts – the company has now been acquired by Tech Mahindra.) What sort of an impact has that had on the way Indian IT companies are perceived?

Nilekani: Satyam was a specific case of fraud. It happened to be somebody who was in the IT sector, who also got into some real estate activities. So, it was a case of fraud. I do not think it in any way takes away from the enormous success of what technology has done [for the] Indian economy and society.

India Knowledge@Wharton: Tom Friedman, in the Foreword to your book, calls you “the great explainer.” What I am hoping you will explain is how such a huge fraud could go on undetected for such a long time. When you talk to your clients, do they see this as an isolated instance?

Nilekani: Yes, absolutely it is seen as an isolated instance – because it is a case [of] one entrepreneur going errant. I guess it is all part of what happens in a bubble. I mean, look at the Bernie Madoff $50 billion scam. Nobody seemed to know about it and some very, very influential and knowledgeable people seem to have put money there. It is difficult to say where you draw the line on these things.

It was an unfortunate episode because we have been trying to project India’s entrepreneurs as the new face of India. This incident took us back, because the whole argument was predicated on the statement that these were good, honest entrepreneurs. It was a setback for the Indian image we wanted to build, but it is very much an isolated instance. I think we have excellent companies today in India which are –- and I think the technology story is huge because people tend to see the technology story as the stuff which has to do with outsourcing – which is a huge achievement.

But how technology has been used within the country is an equally compelling story. In India’s recent election with 700 million voters, some 1.1 million voting machines were deployed and they were all electronic. No other country on the planet has gone to a completely electronic way of voting.

Moreover, consider what people at ICICI Bank have done using technology. I have offered  many such case studies in my book. They have transformed the way the common man gets access to banking. I think technology has played a huge role not only in the external side but also domestically.

India Knowledge@Wharton: In India much grumbling is heard about the infrastructure goes, but as you note in your book, in telecommunications infrastructure has worked extremely well. Are there any lessons that the rest of India could learn from the telecommunications experience?

Nilekani:  Yeah. I think a couple. Telecom is a huge story and today we are talking about [adding] 8 million [new] mobile phones a month; 99% of the mobile phones are prepaid which means they are being taken by people who do not have a credit history. And 40% of the prepaid charge is less than 10 rupees (20 cents) a pop, which is a phenomenal achievement of really creating a mass movement.

I think a part of it was the regulatory environment being changed. There are some challenges there but still it is trying to create a playing field between both public and private money. And also I think technology played a big role because you had a huge Moore’s Law kind of thing operating there. [In a 1965 paper, Intel co-founder Gordon Moore postulated that the number of transistors that could be built into an integrated circuit chip had doubled roughly every two years since 1958 and would continue to do so for the foreseeable future. This formulation of what has come to be called Moore’s Law has been used to explain the fall in technology prices.]

The infrastructure is growing elsewhere too. Airports are coming up: the Bangalore Airport has come up; the Hyderabad Airport has come up; Bombay and Delhi are getting redone. The highways, of course, did slow down a bit; but there has been a lot of movement on highways. I do see a lot of improvements in infrastructure.

India Knowledge@Wharton: One last question: Since your book is titled, “Imagining India,” what kind of an India would you imagine for your grandchildren and their children?

Nilekani: My point in this book is to say that India is at a strategic opportunity. This is a result of its demographics, its entrepreneurs, its technology prowess, its democracy, the fact that the world is ageing while we are young; the fact that we have English as a language. All these are unique attributes.

If we make full use of this opportunity, India could be a role model for the 21st century. The reason is that you are talking about a billion people reaching prosperity, living in a peaceful manner, in a democracy, handling extraordinary diversity. I mean, the whole issue today is the so called “clash of civilizations.” India has – daily – all those civilizations, and yet they all co-exist. The ability to show this combination of development, diversity and democracy, will make India a very successful country, if we do it right.

But we can also go the other way. The same demographic dividend could turn into a disaster if we do not harness the energy of our people well. Once their aspirations have been unleashed, they could become disgruntled and disaffected by lack of jobs and lack of economic growth, and then they can also become a source of violence and divisiveness. We are on the razor’s edge. It is up to us to decide whether we go this way or that way.

Channeling the “Animal Spirit” 

By Benjamin W. Heineman, Jr.; published in the Washington Post’s forum, “On Leadership”

We can describe what should happen inside financial institutions – but the real question is how to confront the powerful forces that drive a short-term culture focused heavily on remuneration and which are resistant to change.

Four fundamental, interrelated governance actions inside corporations are essential to create real economic value (not the paper chase that brought the sector low), to enhance accountability, to increase the confidence of investors and other stakeholders and, in this era importantly, to ensure that the public trust and public mission of finance is honored.

• Boards of directors must redefine the role of the CEO–and then choose a leader who meets the new spec. The CEO’s first foundational task is to achieve a core balance between taking economic risk and creating economic value (promoting creativity and innovation) and managing economic risk (within a systemic framework of financial discipline) over a sustained period of time. The second foundational CEO task is to fuse this high performance with high integrity–-tenacious adherence to the spirit and letter of formal rules, voluntary adoption of ethical standards that bind the company and its employees, and employee commitment to core values of honesty, candor, fairness, reliability and trustworthiness which together address legal, ethical, reputational and public policy risk.

• Boards and business leaders must institute new management development processes for corporate P&L and functional leaders that, at early stages in their careers, put strong emphasis not just on achieving commercial goals but on developing the experience and skills to do this through balanced risk-management and performance with integrity. This should be a talent-management imperative as individuals rise within the corporation and face greater challenges in all dimensions.

• Boards must completely redesign compensation systems to reward these redefined foundational CEO and top leadership behaviors. Measurements for durable, sustainable economic performance, sound risk management and high integrity embedded in daily business operations must be developed. They must form the basis for compensation paid out not just annually but systematically over time, with good or bad results on those new measurements yielding more or less compensation . The huge naked annual cash payout and stock-option grant based only on stock price increases should become extinct.

• Board “oversight of strategy” should focus on the highest priority risks and opportunities along these three dimensions of the redefined CEO role and redesigned compensation –-economic performance, risk management and integrity–-with reviews both of this year’s efforts and also of results over a longer-time horizon. These issues should be core agenda items for the boards of a growing, sustainable and durable companies.

Although corporate rhetoric might suggest that these fundamentals are recognized, corporate reality suggests that they are not. Within the financial sector itself, few leaders have been heard to criticize the short-termism, lack of risk management, improper compensation incentives, failure to act with integrity in the public interest, despite the failures of the sector that nearly drove the world economy into a depressions.

The harsh reality is that business organizations must be designed–-by boards at a conceptual level and business leaders at both a conceptual and operational level–-to check greed, stupidity and corruption and to channel capitalism’s “animal spirits” into sustained, durable creation of real economic value within a framework of financial discipline, law, ethics and values.

The necessary changes inside financial institutions may be stymied by some fundamental forces:

• The labor market for executive and financial talent drives companies to short-term behavior that may lead to a selfish culture with excessive risk-taking. Unless the company can develop a strong culture of loyalty which promotes other values, then individuals who want only to maximize their income will defect to non-regulated companies, if public policy seeks to address this problem in a certain class of financial institutions, or to other jurisdictions with weaker rules (regulatory arbitrage).

• The short-termism of today’s stock market puts pressure on companies which seek to act in the longer term and to reward executives and money-makers for accomplishments on economic performance, firm enterprise risk and strong integrity over time.

• Calling for more shareholder involvement in company leadership may be letting the fox in the chicken-coop. There is no such thing as a “shareholder” but instead a menagerie, with an increasingly number focused only on the short-term and on beating bench-marks with little interest in the long-term economic growth of the companies whose stock they own.

• It is difficult to define the right-sized role of the board (see basics above), and even more difficult to find experienced, broad-guaged and tough-minded people who can define, select and support a new type of CEO, maneuver through the shoals of the labor market and resist short-termism. For example, boards need to find new compensation experts–not individuals who know how to manipulate different compensation mechanics and how much the person next door took home but a real business expert who can understand what metrics for performance, risk and integrity are appropriate and how to assess those over time to link with proper compensation.

The core truth is that without strong boards selecting strong business leadership with a more balanced mission and the ability to create a strong culture, there is a high likelihood that we will return to the excesses of the past. With respect to internal leadership of institutions, regulations can point in the right direction and impose some process requirements, but they will not accomplish the task.

The innovation, wealth creation, integrity, safety and soundness of financial institutions turns, as it always has, on its top leaders. The basic question is whether the sad past of business leadership, as we move through the crisis and green sprouts become trees that obscure the forest, is unfortunate prologue.

Note:  Benjamin Heineman is a senior fellow at Harvard’s schools of law and government; former General Counsel for General Electric; and former assistant secretary for policy at the U.S. Department of Health, Education and Welfare (now Health and Human Services).  The Washington Post’s “On Leadership” website can be accessed at http://views.washingtonpost.com/leadership.