What is welcome and all too rare? Leaders who care about building great institutions, not just profits. What sets these leaders apart in their practice and outlook?
Harvard Business School's Michael Beer in his new book, Higher Ambition: How Great Leaders Create Economic and Social Value, examines how CEOs from major companies around the globe—Becton Dickinson, IKEA, Tata Group—made a positive difference for their employees, their customers, their community, and society while not neglecting profits. Beer cowrote the book with Russell Eisenstat, Nathaniel Foote (Harvard MBA'81/JD'82), Tobias Fredberg, and Flemming Norrgren.
"The world of business has been governed by an implicit leadership model," Beer explains. "With the exception of a minority of CEOs, however—those we interviewed and others like them—the purpose of the firm is defined by a single-minded focus on return on financial and physical assets, not creating social value."
Higher-ambition leaders, as the authors call them, also make decisions about long-term relationships with all their stakeholders in mind. "Consider United Stationers' strategy of 'enabling our partners to succeed,' or Becton Dickinson's concern with creating healthy lives, not just profits, from its medical products. Higher-ambition leaders craft a distinctive set of practices, outlined in our book, to enact the multiple stakeholder perspective."
In addition to being the Cahners-Robb Professor of Business Administration, Emeritus, at HBS, Beer serves as chairman of the consultancy TruePoint Partners and of its educational and research institute, the TruePoint Center for Higher Ambition Leadership. In the e-mail interview that follows, Beer talks about the book and what boards and business schools can do to cultivate higher-ambition leaders.
Martha Lagace: What is missing in leadership models today?
Michael Beer: Most formal leadership models do not incorporate institution-building in their definition of leadership. Leadership is thought of as a means for activating change, employee engagement and motivation, ethical behavior, improvement processes of one kind or another, innovation, and so on. With a few notable exceptions—including Jim Collins's work on "Level Five" leaders, and the treatment of leadership both in my previous book, High Commitment, High Performance, and in Higher Ambition—however, there are few leadership models that explicitly address the leaders' role in building a "great institution": one that does "well" (produces financial results) and "good" (contributes to the larger good).
Q: Who are higher-ambition leaders?
A: In our book we explicitly selected leaders who defined their purpose as creating economic and social value. The goal of the corporation is to add value to employees, customers, suppliers and other partners, and community/society. These CEOs and the companies they lead make decisions with the interests of these other constituencies in mind. Higher-ambition leaders are concerned with long-term relationships, not transactional relationships where immediate price (for employees, salary) and cost are the only factors in decisions.
Q: You and your coauthors spoke with 36 CEOs based on three continents. Why did you choose these particular people to study?
A: We started out to find outliers: CEOs who produced outstanding economic and social value. Every successful CEO produces the first, but too few frame the purpose of their firm or behave in a way that illustrates their concern with social value. So we had two criteria that CEOs and their companies had to meet.
The CEOs we chose to study must have had a compounded annual growth rate in revenues, profits, and market capitalization that exceeded the 50th percentile of industry peers between 1997 and 2006 or for the CEO's tenure. Corresponding figures were used for public or privately held companies. There was evidence from the public record—articles, speeches, and views from those with direct knowledge—that the CEO was concerned with developing a people-centric, high commitment culture.
In effect, we searched for CEOs who were leading high commitment, high performance companies like those I described in my previous book. They were successfully creating commitment to the firm and its purpose in all their stakeholders. We wanted to take a deep dive into how these CEOs thought, spoke, and described their stewardship of the company.
I want to emphasize that in no way did we set out to prove a relationship between the practices of these CEOs and financial performance. There is already ample evidence to support this. We wanted to understand what this model of leadership looks like close up.
Q: One key to success is that these leaders align strategy and organization instead of treating them as separate realms. How do higher-ambition leaders align strategy and organization?
A: The CEOs we interviewed align strategy and organization by first and foremost developing and defining the direction of the company in a different way than do most CEOs and companies. They began the search for what markets to serve and what products or services to offer by first looking inside. Contrary to most companies that begin by looking at markets and competition, these CEOs looked inside to define "who" the company was—where was the most powerful intersection between their company's capabilities and purpose and the passions of their people with marketplace opportunity. These CEOs spent a great deal of time crystallizing their values and purpose and how strategy could be defined in a way that integrated strategy with values.
In this way the animating beliefs of the leaders, the employees, and the company's strategy were aligned. It was what we call in the book "forging strategic identity." Sometimes, usually with startups, this is done at the beginning of the CEO's tenure. In other instances this way of thinking develops over time. This process is often accompanied by divestment and sale of businesses that the company should not have entered in the first place.
The example we use in the book is Nokia. Consultants from a leading strategy consulting firm had recommended that Nokia should absolutely not be in the cell phone business. (Nokia already had engineers and resources for this but they were underdeveloped.) Nokia's CEO knew, however, that the passion and capabilities of the company lay in its cell phone business, and that there was a unique market opportunity to transform [cell phones] from an expensive tool for the rich to an affordable and transformative tool for communications in both developing and more mature economies. He sold off many other unrelated businesses to successfully focus on this one, with remarkable success until very recently.
Having forged an identity that defines strategy and the company's animating beliefs and values, higher-ambition leaders work hard to enroll everyone in this strategic direction through a variety of practices. They spend an enormous amount of time engaging their employees in communicating and further refining the company's strategic identity. Val Gooding, then the CEO of BUPA in the United Kingdom, gave talks and encouraged much discussion of the company's direction in many locations over a long period. Peter Sands at Standard Chartered Bank worked with his immediate leadership team to define the bank's values and strategic direction and then engaged his top 300 staff in the same process. Ed Ludwig, CEO of Becton Dickinson, appointed a task force to interview 250 key staff about the company's strengths and barriers to achieving a new direction.
This engagement enabled our leaders to:
- forge demanding goals to which people were committed;
- create a community of shared purpose, one in which people are committed to the larger good of the company as opposed to their department or themselves;
- hire people whose values and skills fit the culture and strategy, thus reinforcing and sustaining the community of purpose.
In addition, leaders spend a great deal of time on leadership development. In the case of former Campbell Soup CEO Doug Conant, he taught in a leadership course that he had designed for the company's high-potential managers. In all cases, higher-ambition leaders identified future leaders and developed them—usually through cross-functional and cross-geographic career paths.
Q: How does someone earn the right to lead? What personal attributes were crucial among the leaders you have studied?
A: There is no substitute for leaders personally meeting employees. Leif Johansson, CEO of the Volvo Group in Sweden, did a lot of that when he took charge. He made an important decision to locate headquarters where most of the employees in Sweden were. Russ Fradin, of Hewitt Associates, said that early in his tenure he spent three-quarters of his time going around. I think he met with 72 clients in the first 100 days, just hearing what they had to say.
Making yourself vulnerable increases trust and commitment. When Becton Dickinson's Ludwig owned up to his responsibility for problems with a multimillion-dollar IT system brought to him by a task force he had commissioned to speak truth to power, and then outlined his commitment to fix the problem, he earned trust. In one way or another, the CEOs we studied were able to engender trust by holding themselves accountable publicly.
Q: Your book analyzes leaders primarily in public for-profit companies. What is different about being a higher-ambition leader at a public or private firm?
A: Private company leaders have a great deal more freedom to take a long-term view of the firm. There is substantial evidence for this: see Danny Miller and Isabelle Le Breton-Miller's book Managing for the Long Run: Lessons in Competitive Advantage from Great Family Businesses. These leaders also start with the motivation to leave a legacy and build an institution, something that does not come as easily to public company leaders, with the exception of the higher-ambition-type leaders we studied.
Public company leaders have the constraints of capital market expectations for short-term quarterly earnings. They live in a world in which the conventional but incorrect wisdom is that their exclusive purpose is to produce ever-higher shareholder returns. So it is the extraordinary leader who has the courage to break out of that frame and define a higher ambition. The public company leader simply has more headwind and therefore needs more conviction, skills, and courage to fashion and execute against a higher-ambition agenda.
Q: Many companies in your book have a global reach. At the same time, however, they are often connected to a local identity or home base. How do higher-ambition leaders view culture? How do they treat culture as an asset?
A: Some of the companies in our sample had developed a strong, locally oriented culture. Examples include Cummins and Herman Miller. Their respective cultures were rooted in the values of the small towns in which they were headquartered. Building a global culture required reshaping the culture around a broader set of values that would attract and motivate a diverse global community.
The challenge, of course, was to create a community of shared values and purpose from a much more diverse set of people ethnically, religiously, nationally, and so on. The leaders did this by developing an identity with a common mission and a set of human values that everyone could connect with. People around the world value trust, want meaning out of work, and want to do good and well. In the example of Standard Chartered Bank, people from a diverse set of countries and backgrounds could relate to and become committed to the goal of dramatically reducing preventable blindness worldwide. United Stationers, not in our sample but a higher-ambition company, has been able to use higher purpose to do good: Employees want to help others through community projects they define and work on together. And by collaborating around "worthy" community projects, employees team up better around business issues.
Q: Boards and business schools, for different reasons, do not cultivate higher-ambition leaders. How should they?
A: Boards need to begin to change their frame for how they evaluate management and firm effectiveness. They should be asking their CEO what kind of an institution they are building. Does the CEO and the firm have a higher purpose? What is she or he doing to create a healthy institution that can deliver long-term and sustainable success? Boards should spend time assessing whether the CEO has created a strategic identity, a community of shared values, and trust-based relationships with employees, customers, community, and investors. Boards often do not ask the right questions about these things nor have the data to know if it is happening.
In a recent article in Directorship magazine, Nathaniel Foote and I suggest that boards need to create mechanisms for learning the truth about what is going on in the firm. Consider how things might have gone differently for some failed firms like Washington Mutual and Lehman Brothers if the boards had insight into the prevailing culture and the leader.
Business schools are teaching ethics and corporate social responsibility, but they do not teach these subjects in the context of building a higher-ambition or a high commitment, high performance firm. Students learn about finance and organizational behavior, for example, without ever learning how to integrate these and many other disciplines (marketing, operations, etc.) into a coherent, internally consistent set of practices that collectively reinforce a higher- ambition mission. If financial considerations require cost cutting, what should be the stance of the company toward layoffs if management also aspires to develop commitment from employees? If the company strategy calls for rapid growth, can this be done without diluting the higher-ambition culture? If you are trying to develop such a culture, rapid growth makes it harder to find people who fit the culture and possess the capabilities needed. And business schools, with the exception of a few like Harvard Business School, do not ask students to reflect on their values and define who they are and then help them see how these values relate to decisions they make about strategy, performance measurement, growth, and so on.
In short, business schools, as we argue in the book, do not teach integrity. By integrity we mean learning about (1) how different disciplines must be integrated with each other and higher-ambition purpose and values, and (2) how students' espoused higher-ambition values are reflected in decisions and actions they recommend should be taken in marketing, strategy, and finance. What business schools need is a course that teaches students how to think and act to build a higher-ambition firm.
Q: What are you working on next?
A: If business is to regain the legitimacy that it has lost in the last 20 years, and particularly since the 2008-2009 economic meltdown, we must change the leadership and management paradigm. We need to widen the circle of leaders who "get" higher ambition. My colleagues and I have committed ourselves to this mission. We have founded the TruePoint Center for Higher Ambition Leadership, a not-for-profit educational and research institute that will bring together higher-ambition leaders from around the world to learn from each other's experience. It will also offer leadership development programs for the next generation of leaders, as well as conduct research about what it takes to manage in a higher-ambition way.
Book Excerpt from Higher Ambition: How Great Leaders Create Economic and Social Value
Val Gooding's experience and approach to collective leadership is particularly instructive. Over the twelve years from her arrival at BUPA in 1996 to her retirement in 2008, she led a remarkable transformation of both the economic performance and the social institution. Gooding oversaw a rise in revenues from £1 billion to more than £5 billion, and she and her team worked to reconfigure the business portfolio. When she arrived, BUPA was a provider of health insurance and owner and operator of hospitals, with most of its revenue coming from the United Kingdom. When Gooding departed, BUPA had sold its hospitals, positioned itself in several growth segments of the health market, and generated 50 percent of its revenues from overseas markets.
When BUPA recruited Gooding as managing director for its U.K. business, the core health insurance business was in a perilous state. BUPA was losing market share, and the company's profits had been dropping. Gooding suggested, with a bit of humor, that she might not have taken the job had she realized that the organization was in such a mess. … [S]he acknowledged: "I probably should have done more research. The core business wasn't making any money. The customer service was poor. In my first few weeks, three or four of the senior managers came in and said, 'Oh, we're glad you've come because this will need sorting out. And oh, by the way, if you can't sort it out, we're all leaving.' "
The organization could not continue as it was; it simply would not have had the resources to sustain its operations. Yet, BUPA was an unusual organization: it is a provident association with no shareholders (BUPA stands for British Untied Provident Association). Any profits are reinvested in the business. So, because there are no shareholders to protest, the deteriorating finances did not bring corresponding external pressures to improve results. There was no "burning platform" from the threat of takeover that might have provoked a turnaround, as it would, for example, in a publicly owned company. BUPA's employees were not even particularly sure that profits really mattered to the organization. As Gooding characterized it, "If you had asked people in BUPA, 'So do we have to make a profit?' you have gotten a hundred different answers."
To make any change in the business, therefore, and to rescue it from almost certain extinction, leadership had to provide both the urgency and the direction needed to get people engaged and in gear. Gooding and her team had to help forty-five thousand people throughout the organization understand the urgency of improved financial performance and customer service. To do so—in an effort of several years—they did a number of things to sharpen the company's focus on performance, both financial and operational. They created more rigorous financial accountability at all levels of management. They instituted an incentive scheme that gave employees a financial stake in the performance of the business. They invested in IT systems and other tools to improve the ability of frontline call-center workers to deliver superior customer service. They put in place measures of customer satisfaction in every part of the business and set targets and rewarded based on those targets. "Our model is that if we do a good job for our customers, they will recommend us to others, and they will become our advocates," Gooding said. "It will become a circle, and so we will be able to deliver reasonable returns on the investments in our assets. And then we will be able to grow and deliver more health care to more people."
But what was most distinctive was the extent to which Gooding galvanized the turnaround by seeking to change the culture: she invested in leadership and personally modeled the new leadership behaviors. She sought to instill a performance ethic and a customer service orientation, not just by the new metrics and systems, but by drawing out the best in people and tapping their own higher aspirations. Gooding told us: "In terms of changing the culture, I had the chance to do everything I believe in. Either they work or not. That is the job of being chief executive. Fortunately, they did work." She was quick to point out, however, that the approach depended on high-quality leadership throughout the organization. …
It's not that Gooding actually had a great team when she arrived. As we've noted, a good number of them were ready to bolt. Gooding made it a priority to assemble a high-quality senior team and, further, to personally invest the time and energy in creating healthy relationships and building the trust needed for a cohesive, effective team. Gooding also made a major commitment to creating alignment, developing capabilities, and building commitment within the extended leadership group.
In her level of commitment to building collective leadership at both these levels, she was typical of most of our higher-ambition leaders.
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Excerpted with permission of Harvard Business Review Press. Copyright © 2011 TruePoint LLC. From Higher Ambition: How Great Leaders Create Economic and Social Value by Michael Beer, Russell Eisenstat, Nathaniel Foote, Tobias Fredberg, and Flemming Norrgren.
About the Author:
Martha Lagace, a student in Boston, is former senior editor of HBS Working Knowledge.
