Will China Slow Down? Opportunity in the Euro Zone Q4.2010 $9.95 Us $9.95 Cnd €7.50Eur £6.70 Uk ¥915 Jpy 10.60 Chf 36.50 Aed ¥70 Cny

pg.26 Carlos Slim An Interview With

Seeds of Wealth Planting the

pg.33 pg.58

pg.18

pg.14

pg.8

BP Case Study: Do the Right Thing Giving the Brain a Seat at the Table Drug Discovery and the Balance Sheet Will China Slow Down? Opportunity in the Euro Zone Q4.2010 $9.95 us $9.95 cnd €7.50eur £6.70 uk ¥915 jpy 10.60 chf 36.50 aed ¥70 cny

the korn/ferry institute briefings on talent & leadership issue 4 Q4. 2010 contents

8 14

5 Letter from the CEO 18 Latest Thinking 8 Will China sloW doWn? Will China act as the world’s engine, or as its brake? 9 philanthropy after the fall With the world struggling, philanthropy is needed more than ever. Viewpoint

12 agile learning Research shows the best leaders are the best learners. BY george s. hallenBeck jr. and kim e. ruYle

12 10

Europe

14 amid grey Clouds, opportunity in the euro zone 50 Not all doom and gloom, a weak euro means growth for the Eurozone, hope for companies. BY adrian wooldridge

Leadership 18 the biology of leadership: giving the brain a seat at the table The brain has a logic all its own when it comes to who follows and who leads. BY david BerreBY 42 Interview 26 planting the seeds of Wealth In Review Carlos Slim, the world’s wealthiest man, isn’t just building companies, he’s building countries. 64 “the Ceo’s boss” BY garY Burnison, eduardo taYlor 68 “leadership from the inside out” and joel kurtzman

Cool Companies Parting Thoughts

33 drug disCovery and the balanCe 72 W ith more people, more Work sheet gets done A California start-up’s stem-cell revolution. More trained people will mean more problems solved. BY lawrence m. fisher BY joel kurtzman

Talent 33 42 priCe Cutting at the bottom of the pyramid Success in emerging markets is a matter of price. BY victoria griffith 50 the upside doWn Company What would Jack Welch think? HCL’s Vineet Nayar is putting employees first. BY glenn rifkin

Downtime

49 Wit and wisdom from the front lines. Governance

58 do the right thing: a Case study on bp The whole world’s watching. What should BP do? 58 Tell the truth. from the ceo

the eighth wonder of the world

By Gary Burnison

It could be added as the Eighth Wonder of the nizes failure but realizes that failure is World: leadership. It is something that is better not defined in the moment, but rather by what the leader does after the fail- seen and felt than defined and said. John Quincy ure occurs. In its essence, leadership Adams, the sixth president of the United States, comes with a special type of inner se- said it best, “If your actions inspire others to renity, one that reconciles failure with dream more, learn more, do more and become success and recognizes that the two more, you are a leader.” are inextricably linked. Failures are fatal only when a leader fails to learn from them. I’ve been on a quest to discover some of the fun- Leadership is much less about the leader, much damental truths about leadership. Over the last year, I more about the followers and the mission. It’s about have had the privilege to speak with and interview having individuals look into your eyes and see who dozens of leaders around the world — people in high you really are; it’s about letting them see into your soul. places, people with tough jobs, people with global More than charisma, real leadership is about being roles, people with local roles — from the president of authentic, which is a trait that endures. Leadership is a sovereign nation to global Fortune 500 CEOs to the also about compassion and the genuine development richest man in the world. I’ve thought about what of the people you are leading. It is about helping peo- they’ve said and I’ve compared their insights with ple feel sufficient common purpose that they are able what I’ve learned in my own life. to achieve extraordinary things. Great leaders, at least the ones I’ve talked to, Though I’ve traveled the world interviewing lead- don’t agree on everything, but they seem to agree on ers, I’ve learned that leadership is in many ways as some things. simple as the lesson my father (and probably your First and foremost, leadership starts with the in- father, too) taught: actions speak louder than words. ner being of the leader, and is reflected and dissemi- Consider a leader off the beaten track — John nated through words, actions and passion. It’s built McKissick, the football coach at Summerville High on honesty, humility and integrity, and it ends with School in Summerville, S.C. He is America’s all-time taking personal accountability for failure and team winning football coach. As of the end of the 2009 foot- recognition for success. It’s built on long hours of ball season, Coach McKissick had amassed an incred- work, attention to details, a relentless and insatiably ible tally of 576 victories — far more than any other competitive spirit and good decision making. That coach at the high school, college or professional level. kind of leadership can’t be faked. What’s McKissick view of how he scored all In my experience, leaders who are selfish usually those victories? “Coaches never win games; players fail, at least in the long run. And yet, if leaders are self- never lose games,” is what he said. His point is simple, less, they may fail too. That’s because failure, like the poignant and humble. Winning is not about the “dawn’s early light” (to put it in poetic terms) is inevi- leader. It is about the team, and the leader’s role is to table. It cannot be dispensed with. Leadership recog- always make it so. Briefings on TalenT & l eadership Q4.20105 6 Q4.2010 Mexico’s Carlos Slim If he or she is pessimistic, theorganizationwillsuc- heor sheispessimistic, If The real leaders I’ve metareaboutstandingforsome- realleadersI’ve The messenger of theteam’smessenger of strategy. Heisthemessage. from aroundtheworldthatrealleadershipisnever ing tostretchthanbeforetheconversationbegan. will also shine. Leadership is making certain that that certain making is Leadership shine. also will about power but the restraint of power.about powerbuttherestraintof Itisabout after everyconversationwithanemployee,thatem- and valuesstrongenough,topushhisteamsaheadaf- ployee feels better and more capable and more will- more and capable more and better feels ployee but he lost a lot of gamestoo.but helostalotof Hebuilthisrecordnot the real-world arts. It examines the leadership style of the real-worldarts.Itexaminesleadershipstyleof thing farbiggerthanthemselves. ter they lost. Asaleader,ter theylost. McKissickisnotsimplya leader reflects brightness and light, theorganization leader reflectsbrightnessandlight, losses, butoncreatingavisioncompellingenough, cumb tomediocrity. Manyleaderstoldmethis. the If self-discipline andaboutrisingabovetheimmediate. on communicatingasilverliningtogowiththe Leaders aremirrorsfortheentireorganization. McKissick mayhavewonmorethan500games, I’ve learnedinmyconversationswithleaders I’ve This issueofBriefingscombinesleadershipwith — traits that made him the world’s Vineet Nayar, India’s oneof mosttalentedbusiness richest richest man making big advances in stem cell research. The arti- making bigadvancesinstemcellresearch.The in the Gulf of Mexico, of in theGulf toseehowthatcrisiscould ing onprice.ItalsotakesalookattheBPoildisaster it looksatthesciencebehindalittlestart-upthatis while keepingtheirheroicaspirationsandrecog- and should nizing thatleadership, likelife,isajourney. provoking thoughts. must Leadersmustbegroundedtoo. They how the brain itself works,how thebrainitself andhowitiswired.And, despite thestrains, andhowcompaniescangain looks atwhetherChinawillcontinueonitsrapid leaders, isturninghiscompany, upsidedown. HCL, looking at the biology of leadershipandexamining of looking atthebiology greater marketshareintheemergingworldbyfocus- growth course,whethertheeurowillholdtogether cles inthisissueareglobal,thoughtfulandthought separate whattheydofromwhoare,allthe stand how he thinks. In this issue, we also look at how This issue, which is our most global yet, also issue,whichis ourmostglobalyet, This This issue of Briefingsalsowidenshorizonsby issueof This But leadershipisnotjustaboutthinkinglofty — — — traits everyleadermusthave. have beenmanaged. and delves down deeper to try and under- —

David Pohl/theispot thinking Latest 8 Q4.2010 C Slow Down? Will China hina’swasthefirstmajor the economicboomorchestratedbyBeijing. Analysts disagreeaboutthesustainabilityof global recession.Whenthecrisis Chinese authoritiesreactedwithadou- ble-barreled policyofdrasticmonetary began tointensifyinthefallof2008, easing andamassivestimuluspackage. economy tobeginrecoverfromthe

The combinedeffectwasasharpuptick the vaunted Chinese economic boom economic Chinese vaunted the why aremanyanalystsnowwarningthat may beabouttohittheskids? most externalobservershadexpected.So in growth in

The problemisthatthemonetary — well above the pace that pace the above well 2010 hadreinstatedmandatorylending Unit’s forecastingserviceforChina,that fail to acknowledge the steps China’s faults. Also,themeasuresmayhaveset Miller, theBeijing-basedmanagingeditor growth as early as mid-2009 and by early growth momentum and that they also gues thatcriticsfailtoappreciatethe thorities adopted initiatives to slow lending advantages Chinawillaccrueasaresult are exaggerated.InhisMarch2010pa- Chinese government’spolicywhipsawing Chinese governmenttoputonthebrakes International EconomicsinWashington, worked toowell.“Thekeyriskisthat nation’s “growthwillbeslowingsignifi- more quicklythanitwouldlike,” saidTom potential adverse effects of the stimulus. per, “TheSustainabilityofChina’sRecov- believes suchconcerns,whilelegitimate, ment andexportsforitsgrowth. more onconsumptionthaninvest- back China’smuch-neededeffortstorely prices andprofitsleadingtoloande- medium term,theymayleadtoexcess number ofadverseconsequences.Inthe but criticsalsoarguethattheinitialmon- industrial capacity, puttingpressureon in thepropertyandequitymarkets.In senior fellowatthePeterson Institutefor short run,theymayhavecreatedbubbles cantly fromnowon.” of overheating andinflationwillforcethe of comingthroughthecrisiswithstrong could causeconvulsionsinthesystem, lus iswithdrawn,saidStephenJoske,the leaders have already taken to head off the director oftheEconomistIntelligence ening measuresaretakenandthestimu- easing andthestimulusmayhave ery fromtheGlobalRecession,” hear- etary easingandstimuluswillhavea The ChinaEconomicQuarterly Not onlydomanyworrythatthe For example,Lardysaid,Chineseau- Nicholas Lardy, aChinaexpertand e T The Korn/Ferry InsTITu . Iftight-

Yuko Shimizu quotas for banks, raised their required re- expanding production capacity in China’s come at the cost of a substantial increase serve ratios and required them to sell off traditional industries. in government debt, equal to almost a large amounts of subordinated debt. As for the charge that the stimulus fifth of China’s GDP. While China is cer- Lardy also pointed out that steps had program has set back China’s efforts to tainly not alone in that predicament, it already been taken to moderate a poten- achieve more balanced growth by en- clearly cannot be considered an unquali- tially overheating real estate market: the couraging private consumption, Lardy of- fied good thing. The Chinese, Lardy said, government reinstated a 40 percent min- fers a number of data points that would “recognize that flooding the economy imum down payment for mortgages and seem to disprove the contention. Al- with more credit is not the way forward lengthened to five years the period that though employment in export-oriented and that they will have to take strong ad- investors must hold a property to avoid industries did suffer in 2009, the boom ditional policy initiatives to sustain eco- paying sales tax when it is sold. “These in construction-related employment cre- nomic growth.” moves dramatically cut the pace of prop- ated by the stimulus largely offset those To reduce the distortions that for erty sales and disincentivized speculators,” losses. In addition, the government much of the past decade have favored Lardy said. “It is also important to recog- raised payments to 70 million of China’s industry and exports over services and nize that even a major property price lowest income citizens, increased pen- consumption, the Chinese will have to correction in China would not have the sion payments to retirees and offered its consider raising the prices of basic re- systemic implications that it had in the own version of “cash for clunkers” for ve- sources like water and electricity, levying United States” because “there is much hicles and other consumer durables. All environmental taxes and fees and ad- less leverage in China’s property market these factors, along with a substantial in- justing, finally, the exchange rate for their and the share of debt devoted to the pur- crease in household borrowing, com- undervalued currency. China has thus far chase of property is relatively small” bined in 2009 to raise consumption ex- shown little willingness to take such steps, among consumers. penditures in China well ahead of GDP however. Add to that its intransigence Lardy sees China’s excess capacity as growth for the first time in a decade. about reducing greenhouse gas emissions essentially a nonissue. First, he points out While Lardy believes that China’s or imposing sanctions on Iran and throw that Chinese firms have historically tended stimulus investments are likely to benefit in its reliance (like all other nations) on a to hold on to outdated equipment, so the nation in the long term by creating tenuous global financial system, and you Chinese data on excess capacity may an infrastructure for sustained economic have ample reason to question the direc- overstate the case compared with other growth and increased tax revenue, he tion, economic or otherwise, that China countries. Second, there is a substantial readily concedes that the benefit will may be taking in the near future. difference between excess capacity of, say, 20 percent in a mature economy growing at just 2 to 3 percent per year and in China, where growth has averaged about 10 percent for the past 30 years Philanthropy and any excess capacity is readily absorbed. The Chinese steel industry, for example, had excess capacity of 15 to After the Fall 30 percent at the end of 2008; this was more in overcapacity than the next larg- Will the rigors imposed by the “great recession” est global steel producers — Japan and compel a new level of efficacy in social investment? the United States — had in capacity. What seemed like massive excess to many observers was simply in line with he notion of socially responsible a cosmetic overlay having little to do with China’s historical growth, which has re- business has always worn many guises. It business fundamentals. A number of quired a 15 percent increase in steel pro- has been equated variously in both the leading thinkers, however, believe that duction annually since 2000. Finally, public and the corporate minds with phi- one of the legacies of the “great” reces- Lardy emphasizes that China’s 2009 lanthropy or environmentalism or sus- sion may be that it is enforcing the kind stimulus focused on financing fixed in- tainability or ethics. And, almost without of real alignment between social aims vestment in infrastructure, and not on Texception, it has seemed a bit artificial— and business profitability that has eluded

BrI e FIngs on TalenT & l eadershI p Q4.20109 Latest thinking

social investors for decades. Social Science Research Network, 2010), “If you go back 20 years, companies makes the case that the recession has like Nike, Nestle, Coca-Cola and Wal-Mart already begun to create fertile takeoff regarded it as a badge of honor to be seen conditions for future philanthropic invest- as not soft and sentimental and socially ment by forcing philanthropists to be progressive,” said Matthew Bishop, The smarter — to increasingly seek to lever- Economist’s New York bureau chief in a age their capital, lower costs, spread risk recent interview with INSEAD Knowledge. and simplify and consolidate their efforts. Bishop, who is a co-author with Michael He discusses several strategies that are Green of “The Road from Ruin: How to gaining favor, including time-bound sub- Renew Capitalism and Put America Back sidies, joint capital pools and “synthetic” on Top” (Crown, 2010), believes the social businesses. global economic crisis has prompted an A time-bound subsidy is essen- urgent re-examination of how capitalism tially a catalyst for an initiative that can be made to work more in concert will later seek commercial financing with societal aims: “In boardrooms now, to fund further expansion. “Proof of there is an understanding that, as they concept often needs grant money; think long term, they have to be on the and scaling up requires commercial right side of social progress.” money,” explains Martin. “Time- In the short term, the recession has bound subsidies are an instrument for certainly had a profound negative impact philanthropists to ensure that once on philanthropy and social investment. initiatives no longer need subsidies, the According to Maximilian Martin of the philanthropic money is redirected to University of Geneva Faculty of Economic some other area where it can make a and Social Sciences, the 18-month re- difference.” Martin points to Banco Com- cession left foundation endowments partamos, a Mexican microfinance bank down 30 to 40 percent in the United with 1.4 million clients and a total active States and 20 to 30 percent in Europe. loan portfolio of $550 million, which be- In 2009, about two thirds of foundations gan life as a grant-funded nonprofit. in the United States reduced their pay- In situations where grants alone outs. In the United States alone, 460 cannot do the job and investment capital foundations lost 80 percent or more of is often unwilling to go into the riskier or their endowment assets. Not surprisingly, less conventional markets where the many foundations instituted hiring and need is greatest, a joint capital pool offers salary freezes and severely cut budgets. a solution. It seeks to combine philan- Although Martin admits that these thropists, social investors and commer- inclined to provide grant funding while a downward adjustments will hold back net cial investors into consortia or funds that social investor may be willing to provide worth and endowment assets for years to take into consideration the different risk subordinated debt at a relatively low income, his recent paper, “Managing Phi- tolerance, return objectives and expertise terest rate and a purely commercially lanthropy after the Downturn: What Is sets of each group. “For example,” says minded investor would make equity in- Ahead for Social Investment?” (Viewpoint, Martin, “a charitable foundation may be vestments based on the consideration that part of the risk has already been absorbed by the other types of capital The recession has already begun to create fertile takeoff providers.” conditions for future philanthropic investment by forcing Finally, Martin believes that more philanthropists to be smarter — to increasingly seek to and more businesses will begin to operate as “synthetic” social businesses. leverage their capital, lower costs, spread risk and simplify “That is,” he says, “a business venture and consolidate their efforts.

whose social purpose is encoded in the Right: Hal Mayforth Negley. Above: Keith

10 Q4.2010 The Korn/Ferry InsTITu T e holding structure of the company. This interesting... means that a philanthropic foundation holds a significant ownership stake and ARE YOU A TEXTAHOLIC? special voting rights with the mission to Consumers are more attached to texting make the good or service available to as than ever. 39 percent of users admit they many people as possible around the text at the dinner table, 26 percent say world.” A synthetic social business is they text on dates, and a surprising 13 developed just like any other business, percent confess they can’t even abstain from texting in their house of worship. operating according to private-sector Source: Kelton Research, 2010 principles and making use of private- sector management talent. But since the company inherently seeks to serve the broadest possible swath of society, it is more likely to produce in higher volumes at lower margins and use tiered pricing strategies and the like. One such organization is The Petra Group of Malaysia, which provides financial and management support for early- stage technology businesses. Pe- tra is 60 percent owned by the Sekhar Foundation, the company’s charitable arm, which supports a essentially be back to square one. multitude of environmental, educational The second problem has been voiced and children’s causes around the world. by, among others, former Ford Founda- “You can’t do anything that’s going to tion director Michael Edwards, author of make a global impact unless it’s com- “Small Change: Why Business Won’t Save mercial,” says Petra’s president and chief the World “(McGraw-Hill, 2010). Edwards executive officer Vinod Sekhar. “We asserts that business by its very nature is should be smart enough to be able to do not equipped to address long-term social that and do some good along the way.” transformation, which, he says, is neither Michael Bishop echoes that senti- easy to measure nor always cost-effective ment: “Relying on charity is never a good in profit-maximizing terms. It requires place to be, whereas if you have a profit- a different set of operating values that able business, then you’re always going emphasize cooperation over competition, to find investors.” collective action over individual effort There are at least two potential prob- and systemic solutions over immediate lems, however, with this vision of “new” results. philanthropy. The real solutions, says Edwards, lie Martin articulates the first problem in in “businesses acting more like civil soci- his paper, saying that as investor demand ety, not the other way around.” At the grows for social investment opportunities, end of the day, that may turn out to be their commercial aspects would domi- an important insight not only for deter- nate and “their social impact standards mining the post-recession future of so- risk being watered to the extent that social investment, but for figuring out how cial investment would become largely a to eliminate the problems that got us marketing exercise.” That is to say, we’d into the recession in the first place.

BrI e FIngs on TalenT & l eadershI p Q4.201011 view point

agile learning

By George S. Hallenbeck Jr. and Kim E. Ruyle

When Richard Branson started Virgin as a recording company in 1970, it is unlikely that even he foresaw the direction his company would take.

Had the company remained in its original niche, Vir- figures rather than the vaguer notion of “potential,” in which gin would probably have closed its doors years ago. But learning agility plays a big role. Good numbers in the form of sales or productivity usually lead to a step up the ladder. Good Branson’s remarkable versatility has kept Virgin going. people skills may not. Then there is the problem of momen- He reinvented the company as an airline in the 1990s tum. CEOs who are not agile learners themselves tend to and then again five years ago as a mobile telephone shun people who are; the masters of adaptability can be seen company. Earlier this year, Virgin received a full bank- as high maintenance individuals who are always trying to stir ing license from the British government. things up. And if agile learners are not nurtured throughout their career, they are very likely to jump ship. Branson possesses a strength that is in surprisingly short Sometimes, those who seem to be agile learners are not. supply in executive suites: he is “learning agile,” that is, he is Consider the case of one manager at a big multinational cor- able not only to adapt to but also to take advantage of signifi- poration whose lack of adaptability set him — and the subsid- cant changes. Learning agility, the lubricant for performing iary he led — up for failure. For more than two decades, this well in periods of great change, will be in increasing demand executive had been considered a high-potential manager. He in coming years. The business world is hurtling forward at an had proved himself capable in a wide variety of functions, in- unprecedented pace, with globalization, demographic shifts cluding engineering, sales and customer services. When his and cultural conflicts making the world an extremely volatile corporation purchased a small, entrepreneurial business with place. Executives who can adapt to these massive shifts will 4,000 employees, this promising executive was put in charge. thrive. Managers who rely on the same bag of tricks, on the Things quickly began to unravel. The executive insisted other hand, will eventually find themselves outmaneuvered. on following the corporate practices of the large multinational Our research indicates there are 27 traits, like tolerance he had grown used to even though the culture of the newly for ambiguity and a sense of perspective, that are facets of purchased subsidiary had been very different — more entre- learning agility. We can reliably measure managers’ learning preneurial and less centralized. The staff became mutinous and agility by assessing to what degree they possess these traits. the executive was soon forced out. His employers were left Surprisingly, our studies show that despite its importance to with a rocky integration and his career was sidetracked. corporate performance, true learning agility is just as rare The behavior of this ill-fated manager is all too easy to among top executives as in the general population. No more understand. Humans are creatures of habit because it would than 20 percent of top executives are what we define as agile take too much effort to have to reinvent the way we do things learners. Since learning agility is necessary for becoming a all the time. If our behaviors have brought us past successes, great leader, the number is worrisomely small. we have all the more motivation to stay the course. Yet often Why are there so few learning-agile executives? To begin that is the wrong thing to do, as the executive coach Marshall with, most companies do not do a very good job of identifying Goldsmith outlined in his book, “What Got You Here Won’t this special breed. Beyond seeming to require a baseline in- Get You There.” New situations require new ways of doing telligence (agile learners tend to be above the bottom third in things. And, failure can be even more perilously habit-form- intelligence), learning agility is not linked to I.Q. Rather, it ing than success. When faced with adversity, people also tend is associated with hard-to-pinpoint traits like an eagerness to fall back on the comfort of old habits. to tinker. Fortunately, we can train ourselves and other leaders in Even if agile learners can be identified, many will not be our companies to become agile learners. Our research shows promoted. Corporations tend to rely on hard performance that flexibility is substantially innate. But learning agility is 12 Q4.2010 The Korn/Ferry InsTITu T e David Cowles e BrI reports weremenandwere,inRosenfeld’swords, “not wild” herdirect Rosenfeld wasnoteagertomakethemove.Allof fort. Often, itisthejobyoudonotwanttotakethatyields fort. in a static environment. Oncechangedoescome,though,ex- in astaticenvironment. is onecompanythathassuccessfullyusedglobalexperience was appointed CEO of theentirecompany.was appointedCEOof woman couldunderstandCanadianconsumers. Rosenfeld without agile learners at the top. Adaptability is not useful not is Adaptability top. the at learners agile without what we eat for breakfast and how to greet colleagues. Pepsi Co very quickly. Consider, forinstance,therapidimplosionof about Americans. ShesetouttoprovethatanAmerican also partlyanacquiredcapability. Perhapsnothingservesasa biggest chance to improve learning agility. We call these as- these call agility.We learning improve to chance biggest better teacher, in this department, than adversity and discom- ternational isoftencalledupontohelpcompaniesconfront- the UnitedStatestextileandsteelindustries. Korn/FerryIn- turned Kraft’s businessaroundinthatcountry. In2006, she talent poolthathaseasedsuccessionissues. to fosterlearningagilityinitskeyexecutives, creatingadeep her GAGassignmentwhenshewasaskedtobecomepresi- dent of thecompany’sCanadianoperationinlate1990s.dent of conveyor beltandmakesusquestionthesmallestthings, like surprising not is which assignments, overseas from come ecutives’ inabilitytoadaptcancausethingsgoverywrong, see theworldinadifferentway. the Livingabroadgetsusoff since livingwithpeoplefromdifferentculturesforcesusto signments “GAG,” forgoingagainstthegrain. FIngs on TalenT Irene Rosenfeld, CEO of Kraft Foods Inc., encountered KraftFoodsInc., Irene Rosenfeld,CEOof Corporations can coast along for years, even decades, even years, for along coast can Corporations Some of the most important GAG opportunities may opportunities GAG important most the of Some &l p eadershI Bill Gatesisinterestedineverythingfrommedicinetoeduca- ing massivechange;manytimes, acompany’sboardsaysit which isnecessaryforsustainingabusinessinthelongrun. wants tobringinanewCEOwhowill“shake thingsup.”Yet and nottheset-in-their-waysuncles and theworkenvironmentisunclear.Yet itbearsnotingthat are famous. bring insomeonewhohastruelearningagility.” are but theybasicallydothesamethingsalltime.They andclosingbranches, toughactionlikecuttingstaff pable of are ca- pany thatspecializesinleadershipconsulting.“They trick forcorporationsistomakesureittheagilelearners the samedishespreparedinwayyearafteryear. The to thetop. times following a script,” saidRobertEichinger,times followingascript,” formerCEO themselves, cannotbeconfusedwithreallearningagility, tion. And,Branson’s escapadesonyachtsandhotairballoons uncle whotellsthesamejokeseveryholidayandinsistson good tohavearoundforafewyears, butthenyouneedto Korn/Ferry LeadershipandTalentConsulting. and KimE.Ruyleisvicepresidentofresearchdevelopmentfor George S.HallenbeckJr.isdirector,intellectualpropertydevelopment, correlation betweenlearningagilityinnonworksituations curiosity andcouragespilloverintotheirpersonallives. The executives’ willingnesstoinflictchangeonothers, butnoton of Lominger International,aKorn/FerryInternationalcom- of “Executives who look like masters of changearesome- “Executives wholooklikemastersof We also know people who are set in their ways their in set are who people know also We Some managers seem remarkably versatile, and their and versatile, remarkably seem managers Some — whomaketheirway Q4.2010 — the —

13 14 Q4.2010 e T The Korn/Ferry InsTITu

Credit e BrI David G. KKlein opportunity clouds, grey Amid euro zone euro in the FIngs on TalenT &l p eadershI

signs ofblowingitselfout. The stormintheeurozoneshowsno the wholeeurozone. the eurowillhaveroughlysameimpacton value their way out of a crisis. Butthedeclineof vidual countriesmaynolonger be able to de- adrenalin.Indi- help givetheeurozonearushof lowereurowill in allthesestormclouds. The have goneonstrike. express theirfury. Somepublic-sectorworkers model, andpeoplehavetakentothestreets crisis istakingitstollonEurope’s vauntedsocial theyear.in write-downsbeforetheendof The that Europeanbanksfacemorethan$239billion EuropeanCentralBankwarns The percent. 10.2 to multiply. Eurozoneunemploymentisnow dollar. Anddismaleconomicnewshascontinued markets. euro rescuepackagehasdonelittletocalmthe Union’s belateddecisiontocreatea750billion Europeans haveatleastfoundasilverlining eurohascontinuedtofallagainstthe The By AdrianWooldridge The European The europe Q4.2010 15 Most European business leaders have welcomed the euro’s used the high euro to purchase companies that were based decline. EADS, Airbus’ parent company, calculates that a 10 outside the euro zone at rock-bottom prices. We are unlikely percent decline of the euro translates into an additional billion to see many more British financial institutions bought up by dollars in profits. Daimler AG has seen sales of its Mercedes- Santander, for example. And some companies operate in niche Benz cars increase by more than 20 percent in the first four markets that are not particularly sensitive to price. Germany months of this year. The attitude of Areva, a French nuclear in particular abounds in small and medium-sized industrial energy company, toward the euro’s decline could be summed companies that are market leaders in their fields. Some tailor up as, “Bring it on.” Many luxury goods makers, which play an their products for particular customers. Others, such as RUD important role in France, Italy and Spain and sell much of in industrial chains, Oerlikon in vacuum and engine technol- what they produce to rich Americans and Asians, are rubbing ogy, and Otto Bock in orthopedic technology, are so dominant their hands in glee. The European tourist industry looks for- that they set standards in their fields. ward to a bonanza as Americans flock to Europe to spend The biggest problem for European business, however, is their once-again mighty dollars. that the piecemeal gains that Europe will reap from the lower European policymakers are equally positive. They point euro will be swamped by the impact of sharp cuts in public to O.E.C.D. data which suggests that a 10 percent decline in expenditures. Ireland has reduced public-sector salaries by up the value of currency produces three-quarters of a percentage to 10 percent. Greece is in the process of cutting them by 15 point of extra growth. They bristle at the suggestion that the percent. Spain has announced that it will cut them by 7 per- euro’s decline is a sign of weakness. The euro has been severely cent and may have to make further cuts as the crisis plays out. overvalued for the past four years. It has not so much declined This will not only reduce demand in countries that are as returned to its proper value, judged on the basis of purchas- heavily dependent on their state sectors; it could also lead to a ing power parity, they say. The euro is now in much the same wave of strikes that will disrupt a wide range of businesses. Most European business leaders have welcomed the euro’s decline. European policymakers are equally positive.

position against the dollar as it was when it was launched, at Europe could easily lose another three to four million jobs in 1.18 euros to the dollar. the next three years. In Spain, which already suffers from 40 This is all very reasonable. But we should guard against percent youth unemployment, an entire generation of people overestimating the benefits that the cheaper euro can bring may be lost to the labor market. This generation, condemned to the union. There are two big constraints on the benefits of to long-term idleness, could provide combustible raw mate- the euro’s decline. The first is that the bulk of European trade rial for parties of the far left or right. takes place within the euro zone (which is one reason that the The euro’s travails have removed one of European busi- euro was introduced in the first place). Even Germany, which ness’s most prized assets — certainty. For the most part, Euro- is Europe’s most successful exporter, lists France as its number pean businesses regarded the European project of ever closer one trading partner. America, a far bigger economy, is number integration as a road map to the future. They also regarded the two. The euro’s decline may make no difference to the prices euro as a source of price stability in a quickly changing world. that many European companies can charge. But the euro’s precipitous fall has opened up fault lines in the The second is that while the euro’s decline makes exports European elite. The Franco-German relationship — the engine cheaper, it also makes imports more expensive. Most Euro- of European integration — is in the worst state that it has been pean companies have to pay more for oil and other basic com- in since the euro’s founding. Angela Merkel, Germany’s chan- modities (which tend to be priced in dollars). This means that cellor, and Nicolas Sarkozy, France’s president, once partners, some European companies are caught in an unexpected trap: now appear to have a strained working relationship. they are paying more for their raw materials, but they are sell- Eurocrats have drawn sharply different conclusions from ing almost all their products in the euro zone. the crisis. Some argue that the only solution to Europe’s prob- There are still other wrinkles in the good news story. Some lems lies in more Europe — increasing the powers of the Euro- companies have locked themselves into hedging arrangements pean Central Bank, creating a single tax-raising power and al- that will prevent them from taking advantage of the lower euro lowing the European Union to issue bonds. Members of this for a year or two. Some companies benefited from the higher school insist that the euro is protecting Europe from yet more euro. Banks such as Santander of Spain or Banca Intesa of Italy instability, particularly a crisis of competitive devaluation. 16 Q4.2010 The Korn/Ferry InsTITu T e Some argue that the only solution lies in a looser federation of higher tax rates and a punitive attitude toward bankruptcy: — in loosening the bonds that have linked a highly productive Germans are prevented by law from becoming CEOs if they Europe to some of its less productive cousins through what have ever been bankrupt, for example. Such a law in the United some are now calling Europe’s “Instability and Lack of Growth States would have stymied many of America’s most successful Pact,” a play on the Stability and Growth Pact that was key to high-tech entrepreneurs. And, deserved or not, Europeans are the establishment of the euro. And some argue that Europe developing a reputation for being much keener on la dolce needs to rethink the role of its central bank. They worry that vita than on hard work. In the late 1960’s, Europeans worked the E.C.B.’s exclusive focus on fighting inflation is counter- more weeks per year than Americans; today they work 35 to productive in a deflationary world and believe that the E.C.B. 40 weeks per year while Americans work 46 weeks per year. should model itself on the Federal Reserve Board in the United Europeans are also much more suspicious of business. Forty- States, dedicating itself to both promoting growth and hold- two percent of Europeans agree that entrepreneurs exploit ing prices steady. other people’s work, compared with just 26 percent of Ameri- The euro’s fall has also highlighted the problems at the cans, according to a Flash Eurobarometer poll. heart of the European economy: Europe’s faltering competi- These cultural leanings are reinforced by structural fac- tiveness. Europe remains heavily dependent on two great en- tors. The venture capital industry, though growing, is still gines of job creation and growth — a handful of world-class small by American standards: last year European start-ups companies, such as Daimler, and the public sector. Almost all received 2.2 billion euros in start-up capital, less than their Europe’s job creation since 2000 has come in the public sector. American equivalents were given in the first quarter of this But the world-class companies are not creating new jobs. In- year alone. The European market remains fragmented com- deed, many of them are busily shifting not just manufacturing pared with the American one: entrepreneurs have to grapple but also research and development to the developing world. with a patchwork of legal codes and an expensive and time- Most European business leaders have welcomed the euro’s decline.

European policymakers are equally positive. consuming patent system. The long-awaited unification of European patent law has been held up by bureaucratic quib- And the public sector will be contracting for years to come. bles, such as Spain’s insistence that all rules should be written Europe has failed to make the leap that America made in in Spanish. In many countries, the tax system and labor laws the 1980’s to a more innovative and entrepreneurial style of discourage companies from growing above a certain size. capitalism. Europeans are much less keen on establishing America has at least 50 times as many angel investors as start-ups than Americans: only 4 percent of German residents Europe, thanks, in part, to the tax system that leaves more are classic entrepreneurs, compared with 11 percent of Ameri- money in individual pockets for investment. cans, according to the Global Entrepreneurship Monitor. And The storm over the euro zone will at least bring some far fewer of those start-ups become big businesses. A list of good if it forces Europeans to grapple with these deeper is- America’s biggest companies includes plenty of companies sues of competitiveness. How can countries compete if they that have only been around for a few years, such as Google and remain low on The World Bank’s annual “Doing Business” Facebook. America’s biggest company, Wal-Mart Stores, was survey? How can Europe kick-start its innovation machine if founded in 1962 and went public only a decade later. it fails to tackle patent laws? Europe’s social model depends In contrast, the list of Europe’s biggest companies has on using the dividends of growth to support a prosperous scarcely changed in decades. Only 5 percent of European com- lifestyle; but the model is now threatening to snuff out the panies that were created from scratch since 1980 are in the top growth on which transfer payments depend. 1,000 E.U. companies by market capitalisation, according to Yet so far the euro zone’s problems have been a distrac- Janez Potocnik, the E.U.’s former commissioner for science and tion rather than a help. We have heard endless discussion research and now commissioner for environment. The compa- about the details of rescue packages and financial architecture. rable figure for America is 22 percent. More worrisomely still, Almost nobody in the European establishment has dared to many of Europe’s high-tech companies look tired. Some of its mention words such as “entrepreneurship” and “deregula- software heavyweights are thought to be past their primes, tion.” Even so, a discounted euro is a start. while some of its high-tech heroes are looking winded and slow. This is partly due to cultural attitudes. Europeans tend to Adrian Wooldridge is co-author of several books and is the management be more risk averse than Americans, thanks to a combination editor for The Economist. He is based in London. BrI e FIngs on TalenT & l eadershI p Q4.201017 18 Q4.2010 The Korn/Ferry InsTITu T e e BrI Max Scratchmann (all) FIngs on TalenT knowing how itwent. themeeting not you walkedout of working moreasateam.And eachtime more engaged,becoming efficient, clear andcrisppoints your messageintowhatyouthoughtwere on factoryfloors.honed Eachtime,you’ve spoken tothetroopsinassemblyhallsor their directreports.even Maybeyou’ve address groupsof goneintomeetingroomsto You’ve one. your mostseniordirectreportsoneon spokento there countlesstimes.You’ve The Biology ofl The Biology ofl &l p eadershI eaD eaD ership: ership: g g iving T iving T — aboutgetting By DaviD By DaviD You’ve been You’ve he Brainas he Brainas BerreBy BerreBy ea ea leadershIp T T a a T T T T T T Q4.2010 he TaB he TaB 19 le le Some senior managers seem to get the results they hUmaniTy’s giganTic cereBral want in everything from improved morale to better bot- corTex is a 200,000-year-olD BeTa tom lines. But for most, those mere mortals without the magic touch, every meeting feels like a gamble. Your mes- Design, siTTing on T op of legacy sage gets through. Or it doesn’t — and you’re not sure sysTems ThaT evolUTion proDUceD why. The process doesn’t seem rational. In fact, it isn’t. Changing the way that companies millions, anD even hUnD reDs of operate is, at root, changing the way employees behave millions, of years ago. and think. That means tinkering with equipment that even the most gifted IT department can’t troubleshoot: the supercomputer known as the human brain. Neuro- scientists have found that this amazing device is neither of up-to-date computers, vacuum-tube electrical con- entirely rational nor irrational, emotional nor calculat- trols from the 1940s and an even older array of pneu- ing, full of foresight nor “in the moment” — instead, the matic tubes that served as important safety valves. brain is an amalgam of all those sometimes contradic- Like the boiler, the brain is a collection of many tory traits. interconnected parts, each built to do what it does tol- That makes leadership look a lot more complicated erably well, often without regard to the overall opera- than it used to be in earlier eras, when managers were tion — and obviously with no anticipation of future advised to just be “alpha males” or, conversely, to be cool technology. Humanity’s gigantic cerebral cortex is a and rational masters of facts. But science’s more accurate 200,000-year-old beta design, sitting on top of legacy picture of the brain is well worth getting to know. To the systems that evolution produced millions, and even extent that managers become “brain savvy,” they become hundreds of millions, of years ago. The basic mecha- more effective: once you know more about what’s going nism of the “fight-or-flight” response, for example, is so on in there, you’re closer to getting the outcomes you old that we share it with salmon and fruit flies. want from your leadership moves. The rational mind, far from being the master of this facility, is only one of its many components. And looking UnDer The Hood the rational mind’s work — logical rules, which we can explain to others, applied to objective facts — is just At first sight, it is easy to tell the difference be- one of many brain processes. Other sections work dif- tween a human brain and a pig’s brain. In both, ferently: they use different kinds of input, and handle the surface layer of cells wraps around every fold and that input according to different rules. curve. In people, though, this outer layer, the cerebral In the past few decades, scientists have made great cortex, is much, much bigger. It sits on the rest of the advances in understanding what these different units brain like a peach’s fruit around its pit, Temple Grandin do, and how they communicate with one another. writes in “Animals in Translation,” one of her best-sell- Though they’ll always tell you that more research is ing books about animal and human behavior. Almost needed, their work has already yielded some practical three-quarters of a person’s brain is cortex, and cortex guidelines for people who need to influence, motivate is almost all of the brain regions behind our foreheads and persuade others — in other words, for leaders. The — where we plan, reason and talk to ourselves. better scientists understand the brain’s dynamics, the But when you look underneath, at the “pit” parts of better they can explain what succeeds in winning over the human brain — the structures that process emotions that mysterious organ. And what doesn’t. and, even deeper down, those that handle breathing, There are four key insights managers should re- balance and other basics — the pig brain and the human member about the brains they want to influence (in- brain look “exactly alike,” Grandin writes. So the parts cluding their own!). First, the brain is a social organ. of our brains that are distinctly human (which let us Second, it likes a good story. Third, it often runs on talk, think, do math, invent airplanes and trade deriva- autopilot. Fourth, it has its secrets. Because it is made tives) depend on, constantly exchange information with up of so many different systems, it doesn’t always and are influenced by other parts— no differently than know which one is “in charge” at the moment. In other any other mammal’s. words, people often don’t know the real reasons why That’s why the neuroscientist John Morgan Allman they act, feel and think as they do. Keeping these gen- compares the human brain to a boiler room he once eral traits in mind can help you turn a leadership mess toured, which was run by a Rube Goldberg combination into a success. 20 Q4.2010 The Korn/Ferry InsTITu T e tion to social life. It’s also a good example of how much brain activity is hidden from its owner. Without realiz- ing that they do so, people consistently rate adults with The Brain is a Social organ such “baby faces” as more trustworthy, but less competent, than others. Human beings, lacking wings, armor plates, In a study published last year, Robert Livingston claws, gigantic teeth or other impressive hard- and Nicholas Pearce of Northwestern’s Kellogg School ware, have risen to dominate the earth by using of Management spelled out the real-world consequences social relationships instead. for managers. When the researchers had undergradu- So the brain wasn’t designed to plan moon landings ates rate photos of past and present Fortune 500 CEOs, or do physics or assemble a supply chain. It evolved to in general the executives judged more baby-faced actu- handle relationships — to notice other people, under- ally earned less than their “mature-faced” competitors. stand their actions, and connect with them — and to Humans are so tuned in to one another that they influence others and be influenced by them. Babies as literally share feelings at the physiological level. When young as five weeks respond to anything that looks like I see you in pain, for example, cells in my brain in- a face (even three dots and a line). crease their activity in two regions, the anterior insula Of course, adults respond to babies, too. They re- and the dorsal anterior cingulate cortex. The same spond to a round face, large eyes, a small nose, a high thing happens when I myself am hurt. forehead and a small chin, even in other adults. That’s a Similarly, when you watch a colleague drink a good example of how the brain is designed to pay atten- soda, your motor neurons are firing, just as they would BrI e FIngs on TalenT & l eadershI p Q4.201021 22 Q4.2010 The Brainl The Brainl are justsofunny”). horse, say,horse, say, guys guys orthedoctorsstandingaround(“You orthedoctorsstandingaround(“You that reads: “Hello, my name is [blank] [blank] name, last name, e-mail address) with a form compared astandardregistration form(first recentlyfound.They Vast.com search site asresearchersattheshop-and- this effect, Web formshows Web formshows end. Evenabasicandfamiliar end. Evenabasicandfamiliar characters,characters, conflictandabeginning,middle conflictandabeginning,middle more convincingwhenitarrivesasastory,more convincingwhenitarrivesasastory, with with life,is to ascientifictheoryphilosophyof ends. Itwantsthatstory. braincan’t braincan’t standgaps, standgaps,whole. The blanksanddead whole. The blanksanddead coherent a into data of pieces and bits weaving self stories. savvy leadership.Thebrainisalwaystellingit- savvy leadership.Thebrainisalwaystellingit Which bringsustothesecondprincipleofbrain- she laughedatwhatevershe’djustseen “I justlaughedfornoreason.” Instead,shewouldsay her leftlobewouldmakelaugh.Butsheneversaid, different regions, henoticedthatajolttoonepartof an epilepticpatient’s brainbyelectricallystimulating your predecessor. about whytheydon’t feelthewaytheyusedtounder storytotell havesomekindof appearance). Butthey’ll won’t knowabouttheirinvoluntaryresponsetoyour seen,they probably won’t sayso(because,aswe’ve as abossbecauseyoulookyouthful,forinstance,they week at work” at week sights into vision or scattered memories into “my first “I justlaughedfornoreason.” Instead,shewouldsay her leftlobewouldmakelaugh.Butsheneversaid, different regions, henoticedthatajolttoonepartof an epilepticpatient’s brainbyelectricallystimulating about whytheydon’t feelthewaytheyusedtounder storytotell havesomekindof appearance). Butthey’ll won’t knowabouttheirinvoluntaryresponsetoyour seen,they probably won’t sayso(because,aswe’ve as abossbecauseyoulookyouthful,forinstance,they pleasant way. it willnotgoaway. Itwillsurpriseyou,andnotina youignorethis, If effect ontheworkingenvironment. vant” yourface)willhavean factors(liketheshapeof our intenselysocialsidemeansthatsupposedly“irrele- about howwellthatsocialprocessisgoing.However, by others, tocoordinatewiththemandcaredeeply People arebornwithabuilt-inabilitytobeinfluenced It isthereasonleadershippossible,andnecessary. why peoplearesoadeptatbeinginsync. mirroring, andthatthese“mirror neurons” explain man beingshavebraincellsdedicatedtothiskindof Ramachandranthathu- SanDiego’sUniversity of V.S. many (thoughnotall)neuroscientistsagreewiththe you were raisingthestrawtoyourownlips.if Indeed, Whatever itsjob Whatever That’s why any idea That’s or plan, from a sales pitch That’s why any idea That’s or plan, from a sales pitch When theneurosurgeonItzhakFriedwastesting When When theneurosurgeonItzhakFriedwastesting When thebrainisoftenyourfriend. socialnatureof The If yourteamisn’t If asimpressedwithyou ikes ag ikes ag — each piece of the brain is busy is brain the of piece each — beitturningdisconnected D ooD D ooD Story Story — a picture of a apictureof - T inT resUlT B sTory-T ent processesintoacoherentexperience(Ididn’t just gether,” differ- bymeldingthecontradictoryresultsof the-facts” format. the formwere25to40percenthigherthan“just- you soon..” Responseratestothenarrativeversionof in the[blank]areaandIwouldliketohearbackfrom and I’d like to learn more about [product]. I live at [blank] he B y melD Storytelling literallyhelpsthebrain“keepitto- o acoherenT T T rain “keepiT s ofD elling liT ing T ifferenT he conT e T The Korn/Ferry InsTITIns u experience erally helps ogeT raD processes Tory icTory her,”

TIT u T e Credit Br e BrI Credit The BrainofT The BrainofT I e friendly invitation brain thatplanandcalculate.Atthesametime,it’s a ing to only one part of themultilayeredbrain. ing toonlyonepartof often becausetheleader’s“story” istoosimple,appeal- tionships andstatus. ble. The formisan efficienttool ble. The tion andtheunconsciousmind’seagernesstobesocia- conscious, rationalchoicetoaskforproductinforma- ceeded betterasanarrative:itsatisfiestheconsumer’s Web formthatsuc- the isthe lessonof the brain.This are thosethat“make sense” tomanydifferentpartsof thestoriesthatsucceed these guysaresofunny).Thus, laugh fornoreasonIcanexplain;laughedbecause cules — for which they’re designed. designed. they’re they’re which which for for — — cules cules mole- mole particular particular even even — — smells smells sounds, sounds, sights, sights, the the to to automatically automatically respond respond that that structures structures ancient are brain multilayered the of base the At require, and they don’t allow, conscious deliberation allow,conscious don’t they and require, FI FIngs on TalenT ngs on Talen If aleader failstoconvinceormotivatepeople,it’sIf cin levelsrisewhenmothersnurse, andwhen cin levelsrisewhenmothersnurse, andwhen mones withastrongeffecton behavior. Oxyto- mones withastrongeffecton behavior. Oxyto been exposed. been exposed. made fairer offers than did women who hadn’t made fairer offers than did women who hadn’t dose of testosteroneundertheirtongues dose of dose of testosteroneundertheirtongues dose of about whattodo. Considerwhathappened he foundthatthosewhohadbeengivena he foundthatthosewhohadbeengivena ilar experiment with a group of women, ilar experimentwithagroupof ilar experiment with a group of women, ilar experimentwithagroupof egger of the University of Zurich ran a sim- egger of the University of Zurich ran a sim Oxytocin andtestosteroneareboth hor- Oxytocin andtestosteroneareboth hor who’d inhaled a placebo. who’d inhaled a placebo. generous intheiroffersaswerethose generous intheiroffersaswerethose hormone oxytocinwerenearlytwiceas hormone oxytocinwerenearlytwiceas inhaled anasalspraycontainingthe inhaled anasalspraycontainingthe gets anything. gets anything. Conversely,Conversely, whenChristoph Eisen whenChristoph Eisen- they split;rejectionmeansneither they split;rejectionmeansneither — en rUnson en rUnson players goawaywiththemoney players goawaywiththemoney offer.offer. Anacceptedoffermeansthe Anacceptedoffermeansthe totheregionsthatfocusonrela- other eitheracceptsorrejectsthe other eitheracceptsorrejectsthe 50-50 to99-11-99,50-50 to99-11-99, andthe andthe T In the experiment, menwhohad menwhohad In theexperiment, In theexperiment, proposes anysplithelikes,proposes anysplithelikes, from from to asimplerule:oneperson to asimplerule:oneperson &l & to to split split some some money according money according game, inwhichtwopeople try had menplaytheultimatum mont GraduateUniversity Clare- of Zak J. Paul when p eadershI — to the regions of the totheregionsof Autopilot Autopilot They don’t They the brain’s consciousness. activities occuroutsideof It’s for example. consciously realizedtheywere tougher onrainydays, scribe. It’s unlikelythosemedicalschoolinterviewers for reasonsthatmakelogicalsense,andwecande- ourthoughtsandactions.that masktherealcausesof lower scoresfromtheirinterviewers. whose appointments occurred on rainy daysreceived of Toronto between 2004 and 2009. As a group, students views withmedicalschoolapplicantsattheUniversity inter- doctors correlatedweatherreportswith2,926 Simon D. Toronto.two theUniversityof Baxterof The Redelmeierand organizations, accordingtoDonaldA. for consequences serious more has rain to reaction into theboxforadoughnutinbreakroom.People’s to be late, leave early and “forget” to throw their payment Bad weather, for example, makes employees more likely rassingly at odds with the way we prefer to see ourselves. out anyconsciouschoiceorawarenessontheirpart. responded to these ancient hormonal messengers with- dents’ behavior changed because their brains and bodies stu- consciousness.was involuntaryandoutsideof The ner. Itmadethemmoregenerous. more warmandfuzzytowardtheirnegotiatingpart- tosterone madethemmorefair. to refuseyourbid,leavingeveryonewithzero. Sotes- And youaren’tforceyouropponent agoodplayerif about theirstatus, whichmadethemwanttoplaywell. able drop.) measur- a experience will losers of fans over,the even testosterone levelsrise,andthelosers’godown.More- (In a sports match, researchers have found, the winners’ it seems to be most important in competition for status. be the male hormone of aggression and dominance, but ging eachother. Testosterone, course,issupposedto of people havesexand,forthatmatter, hug- whenthey’re are. and perceptionsthataren’twhatwethinkthey which weareunaware,alsohaveexperiences As wehaveexperiencesandperceptionsof The Brainh Dan Arielycalls“decision illusions” story. This is the realm of what the behavioral economist The Brainh Decision illusions arise in part because so much of Decision illusionsariseinpart because somuchof Most oftentheillusionisthatwemadeourchoice thesenon-consciousprocessesareembar- Some of In bothcases, thehormonaltreatment theeffectof On theotherhand,oxytocinmademenfeel Testosterone madethewomenmoreconcerned Think of thisasanotherlevelinthemultilayered of Think s as iTs s as iTs Secrets Secrets — brainprocesses Q4.2010 23 hard to notice that you’ve been influenced by the clouds To reach people anD moTivaTe when you don’t know it happened. But the mind also Them, engage BoT h Their has defenses against unwelcome or unsettling information. If it can’t hide unpleasant news, it actively Top-Down Thinking anD Their fights it. BoTTom-Up inTUiTions. A region of the frontal cortex — called the dorsolateral prefrontal cortex (DLPFC), it’s located above the eyes, behind the forehead — appears to be essential to Consider Eisenegger’s experiment with testoster- this active censorship. For instance, in recent MRI ex- one. In that study, women played more fairly if they’d periments comparing scientifically illiterate under- absorbed some testosterone. However, there were some grads with physics majors, Dartmouth’s Kevin Dunbar women who became much more aggressive in the game: found a difference in the way their brains responded. they were the ones who thought they had received tes- When they saw doctored videos that appeared to vio- tosterone. (In reality, they’d gotten a placebo.) Where late the laws of physics, all students showed activity in women who had actually received the hormone acted the “error detecting” regions of the cortex. But the more competently, those who imagined they had the trained students also had activity in the dorsolateral “male hormone” in their systems acted more like they prefrontal region, which was busy erasing the anomaly figured men should act. Testosterone, a peptide hor- from their awareness. Their brains weren’t just regis- mone, had a “bottom-up” impact on behavior. But the tering “that looks wrong.” They were also registering idea of testosterone had a “top-down” impact as well. “forget it, that can’t be.” (It’s especially clear in this study precisely because Similarly, the DLPFC is also active when people those two effects weren’t the same.) “correct” their taste buds. As Samuel McClure of Baylor The Coke-Pepsi experiments are another case in and his colleagues discovered in MRI experiments, when point. Bottom line: don’t try to lead by picking a favorite people chose between Coca-Cola and Pepsi in blind taste brain layer. To reach people and motivate them, engage tests, the DLPFC was quiet, and sensory brain centers both their top-down thinking and their bottom-up were busy. But in a later test, when they saw an image intuitions. of a Coke can before one of their sips, each person’s 2. Big challenges don’t always need big DLPFC lit up — and they much preferred that choice. solutions. It’s natural to feel that big problems need Since the options in that test were identical (all big responses, and that the right answer is going to be Coke), their preference was clearly based on branding, far from the wrong one. That’s one of the brain’s in- not tasting. And the sensory message — “there’s no dif- built biases, in fact. If your anti-smoking informational ference between A and B!” — had been edited. That’s pamphlets aren’t affecting employees’ tobacco use, then great news for branders, who want consumers to stay maybe you’re tempted to go for a ban on smoking. After loyal. But it’s not as encouraging for leaders in changing all, you gave them all the statistics they need to make times, who need their people to put aside old habits the right choice, and it “didn’t work.” and old ways of thinking. Remember, though, that everything you experience has multiple meanings, because the same object is Guideposts forfor leaDership treated differently in different parts of the brain. To- bacco isn’t just a suicidal habit that makes no statistical While much remains to be understood about the sense. It’s also a jolt of stimulant, and an addictive sub- brain, the characteristics that we do know stance, and, for many people, an emotional signal of something about point the way to a handful of autonomy and independence. You don’t undo all that fundamental principles that can guide day-to- by explaining the epidemiology of emphysema. day leadership decisions. Instead of big, dramatic, difficult changes at the 1. It’s top-down AND it’s bottom-up. Reading level of rational persuasion, you can make slight adjust- about neurons and brain pathways, it’s easy to be lulled ments to details that matter at other levels of meaning. into the notion that “bottom-up” processes — sights and These are easier and quicker. Often, they’re all it takes. sounds, strong feelings, unconscious biases that we Programs that help employees quit tobacco are more share with animals — are more important in people’s effective in companies where people feel that manage- behavior. But they aren’t. Nor is it true that “top-down” ment cares about their future; they’re also more effec- processes — conscious thoughts and rational decision- tive when each participant has one-on-one contact with making — always carry the day. a “coach.” 24 Q4.2010 The Korn/Ferry InsTITu T e Consider, too, the very different responses people The more parts of the multilevel brain you can have to the prospect of donating their organs after speak to, the more effective your message. You can’t death. Donation rates vary a great deal, from nearly 100 get more brain savvy than that. percent in France to 4 percent in Denmark. The difference isn’t a matter of policy, laws or culture. It’s a differ- David Berreby is the author of “Us & Them: The Science of ence in brain-savviness. Identity” (University of Chicago Press, 2008) and writes In countries where people have to “opt-in” to do- BigThink.com’s “Mind Matters” blog about human behavior nate organs by checking a box or filling out a form, (http://bigthink.com/blogs/Mind-Matters). His writing about science has appeared in The New Yorker, The New York Times rates are low. In “opt-out” regimes — where people have Magazine, Nature, Smithsonian, The New Republic and many to make the effort to say they refuse— donation is other publications. near-universal. People are averse to change, paperwork and, especially, thinking about their own deaths. Changing their behavior doesn’t require changing their thoughts or feelings about these unpleasant subjects. All that is needed is a slight change in the story at a difdif-- ferent level: You want to avoid thinking about this? No problem. Often, leading people to and through change needn’t involve big moves. It just needs the right moves. If you don’t see any at the level of rational argument, or if emotions in the team aren’t going your way, try looking elsewhere. 3. Awareness of the biology helps control the biology. It’s not easy to square our self-image as clear- thinking, disciplined people with the evidence that clouds can alter our perceptions of a new employee or that facial anatomy is relevant to the way we respond to a boss. But self-awareness pays off. Instead of denying that bad weather sours people’s perceptions, for example, you can prepare for it. Organizationally, you can correct for the rain effect in evaluations and reports. Personally, you can remind yourself to cut the guy with the umbrella some slack. 4. Make the story coherent on many levels. The more we understand the biological basis of behavior the clearer it is that all brain functions depend on one another. So the best way to engage the multileveled brain is to tell a story that works at many levels. It’s the “wellness program” that lays out facts about health-care costs and tells employees they’ll feel better if they lose weight and sets up teams so they can power-walk together and not feel alone. Or the supervisor who explains the new project with a spreadsheet and a meeting where each member is asked to comment and a T-shirt for every team memmem-- ber to encourage the feeling of belonging. BrI e FIngs on TalenT & l eadershIp Q4.201025 ‘‘ 26 If tree, youhaveafruit the fruit Planting the Seeds of Wealth theSeedsof Planting If tree, youhaveafruit the fruit Q4.2010 InTervIew America. Underhisleadership, thesecompanieshave grownorganicallyandthroughacquisitions. Carlos SlimHelúhasamathematicalmindandsimpletastes. While criticized for charging some of thehighestphonefeesinworld,Slim’s criticizedforchargingsomeof While companieshave (Telmex). investinginitsnet- Slimpaidpersonalattentiontothecompany’smobilephoneunit, For more than 40 years, he has lived in Mexico City in the same house, which he describes as describes he which house, same the in City Mexico in lived has he For morethan40years, Bell fromtheUnitedStates, andFranceTélécom revolution, whichbeganin1910, the1929stock marketcrash. andagainintheaftermathof recently beenpraisedforadjustingtheirtariffsdownward. retail shopsandrestaurants. responsible forincreasingTelmex’s marketpenetrationto85percent. ments in a variety of sectors ments inavarietyof according toForbesmagazine,Slimistheworld’swealthiestperson,havingover- yet, And modest. money andnotknowingSpanish.Slim’s self-discipline,edu- fathertaughthimtheimportanceof individual to purchase a card and receive a handset along with it. Prepaidphonecardshavebeen individual topurchaseacardandreceivehandsetalongwithit. nonfamily investorinthecompany. expandingcoverageandcreatinginnovationssuchasprepaidphonecards, whichenablean work, taken Bill Gates and Warren Buffett of the United States and Mukesh Ambani of India. theUnitedStatesandMukeshAmbaniof Warren Buffettof taken BillGatesand Slim Haddad, who was born in Lebanon and immigrated to Mexico in 1902, at the age of 14, without cation, hard work, goodaccounting,andrisktaking.Slim’scation, hardwork, fatherinvestedinMexicoduringits enthusiast, Slim recently made a big investment in The NewYorkTimes, becoming thelargest SlimrecentlymadeabiginvestmentinThe enthusiast, Anavidreader,ematics andlinearprogrammingwhilestillastudent. artcollectorandsports an interview Like Buffett, Slim is an astute investor who quietly pieced together a diverse array of invest- Slimisanastuteinvestorwhoquietlypiecedtogetheradiversearrayof Like Buffett, In 1990, whenMexicowasprivatizingitseconomy, Slimandtwo partners Trained as an engineer at the National Autonomous University of Mexico, Slim taught math- taught Mexico,Slim of University Autonomous National the at engineer an Trainedas Slim, 70, hissuccesstolessonshelearnedfromfather, attributesalargemeasureof Julién Slim’s telecommunicationscompaniesdobusiness throughoutNorth, SouthandCentral — printing, mining,minerals, metals, industrialproducts, insurance, with carlos slim — acquired thestate-ownedTeléfonos deMéxico — Southwestern e T The Korn/Ferry InsTITu

JT Morrow (all)

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If you have a fruit tree, the fruit grows down from the branches BrI e FIngs on TalenT & l eadershI p Q4.201027 Slim recently discussed leadership in Mexico City with branches and you reach for it. You eat the fruit, but you take Gary Burnison, chief executive of Korn/Ferry International; out the seeds and you plant them because you have to rein- Eduardo Taylor, Korn/Ferry’s regional market leader for Latin vest. That’s where the wealth lies — in producing more trees. America; and Joel Kurtzman, editor in chief of Korn/Ferry You will not necessarily have more income every year, but Briefings. The following comes from that discussion. you will have more wealth if you plant the seeds. And if you do it long enough, you will have enough wealth to create a Your success in business has made you the richest man in middle class, which will form the strongest market you can the world, according the recent rankings in Forbes maga- have and the best society. So the responsibility of someone zine, ahead of Bill Gates and Warren Buffett. What role with wealth is to create more wealth. does money play in your life? Does it motivate you? Slim: The house where I was born was better than the house And then distribute it? where I now live. The house in which my wife grew up was a Slim: I don’t believe that you need to create wealth and then lot better than the house where I now live. So I would say the make a distribution plan for it. I think wealth is created be- answer is no. Money does not motivate me. It is my view that cause the market is growing and society is growing and then when families have money in excess and they are not making the overall economy grows. It’s classical economics. But hav- investments and building businesses and creating jobs and ing said that, I can say that the best investment is to fight doing things for society — when they think only materially poverty. Fighting poverty is not just a social issue or an ethical — then something is wrong. That is the way I was raised, and issue. It’s an economic issue, and there is an economic need those are the values that were taught to me. The truth is, to fight poverty. It’s best for everyone and everything because when I pass away, I will not take 1 cent with me. I will not if you fight poverty, you create a bigger market, which creates take anything. In my opinion, wealth is a responsibility and more wealth and with it more stability. If you do that, you in some ways a compromise. You must keep it growing and create enough wealth to educate people and then they have use it to society’s benefit. higher levels of productivity. This means you can create more jobs and employment. And, of course, all of this creates human Are you suggesting that a wealthy person — a CEO, for ex- capital. In my view, prosperity is good. But if only one coun- ample — should be a custodian of the wealth of an organi- try is prosperous, it’s still a small market. What do you do zation or a family? with all of the raw materials and production potential that we Slim: No, not at all. The role of a business leader — a CEO — is have? All of the labor? The more prosperity we have, and the to create more wealth, not conserve it. A CEO needs to grow more wealth we create, the better it is for everyone. the wealth of the company and the country. Wealth is not a privilege, it’s a responsibility. If you are a great doctor, you The American industrialist and philanthropist Andrew have a responsibility to use what you know to treat people Carnegie said, “The man who dies thus rich, dies disgraced.” and to help them. If you are a politician, you have to take re- Slim: That’s crazy. In part, of course, because it depends how sponsibility and use that responsibility to build your country. you make your wealth. If you made it selling arms and killing Having a leadership role in business or politics means taking people, that’s a crime. That’s not true wealth in my opinion. responsibility. To me, the word custodian signifies someone But if you are creating enterprises, creating wealth for your who sells everything and puts the proceeds in the bank. It country, your society, creating jobs for people, that’s some- doesn’t suggest someone who is building. thing honorable.

Some might use the word guardian instead of custodian. Who was the biggest influence on you? Slim: Again, I disagree. The point is not to guard or conserve Slim: My father. His examples of values and work were very what you have, but to create. It’s like planting a fruit tree. You powerful for me. I have this copybook from when I was 13. don’t just guard it or conserve it. You water it. You care for it It is on the wall in my office. He had me write in it and keep so it grows. But you must understand there is a difference records of all my expenditures. It includes my first balance between wealth and income. Wealth should be created, it sheet, which I produced when I was 15 years old. My father should be invested, and it should be used to create more passed away when I was 13. My father told me to make my wealth. If you have a fruit tree, the fruit grows down from the copybook clean and to keep it neat and to do it on time. and you reach for it. You eat the fruit, but you take out the seeds 28 Q4.2010 The Korn/Ferry InsTITu T e What else did you learn from him? Did you learn to invest in periods of crisis from your father? Slim: My father showed me how to work. He had a big business Slim: Yes. I learned from him that you invest in times of revo- for that time period. He closed it down — sold it. The circum- lution and crisis. Then I read books and realized there are stances were interesting because he closed it in August 1929, moments when things that are normally very expensive are two months before the October 1929 stock market crash. It was valued very low. I learned that in business, the time to invest a kind of coincidence. And then he invested in new businesses is when things are not in good shape. When you invest, you and real estate. Then, later, he opened another business — a want to take a better position than your competitors. When merchandise business, a hardware store — when he was much there is a recession, we maintain strong positions. When older and sick with diabetes. I was only about 9 years old, maybe there is a recession and your competition doesn’t invest, they 10, but my father sent me to his competitors to look at the are giving you the advantage. prices of the things they sold in their stores, and he had me write down those prices and go over them with him when I got Were you a big investor during the recent global financial back. I felt like a spy looking at the prices. But I learned a lot. crisis? Slim: Yes. And we would have liked to invest more. At the What were some of the other things he taught you? time, members of the American Chamber of Commerce in Slim: Well, I like to think about another example of my father. Mexico invested $2 billion. That included the investment of He arrived in Mexico in 1902, with almost no money, when the big U.S. companies. At the same time, we invested $3.2 he was 14 years old. He had to learn Spanish. But he made a billion. We invested a lot. The U.S. investment in Mexico is business with his brother and by the time he was 23, he had not enough. capital of $40,000. Then came the Mexican revolution, which started in 1910 and which lasted a long time. During the revo- Why is that? lution, my father started investing. He did it during the pe- Slim: I think the U.S. is being left behind. In Mexico, they are riod of crisis. not in the banks; they are not in telecommunications, water and you reach for it. You eat the fruit, but you take out the seeds BrI e FIngs on TalenT & l eadershI p Q4.201029 or power. They are in traditional industries. They need to ate and do something with quality and to optimize the way invest more in Mexico. they work as much as they can. And they feel very good about the achievements they are making as the building goes up. Did you learn any big lessons from the financial crisis? They feel pride about the things they are doing. We have been Slim: One of the important lessons — especially from the talking about the manifestations of leadership, and this is Lehman crisis — is the power of excess. Periods of excess one of them — making people feel a sense of achievement. make you ambitious, but not always for the right thing. Do you get better at leadership over time? Let’s turn to the topic of leadership. How do you define Slim: Yes, I think you do. Leadership is a combination of leadership? things. It’s easy to think something is white or black, that Slim: There are many types of leadership. You can have leader- people have the genetics to be a leader, or that other things ship in your family, between friends, between a team in sports, are in play. And, of course, there are always circumstances. I in business and politics, in religion, and in the professions. personally don’t believe so much in luck, but circumstances So, it’s difficult to define it in three or four words. True, it is are important. linked to achieving some type of target and to a set of mutual responsibilities. But leadership is also about transmitting con- What’s the best way to determine who is a leader? fidence to people, so they can accomplish their goals. So they Slim: The best way to find out is to look at what they have can better target their achievements. So, in general, it depends done in the past. on the type of activity you are engaged in. Some people can be leaders in one type of activity, not in another. But in business, How have you changed as a leader over time? leadership is linked to fulfilling an organization’s objectives, Slim: You develop a consciousness about your responsibili- to increasing its efficiency, to coordinating its activities, to ful- ties and about the areas in which you must compromise. You filling individual and group responsibilities, to being able to look at things differently that you are working on. You de- compromise, and to having some measurable achievements. velop international references regarding competition be- In addition, when people see that a leader or chief executive is cause you are competing internationally. You learn over time. working, it doesn’t matter what position that person has. They will benefit because the leader acts as a role model for them. Does competition teach people about being a leader? Slim: Yes, but not directly. You see, if you are talking about a What else do leaders do? football game, competition is very important. If you are talk- Slim: I believe the leader sets the direction, and even the emo- ing about education at school, the marks you have — com- tional tone, of an organization. It is about satisfying the emo- pared with the marks of others — are just qualifications. They tional needs of people. It’s not just about taking responsibil- are not the same as your knowledge, your way of understand- ity for things. ing the world. At the same time, I think competition makes everyone better. It requires you to make more effort. You What do you mean by setting the emotional tone? have to look around more. You have to study more. You have Slim: People cannot live without doing anything, without to train more. You have to look at where you need to be better having a direction in life, without work. What good organiza- at what you do. So, competition can be valuable. In business, tions do is to set a direction and help develop people. It’s very it is necessary to have competition to be your best. It makes important for leaders in business to work to create human you study what’s going on in other places to see what your capital that way, to give a sense of purpose to a team, and to competitors are doing. And what it shows is that your com- the people in the organization. If leaders do this, then people petitors are always getting better. So, it makes you under- working in organizations will feel they are doing something stand that you always need to improve, too — not just as a important for society and for the people around them. They leader, as an organization. Competition makes you improve. will have a real sense of achievement. You can see that in construction, in a building, for example. There are some people Do you develop leaders for your companies from the inside, in charge who have good leadership skills, and you can see or do you go outside? they work hard. What they are looking for is purpose to cre- Slim: Yes, from the inside. First, the people that are inside the and you plant them because you have to reinvest. That’s where 30 Q4.2010 The Korn/Ferry InsTITu T e that is flexible, and that people can adapt to, and that they feel they would like to join with pleasure. In an acquisition, we don’t really move people. We cannot get involved at that level with so many companies. Besides, if you move people, they will run.

Does that mean that the management of a company is one criterion for an acquisition? Slim: No. The management of the company is important for investors, since you are going to put your resources into a company. But management is by no means the main reason for an acquisition. The reason is primarily when you are in some activity and you need to expand geographically to increase the value of the company. Then an acquisition is a good idea. And, of course, we think that if the management of the company we are acquiring is good, then they will be happy to work with us. On the other hand, if the management is not good, then we will try to improve it.

Are there some industries where management is more important than others? Slim: Yes. There are certain companies where management is very important. This is especially true with technology companies. With some kinds of technologies you really need people with special types of knowledge and understanding. In these sectors, it is very important that people stay in these companies. Management is also important with regard to banks. You need good bankers. In some cases, when you are buying something you know very well — say you’re an international automobile company and you’re buying a local automobile company — you want to have good people there, and you want to give them an opportunity to develop. But people group follow our philosophy. We have a philosophy of leader- who work with us know that they can go as far as their talent ship — some ideas and some concepts. They need to share will take them. We don’t just care about doing the job. We this. Also, because they are inside the company, we see that also care about doing the job in the right way. they work together and not against each other. We all need to go in the same direction. We are not competing on the inside; How do you make sure your managers and leaders develop? we are competing on the outside. What can happen is that Slim: We expanded a great deal in the last few years. In telecom- people coming from outside — when they are new — have a munications, since 1990 for a period of 15 years, we grew at a need to take strong positions to get known. What also hap- rate of 66 percent a year. When you grow so fast, you have many pens is that when people come in from the outside, they problems. So, what we did — years ago, now — was that we told come in at such a high level that it makes people jealous. And our local and regional managers of the companies we wanted they also come in with other ways to work and with other cul- to take international to begin making people available whom we tural ideas and values. That’s not good for the organization. could move outside of the country. I’m not talking about moving 2,000 people outside the country. I’m talking about moving Then how do you deal with acquisitions? one or two or three at a time. But we began planning it and Slim: That is an important issue. You need to have a culture developing our people early, before we expanded so rapidly. and you plant them because you have to reinvest. That’s where BrI e FIngs on TalenT & l eadershI p Q4.201031 Do you consider yourself to be the leader of a big group of particular job very well. I say this because the CEO is very im- companies, or do you consider yourself to be an entrepre- portant to the success of the organization. neur? After all, you built your group from scratch. Slim: I guess I think of myself as an entrepreneur. But an en- So there are times when you go outside for talent? trepreneur who needs to manage people. You see, I think you Slim: If we are going to do something very differently from need to have leadership in business. You need to have leader- what we have been doing since the beginning, then we may ship in all areas of economic activity, just like you need to on occasion need to find an executive who can take charge have leadership in sports. The same is true in politics. But I and make those changes happen. But if we are going to be do- believe you don’t just need to have leadership in the CEO. You ing what we’ve been doing for years, then we need to have need to have it in all of the important areas of the business. people from inside. What is important is that the executive Sometimes you need leadership in the operations people, too, needs to know the essence of the business. This is especially and not just in the CEO. So, I think of CEOs as leaders of lead- true so [he or she] can avoid spending too much time managers, and not as the leader. But in my case, with regard to my ing things that are not important and paying attention to too own activities, I really only have two or three people working many variables that are not significant. Leaders need to have with me. In my role, I work with the leaders of the companies. enough experience so they can simplify things and can focus That’s my job. In our businesses, we don’t have people who on the essentials in order to make the right decisions. are both the CEO and the chairman. We have the CEO, and we have the chairman who, in some ways, is the person who rep- You have talked a lot about the need for enhancing educa- resents the stockholders. Or, we might have a founder who tion in Mexico and elsewhere. Is that one of the aims of works with the CEO. But in any case, my job is to work with your foundation? these people. Slim: Yes. I think that businesspeople, entrepreneurs especially, have very good training in the management of human Do you work with the leaders in your companies in the capital. We have the potential to solve problems. I think for same way? us it is easier to solve some social problems sometimes than Slim: In business, I think there are three basic types of lead- it is for others. One of the biggest problems is to develop hu- ers, and they are usually very different. There are entrepre- man capital. How do you do it? There are many steps. You be- neurs, executives and investors. Then there is also the busi- gin with nutrition for the mother, you pay attention when ness leader who is concerned with political activities — the the child is born, you pay attention to the nutrition of the president of the Chamber of Commerce, for example. In child, then you pay attention to education — to modern edu- small and sometimes medium businesses, and in some large cation, quality education. That’s what the foundation does, private companies, there is some confusion because these but it’s also what we do all the time in our companies. We are roles are often taken on by the same person. In the U.S., in big training people to be the best and to develop their know-how businesses, the entrepreneur doesn’t exist anymore. These to learn. So, I think that economic and social problems — even companies are led by people who are executives with institu- national problems, excluding politics — are areas where peo- tions holding the stock. In some of these large companies, the ple in business have expertise. These are areas where private entrepreneurial type of person is long gone; maybe that per- organizations have the ability to help solve problems. You son left 50 years ago. When that’s the case, the entrepreneur- know, in previous societies the state had the power of econom- ial thinking is gone too. ics, military, politics and so on. But now, society has evolved. Economics is getting complex and society is getting very Is it possible for the same person to perform those roles? complex. The best way to fight poverty is by creating jobs and Slim: The truth is that many people can do all of these jobs. stimulating employment. All companies start small and grow. And the number of small and medium businesses is far bigger than the number of big As a leader, are you still learning? companies. But as the businesses grow, sometimes the Slim: Yes, sure. I learn every day. founder is no longer the best person to run the company. Then, you need to find the best people to run the business. You are one of the most successful people in the world. Are You need to find the best executives — people who do that there words you live by? Slim: It sounds better in Spanish, but I will say it in English anyway: “Impose your will against your weakness.” That is the wealth lies. what I believe. 32 Q4.2010 ’’ The Korn/Ferry InsTITu T e Briefings onTalen T Credit &l eadership Drug Drug By LawrenceM.Fisher to Chan Have BeenBidding Its Two SeasonedCEOs Upstar Sheet Balance and the Discovery cool companies t iPierianand ge theGame Q4.2010

34 Q4.2010 The Korn/ f erry i e T u T i nsT

Credit Briefings onTalen T MedicalRF.com/age fotostock prove to be game-changers iPierian isstilltooyoungtohavedevelopedanydrugs. and investment this All Ventures. Google and ners, Byers, HighlandCapitalPartners, Mitsubishi UFJPart- venture capitalfirmsasKleiner, Perkins, Caulfieldand $54millioninfinancingfromsuchheavyweight of alone for tiny iPierian, which so far has garnered a total companies,be anaudaciousgoalforthebiggestof let drugs fasterandthusdramaticallyloweringthecost. intandem,findingwinning develop itstechnology dustry andtousethosepartnershipsaggressively in- the in common now is than stage earlier much a iPierian’s partnershipsat planistoformanetworkof odds. the better greatly to model another embraced and weaknesses, which shrinksthelearningcurve. other things, theteam knowseachother’sstrengths successbecause, among gether increasestheoddsof its EntrepreneurshipCenter. Suchateamworkingto- andchairof Management, SloanSchoolof at M.I.T.’s research carriedoutbyEdwardB. Roberts, aprofessor to thelikelihoodastart-upwillsucceed,according gether before. Starting a company with such a team adds andtheteamattop,ogy whomworkedto- manyof The commonwisdom somewhere alongtheway. 10 drugcandidatesfail and that9outof about10 yearsand$1billion, average of a newdrugtomarketnowtakesan as an industry phoenix and not as a dodo a as not and phoenix industry an as two otherbiotechnewbies, iPierianclearlyseesitself what hasbeenthemodelisgoingtoleadextinction.” billion.Atthatrate,Ithink significantly over$2.5 putsthecostup;it’s25, 1in30,” Goodmansaid.“That big pharmaandbiotech,therealityismorelike1in San Francisco. abiotechstart-upbasedinSouth iPierianInc., man of ally muchworse,accordingtoCoreyGoodman,chair- But iPierianhastwothingsgoingforitthatmay Reinventing thedrugdiscoveryparadigmwould Born justayearago, amergerof theproductof “If we put Genentech as the outlier and just look at Bad asthosenumberssound,thesituationisactu- &l — eadership its breakthrough technol- — and has and isthatbringing there is an early handoff fromone there isanearlyhandoff isparticularlyimportantwhen This business opportunityis.” stand scienceandseethroughthat towhatthereal and whathebringstothetable isanabilitytounder- He’snot evenclosetobeingascientist. abusinessguy, since theirdaystogetheratAmericanHospital.“He’s leader formedicaldevices,Walker whohasknown Robert Ruh,Korn/FerryInternational’s globalsector by familyissues. decision toleavethecompanyearlywasprecipitated Walker’s several biotechstartupsfrombirthtomarket. Hospital Corporationbeforesuccessfullyshepherding theAmerican Walker rosetobeheadof ing inscience, and deeporganizationalskills.Withnoformaltrain- Walker, whohasalongtrackrecordin theindustry existence, toitsoutgoingCEO, P. 62-year-oldJohn ian now, thecompanyowesitsvision,andperhaps Venuti runsiPier- mer venturecapitalpartner. While scienceofficerandafor- the company’sformerchief biochemistwhowas Ph.D. 56-year-old M.I.T.-trained partnerships practical. search processcouldmakeearlytechnology-sharing tion, fromabusinessperspective,acceleratingthere- screening processtospeedupdrugdiscovery. Inaddi- adult stemcellscouldshort-circuitthenormaldrug raising thetantalizingpossibilitythatresulting be takenfromlivingpatientswithaparticulardisease, needed. Andthenecessarytissuesamplescanactually discardedhumanembryosis troversial harvestingof replicatinganycellinthebody.are capableof No con- formed intostemcells, lifethat thoseprogenitorsof whichisthecaseatiPierian. leader tothenext, fromone there isanearlyhandoff isparticularlyimportantwhen This And what that opportunity is this time is revolu- is time this is opportunity that what And “He hasaverystrongpracticalsensetohim,”said Venuti, a iPierianisMichaelC. CEOof The iPierian’s allowsadultcellstobetrans- technology Q4.2010 35 tionary, said Walker, choice. Shortly after arriving in California in 1985, he “because for the first formed a relationship with Kleiner Perkins, the legend- time it allows you to ary Silicon Valley venture firm that had provided initial turn drug discovery financing to Genentech and other industry pioneers. on its head by put- Walker said he shared a long-term perspective with the ting the patient at firm’s partners on how to create value through nurturing the front of the cycle.” new companies. Together they built five companies, of As part of the which three went public and two were acquired, an en- handoff to Venuti, viable record in the high-risk world of start-ups. Walker will remain an When Seidenberg called, iZumi and Pierian already advisor to the firm. had a team of scientists in the field of stem cell research, strong financial backing, and filings on crucial patents. From Magic Bullet to Walker brought leadership, organizational ability and Scar Tissue business acumen, to stitch those elements together into Drug discovery has traditionally begun with a poten- a company. tial therapeutic compound and worked its way back to The depth and breadth of the opportunity shaped the patient, through in vitro studies, animal models, iPierian’s strategy and suggested a business model based clinical trials and many millions of dollars. But what if on a set of partnerships, Walker said. As a result, iPierian you could start with the patient’s disease and work plans to join forces with an established maker of bio- back to the cure? logical and chemical tools. By doing so, it hopes to in- Popular media discussion of stem cells centers on dustrialize iPierian’s technology rapidly and broadly, their potential use as drugs, which casts them as the while partnering with biopharmaceutical companies latest edition of the pharmaceutical Holy Grail — the to address specific diseases and entire therapeutic cate- magic bullet, a canny molecule that can locate and elim- gories. In addition, iPierian’s own proprietary drug de- inate disease with exquisite accuracy. While stem cells velopment program will focus on neurodegenerative may one day fulfill that quest, iPierian thinks that their diseases, such as Parkinson’s and ALS (“Lou Gehrig’s first best application will be as highly specific targets Disease”), which are particularly underserved by exist- to be used in drug discovery, not treatment. iPierian’s ing discovery methods. stem cells are a new form of highly capable, drug-dis- In today’s uncertain financial environment, Walker covery tool. said this partnering strategy should provide adequate iPierian was formed in July 2009 from the merger capital for iPierian to advance adult stem cells as a of iZumi Bio Inc. of South San Francisco and Pierian Inc. platform technology and bring its own first drugs to of Cambridge, Mass., both created to take advantage of the clinic without multiple rounds of dilutive equity these discoveries. To supplement a scientific advisory offerings. board and key hires drawn from the Harvard Stem Cell The Productivity Crisis in Drug Discovery Institute and the Gladstone Institutes at the University of California at San Francisco, iPierian’s founding in- Why is the drug discovery process so difficult? The an- vestors sought an experienced chief executive with swer is that the industry is witnessing the fundamental “muscle memory and scar tissue,” to build the team, said limitations of a discovery paradigm based on two op- Beth Seidenberg, a partner at one of the investors, tions: serendipitous finds, like aspirin and opium, Kleiner Perkins Caufield & Byers. She recruited Walker, whose derivatives are still among the most commonly first to be CEO of iZumi, but with a mandate to take over prescribed drugs, or the screening of vast chemical li- the merged companies. braries against targets of unknown and unquantifiable Walker, who had recently retired, was an obvious relevance. The weaknesses of this random approach are

This partnering strategy should provide adequate capital for iPierian to bring its own first drugs to the clinic without multiple rounds of dilutive equity offerings. 36 Q4.2010 The Korn/f erry i nsT i T u T e Briefings onTalen T Courtesy of iPierian provement inpurity. closelywithacom- “Working nottwo,magnitude, if coupled withaconcomitantim- Yields mustimprovebyat leastanorderof from trivial. ratory quantitiestocommercial productionwillbefar scalingupstemcellprocesses fromlabo- actual taskof izing adultstemcells. industrial- enable iPieriantomonetizetheoffshootsof partnerwill royaltypayments.ongoing streamof The so thecompanycanaccessupfrontcapitalaswellan turn iPierian’s innovationsintoproductopportunities, sive long-termrelationship, wherethepartnercan ship withasingleoutstandingcompanyforanexclu- itsbusinessmodel. which formsanelementof the firstbroadpartneringopportunityforiPierian, up alongwiththeindustry. toolmakerspresent These sophisticatedvendorsthathasgrown community of produce theirownbiologicaltools, buttodaythereisa where Mulliswasemployed,oftenhadtoinventand ology. samewillbetrueforadultstemcells. The required manyadvancesinhardware,softwareandbi- quence, the further industrialization of these processes aparticularDNAse- copiesof thousands tomillionsof Prize for the development of a technique for generating Although KaryMullisultimatelyreceivedtheNobel biologicaltoolsandenablingtechnologies.makers of thebiotechrevolutionwere unsungheroesof The Technology The Foundation ofaNew Platform sheadded. right,” to streamline drugdiscoverybygettingthebiology positions positions at at Merck Merck & & Co.Co. “iPierian’s“iPierian’ssearch search objective objective is is re- held executive previously who officer, nology tech- chief and research for president vice iPierian’s dollars,” dollars,” billionsof billionsof to thetuneof saidBertaStrulovici, to thetuneof saidBertaStrulovici, targets andthenpushingforwardwhateveryouchoose targets andthenpushingforwardwhateveryouchoose the beginning:choosingwrongbiology,the beginning:choosingwrongbiology, thewrong thewrong still-unknown pathologies. of result the are diseases many Toocauses. known approach, butitislimitedtodiseaseswithwell- this of validity the to testimony is kin its and tech Genen- successof disease.The molecular pathwaysof the of knowledge expanded upon premised model drug discoveryawayfromsuchshotsinthedarktoa thepharmaceuticalindustry.tivity of now painfullyvisibleinthedecliningresearchproduc-produc “I know the problems of pharmaandtheystartat “I knowtheproblemsof Though “industrialize” isatidysoundingverb,Though the Walker saidthatiPierianplanstostrikeapartner- Biotech pioneerssuchastheCetusCorporation, pharmaandtheystartat “I knowtheproblemsof wastotake biotechnology earlypromise of The &l eadership - ing the fruits of ourlaborwidelyavailable.”ing thefruitsof benefit thebroaderlifesciencescommunitybymak- Walker said.“Andpractice,” thecollaborationwillalso cutting thetimewehavetospendreducingscience ready-to-use productswillbenefitiPieriandirectlyby turninginnovationinto pany thatisinthebusinessof with near-term potential. But with a breakthrough a with But potential. near-term with and tolargecompanieslooking forproductcandidates acoreasset, seeking tomaximizethemonetization of risk-averse approachmakessense tosmallcompanies FoodandDrugAdministration. That quired bytheU.S. humanclinicaltrialsre- vanced inthethreestagesof ad- well is molecule a until achieved be not may which collaboration is usually deferred until proof-of-concept, ner much earlier than is common practice today, where cancer andcardiology. broad therapeuticareas, suchasmetabolicdisease, A secondmodelwillservecompaniesworkingin deathininfantsandtoddlers.leading geneticcauseof the is that disease neurodegenerative a dystrophy, iPierian isfocusingoninternally, likespinalmuscular distinct models. Onemodelisforspecificdiseasesthat companies.Walkerforeseestwo and biotechnology pharmaceutical with strategy partnering Venuti’s, now and Walker’s, informs philosophy same The Two ModelsforPharmaceutical Partnerships In bothcases, however, iPierian willseektopart- Differentiated motorneuroncellculture from healthyadultstemcells. Q4.2010 37 It is one thing to reprogram a few sample cells in small dishes in a lab, entirely another to create an automated system that can produce millions of cells to order.

technology like adult technology. It is one thing to reprogram a few sample stem cells, the company cells in small dishes in a lab, entirely another to create can create real value and an automated system that can produce millions of cells receive proper compensa- to order, day-in day-out, within specific tolerances and tion for partnering far earlier in with a guaranteed level of purity. Yields have improved the process, much the way the first exponentially — early experiments reprogrammed biotech companies did, said Dushyant Pathak, iPier- fewer than one in 10,000 cells — but the company has a ian’s vice president for business development. “We see long way to go to achieve production volumes. The bi- stem cells as a product-enabling platform, as opposed ology needed to grow neurons is vastly more complex to a pure technology play, because it enables an en- than growing generic tumor cells in a dish, so simple tirely new way of approaching drug discovery,” Pathak off-the-shelf solutions will not be adequate to the task, added. which is why iPierian and its partners will be inventing With such a broadly applicable platform, iPierian new systems and processes as they progress. could have built a business as a pure biological tool There will also be a specific scientific challenge company. But Walker and Venuti believe iPierian can with each disease, which is coming up with a suitably create greater value for shareholders and deliver much- predictive model. It’s not enough to produce repro- needed new therapies to patients by also employing grammed cells for a test if the particular cell type is not stem cell technology in the discovery and development conclusively implicated in the disease. In many cases, of the company’s own drugs. several different cell types will have to be created for Nevertheless, Walker concedes that a small com- one disease. pany is limited in the medical markets it can address. A Solid Intellectual Property Portfolio Even after the science is proven, after a candidate drug successfully passes through clinical trials and approval Beyond the science and engineering, biotechnology by the F.D.A., the company faces immense logistical companies all typically face a level of legal risk associ- and financial hurdles in building adequate manufac- ated with intellectual property. Most scientific discov- turing, marketing and sales capabilities to bring that eries have multiple parents, and determining custody drug to market. In truth, very few biopharmaceutical rights is often a long, litigious process. If the intellec- start-ups grow into successful operating companies. tual property underlying a new process is split between too many parties, any one of them may have a difficult Walking the Risk/Reward Tightrope time building a viable business. One obstacle to iPierian’s success is that the cells differ- Shinya Yamanaka’s 2006 creation of adult stem cells entiated from adult stem cells do not absolutely dupli- from mouse cells was a watershed event for biology. cate the actual somatic cells in the human body, and The production of human adult stem cells less than two there is currently no reliable measure of the relative ac- years later, by Yamanaka’s lab at Kyoto University and curacy of the reprogramming process. But iPierian’s others, opened a new era in drug discovery. While Ya- scientists say that the differences are minuscule and manaka’s breakthrough work in mouse cells generated inconsequential compared to the difference between a the headlines, the first patent filings in human adult cell from a specific Parkinson’s patient and a cell from a stem cells were made in June 2007 by a team at Bayer research or laboratory animal. They expect the predic- Japan, whose work, because it was done without fanfare tive power of a drug test based on a motor neuron gen- inside a private company, went largely unnoticed. In- erated from adult stem cells will be so much better deed, as late as October 2007, Yamanaka publicly stated than one done traditionally, with animal cells. that it was unclear when, if ever, human adult stem cell A more compelling obstacle will be scaling the research might succeed. In a review of its operations 38 Q4.2010 The Korn/f erry i nsT i T u T e Briefings onTalen T Courtesy of iPierian Venuti Michael pain, priortoitsacquisitionbyEvotec. developer ofinnovativetherapies for Goodman’s previouscompany, Renovis, a a positionWalker himselfhadfilledat chairman ofiPierian’sboarddirectors, they bothsaid‘yes,thisisreal.’” consider it.IcalledMikeandCorey potentially game-changingthatIhadto calls. “Buttheopportunityherewasso other companyatthattime,” Walker re- terand plcinFebruary 2010. discovery, whichwasacquiredbyAs- throughput biologicalsystemsfordrug of BioSeekInc,acompanyusinghigh Michael C.Venuti, chiefexecutiveofficer U.S. NationalAcademyofSciences;and innovation Centerandamemberofthe dent ofPfizer’sBiotherapeuticsandBio- They wereCoreyGoodman,pastpresi- dentials matchedhisbusinesschops. to twooldfriendswhosescientificcre- part ofhisduediligencewastoreachout ing thecompanythatbecameiPierian, When JohnWalker firstconsideredjoin- A Close-Knit Team Walker tappedGoodmantobe “I hadn’tbeenintendingtorunan- &l eadership biopharmaceuticals, medicaldevice and of leaders current of number dented ucts andservices,spawnedanunprece- outside theindustryofhealthcareprod- This now-defunctcompany, littleknown successor asCEO, holdsanA.B.from has impressivecredentials.Venuti, his search onstartupsfromM.I.T. up’s chancesofsuccess,accordingtore- approach thatgreatlyenhancesastart- that hasworkedtogetherpreviouslyisan Kleiner Perkins. leading venturecapitalfirms,including tech andSyntex,hadworkedwith viously heldseniorpositionsatGenen- preclinical development.Venuti hadpre- was seniorvicepresidentofresearchand president andchiefexecutive,Venuti acquisition byCelera,whereWalker was its to prior Pharmaceuticals Axys at well, as together had previouslyworked as hissuccessor. Walker andVenuti chief scientificofficer, andultimately, Venuti onboardtoo,aspresidentand brought immediately he February, And aftertheBioSeekacquisitionin Dartmouth College,andaPh.D. inor- American HospitalSupplyCorporation. ganic chemistry from M.I.T.from chemistry ganic Good- executive reallywenttoschoolatthe Walker’s hand-pickedstart-upteam Starting acompanywithgroup man attendedStanfordUniversity said thatiPierian’soutgoingchief are inbusiness,butitcouldbe as aSearleScholarandearned SUNY andKellogg, hisdegrees his B.S.inbiologywithdistinc- ogy. WhileWalker attended tion andhonors.Hewasa earned hisPh.D. inneurobiol- National ScienceFoundation California Berkeleyand Fellow attheUniversityof other health-relatedcompanies. ketplace isquiteanother. grants isonething;winninginthe mar- National InstitutesofHealth.Winning tute forRegenerative Medicineandthe search grantsfromtheCaliforniaInsti- iPierian’s recentlybeingawardedre- adult stemcells.Thisiswasevidencedby has emergedastheleader,” inutilizing viser. “Underhis leadership,thecompany er’s continuingpresenceasaseniorad- Venuti, whosaidhewillwelcomeWalk- able business.” turn themostadvancedscienceintoavi- ing scientistsandworkingwiththemto has alwaysenjoyedthecompanyoflead- Ruh ofKorn/Ferry International.“Buthe of newtechnology. of biotechstart-upsonthecuttingedge was fortheopportunitytorunanumber science, whenhemovedtoCalifornia,it And, thoughhehasnoformaltrainingin cidedly low-techsideofthebusiness; American HospitalCorporation,thede- ranks theretobecomepresidentofthe personal skills.Walker rosethroughthe gence, self-motivationandstronginter- institutional valuesofpracticalintelli- tal inoculatedhimwiththecompany’s At iPierian,thattasknowfallsto He isnotascientist,” saidRobert Walker’s tenureatAmericanHospi- Q4.2010 39 following its merger this is not only very valuable to us, but also very valu- with Schering, Bayer able to others. If we can’t raise hundreds of millions in elected not to con- a combination of strategic money and an IPO, we can’t tinue the stem cell succeed.” work in Japan, and At its current burn rate of about $1.3 million per iZumi, iPierian’s month, iPierian has adequate capital to operate predecessor, was able through 2011 without partners. Matthew Plunkett, to acquire all of the chief financial officer, estimates that the company will related intellectual need $125 million from 2010 to 2014. He believes the property. partnership strategy should begin to provide non-dilu- iPierian’s intellectual tive capital as early as next year. property also draws upon fil- “The assumption is we can partner on three thera- ings generated by the Gladstone peutic programs and take the spending on those off Institutes in San Francisco; Pierian, our books,” Plunkett said. “The more that we have, five prior to merging with iZumi; and by iPierian, since to eight true programs, each of which we can partner combining the companies. In January 2010, the Intel- for $10-$20 million up front, the more we can make an lectual Property Office in the United Kingdom issued a attractive proposition for investors. But the other chal- Notification of Grant to iPierian for its first patent re- lenge is if we give away too much too early, there won’t lated to adult stem cell technology. This is the first pat- be a lot of retained value here. And that will affect us as ent related to adult stem cells granted outside Japan. a public company, and as an acquisition target.” U.S. patent applications are pending. Indeed, many biotech companies have discovered Nevertheless, for such a broadly applicable and that promiscuous partnering can be the most danger- potentially powerful technology, there will be competi- ous dilution of all because it fritters away future prof- tion, and inevitably, competing patent claims. Already, its. Also, the more complicated a web of relationships a Cellular Dynamics International, based in Madison, small company weaves, the less likely it will be ac- Wis., and founded by stem-cell pioneer James Thomp- quired due to potential conflicts between partners and son and three university colleagues, has agreed to sup- the acquiring company. ply Roche with beating heart cells for toxicity testing. Moving Forward In San Diego, Fate Therapeutics is collaborating with biotech toolmaker Stemgent to form Catalyst, a ven- Walker and the team he assembled at iPierian believe ture that will make adult stem cells for other compa- the shift from random screens, surrogate animal mod- nies in a consortium. els and serendipity to a patient-based, cell-specific approach will be the most compelling development in Finance Beyond the Term Sheet drug discovery since the introduction of recombinant In the glory days of biotech finance, which began DNA. And indeed it is nearly impossible to imagine a roughly with the initial public offering of Genentech scenario where it would not be to medicine’s advan- in 1980 and extended through the genomics bubble of tage to have relevant biological studies and population- the early 1990’s, the public equity markets poured capi- based disease cells for drug screening and discovery. tal into any number of risky scientific ventures. But for “Considering the billions of dollars now spent on other than a handful of winners, the cumulative return drug discovery efforts that lead to suboptimal results, a on investment over the life of the sector was negative new paradigm that reduces those costs and increases even before the financial markets’ collapse in 2008. In the number of leads that turn into drugs will substan- today’s risk-averse market, even the most promising tially improve the returns on biopharmaceutical in- company cannot count on an initial public offering, so vestment,” Walker said. “Biotech companies have been iPierian will have to find creative ways to fund its future. built upon one or two successful molecules or upon “Business development deals will be crucial,” said production of essential tools for the work of others. Bob Higgins, a general partner with Highland Capital. iPierian has the chance to do both.” “I’m not a huge biopharma investor; I like only really unique situations, and this one rang my bells, but if Lawrence M. Fisher has written for The New York Times, Strategy this is going to require hundreds of millions in private + Business and many other publications. He is based in San equity, it will be very hard. So we need to prove that Francisco. 40 Q4.2010 The Korn/f erry i nsT i T u T e 42 A Q4.2010 TalenT ofthePyramid at theBottom be greaterthanthoseinBritain. Lastyear, that emergingmarketsrepresented 37percentof year, drugs inBrazilwill according totheresearchcompanyIMSHealthIncorporated.Sales of tries, areexperiencing astrongsurgeindemandfrompoorernations. dustry andhightechnology, which oncefocusedonupscaleitemsbettersuitedtowealthycoun- while emergingcountryconsumersarehungryfornewproducts. Evensectorslikethedrugin- tional MonetaryFund.Westernmarketsareincreasinglysaturated, withlittlegrowthpotential, kets now exceeds that of developed countries, up from one-third in 1990, according to the Interna- mar- emerging of product domestic gross combined The compelling. are numbers nations.The Managementcitedasoliddemandinemerging marketsasthereason. spite atoughmarket. Household productscompanyUnileverechoedthegoodnews, witha4percentriseinsales, de- surge infirstquartersales, thankstoastrongperformanceinguesswhere?Emergingmarkets. emerging markets. ous year. reasonforthebetter-than-expectedperformance?A19percentincreaseinsalesto The theprevi- announcing an11percentjumpinrevenue,comparedwiththefirstthreemonthsof ttheendofApril,pharmaceuticalcompanyAstraZenecasurprisedmarketsby Pharmaceutical salesinChina,forinstance, willexceedthoseinFranceandGermanynext Pharmaceutical developing in consumers reaching on depends success their that know companies Smart Sensing apattern? samemonth,theconsumergoodscompanyProcter&Gamblecelebrateda7percent That than itlooks. But itisharder mass market. to reachtheglobal slashing prices Companies are by VictoriaGriffith e T The Korn/Ferry InsTITu

Michael Austin (all) e BrI Credit FIngs on TalenT &l p eadershI Q4.2010 43 industry’s growth. Other sectors are looking at similar fig- everything, from research and development to distribution ures. Developing market sales accounted for the biggest sales channels. gain of any Kraft Foods division between 2007 and 2009, at 33 “It’s not going to be enough to lower input costs, such as percent annual growth, for example. labor and raw materials,” warned Peter Williamson, a profes- Yet selling to emerging markets is a huge challenge for sor at the Cambridge Judge School of Business and a leading Western multinationals, mainly because consumers in those thinker on the subject. ”Western companies are going to have markets will not accept the price points of consumers in the to change their processes, and that’s why it’s problematic for developed world. “It’s not an exaggeration to say this is the them. It upsets their whole business model.” most pressing management issue that will face corporations The challenge has been made more pressing by the rise over the next two decades,” said Michael Chui, a consultant of domestic corporate powerhouses within the emerging on global information technology with McKinsey & Company. markets. Bharti Airtel of India, for instance, has in a remark- Cutting prices is not just a question of printing up new ably short time come to dominate the telecommunications price tags. The point is to cut prices without drowning in red business in that country. Western multinationals hoping to ink. Some companies are making inroads. Unilever, for in- break in now may find it is a little late; they will confront a stance, has figured out that by offering shampoos, soups, de- fierce homegrown competitor. tergents and other items in small sachets, poor consumers Some corporations in developing countries have even might be better able to afford its products. Procter & Gamble reached the point that they are threatening Western multinationals on their own turf. It turns out that consumers in West- ern nations are more price sensitive than previously thought. are Hard economic times and stagnant incomes at the lower end What is needed of the scale are boosting demand for cheaper products. Two years ago, the Indian automotive company Tata Mo- new cheap products, not tors introduced to the domestic market what was billed as old cheap products. “the world’s cheapest car,” the Nano, priced at $2,500. Within the next couple of years, the car is expected to be available in Europe and the United States, albeit at a somewhat higher price, perhaps $8,000, to meet local safety standards. The suc- came up with lower-tech cleaners, its “Basic” line, to better cess of companies like Tata and Bharti has served as an alarm suit more restrained pocketbooks. for Western multinationals. “Every CEO in the West is now Jeff Immelt, CEO of General Electric, and Vijay Govinda- thinking about cutting prices,” said Jack W. Plunkett, CEO of rajan, professor of international business at Tuck School of Plunkett Research. “If they’re not, they shouldn’t be CEO.” Business at Dartmouth, call this phenomenon “reverse inno- In many cases, corporations in emerging markets may vation” — considering the needs of poorer consumers and have the leg up on price. Western companies are burdened working backward to create a product at a price they will find with what are often referred to as “legacy systems,” a “We’ve appealing. Corporations do this, in part, by simplifying. G.E.’s always done it this way, so why change?” attitude. “CEOs want hand-held electrocardiogram unit, for instance, designed spe- to change things,” said Williamson. “The problem is getting cifically for India, has just four buttons and a tiny printer that everyone else in the company to go along with it.” spits out the quality of image you get on a supermarket receipt. Multinationals’ past successes in emerging markets give The focus on simplification will continue. But to achieve them little to go on. Traditionally, they focused on aspirational the revolutionary price cuts that will be necessary to shore up goods — such as Nike shoes or Gillette razors — for the small emerging markets, managers will need to look beyond prod- demographic segment of emerging markets that could afford uct design and re-examine their processes. To understand how them. Now, they are going after emerging countries’ mass disruptive this can be, consider a few historical examples. markets. And that is quite a different ballgame. Early in the last century, Henry Ford turned the car indus- Bob McDonald, CEO of Procter & Gamble, sees the global try upside down by using assembly lines to create Model T’s mass market as the company’s future. He wants to reach one for the masses. In the 1990’s, Dell took the computer industry billion more consumers in poorer nations over the next decade. by storm when it used a “just-in-time” inventory approach to Last year, he changed the company’s longstanding slogan to streamline costs and build much cheaper computers. Wal- reflect the new thinking. Instead of “Touching and Improv- Mart Stores created a retail revolution by leveraging supplier ing Lives,” the corporate motto is now “Touching and Im- relationships to chop prices for shoppers. To succeed in devel- proving More Consumers’ Lives in More Parts of the World.” oping countries, multinationals have to pull off these kinds The company currently sells its products to about 60 percent of paradigm shifts. Managers are questioning the cost of of the Chinese population; it wants to reach 100 percent. 44 Q4.2010 The Korn/Ferry InsTITu T e Other corporations have similar aspirations, and the dated ones.” Chui agreed, adding that products developed for shifting goals are reverberating around boardrooms all over Western consumers may not have the durability, reliability the world. It is a radical departure; most Western companies and portability necessary for them to compete in the emerg- are simply not used to the type of customers they are now ing world. What is needed are new cheap products, not old pursuing. Most of the world’s population still lives well be- cheap products. low the level most Westerners would consider middle class. Western corporations may also have a bias toward prod- The average per capita income in the United States is just uct over process innovation. John Seely Brown, former chief over $46,000, according to the International Monetary Fund; scientist for Xerox Corporation, calls this a fascination with in China, it is less than $4,000, and in India, about $1,000. “big bang” innovation. The tendency for multinationals to Two-thirds of India’s population of 1.5 billion lives in remote, focus on the next big idea — from supercomputers and block- rural village areas. buster pharmaceuticals to alternative energy and nanotech- The race for the bottom of the consumer market is turn- nology — will ultimately prove harmful, he argues. Instead, ing traditional management thinking on its head. Multina- corporations should focus on improvements in process, and tionals, for instance, have traditionally striven not for on smaller, incremental breakthroughs. cheaper products, but for better products. Gillette’s two- Corporations need to make the distinction between the bladed razor morphed into the three-bladed razor, which world’s poor and the world’s very poor, said Martin Fisher, eventually became the Mach3. co-founder and CEO of KickStart, a nonprofit that sells $100 The high-technology sector has historically introduced water pumps to farmers in Africa. The economic situation of new products to early adopters at a high price, and then grad- very poor consumers is distinct from that of the less poor. ually moved the product down the consumer chain. This for- They have uneven cash flow. During harvest time, for instance, mula does not work for the world’s mass markets. “By the very poor farmers get a lot of money in at once; when it comes time the product is cheap enough to reach consumers in the time to pay school fees for their children, they have a large villages of India, it may be obsolete,” said Williamson. outflow of funds. Trying to sell them something when they “Emerging market buyers want cheap products, but not out- have no cash is probably pointless. Marketing products that

BrI e FIngs on TalenT & l eadershI p Q4.201045 can save them time will probably also be fruitless, because ers in the West might turn up their noses at would go a long time is something many of the world’s poorest have in abun- way toward improving the domestic lives of most Brazilians. dance, said Fisher. For instance, most people could not afford “new and im- Even in the most poverty-stricken corners of the world, proved” Tide, with all its cutting-edge cleaning abilities. Yet however, people do buy things. And because what they buy is the alternative was to spend hours pre-scrubbing dirty often relatively expensive and of low quality, there is an op- clothes. Armed with this knowledge, Procter & Gamble intro- portunity to make inroads. “They buy salt, cooking oil, cos- duced a new line of simplified products, including a deter- metics and other goods,” Fisher explained. “If you can access gent that still eliminated the need for pre-scrubbing. As a re- those markets, you can make money.” Chui believes it is a sult, Procter & Gamble quickly grabbed a bigger market share. mistake to treat all emerging markets as one but that even Procter & Gamble calls this strategy “simplification,” and the poorest consumers cannot be ignored. “I was speaking it has become commonplace across a broad range of sectors. with someone in the Sudan the other day, and he told me In April of this year, for instance, Vodafone worked with the even people without an address, without a home, have cell Norwegian browser maker Opera Software to come up with a phones,” he observed. browser equipped to run on the low-end voice handsets com- Despite the challenges, some companies, based both in monly used in emerging markets. General Electric is now emerging markets and developed nations, are breaking new selling a hand-held electrocardiogram that sells for a fraction ground in the race to produce inexpensive goods appealing to of the larger model’s price. A variety of companies, including poor people. Their ability to reach poor consumers effectively Unilever, are also offering products in more affordable pack- is intensifying competition. It is also providing a road map to ages, e.g., cell phones that calculate usage by the minute those savvy enough to pay attention. rather than the hour and small sachets of soaps and cleansers. Following are some of the ways these companies are suc- Designing a product specifically for a developing market ceeding in this endeavor. is not a new concept. Corporations have been thinking “glo- cally” for years; Colgate-Palmolive sells tea-flavored tooth- Simplify, Simplify paste in China, for instance, and McDonald’s offers lamb Earlier in the decade, teams of Procter & Gamble researchers burgers in India. What is different now is the focus on price. spent time with — in some cases actually lived with — average Lamb burgers and tea-flavored toothpaste may not have wide- Brazilians to figure out why they were not using the company’s spread appeal; cheaper electronics do. products. The main finding, unsurprisingly, was that Procter While the concept of reverse innovation has received a & Gamble’s goods were just too expensive. But the research- lot of attention, Williamson believes even greater — and ers also made another observation: cleaners that homeown- largely untapped — potential lies in “horizontal innovation.” 46 Q4.2010 The Korn/Ferry InsTITu T e One thing all developing nations have in common is the need an industry competitor. Battery manufacturing was consid- for cheaper goods. A well-priced product that does well in one ered a capital-intensive process, involving, among other emerging market is likely to do well in another. things, $100,000 robotic arms. Emerging markets have cheap labor, but they have traditionally been short on funding for Bargain Research and Development capital investments. Research and development can account for a large chunk of Wang Chuanfu, a Chinese entrepreneur who founded the cost of a new product. Cutting down on such expendi- the BYD Company in 1995, questioned this notion. For the tures has therefore become vital to achieve innovation on the cost of a few robotic arms, Chuanfu reasoned he could afford cheap. A few companies, such as the pharmaceutical giant to hire thousands of employees. Westerners countered that GlaxoSmithKline of Britain, are trying to reduce their overall these workers would be too low-skilled to replicate the work amount of research and development so that they can pass of robots. Adapting for his employees’ low skill set, Chuanfu the savings on to consumers in the developing world. divided the battery manufacturing process into more than “In the drug industry, we’ll probably see companies bring- 100 small steps. The steps are so specific that in the charge ing in products from smaller biotechnology groups, in licens- and discharge phase, for instance, a single group of workers ing kinds of deals, rather than try to do it all in house, which is loosens tape on the batteries before sending them to another very expensive,” said Vishal Manchanda, senior equity ana- group of workers, which removes the tape entirely. Chuanfu lyst at the pharmaceutical research company Mehta Partners. also instituted strict quality controls and tests at each step to Corporations can also slice budgets by moving research ensure that the final product would be up to par. operations to emerging markets. More pharmaceutical com- By 2002, the BYD Company had become the second-larg- panies, for example, are looking into conducting clinical tri- est rechargeable battery maker in the world. Two years ago, als — drug testing in humans — outside of the developed Warren E. Buffett took a large stake in the company, which is world. The new Bangalore facility of the computer company now moving into the manufacture of electric cars. Manufac- Cisco Systems is expected to take on half of the company’s re- turing breakthroughs remain BYD’s focus. Just one-third of search and development functions over the next few years. the company’s research and development budget is allocated “There are a lot of talented people in emerging markets, and to product innovation; the other two-thirds are used to come the talent there is generally cheaper,” said Chui. up with ways to cut costs on the manufacturing line. Low-Cost Manufacturing Outsourcing on Steroids

In the mid-1990’s, most battery manufacturers would have When Bharti, the Indian telecom company, opted to out- laughed at the notion that a Chinese operation could become source its information technology functions to I.B.M. in BrI e FIngs on TalenT & l eadershI p Q4.201047 2004, it was not considered a radical move. Companies have ings, and C.K. Prahalad, a professor at the University of Mich- been outsourcing functions, after all, for decades. But Bharti igan until his death earlier this year, noted that the average broke new ground by taking the concept of outsourcing to ex- Indian consumer samples more than three times the number tremes. Early on, the company decided it would keep only sales of new brands as the average consumer in the United States. and marketing in-house. Bharti splits network operations To be effective, marketing must be highly differentiated. between Nokia and Ericsson, and it recently handed the Television commercials, for instance, are probably a good bet management of its landlines and broadband access to Alcatel- in Brazil, where most people at least have access to a televi- Lucent. This strategy has permitted the company to build a mas- sion. But they are likely to fall flat in rural Africa, where peo- sive operation quickly with minimal investment. Bharti now ple’s main source of information and entertainment is likely has 131 million customers served by just 30,000 employees. to be a radio. Multinationals are experimenting. For instance, Outsourcing “allows us to focus on our business pro- Pfizer has formed alliances with physicians in Venezuela to cesses, on our organizational construct and how it is we really get them to prescribe its medications. bring to bear what it takes to deliver services to our customer,” Fisher of KickStart believes some of the techniques used said Jai Menon, director of information technology for Bharti. in the 1950s in the United States are relevant to developing The company is now accepting bids to outsource manage- markets now — think Tupperware parties and product dem- ment of its fiber-optic cables, which transmit voice and data onstrations at the local store. To sell its irrigation pumps, for between cities. instance, KickStart sponsors competitions at local fairs, hand- ing out a free pump to the person who gets the most correct New Distribution Channels answers in a game show-like format. In the 1990s, the cosmetics company Avon Products was in a And persistence pays off. The Coca-Cola Company, for in- funk. Nobody seemed to want the company’s products any- stance, lost money for years in Africa. But its operation there more, and its marketing and distribution strategy — remem- has finally turned profitable. And it is predicted that its sales ber the “Avon calling” commercials — seemed out-of-date. The in the region will rise 10 percent annually over the next few company considered scrapping its “Avon girls” sales force, or- years, a nice reward for a long-term investment. dinary people who worked strictly on commission, and mov- Overhauling Organizational Structure ing into department store sales. Instead, the company banked on the developing market, Corporations are searching for low-cost ways to gain a foot- with resounding success. In Brazil, for instance, women with hold in emerging markets. Joint ventures and partnerships, little access to the traditional job market warmed instantly to in particular, have become popular, and it seems a new one is the Avon girl model. This intrepid, low-cost sales force is able announced every day in the financial press. to penetrate areas traditional sales representatives would But the expertise residing within the individual collabo- shun. Avon representatives sell their products everywhere, rators may not be as easily leveraged as managers hope. Wil- from the highest-crime, urban areas in the country to remote liamson of the University of Cambridge believes the winning areas of the rain forest. Last year, Avon revenue in Brazil hit formula, instead, will be wholly owned subsidiaries that can $1.67 billion, exceeding sales in the United States. take on some of the management tasks traditionally per- Nokia has hit on a similar strategy in emerging markets. formed in the West. A few companies are making this radical To more efficiently obtain access to emerging markets, the shift. Koninklijke Philips Electronics’ television business, for Finnish company markets its handsets through more than example, is effectively run out of China now. Cisco is transfer- 300 distribution centers. The company has become adept at ring much of its research and development — and some of its reaching isolated consumers. In India, for instance, represen- top executives — to its new base in Bangalore, India. tatives bump along rutted country roads in easy-to-recognize This kind of power shift will not be easy to pull off blue vans, stopping in rural villages to explain to potential though. “In many cases, it makes sense to let emerging mar- customers how to use the product. The strategy has helped kets subsidiaries run entire divisions,” said Williamson. “But Nokia grab a 37 percent market share of mobile phone sales this is hard for Western managers to accept. The instinct is to worldwide. want to run everything from headquarters.” Chui thinks there is room for partnerships and joint Marketing on the Cheap ventures as well as subsidiaries. But he says the size of a com- Advertising and marketing are perhaps the most difficult ar- pany’s commitment matters. “The bigger the investment, eas in which to innovate to reduce costs in developing coun- the more the corporation is likely to learn,” he observed. tries. Consumers in these markets do not have the same level of brand loyalty as their Western counterparts. One study, for A long-time correspondent for The Financial Times, Victoria Griffith cov- instance, by Kenneth G. Lieberthal, a senior fellow at Brook- ers business from Boston. 48 Q4.2010 The Korn/Ferry InsTITu T e Briefings onTalen T Top: © Robert Mankoff/The New Yorker Collection/www.cartoonbank.com. Bottom: © Leo Cullum/The New Yorker Collection/www.cartoonbank.com theconsequencesofavoidingreality. You can avoidreality, &l eadership

but youcannotavoid

—Ayn Rand Q4.2010 time down 49

w 50 “Best Employer”inIndiaandAsia byHewittAssociates. andHCLwasnamed in 26countriesdroppedby50percent, tomers grewfivefold,attrition amongthe58,000employees HCLcus- erating incomemorethantripled, thenumberof Since 2005, when Nayar tookoverasCEO, revenueandop- with stunninggrowthandnewfoundglobalrecognition. had reasontocelebrate,havingemergedfromtherecession information technology services firm based in Noida, India, billionglobal $2.6 actresses, dancersandafauxwedding.The turned intoaraucousBollywoodextravaganza,repletewith ers roaredandeggedhimonastheevening’sfestiveparty 1,000Benes dancemoves.HCLemployeesandcustom- The to shimmyandshakeacrossthestagewithhisbestElaine signaled forsomeheavyBollywooddiscomusicandbegan fifth annualglobalconferenceinAprilOrlando, Fla.,he Q4.2010 Nayar, withadecidedlyunconventionalleadershipstyle, TalenT VineetNayar, CEOOfHCLTechnologies Limited An InterviewWith The took the stage at the company’s HCL Technologies Limited, year-old chief executive of executiveof year-old chief hen Vineet Nayar,hen the48- Company M.B.A., isaself-proclaimed“sucker fortransformation,”and M.B.A., India’sof topbusiness schoolsandjoinedHCLasayoung vative corporateculture.ButNayar, whograduatedfromone than atthebottomwasviewed as aberrantinIndia’s conser- the valuepyramidrather that puttingemployeesatthetop of thecompany’sculture.Hisbelief new lifewithanoverhaulof companyneededashake-up, andNayarshare. The injected withslowinggrowthanddecliningmarket come stagnant, Wipro ITBusiness.gies LimitedandButby2005, ithadbe- companiesalongwithInfosysTechnolo-mation technology rapidly losingitsluster. HCLwasamong India’s topfiveinfor- dia’s emergingITservicessectoratitsinception in1976, was firm, hewaswelloutonthefringe. services where, butforagiantIndianinformationtechnology in demand.Hismethodswouldbeconsideredunusualany- June byHarvardBusinessPublishing,andNayar issuddenly CustomersSecond,”waspublishedin “EmployeesFirst, book, cles forhisatypicalviewsonhowtorunacompany. Hisnew has gainedstarstatusinthebusinesspressandacademiccir- When Nayar becameCEO,When thecompany, apioneerinIn- e T The Korn/Ferry InsTITu Down UpsiDe

Credit e BrI Credit FIngs on TalenT &l p eadershI became accountabletothepeople whocreatedthevalue. the managersandexecutives. themanagers InthisnewHCL, company atthetopsotheywould nolongerbehamperedby side down,puttingemployeeswho createtherealvaluein tion orprovideasolutiontoeveryproblem.” mustavoidtheurgetoanswereveryques- Nayar wrote.“You change,” astheonlysourceof yourself must stopthinkingof Inordertotrulyempoweremployees, “you walked thetalk. butfewactually were thecompany’smostimportantasset, released.” being from employees the of energy the and democratized much power. prevents That the organization from becoming traditional managementsystemsisthattheleaderholdstoo pete inaknowledgeeconomy. thestructuralflawsof Oneof perhaps themostdifficulttodefineincompaniesthatcom- leadership wasineffectiveandsuffocatingforemployees. he hadlongbelievedthatcommand-and-control,top-down Taking faith,Nayar aleapof turnedtheorganizationup- Nayar hadheardmanyCEOsclaimthattheirpeople leadershipis roleof Nayar wrote,“The In hisnewbook, Q4.2010 51 Having grown up in a small town in the foothills of the one of the reasons so many large companies are struggling Himalayas in northern India, Nayar has always been inspired and unable to grow is they have spread legs. And that was true by mountains. “You always want to climb them, and you al- with HCL Technologies when I took over. ways want to look beyond them,” he said. In this interview with Glenn Rifkin, a contributing editor for Briefings on Talent How did you address that? & Leadership, at the Orlando global conference, Nayar talked NAYAR: The first thing we discovered as a team was the fact about looking beyond the mountains in his management that the person in control was actually not creating any value, philosophy and the impact of his outlook on HCL. and the people who were creating value had no control. So we created what I call a star organization. The control pyramid In reading your new book, “Employees First, Customers remains in place because you need it for governance and Second,” one gets the feeling that you have developed compensation and important organizational structures. But great insight into what motivates people. Where did that we also inverted the pyramid, placed it over the control pyra- come from? mid and created a star so the people who are creating the NAYAR: I’ve floundered my way into these opinions and there- value gained control as well. fore, in hindsight, the book looks impressive. In fact, these opinions are the results of lots of experiments, so the last im- So you created a star. pression I want to give is that I have any foresight on human NAYAR: We created a star. Now let me take it to the next level. behavior. However, I love people. And the question I ask is, With each passing day, you learn more. And when I was “Who’s the person? Is the person someone who walks into explaining this concept of employee first to a group of very the company?” In my own case, most of my life, the person young people at work, they began to debate with me. One who walked into the company was actually not me, at least fellow said, “You know, you are old.” And I said, “Why?” He not all of me. It was a very small percentage of me. I’m a fa- said, “Because you think in straight lines.” And I said, “What ther. I’m a sports enthusiast. I’m a social worker. I’m a son. I does that mean?” He said, “Young people like us are always like my movies. I like to read some crazy books. And also I un- collaborating, so we are circles. You see it as the pyramid you derstand technology. And most of my life, HCL actually took have made into a star. Now you need to make it a sphere.” only one part of me, which is the part that understands tech- Which is what the collaborative enterprise really is. nology. And I’m very good at it. Therefore, they loved me for that. But they left the other seven elements out. So the more I thought about that, the better I understood that the more of “One of the most important parts of life is to be very honest and realize that you don’t know what you don’t know.” those seven complements that we can bring inside the organization, the more beautiful the organization becomes. Interesting take on the concept.

Among your innovations is the way you have inverted the NAYAR: It was interesting. And by the way, none of these are my pyramid within HCL, making employees first. What was the ideas. But once they told me I had to think about a sphere, I most important part of that transition? said, “Okay, so how do I create the next generation organiza- NAYAR: The real initiative isn’t employees first because most tion which looks like a sphere and there are concentric circles companies will get that wrong. The key is customers second. that are collaborating among themselves and the straight lines And let me explain what I mean. I see a zone of control and a are gone?” These catalyst kinds of ideas have a big impact, and zone of value. Traditionally, the zone of control — i.e., the they allowed us to move very fast. managers, the office of the CEO — was very closely linked to the zone of value. The entrepreneur who created the com- These ideas would be challenging anywhere, but I think pany, he was an engineer, an auditing guy, a manufacturing they would be particularly difficult to implement in India, expert, and everything that happened was linked to his exper- with its more conservative corporate culture. Did people look at you as if you had just arrived from Mars? tise. The guy in control was the guy creating the value. But with the emergence of the knowledge economy, the Internet, NAYAR: Well, the first thing is that 95 percent of our revenues emerging global markets, service industries and business come from outside of India. We have about 6,000 employees complexity, the zone of control remained where it was, in the in the U.S. alone; the same number in Europe and also in CEO’s office or with the managers. But the value zone has some other countries. So we have a huge global work force. moved far away into the interface between customers and I was in search of an idea which had global implications and employees. Suddenly, you have an organization where the was culturally agnostic. It didn’t matter if I was Indian or Eu- control zone and value zone are far apart. If you try to spread ropean or a Swede or a German because it had to connect the your legs as far as you can, there’s no way you can walk. So whole company. “Employees First, Customers Second” has 52 Q4.2010 The Korn/Ferry InsTITu T e “One ofthemostimportantpartslifeistobe

e BrI JT Morrow (all) you everdidbefore. verting thepyramid,andyoustart runningmuchfasterthan thereview,determining theresultsof asignificantsteptoin- one voiceamongmany. teaminthevaluezonewouldbe The er’s bosswouldbecomefarless powerfulintheprocess, just among managersandexecutives, itwouldmeanthe manag- thiscertainlycreatedsomeconcern the results. Though 360-degree reviewsothatanyoneintheorganizationcansee create hugemultipleimpacts. Forexample,weopened upthe transformation initiatives. Take small catalystactionswhich transformation, donottakebigstepstryingtoleadmassive youwanttomakeagood NAYAR: Itiseasytounderstand.If And itiseasytounderstand. that goesacrosscultures. guyinthevaluezone,and value, whoisthesmartest?The just invertedthevaluepyramid,sowhenitcomestocreating I lot morestructuredandaligned.Ididn’tthat. touchanyof powered, andtheIndiansChinesewouldmaybebea tural. Forexample,theAmericanswouldbealotmoreem- nothing todowiththecontrolpyramid,becausethatiscul- FIngs on TalenT

very honest &l andrealizethat p eadershI you don’tknowwhat forward. move could we so excited them got it and idea, radical a was this convinced were who people few a just was It happen. to something for wait and watch who group, largest the sitters, fence the and faces, their on frowns with meetings in sit who souls, lost the to opposed “Allas call, aboard,” to conductor a for waiting just were who people the “transformers,” the call I what convince to had only everybody,I convince to trying of instead that was early realized I thing second survive.”A to want you if something do well as might you so in, come has who CEO a of buffoon a have “You said, I happening. started change of ownership of transfer the that moment the was that later realized I answers. the have didn’t I knew I me, to up look to were they if and customers complex have and technologies complex very with involved are we Because true. was know,which don’t I that clearly very them told I employees, the all with met I time first know.The don’t you what know don’t you that realize and honest very be to is life of parts important most the of One NAYAR: in? kicking really was it felt you when transformation this during moment a there Was Q4.2010 53 .” You speak in the book about instituting the “mirror-mirror” But it still takes more for the transformation to really take exercise when you took over as CEO. You asked every effect. employee to look in the mirror and truthfully and openly NAYAR: Right. Once we were very clear that it’s not about the assess what they saw. What was the impact? love for employees but the love for growth, that brought em- NAYAR: “Mirror-mirror” triggered the kind of honest conver- ployee-centricity to the forefront as a strategic initiative for sation that got the company excited. These employees were competitive differentiation. But once you are zoned in, the suddenly washing dirty linen in public, and they had never question is, “How do you make the transformation happen?” seen this as part of our culture before. The result was that we Step one of the transformation is learning from the past. created trust. When you think about great leaders, heroes like Gandhi and Nelson Mandela, what they did was they created dissatisfaction with today. There are lots of companies which are not growing, but I don’t think they’re unhappy with themselves. So the first thing you need to do is make them unhappy with themselves, and then you need to create the romance of tomorrow, where you can be free or you can be great or you can be number one. And then you must tie those strategies together. And that’s what the “mirror-mirror” exercise is all about. Thus, unless you become uncom- fortable with who you are, you will not stop being an ant. You can be a fast ant, you can be a rich ant, but you’re still an ant and you’ll never be a butterfly.

And that is just the beginning of the transformation? NAYAR: Yes. One thing I saw early on was that we didn’t do a good job of having a transparent, trust-based relationship with our employees. So the trust quotient between the employees and the management was very low. On the other side, the complexity of business was very How did this translate into value creation? high. You need to transform, you need to go to emerging NAYAR: I think the first logical question to ask is, “What is the markets, you need to drop your price, you need to compete, business of the company?” To create value. The second ques- and for all that, you need employee innovation. In this era of tion is, “Where is the value being created?” In the interface the pink slip, you now have disenchanted employees be- between the employee and the customer. Okay. So what should cause of the way you behaved, not with the people you fired the business of management be? To maximize the value cre- but with the people who remain. You are putting them in ation. How can management maximize the value creation? uncertain situations, and every time they come to the office, By being in the business of enabling, enthusing, encouraging. they wonder if a pink slip is waiting. The employee doesn’t And not by controlling. So once we understood the logic in all trust you, and so you’ll have maybe one-tenth of that em- of this, we were very clear that if the management focuses on ployee coming to the office. You have to create a culture of the employees, the value for the customers will be created as trust, and that can only happen by pushing the envelope a competitive advantage. of transparency. 54 Q4.2010 The Korn/Ferry InsTITu T e This is a lot tougher than you make it sound. Gen Y? NAYAR: The last part, which is extremely important, is to NAYAR: Yes, Gen Y is coming to the company. So how can you transfer the ownership of change. Once you do that, beauti- maintain the old management style? There is a fantastic op- ful things happen. This is how revolutions happen. Nelson portunity for young managers to adopt a new management Mandela is a great example. He is no longer the president style, maybe this, or maybe something else. I hope this book of South Africa, but the amount of transformation and influ- acts as a trigger of thought and experimentation. With the ence he has brought there is significant. When he had the Facebook generation, you have to get deep into what they are opportunity, he kept himself behind the scenes rather than thinking and transform your management style to galvanize out front. Nobody else could have done what he has done. them. Your ability to deliver transformation is based on this.

This all sounds fine on paper, but I suspect some skeptics How then would you define leadership? will ask, “Can this work for my company?” A lot of corpo- NAYAR: It’s very difficult to say. In a Facebook culture, the rate leaders are just not comfortable letting go in the way concept called “leadership” doesn’t exist. We have an obses- you are suggesting. sion with the word leadership. I believe in a collaborative NAYAR: This book is not meant for the CEOs. This book is enterprise like Facebook. Who’s the leader? If I want to buy a meant for managers. The question is, “Why do you have to skateboard, you may be the leader, or if I want to find a good depend on your CEO to change anything?” restaurant, someone else might be the leader. Worldwide, 50 percent of the population is less than 25 years old. For them, Because he gets paid $10 million a year plus bonus. who’s the leader? There is no leader. They have role models for NAYAR: Forget it. You have to ask yourself, “Are you in the what is relevant. And everybody has maybe 10 or 15 role mod- business of making your company better or evolving as a els. Some in music. Some in video. Some in social enterprise. better manager?” That’s the first question to ask. The So when somebody asks me what kind of a leader I am, I second is, “Because there are so many skeptics, is there an shudder to think because I don’t have the answer. I don’t truly opportunity?” If everybody gets it, everybody can do it. So believe in the concept called “omnipresent leader.” Leadership what’s the competitive differentiation? There is an oppor- should be finding role models and connecting them with the tunity to translate this into competitive advantage because people who need those role models. there are so many people out there who don’t get it. Because it needs more than intellect. It needs application. It needs Not everyone is comfortable with so many choices and so you to take the leap of faith. So if you are a person who much freedom. Are there people who would not be com- gets it and has the capability to take the leap of faith, you fortable at HCL, so you simply do not hire them? Can you know that about people when you are in the hiring process? actually will outperform everybody else as a team leader. You will be able to galvanize the entire team, and you will NAYAR: In the end, basically, you join a company to be success- grow much faster. ful. If “Employees First, Customers Second” makes you successful, you’ll adopt it. If it doesn’t, you’ll resist it. It doesn’t You say your role as a father taught you lessons? matter if it is a corporate culture or written in blue or red. NAYAR: The family unit has always been about command Does it work? In HCL, in these five years, we have role models and control, but it has to evolve. When my dad told me to who have adopted this and it made them successful. So new do engineering, I did. When I told my son I did engineering, employees are not adopting it because they are convinced he said, “That’s what I will not do! Why? Because that’s what about it; they are adopting it because it is going to make them you did!” So if the family unit is to survive, it’ll move toward successful. We are not in the business of brainwashing you. collaboration. I now tell my children, “I want to be a friend of yours. When you have your first girlfriend or boyfriend, Are your reward systems tied to all this? Are there incen- I should be the first to know.” As a father, you learn a lot. tives for employees to adopt your methods? Do you pay Today, the kids’ aspirations are different, their attitudes are more than your competitors? different, their way of collaboration is different and the world NAYAR: I think there are two very important fundamental is- is very different, and unfortunately, today, our structures sues. Number one, HCL pays as much as it was paying in make them square pegs in round holes. Thinking about this 2005, when I took over. So there has been no compensation got me hugely interested in the “how” of running companies policy changed. The basis of your question is, “Is reward im- rather than the “what” of running companies. So as the fam- portant or recognition important?” ily unit is changing, you must understand that these young people are coming into the companies, and they too need Yes. to change. NAYAR: Both are, but reward without recognition is a single BrI e FIngs on TalenT & l eadershI p Q4.201055 boring line. In fact, in our 360-degree review, when someone is no longer the hand of God. Instead, we will measure those gets great scores and everybody in the company sees them, managers by the value they are creating for the employee, and what do you think happens to you? You get extremely moti- everyone will see that value through the 360-degree evalua- vated. You get recognized. And when employees send a mes- tion. Through this, we created reverse accountability. sage to the manager that a thousand of us think you are very great? You walk on water that day. Of course, this requires a tremendous amount of transparency, which could be potentially dangerous, especially in But eventually, you want to buy your house and pay for the financial sector or pharmaceuticals or businesses your kids’ college. where information is so crucial. NAYAR: I’m saying we are liberal in our compensation. It’s NAYAR: If you become fearful of your competitors, are you also not an issue. But compensation is table stakes; it’s not the afraid of what happens when two of your employees working differentiating factor. on the same project don’t know what is happening in the project? Which is worse? We have most HCL people in synch, A key part of your concept is reverse accountability. You marching in one direction. But does some information leak? talk about the fact that employees are accountable, not Of course it does. But it would leak anyway. I think the power only to their immediate managers but also to enabling of collaboration through transparency and the trust it creates functions like finance, HR, quality assurance, service, etc. is a significantly higher gain than the potential negatives. How do you turn that around on itself? And there have been negatives. We’ve had a lot of informa- NAYAR: We used to believe that our kids were accountable to tion leak out which put us in very embarrassing positions. us, and we were not accountable to them. But nowadays, many But that’s fine. You make choices in life. parents feel accountable to their children: that their actions, inactions, behaviors, ideas play a big role in influencing their Is there an example of a negative impact? children. How does that apply within an organization? Em- NAYAR: When a team knew that it was not doing well, it ployees must be accountable to you because you believe con- caused demotivation. And if the manager is not capable of trol, governance, all that with which we surround ourselves in handling that demotivation, we have attrition. People don’t organizations is very important. So we said, “Okay. Now how want to be working on failed projects or failed businesses. can we invert it?” Keep in mind, the enabling functions like HR and finance create no value in the value zone; they enable So you lost some people? it. But because of SEC regulations and other factors, they sud- NAYAR: We lost some people. And there were also instances denly became very important. They control the value zone where it didn’t work when things were going extremely well. without adding any value to it. So I said, “How can we make People became lazy. But here’s what happened. Those projects them and the managers accountable to this value zone?” We which were not doing well suddenly attracted a lot of trans- created what we call a “Smart Service Desk,” which allows any formers and they said, “Vineet, give me a chance. I’ll turn it employee who has a problem to open a trouble ticket on any of around.” They motivated the team by saying, “Hey guys, we the enabling functions. It is similar to the process we use with are not doing well. Here’s an opportunity of turning it customers. The open ticket allows a problem to be tracked around.” And you know what? The organization notices turn- from the outset until it is resolved. By instituting a similar around more than it notes happy projects. So suddenly you at- process internally for employees and the enabling functions, tracted the right talent to turn around a bad business. And in we were able to create a transparent, efficient system for re- the end, it turned out positive. solving internal issues. The employee who opened the ticket determines when the problem is sufficiently resolved. The transformation at HCL is a continuing metamorphosis, a work in progress. What keeps you up at night when you How about the managers? think about the future? NAYAR: When you are in trouble, you go to your manager and NAYAR: Sustainability. I think the experimental journey we he or she picks up the phone and makes a call to a friend and have begun has worked for the last five years. But I still believe fixes things for you. I call that “the hand of God” role. That’s that I’m standing on the ledge of a burning building predom- the manager’s value add — not in solving your problem or inantly because I don’t think we have even started understand- empowering you or doing anything. It’s just this hand of God ing how to involve the human being. My book is really all role. If the call isn’t made, you don’t get your bonus or some- about putting the human being back in business and involv- thing bad happens to you. The manager is not creating value ing the whole person rather than one part of the person. for the value zone. And if information is available to everyone I do not think we have done justice toward that objective. and access to services is available to everybody, the manager We have just taken one step forward. 56 Q4.2010 The Korn/Ferry InsTITu T e 58 Q4.2010 e T The Korn/Ferry InsTITu

Credit e BrI Asaf Hanuka 30,000 vessels, large and small, were scouring the scouring were small, and large vessels, 30,000 reports stressed the chaotic nature of thesituation, reports stressedthechaotic natureof president of the United States president of rig workers and setting off amassiveoilleakatthe rig workersandsettingoff perspective, few corporate dis- residents, business executives, the media and the and media the executives, business residents, mouth of the damaged deep-ocean well. Months later, match thesituationinwhichBP fishermen, residentsandbusi- finally ceasedtoflow. BPissuedastatementurging finds itself. as to how to put an end to the crisis. In fact, media fact, In crisis. the to end an put to how to as nesses thatdependonthepris- asters inindustrialhistorycan BP’s DeepwaterHorizonoilrigexploded,killing11 BP’s By now, thestoryiswellknown.OnApril20, 2010, the Gulf of Mexico, of the Gulf causingan the ruptured well, situated 50 miles off the Louisiana tine waters and beaches of the tine watersandbeachesof Gulf foralivelihood.Froman Gulf Gulf to clean up the oil. The companyhadcomeun- tocleanuptheoil.The Gulf BP in the Gulf CASE STUDY: likely been plugged. At the same time, more than more time, same the At plugged. been likely der fire from all sides coast, coast, continued to spew millions of barrels of oil into caution, butalsoindicatingthattheleakhadmost vrwdnn sra o de of spread ever-widening economic, politicalandbrand economic, struction anddespairamong oil, anunderwatercameradisplayedthattheoilhad FIngs on TalenT At this writing, after three months of gushing At thiswriting,afterthreemonthsof &l — environmentalists, Gulf Coast p eadershI - — and seemed at a loss “Do the

Right ng h T House, wheretheyagreedtoput$20 billioninto White Henric Svanberg,weresummonedtothe Dudley then replaced Hayward as BP’s CEO.Dudley thenreplacedHayward asBP’s Shortly after, Haywardremovedaccident. the for intense scrutiny and criticism for the handling of intense scrutinyandcriticismforthehandlingof President Obama said, “We willmakeBPpayforthe President Obamasaid,“We and eightweeksintothecrisis, thecompany’sstock and bothBPthefederalgovernmentwereunder and putanAmerican,Robert Dudley, incharge. an escrowaccounttopayfordamagesandcancel BP’s then-CEO,BP’s Tony Hayward,andchairman,Carl- the crisis. CEO’s share price plunged nightmare come true. BP’s himself from day-to-day oversight of thedisaster fromday-to-dayoversightof himself held apressconferenceduringwhichheapologized damage their company has caused.” The next day,next caused.” has The company their damage stockholder dividendsfortheyear. Svanberg then From a public relations point of view, it was every ” pay adividendtoshareholders paign totrysalvageitsimage money onrepayingthevictims President Obamaexpressed and hadannounceditwould had lost nearly half itsvalue. had lostnearlyhalf $50 millionadvertisingcam- cast livefromtheOvalOffice, sisted, shouldbespendingits outrage thatBPhadinitiateda over thesummer. BP, hein- of thespill.Inaspeechbroad- of governance Q4.2010 59 BP, it turned out, was not unfamiliar with oil-related di- When I speak on crisis leadership, one of the points I sasters. In 2005, at its Johnson City, Tex., oil refinery, an ex- make is that it is what you do between the crises that really counts. plosion killed 15 workers, an event later attributed at least You have to look at lessons learned, imagine the risk you are partially to cost-cutting. In 2006, a BP oil pipeline ruptured dealing with, strategize, plan, exercise and train. You have to and spilled more than 200,000 gallons of oil into Prudhoe Bay do all these things and even if you don’t identify a risk before- in Alaska. With such a track record, BP is receiving very little hand, you will be better prepared to address it if it happens. BP, compassion from its critics. for example, was not new to catastrophic events. The company’s Though BP is a highly profitable and cash-rich giant ($17 prior oil disasters should have been fresh in executives’ minds. billion in profits in 2009), the first whispers on Wall Street In addition, executives need to identify the players who were heard in June that the company might indeed have trou- are going to be in place when a crisis happens. There is a ble surviving this crisis intact.Rumors of a whole range of advisers you will be de- potential takeover or even bankruptcy were pending on, and they have to be identi- rampant as BP’s shares tumbled and liti- fied in advance. gants began lining up. Hayward responded “There’s an I’m convinced that a fair number of by putting out a statement: “There is no important corporate lawyers are advising BP’s CEO objective justification for this share price and telling him what he cannot do and movement.” This followed an earlier press difference not enough advisers are telling him statement in which he told reporters: between what he can do. Every company in the “There’s no one who wants this over more universe ought to be learning from this than I do. I’d like my life back.” That state- doing the crisis. You won’t be able to identify every ment met with widespread criticism. right thing risk. But the more you’ve worked and ex- As the weeks passed, BP’s troubles ercised on what you can identify, the bet- mounted. Oil continued to flow from the and doing ter it sets up behavior patterns and orga- damaged wellhead, and estimates of the ac- things right.” nizational patterns on how you might tual amount of oil being lost grew expo- deal with something you didn’t imagine. nentially from 1,000 barrels a day, when the Once a crisis is under control, cor- crisis began, to as many as 60,000 barrels a porate leadership must focus with laser day, at this writing. Unable to cap the damaged well, BP’s ef- intensity on what was learned and what will be done differ- forts to focus on both the cleanup and its damaged corporate ently in the future. Let me tell you how hard that is. You’ve reputation were under increasing pressure. Britain’s new got people working as hard as they can on a crisis, and then prime minister, David Cameron, weighed in and suggested you bring in a team to do a post-mortem. It is as hard to be re- that BP was being unfairly criticized in the United States. For ally self-critical as it was to deal with the crisis in the first its part, BP continued its advertising to try to reassure the place. But as a leader, you have to have the fortitude to do it. public that it was not only sorry for the situation but was also There is no book to read for the next time. committed to making it right, no matter the cost. Another key lesson: Values matter. There’s an important For BP’s board, executives and shareholders, the compa- difference between doing the right thing and doing things ny’s future was enshrouded in a dark cloud. How would BP right. All the lawyers will tell you to do things right, but you recapture its business momentum in the light of a catastro- want to do the right thing. The right thing is to be open and phe of this scope? As this case study unfolded, Briefings asked share. A CEO sets the course and tone about what are the im- four crisis and risk management experts to weigh in. portant values. You are taking care of people, being transparent, open, honest, sharing facts, acting when you can, communicating. Those are critical things you have to do. But from Rear Adm. Marty Evans, retired, United States the lawyers’ perspective, being open may not be doing it right. Navy, president and CEO of the American Red Cross during Also, you must communicate. In a disaster, there’s no and after Hurricane Katrina. such thing as communicating too much. BP has been reactive I had the Tony Hayward role at the Red Cross during Hur- and defensive. Both the administration and BP are to blame ricane Katrina, then Rita and Wilma too, which came back to for not communicating clearly what is going on. Early esti- back. So I am very sensitive to the BP role in this situation. We mates of the damage, the scope of the spill, the existence of had a long-term problem, which required coordinated, joint underwater oil plumes and a list of possible solutions were solutions with many player agents in the mix. People say, all ambiguous and misleading. Things had to be dragged out “Something should be done.” But sometimes, nothing can be of BP. There was a sense that it was hiding something. done — at least not as fast as everyone would want. The board of directors has a key role as well. They must 60 Q4.2010 The Korn/Ferry InsTITu T e find the right CEO. Some people are great leaders but become of the reason was that we didn’t have the Internet then. Today, paralyzed during crises. They just don’t have a natural gift to we have millions of people, all of whom are essentially re- connect and communicate with the constituencies that they porters. Everyone has video, audio, print and an instant way need to connect with. More than ever, it is up to the board of to share all of it. The potential for reputational damage today directors to evaluate and hire the right CEO, especially for is several orders of magnitude higher than it was for Exxon. companies in high-risk industries like oil and finance. This incident will live on longer for BP. Though it isn’t easy to illuminate in advance how any individual will react in a crisis, corporate boards must do everything possible to identify individuals with not just day-to-day operational skills but with the skill set required to be effective leaders during a crisis.

Jonathan Bernstein, president of Bern- stein Crisis Management Inc. in Los Angeles and author of the book, “Keeping the Wolves at Bay.” This is a seminal moment for BP and for the oil industry. What they do in handling this could determine whether this country finally turns in the direction of finding a safer way of getting energy. It is the oil industry’s equivalent of a nuclear reactor meltdown. For BP’s leaders, there are very few options. Whatever their technical legal liability is, they’ve been so severely damaged because of their lack of advanced preparedness that my recommendation would be to be bold and pro- active. For any chance to salvage the company’s reputation, they should make a public pledge to liquidate any assets they need to in order to make things financially right for everybody damaged, regardless of whether BP is required to or not. They’ve got the assets with which to compensate the fishing industry, the tourist industry and everybody who has been damaged there. The only thing a CEO should do in this kind of situation is express tremendous remorse for what has happened and tell people what the company is going to do to make it right and prevent it from happening again. It’s very important to come across as being on top and in control, even if in many respects you are not. For example, Rudy Giuliani, New York’s mayor when Sept. 11 happened, was an excellent role model. His manner of communication was so reassuring and com- passionate, regardless of what was actually happening opera- Robert Meyer, co-director of the Risk Manage- tionally, that people felt better. He said later he was able to do ment and Decision Processes Center at the Wharton School this as a result of relentless preparation, a lot of training of Business of the University of Pennsylvania. about what you should say and how you should say it from Individuals involved in complex tasks tend to focus myo- a crisis communications standpoint. He was so well pre- pically, seeing their own risk as minimal. For example, an indi- pared that it wasn’t until a year after Sept. 11 that people re- vidual who was responsible for making sure that the methane alized that the operational preparedness was horrible. was released from the pipes might have cut his test time from When the Exxon Valdez disaster happened in 1989, Exx- a recommended 10 hours to just over half an hour to save time. on’s executives made several big mistakes. They were very That one decision may not seem especially risky from a narrow slow to respond, and the CEO failed to be on the scene quickly. perspective but when viewed in concert with all the other is- Today, when I make presentations, I say the word “Exxon” and sues involved might greatly elevate the overall risk. There is a everybody in the audience says “Valdez.” That’s the long-term tendency for individuals to not be aware of the holistic level association. That crisis didn’t hurt their bottom line, but part of risk that a system faces when there are a lot of different BrI e FIngs on TalenT & l eadershI p Q4.201061 compound parts. This is why a strong and competent CEO is so important. A natural human instinct is to believe that rare events happen to other people, and thus people are nat- urally optimistic that they are im- mune from catastrophes. At the same time, business leaders rely heavily on “norms” and “best practices” within a given industry. By seeking metrics that define what competitors and peers are doing, we tend to infer that if everyone else is doing it, it must be safe. That often can be quite wrong if everybody else is making the same risky sorts of decisions. It creates a very false sense of safety. Short-term quick fixes are usually the more attractive op- tion for corporate leaders, especially those under time and cost pressures. Risk management must be a long-term focus, not a short-term solution. Enterprise risk management must rise from No. 7 or 8 on corporate to-do lists to No. 1. This goes far beyond a perfunctory “What Risk management are possible bad things that could happen?” to an extensive and system- must be a atic audit of business risks and the long-term focus, processes in place to take on worst- case scenarios. not a short-term By audit, I mean looking at the solution. ways in which the different types of activities in which BP is involved are interconnected and thinking them through: “What happens if a supplier two stages down the chain screws up? How does that affect time is the emotional memory of these things, and that is the overall system? And what does that imply about the over- what is difficult to overcome. The pain that is caused and the all risk we are facing?” emotional trauma tend to fade and that sense of emotion, BP should have looked at the incentive structures in con- that emotional trauma, is what really kicks people into action. tracts and asked, “Do we have contracts in place that basically BP has obviously had a hard time remembering, given its encourage someone down the chain to engage in risky behav- track record. In the oil industry, if a company is not person- ior, which is ultimately going to bubble up and bite us?” ally going through what BP is going through, rather than say- There is also a tendency within organizations and in pol- ing, “Why don’t we try to simulate this and believe this is us,” itics to embrace an attitude known as “Not in my term of of- there is instead a natural tendency to say, “Thank God it’s not fice,” which results in a focus on the short term at the expense us.” And once you have that mind-set — that it could never of the long term. Getting a company like BP to shift from a my- happen to you — you are in trouble. opic short-term view, especially with incentive systems built upon rewarding short-term thinking, is a major challenge. But companies that think this way face greater risk for trouble. Jonathon Chandler, partner, Reputation Finally, we’ve found that people have real difficulty in Inc., London. learning from disasters. We’ve often observed that an indi- With crises in the food and airline and toy industries, vidual, a community or an organization will have something once a crisis starts, it ends. If something goes wrong with bad happen to them and they recover from it, and the same food on the shelf, as it did with Coca-Cola in Belgium in 1999, thing happens again down the road. What tends to erode over the food can be taken off the shelf and at least the problem 62 Q4.2010 The Korn/Ferry InsTITu T e part of the crisis is over. The same is true with toys. When But there’s a missing ingredient here, and that is that the Mattel imported tainted toys from China, it took them off the people at the top of BP should have moved quickly to close the shelf and the problem part of the issue was over. The same is gap with government organizations in the United States at true with airlines. If something happens to a plane, it’s a trag- the federal, state and local levels. They should have done this edy, but when it’s over, it’s over. You address the tragedy, you early on. In fact, putting aside the rules of protocol, the peo- take your hits to your revenue, your reputation, your trust, ple at the top of BP — Hayward and his team — should have but then you begin building it all back. been in touch with the president, or at least as close to him as In the case of the BP spill, it’s not over. In fact, the leak they could get. They should have said, “We have a problem.” hasn’t stopped, and it continues day by day. So, it’s different Then, they should have done whatever they could to close the from a traditional crisis because it’s ongoing, which means gap between BP and everyone affected by the spill, from the most things in the traditional crisis manual won’t work in fishermen to the president. this type of situation. The idea of trying to close the gap would be to try to cre- And then, just think about the impacts. Here’s a British ate the impression that everyone is working on the same company that’s now affecting the lives of poor fishermen and team. So it’s not just BP’s problem. It’s a shared problem and hoteliers in the Gulf, but also affecting the career and reputa- everyone’s working to fix it. Now, all you need to do is look tion of the president of the United States. So, the first— and at the president’s comments to see that’s not the situation. perhaps most important — thing to do is to find out exactly Right now, BP’s the enemy. I’m not saying there should be how far this can go. How bad can it get? What’s the extent? love between all the parties, only that the gap needs to be And then disclose it. narrowed. The aim has to be to collaborate. BrI e FIngs on TalenT & l eadershI p Q4.201063 i n review

Staying Independent While Staying Involved

“The CEO’s Boss: Tough Love in the Boardroom,” by William M. Klepper (Columbia Business School Publishing, 2010)

Boards and CEOs need a new “social contract.” One that’s fairer and tougher.

hile CEOs have taken most of the blame for recent cor porate failures, their boards certainly share considerable responsibility, Waccording to William M. Klepper, author of “The CEO’s Boss: Tough Love in the Boardroom.” So, to limit repeats of recent failures, the working relation ship between boards and CEOs needs substantial improvement.

In his book, Klepper, a professor of management at Columbia Business School, sets out to describe how boards and their CEOs can most effectively work together at the same time that boards provide independent oversight of their CEOs. Klepper sug gests some essential building blocks for productive boardCEO relationships and im portant yardsticks boards can use in evaluating their CEOs’ performance. At the core of a CEOboard relationship should be a cooperatively developed set of principles — what Klepper calls a “social contract” — to which both board and CEO com mit themselves. To ensure adherence to these principles, which Klepper recommends should include satisfaction of stakeholders, the board must frequently provide candid and unflinching critiques of the CEO’s performance, what Klepper calls, “tough love.” Klepper devotes most of “The CEO’s Boss” to explaining what boards should be looking for in a CEO and thus the basis for their feedback. Klepper’s major insight is that there is an optimal leadership style for each stage of 64 Q4.2010 The Korn/Ferry InsTITu T e the business cycle. Boards, therefore, should holders to be able to nominate board candi be continually ensuring that their CEO’s style dates or requirements that board members is what is required, given the company’s stage have substantial ownership stakes in the along the business cycle. A board, for example, company. may have astutely hired a driver personality These omissions are important because to bring its company out of a low point in the the efficacy of all of Klepper’s prescriptions business cycle. But, if that CEO maintains that rests on the good and steadfast intentions of same style as the company progresses into a board members — from their commitment surge of growth, the board must inform the to the social contract to their best efforts to CEO that he or she needs to adopt a more “ex evaluate CEOs on the basis of the appropriate pressive,” spontaneous, trustingthegut style. ness of their leadership style and soft metrics. If the CEO is unable to do so, the board must But, it is most likely that an overwhelming What Klepper exercise tough love and find a new CEO. majority of the Lehman Brothers board mem Klepper also says that boards must use bers who allowed Richard Fuld Jr. to run amok does not soft metrics, such as integrity, leadership, de and of the other boards whose companies address is velopment of internal candidates, and stra went bankrupt in the recent financial crisis tegic thinking, to supplement hard metrics would affirm that they operated by the prin how to ensure in assessing CEO performance. These metrics ciples in Klepper’s model social contract. Peer that board can often produce early warning signs, so that pressure, desire to protect their positions if a board keeps an eye out for them and re and the lack of hard incentives to keep their members will sponds to them quickly enough, it can fore eyes on the ball, however, led them to abdi remain faithful stall deterioration in profitability. cate their supervisory responsibilities. to the social Klepper is thorough and persuasive in Klepper provides a reminder of how his argument for the necessity of a social con boards and CEOs should operate. But, his rec contract and tract and the merits of using the leadership ommendations can be useful only if they are committed to style/business cycle matrix and soft metrics underpinned by incentives to maintain their in evaluating CEOs. The author’s leadership commitment to the social contract. providing the style/business cycle matrix in particular can As much as it would be heartening to be tough love provide a useful framework for a board’s as lieve that we could depend on the appoint required to sessment of how a CEO is doing in view of the ment of wellintentioned people to manage company’s needs. ment and board positions for achieving high uphold it. What Klepper does not address is how functioning boards, experience has proven to ensure that board members will remain that this is hopelessly idealistic. Klepper, like faithful to the social contract and committed so many others, points to Tyco International to providing the tough love required to up under Chairman and CEO Edward D. Breen hold it. There is no discussion in “The CEO’s and Jack Krol, lead director, as the model of Boss” of the factors that have been cited by how a CEO and board can function effectively. regulators and many other commentators Breen and Krol committed to a jointly crafted that contribute to boards straying from their social contract, Klepper observes. But, the responsibilities. What is to keep them from fact that they successfully turned Tyco around being cowed by a CEO, with his or her power seems largely a result of their internal com to marginalize them, take away some of their passes that steered them to work on behalf perks or blackball them so they will not be of shareholders and other stakeholders and considered for other lucrative corporate not primarily in their own selfinterests. board positions? Missing here are sugges Certainly, if people who could be counted on tions for objective standards and structures to put stakeholders’ interests first populated to institutionalize the independence of di all boards and CEO offices, there would be rectors. There is no mention of the many leg no need for laws, leadership style/business islative and other proposals that have been cycle matrices or any other schemes to make made to encourage the independence of boards provide the requisite amount of boards, such as separation of the CEO’s and tough love and function ideally as their chairman’s positions, proxy access for share CEO’s boss. 66 Q4.2010 The Korn/Ferry InsTITu T e i n review

Becoming an Authentic Leader

“Leadership from the Inside Out: Becoming a Leader for Life,” by Kevin Cashman (Berrett- Koehler Publishers)

The best leaders start by evaluating their own strengths and weaknesses

n 1998, when the leadership development guru Kevin Cashman first published his seminal work, “Leadership from the Inside Out: Becoming Ia Leader for Life,” the business landscape had a decidedly different look and feel. With a new millennium looming, the tough-minded Jack Welch, the leg- endary chief executive at General Electric, was the reigning leadership icon in Corporate America. His success running G.E. made him a mythic figure and solidified the image of the CEO willing to “cowboy up” to any challenge.

Back then, books about leadership were generally given a lukewarm embrace, while the best-seller lists were dominated by tomes touting a coming economic boom or offering financial advice. A technology-fueled surge in the economy raised stock prices, filled corporate coffers and rewarded senior executives with outlandish compensation packages. Business leaders felt entitled and empowered and were generally uninterested in self-actualization regimens. But change was on the horizon, and a few visionary consultants and academic voices such as Peter Drucker, Warren Bennis and John Kotter were touting the importance of the examined life of the corporate leader. At the time, “Leadership from the Inside Out” was a contemporary complement to Peter Senge’s “The Fifth Discipline,” Kotter’s “Leading Change,” and Daniel Goleman’s

68 Q4.2010 The Korn/Ferry InsTITu T e “Emotional Intelligence.” The book tapped into tant, why don’t we recognize it as an issue? a nascent urge to look beyond the accepted The answer is both simple and profound: We command-and-control top-down leadership are always authentic to our present state of devel- style to identify the “soft skills” required of opment. We all behave in perfect alignment new millennium leadership. Cashman, the with our current level of emotional, psycho- founder and president of LeaderSource, a con- logical and spiritual evolution. All our actions sultancy focusing on leadership development, and relationships, as well as the quality and executive coaching and talent management power of our leadership, accurately express (now part of Korn/Ferry International), has the person we have become. Therefore, we spent 30 years coaching thousands of senior conclude that we are “authentic.” executives seeking ways to enhance perfor- “There is a big hitch, however,” he con- mance and master the essence of leadership. tinues. “While we are true and authentic to our The book’s By the time Cashman published a 10th- current state of development, we are inauthentic anniversary edition of his best-selling book to our potential state of development.” In other premise is in 2008, which includes new research from words, leaders are severely limited by their simple but Korn/Ferry International, Lominger, and re- own shortsighted view of how they can searchers Daniel Goleman, Jim Collins, Jack achieve significant levels of growth and im- compelling: Zenger and Joseph Folkman, among others, a provement. Caught up in the daily machina- there is a global recession was gathering steam, Wall tions of a corporate entity, they neglect the Street was in tattered disarray and the dearth future for the present and become trapped. powerful of potent leadership in American companies Given the complexities and intense de- connection was startling. Ironically, despite these tectonic mands on leaders in the current economic between changes — or perhaps because of them — maelstrom, it is the rare executive who seeks “Leadership from the Inside Out” remains as his or her own inner light. “Leadership from our internal relevant and instructive today as it was at the the Inside Out” is less prescriptive than edu- selves and time of its debut. The book’s premise is sim- cational. Cashman ends each chapter of the ple but compelling: there is a powerful con- book with Reflections, a workbook section our external nection between our internal selves and our for executives in which they can pose critical results. external results. Prospective leaders must seek questions for themselves from material in personal mastery through self-awareness, the chapter, such as: “Under what conditions authenticity, courage and purpose in order to do you shut down communication? What successfully lead their organizations. beliefs are causing you to shut down? How “Leadership is not simply something we can you be more open in future situations?” do,” Cashman writes. “It comes from a deeper There is no denying the provocative reality within us; it comes from our values, impact that Cashman’s insights trigger, principles, life experiences and essence. Lead- particularly in an era of outlandish CEO ership is a process, an intimate expression of compensation, a steady parade of corporate who we are.” malfeasance and the very real damage leaders The foundation of Cashman’s thesis is have wrought on our economy. authenticity, which he defines as “the contin- “It is no longer possible to discount ual process of building self-awareness of our these principles as soft,” Cashman writes, ex- whole person — strengths and limitations.” plaining the reason for an updated version of In order to support sustainable leadership, the book. “They produce measurable results, authenticity may be the single most impor- and they are essential to substantial leader- tant principle. Unfortunately, most people, ship, team and organizational success.” especially executives, have little realization It is the rare organization that pays of the lack of authenticity in their lives and more than lip service to the idea that its peo- the crucial role it plays. Cashman notes that ple are its most valuable asset. But for Cash- in three decades of work, he has never had a man, the payoff is tangible. “Organizations single executive come to him complaining that invest as proactively in people develop- of a lack of authenticity. ment as they do in business development And he asks: “If authenticity is so impor- will thrive for decades to come,” he writes. 70 Q4.2010 The Korn/Ferry InsTITu T e 72 thoughts Partingparting t houghts Q4.2010 Mexico. While wecouldviewthisascompetition, Mexico.While While muchoftheworldhasbeenfocusedonhuman much wecomplain,theworldisbecomingwealthier, health- market couldgrowbyasmuch40percentthisyear, while means morebrightmindswill be tack- fying itasaNano orProtonGeelyChery. Asiancar The for rawmaterials and new sources of energy. They ier andmoreintegrated. at rushhour, itdoesrepresentaglobalmilestone.Nearly Gulf of Mexico, of Gulf anotherimportantandrelatedeventistakingplace,largelyunnoticed. more workgetsdone with morepeople, add scientistsfromChina,India, Bra- are vying fortherighttoexploreoilinwaters panies areactiveinAfrica,SouthAmerica,Austra- jobs andmarkets just as deep and dangerous as those in the Gulf of of just asdeepanddangerousthoseintheGulf the Western market is expected to be flat, at best. atbest. Western marketisexpectedtobeflat, the the moreworkgetsdone. that’s notthewayIseeit. headwinds. That carisalsolikelytohaveanameplateidenti- headwinds. That hope thatthebillionthcarwon’tours, beinfrontof especially tragedies surrounding the explosion of BP’s Deepwater Horizon drilling platform in the zil, Russiaandelsewheretothe world’s hands we have on deck, toputitinthevernacular,hands wehaveondeck, likely tobesoldinChinaorIndiaBrazil,wheretheecon- lia, theMiddleEastandareasaroundCau- ling life’s mostdifficult challenges.If we growing economicmightisascompetition,andnotjustfor gineers, scientistsand physicians, that car willtakeitsplaceontheworld’sroads. Andwhileweall casus. They arelockingdownlong-termcontracts casus. They omies continuetogrowswiftly, evenwithtoday’seconomic one infiveadultsalivetodaycanaffordacar. Nomatterhow If ChinaandIndiaareeducatingen- If What historyseemstoshowisthatthemore What The worldisbecomingmiddleclass. The This year,This perhapsrightaboutnow, theworld’sbillionth Given thewayworldisgrowing,billionthcar One way a Westerner mightthinkaboutAsia’sOne waya rapidly — competition foreverything.Asiancom- by JoelKurtzman rounding climate and the environment, housingandwater,rounding climateandtheenvironment, malaria orsomeotherdreadeddiseasecanonlyincrease. we can’t do it by erecting bigger barriers, or piling restrictions and people. ple workingtosolveproblems, likethosethatcausedthe problems, besolved. thesoonerthey’ll the owner drives it out of theshowroomandontostreets,the ownerdrivesitoutof do itonlybybuildingbridgesbetweencultures, companies drug discoveryteams, finallycuringcanceror ourchancesof let’s hopethatperson,whereverheorshemaybe,isgetting educated as well as getting rich. We canuseafewmorepeo- educated aswellgettingrich. economy, themoresmartpeoplewehaveworkingonthese oil spill. We can on trade,orlimitingwherestudentscangotolearn. theimbalancesinglobal wewanttocorrectsomeof or if Likewise, if wewanttotacklethereallybigissuessur- Likewise, if When the billionth car rolls off theassemblyline,and thebillionthcarrollsoff When If If we want to find solutions to the world’s really big issues, • • Briefings on Talent &Leadership: Upcoming inthenextissueof Leadership InstituteattheYale of theinfluential Yale ChiefExecutive senior associatedeanandfounder A profileofJeffreySonnenfeld, company gotbackitsfizz Coca ColaCompany, abouthow the dynamic chairmanandCEOofthe An interviewwithMuhtarKent, the School ofManagement And muchmore… andenvironmental e T The Korn/Ferry InsTITu

Robert Risko