Chapter Thirteen

Increasingly, the identities of corporations are mere reflections of the personalities of their leaders. Today, a business magazine won't run a cover story about Ford Motor Company; instead, it will feature the company's CEO, Jacques Nasser, in a full-color spread. Even in the high-tech world—where one would expect the full focus of attention to be on the latest cyber gizmo—the public eye is riveted more on the persona of CEO Scott McNealy than on his company's red-hot Java product—and hardly any heed is paid to Sun Microsystems as a corporation. Indeed, recent research shows that the perceived image of a high-profile chief executive brings a premium to a company's stock. Investors thus join journalists in the personification of corporations, focusing on the characters, biographies, and alleged charisma of CEOs. As a result, American business organizations are more often than not portrayed as shadows of the “Great Men” who sit in the chief executive's chair. In the most extreme case, for all intents and purposes Warren Buffet is the Berkshire Hathaway corporation.

And academic theory follows practice. Over the last decade, the parsing of leadership styles has become de rigeur in American business schools, the subject of practical (and arcane) professorial research, as well as stacks of graduate dissertations. In continuing education seminars, in MBA classes, even at the undergraduate level, professors now teach students each to adopt the “right leadership style” for themselves—using “360 degree feedback” to make them aware of how they are perceived by others and, especially, to learn how to manage those perceptions. And for those who are severely leadership-impaired, there is always that growth industry called executive coaching.

This focus on personality is peculiarly American, perhaps an outward manifestation of our collective unconscious—on which the image of George Washington astride his powerful white steed is indelibly depicted. In recent times, Europeans have tried to resist such personification of leadership. Indeed, thanks to the likes of Hitler, Lenin, Stalin, Franco, and Mussolini, Europeans were more than happy to concede the whole sorry field of leadership studies to Americans after 1945. If you don't count the scads of books written in French about Charles De Gaulle, Americans owned the subject of leadership for most of the second half of the last century. And, during that time, we applied our theories not only to political leaders but, unique in the world, to leaders of business corporations.

And, of course, we got it wrong. “We” meaning those of us in American business, academia, consulting, and journalism who habitually discussed, studied, and wrote about leadership solely as an individual trait. While this obsession on a single personality is occasionally appropriate—particularly when the founding entrepreneur is still running a company—evidence offered here indicates that this perspective often skews analysis away from organizational factors, which are the more important drivers of performance. My colleagues and I came to this conclusion quite by accident. In early 1999, we began a research project on Strategic Leadership in conjunction with the World Economic Forum. For the last decade, leadership sessions had been a good draw at the Forum's annual Davos conclave, but Forum members had started to grow tired of the usual bill of fare: a thin gruel of CEO war stories, anecdotes, and homilies. So we were charged with putting a little beef on the Davos leadership menu. We formed a research team and set out to create something that didn't exist: a data base of hard information about the soft subject of leadership.

Working with Forum member corporations, we began our efforts with traditional premises about leaders—but soon were surprised to discover that the relative performance of large corporations cannot be explained adequately by measures of the individuals who head them. Note that operative word, adequately. As predicted, we discovered that most of the large global companies we studied operate, to one degree or another, under a traditional model of strong individual leadership at the top. Moreover, the quality of that leadership bears on the overall performance of those companies. But we also noticed that a few of the companies we studied—and some business units within others—are characterized by a different pattern of leadership. Instead of leadership being a solo act, an aria sung by the CEO, in these organizations it is a shared responsibility, more like a chorus of diverse voices singing in unison.

Significantly, this characteristic is more than the frequently observed phenomenon of “cascading” leadership (in which a strong leader at the top empowers other leaders down the line). Although cascading is often a part of what we observed, more to the point in these organizations many of the key tasks and responsibilities of leadership are institutionalized in the systems, practices, and cultures of the organization. Typically, cascading leadership depends on the continuing support of whoever is the leader of an organization at any given time; what we observed is behavior that is not personality-dependent. Eventually, we realized we were observing a form of leadership that is rooted in systems, processes, and culture. Without the presence of a high-profile leader (or “superior” goading or exhorting them on) we observed that people at all levels in these organizations …

• Act more like owners and entrepreneurs than employees or hired hands (that is, they assume ownerlike responsibility for financial performance and managing risk).
• Take the initiative to solve problems and to act, in general, with a sense of urgency.
• Willingly accept accountability for meeting commitments, and for living the values of the organization.
• Share a common philosophy and language of leadership that paradoxically includes tolerance for contrary views and a willingness to experiment.
• Create, maintain, and adhere to systems and procedures designed to measure and reward these distributed leadership behaviors.

Obviously, we did not invent this model of leadership, nor do we believe that it is necessarily new. Doubtless, it has been around a long time and we, like others, missed it because we were blinded by the powerful light that emanates from high-profile leaders. We were also prisoners of the current wisdom about the necessity for personalized, take-charge leadership—particularly in times of rapid change. Moreover, it is important to stress that the organization- based model we identified was not the only one we observed in our study, nor was it necessarily always the most effective. In fact, the two most successful companies in our sample operate on two different models, Oracle being headed by a single strong leader, and Enron with widely diffused and systematized leadership responsibilities. Thus we are not advocating a newly discovered “best way to lead”; instead, we are calling attention to a previously unnoticed— but equally viable—alternative to the traditional leadership model. Among other things, this discovery helps to explain some persistent contradictions to the dominant model of leadership. If leadership were solely an individual trait …

• Why is it that some companies continually demonstrate the capacity to innovate, renew strategies and products, and outperform competition in their industries over the tenures of several different chief executives? Intel, for instance, has been a rip-roaring success under the leadership of, in sequence, Gordon Moore, Andrew Grove, and now, Craig Barrett.

• Why is it that some CEOs who have succeeded in one organization often turn in so-so performances in the next? Consider George Fisher, who was a star at Motorola, but far less effective at Kodak. (Conversely, why is it that some companies headed by singularly unimpressive CEOs nonetheless rack up good performance records?)

• Why is that academics are unable to quantify the relationship between CEO style on one hand and organizational performance on the other? (In fact, they have found no objective correlation between those two factors—concluding, unhelpfully, that “it all depends.”)

Moreover, as history shows, businesses that become dependent on a single leader run a considerable risk. If that individual retires or leaves (or dies in office), the organization may well lose its continuing capacity to succeed—witness the performance of General Motors after Alfred Sloan, ITT after Harold Geneen, Polaroid after Edwin Land, and Coca-Cola after Roberto Goizueta. More frequently, organizations learn the hard way that no one individual can save a company from mediocre performance—and no one individual, no matter how gifted a leader, can be “right” all the time. As one CEO said, “None of us is as smart as all of us.” Since leadership is, by definition, doing things through the efforts of others, it is obvious that there is little that a business leader—acting alone—can do to affect company performance (other than try to “look good” to investors).

In light of these observations, it should not have been so surprising that our research revealed that, in many successful companies, leadership is treated as an institutional capacity and not solely as an individual trait. It turns out that many corporations whose familiar names perennially appear on “most respected” lists are ones with the highest institutionalized leadership capacities. Like individual IQs, companies have collective LQs—leadership quotients—that can be measured and compared. (Moreover, unlike individual IQ an organization's leadership capacity can be bolstered through appropriately directed effort.) Hence, we now are better able to explain why companies like Intel, ABB, GE, Enron, BP, Ford, Nestlé, and Motorola continue to renew themselves year after year, and over the tenures of many different leaders: Such companies are not only chock-full of leaders from the executive suite to the shop floor, they make conscious efforts to build their LQs, that is, their overall organizational leadership capacities.

That last point requires an important clarification. To our surprise, we discovered that some companies with continuing records of success do not pay much, or any, attention to traditional—that is, individual—leadership development. Instead of asking “What qualities do we need to develop in our leader?” these companies continually ask “What qualities do we need to develop in our organization?” And, though this may seem to defy the current wisdom about the importance of leadership, on reflection it squares with experience. At Motorola, for example, there has been a decades-long pattern of self-renewal that has continually belied the predictions of Wall Street analysts who, on at least four occasions, have written the company off for dead. When it has suffered one of its periodic setbacks, how could Motorola reasonably be expected to turn itself around without a take-charge leader like Jack Welch at its helm? But it has done so repeatedly, and under the collective leadership of several different individuals. In light of what we have learned from our study, we posit that the secret sauce at Motorola is the company's strong, institutionalized leadership capacity— systems consciously created by former-CEO Bob Galvin's leader-ship teams over a period of thirty years.

And the effectiveness of the organizational leadership model should not come as a surprise to those who have tried to change the behavior of a CEO—or of any executive whose career has been validated by rising to the top. Powerful executives tend to see leadership as positional. To them, by definition, the CEO is the leader of the corporation. For example, a couple of years ago we suggested to the CEO of a Fortune 500 company that he (and his executive team) might benefit from a leadership development program. He looked at us as if we were space aliens and testily replied, “If the board thought there was someone who was more qualified to lead this company, they would have named him and not me.” Given that such ego-driven denial is fairly common in executive suites, it makes practical sense that the high-LQ companies in our study focus on identifying business-related activities as the source of leadership development—that is, they stress improving the ability of their leaders collectively to do their central tasks, rather than on trying to fix them as individuals.

The lesson we take from this is not that individual leadership behaviors are unimportant, but that in some cases, at least, it may be more effective to treat them as secondary to organizational issues. Moreover, it is far easier for leaders to learn to do things differently in terms of business processes than it is for them to change who they are. (Nearly a century of experience with psychoanalysis proves that it is almost impossible to change basic individual traits, and that the rare successes come only after considerable time and effort.) And, hopefully, certain leadership behaviors—as opposed to the ingrained factors we call personality—can be changed more effectively in the context of organizational and business imperatives. In our experience, individual leaders often see more clearly, and less threateningly, how they have to change personally as leaders— and why they must do so—when the reason is business-related, as opposed to fixing them personally.

Using Leadership Data as an Objective Focus for Change

In effect, our research uncovered an alternative model not only of leadership but of organizational change as well. By surveying the behavior of over three thousand leaders at all hierarchical levels—and buttressing these observations with hundreds of interviews—we are in the process of creating an objective data bank about alternative ways leaders bring about strategic and organizational change. This body of data has allowed our research team to pinpoint specific business systems and processes that leaders use as levers to bring about significant shifts in organizational behavior and, ultimately, improvements in business performance. For example, at one large global high-tech company we surveyed leaders at five different levels to collect data on sixty items related to the effectiveness of twelve categories of systems that leaders use to affect behavior (see Exhibit 13.1).

In parallel interviews, we discovered that there were competing theories about the reasons why this company was not as profitable as its competitors. When we then analyzed the survey data and fed the results data back to the top management team, they were able to compare the relative effectiveness of their systems to those of other companies in our study. They discovered that they did well on about eight of the key systems we measured, average on two, but that their scores for performance appraisal and decision making were near the low end of the scale. The data was unequivocal: top management wasn't holding operating heads to their commitments, and decision making was based more on relationships than on objective facts. The team members, who had been in denial about some of this—and divided about what was causing the rest—were then able to come to grips with their organizational leadership problems, and to create an agenda for repairing the broken systems. They were also able to identify a “concrete layer” in their hierarchy where transmission of messages from the top was getting stuck on the way down the line.

The executives then began a change process by feeding the data back to the next two levels of the organization, building consensus about the roles and responsibilities of each level, clearly identifying what needed to be done and by whom. In the process, they asked us to prepare cases of how other companies dealt with similar problems, and they discussed these in a series of four workshops over a two-month period, building a common language about, and approach to, leadership. In sum, they were able to consciously build their organizational LQ by addressing the systems that had the greatest impact on performance. The bottom line is that, by using those systemic levers, the executives became more effective change agents and leaders than had been the case in the past when they had worked with organizational development experts to alter their individual leadership styles. They came away from the data-based exercise with the belief that, although one has to be born with charisma, almost all of them could learn how to better manipulate a small set of enabling management systems. Moreover, they now had an objective way to measure the extent and degree to which the changes they had initiated had been adopted by leaders down and throughout the company.

Building Organizational Coherence and Agility

In the highest-LQ organizations we studied, leaders at all levels use such ordinary systems as goal setting, communications, capital allocations, and recruiting in a conscious way to create two prime attributes of long-term organizational success: coherence and agility. Coherence means that common behaviors are found throughout an organization that are directed toward the achievement of shared goals. And agility is the institutionalized ability to detect and cope successfully with changes in the external environment, especially when such changes are difficult to anticipate. Until recently, scholars had posited that companies with high levels of coherence were “built to last,” and that the task of leadership was to get the right fit, or alignment, among key institutional characteristics. But we discovered that not all institutional coherence is good. For instance, bureaucratic alignment anchored in the habits of the past is deadly, as we documented in a couple of the companies we surveyed. Similarly, although agility has often been identified with corporate success, we found that too much of that good thing leads to chaos and wasting resources on duplicate efforts.

What we found is that organizations need to be coherent and agile at the same time. In fact we discovered that not only were the operating systems of high-LQ companies directed to those two ends, the leaders viewed their prime task as creating those attributes. (These quantitative findings from our survey are consistent with recently espoused qualitative theories about the centrality of organizational “alignment and adaptability” offered by such scholars as Harvard's Ronald Heifetz, Stanford's Charles O'Reilly, and Columbia's Michael Tushman.) Significantly, one of the highest-performing companies in our study, Enron, actually aligns around agility: that is, its leaders rigorously measure and reward the seemingly loose entrepreneurial behaviors of market-responsiveness and risk taking. In essence, Enron creates organizational coherence around shared business objectives while simultaneously encouraging the agility to meet discontinuous threats and opportunities. More specifics about Enron in later sections, but first we should address some points of natural skepticism likely to arise concerning our approach and findings.

A Distinction with Consequences

Does it make any real difference whether leadership is treated as an institutional capacity or as an individual trait? Because fundamental premises drive behavior, when leadership is thought of as an organizational trait there are profound consequences for almost everything that follows. For example, because ABB views leadership organizationally, its highly respected former CEO, Percy Barnevik, could retire at age fifty-four in full confidence that the company had the capacity to carry on successfully without him (thus freeing Barnevik to take on even greater responsibilities for the Swedish Wallenberg family, ABB's largest shareholders, and allowing the company to make several needed changes in structure that had been closely identified with Barnevik's tenure). Because Intel sees leadership as an organizational trait, the company did not miss a beat when Andy Grove retired as CEO—in fact, it was well positioned to move on to a higher level, with the capacity to take on new strategic challenges. How often is it that a company not only doesn't go into the tank when a CEO as respected as Grove steps down, it actually renews itself with a fresh line of products and promising new areas of business? And the reason for the successful hand-offs at ABB and Intel is not simply good succession planning. The key factor is that neither company is dependent on any one, two, or half-dozen key individuals for its ongoing success. As observers note, neither company talks much about individual leadership at all. Instead, they focus on building the human capacity to manage the systems that, in fact, are at the heart of their respective successes. And that is what we found at our high-LQ companies.

The Role of Enabling Systems

In essence, we found that there is something palpably different about a company that emphasizes building enabling systems versus one that depends on a single personality at the top. Since the contributions of every leader are seen as important, there is concerted effort to define and measure leadership behavior down the line—and parallel emphasis on accountability at all levels for how the enabling systems are used—and to make certain that they are used. But what do we mean by enabling systems? Here are four examples of such systems (from the list in Exhibit 13.1), and how the high-LQ companies we studied use them in order to institutionalize leadership:

Goal Setting and Planning. Some of the companies we studied religiously institutionalize the process of setting challenging goals to drive performance. Although it often has been remarked that great individual leaders constantly challenge and stretch their followers, we discovered that institutions can also do this through the use of disciplined organizational processes. In several of the companies we studied, there were formal mechanisms that ensured that leaders at all levels and at all times have a clear sense of how the organization is doing relative to its goals. Moreover, individual leaders are rewarded (and, yes, punished) based on rigorous measurement of performance against goals. While most organizations pay lip service to setting stretch goals—and to measuring the things that are most important to success of their business—we found that a few rare companies actually do it, and stick with it, no ifs, ands, or buts. This was an especially welcome finding because, in the personality-based organizations we studied, the punishment of poor performers either didn't happen or, when it did, was seen as a sign of “the boss” playing favorites. But in the most structured and disciplined of the processes we observed, there is a high degree of involvement in goal setting, and highly participative processes of establishing performance metrics—thus ensuring a climate of organizational fairness previously associated only with the actions of an unusually trustworthy leader.

Risk Management. Perhaps the most surprising finding in our stu dy was the importance of risk management systems in creating a sense of leadership down the line. In some companies, we found formal processes designed to make certain that everyone understands the size and likelihood of the key risks facing the business. In light of this knowledge, leaders at all levels become willing and able to take prudent risks, and they are enculturated to (and rewarded for) avoiding negative financial surprises. Because processes (not personalities) are paramount, capital allocation is seen as an objective process of pursuing business objectives (rather than personal agendas). Thus people are confident not only that objectively defensible projects will be funded but that the system behaves fairly when making all capital allocation decisions.

Communications. There is a striking consensus among scholars and practitioners about the centrality of communication to the role of the leader. Significantly, we found some companies where this important task was viewed to be the responsibility of every leader at every level—and that they were evaluated on how well they performed this task. In companies where leadership is institutionalized, we found that leaders at all levels spend a significant amount of time communicating the big picture—the vision, strategy, mission, and purpose of the organization. At the operating level, leaders provide ready access to information that others need to do their work. In particular, we found that those who have the most relevant information have the greatest impact on decisions.

Recruiting. All companies recruit. But in high-LQ companies, recruiting is a prime task not of the HR department but of operating managers at all levels (including the CEO). These companies make a conscious effort to define selection criteria for new recruits that are closely related to overall corporate goals. Some, like sports teams, even recruit “the best talent available regardless of position,” instead of looking to fill specific niches. Moreover, they consciously include leadership criteria in their recruitment profiles. For example, they look for people who are interested in developing subordinates, and who see leaders as teachers rather than bosses.

Different in Countless Ways

While this discussion may sound familiar, what is striking is that none of the companies we studied stresses all twelve of the systems we identified. Instead, they each focus on managing a few systems tightly, while leaving the others loose. For example, one high-performing corporation keeps tight control of vision and communications, but leaves it to the business units to make decisions relative to structure, recruitment, planning, and the rest. Significantly, we found no pattern in the choice of systems that are stressed, and no correlation between performance and the systems emphasized. What seems important is that there be a clear focus on any two or three key systems—the particular choices being driven by the strategy, industry, or challenge faced by the company. As noted earlier, the two highest-performing companies in our sample are exact opposites of each other (Oracle has a traditional leadership model, and Enron is a high-LQ company), and they each emphasize quite different systems. Yet these two dissimilar organizations are mirror images of each other in making clear and conscious choices to stress certain systems—and then disciplining themselves to follow through with the application of those systems.

When all of the sixty-plus variables in our study are analyzed—the regressions run, the variations standardized, and the chis squared—what the highest-performing companies seem to have in common is that they consciously choose what systems to emphasize. Leadership is thus a rational and analytical process, and not a natural trait with which some fortunate few are born. Related, when the highest-performing companies we studied create a system, announce a major managerial policy, or introduce a change in process, they stick to it in a disciplined way and hold leaders at all levels accountable for behaving consistently with the chosen course. In contrast, the lower-performing companies we studied are often characterized by arbitrary policies, inconsistent enforcement of systems, and the lack of follow-through in both implementation of policy and change initiatives. We found this distinction to be as true for companies like Oracle that operate with a traditional model as it is for those like Enron where leadership is institutionalized.

The Moral Equivalent of Individual Leadership

With specific reference to the high-LQ companies we studied, we think they may have developed the moral equivalent of great individual leadership. While having a Larry Ellison, Jack Welch, or Percy Barnevik at the helm is obviously desirable, and companies who have such talented leaders are indeed fortunate, such good fortune is rare. But companies with a high LQ get many of the benefits of such leadership, even if the individual in the executive suite is not a star performer. And when the individual in charge is sadly less-than-stellar, strong systems can help to make up for the morale-sapping effects of arbitrary, erratic, indecisive, weak, or egotistic leadership. It is here that students of organizational theory will recognize shades of what Max Weber was struggling with over a hundred years ago when he advocated bureaucracy over the only alternative available at the time: personality-driven leadership. While Weber may have solved the problem of capricious and politicized management, his solution—bureaucracy—merely substituted the problems of immobility and rigidity that came to characterize not only his beloved Prussian civil service but, in time, the likes of General Motors, IBM, and AT&T. But now, after a century of struggling between the Charybdis of arbitrary leadership and the Scylla of bureaucracy, high-LQ companies may have resolved the Weberian dilemma. These companies are not only both coherent and agile, they are also not burdened with the vicissitudes of arbitrary leadership.

Case in Point: Enron

Enron is a particularly instructive case of how a high institutional leadership capacity can contribute to business performance. As recently as a decade ago the company was an unlikely candidate to be chosen as Fortune magazine's “most innovative company” in 1999 (and again in 2000). In the late 1980s, Enron was a slow-growing Texas-based gas pipeline company. Today it is one of the fastest-growing, most entrepreneurial corporations in the world, moving into countless new lines of business (such as power marketing and bandwidth trading). Enron management transformed the company by consciously creating the opportunity for many leaders at all levels of the organization to take risks, create new businesses, and share in the fruits of their success. They started the process of change through an expensive recruiting initiative. Competing against the attractive enticements offered by high-tech companies and high-paying financial institutions, Enron successfully recruited two hundred MBAs from top schools to come to backwater Houston with an unambiguous charge to shake things up.

Enron's CEO, Kenneth Lay, may not have had a detailed blueprint of what all those energetic young people would do when they got on the job, but he established an environment in which they could think creatively, speak up, try new things—and motivate the existing corps of managers—all in the belief that “exposure to new talent stimulates people to do better work.” And he kept it up: Enron has pursued a vigorous recruiting effort in each subsequent year. And, to build organizational coherence, the company introduced a free internal labor market (allowing people to move around easily), and it provides training that enables them to “own their own employability.” It inaugurated a policy in which there is freedom to fail without penalty if people take the right kinds of risks, and Lay gives the hundreds of new leaders Enron has recruited a free hand in running the businesses they create—and a healthy financial stake in their success. As the many leaders of Enron now say, “We are given the freedom and financial wherewithal to succeed.” Not coincidentally, Enron also was chosen last year as one of Fortune's “ten best corporations to work for.”

Lessons for the Next Generation of Leaders

A message that emerges loud and clear from our study is that CEOs like Ken Lay don't need to know all the answers, and they don't have to do all the work of leadership by themselves. In fact, Lay defined his task as creating the systems under which others would be encouraged to do all the things that typically end up on the desk of the do-it-all leader. We believe that in many, if not most, corporations it is easier to motivate and reward leaders down the line to take up the mantle of leadership themselves than it is for a single CEO to provide detailed direction to hundreds, even thousands, of managers. To this end, it is instructive to review in passing how some of the companies in our study have used the survey data we have reported back to them. At the annual World Economic Forum meeting at Davos, Lay was joined on a panel by leaders from Oracle, Renault, and one of India's largest companies, Godrej & Boyce. They addressed common themes: The value of assessing the level of coherence and agility in their organizations; the usefulness of locating the “concrete layer” in their hierarchies where the transmission of messages to the front line get blocked; the importance of identifying and communicating the right leadership model for the organization given its particular challenges and aspirations; and the absolute requirement of pinpointing what systems should be given the highest priority in order to build the organization's leadership capacity. And all of these steps are facilitated by having objective and comparable data.

Collecting and feeding back hard data about institutionalized leadership is still a new concept, and much remains to be done to make the information gathered both reliable and useful. What gives us hope that the effort is worth the candle is a comment made by a top executive in one company we studied—an organization where not all the information fed back about leadership capacity was positive: “At least now we can discuss leadership without defensiveness. Instead of threatening egos, which is never effective, we can talk about needed changes in terms of organizational tasks. And almost everybody can buy into that process.” We have found that there is nothing like a little objective data to overcome denial and to get leaders focused on the collective work that needs to be done.

Our message to young leaders is not that the personality-driven model of leadership is headed for extinction, nor do we believe that it should be. Clearly it will continue in small and start-up companies, and in places where appeals to the human heart must be made in order to bring about drastic change that requires considerable sacrifice (paradoxically, the impetus to move toward the organizational model probably requires the personal leadership of a Bob Galvin or a Ken Lay, individuals willing to forgo personal glory for the collective good of their enterprise). Nonetheless, we believe that more CEOs of large companies may be drawn to the organizational model of leadership for the simple reason that it is potentially more productive—and satisfying—to become a leader of leaders than it is to risk trying to look like George Washington on a white horse. The bad news—at least for those who like a People Magazine approach to business journalism—is that there may be fewer “cover boy” CEO leaders in coming decades. The good news is that there may also be much more effective corporate leadership. As we now have learned, leadership need not be just a solo act.