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Leadership Challenges for the Third Millennium

In an era where technologies, economies, and even corporations are converging, the same old leadership model won’t cut it. CE gathered leading-edge CEOs at the home of Castle Harlan’s John Castle to explore the challenges facing business leaders in the 21st century.

THE FUTURE’S SO BRIGHT

Dana Mead (Tenneco): I’m reminded of what the famous baseball philosopher said-predictions are very difficult, especially when they involve the future. We’re now beginning to enter a new commercial century, where commercial forces may dominate. And we’re already seeing evidence that the speed, size, and general impact of commercial events will overwhelm the ability of our social, political, and economic institutions to cope with them.

The huge and rapid capital flows in the last few years-where you could transfer the entire GDP of a small country with two keystrokes-and the communications revolution, are creating a set of opportunities for us, but also a set of problems, because the very capacity of those technologies creates instability.

Capital is a great example. In ’83, there was about $1 of capital turnover for every $3 of major bank reserves in the world. That ratio has flipped. The turnover in capital is about three times for every dollar of bank reserves. And it can be done very rapidly and without a lot of controls.

One of the things business leaders have to try to find is institutions that can deal with this transition, many of which are outside governmental channels. The transatlantic business dialogue was an effort to put the commercial interests across the Atlantic talking face to face outside of the government institutions that govern trade. If you think about the incursion of NATO into the Eastern Bloc, it has more to do with economics than defense. Even the Russians have started to figure out that if Poland becomes part of NATO, it isn’t as much a security threat as it is a commercial threat.

What’s the bottom line? First, business leaders are going to have to learn how to operate in this vastly different environment. Second, they will have to establish and manage international relationships that are much broader and more challenging. We’re going to have to play a role in building the institutions to handle this change, otherwise someone else is going to build them for us, and I can guarantee we’ll be unhappy.

Arnie Pollard (CE): How might these new institutions play out? Will we have IBM printing currency and having ambassadors to countries? Will the EU evolve into the world union, because we need global rules?

Mead: I think you will begin to see more off-the-system type relationships. There’s a movement afoot right now, among serious bankers in the world, to develop a substitute to the IMF, and for Russia, to build some kind of an investment fund, which would be much more private. Obviously, it would not have the firepower that the government funds do, but it’s the kind of start you might see. Also, in certifications, regulations, and standards-which are a huge impediment to us right now, and to the development of technology worldwide-we could see businesses develop agreements and then lobby their own governments as third parties. That’s what we’ve got to start building.

Marilyn Carlson Nelson (Carlson): I agree that there needs to be some supra-governmental or non-governmental agency. But where do the checks and balances come in, accepting or presuming to take responsibility outside of the systems?

Mead: Good question. As business agreements like this have developed, we’ve had to drag our governments into this, sometimes kicking and screaming. Sometimes they jump in, because they realize they’re losing control.

Many issues are arising because of the commercial issues globally, rather than through the political process. The whole banking system, whether it be the deregulation of banking or whatever, created cross-national, cross-continental boundaries problems that just blew by the——governments. The technologies created ways of communicating and moving funds, and investing, and not investing, and designing products and everything, far beyond the ability to socially manage it.

Jim Broadhead (FPL Group): Increasingly, it seems government is becoming more run by sound bites and slogans instead of analysis. And it makes me worry that as each area becomes more complex, the ability of the government to go flying off in the wrong direction will be greatly increased.

FOUR FORCES

Mike Armstrong (AT&T): The defining idea of the future of the world that we will do our business and live our lives in will be the advent of broadband communications. Four underlying forces are making this happen. First, we are finally finding technology that is implementing unlimited bandwidth. We’ve been constrained by monopolies, by regulations, by depreciation schedules, and by technology. Second, the thing that’s driving that technology is photonics, or light waves. Moore‘s Law says that the price performance of the semiconductor or the transistor will double in price performance every 18 months. And photonics is happening in communications at more than twice that pace.

Third, communications is rapidly becoming a digital expression and a new language-Internet Protocol (IP)-permits digital devices to talk to each other. The telephone, television, and computer have all been dedicated devices with dedicated channels of communications. With IP, all these devices and applications will converge.

Fourth, the common stream of applications that will come at us will affect the way we conduct our lives both personally and in the workplace. For example, until the wireless telephone, we were really tethered in our communications to where the communications device was. Now a tri-modal chip will enable the wireless phone to attach to an analog or digital signal at the cellular spectrum, or to the PC’s digital spectrum. So this phone talks to any technology in the U.S. Then somewhere around 2000, technology will converge so that this phone will be a global phone.

It will also become a broadband device. The next chip set will be a 56 kilobyte modem, the fastest modem you can put on your PC now. The next generation will be a 384 kilobyte modem that will enable true full motion video. So this device will be able to go anyplace on the globe and do any form of communication. On average, three out of four minutes spent on the Internet are in three applications: e-mail, messaging, and chat. There’s no reason that we have to go to a $3,000 device with three million lines of Windows code to do that. And with a 384 kbps modem and a global phone, we ought to be able to teleconference. Or dial up Japan, and in our English language, speak to the network that connected us and have it recognize our speech and translate it into Japanese, real time, on-line. So this will become the most ubiquitous Internet device in the world.

Mead: We’re moving into a period where we have to begin to deal with the dichotomy-a tremendous number of have’s and have-not’s-that this knowledge economy we’re talking about is going to create. Two-thirds of the people in our plants are capable of learning new technologies. The other third aren’t, or won’t. We have to find a way to get through this transition without creating an enormous amount of social upheaval.

Mike Bonsignore (Honeywell): How do you deal with the one-third that either won’t or don’t get it? Management has to prime the pump. But then if the accountability is clear, and the alignment between the shareholders and the employees is good, it’s amazing how this process tends to be self-generating. Then what you have to do is get out of the way and let it happen.

Craig Winn (Value America): Bill Gates being interviewed by Congress was an embarrassment-not to Bill Gates, but to Congress and their inability to grasp the complex issues. I spend all of my day as a troubadour for specifically the brave new world Mike described, and this convergence of untethered appliances will impact all of our businesses and all of our lives.

Woody Morcott (Dana Corp.): One of my concerns is that I learned more about leadership in the U.S. Army than I did at the University of Michigan Graduate School and today’s generation is not getting that. The future’s not going to have those kinds of people, because they aren’t going through those kinds of experiences.

Ralph Larsen (Johnson & Johnson): Who our future leaders will be is probably the biggest issue facing our corporation. Our view is that leadership is a learnable skill. We expect everybody-from the janitor on up-to be a leader in their area of responsibility. Saying “I’m here just to do what somebody else tells me to do,” is unacceptable.

Leadership is someone’s willingness and ability to make a difference. We have no trouble finding people who can do what they’re told. But we have a much larger problem finding people who are willing to step up to the plate and say, I can really make a difference.

Steve Kaufman (Arrow Electronics): I don’t want to sound like Chicken Little with the sky falling, but all today’s business school grads want to know is, how much will I get paid? And when’s my first promotion? But they’re not asking, how do I contribute? I’m troubled by how we can inculcate the younger generation with the notion that giving is as important as taking. We don’t see it anymore in our national leadership.

Nelson: I believe you can create a culture where that’s recognized, rewarded, respected. Being privately held is in some ways a luxury, because we can try to keep a balance between the employee, the customer, and the shareholder. I see so many of you under so much pressure, that that employee relationship from time to time doesn’t get the nurturing, the attention, the investment that it might.

Armstrong: If our kids remain in the fourth quartile, relative to the rest of the kids of the world, our system will not remain in the first quartile.

Mead: You have to keep asking yourself, if we have such crappy test scores-and we’ve had them for a long time-why are we doing as well as we’re doing? I think it’s because we had a set of values which have taken the technical capability we have, and began to apply it in different ways.

Dermot Dunphy (Sealed Air): Look at all the geniuses we have in Silicon Valley, and in biotechnology. We’re the technological leaders of the world in every field, so somebody must be doing their homework, and maybe getting better test scores.

I’m optimistic. Young people are better than we were in our age. You say they want to know what their salaries are. But when I graduated from Harvard Business School about 40 years ago, my classmates and I all made our career decisions based on who would pay us the most money.

John Castle (Castle Harlan): With Mike’s little machine, you can call anywhere in the world, presumably, and nobody can regulate it. That drives people to be a me-me kind of a person. If people wanted to be entertained 100 years ago they had to get together. Now everyone can get out their little phones and have their own interaction individually.

William Lichtenberger (Praxair): We operate in 45 countries around the world. We’ve evolved from where everybody used to look to the U.S. for leadership in every area to the point now where of our two major businesses in the U.S.-one is run by a South American, another one is run by a Swiss. We found they were able to provide stronger leadership than some of the people that we had here in this country.

Jim Perrella (Ingersoll-Rand): Dana said earlier that we’d like to have commerce move across nations without government interference. But with the Internet, we have no standards and we have a problem. We need a regulation system that works.

Glen Nelson (Medtronic): We’re going to have to find some way to certify information on the Internet. I’m trying to organize a medical specialty society to certify certain medical information and put it on sites, so that an individual visiting that site would know that a professional society had reviewed that information.

Winn: One of the advantages of the Internet is that it gives people access to many different sources so they can make a better informed decision. I don’t believe that government will ever be able to control, nor should control, the Internet. It literally overwhelms them. It moves too fast, it is too big, it is beyond their capacity to understand or to deal with. And it is the environment where business can make the biggest impact. Bonsignore: What role should firms play in creating a new social contract in driving change in the world community? Large corporations in the 21st century will have far more influence around the world than the governments of the countries in which they operate. What does the leader for the 21st century look like? And what should we as CEOs be doing as we groom the people who will take our jobs? The firms that can capture the essence of some of these questions are the ones that will prosper and persevere in spite of all this ambiguity, complexity in the future.

Our youth is probably better qualified and more aware of reality today than any I’ve seen in a long time. And insulating them and isolating them from the Internet accomplishes nothing. It’s the moral fiber and the value system that we imbue in them that becomes the control mechanism that decides what kind of human beings they will be and how much we have to protect them from the world around them, which is going to be there whether we like it or not.

Mead: I want to ask Mike a question that troubles a lot of CEOs. How do you align the shareowner and employee interests when you’re laying off 4,000 employees? I went to a dinner recently where John Biggs from TIAACREF made the point that many CEOs got pops in their stock by announcing massive layoffs, which arguably helped the shareowner, but decimated the employees. You can’t be a company that is really paternalistic, and I mean that in the positive sense, and hit an economic downturn and not have to take fairly draconian measures.

Bonsignore: It gets back to communicating the company’s ambition, processes, and values. We have a major ambition to get our working capital at 20 percent of sales or under. And it’s created a gold mine of free cash flow. In the beginning, employees would come to me and say, “We’d love to help you with working capital, but we don’t know what the hell it is.” And so we started a major effort to help employees understand working capital and what they can do to influence it. The coup de grace on the whole thing is getting the employees involved as owners. If all of those parts and pieces are operating, when that downsizing time comes, it will be the employees who first understand the need for work force reductions. And they know who the people are that represent the one-third much better and much faster than we in management do.

J.P. Donlon (CE): Bob and Marilyn, do you have an edge on public companies?

Bob Herres (USAA): It’s a two-edge sword. Sometimes the sense of urgency that the tickertape provides in a stock-held company keeps everybody on their toes. It’s easy for complacency to develop. It is gratifying to know that we don’t have to worry about the shareholders, but the other side of that is we’ve got to be successful.

PRIVATE LIVES

Nelson: I don’t think anyone in business is free from the stewardship of assets. Being private simply allows us to accept a growth rate that might be a little slower if we want to retain a certain employee base. Two or three years is the kind of patience that we don’t see in the market now. I’m not sure I can convince my family for two or three years either.

Mead: How many of you have talked to institutional investors about your company spending time on leadership development; employee training or environmental performance? And what’s the reaction?

Kaufman: They ask, “Why are you spending time doing this?”

Mead: Yet it’s very important.

Bonsignore: I look at where the U.S. is in the world today, economically, politically, technologically, educationally, socially, values-wise. I’m not ignoring the fact that this is not a perfect world. I believe passionately that firms will have to fill in a big gap government has created in our social fabric, in mentoring, in public-private partnerships, because corporations are better organized, quicker, more efficient than government will ever be in dealing with some of these problems.

Larsen: We try to identify what we call standards of leadership-those attributes of a leader that we happen to think are important to our business in the future, and not obvious in the conventional sense, such as the ability to master ambiguity and complexity. The leader of tomorrow is someone who will have to deal with this flood of knowledge that’s coming at him through Mike’s technology and elsewhere, and not everybody is comfortable with that. Those are standards of leadership we think are important and teachable if you set the environment to encourage it.

Armstrong: One of my biggest problems is getting trained people to pull off the strategy we’re investing in. I’m not short of Harvard guys, engineers, or guys to sweep the floors. I don’t have enough trained technical people. That’s a real problem in America, that in Dana’s commercial era of the next century, which I sure buy into, we do have to have a corporate social contract that helps fix that problem.


A Who’s Who Of Roundtable Participants

C. Michael Armstrong is chairman and chief executive of New York City-based AT&T, a $53.2 billion communications services company.

Michael Bonsignore is chairman and chief executive of Minneapolis, MN-based Honeywell, an $8.43 billion provider of control components, products, systems, and services.

James L. Broadhead is chairman, president, and chief executive of Juno Beach, FL-based FPL Group, a $6.4 billion diversified holding company with utility and non-utility operations, and is also chairman and CEO of FPL‘s principal subsidiary, Florida Power and Light Co.

John K. Castle is chairman and chief executive of New York City-based Castle Harlan, a private merchant banking firm managing more than $30 billion in assets.

T.J. Dermot Dunphy is chairman and chief executive of Saddle Brook, NJ-based Sealed Air Corp., a $2.5 billion manufacturer and marketer of proprietary protective packaging products and systems.

Leonard M. Harlan is president of New York City-based Castle Harlan, a private merchant banking firm managing more than $30 billion in assets.

General Robert T. Herres is chairman and chief executive of San Antonio, TX-based USAA, an insurance and financial services company, managing over $42 billion in assets, serving former members of the U.S. military and their families.

Stephen P. Kaufman is chairman, president, and chief executive of Melville, NY-based Arrow Electronics, a $7.8 billion distributor of electronic components and systems.

Ralph Larsen is chairman and chief executive of New Brunswick, NJ-based Johnson & Johnson, a $22.6 billion diversified international health care company.

H. William Lichtenberger is chairman and chief executive of Danbury, CT-based Praxair, a $4.7 billion industrial gas company.

Robert Marston is chairman and chief executive of New York City-based Robert Marston and Associates, a public relations firm.

Dana Mead is chairman and chief executive of Greenwich, CT-based Tenneco, a $7.6 billion global manufacturer of automotive parts and packaging.

Southwood J. “Woody” Morcott is chairman of Toledo, OH-based Dana Corp., a $12.5 billion manufacturer of vehicular and industrial components.

Thomas J. Neff is chairman, U.S., of Chicago-based Spencer Stuart, an executive search firm.

Glen D. Nelson is vice chairman of Minneapolis, MN-based Medtronic, a $2.6 billion medical technology company specializing in implantable and interventional therapies.

Marilyn Carlson Nelson is president and chief executive of Minneapolis, MN-based Carlson Companies, a $20 billion international corporation specializing in the travel, hospitality, and marketing sales/incentive industries.

James E. Perrella is chairman, president, and chief executive of Woodcliff Lake, NJ-based Ingersoll-Rand, an $8.3 billion diversified industrial and components manufacturer.

Craig Winn is chairman of Charlottesville, VA-based Value America, an on-line retailer.


Castle Camelot

When John K. Castle, chief executive of Castle Harlan, started touring waterfront properties in Palm Beach, he and his wife Marianne were looking to buy a winter home, not a piece of American history. But what they found was a house with a past.

Built in 1923 for Philadelphia department store heir Redman Wanamaker, the structure that was to become known as John F. Kennedy’s “Winter White House” was originally designed by high society architect Addison Mizner, whose Mediterranean-style homes became the archetype of Palm Beach architecture. But its place in history wasn’t assured until Joseph Kennedy bought the six-bedroom home, which the Wanamaker’s had dubbed “La Guerida” or “bounty of war,” for a paltry $120,000 in 1933.

While the Kennedys made a series of improvements, including adding a swimming pool and tennis courts, over the years, it’s the compound’s role as the famous-and at times infamous-family retreat that make the two-acre property unique. It’s here that Joe Kennedy taught the nation’s future leaders to swim, where he and Rose watched election returns, and where JFK chose his Cabinet and spent the last weekend of his life. Here also is the 205-foot stretch of beach on which the sexual encounter that led to William Kennedy Smith being charged with rape took place.

For the Castles, the house’s $4.92 million price tag-$2 million less than the Kennedys’ asking price-for the house and its furnishings offered the chance to blend comfort and style with a piece of national history. After buying the North Ocean Boulevard home in 1995, the couple poured an additional $6 million into restoration efforts, seeking to make the dwelling a little grander and a lot more comfortable, while simultaneously preserving the Kennedy legacy. Among the practical and aesthetic improvements were the addition of a medieval turret bearing the Castle family crest and motto (“One hand for your country”), central heating and air conditioning, a cosmetic makeover and new exercise equipment for the poolroom, and new marble interiors for the bathrooms. The Castles left the small south wing housing Jack and Robert Kennedy’s former bedrooms intact; restored the Kennedy’s furniture, including the family’s oak dining room table and chairs; and replaced the dying palm trees on the oceanfront grass field where the Kennedy clan played touch football.

But the time, effort, and money spent on preservation are not without a practical benefit. The Leadership Challenges roundtable jointly sponsored by Castle Harlan, Value America, and CE is not the first event held at the Winter White House-and it won’t be the last. Castle, who is, incidentally, a staunch Republican, intends to entertain investors in Castle Harlan’s private equity partnerships, as well as potential donors for the several organizations for which he serves as a trustee, including the New York Presbyterian Hospital, the New York Medical College, and the Whitehead Institute.

First and foremost though, the house will be a home. “It’s a wonderful house for a family, with lots of things that are good for kids-beach, tennis, great views,” Castle told The New York Times after the purchase. “We look forward to having it as great home for our children, who are in their 20s.”  

About Jennifer Pellet

As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.