Before becoming professor of management practice at the Harvard Business School, Bill George was chairman and CEO of Medtronic, the Minneapolis medical device maker. Under his leadership the medical technology company’s market capitalization grew from $1.1 billion to $60 billion, averaging an annual 35 percent increase. Earlier in his career he was an executive with Honeywell, Litton Industries and served in the Department of Defense. Since leaving Minneapolis for Cambridge, Mass., George has turned into the Diogenes of executive management, searching for and occasionally finding what he calls “authentic” leaders, men and women who lead effectively because they are, first, honest with themselves. He currently teaches a course on authentic leadership that is one of the most popular among HBS students. In this pursuit he has written several books, including True North, Finding Your True North, Authentic Leadership and, most recently, Seven Lessons for Leading in a Crisis. He is currently on the boards of Goldman Sachs and ExxonMobil, and is a former board member of Novartis and Target. CEOs who know him or read his books like his straight talk and no-nonsense guidance. The recent economic calamity, he argues in his most recent book, has been made worse by a failure of authentic leadership within business itself, by which he means a failure of character and a certain lack of courage in facing up to reality. CE caught up with him recently in New York.
According to polls, the public ranks CEOs, particularly those on Wall Street, almost as low as members of Congress in popularity, mostly for a lack of transparency and perceived accountability that goes to the heart of your Rule Six from Seven Lessons for Leading in a Crisis. To cite a popular example, Treasury Secretary Tim Geithner landed his previous job as head of the New York Federal Reserve thanks to heavy lobbying from his old pal Larry Summers and Wall Street mentor Robert Rubin, a senior executive at Citigroup, which the New York Fed regulates, or is supposed to regulate. Later, Geithner supported the $52 billion bailout of Citi and later fostered the $30 billion Bear Stearns bailout and the continuing AIGs subventions [$85 billion and $38 billion under Bush and $30 billion under Obama].
This is why the general public is so angry right now: They feel like it’s an insider’s game. And maybe it is. What you describe with the New York Federal Reserve reminds me of The New York Stock Exchange under Richard Grasso, when they had an insider-dominated board setting rules for the exchange that favored the same people sitting on the board. While it’s important to have people who know how our capital markets work, we need people who are independent to serve true governance. Those bailouts you refer to may have been necessary to save the whole system from going down, but the appearance of insiders helping themselves first was not good.
But this is not new.
In my first job, I was working in the Department of Defenses as a civilian. We were trying to place some constraints on Air Force contracts to curb multibillion dollar cost overruns on the F-I11 and C-5A. One was $10 billion over and the other was $2 billion or $3 billion over. I remember flying out to meet contractors with some Air Force generals. We were met at the private hanger of General Dynamics by four retired Air Force generals who were superior in rank to the generals on our plane. This revolving door is not healthy for our society. CEOs have to recognize that if they are going to be successful, they need to sell into a healthy market and they have to do the right thing for everyone. One of the problems we have today is that no one on Wall Street believes that anymore. This was evident with the failures of Long Term Capital Management and Enron. It didn’t just start with the subprime mess.
You argue in your book that at least one leader from the financial industry should have stepped forward and apologized for abrogating the public’s trust. Unless I missed it, no one stepped forward to, use your phrase, “take ownership” that the system was broken.
Hank Paulson came as close as anyone in a speech to the National Press Club after the Enron scandal in admitting that a lot of mistakes were made. But I was astonished that when the CEOs of Bear Stearns and Lehman Brothers were interviewed they said they wouldn’t have done anything differently. People like Jamie Dimon [J.P. Morgan Chase] and Lloyd Blankfein [Goldman Sachs] have a real obligation to figure out what will make this system operate more transparently. Otherwise the politicians will step in and write the rules, as Sen. Chris Dodd is trying to do with his amendment restricting bonuses to no more than 50 percent of one’s salary compensation. If people on Wall Street had come forward and said that compensation will only be based on long-term value and that no one would be allowed to walk away with all the cash if [it turns out that] the value isn’t there at a later date, the financial industry wouldn’t be faced with the same degree of backlash and political opposition they are today.
In studying executive compensation, Judith Samuelson of the Aspen Institute came to the conclusion that top executives weren’t “overpaid” as it is commonly understood, but paid to do the wrong things—what she calls “short-termism,” where leaders are compensated for quick, risky gains instead of steady, long-term progress.
I have worked with Judy Samuelson, and generally agree. I am on the board of ExxonMobil and can tell you that at ExxonMobil 70 percent of your compensation comes in stock. But you don’t get it till you retire or after 10 years, whichever is the greater, because Exxon looks at itself in 25- to 50-year cycles. They just did a big deal with the Chinese that has a 25-year horizon. A refinery may have a 50-year horizon. When you explore oil in Canada you know that’s a long-term proposition. The higher up you are in the organization, the more the compensation should only be paid long term. I am talking about half to 75 percent. I was very well paid at Medtronic but the company performed well on a long-term basis. If the company that I had turned over to my successor had blown up, all my stock options and restricted stock would have blown up in my face.
Considering that GE’s share price has gone sideways since its CEO took over, how would you apply your pay-for-long-term performance principle to Jeffrey Immelt?
The jury is still out. He gets his salary but won’t get significant rewards until his longer-term projects like eco-imagination and GE’s healthcare initiatives pay off. I think he is a very good leader, but the company’s got to perform in the market, which it hasn’t done yet.
But what about the impatience of investors? Their idea of long term is notoriously brief.
This is a real issue. Many investors don’t own a piece of a company, they own a stock. They’ll sit on the sidelines if they don’t see immediate results. But if you manage a company to get a short-term bump, as retailers like Sears and Kmart have done in the past, then shame on you.
The problem is worse today than when I was running Medtronic for the simple reason that back then CEO tenure averaged 10 years. Today it’s almost down to four years. But some CEOs rise to the occasion. Look at Sam Palmisano at IBM. The changes in strategy and culture took five to seven years to undertake but consider that IBM has weathered this recession better than most. Take Wal-Mart. Most people think retail is a short-term business, but when they expanded internationally and got into the Wal-Mart Supercenters, they took a long-term view that is paying off now.
In your book you write that a true leader doesn’t necessarily take people where they already want to go but where they may not necessarily want to go. Some would say that describes President Obama’s leadership.
As a politician if you are going to take people where they don’t want to go you better be right.
In Obama’s case, I am concerned that in the case of healthcare and energy they are playing politics, instead of policy. There is no health policy coming out of the Obama administration that considers where innovation will come from, which isn’t surprising since the administration is filled with politicians and economists. There is not a single businessperson in the entire administration. Meanwhile, there are 9.8 million people out of work officially, but it’s more like 10 to 12 million if you count the people who are no longer looking for jobs, or the engineer or software developer who was making $80,000 a year who is now earning $15 an hour working part-time at Burger King.
Who is advising the President? It worries me a lot. Yes, business leaders show up at the White House, talk for half an hour and have a photo op. This is not what I am talking about. We need integrated plans and policies that offer incentives, not top-down directives. I am a radical on this. If you want to take costs out of healthcare, for example, you can’t do anything until people have skin in the game. You need to offer incentives to induce people to do the right thing, At Medtronic, for example, we offered incentives to employees to give up smoking. Our cafeteria eliminated high-fat foods. Our healthcare cost increases were half the national average and a third of what GM experienced.
That’s why I am not a politician. I couldn’t get elected dog catcher.
Whole Foods’ CEO John Mackey has raised serious controversy by advocating precisely the incentive based program you describe. He also appears to be leading where some customers don’t want him to go.
John Mackey got my attention four years ago when he debated Milton Friedman. He disagreed with Friedman, who said that the only thing that mattered was maximizing profits for shareholders in the short term. Mackey took the long-term view, which took a lot of courage. He is doing it again. Yes, some people will boycott his stores, but I give the guy a lot of credit for saying, ‘This is what we stand for.’ When I go there, I can’t find my diet Coke and that makes me unhappy because then I have to go somewhere else to get it. But he is the kind of visionary leader we need more of.