New World, Old Traditions

Moving a business to the Internet has kept many managers awake nights wondering whether they can survive in that much-fabled world: a place where young entrepreneurs make more money in an IPO minute than their parents will in a lifetime; where business cycles spin like the blades on a fan; where fortunes and reputations rise and fall faster than a kid on a pogo stick.

These apprehensions are understandable. But from the bold new world of e-commerce comes reassuring news: Success is based on the same discipline and values as in the brick-and-mortar world. In fact, one of the many paradoxes we have discovered at Schwab since going online is that cyberspace rewards a strengthening, not weakening, of traditional business values.

These values have nothing to do with the gold-rush mentality so often associated with the Web. On the contrary-our success at Schwab is the direct result of building and maintaining a corporate culture which first and foremost recognizes the need to focus on customers and employees rather than maximizing short-term company profit.

Before taking a closer look at what we mean by culture, and at the all-important part a leader plays in the Internet challenge, consider Schwab’s Web experience. We launched Internet trading in 1996, and with that move, became one of the first companies to effectively reinvent itself. Of course, we didn’t abandon our brick-and-mortar operations; we simply added the “click” of the mouse.

And this mouse roared. By 1998, we were widely recognized as the world leader in online investing. Our Web site is now the busiest in our business; we’ve had as many as 96,000 simultaneous Web sessions and, in the first quarter of 2000, we transacted $25.1 billion in securities each week through Schwab.com.

We are extremely pleased to have gained such a resounding vote of confidence from the marketplace, and proud to have provided jobs to a workforce now grown to 24,000 employees. The larger picture, however, is that the Internet, for all its dazzling technological marvels, has clearly validated traditional business virtues. Without those, a company’s life on the Web might well justify every sleepless night suffered by its beleaguered CEO.

Culture is Key

Corporate culture has played a central role in our Web success, a statement that might raise two questions for other cyberspace leaders: What exactly is corporate culture and why is it important?

Corporate culture, as we see it, is the sum of the beliefs and values that animate our company. Our culture is built around a straightforward, yet profound question Chuck Schwab has asked since day one: How do we best serve our customers? Our job, as Chuck has always maintained, is to provide customers with the most useful and ethical financial services in the world.

This is not a case of writing ad copy. Our company truly is built on these beliefs, and it’s quite clear that they explain a great deal of our successful offline and online performance. I have talked with Chuck Schwab for hours without hearing him mention profits, but would hear these lines several times: “a chance to serve others,” “a chance to make a difference,” “a chance to change the world.” His philosophy stands in stark contrast to a business ethic built solely on the acquisition of profit.

My belief in these values has greatly increased during my years with Schwab. At one time, some of the culture-building exercises we routinely undertake would have struck me as having little or nothing to do with business success. But, in fact, there is nothing mysterious about why a service-based culture works so well. A strong corporate culture serves deep human needs, inspires commitment among employees, and makes change at Internet speed possible. Consider these points:         

  • Culture grounds people in something unchanging.No matter how much the world changes-and how quick the pace of Internet change-our employees know that our purpose and our values remain constant. This knowledge serves as a safety net. Coping with change requires a foundation of values that are permanent-and we think culture is it.
  • Culture builds a basis of alignment-a single direction for us to move toward.Knowing our purpose and our values inspires and focuses our employees, holds our company together, and distinguishes us in the eyes of customers. Having a shared vision is particularly important in an era where the pace of change prevents us from seeing a clear picture of the future. While the final destination may not always be clear, everyone knows what direction we’re headed in.
  •  Culture also serves as a filter for determining who is with us and who isn’t. Our values serve as a sort of litmus test when we consider new hires-a filter for people and policies. When we’re hiring, we think it’s best to find people whose personal values mirror our organizational values. The reason is simple. You cannot write personnel policies at Internet speed. An employee must know, almost instinctively, how our values apply to business situations. When we do have time to create or modify policies, they must always reflect our core values. Otherwise, the disconnect will be felt not only internally, but by our customers as well.
  •  Culture helps us export company values to customers.Values form standards of behavior, and those standards are the face we show to our customers. We strive to be a company that’s both high-tech and high-touch. When the combination is right, our customers respond positively. At the end of the day, customers will be satisfied with a company because of what you do for them-but they are loyal because of who you are.                                                 

The Importance of Leadership

The cyberspace leader is not our grandfather’s CEO. Chief executives must accept the fact that they not only lead businesses, but cultures as well, and that their performances may be under constant scrutiny. Leaders must not only inspire employees to embrace and export the company culture, but must also be the most vivid example of that culture at work. Our experience tells us that those who don’t practice what they preach will soon pay the price in this media-saturated age.

Let’s consider the role of inspiring passion by embodying the company’s culture. How do you do this? One key is to make colleagues at every level feel important. Communicating personally through e-mail, the Web, and phone is vital to this effort. But here we encounter another Internet paradox: to be really effective using technology enabled communications, you must first earn the trust of your employees by establishing your authenticity as a face-to-face communicator. These good old-fashioned in-person meetings between a company leader and his or her colleagues are more crucial than ever in today’s world that moves at Internet speed. It’s how we tell folks they are valued by deeds-not just words.

Here’s one example. During a period of expansion in Europe, I took a trip to England to talk with employees about our company’s culture and goals. It was a good meeting and, as usual, we closed with a question and answer session. During this time the managers

were asked how many of them would be sharing our discussion with their workers. Not a single hand was raised. They were quite blunt as to why. It wasn’t necessary for them to do so. In their opinion, their workers simply did not need to know what we had been talking about. My response was to ask if they really needed me to travel to England from San Francisco to have our discussion.

They got the point. They recognized that the company’s leaders did not have to come all that way to talk to them, but did so because they are considered important to the company’s success. By meeting with our U.K. managers in person, I wanted to let them know that they were valuable in a way that communication by the Internet or telephone never could. In the end, these managers did agree to share the messages of our meeting with their employees.

We did much the same thing, on a vastly larger scale, in 1999. We had been growing very quickly and finally realized that there were thousands of employees who really didn’t know what our philosophy and values were. Or, at least, they had not heard them from the top.

We convened our entire workforce on a Saturday, and each of our 13,000 employees heard Chuck and me discuss our corporate values and philosophy. Five thousand employees were actually gathered in a convention center in San Francisco, while the others were linked by video simulcast in other locations around the world. After hearing about Schwab’s values and culture from those at the top of the organization’s ladder, they then had the opportunity to participate in interactive sessions that presented the framework of our strategic thinking. In teams of 10, they discussed where we had been as a company, where we planned to go in the future, and most importantly, why we needed to go there. Through these exercises, they learned the special roles they play in maintaining the company’s culture and achieving corporate goals. By the end of the day, we were, as a group, aligned to a degree we had never been before.

This was not a cheap exercise; the meeting cost us $6 million. Yet there is no doubt we made the right choice. It was a great investment in our development as an Internet company. We have quantified one area of savings. After these meetings, our employee attrition rate dropped from 13 percent to 11 percent. Since every percentage drop saves us $15 million, we spent $6 million to save $30 million. This reflects the findings of Barry Posner and W.H. Smith of the University of Santa Clara in their book, Leadership Challenge: How to Keep Getting Extraordinary Things Done in Organizations: “People who had the greatest clarity about personal and organizational values had the highest degree of commitment to the organization.”

And I have no doubt that the gains have been much greater than that, and indeed are reflected in customer growth and loyalty. That’s because workers who are dedicated to company values will make life better for our customers, and that will make our business stronger.

One area that begs mention is often overlooked: the Internet leader’s job as a role model. Whether we like it or not, leaders are very much in the spotlight these days, much more than ever before. As CEOs, we might all wish that the sphere of privacy were much larger than it is today, but leaders in both the private and public sectors recognize an expanding media that must deliver news 24 hours a day, seven days a week. In addition, a CEO’s behavior, both personal and professional, is the topic of instant discussion on the Web.

I think of it this way: Besides having the traditional media looking over your shoulder, a leader will be well served to keep in mind that every employee is, for all intents and purposes, the editor of his or her e-mail “newsletter.” When a leader’s personal acts do not mirror the culture he or she claims to champion, this discrepancy will be noted. Integrity has never been more important.

Warren Bennis, a noted expert on the subject of leadership, summed up the situation well: “In tomorrow’s world, exemplary leaders will be distinguished by their mastery of the softer side: people skills, taste, judgment, and above all, character.”

That day has already come.

It’s ALL About People

Despite Schwab’s success in cyberspace, I would hate to leave the impression that I have no worries. Quite the contrary. And if there’s one area I worry about most, it’s getting and keeping good people. At Schwab, we are dedicated to attracting, hiring, and keeping the brightest and most dedicated people. Of course, so is everyone else.

While this is hardly news, attracting and retaining the best people is increasingly important-and there’s a new twist to this traditional concern. The Internet has made the technologist                that mysterious individual in the dark clothes who keeps the system

humming–central to success. Initially, Internet leaders may find technologists to be a bit different than some of their colleagues. Business leaders, especially at higher levels, tend to think in broad and sometimes visionary terms, where technologists are very precise and concrete thinkers.

While we recognize that business people and technologists approach issues differently, that’s never an excuse to “undervalue” our technology colleagues. Our approach at Schwab has been to cherish the technologist. We do not treat them as hired guns, but as partners. We make the point by having our hugely talented CIO report directly to the co-CEO; it’s a gesture that is noticed and appreciated. In fact, we interact with technologists in exactly the same spirit as with other colleagues. They, too, must embrace our values and understand their role in serving customers. When technologists and business people realize they are working toward the same goal and do so in harmony, great things happen. Ester Dyson, who is clearly one of the foremost thinkers on the Internet’s implications for business and society, says, “The limitation on the application of technology will never be ideas or capital. It will be people… enough of them trained and excited about taking the ideas of the technologist and making them real in the world.” I couldn’t agree more. But let’s take it a step further and say that recruiting and training is only half the battle. Leaders in the Internet age would be wise to provide their employees with more than just a paycheck and a high-powered workstation. They need to create a culture that builds community and inspires people to do their best work. The adage-“people will work hard for money, but they will devote their lives for meaning”-rings true even in the age of hot start-ups and IPOs.

My final word of advice: be bold. After all the hype dies down, I believe we’ll see the Internet for what it is-a fabulous technology that enables new models of information distribution, product ordering, and client relationships. It will enable us to develop new cost structures, resultant prices, and service models that were unimaginable in the pre-Web world. But the Web will not replace the retail store any more than it will replace the local coffee shop, movie theater, or place of worship. And the timeless managerial practices of measurement, service quality management, marketing, and the like do not go away. They are more important than ever, though applied in a new context with greater speed and flexibility.

Cyberspace is a new world, but it’s not an alien one. It has brought us a revolution that will demand the best from every one of us as we focus on our customers.

david s. pottruck :