Beyond Shareholder Value

????Q: In your writing you've observed that enduringly great companies don't exist merely to provide a return to shareholders. They have a sense of higher purpose. Have you found examples of companies that did not start out that way, but later made the transition to embracing a higher purpose?

????A: Let me first dispel a little bit of a myth about this. What we found is not so much that they necessarily always have a grand purpose, but that they have a purpose beyond just making money.

????In some cases, it might be like when William McKnight was building 3M. He was driven by the theme of solving problems through innovation. If you would have asked him how that might transform the world, he would have answered, "I have no idea. All I know is that we could make this amount of money that doesn't involve our creativity, or this amount using our creativity. We just think that using creativity is really cool. Because creativity is what we're all about. "

????Then you have a company like Sony, which started out in a bombed-out building in Tokyo in 1945. Akio Morita and Masaru Ibuka came of age while Japan was still on its back, devastated and humiliated. Their purpose was ultimately to change the poor quality image of Japanese products around the world, and to elevate the Japanese national culture and status. Sure, they initially failed with some products like the rice cooker, but theirs was a higher purpose related very much to their nation.

????Then you take Avon. Andrea Jung talks about what Avon is all about. For her it is not just about cosmetics, but creating opportunities for women around the world, in places where they might not have many entrepreneurial opportunities, to provide a sense of self-sufficiency.

????I don't believe Steve Jobs is just about maximizing shareholder wealth.

????One of my favorite examples of this is Nucor. Their purpose was not to make the world a better place through steel. What it was, was that Ken Iverson had a visceral hatred of hierarchy and of treating people in the managerial class in a way that was superior to that of the working class.

????He just thought this was wrong. He hated it. He felt it was demeaning to people.

????So when he began building his little division at Nucor, called the ball craft division, he created this culture around an egalitarian, "We're all in this together" kind of spirit. And by the way, if we have a bad year, the managers will suffer more than the workers. We're going to remove as many class distinctions as possible.

????In the beginning, that was just Iverson's division of the company. It didn't apply elsewhere in the company, which was into all kinds of different products, and in the process of going bankrupt.

????So the Board looked around for a manager who was doing well, and they found Iverson running this very successful division; and they said, "Ken, you're going to be the CEO."

????He then brought that spirit of egalitarianism to the whole company. That was 1965, and 35 years later, they have never had an unprofitable year in the steel business, which is a remarkable record. They became the most profitable steel company in America, starting from the base of near disaster.

????They have never lost that egalitarian spirit, even though they didn't have it from 1920, when the company was founded, until 1965, when Iverson became CEO.

????That's another way of saying that if the sole or highest purpose of the management philosophy of a company is profit and cash flow, they're going to be consigned to mediocrity, or perhaps goodness.

????If you look at David Packard, he was very clear that HP's fundamental role should be to make technical contributions which would make things work better. If it wasn't a technical contribution, HP shouldn't do it. Period.

????But he also said HP had to have an enormously profitable, high cash flow business because they were not going to have debt. They had to fund from cash flow because he did not want them to be beholden to debt holders.

????You put these two together and ask which one was David Packard? Both. If there is only just the purpose, and no hard-nosed results, you're also not going to be a great company. It's when you put these two things together than you have something very, very hard to beat and very durable.

????As Peter Drucker liked to put it, "Good intentions are no excuse for incompetence."

Great Leaders Confront the Brutal Facts

????Q: You've written a lot about the importance of CEOs and Boards confronting the brutal facts. That's a big challenge in any culture, and perhaps even more so in Chinese culture, where there can be a tendency not to let bad news travel upwards. What can CEOs do to ensure they get access to the brutal facts?

????A: It's hard to overstate how important this is. One of the things we found in "How the Mighty Fall", which is very scary, is that you can already be in a state of decline but still look healthy on the outside, ignorant of the brutal facts.

????So what did leaders do that allowed them to confront this?

????First, there is a big difference between letting people have their say, and having the truth be heard. Great leaders have a high question-to-statement relationship.

????This is actually something practical which any leader or business leader can do, which is to ask themselves "What is my question-to-statement ratio? "

????The second is, when asking questions, ask not for opinions but empirical facts. "What is the empirical evidence? "

How Great Companies Can Fall

????Q: In "How The Mighty Fall" you outline five stages of decline for companies that had once been mighty. Can you share your thoughts on how widely these may apply across different geographies and cultures?

????A: I got fascinated with the question of how enterprises bring about their own demise because in our research we saw companies that had been truly great, but then lost it. If some of these great enterprises can fall, it's actually very frightening, because it means anyone is vulnerable, no matter how successful you have been. It may even be that the more successful you have been, the more worried you should be.

????As we stood back and looked at it, we came to see that there are these five stages. Most people in their lives are touched at some point by cancer among their family and friends, a disease which involves a staging process. You can look healthy on the outside, but actually be sick on the inside. It turns out that in the cases we studied, the same thing can happen to companies: they don't actually visibly fall to where the rest of the world knows they're in trouble until stage four. They look healthy for the first three of the five stages of decline.

????The big difference, however, is that cancer in an individual is not self-inflicted; whereas self-destruction of an enterprise is self-inflicted, at least through the lens of the analysis which we did.

????In capital systems, or in rapidly changing markets, there's no law which says that if you have been successful, you're going to fall. It's when the successes are followed by a very high degree of arrogance that problems begin.

????Stage One of decline is hubris. I've always loved the definition of "hubris" by Classics Professor J Rufus Fears: "outrageous arrogance that inflicts suffering on the innocent," which of course goes back to the ancient Greeks. So we can see this idea of arrogance leading to decline is so universal that it dates back thousands of years.

????In the realm of companies, if you look for indicators that you're in this stage of hubris, one of them is that you cease to be afraid. You no longer feel like your doom could be just around the corner. If you begin to think that your success is deserved, that somehow is was really all due to you, that you really are that good, that you look in the mirror and say "We're successful because we're so great!", then you're already in trouble.

????By definition, the moment you think you're great, you're not. So the first step is to always somehow distrust everything good that has happened, and realize you might have just been lucky, you really weren't that good, you had the wind at your back, and so on, and basically remain fearful all the time.

????Two other patterns of behavior show up in Stage One of decline. One is becoming arrogant about what you do and the way that you do it, rather than understanding why you do what you do, so you can change it as may be required. In other words, understanding why you do things, and why they produce results.

????The second relates to entrepreneurs' love of opportunity, and desire to grow something new. They tend to forget that the next big thing is very likely the big thing they already have. Once they've built something very successful, they tend to leap over to a new adventure, a new thing, and leave the old one running on autopilot, which is a very arrogant thing to do.

????The most important thing is to continue to pay attention to the primary flywheel that made you successful to begin with.

????Stage Two of decline is "The Undisciplined Pursuit of More." I would imagine that in a booming economy like China's, the opportunities are immense. What's really striking when you look at the rise and fall of great companies is that they are very good at saying "No" to opportunity, at saying "No" to growth, if it would lead them to be undisciplined. Let me explain that in three ways.

????First is what we have named Packard's Law, which is about as close to a law of management as I think you can get. David Packard, the co-founder of HP, made an interesting observation, that a great company is more likely to die of indigestion caused by too much opportunity, than of starvation caused by too little.

????I'm guessing there may be a lot of Chinese companies right now that have indigestion of opportunity.

????Packard's Law states that if you allow growth in revenues, growth in scale, growth in complexity, growth in new adventures, to exceed your ability to have all of the key seats filled with the right people in order to execute on that growth brilliantly, you will fall.

????So the constraint on growth is not external opportunity but getting enough of the right people in the key seats. It takes discipline to say "No" to growth if you see that the growth is much larger than the people you have.

????Second, a common sign that undisciplined growth is taking place is a rising bureaucracy. The right people don't need a lot of rules, but as you start to have a lower proportion of the right people for the key seats, companies start putting in a lot of rules to compensate for that. Then what happens is the right people start to become unhappy with the rising bureaucracy because that's not what they signed up for.

????The third thing relates to the Hedgehog Concept. According to this, you have these three intersecting circles. An undisciplined leader would say "We're going to do something big, bold and untested" -- such as a giant acquisition or a bold move into a new business -- that fails the test of these three circles. Either they're not passionate about it, can't be the best in the world at it, or it doesn't fit with the core economic engine. If it fails one of these three, it's an undisciplined bid for more and more growth.

????The key is to increase your discipline while also increasing scale, complexity, revenues and opportunities.