BM Issue Fall 2010

the korn/ferry institute briefings on talent & leadership

Will China Slow Down? pg.8 Opportunity in the Euro Zone pg.14 Giving the Brain a Seat at the Table pg.18

issue 4

Drug Discovery and the Balance Sheet pg.33 BP Case Study: Do the Right Thing pg.58

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Planting the

Seeds of

Wealth Carlos Slim An Interview With

pg.26

$9.95 us $9.95 cnd €7.50eur £6.70 uk ¥915 jpy 10.60 chf 36.50 aed ¥70 cny

contents

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14

8

5 Letter from the CEO 18

Latest Thinking 8 W ill China sloW doWn? Will China act as the world’s engine, or as its brake?

9 p hilanthropy after the fall With the world struggling, philanthropy is needed more than ever.

Viewpoint 12 agile learning

Research shows the best leaders are the best learners.

BY george s. hallenBeck jr. and kim e. ruYle

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12

Europe 14 amid grey Clouds, opportunity in the euro zone

50

Not all doom and gloom, a weak euro means growth for the Eurozone, hope for companies.

BY adrian wooldridge

Leadership 18 t he biology of leadership: giving the brain a seat at the table T he brain has a logic all its own when it comes to who follows and who leads.

BY david BerreBY

42

Interview 26 planting the seeds of Wealth

Carlos Slim, the world’s wealthiest man, isn’t just building companies, he’s building countries.

BY garY Burnison, eduardo taYlor and joel kurtzman

In Review 64 “ the Ceo’s boss” 68 “leadership from the inside out”

Cool Companies

Parting Thoughts

33 drug disCovery and the balanCe sheet A California start-up’s stem-cell revolution.

72 With more people, more Work gets done

BY lawrence m. fisher

More trained people will mean more problems solved.

BY joel kurtzman

Talent

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42 p riCe Cutting at the bottom of the pyramid Success in emerging markets is a matter of price.

BY victoria griffith

50 the upside doWn Company What would Jack Welch think? HCL’s Vineet Nayar is putting employees first.

BY glenn rifkin

Downtime 49

Wit and wisdom from the front lines.

Governance 58 do the right thing: a Case study on bp The whole world’s watching. What should BP do?

Tell the truth.

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from the ceo

the eighth wonder of the world

By Gary Burnison

It could be added as the Eighth Wonder of the World: leadership. It is something that is better seen and felt than defined and said. John Quincy Adams, the sixth president of the United States, said it best, “If your actions inspire others to dream more, learn more, do more and become more, you are a leader.”

I’ve been on a quest to discover some of the fundamental truths about leadership. Over the last year, I have had the privilege to speak with and interview dozens of leaders around the world — people in high places, people with tough jobs, people with global roles, people with local roles — from the president of a sovereign nation to global Fortune 500 CEOs to the richest man in the world. I’ve thought about what they’ve said and I’ve compared their insights with what I’ve learned in my own life.

Great leaders, at least the ones I’ve talked to, don’t agree on everything, but they seem to agree on some things.

First and foremost, leadership starts with the inner being of the leader, and is reflected and disseminated through words, actions and passion. It’s built on honesty, humility and integrity, and it ends with taking personal accountability for failure and team recognition for success. It’s built on long hours of work, attention to details, a relentless and insatiably competitive spirit and good decision making. That kind of leadership can’t be faked.

In my experience, leaders who are selfish usually fail, at least in the long run. And yet, if leaders are selfless, they may fail too. That’s because failure, like the “dawn’s early light” (to put it in poetic terms) is inevitable. It cannot be dispensed with. Leadership recog-

Briefings on TalenT & leadership

nizes failure but realizes that failure is not defined in the moment, but rather by what the leader does after the failure occurs. In its essence, leadership comes with a special type of inner serenity, one that reconciles failure with success and recognizes that the two are inextricably linked. Failures are fatal only when a leader fails to learn from them.

Leadership is much less about the leader, much more about the followers and the mission. It’s about having individuals look into your eyes and see who you really are; it’s about letting them see into your soul.

More than charisma, real leadership is about being authentic, which is a trait that endures. Leadership is also about compassion and the genuine development of the people you are leading. It is about helping people feel sufficient common purpose that they are able to achieve extraordinary things.

Though I’ve traveled the world interviewing leaders, I’ve learned that leadership is in many ways as simple as the lesson my father (and probably your father, too) taught: actions speak louder than words.

Consider a leader off the beaten track — John McKissick, the football coach at Summerville High School in Summerville, S.C. He is America’s all-time winning football coach. As of the end of the 2009 football season, Coach McKissick had amassed an incredible tally of 576 victories — far more than any other coach at the high school, college or professional level.

What’s McKissick view of how he scored all those victories? “Coaches never win games; players never lose games,” is what he said. His point is simple, poignant and humble. Winning is not about the leader. It is about the team, and the leader’s role is to always make it so.

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richest man — and delves down deeper to try and understand how he thinks. In this issue, we also look at how Vineet Nayar, one of India’s most talented business leaders, is turning his company, HCL, upside down.

This issue, which is our most global yet, also looks at whether China will continue on its rapid growth course, whether the euro will hold together despite the strains, and how companies can gain greater market share in the emerging world by focusing on price. It also takes a look at the BP oil disaster in the Gulf of Mexico, to see how that crisis could — and should — have been managed.

This issue of Briefings also widens horizons by looking at the biology of leadership and examining how the brain itself works, and how it is wired. And, it looks at the science behind a little start-up that is making big advances in stem cell research. The articles in this issue are global, thoughtful and thought provoking — traits every leader must have.

But leadership is not just about thinking lofty thoughts. Leaders must be grounded too. They must separate what they do from who they are, all the while keeping their heroic aspirations and recognizing that leadership, like life, is a journey.

David Pohl/theispot

McKissick may have won more than 500 games, but he lost a lot of games too. He built his record not on communicating a silver lining to go with the losses, but on creating a vision compelling enough, and values strong enough, to push his teams ahead after they lost. As a leader, McKissick is not simply a messenger of the team’s strategy. He is the message.

Leaders are mirrors for the entire organization.

If he or she is pessimistic, the organization will succumb to mediocrity. Many leaders told me this. If the leader reflects brightness and light, the organization will also shine. Leadership is making certain that after every conversation with an employee, that employee feels better and more capable and more willing to stretch than before the conversation began.

I’ve learned in my conversations with leaders from around the world that real leadership is never about power but the restraint of power. It is about self-discipline and about rising above the immediate.

The real leaders I’ve met are about standing for something far bigger than themselves.

This issue of Briefings combines leadership with the real-world arts. It examines the leadership style of Mexico’s Carlos Slim — traits that made him the world’s

Will China Slow Down?

Analysts disagree about the sustainability of the economic boom orchestrated by Beijing.

C

hina’s was the first major economy to begin to recover from the global recession. When the global crisis began to intensify in the fall of 2008, the Chinese authorities reacted with a double-barreled policy of drastic monetary easing and a massive stimulus package.

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The combined effect was a sharp uptick in growth — well above the pace that most external observers had expected. So why are many analysts now warning that the vaunted Chinese economic boom may be about to hit the skids?

The problem is that the monetary

easing and the stimulus may have worked too well. “The key risk is that overheating and inflation will force the Chinese government to put on the brakes more quickly than it would like,” said Tom Miller, the Beijing-based managing editor of The China Economic Quarterly. If tightening measures are taken and the stimulus is withdrawn, said Stephen Joske, the director of the Economist Intelligence Unit’s forecasting service for China, that nation’s “growth will be slowing significantly from now on.”

Not only do many worry that the Chinese government’s policy whipsawing could cause convulsions in the system, but critics also argue that the initial monetary easing and stimulus will have a number of adverse consequences. In the short run, they may have created bubbles in the property and equity markets. In the medium term, they may lead to excess industrial capacity, putting pressure on prices and profits and leading to loan defaults. Also, the measures may have set back China’s much-needed efforts to rely more on consumption than on investment and exports for its growth.

Nicholas Lardy, a China expert and a senior fellow at the Peterson Institute for International Economics in Washington, believes such concerns, while legitimate, are exaggerated. In his March 2010 paper, “The Sustainability of China’s Recovery from the Global Recession,” he argues that critics fail to appreciate the advantages China will accrue as a result of coming through the crisis with strong growth momentum and that they also fail to acknowledge the steps China’s leaders have already taken to head off the potential adverse effects of the stimulus.

For example, Lardy said, Chinese authorities adopted initiatives to slow lending growth as early as mid-2009 and by early 2010 had reinstated mandatory lending

Yuko Shimizu

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quotas for banks, raised their required reserve ratios and required them to sell off large amounts of subordinated debt.

Lardy also pointed out that steps had already been taken to moderate a potentially overheating real estate market: the government reinstated a 40 percent minimum down payment for mortgages and lengthened to five years the period that investors must hold a property to avoid paying sales tax when it is sold. “These moves dramatically cut the pace of property sales and disincentivized speculators,” Lardy said. “It is also important to recognize that even a major property price correction in China would not have the systemic implications that it had in the United States” because “there is much less leverage in China’s property market and the share of debt devoted to the purchase of property is relatively small” among consumers.

Lardy sees China’s excess capacity as essentially a nonissue. First, he points out that Chinese firms have historically tended to hold on to outdated equipment, so Chinese data on excess capacity may overstate the case compared with other countries. Second, there is a substantial difference between excess capacity of, say, 20 percent in a mature economy growing at just 2 to 3 percent per year and in China, where growth has averaged about 10 percent for the past 30 years and any excess capacity is readily absorbed. The Chinese steel industry, for example, had excess capacity of 15 to 30 percent at the end of 2008; this was more in overcapacity than the next largest global steel producers — Japan and the United States — had in capacity.

What seemed like massive excess to many observers was simply in line with China’s historical growth, which has required a 15 percent increase in steel production annually since 2000. Finally, Lardy emphasizes that China’s 2009 stimulus focused on financing fixed investment in infrastructure, and not on

expanding production capacity in China’s traditional industries.

As for the charge that the stimulus program has set back China’s efforts to achieve more balanced growth by encouraging private consumption, Lardy offers a number of data points that would seem to disprove the contention. Although employment in export-oriented industries did suffer in 2009, the boom in construction-related employment created by the stimulus largely offset those losses. In addition, the government raised payments to 70 million of China’s lowest income citizens, increased pension payments to retirees and offered its own version of “cash for clunkers” for vehicles and other consumer durables. All these factors, along with a substantial increase in household borrowing, combined in 2009 to raise consumption expenditures in China well ahead of GDP growth for the first time in a decade.

While Lardy believes that China’s stimulus investments are likely to benefit the nation in the long term by creating an infrastructure for sustained economic growth and increased tax revenue, he readily concedes that the benefit will

come at the cost of a substantial increase in government debt, equal to almost a fifth of China’s GDP. While China is certainly not alone in that predicament, it clearly cannot be considered an unqualified good thing. The Chinese, Lardy said, “recognize that flooding the economy with more credit is not the way forward and that they will have to take strong additional policy initiatives to sustain economic growth.”

To reduce the distortions that for much of the past decade have favored industry and exports over services and consumption, the Chinese will have to consider raising the prices of basic resources like water and electricity, levying environmental taxes and fees and adjusting, finally, the exchange rate for their undervalued currency. China has thus far shown little willingness to take such steps, however. Add to that its intransigence about reducing greenhouse gas emissions or imposing sanctions on Iran and throw in its reliance (like all other nations) on a tenuous global financial system, and you have ample reason to question the direction, economic or otherwise, that China may be taking in the near future.

Philanthropy After the Fall Will the rigors imposed by the “great recession” compel a new level of efficacy in social investment?

T

he notion of socially responsible business has always worn many guises. It has been equated variously in both the public and the corporate minds with philanthropy or environmentalism or sustainability or ethics. And, almost without exception, it has seemed a bit artificial —

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a cosmetic overlay having little to do with business fundamentals. A number of leading thinkers, however, believe that one of the legacies of the “great” recession may be that it is enforcing the kind of real alignment between social aims and business profitability that has eluded

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social investors for decades.

“If you go back 20 years, companies like Nike, Nestle, Coca-Cola and Wal-Mart regarded it as a badge of honor to be seen as not soft and sentimental and socially progressive,” said Matthew Bishop, The Economist’s New York bureau chief in a recent interview with INSEAD Knowledge.

Bishop, who is a co-author with Michael Green of “The Road from Ruin: How to Renew Capitalism and Put America Back on Top” (Crown, 2010), believes the global economic crisis has prompted an urgent re-examination of how capitalism can be made to work more in concert with societal aims: “In boardrooms now, there is an understanding that, as they think long term, they have to be on the right side of social progress.”

In the short term, the recession has certainly had a profound negative impact on philanthropy and social investment.

According to Maximilian Martin of the University of Geneva Faculty of Economic and Social Sciences, the 18-month recession left foundation endowments down 30 to 40 percent in the United States and 20 to 30 percent in Europe.

In 2009, about two thirds of foundations in the United States reduced their payouts. In the United States alone, 460 foundations lost 80 percent or more of their endowment assets. Not surprisingly, many foundations instituted hiring and salary freezes and severely cut budgets.

Although Martin admits that these downward adjustments will hold back net worth and endowment assets for years to come, his recent paper, “Managing Philanthropy after the Downturn: What Is Ahead for Social Investment?” (Viewpoint,

Social Science Research Network, 2010), makes the case that the recession has already begun to create fertile takeoff conditions for future philanthropic investment by forcing philanthropists to be smarter — to increasingly seek to leverage their capital, lower costs, spread risk and simplify and consolidate their efforts.

He discusses several strategies that are gaining favor, including time-bound subsidies, joint capital pools and “synthetic” social businesses.

A time-bound subsidy is essentially a catalyst for an initiative that will later seek commercial financing to fund further expansion. “Proof of concept often needs grant money; and scaling up requires commercial money,” explains Martin. “Timebound subsidies are an instrument for philanthropists to ensure that once initiatives no longer need subsidies, the philanthropic money is redirected to some other area where it can make a difference.” Martin points to Banco Compartamos, a Mexican microfinance bank with 1.4 million clients and a total active loan portfolio of $550 million, which began life as a grant-funded nonprofit.

In situations where grants alone cannot do the job and investment capital is often unwilling to go into the riskier or less conventional markets where the need is greatest, a joint capital pool offers a solution. It seeks to combine philanthropists, social investors and commercial investors into consortia or funds that take into consideration the different risk tolerance, return objectives and expertise sets of each group. “For example,” says Martin, “a charitable foundation may be

The recession has already begun to create fertile takeoff conditions for future philanthropic investment by forcing philanthropists to be smarter — to increasingly seek to leverage their capital, lower costs, spread risk and simplify and consolidate their efforts.

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inclined to provide grant funding while a social investor may be willing to provide subordinated debt at a relatively low interest rate and a purely commercially minded investor would make equity investments based on the consideration that part of the risk has already been absorbed by the other types of capital providers.”

Finally, Martin believes that more and more businesses will begin to operate as “synthetic” social businesses.

“That is,” he says, “a business venture whose social purpose is encoded in the

Above: Keith Negley. Right: Hal Mayforth

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holding structure of the company. This means that a philanthropic foundation holds a significant ownership stake and special voting rights with the mission to make the good or service available to as many people as possible around the world.” A synthetic social business is developed just like any other business, operating according to private-sector principles and making use of privatesector management talent. But since the company inherently seeks to serve the broadest possible swath of society, it is more likely to produce in higher volumes at lower margins and use tiered pricing strategies and the like.

One such organization is The Petra Group of Malaysia, which provides financial and management support for earlystage technology businesses. Petra is 60 percent owned by the Sekhar Foundation, the company’s charitable arm, which supports a multitude of environmental, educational and children’s causes around the world.

“You can’t do anything that’s going to make a global impact unless it’s commercial,” says Petra’s president and chief executive officer Vinod Sekhar. “We should be smart enough to be able to do that and do some good along the way.”

Michael Bishop echoes that sentiment: “Relying on charity is never a good place to be, whereas if you have a profitable business, then you’re always going to find investors.”

There are at least two potential problems, however, with this vision of “new” philanthropy.

Martin articulates the first problem in his paper, saying that as investor demand grows for social investment opportunities, their commercial aspects would dominate and “their social impact standards risk being watered to the extent that social investment would become largely a marketing exercise.” That is to say, we’d

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int erest ing ...

ARE YOU A TEXTAHOLIC? Consumers are more attached to texting than ever. 39 percent of users admit they text at the dinner table, 26 percent say they text on dates, and a surprising 13 percent confess they can’t even abstain from texting in their house of worship.

Source: Kelton Research, 2010

essentially be back to square one.

The second problem has been voiced by, among others, former Ford Foundation director Michael Edwards, author of “Small Change: Why Business Won’t Save the World “(McGraw-Hill, 2010). Edwards asserts that business by its very nature is not equipped to address long-term social transformation, which, he says, is neither easy to measure nor always cost-effective in profit-maximizing terms. It requires a different set of operating values that emphasize cooperation over competition, collective action over individual effort and systemic solutions over immediate results.

The real solutions, says Edwards, lie in “businesses acting more like civil society, not the other way around.” At the end of the day, that may turn out to be an important insight not only for determining the post-recession future of social investment, but for figuring out how to eliminate the problems that got us into the recession in the first place.

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view point

agile learning

By George S. Hallenbeck Jr. and Kim E. Ruyle

When Richard Branson started Virgin as a recording company in 1970, it is unlikely that even he foresaw the direction his company would take.

Had the company remained in its original niche, Virgin would probably have closed its doors years ago. But Branson’s remarkable versatility has kept Virgin going.

He reinvented the company as an airline in the 1990s and then again five years ago as a mobile telephone company. Earlier this year, Virgin received a full banking license from the British government.

Branson possesses a strength that is in surprisingly short supply in executive suites: he is “learning agile,” that is, he is able not only to adapt to but also to take advantage of significant changes. Learning agility, the lubricant for performing well in periods of great change, will be in increasing demand in coming years. The business world is hurtling forward at an unprecedented pace, with globalization, demographic shifts and cultural conflicts making the world an extremely volatile place. Executives who can adapt to these massive shifts will thrive. Managers who rely on the same bag of tricks, on the other hand, will eventually find themselves outmaneuvered.

Our research indicates there are 27 traits, like tolerance for ambiguity and a sense of perspective, that are facets of learning agility. We can reliably measure managers’ learning agility by assessing to what degree they possess these traits.

Surprisingly, our studies show that despite its importance to corporate performance, true learning agility is just as rare among top executives as in the general population. No more than 20 percent of top executives are what we define as agile learners. Since learning agility is necessary for becoming a great leader, the number is worrisomely small.

Why are there so few learning-agile executives? To begin with, most companies do not do a very good job of identifying this special breed. Beyond seeming to require a baseline intelligence (agile learners tend to be above the bottom third in intelligence), learning agility is not linked to I.Q. Rather, it is associated with hard-to-pinpoint traits like an eagerness to tinker.

Even if agile learners can be identified, many will not be promoted. Corporations tend to rely on hard performance

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figures rather than the vaguer notion of “potential,” in which learning agility plays a big role. Good numbers in the form of sales or productivity usually lead to a step up the ladder. Good people skills may not. Then there is the problem of momentum. CEOs who are not agile learners themselves tend to shun people who are; the masters of adaptability can be seen as high maintenance individuals who are always trying to stir things up. And if agile learners are not nurtured throughout their career, they are very likely to jump ship.

Sometimes, those who seem to be agile learners are not.

Consider the case of one manager at a big multinational corporation whose lack of adaptability set him — and the subsidiary he led — up for failure. For more than two decades, this executive had been considered a high-potential manager. He had proved himself capable in a wide variety of functions, including engineering, sales and customer services. When his corporation purchased a small, entrepreneurial business with 4,000 employees, this promising executive was put in charge.

Things quickly began to unravel. The executive insisted on following the corporate practices of the large multinational he had grown used to even though the culture of the newly purchased subsidiary had been very different — more entrepreneurial and less centralized. The staff became mutinous and the executive was soon forced out. His employers were left with a rocky integration and his career was sidetracked.

The behavior of this ill-fated manager is all too easy to understand. Humans are creatures of habit because it would take too much effort to have to reinvent the way we do things all the time. If our behaviors have brought us past successes, we have all the more motivation to stay the course. Yet often that is the wrong thing to do, as the executive coach Marshall Goldsmith outlined in his book, “What Got You Here Won’t Get You There.” New situations require new ways of doing things. And, failure can be even more perilously habit-forming than success. When faced with adversity, people also tend to fall back on the comfort of old habits.

Fortunately, we can train ourselves and other leaders in our companies to become agile learners. Our research shows that flexibility is substantially innate. But learning agility is

The Korn/Ferry InsTITuTe

ing massive change; many times, a company’s board says it wants to bring in a new CEO who will “shake things up.” Yet executives’ willingness to inflict change on others, but not on themselves, cannot be confused with real learning agility, which is necessary for sustaining a business in the long run.

“Executives who look like masters of change are sometimes following a script,” said Robert Eichinger, former CEO of Lominger International, a Korn/Ferry International company that specializes in leadership consulting. “They are capable of tough action like cutting staff and closing branches, but they basically do the same things all the time. They are good to have around for a few years, but then you need to bring in someone who has true learning agility.”

Some managers seem remarkably versatile, and their curiosity and courage spill over into their personal lives. The correlation between learning agility in nonwork situations and the work environment is unclear. Yet it bears noting that Bill Gates is interested in everything from medicine to education. And, Branson’s escapades on yachts and hot air balloons are famous.

We also know people who are set in their ways — the uncle who tells the same jokes every holiday and insists on the same dishes prepared in the same way year after year. The trick for corporations is to make sure it is the agile learners — and not the set-in-their-ways uncles — who make their way to the top.

George S. Hallenbeck Jr. is director, intellectual property development, and Kim E. Ruyle is vice president of research and development for Korn/Ferry Leadership and Talent Consulting.

David Cowles

also partly an acquired capability. Perhaps nothing serves as a better teacher, in this department, than adversity and discomfort. Often, it is the job you do not want to take that yields the biggest chance to improve learning agility. We call these assignments “GAG,” for going against the grain.

Irene Rosenfeld, CEO of Kraft Foods Inc., encountered her GAG assignment when she was asked to become president of the company’s Canadian operation in the late 1990s.

Rosenfeld was not eager to make the move. All of her direct reports were men and were, in Rosenfeld’s words, “not wild” about Americans. She set out to prove that an American woman could understand Canadian consumers. Rosenfeld turned Kraft’s business around in that country. In 2006, she was appointed CEO of the entire company.

Some of the most important GAG opportunities may come from overseas assignments, which is not surprising since living with people from different cultures forces us to see the world in a different way. Living abroad gets us off the conveyor belt and makes us question the smallest things, like what we eat for breakfast and how to greet colleagues. PepsiCo is one company that has successfully used global experience to foster learning agility in its key executives, creating a deep talent pool that has eased succession issues.

Corporations can coast along for years, even decades, without agile learners at the top. Adaptability is not useful in a static environment. Once change does come, though, executives’ inability to adapt can cause things to go very wrong, very quickly. Consider, for instance, the rapid implosion of the United States textile and steel industries. Korn/Ferry International is often called upon to help companies confront-

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Credit

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europe

Amid grey clouds,

The storm in the euro zone shows no signs of blowing itself out. The European Union’s belated decision to create a 750 billion euro rescue package has done little to calm the markets.

The euro has continued to fall against the dollar. And dismal economic news has continued to multiply. Euro zone unemployment is now 10.2 percent. The European Central Bank warns that European banks face more than $239 billion in write-downs before the end of the year. The crisis is taking its toll on Europe’s vaunted social model, and people have taken to the streets to express their fury. Some public-sector workers

opportunity have gone on strike.

in the euro zone

Europeans have at least found a silver lining

in all these storm clouds. The lower euro will help give the euro zone a rush of adrenalin. Individual countries may no longer be able to devalue their way out of a crisis. But the decline of the euro will have roughly the same impact on

David G. KKlein

the whole euro zone.

By Adrian Wooldridge

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Most European business leaders have welcomed the euro’s decline. EADS, Airbus’ parent company, calculates that a 10 percent decline of the euro translates into an additional billion dollars in profits. Daimler AG has seen sales of its MercedesBenz cars increase by more than 20 percent in the first four months of this year. The attitude of Areva, a French nuclear energy company, toward the euro’s decline could be summed up as, “Bring it on.” Many luxury goods makers, which play an important role in France, Italy and Spain and sell much of what they produce to rich Americans and Asians, are rubbing their hands in glee. The European tourist industry looks forward to a bonanza as Americans flock to Europe to spend their once-again mighty dollars.

European policymakers are equally positive. They point to O.E.C.D. data which suggests that a 10 percent decline in the value of currency produces three-quarters of a percentage point of extra growth. They bristle at the suggestion that the euro’s decline is a sign of weakness. The euro has been severely overvalued for the past four years. It has not so much declined as returned to its proper value, judged on the basis of purchasing power parity, they say. The euro is now in much the same

used the high euro to purchase companies that were based outside the euro zone at rock-bottom prices. We are unlikely to see many more British financial institutions bought up by Santander, for example. And some companies operate in niche markets that are not particularly sensitive to price. Germany in particular abounds in small and medium-sized industrial companies that are market leaders in their fields. Some tailor their products for particular customers. Others, such as RUD in industrial chains, Oerlikon in vacuum and engine technology, and Otto Bock in orthopedic technology, are so dominant that they set standards in their fields.

The biggest problem for European business, however, is that the piecemeal gains that Europe will reap from the lower euro will be swamped by the impact of sharp cuts in public expenditures. Ireland has reduced public-sector salaries by up to 10 percent. Greece is in the process of cutting them by 15 percent. Spain has announced that it will cut them by 7 percent and may have to make further cuts as the crisis plays out.

This will not only reduce demand in countries that are heavily dependent on their state sectors; it could also lead to a wave of strikes that will disrupt a wide range of businesses.

Most European business European policymakers position against the dollar as it was when it was launched, at 1.18 euros to the dollar.

This is all very reasonable. But we should guard against overestimating the benefits that the cheaper euro can bring to the union. There are two big constraints on the benefits of the euro’s decline. The first is that the bulk of European trade takes place within the euro zone (which is one reason that the euro was introduced in the first place). Even Germany, which is Europe’s most successful exporter, lists France as its number one trading partner. America, a far bigger economy, is number two. The euro’s decline may make no difference to the prices that many European companies can charge.

The second is that while the euro’s decline makes exports cheaper, it also makes imports more expensive. Most European companies have to pay more for oil and other basic commodities (which tend to be priced in dollars). This means that some European companies are caught in an unexpected trap: they are paying more for their raw materials, but they are selling almost all their products in the euro zone.

There are still other wrinkles in the good news story. Some companies have locked themselves into hedging arrangements that will prevent them from taking advantage of the lower euro for a year or two. Some companies benefited from the higher euro. Banks such as Santander of Spain or Banca Intesa of Italy

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Europe could easily lose another three to four million jobs in the next three years. In Spain, which already suffers from 40 percent youth unemployment, an entire generation of people may be lost to the labor market. This generation, condemned to long-term idleness, could provide combustible raw material for parties of the far left or right.

The euro’s travails have removed one of European business’s most prized assets — certainty. For the most part, European businesses regarded the European project of ever closer integration as a road map to the future. They also regarded the euro as a source of price stability in a quickly changing world.

But the euro’s precipitous fall has opened up fault lines in the European elite. The Franco-German relationship — the engine of European integration — is in the worst state that it has been in since the euro’s founding. Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, France’s president, once partners, now appear to have a strained working relationship.

Eurocrats have drawn sharply different conclusions from the crisis. Some argue that the only solution to Europe’s problems lies in more Europe — increasing the powers of the European Central Bank, creating a single tax-raising power and allowing the European Union to issue bonds. Members of this school insist that the euro is protecting Europe from yet more instability, particularly a crisis of competitive devaluation.

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Some argue that the only solution lies in a looser federation — in loosening the bonds that have linked a highly productive Europe to some of its less productive cousins through what some are now calling Europe’s “Instability and Lack of Growth Pact,” a play on the Stability and Growth Pact that was key to the establishment of the euro. And some argue that Europe needs to rethink the role of its central bank. They worry that the E.C.B.’s exclusive focus on fighting inflation is counterproductive in a deflationary world and believe that the E.C.B. should model itself on the Federal Reserve Board in the United States, dedicating itself to both promoting growth and holding prices steady.

The euro’s fall has also highlighted the problems at the heart of the European economy: Europe’s faltering competitiveness. Europe remains heavily dependent on two great engines of job creation and growth — a handful of world-class companies, such as Daimler, and the public sector. Almost all Europe’s job creation since 2000 has come in the public sector.

But the world-class companies are not creating new jobs. Indeed, many of them are busily shifting not just manufacturing but also research and development to the developing world.

of higher tax rates and a punitive attitude toward bankruptcy: Germans are prevented by law from becoming CEOs if they have ever been bankrupt, for example. Such a law in the United States would have stymied many of America’s most successful high-tech entrepreneurs. And, deserved or not, Europeans are developing a reputation for being much keener on la dolce vita than on hard work. In the late 1960’s, Europeans worked more weeks per year than Americans; today they work 35 to 40 weeks per year while Americans work 46 weeks per year.

Europeans are also much more suspicious of business. Fortytwo percent of Europeans agree that entrepreneurs exploit other people’s work, compared with just 26 percent of Americans, according to a Flash Eurobarometer poll.

These cultural leanings are reinforced by structural factors. The venture capital industry, though growing, is still small by American standards: last year European start-ups received 2.2 billion euros in start-up capital, less than their American equivalents were given in the first quarter of this year alone. The European market remains fragmented compared with the American one: entrepreneurs have to grapple with a patchwork of legal codes and an expensive and time-

leaders have welcomed the euro’s decline. are equally positive.

And the public sector will be contracting for years to come.

Europe has failed to make the leap that America made in the 1980’s to a more innovative and entrepreneurial style of capitalism. Europeans are much less keen on establishing start-ups than Americans: only 4 percent of German residents are classic entrepreneurs, compared with 11 percent of Americans, according to the Global Entrepreneurship Monitor. And far fewer of those start-ups become big businesses. A list of America’s biggest companies includes plenty of companies that have only been around for a few years, such as Google and Facebook. America’s biggest company, Wal-Mart Stores, was founded in 1962 and went public only a decade later.

In contrast, the list of Europe’s biggest companies has scarcely changed in decades. Only 5 percent of European companies that were created from scratch since 1980 are in the top 1,000 E.U. companies by market capitalisation, according to Janez Potocnik, the E.U.’s former commissioner for science and research and now commissioner for environment. The comparable figure for America is 22 percent. More worrisomely still, many of Europe’s high-tech companies look tired. Some of its software heavyweights are thought to be past their primes, while some of its high-tech heroes are looking winded and slow.

This is partly due to cultural attitudes. Europeans tend to be more risk averse than Americans, thanks to a combination

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consuming patent system. The long-awaited unification of European patent law has been held up by bureaucratic quibbles, such as Spain’s insistence that all rules should be written in Spanish. In many countries, the tax system and labor laws discourage companies from growing above a certain size.

America has at least 50 times as many angel investors as Europe, thanks, in part, to the tax system that leaves more money in individual pockets for investment.

The storm over the euro zone will at least bring some good if it forces Europeans to grapple with these deeper issues of competitiveness. How can countries compete if they remain low on The World Bank’s annual “Doing Business” survey? How can Europe kick-start its innovation machine if it fails to tackle patent laws? Europe’s social model depends on using the dividends of growth to support a prosperous lifestyle; but the model is now threatening to snuff out the growth on which transfer payments depend.

Yet so far the euro zone’s problems have been a distraction rather than a help. We have heard endless discussion about the details of rescue packages and financial architecture.

Almost nobody in the European establishment has dared to mention words such as “entrepreneurship” and “deregulation.” Even so, a discounted euro is a start.

Adrian Wooldridge is co-author of several books and is the management editor for The Economist. He is based in London.

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leadershIp

The Biology of leaDership:

You’ve been

there countless times. You’ve spoken to your most senior direct reports one on one. You’ve gone into meeting rooms to address groups of

giving The Brain a seaT aT The TaBle

their direct reports. Maybe you’ve even spoken to the troops in assembly halls or on factory floors. Each time, you’ve honed your message into what you thought were clear and crisp points — about getting more engaged, becoming more efficient,

Max Scratchmann (all)

working more as a team. And each time you walked out of the meeting not knowing how it went.

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By DaviD BerreBy

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Some senior managers seem to get the results they want in everything from improved morale to better bottom lines. But for most, those mere mortals without the magic touch, every meeting feels like a gamble. Your message gets through. Or it doesn’t — and you’re not sure why. The process doesn’t seem rational.

In fact, it isn’t. Changing the way that companies operate is, at root, changing the way employees behave and think. That means tinkering with equipment that even the most gifted IT department can’t troubleshoot: the supercomputer known as the human brain. Neuroscientists have found that this amazing device is neither entirely rational nor irrational, emotional nor calculating, full of foresight nor “in the moment” — instead, the brain is an amalgam of all those sometimes contradictory traits.

That makes leadership look a lot more complicated than it used to be in earlier eras, when managers were advised to just be “alpha males” or, conversely, to be cool and rational masters of facts. But science’s more accurate picture of the brain is well worth getting to know. To the extent that managers become “brain savvy,” they become more effective: once you know more about what’s going on in there, you’re closer to getting the outcomes you want from your leadership moves.

looking UnDer The Hood At first sight, it is easy to tell the difference between a human brain and a pig’s brain. In both, the surface layer of cells wraps around every fold and curve. In people, though, this outer layer, the cerebral cortex, is much, much bigger. It sits on the rest of the brain like a peach’s fruit around its pit, Temple Grandin writes in “Animals in Translation,” one of her best-selling books about animal and human behavior. Almost three-quarters of a person’s brain is cortex, and cortex is almost all of the brain regions behind our foreheads — where we plan, reason and talk to ourselves.

But when you look underneath, at the “pit” parts of the human brain — the structures that process emotions and, even deeper down, those that handle breathing, balance and other basics — the pig brain and the human brain look “exactly alike,” Grandin writes. So the parts of our brains that are distinctly human (which let us talk, think, do math, invent airplanes and trade derivatives) depend on, constantly exchange information with and are influenced by other parts — no differently than any other mammal’s.

That’s why the neuroscientist John Morgan Allman compares the human brain to a boiler room he once toured, which was run by a Rube Goldberg combination

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hUmaniTy’s giganTic cereBral corTex is a 200,000-year-olD BeTa Design, siTTing on Top of legacy sysTems ThaT evolUTion proDUceD millions, anD even hUnDreDs of millions, of years ago.

of up-to-date computers, vacuum-tube electrical controls from the 1940s and an even older array of pneumatic tubes that served as important safety valves.

Like the boiler, the brain is a collection of many interconnected parts, each built to do what it does tolerably well, often without regard to the overall operation — and obviously with no anticipation of future technology. Humanity’s gigantic cerebral cortex is a 200,000-year-old beta design, sitting on top of legacy systems that evolution produced millions, and even hundreds of millions, of years ago. The basic mechanism of the “fight-or-flight” response, for example, is so old that we share it with salmon and fruit flies.

The rational mind, far from being the master of this facility, is only one of its many components. And the rational mind’s work — logical rules, which we can explain to others, applied to objective facts — is just one of many brain processes. Other sections work differently: they use different kinds of input, and handle that input according to different rules.

In the past few decades, scientists have made great advances in understanding what these different units do, and how they communicate with one another.

Though they’ll always tell you that more research is needed, their work has already yielded some practical guidelines for people who need to influence, motivate and persuade others — in other words, for leaders. The better scientists understand the brain’s dynamics, the better they can explain what succeeds in winning over that mysterious organ. And what doesn’t.

There are four key insights managers should remember about the brains they want to influence (including their own!). First, the brain is a social organ.

Second, it likes a good story. Third, it often runs on autopilot. Fourth, it has its secrets. Because it is made up of so many different systems, it doesn’t always know which one is “in charge” at the moment. In other words, people often don’t know the real reasons why they act, feel and think as they do. Keeping these general traits in mind can help you turn a leadership mess into a success.

The Korn/Ferry InsTITuTe

The Brain is a Social organ Human beings, lacking wings, armor plates, claws, gigantic teeth or other impressive hardware, have risen to dominate the earth by using social relationships instead.

So the brain wasn’t designed to plan moon landings or do physics or assemble a supply chain. It evolved to handle relationships — to notice other people, understand their actions, and connect with them — and to influence others and be influenced by them. Babies as young as five weeks respond to anything that looks like a face (even three dots and a line).

Of course, adults respond to babies, too. They respond to a round face, large eyes, a small nose, a high forehead and a small chin, even in other adults. That’s a good example of how the brain is designed to pay atten-

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tion to social life. It’s also a good example of how much brain activity is hidden from its owner. Without realizing that they do so, people consistently rate adults with such “baby faces” as more trustworthy, but less competent, than others.

In a study published last year, Robert Livingston and Nicholas Pearce of Northwestern’s Kellogg School of Management spelled out the real-world consequences for managers. When the researchers had undergraduates rate photos of past and present Fortune 500 CEOs, in general the executives judged more baby-faced actually earned less than their “mature-faced” competitors.

Humans are so tuned in to one another that they literally share feelings at the physiological level. When I see you in pain, for example, cells in my brain increase their activity in two regions, the anterior insula and the dorsal anterior cingulate cortex. The same thing happens when I myself am hurt.

Similarly, when you watch a colleague drink a soda, your motor neurons are firing, just as they would

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if you were raising the straw to your own lips. Indeed, many (though not all) neuroscientists agree with the University of San Diego’s V.S. Ramachandran that human beings have brain cells dedicated to this kind of mirroring, and that these “mirror neurons” explain why people are so adept at being in sync.

The social nature of the brain is often your friend.

It is the reason leadership is possible, and necessary.

People are born with a built-in ability to be influenced by others, to coordinate with them and to care deeply about how well that social process is going. However, our intensely social side means that supposedly “irrelevant” factors (like the shape of your face) will have an effect on the working environment. If you ignore this, it will not go away. It will surprise you, and not in a pleasant way.

The Brain likes a gooD Story

sTory-Telling liTerally helps The Brain “keep iT TogeTher,” By melDing The conTraDicTory resUlTs of DifferenT processes inTo a coherenT experience and I’d like to learn more about [product]. I live at [blank] in the [blank] area and I would like to hear back from you soon . . .” Response rates to the narrative version of the form were 25 to 40 percent higher than to the “justthe-facts” format.

Storytelling literally helps the brain “keep it together,” by melding the contradictory results of different processes into a coherent experience (I didn’t just

as a boss because you look youthful, for instance, they probably won’t say so (because, as we’ve seen, they won’t know about their involuntary response to your appearance). But they’ll have some kind of story to tell about why they don’t feel the way they used to under your predecessor.

When the neurosurgeon Itzhak Fried was testing an epileptic patient’s brain by electrically stimulating different regions, he noticed that a jolt to one part of her left lobe would make her laugh. But she never said, “I just laughed for no reason.” Instead, she would say she laughed at whatever she’d just seen — a picture of a horse, say, or the doctors standing around (“You guys are just so funny”).

Whatever its job — be it turning disconnected sights into vision or scattered memories into “my first week at work” — each piece of the brain is busy weaving bits and pieces of data into a coherent whole. The brain can’t stand gaps, blanks and dead ends. It wants that story.

That’s why any idea or plan, from a sales pitch to a scientific theory to a philosophy of life, is more convincing when it arrives as a story, with characters, conflict and a beginning, middle and end. Even a basic and familiar Web form shows this effect, as researchers at the shop-andsearch site Vast.com recently found. They compared a standard registration form (first name, last name, e-mail address) with a form that reads: “Hello, my name is [blank] [blank]

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Credit

Which brings us to the second principle of brainsavvy leadership. The brain is always telling itself stories. If your team isn’t as impressed with you

The Korn/Ferry InsTITuTe

laugh for no reason I can explain; I laughed because these guys are so funny). Thus, the stories that succeed are those that “make sense” to many different parts of the brain. This is the lesson of the Web form that succeeded better as a narrative: it satisfies the consumer’s conscious, rational choice to ask for product information and the unconscious mind’s eagerness to be sociable. The form is an efficient tool — to the regions of the brain that plan and calculate. At the same time, it’s a friendly invitation — to the regions that focus on relationships and status.

If a leader fails to convince or motivate people, it’s often because the leader’s “story” is too simple, appealing to only one part of the multilayered brain.

The Brain ofTen rUns on Autopilot

Credit

At the base of the multilayered brain are ancient structures that respond automatically to the molesights, sounds, smells — even particular mole cules — for which they’re designed. They don’t

require, and they don’t allow, conscious deliberation about what to do. Consider what happened when Paul J. Zak of Claremont Graduate University had men play the ultimatum game, in which two people try to split some money according to a simple rule: one person proposes any split he likes, from 50-50 to 99-1 to 1-99, and the other either accepts or rejects the offer. An accepted offer means the players go away with the money they split; rejection means neither gets anything.

In the experiment, men who had inhaled a nasal spray containing the hormone oxytocin were nearly twice as generous in their offers as were those who’d inhaled a placebo.

EisenConversely, when Christoph Eisen simegger of the University of Zurich ran a sim ilar experiment with a group of women, he found that those who had been given a dose of testosterone under their tongues made fairer offers than did women who hadn’t been exposed.

Oxytocin and testosterone are both hor hormones with a strong effect on behavior. Oxyto Oxytocin levels rise when mothers nurse, and when

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people have sex and, for that matter, when they’re hugging each other. Testosterone, of course, is supposed to be the male hormone of aggression and dominance, but it seems to be most important in competition for status.

(In a sports match, researchers have found, the winners’ testosterone levels rise, and the losers’ go down. Moreover, even the fans of losers will experience a measurable drop.)

Testosterone made the women more concerned about their status, which made them want to play well.

And you aren’t a good player if you force your opponent to refuse your bid, leaving everyone with zero. So testosterone made them more fair.

On the other hand, oxytocin made the men feel more warm and fuzzy toward their negotiating partner. It made them more generous.

In both cases, the effect of the hormonal treatment was involuntary and outside of consciousness. The students’ behavior changed because their brains and bodies responded to these ancient hormonal messengers without any conscious choice or awareness on their part.

Some of these non-conscious processes are embarrassingly at odds with the way we prefer to see ourselves.

Bad weather, for example, makes employees more likely to be late, leave early and “forget” to throw their payment into the box for a doughnut in the break room. People’s reaction to rain has more serious consequences for organizations, according to Donald A. Redelmeier and Simon D. Baxter of the University of Toronto. The two doctors correlated weather reports with 2,926 interviews with medical school applicants at the University of Toronto between 2004 and 2009. As a group, students whose appointments occurred on rainy days received lower scores from their interviewers.

The Brain has iTs Secrets As we have experiences and perceptions of which we are unaware, we also have experiences and perceptions that aren’t what we think they are. Think of this as another level in the multilayered

story. This is the realm of what the behavioral economist Dan Ariely calls “decision illusions” — brain processes that mask the real causes of our thoughts and actions.

Most often the illusion is that we made our choice for reasons that make logical sense, and that we can describe. It’s unlikely those medical school interviewers consciously realized they were tougher on rainy days, for example.

Decision illusions arise in part because so much of the brain’s activities occur outside of consciousness. It’s

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hard to notice that you’ve been influenced by the clouds when you don’t know it happened. But the mind also has defenses against unwelcome or unsettling information. If it can’t hide unpleasant news, it actively fights it.

A region of the frontal cortex — called the dorsolateral prefrontal cortex (DLPFC), it’s located above the eyes, behind the forehead — appears to be essential to this active censorship. For instance, in recent MRI experiments comparing scientifically illiterate undergrads with physics majors, Dartmouth’s Kevin Dunbar found a difference in the way their brains responded.

When they saw doctored videos that appeared to violate the laws of physics, all students showed activity in the “error detecting” regions of the cortex. But the trained students also had activity in the dorsolateral prefrontal region, which was busy erasing the anomaly from their awareness. Their brains weren’t just registering “that looks wrong.” They were also registering “forget it, that can’t be.”

Similarly, the DLPFC is also active when people “correct” their taste buds. As Samuel McClure of Baylor and his colleagues discovered in MRI experiments, when people chose between Coca-Cola and Pepsi in blind taste tests, the DLPFC was quiet, and sensory brain centers were busy. But in a later test, when they saw an image of a Coke can before one of their sips, each person’s DLPFC lit up — and they much preferred that choice.

Since the options in that test were identical (all Coke), their preference was clearly based on branding, not tasting. And the sensory message — “there’s no difference between A and B!” — had been edited. That’s great news for branders, who want consumers to stay loyal. But it’s not as encouraging for leaders in changing times, who need their people to put aside old habits and old ways of thinking.

Guideposts for leaDership While much remains to be understood about the brain, the characteristics that we do know something about point the way to a handful of fundamental principles that can guide day-today leadership decisions.

1. It’s top-down AND it’s bottom-up. Reading

about neurons and brain pathways, it’s easy to be lulled into the notion that “bottom-up” processes — sights and sounds, strong feelings, unconscious biases that we share with animals — are more important in people’s behavior. But they aren’t. Nor is it true that “top-down” processes — conscious thoughts and rational decisionmaking — always carry the day.

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To reach people anD moTivaTe Them, engage BoTh Their Top-Down Thinking anD Their BoTTom-Up inTUiTions.

Consider Eisenegger’s experiment with testosterone. In that study, women played more fairly if they’d absorbed some testosterone. However, there were some women who became much more aggressive in the game: they were the ones who thought they had received testosterone. (In reality, they’d gotten a placebo.) Where women who had actually received the hormone acted more competently, those who imagined they had the “male hormone” in their systems acted more like they figured men should act. Testosterone, a peptide hormone, had a “bottom-up” impact on behavior. But the idea of testosterone had a “top-down” impact as well.

(It’s especially clear in this study precisely because those two effects weren’t the same.)

The Coke-Pepsi experiments are another case in point. Bottom line: don’t try to lead by picking a favorite brain layer. To reach people and motivate them, engage both their top-down thinking and their bottom-up intuitions.

2. Big challenges don’t always need big solutions. It’s natural to feel that big problems need

big responses, and that the right answer is going to be far from the wrong one. That’s one of the brain’s inbuilt biases, in fact. If your anti-smoking informational pamphlets aren’t affecting employees’ tobacco use, then maybe you’re tempted to go for a ban on smoking. After all, you gave them all the statistics they need to make the right choice, and it “didn’t work.”

Remember, though, that everything you experience has multiple meanings, because the same object is treated differently in different parts of the brain. Tobacco isn’t just a suicidal habit that makes no statistical sense. It’s also a jolt of stimulant, and an addictive substance, and, for many people, an emotional signal of autonomy and independence. You don’t undo all that by explaining the epidemiology of emphysema.

Instead of big, dramatic, difficult changes at the level of rational persuasion, you can make slight adjustments to details that matter at other levels of meaning.

These are easier and quicker. Often, they’re all it takes.

Programs that help employees quit tobacco are more effective in companies where people feel that management cares about their future; they’re also more effective when each participant has one-on-one contact with a “coach.”

The Korn/Ferry InsTITuTe

Consider, too, the very different responses people have to the prospect of donating their organs after death. Donation rates vary a great deal, from nearly 100 percent in France to 4 percent in Denmark. The difference isn’t a matter of policy, laws or culture. It’s a difference in brain-savviness.

In countries where people have to “opt-in” to donate organs by checking a box or filling out a form, rates are low. In “opt-out” regimes — where people have to make the effort to say they refuse — donation is near-universal. People are averse to change, paperwork and, especially, thinking about their own deaths.

Changing their behavior doesn’t require changing their thoughts or feelings about these unpleasant subjects.

All that is needed is a slight change in the story at a dif different level: You want to avoid thinking about this? No problem.

Often, leading people to and through change needn’t involve big moves. It just needs the right moves. If you don’t see any at the level of rational argument, or if emotions in the team aren’t going your way, try looking elsewhere.

The more parts of the multilevel brain you can speak to, the more effective your message. You can’t get more brain savvy than that.

David Berreby is the author of “Us & Them: The Science of Identity” (University of Chicago Press, 2008) and writes BigThink.com’s “Mind Matters” blog about human behavior (http://bigthink.com/blogs/Mind-Matters). His writing about science has appeared in The New Yorker, The New York Times Magazine, Nature, Smithsonian, The New Republic and many other publications.

3. Awareness of the biology helps control the biology. It’s not

easy to square our self-image as clearthinking, disciplined people with the evidence that clouds can alter our perceptions of a new employee or that facial anatomy is relevant to the way we respond to a boss. But self-awareness pays off.

Instead of denying that bad weather sours people’s perceptions, for example, you can prepare for it. Organizationally, you can correct for the rain effect in evaluations and reports. Personally, you can remind yourself to cut the guy with the umbrella some slack.

4. Make the story coherent on many levels. The more we understand the biological

basis of behavior the clearer it is that all brain functions depend on one another. So the best way to engage the multileveled brain is to tell a story that works at many levels.

It’s the “wellness program” that lays out facts about health-care costs and tells employees they’ll feel better if they lose weight and sets up teams so they can power-walk together and not feel alone.

Or the supervisor who explains the new project with a spreadsheet and a meeting where each member is asked to comment and a T-shirt for every team member to encourage the feeling of belonging.

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InTervIew

Planting the Seeds of Wealth an interview with carlos slim

Carlos Slim Helú has a mathematical mind and simple tastes.

For more than 40 years, he has lived in Mexico City in the same house, which he describes as modest. And yet, according to Forbes magazine, Slim is the world’s wealthiest person, having overtaken Bill Gates and Warren Buffett of the United States and Mukesh Ambani of India.

Slim, 70, attributes a large measure of his success to lessons he learned from his father, Julién Slim Haddad, who was born in Lebanon and immigrated to Mexico in 1902, at the age of 14, without money and not knowing Spanish. Slim’s father taught him the importance of self-discipline, education, hard work, good accounting, and risk taking. Slim’s father invested in Mexico during its revolution, which began in 1910, and again in the aftermath of the 1929 stock market crash.

Like Buffett, Slim is an astute investor who quietly pieced together a diverse array of investments in a variety of sectors — printing, mining, minerals, metals, industrial products, insurance, retail shops and restaurants.

In 1990, when Mexico was privatizing its economy, Slim and two partners — Southwestern Bell from the United States, and France Télécom — acquired the state-owned Teléfonos de México (Telmex). Slim paid personal attention to the company’s mobile phone unit, investing in its network, expanding coverage and creating innovations such as prepaid phone cards, which enable an individual to purchase a card and receive a handset along with it. Prepaid phone cards have been responsible for increasing Telmex’s market penetration to 85 percent.

Slim’s telecommunications companies do business throughout North, South and Central America. Under his leadership, these companies have grown organically and through acquisitions.

While criticized for charging some of the highest phone fees in the world, Slim’s companies have recently been praised for adjusting their tariffs downward. ematics and linear programming while still a student. An avid reader, art collector and sports enthusiast, Slim recently made a big investment in The New York Times, becoming the largest nonfamily investor in the company.

JT Morrow (all)

Trained as an engineer at the National Autonomous University of Mexico, Slim taught math-

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Slim recently discussed leadership in Mexico City with Gary Burnison, chief executive of Korn/Ferry International; Eduardo Taylor, Korn/Ferry’s regional market leader for Latin America; and Joel Kurtzman, editor in chief of Korn/Ferry Briefings. The following comes from that discussion.

Your success in business has made you the richest man in the world, according the recent rankings in Forbes magazine, ahead of Bill Gates and Warren Buffett. What role does money play in your life? Does it motivate you?

Slim: The house where I was born was better than the house where I now live. The house in which my wife grew up was a lot better than the house where I now live. So I would say the answer is no. Money does not motivate me. It is my view that when families have money in excess and they are not making investments and building businesses and creating jobs and doing things for society — when they think only materially — then something is wrong. That is the way I was raised, and those are the values that were taught to me. The truth is, when I pass away, I will not take 1 cent with me. I will not take anything. In my opinion, wealth is a responsibility and in some ways a compromise. You must keep it growing and use it to society’s benefit.

Are you suggesting that a wealthy person — a CEO, for example — should be a custodian of the wealth of an organization or a family?

Slim: No, not at all. The role of a business leader — a CEO — is to create more wealth, not conserve it. A CEO needs to grow the wealth of the company and the country. Wealth is not a privilege, it’s a responsibility. If you are a great doctor, you have a responsibility to use what you know to treat people and to help them. If you are a politician, you have to take responsibility and use that responsibility to build your country.

Having a leadership role in business or politics means taking responsibility. To me, the word custodian signifies someone who sells everything and puts the proceeds in the bank. It doesn’t suggest someone who is building.

branches and you reach for it. You eat the fruit, but you take out the seeds and you plant them because you have to reinvest. That’s where the wealth lies — in producing more trees.

You will not necessarily have more income every year, but you will have more wealth if you plant the seeds. And if you do it long enough, you will have enough wealth to create a middle class, which will form the strongest market you can have and the best society. So the responsibility of someone with wealth is to create more wealth.

And then distribute it?

Slim: I don’t believe that you need to create wealth and then make a distribution plan for it. I think wealth is created because the market is growing and society is growing and then the overall economy grows. It’s classical economics. But having said that, I can say that the best investment is to fight poverty. Fighting poverty is not just a social issue or an ethical issue. It’s an economic issue, and there is an economic need to fight poverty. It’s best for everyone and everything because if you fight poverty, you create a bigger market, which creates more wealth and with it more stability. If you do that, you create enough wealth to educate people and then they have higher levels of productivity. This means you can create more jobs and employment. And, of course, all of this creates human capital. In my view, prosperity is good. But if only one country is prosperous, it’s still a small market. What do you do with all of the raw materials and production potential that we have? All of the labor? The more prosperity we have, and the more wealth we create, the better it is for everyone.

The American industrialist and philanthropist Andrew Carnegie said, “The man who dies thus rich, dies disgraced.”

Slim: That’s crazy. In part, of course, because it depends how you make your wealth. If you made it selling arms and killing people, that’s a crime. That’s not true wealth in my opinion.

But if you are creating enterprises, creating wealth for your country, your society, creating jobs for people, that’s something honorable.

Some might use the word guardian instead of custodian.

Who was the biggest influence on you?

Slim: Again, I disagree. The point is not to guard or conserve what you have, but to create. It’s like planting a fruit tree. You don’t just guard it or conserve it. You water it. You care for it so it grows. But you must understand there is a difference between wealth and income. Wealth should be created, it should be invested, and it should be used to create more wealth. If you have a fruit tree, the fruit grows down from the

Slim: My father. His examples of values and work were very powerful for me. I have this copybook from when I was 13.

It is on the wall in my office. He had me write in it and keep records of all my expenditures. It includes my first balance sheet, which I produced when I was 15 years old. My father passed away when I was 13. My father told me to make my copybook clean and to keep it neat and to do it on time.

and you reach for it. You eat the 28

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The Korn/Ferry InsTITuTe

What else did you learn from him?

Did you learn to invest in periods of crisis from your father?

Slim: My father showed me how to work. He had a big business for that time period. He closed it down — sold it. The circumstances were interesting because he closed it in August 1929, two months before the October 1929 stock market crash. It was a kind of coincidence. And then he invested in new businesses and real estate. Then, later, he opened another business — a merchandise business, a hardware store — when he was much older and sick with diabetes. I was only about 9 years old, maybe 10, but my father sent me to his competitors to look at the prices of the things they sold in their stores, and he had me write down those prices and go over them with him when I got back. I felt like a spy looking at the prices. But I learned a lot.

Slim: Yes. I learned from him that you invest in times of revolution and crisis. Then I read books and realized there are moments when things that are normally very expensive are valued very low. I learned that in business, the time to invest is when things are not in good shape. When you invest, you want to take a better position than your competitors. When there is a recession, we maintain strong positions. When there is a recession and your competition doesn’t invest, they are giving you the advantage.

What were some of the other things he taught you?

Slim: Well, I like to think about another example of my father.

He arrived in Mexico in 1902, with almost no money, when he was 14 years old. He had to learn Spanish. But he made a business with his brother and by the time he was 23, he had capital of $40,000. Then came the Mexican revolution, which started in 1910 and which lasted a long time. During the revolution, my father started investing. He did it during the period of crisis.

Were you a big investor during the recent global financial crisis?

Slim: Yes. And we would have liked to invest more. At the time, members of the American Chamber of Commerce in Mexico invested $2 billion. That included the investment of the big U.S. companies. At the same time, we invested $3.2 billion. We invested a lot. The U.S. investment in Mexico is not enough.

Why is that?

Slim: I think the U.S. is being left behind. In Mexico, they are not in the banks; they are not in telecommunications, water

fruit, but you take out the seeds BrIeFIngs on TalenT & leadershIp

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or power. They are in traditional industries. They need to invest more in Mexico.

Did you learn any big lessons from the financial crisis?

Slim: One of the important lessons — especially from the Lehman crisis — is the power of excess. Periods of excess make you ambitious, but not always for the right thing.

Let’s turn to the topic of leadership. How do you define leadership?

Slim: There are many types of leadership. You can have leadership in your family, between friends, between a team in sports, in business and politics, in religion, and in the professions.

So, it’s difficult to define it in three or four words. True, it is linked to achieving some type of target and to a set of mutual responsibilities. But leadership is also about transmitting confidence to people, so they can accomplish their goals. So they can better target their achievements. So, in general, it depends on the type of activity you are engaged in. Some people can be leaders in one type of activity, not in another. But in business, leadership is linked to fulfilling an organization’s objectives, to increasing its efficiency, to coordinating its activities, to fulfilling individual and group responsibilities, to being able to compromise, and to having some measurable achievements.

In addition, when people see that a leader or chief executive is working, it doesn’t matter what position that person has. They will benefit because the leader acts as a role model for them.

What else do leaders do?

Slim: I believe the leader sets the direction, and even the emotional tone, of an organization. It is about satisfying the emotional needs of people. It’s not just about taking responsibility for things.

What do you mean by setting the emotional tone?

Slim: People cannot live without doing anything, without having a direction in life, without work. What good organizations do is to set a direction and help develop people. It’s very important for leaders in business to work to create human capital that way, to give a sense of purpose to a team, and to the people in the organization. If leaders do this, then people working in organizations will feel they are doing something important for society and for the people around them. They will have a real sense of achievement. You can see that in construction, in a building, for example. There are some people in charge who have good leadership skills, and you can see they work hard. What they are looking for is purpose to cre-

ate and do something with quality and to optimize the way they work as much as they can. And they feel very good about the achievements they are making as the building goes up.

They feel pride about the things they are doing. We have been talking about the manifestations of leadership, and this is one of them — making people feel a sense of achievement.

Do you get better at leadership over time?

Slim: Yes, I think you do. Leadership is a combination of things. It’s easy to think something is white or black, that people have the genetics to be a leader, or that other things are in play. And, of course, there are always circumstances. I personally don’t believe so much in luck, but circumstances are important.

What’s the best way to determine who is a leader?

Slim: The best way to find out is to look at what they have done in the past.

How have you changed as a leader over time?

Slim: You develop a consciousness about your responsibilities and about the areas in which you must compromise. You look at things differently that you are working on. You develop international references regarding competition because you are competing internationally. You learn over time.

Does competition teach people about being a leader?

Slim: Yes, but not directly. You see, if you are talking about a football game, competition is very important. If you are talking about education at school, the marks you have — compared with the marks of others — are just qualifications. They are not the same as your knowledge, your way of understanding the world. At the same time, I think competition makes everyone better. It requires you to make more effort. You have to look around more. You have to study more. You have to train more. You have to look at where you need to be better at what you do. So, competition can be valuable. In business, it is necessary to have competition to be your best. It makes you study what’s going on in other places to see what your competitors are doing. And what it shows is that your competitors are always getting better. So, it makes you understand that you always need to improve, too — not just as a leader, as an organization. Competition makes you improve.

Do you develop leaders for your companies from the inside, or do you go outside?

Slim: Yes, from the inside. First, the people that are inside the

and you plant them because you 30

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The Korn/Ferry InsTITuTe

that is flexible, and that people can adapt to, and that they feel they would like to join with pleasure. In an acquisition, we don’t really move people. We cannot get involved at that level with so many companies. Besides, if you move people, they will run.

Does that mean that the management of a company is one criterion for an acquisition?

Slim: No. The management of the company is important for investors, since you are going to put your resources into a company. But management is by no means the main reason for an acquisition. The reason is primarily when you are in some activity and you need to expand geographically to increase the value of the company. Then an acquisition is a good idea. And, of course, we think that if the management of the company we are acquiring is good, then they will be happy to work with us. On the other hand, if the management is not good, then we will try to improve it.

Are there some industries where management is more important than others?

group follow our philosophy. We have a philosophy of leadership — some ideas and some concepts. They need to share this. Also, because they are inside the company, we see that they work together and not against each other. We all need to go in the same direction. We are not competing on the inside; we are competing on the outside. What can happen is that people coming from outside — when they are new — have a need to take strong positions to get known. What also happens is that when people come in from the outside, they come in at such a high level that it makes people jealous. And they also come in with other ways to work and with other cultural ideas and values. That’s not good for the organization.

Then how do you deal with acquisitions?

Slim: That is an important issue. You need to have a culture

Slim: Yes. There are certain companies where management is very important. This is especially true with technology companies. With some kinds of technologies you really need people with special types of knowledge and understanding. In these sectors, it is very important that people stay in these companies. Management is also important with regard to banks. You need good bankers. In some cases, when you are buying something you know very well — say you’re an international automobile company and you’re buying a local automobile company — you want to have good people there, and you want to give them an opportunity to develop. But people who work with us know that they can go as far as their talent will take them. We don’t just care about doing the job. We also care about doing the job in the right way.

How do you make sure your managers and leaders develop?

Slim: We expanded a great deal in the last few years. In telecommunications, since 1990 for a period of 15 years, we grew at a rate of 66 percent a year. When you grow so fast, you have many problems. So, what we did — years ago, now — was that we told our local and regional managers of the companies we wanted to take international to begin making people available whom we could move outside of the country. I’m not talking about moving 2,000 people outside the country. I’m talking about moving one or two or three at a time. But we began planning it and developing our people early, before we expanded so rapidly.

have to reinvest. That’s where BrIeFIngs on TalenT & leadershIp

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Do you consider yourself to be the leader of a big group of companies, or do you consider yourself to be an entrepreneur? After all, you built your group from scratch.

Slim: I guess I think of myself as an entrepreneur. But an entrepreneur who needs to manage people. You see, I think you need to have leadership in business. You need to have leadership in all areas of economic activity, just like you need to have leadership in sports. The same is true in politics. But I believe you don’t just need to have leadership in the CEO. You need to have it in all of the important areas of the business.

Sometimes you need leadership in the operations people, too, and not just in the CEO. So, I think of CEOs as leaders of leaders, and not as the leader. But in my case, with regard to my own activities, I really only have two or three people working with me. In my role, I work with the leaders of the companies.

That’s my job. In our businesses, we don’t have people who are both the CEO and the chairman. We have the CEO, and we have the chairman who, in some ways, is the person who represents the stockholders. Or, we might have a founder who works with the CEO. But in any case, my job is to work with these people.

Do you work with the leaders in your companies in the same way?

Slim: In business, I think there are three basic types of leaders, and they are usually very different. There are entrepreneurs, executives and investors. Then there is also the business leader who is concerned with political activities — the president of the Chamber of Commerce, for example. In small and sometimes medium businesses, and in some large private companies, there is some confusion because these roles are often taken on by the same person. In the U.S., in big businesses, the entrepreneur doesn’t exist anymore. These companies are led by people who are executives with institutions holding the stock. In some of these large companies, the entrepreneurial type of person is long gone; maybe that person left 50 years ago. When that’s the case, the entrepreneurial thinking is gone too.

Is it possible for the same person to perform those roles?

Slim: The truth is that many people can do all of these jobs.

All companies start small and grow. And the number of small and medium businesses is far bigger than the number of big companies. But as the businesses grow, sometimes the founder is no longer the best person to run the company.

Then, you need to find the best people to run the business.

You need to find the best executives — people who do that

the wealth lies.

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particular job very well. I say this because the CEO is very important to the success of the organization.

So there are times when you go outside for talent?

Slim: If we are going to do something very differently from what we have been doing since the beginning, then we may on occasion need to find an executive who can take charge and make those changes happen. But if we are going to be doing what we’ve been doing for years, then we need to have people from inside. What is important is that the executive needs to know the essence of the business. This is especially true so [he or she] can avoid spending too much time managing things that are not important and paying attention to too many variables that are not significant. Leaders need to have enough experience so they can simplify things and can focus on the essentials in order to make the right decisions.

You have talked a lot about the need for enhancing education in Mexico and elsewhere. Is that one of the aims of your foundation?

Slim: Yes. I think that businesspeople, entrepreneurs especially, have very good training in the management of human capital. We have the potential to solve problems. I think for us it is easier to solve some social problems sometimes than it is for others. One of the biggest problems is to develop human capital. How do you do it? There are many steps. You begin with nutrition for the mother, you pay attention when the child is born, you pay attention to the nutrition of the child, then you pay attention to education — to modern education, quality education. That’s what the foundation does, but it’s also what we do all the time in our companies. We are training people to be the best and to develop their know-how to learn. So, I think that economic and social problems — even national problems, excluding politics — are areas where people in business have expertise. These are areas where private organizations have the ability to help solve problems. You know, in previous societies the state had the power of economics, military, politics and so on. But now, society has evolved.

Economics is getting complex and society is getting very complex. The best way to fight poverty is by creating jobs and stimulating employment.

As a leader, are you still learning?

Slim: Yes, sure. I learn every day.

You are one of the most successful people in the world. Are there words you live by?

Slim: It sounds better in Spanish, but I will say it in English anyway: “Impose your will against your weakness.” That is what I believe.

The Korn/Ferry InsTITuTe

cool companies

Drug Discovery and the Balance Sheet Upstart iPierian and Its Two Seasoned CEOs Have Been Bidding to Change the Game

Credit

By Lawrence M. Fisher

Briefings on TalenT & leadership

Q4.2010

33

Credit

34

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The Korn/ferry insTiTuTe

The common wisdom is that bringing

a new drug to market now takes an average of about 10 years and $1 billion, and that 9 out of 10 drug candidates fail

MedicalRF.com/age fotostock

somewhere along the way.

Bad as those numbers sound, the situation is actually much worse, according to Corey Goodman, chairman of iPierian Inc., a biotech start-up based in South San Francisco.

“If we put Genentech as the outlier and just look at big pharma and big biotech, the reality is more like 1 in 25, 1 in 30,” Goodman said. “That puts the cost up; it’s significantly over $2.5 billion. At that rate, I think that what has been the model is going to lead to extinction.”

Born just a year ago, the product of a merger of two other biotech newbies, iPierian clearly sees itself as an industry phoenix and not as a dodo — and has embraced another model to greatly better the odds. iPierian’s plan is to form a network of partnerships at a much earlier stage than is now common in the industry and to use those partnerships to aggressively develop its technology in tandem, finding winning drugs faster and thus dramatically lowering the cost.

Reinventing the drug discovery paradigm would be an audacious goal for the biggest of companies, let alone for tiny iPierian, which so far has garnered a total of $54 million in financing from such heavyweight venture capital firms as Kleiner, Perkins, Caulfield and Byers, Highland Capital Partners, Mitsubishi UFJ Partners, and Google Ventures. All this investment and iPierian is still too young to have developed any drugs.

But iPierian has two things going for it that may prove to be game-changers — its breakthrough technology and the team at the top, many of whom worked together before. Starting a company with such a team adds to the likelihood a start-up will succeed, according to research carried out by Edward B. Roberts, a professor at M.I.T.’s Sloan School of Management, and chair of its Entrepreneurship Center. Such a team working together increases the odds of success because, among other things, the team knows each other’s strengths and weaknesses, which shrinks the learning curve.

Briefings on TalenT & leadership

This is particularly important when there is an early handoff from one leader to the next, which is the case at iPierian. iPierian’s technology allows adult cells to be transformed into stem cells, those progenitors of life that are capable of replicating any cell in the body. No controversial harvesting of discarded human embryos is needed. And the necessary tissue samples can actually be taken from living patients with a particular disease, raising the tantalizing possibility that the resulting adult stem cells could short-circuit the normal drug screening process to speed up drug discovery. In addition, from a business perspective, accelerating the research process could make early technology-sharing partnerships practical.

The CEO of iPierian is Michael C. Venuti, a 56-year-old M.I.T.-trained Ph.D. biochemist who was the company’s former chief science officer and a former venture capital partner. While Venuti runs iPierian now, the company owes its vision, and perhaps its existence, to its outgoing CEO, 62-year-old John P. Walker, who has a long track record in the industry and deep organizational skills. With no formal training in science, Walker rose to be head of the American Hospital Corporation before successfully shepherding several biotech startups from birth to market. Walker’s decision to leave the company early was precipitated by family issues.

“He has a very strong practical sense to him,” said Robert Ruh, Korn/Ferry International’s global sector leader for medical devices, who has known Walker since their days together at American Hospital. “He’s not even close to being a scientist. He’s a business guy, and what he brings to the table is an ability to understand science and see through that to what the real business opportunity is.”

And what that opportunity is this time is revolu-

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tionary, said Walker, “because for the first time it allows you to turn drug discovery on its head by putting the patient at the front of the cycle.”

As part of the handoff to Venuti, Walker will remain an advisor to the firm.

From Magic Bullet to Scar Tissue Drug discovery has traditionally begun with a potential therapeutic compound and worked its way back to the patient, through in vitro studies, animal models, clinical trials and many millions of dollars. But what if you could start with the patient’s disease and work back to the cure?

Popular media discussion of stem cells centers on their potential use as drugs, which casts them as the latest edition of the pharmaceutical Holy Grail — the magic bullet, a canny molecule that can locate and eliminate disease with exquisite accuracy. While stem cells may one day fulfill that quest, iPierian thinks that their first best application will be as highly specific targets to be used in drug discovery, not treatment. iPierian’s stem cells are a new form of highly capable, drug-discovery tool. iPierian was formed in July 2009 from the merger of iZumi Bio Inc. of South San Francisco and Pierian Inc. of Cambridge, Mass., both created to take advantage of these discoveries. To supplement a scientific advisory board and key hires drawn from the Harvard Stem Cell Institute and the Gladstone Institutes at the University of California at San Francisco, iPierian’s founding investors sought an experienced chief executive with “muscle memory and scar tissue,” to build the team, said Beth Seidenberg, a partner at one of the investors, Kleiner Perkins Caufield & Byers. She recruited Walker, first to be CEO of iZumi, but with a mandate to take over the merged companies.

Walker, who had recently retired, was an obvious

choice. Shortly after arriving in California in 1985, he formed a relationship with Kleiner Perkins, the legendary Silicon Valley venture firm that had provided initial financing to Genentech and other industry pioneers.

Walker said he shared a long-term perspective with the firm’s partners on how to create value through nurturing new companies. Together they built five companies, of which three went public and two were acquired, an enviable record in the high-risk world of start-ups.

When Seidenberg called, iZumi and Pierian already had a team of scientists in the field of stem cell research, strong financial backing, and filings on crucial patents.

Walker brought leadership, organizational ability and business acumen, to stitch those elements together into a company.

The depth and breadth of the opportunity shaped iPierian’s strategy and suggested a business model based on a set of partnerships, Walker said. As a result, iPierian plans to join forces with an established maker of biological and chemical tools. By doing so, it hopes to industrialize iPierian’s technology rapidly and broadly, while partnering with biopharmaceutical companies to address specific diseases and entire therapeutic categories. In addition, iPierian’s own proprietary drug development program will focus on neurodegenerative diseases, such as Parkinson’s and ALS (“Lou Gehrig’s Disease”), which are particularly underserved by existing discovery methods.

In today’s uncertain financial environment, Walker said this partnering strategy should provide adequate capital for iPierian to advance adult stem cells as a platform technology and bring its own first drugs to the clinic without multiple rounds of dilutive equity offerings.

The Productivity Crisis in Drug Discovery Why is the drug discovery process so difficult? The answer is that the industry is witnessing the fundamental limitations of a discovery paradigm based on two options: serendipitous finds, like aspirin and opium, whose derivatives are still among the most commonly prescribed drugs, or the screening of vast chemical libraries against targets of unknown and unquantifiable relevance. The weaknesses of this random approach are

This partnering strategy should provide adequate capital

for iPierian to bring its own first drugs to the clinic without multiple rounds of dilutive equity offerings.

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The Korn/ferry insTiTuTe

now painfully visible in the declining research productivity of the pharmaceutical industry.

The early promise of biotechnology was to take drug discovery away from such shots in the dark to a model premised upon expanded knowledge of the molecular pathways of disease. The success of Genentech and its kin is testimony to the validity of this approach, but it is limited to diseases with wellknown causes. Too many diseases are the result of still-unknown pathologies.

“I know the problems of pharma and they start at the beginning: choosing the wrong biology, the wrong targets and then pushing forward whatever you choose to the tune of billions of dollars,” said Berta Strulovici, iPierian’s vice president for research and chief technology officer, who previously held executive research positions at Merck & Co. “iPierian’s objective is to streamline drug discovery by getting the biology right,” she added.

Courtesy of iPierian

The Foundation of a New Platform Technology The unsung heroes of the biotech revolution were the makers of biological tools and enabling technologies.

Although Kary Mullis ultimately received the Nobel Prize for the development of a technique for generating thousands to millions of copies of a particular DNA sequence, the further industrialization of these processes required many advances in hardware, software and biology. The same will be true for adult stem cells.

Biotech pioneers such as the Cetus Corporation, where Mullis was employed, often had to invent and produce their own biological tools, but today there is a community of sophisticated vendors that has grown up along with the industry. These toolmakers present the first broad partnering opportunity for iPierian, which forms an element of its business model.

Walker said that iPierian plans to strike a partnership with a single outstanding company for an exclusive long-term relationship, where the partner can turn iPierian’s innovations into product opportunities, so the company can access upfront capital as well as an ongoing stream of royalty payments. The partner will enable iPierian to monetize the offshoots of industrializing adult stem cells.

Though “industrialize” is a tidy sounding verb, the actual task of scaling up stem cell processes from laboratory quantities to commercial production will be far from trivial. Yields must improve by at least an order of magnitude, if not two, coupled with a concomitant improvement in purity. “Working closely with a com-

Briefings on TalenT & leadership

Differentiated motor neuron cell culture from healthy adult stem cells.

pany that is in the business of turning innovation into ready-to-use products will benefit iPierian directly by cutting the time we have to spend reducing science to practice,” Walker said. “And the collaboration will also benefit the broader life sciences community by making the fruits of our labor widely available.”

Two Models for Pharmaceutical Partnerships The same philosophy informs Walker’s, and now Venuti’s, partnering strategy with pharmaceutical and biotechnology companies. Walker foresees two distinct models. One model is for specific diseases that iPierian is focusing on internally, like spinal muscular dystrophy, a neurodegenerative disease that is the leading genetic cause of death in infants and toddlers.

A second model will serve companies working in broad therapeutic areas, such as metabolic disease, cancer and cardiology.

In both cases, however, iPierian will seek to partner much earlier than is common practice today, where collaboration is usually deferred until proof-of-concept, which may not be achieved until a molecule is well advanced in the three stages of human clinical trials required by the U.S. Food and Drug Administration. That risk-averse approach makes sense to small companies seeking to maximize the monetization of a core asset, and to large companies looking for product candidates with near-term potential. But with a breakthrough

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It is one thing to reprogram a few sample

cells in small dishes in a lab, entirely another to create an automated system that can produce millions of cells to order.

technology like adult stem cells, the company can create real value and receive proper compensation for partnering far earlier in the process, much the way the first biotech companies did, said Dushyant Pathak, iPierian’s vice president for business development. “We see stem cells as a product-enabling platform, as opposed to a pure technology play, because it enables an entirely new way of approaching drug discovery,” Pathak added.

With such a broadly applicable platform, iPierian could have built a business as a pure biological tool company. But Walker and Venuti believe iPierian can create greater value for shareholders and deliver muchneeded new therapies to patients by also employing stem cell technology in the discovery and development of the company’s own drugs.

Nevertheless, Walker concedes that a small company is limited in the medical markets it can address.

Even after the science is proven, after a candidate drug successfully passes through clinical trials and approval by the F.D.A., the company faces immense logistical and financial hurdles in building adequate manufacturing, marketing and sales capabilities to bring that drug to market. In truth, very few biopharmaceutical start-ups grow into successful operating companies.

Walking the Risk/Reward Tightrope One obstacle to iPierian’s success is that the cells differentiated from adult stem cells do not absolutely duplicate the actual somatic cells in the human body, and there is currently no reliable measure of the relative accuracy of the reprogramming process. But iPierian’s scientists say that the differences are minuscule and inconsequential compared to the difference between a cell from a specific Parkinson’s patient and a cell from a research or laboratory animal. They expect the predictive power of a drug test based on a motor neuron generated from adult stem cells will be so much better than one done traditionally, with animal cells.

A more compelling obstacle will be scaling the

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technology. It is one thing to reprogram a few sample cells in small dishes in a lab, entirely another to create an automated system that can produce millions of cells to order, day-in day-out, within specific tolerances and with a guaranteed level of purity. Yields have improved exponentially — early experiments reprogrammed fewer than one in 10,000 cells — but the company has a long way to go to achieve production volumes. The biology needed to grow neurons is vastly more complex than growing generic tumor cells in a dish, so simple off-the-shelf solutions will not be adequate to the task, which is why iPierian and its partners will be inventing new systems and processes as they progress.

There will also be a specific scientific challenge with each disease, which is coming up with a suitably predictive model. It’s not enough to produce reprogrammed cells for a test if the particular cell type is not conclusively implicated in the disease. In many cases, several different cell types will have to be created for one disease.

A Solid Intellectual Property Portfolio Beyond the science and engineering, biotechnology companies all typically face a level of legal risk associated with intellectual property. Most scientific discoveries have multiple parents, and determining custody rights is often a long, litigious process. If the intellectual property underlying a new process is split between too many parties, any one of them may have a difficult time building a viable business.

Shinya Yamanaka’s 2006 creation of adult stem cells from mouse cells was a watershed event for biology.

The production of human adult stem cells less than two years later, by Yamanaka’s lab at Kyoto University and others, opened a new era in drug discovery. While Yamanaka’s breakthrough work in mouse cells generated the headlines, the first patent filings in human adult stem cells were made in June 2007 by a team at Bayer Japan, whose work, because it was done without fanfare inside a private company, went largely unnoticed. Indeed, as late as October 2007, Yamanaka publicly stated that it was unclear when, if ever, human adult stem cell research might succeed. In a review of its operations

The Korn/ferry insTiTuTe

A Close-Knit Team When John Walker first considered join-

And after the BioSeek acquisition in

ing the company that became iPierian,

February, he immediately brought

part of his due diligence was to reach out

Venuti on board too, as president and

to two old friends whose scientific cre-

chief scientific officer, and ultimately,

dentials matched his business chops.

as his successor. Walker and Venuti

They were Corey Goodman, past presi-

had previously worked together as well,

dent of Pfizer’s Biotherapeutics and Bio-

at Axys Pharmaceuticals prior to its

innovation Center and a member of the

acquisition by Celera, where Walker was

U.S. National Academy of Sciences; and

president and chief executive, and Venuti

Michael C. Venuti, chief executive officer

was senior vice president of research and

of BioSeek Inc, a company using high

preclinical development. Venuti had pre-

throughput biological systems for drug

viously held senior positions at Genen-

discovery, which was acquired by As-

tech and Syntex, and had worked with

terand plc in February 2010.

leading venture capital firms, including

“I hadn’t been intending to run an-

Kleiner Perkins.

Walker’s tenure at American Hospital inoculated him with the company’s institutional values of practical intelli-

other company at that time,” Walker re-

Starting a company with a group

calls. “But the opportunity here was so

that has worked together previously is an

gence, self-motivation and strong inter-

potentially game-changing that I had to

approach that greatly enhances a start-

personal skills. Walker rose through the

consider it. I called Mike and Corey and

up’s chances of success, according to re-

ranks there to become president of the

they both said ‘yes, this is real.’”

search on startups from M.I.T.

American Hospital Corporation, the de-

Walker tapped Goodman to be chairman of iPierian’s board of directors,

Walker’s hand-picked start-up team

And, though he has no formal training in

successor as CEO, holds an A.B. from

science, when he moved to California, it

Dartmouth College, and a Ph.D. in or-

was for the opportunity to run a number

ganic chemistry from M.I.T. Good-

of biotech start-ups on the cutting edge

as a Searle Scholar and earned his B.S. in biology with distinc-

Michael Venuti

cidedly low-tech side of the business;

has impressive credentials. Venuti, his

man attended Stanford University

of new technology.

He is not a scientist,” said Robert Ruh of Korn/Ferry International. “But he

tion and honors. He was a

has always enjoyed the company of lead-

National Science Foundation

ing scientists and working with them to

Fellow at the University of

turn the most advanced science into a vi-

California Berkeley and

able business.”

earned his Ph.D. in neurobiol-

At iPierian, that task now falls to

ogy. While Walker attended

Venuti, who said he will welcome Walk-

SUNY and Kellogg, his degrees

er’s continuing presence as a senior ad-

are in business, but it could be said that iPierian’s outgoing chief executive really went to school at the American Hospital Supply Corporation.

Courtesy of iPierian

other health-related companies.

viser. “Under his leadership, the company has emerged as the leader,” in utilizing adult stem cells. This is was evidenced by iPierian’s recently being awarded re-

This now-defunct company, little known

search grants from the California Insti-

a position Walker himself had filled at

outside the industry of health care prod-

tute for Regenerative Medicine and the

Goodman’s previous company, Renovis, a

ucts and services, spawned an unprece-

National Institutes of Health. Winning

developer of innovative therapies for

dented number of current leaders of

grants is one thing; winning in the mar-

pain, prior to its acquisition by Evotec.

biopharmaceuticals, medical device and

ketplace is quite another.

Briefings on TalenT & leadership

Q4.2010

39

following its merger with Schering, Bayer elected not to continue the stem cell work in Japan, and iZumi, iPierian’s predecessor, was able to acquire all of the related intellectual property. iPierian’s intellectual property also draws upon filings generated by the Gladstone Institutes in San Francisco; Pierian, prior to merging with iZumi; and by iPierian, since combining the companies. In January 2010, the Intellectual Property Office in the United Kingdom issued a Notification of Grant to iPierian for its first patent related to adult stem cell technology. This is the first patent related to adult stem cells granted outside Japan.

U.S. patent applications are pending.

Nevertheless, for such a broadly applicable and potentially powerful technology, there will be competition, and inevitably, competing patent claims. Already, Cellular Dynamics International, based in Madison, Wis., and founded by stem-cell pioneer James Thompson and three university colleagues, has agreed to supply Roche with beating heart cells for toxicity testing.

In San Diego, Fate Therapeutics is collaborating with biotech toolmaker Stemgent to form Catalyst, a venture that will make adult stem cells for other companies in a consortium.

Finance Beyond the Term Sheet In the glory days of biotech finance, which began roughly with the initial public offering of Genentech in 1980 and extended through the genomics bubble of the early 1990’s, the public equity markets poured capital into any number of risky scientific ventures. But for other than a handful of winners, the cumulative return on investment over the life of the sector was negative even before the financial markets’ collapse in 2008. In today’s risk-averse market, even the most promising company cannot count on an initial public offering, so iPierian will have to find creative ways to fund its future.

“Business development deals will be crucial,” said Bob Higgins, a general partner with Highland Capital.

“I’m not a huge biopharma investor; I like only really unique situations, and this one rang my bells, but if this is going to require hundreds of millions in private equity, it will be very hard. So we need to prove that

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this is not only very valuable to us, but also very valuable to others. If we can’t raise hundreds of millions in a combination of strategic money and an IPO, we can’t succeed.”

At its current burn rate of about $1.3 million per month, iPierian has adequate capital to operate through 2011 without partners. Matthew Plunkett, chief financial officer, estimates that the company will need $125 million from 2010 to 2014. He believes the partnership strategy should begin to provide non-dilutive capital as early as next year.

“The assumption is we can partner on three therapeutic programs and take the spending on those off our books,” Plunkett said. “The more that we have, five to eight true programs, each of which we can partner for $10-$20 million up front, the more we can make an attractive proposition for investors. But the other challenge is if we give away too much too early, there won’t be a lot of retained value here. And that will affect us as a public company, and as an acquisition target.”

Indeed, many biotech companies have discovered that promiscuous partnering can be the most dangerous dilution of all because it fritters away future profits. Also, the more complicated a web of relationships a small company weaves, the less likely it will be acquired due to potential conflicts between partners and the acquiring company.

Moving Forward Walker and the team he assembled at iPierian believe the shift from random screens, surrogate animal models and serendipity to a patient-based, cell-specific approach will be the most compelling development in drug discovery since the introduction of recombinant DNA. And indeed it is nearly impossible to imagine a scenario where it would not be to medicine’s advantage to have relevant biological studies and populationbased disease cells for drug screening and discovery.

“Considering the billions of dollars now spent on drug discovery efforts that lead to suboptimal results, a new paradigm that reduces those costs and increases the number of leads that turn into drugs will substantially improve the returns on biopharmaceutical investment,” Walker said. “Biotech companies have been built upon one or two successful molecules or upon production of essential tools for the work of others. iPierian has the chance to do both.”

Lawrence M. Fisher has written for The New York Times, Strategy + Business and many other publications. He is based in San Francisco.

The Korn/ferry insTiTuTe

TalenT

Companies are slashing prices to reach the global mass market.

But it is harder than it looks.

at the Bottom of the Pyramid

A

by Victoria Griffith

t the end of April, the pharmaceutical company AstraZeneca surprised the markets by

announcing an 11 percent jump in revenue, compared with the first three months of the previous year. The reason for the better-than-expected performance? A 19 percent increase in sales to emerging markets.

That same month, the consumer goods company Procter & Gamble celebrated a 7 percent

surge in first quarter sales, thanks to a strong performance in guess where? Emerging markets.

Household products company Unilever echoed the good news, with a 4 percent rise in sales, despite a tough market. Management cited a solid demand in emerging markets as the reason.

Sensing a pattern?

Smart companies know that their success depends on reaching consumers in developing

nations. The numbers are compelling. The combined gross domestic product of emerging markets now exceeds that of developed countries, up from one-third in 1990, according to the International Monetary Fund. Western markets are increasingly saturated, with little growth potential, while emerging country consumers are hungry for new products. Even sectors like the drug industry and high technology, which once focused on upscale items better suited to wealthy counPharmaceutical sales in China, for instance, will exceed those in France and Germany next year, according to the research company IMS Health Incorporated. Sales of drugs in Brazil will be greater than those in Britain. Last year, emerging markets represented 37 percent of that

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Michael Austin (all)

tries, are experiencing a strong surge in demand from poorer nations.

The Korn/Ferry InsTITuTe

Credit

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industry’s growth. Other sectors are looking at similar figures. Developing market sales accounted for the biggest sales gain of any Kraft Foods division between 2007 and 2009, at 33 percent annual growth, for example.

Yet selling to emerging markets is a huge challenge for Western multinationals, mainly because consumers in those markets will not accept the price points of consumers in the developed world. “It’s not an exaggeration to say this is the most pressing management issue that will face corporations over the next two decades,” said Michael Chui, a consultant on global information technology with McKinsey & Company.

Cutting prices is not just a question of printing up new price tags. The point is to cut prices without drowning in red ink. Some companies are making inroads. Unilever, for instance, has figured out that by offering shampoos, soups, detergents and other items in small sachets, poor consumers might be better able to afford its products. Procter & Gamble

What is needed are new cheap products, not old cheap products. came up with lower-tech cleaners, its “Basic” line, to better suit more restrained pocketbooks.

Jeff Immelt, CEO of General Electric, and Vijay Govindarajan, professor of international business at Tuck School of Business at Dartmouth, call this phenomenon “reverse innovation” — considering the needs of poorer consumers and working backward to create a product at a price they will find appealing. Corporations do this, in part, by simplifying. G.E.’s hand-held electrocardiogram unit, for instance, designed specifically for India, has just four buttons and a tiny printer that spits out the quality of image you get on a supermarket receipt.

The focus on simplification will continue. But to achieve the revolutionary price cuts that will be necessary to shore up emerging markets, managers will need to look beyond product design and re-examine their processes. To understand how disruptive this can be, consider a few historical examples.

Early in the last century, Henry Ford turned the car industry upside down by using assembly lines to create Model T’s for the masses. In the 1990’s, Dell took the computer industry by storm when it used a “just-in-time” inventory approach to streamline costs and build much cheaper computers. WalMart Stores created a retail revolution by leveraging supplier relationships to chop prices for shoppers. To succeed in developing countries, multinationals have to pull off these kinds of paradigm shifts. Managers are questioning the cost of

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everything, from research and development to distribution channels.

“It’s not going to be enough to lower input costs, such as labor and raw materials,” warned Peter Williamson, a professor at the Cambridge Judge School of Business and a leading thinker on the subject. ”Western companies are going to have to change their processes, and that’s why it’s problematic for them. It upsets their whole business model.”

The challenge has been made more pressing by the rise of domestic corporate powerhouses within the emerging markets. Bharti Airtel of India, for instance, has in a remarkably short time come to dominate the telecommunications business in that country. Western multinationals hoping to break in now may find it is a little late; they will confront a fierce homegrown competitor.

Some corporations in developing countries have even reached the point that they are threatening Western multinationals on their own turf. It turns out that consumers in Western nations are more price sensitive than previously thought.

Hard economic times and stagnant incomes at the lower end of the scale are boosting demand for cheaper products.

Two years ago, the Indian automotive company Tata Motors introduced to the domestic market what was billed as “the world’s cheapest car,” the Nano, priced at $2,500. Within the next couple of years, the car is expected to be available in Europe and the United States, albeit at a somewhat higher price, perhaps $8,000, to meet local safety standards. The success of companies like Tata and Bharti has served as an alarm for Western multinationals. “Every CEO in the West is now thinking about cutting prices,” said Jack W. Plunkett, CEO of Plunkett Research. “If they’re not, they shouldn’t be CEO.” In many cases, corporations in emerging markets may have the leg up on price. Western companies are burdened with what are often referred to as “legacy systems,” a “We’ve always done it this way, so why change?” attitude. “CEOs want to change things,” said Williamson. “The problem is getting everyone else in the company to go along with it.”

Multinationals’ past successes in emerging markets give them little to go on. Traditionally, they focused on aspirational goods — such as Nike shoes or Gillette razors — for the small demographic segment of emerging markets that could afford them. Now, they are going after emerging countries’ mass markets. And that is quite a different ballgame.

Bob McDonald, CEO of Procter & Gamble, sees the global mass market as the company’s future. He wants to reach one billion more consumers in poorer nations over the next decade.

Last year, he changed the company’s longstanding slogan to reflect the new thinking. Instead of “Touching and Improving Lives,” the corporate motto is now “Touching and Improving More Consumers’ Lives in More Parts of the World.”

The company currently sells its products to about 60 percent of the Chinese population; it wants to reach 100 percent.

The Korn/Ferry InsTITuTe

Other corporations have similar aspirations, and the shifting goals are reverberating around boardrooms all over the world. It is a radical departure; most Western companies are simply not used to the type of customers they are now pursuing. Most of the world’s population still lives well below the level most Westerners would consider middle class.

The average per capita income in the United States is just over $46,000, according to the International Monetary Fund; in China, it is less than $4,000, and in India, about $1,000.

Two-thirds of India’s population of 1.5 billion lives in remote, rural village areas.

The race for the bottom of the consumer market is turning traditional management thinking on its head. Multinationals, for instance, have traditionally striven not for cheaper products, but for better products. Gillette’s twobladed razor morphed into the three-bladed razor, which eventually became the Mach3.

The high-technology sector has historically introduced new products to early adopters at a high price, and then gradually moved the product down the consumer chain. This formula does not work for the world’s mass markets. “By the time the product is cheap enough to reach consumers in the villages of India, it may be obsolete,” said Williamson.

“Emerging market buyers want cheap products, but not out-

BrIeFIngs on TalenT & leadershIp

dated ones.” Chui agreed, adding that products developed for Western consumers may not have the durability, reliability and portability necessary for them to compete in the emerging world. What is needed are new cheap products, not old cheap products.

Western corporations may also have a bias toward product over process innovation. John Seely Brown, former chief scientist for Xerox Corporation, calls this a fascination with “big bang” innovation. The tendency for multinationals to focus on the next big idea — from supercomputers and blockbuster pharmaceuticals to alternative energy and nanotechnology — will ultimately prove harmful, he argues. Instead, corporations should focus on improvements in process, and on smaller, incremental breakthroughs.

Corporations need to make the distinction between the world’s poor and the world’s very poor, said Martin Fisher, co-founder and CEO of KickStart, a nonprofit that sells $100 water pumps to farmers in Africa. The economic situation of very poor consumers is distinct from that of the less poor.

They have uneven cash flow. During harvest time, for instance, very poor farmers get a lot of money in at once; when it comes time to pay school fees for their children, they have a large outflow of funds. Trying to sell them something when they have no cash is probably pointless. Marketing products that

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can save them time will probably also be fruitless, because time is something many of the world’s poorest have in abundance, said Fisher.

Even in the most poverty-stricken corners of the world, however, people do buy things. And because what they buy is often relatively expensive and of low quality, there is an opportunity to make inroads. “They buy salt, cooking oil, cosmetics and other goods,” Fisher explained. “If you can access those markets, you can make money.” Chui believes it is a mistake to treat all emerging markets as one but that even the poorest consumers cannot be ignored. “I was speaking with someone in the Sudan the other day, and he told me even people without an address, without a home, have cell phones,” he observed.

Despite the challenges, some companies, based both in emerging markets and developed nations, are breaking new ground in the race to produce inexpensive goods appealing to poor people. Their ability to reach poor consumers effectively is intensifying competition. It is also providing a road map to those savvy enough to pay attention.

Following are some of the ways these companies are succeeding in this endeavor.

Simplify, Simplify Earlier in the decade, teams of Procter & Gamble researchers spent time with — in some cases actually lived with — average Brazilians to figure out why they were not using the company’s products. The main finding, unsurprisingly, was that Procter & Gamble’s goods were just too expensive. But the researchers also made another observation: cleaners that homeown-

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ers in the West might turn up their noses at would go a long way toward improving the domestic lives of most Brazilians.

For instance, most people could not afford “new and improved” Tide, with all its cutting-edge cleaning abilities. Yet the alternative was to spend hours pre-scrubbing dirty clothes. Armed with this knowledge, Procter & Gamble introduced a new line of simplified products, including a detergent that still eliminated the need for pre-scrubbing. As a result, Procter & Gamble quickly grabbed a bigger market share.

Procter & Gamble calls this strategy “simplification,” and it has become commonplace across a broad range of sectors.

In April of this year, for instance, Vodafone worked with the Norwegian browser maker Opera Software to come up with a browser equipped to run on the low-end voice handsets commonly used in emerging markets. General Electric is now selling a hand-held electrocardiogram that sells for a fraction of the larger model’s price. A variety of companies, including Unilever, are also offering products in more affordable packages, e.g., cell phones that calculate usage by the minute rather than the hour and small sachets of soaps and cleansers.

Designing a product specifically for a developing market is not a new concept. Corporations have been thinking “glocally” for years; Colgate-Palmolive sells tea-flavored toothpaste in China, for instance, and McDonald’s offers lamb burgers in India. What is different now is the focus on price.

Lamb burgers and tea-flavored toothpaste may not have widespread appeal; cheaper electronics do.

While the concept of reverse innovation has received a lot of attention, Williamson believes even greater — and largely untapped — potential lies in “horizontal innovation.”

The Korn/Ferry InsTITuTe

One thing all developing nations have in common is the need for cheaper goods. A well-priced product that does well in one emerging market is likely to do well in another.

Research and development can account for a large chunk of the cost of a new product. Cutting down on such expenditures has therefore become vital to achieve innovation on the cheap. A few companies, such as the pharmaceutical giant GlaxoSmithKline of Britain, are trying to reduce their overall amount of research and development so that they can pass the savings on to consumers in the developing world.

“In the drug industry, we’ll probably see companies bringing in products from smaller biotechnology groups, in licensing kinds of deals, rather than try to do it all in house, which is very expensive,” said Vishal Manchanda, senior equity analyst at the pharmaceutical research company Mehta Partners.

Corporations can also slice budgets by moving research operations to emerging markets. More pharmaceutical companies, for example, are looking into conducting clinical trials — drug testing in humans — outside of the developed world. The new Bangalore facility of the computer company Cisco Systems is expected to take on half of the company’s research and development functions over the next few years.

“There are a lot of talented people in emerging markets, and the talent there is generally cheaper,” said Chui.

an industry competitor. Battery manufacturing was considered a capital-intensive process, involving, among other things, $100,000 robotic arms. Emerging markets have cheap labor, but they have traditionally been short on funding for capital investments.

Wang Chuanfu, a Chinese entrepreneur who founded the BYD Company in 1995, questioned this notion. For the cost of a few robotic arms, Chuanfu reasoned he could afford to hire thousands of employees. Westerners countered that these workers would be too low-skilled to replicate the work of robots. Adapting for his employees’ low skill set, Chuanfu divided the battery manufacturing process into more than 100 small steps. The steps are so specific that in the charge and discharge phase, for instance, a single group of workers loosens tape on the batteries before sending them to another group of workers, which removes the tape entirely. Chuanfu also instituted strict quality controls and tests at each step to ensure that the final product would be up to par.

By 2002, the BYD Company had become the second-largest rechargeable battery maker in the world. Two years ago, Warren E. Buffett took a large stake in the company, which is now moving into the manufacture of electric cars. Manufacturing breakthroughs remain BYD’s focus. Just one-third of the company’s research and development budget is allocated to product innovation; the other two-thirds are used to come up with ways to cut costs on the manufacturing line.

Low-Cost Manufacturing

Outsourcing on Steroids

In the mid-1990’s, most battery manufacturers would have laughed at the notion that a Chinese operation could become

When Bharti, the Indian telecom company, opted to outsource its information technology functions to I.B.M. in

Bargain Research and Development

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2004, it was not considered a radical move. Companies have been outsourcing functions, after all, for decades. But Bharti broke new ground by taking the concept of outsourcing to extremes. Early on, the company decided it would keep only sales and marketing in-house. Bharti splits network operations between Nokia and Ericsson, and it recently handed the management of its landlines and broadband access to AlcatelLucent. This strategy has permitted the company to build a massive operation quickly with minimal investment. Bharti now has 131 million customers served by just 30,000 employees.

Outsourcing “allows us to focus on our business processes, on our organizational construct and how it is we really bring to bear what it takes to deliver services to our customer,” said Jai Menon, director of information technology for Bharti.

The company is now accepting bids to outsource management of its fiber-optic cables, which transmit voice and data between cities.

New Distribution Channels In the 1990s, the cosmetics company Avon Products was in a funk. Nobody seemed to want the company’s products anymore, and its marketing and distribution strategy — remember the “Avon calling” commercials — seemed out-of-date. The company considered scrapping its “Avon girls” sales force, ordinary people who worked strictly on commission, and moving into department store sales.

Instead, the company banked on the developing market, with resounding success. In Brazil, for instance, women with little access to the traditional job market warmed instantly to the Avon girl model. This intrepid, low-cost sales force is able to penetrate areas traditional sales representatives would shun. Avon representatives sell their products everywhere, from the highest-crime, urban areas in the country to remote areas of the rain forest. Last year, Avon revenue in Brazil hit $1.67 billion, exceeding sales in the United States.

Nokia has hit on a similar strategy in emerging markets.

To more efficiently obtain access to emerging markets, the Finnish company markets its handsets through more than 300 distribution centers. The company has become adept at reaching isolated consumers. In India, for instance, representatives bump along rutted country roads in easy-to-recognize blue vans, stopping in rural villages to explain to potential customers how to use the product. The strategy has helped Nokia grab a 37 percent market share of mobile phone sales worldwide.

Marketing on the Cheap Advertising and marketing are perhaps the most difficult areas in which to innovate to reduce costs in developing countries. Consumers in these markets do not have the same level of brand loyalty as their Western counterparts. One study, for instance, by Kenneth G. Lieberthal, a senior fellow at Brook-

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ings, and C.K. Prahalad, a professor at the University of Michigan until his death earlier this year, noted that the average Indian consumer samples more than three times the number of new brands as the average consumer in the United States.

To be effective, marketing must be highly differentiated.

Television commercials, for instance, are probably a good bet in Brazil, where most people at least have access to a television. But they are likely to fall flat in rural Africa, where people’s main source of information and entertainment is likely to be a radio. Multinationals are experimenting. For instance, Pfizer has formed alliances with physicians in Venezuela to get them to prescribe its medications.

Fisher of KickStart believes some of the techniques used in the 1950s in the United States are relevant to developing markets now — think Tupperware parties and product demonstrations at the local store. To sell its irrigation pumps, for instance, KickStart sponsors competitions at local fairs, handing out a free pump to the person who gets the most correct answers in a game show-like format.

And persistence pays off. The Coca-Cola Company, for instance, lost money for years in Africa. But its operation there has finally turned profitable. And it is predicted that its sales in the region will rise 10 percent annually over the next few years, a nice reward for a long-term investment.

Overhauling Organizational Structure Corporations are searching for low-cost ways to gain a foothold in emerging markets. Joint ventures and partnerships, in particular, have become popular, and it seems a new one is announced every day in the financial press.

But the expertise residing within the individual collaborators may not be as easily leveraged as managers hope. Williamson of the University of Cambridge believes the winning formula, instead, will be wholly owned subsidiaries that can take on some of the management tasks traditionally performed in the West. A few companies are making this radical shift. Koninklijke Philips Electronics’ television business, for example, is effectively run out of China now. Cisco is transferring much of its research and development — and some of its top executives — to its new base in Bangalore, India.

This kind of power shift will not be easy to pull off though. “In many cases, it makes sense to let emerging markets subsidiaries run entire divisions,” said Williamson. “But this is hard for Western managers to accept. The instinct is to want to run everything from headquarters.”

Chui thinks there is room for partnerships and joint ventures as well as subsidiaries. But he says the size of a company’s commitment matters. “The bigger the investment, the more the corporation is likely to learn,” he observed.

A long-time correspondent for The Financial Times, Victoria Griffith covers business from Boston.

The Korn/Ferry InsTITuTe

down time

Top: © Robert Mankoff/The New Yorker Collection/www.cartoonbank.com. Bottom: © Leo Cullum/The New Yorker Collection/www.cartoonbank.com

You can avoid reality, but you cannot avoid the consequences of avoiding reality.

Briefings on TalenT & leadership

—Ayn Rand

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TalenT

The

Down UpsiDe

w

Company

An Interview With

hen Vineet Nayar, the 48year-old chief executive of HCL Technologies Limited, took the stage at the company’s fifth annual global conference in April in Orlando, Fla., he signaled for some heavy Bollywood disco music and began to shimmy and shake across the stage with his best Elaine Benes dance moves. The 1,000 HCL employees and customers roared and egged him on as the evening’s festive party turned into a raucous Bollywood extravaganza, replete with actresses, dancers and a faux wedding. The $2.6 billion global information technology services firm based in Noida, India, had reason to celebrate, having emerged from the recession with stunning growth and newfound global recognition.

Since 2005, when Nayar took over as CEO, revenue and operating income more than tripled, the number of HCL customers grew fivefold, attrition among the 58,000 employees in 26 countries dropped by 50 percent, and HCL was named “Best Employer” in India and Asia by Hewitt Associates.

Nayar, with a decidedly unconventional leadership style,

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has gained star status in the business press and academic circles for his atypical views on how to run a company. His new book, “Employees First, Customers Second,” was published in June by Harvard Business Publishing, and Nayar is suddenly in demand. His methods would be considered unusual anywhere, but for a giant Indian information technology services firm, he was well out on the fringe.

When Nayar became CEO, the company, a pioneer in India’s emerging IT services sector at its inception in 1976, was rapidly losing its luster. HCL was among India’s top five information technology companies along with Infosys Technologies Limited and Wipro IT Business. But by 2005, it had become stagnant, with slowing growth and declining market share. The company needed a shake-up, and Nayar injected new life with an overhaul of the company’s culture. His belief that putting employees at the top of the value pyramid rather than at the bottom was viewed as aberrant in India’s conservative corporate culture. But Nayar, who graduated from one of India’s top business schools and joined HCL as a young M.B.A., is a self-proclaimed “sucker for transformation,” and

Credit

Vineet Nayar, CEO Of HCL Technologies Limited

The Korn/Ferry InsTITuTe

Credit

BrIeFIngs on TalenT & leadershIp

he had long believed that command-and-control, top-down leadership was ineffective and suffocating for employees.

In his new book, Nayar wrote, “The role of leadership is perhaps the most difficult to define in companies that compete in a knowledge economy. One of the structural flaws of traditional management systems is that the leader holds too much power. That prevents the organization from becoming democratized and the energy of the employees from being released.”

Nayar had heard many CEOs claim that their people were the company’s most important asset, but few actually walked the talk. In order to truly empower employees, “you must stop thinking of yourself as the only source of change,” Nayar wrote. “You must avoid the urge to answer every question or provide a solution to every problem.”

Taking a leap of faith, Nayar turned the organization upside down, putting employees who create the real value in the company at the top so they would no longer be hampered by the managers and executives. In this new HCL, the managers became accountable to the people who created the value.

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Having grown up in a small town in the foothills of the Himalayas in northern India, Nayar has always been inspired by mountains. “You always want to climb them, and you always want to look beyond them,” he said. In this interview with Glenn Rifkin, a contributing editor for Briefings on Talent & Leadership, at the Orlando global conference, Nayar talked about looking beyond the mountains in his management philosophy and the impact of his outlook on HCL. In reading your new book, “Employees First, Customers Second,” one gets the feeling that you have developed great insight into what motivates people. Where did that come from?

NAYAR: I’ve floundered my way into these opinions and therefore, in hindsight, the book looks impressive. In fact, these opinions are the results of lots of experiments, so the last impression I want to give is that I have any foresight on human behavior. However, I love people. And the question I ask is, “Who’s the person? Is the person someone who walks into the company?” In my own case, most of my life, the person who walked into the company was actually not me, at least not all of me. It was a very small percentage of me. I’m a father. I’m a sports enthusiast. I’m a social worker. I’m a son. I like my movies. I like to read some crazy books. And also I understand technology. And most of my life, HCL actually took only one part of me, which is the part that understands technology. And I’m very good at it. Therefore, they loved me for that. But they left the other seven elements out. So the more I thought about that, the better I understood that the more of those seven complements that we can bring inside the organization, the more beautiful the organization becomes.

Among your innovations is the way you have inverted the pyramid within HCL, making employees first. What was the most important part of that transition?

NAYAR: The real initiative isn’t employees first because most companies will get that wrong. The key is customers second.

And let me explain what I mean. I see a zone of control and a zone of value. Traditionally, the zone of control — i.e., the managers, the office of the CEO — was very closely linked to the zone of value. The entrepreneur who created the company, he was an engineer, an auditing guy, a manufacturing expert, and everything that happened was linked to his expertise. The guy in control was the guy creating the value. But with the emergence of the knowledge economy, the Internet, emerging global markets, service industries and business complexity, the zone of control remained where it was, in the CEO’s office or with the managers. But the value zone has moved far away into the interface between customers and employees. Suddenly, you have an organization where the control zone and value zone are far apart. If you try to spread your legs as far as you can, there’s no way you can walk. So

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one of the reasons so many large companies are struggling and unable to grow is they have spread legs. And that was true with HCL Technologies when I took over.

How did you address that?

NAYAR: The first thing we discovered as a team was the fact that the person in control was actually not creating any value, and the people who were creating value had no control. So we created what I call a star organization. The control pyramid remains in place because you need it for governance and compensation and important organizational structures. But we also inverted the pyramid, placed it over the control pyramid and created a star so the people who are creating the value gained control as well.

So you created a star.

NAYAR: We created a star. Now let me take it to the next level.

With each passing day, you learn more. And when I was explaining this concept of employee first to a group of very young people at work, they began to debate with me. One fellow said, “You know, you are old.” And I said, “Why?” He said, “Because you think in straight lines.” And I said, “What does that mean?” He said, “Young people like us are always collaborating, so we are circles. You see it as the pyramid you have made into a star. Now you need to make it a sphere.”

Which is what the collaborative enterprise really is.

“One of the most important parts of life Interesting take on the concept.

NAYAR: It was interesting. And by the way, none of these are my ideas. But once they told me I had to think about a sphere, I said, “Okay, so how do I create the next generation organization which looks like a sphere and there are concentric circles that are collaborating among themselves and the straight lines are gone?” These catalyst kinds of ideas have a big impact, and they allowed us to move very fast.

These ideas would be challenging anywhere, but I think they would be particularly difficult to implement in India, with its more conservative corporate culture. Did people look at you as if you had just arrived from Mars?

NAYAR: Well, the first thing is that 95 percent of our revenues come from outside of India. We have about 6,000 employees in the U.S. alone; the same number in Europe and also in some other countries. So we have a huge global work force.

I was in search of an idea which had global implications and was culturally agnostic. It didn’t matter if I was Indian or European or a Swede or a German because it had to connect the whole company. “Employees First, Customers Second” has

The Korn/Ferry InsTITuTe

is to be very honest and realize that you don’t know what you don’t know.” nothing to do with the control pyramid, because that is cultural. For example, the Americans would be a lot more empowered, and the Indians and the Chinese would maybe be a lot more structured and aligned. I didn’t touch any of that. I just inverted the value pyramid, so when it comes to creating value, who is the smartest? The guy in the value zone, and that goes across cultures.

JT Morrow (all)

And it is easy to understand.

NAYAR: It is easy to understand. If you want to make a good transformation, do not take big steps trying to lead massive transformation initiatives. Take small catalyst actions which create huge multiple impacts. For example, we opened up the 360-degree review so that anyone in the organization can see the results. Though this certainly created some concern among managers and executives, it would mean the manager’s boss would become far less powerful in the process, just one voice among many. The team in the value zone would be determining the results of the review, a significant step to inverting the pyramid, and you start running much faster than you ever did before.

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Was there a moment during this transformation when you felt it was really kicking in?

NAYAR: One of the most important parts of life is to be very honest and realize that you don’t know what you don’t know. The first time I met with all the employees, I told them very clearly that I don’t know, which was true. Because we are involved with very complex technologies and have complex customers and if they were to look up to me, I knew I didn’t have the answers. I realized later that was the moment that the transfer of ownership of change started happening. I said, “You have a buffoon of a CEO who has come in, so you might as well do something if you want to survive.” A second thing I realized early was that instead of trying to convince everybody, I only had to convince what I call the “transformers,” the people who were just waiting for a conductor to call, “All aboard,” as opposed to the lost souls, who sit in meetings with frowns on their faces, and the fence sitters, the largest group, who watch and wait for something to happen. It was just a few people who were convinced this was a radical idea, and it got them excited so we could move forward.

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You speak in the book about instituting the “mirror-mirror” exercise when you took over as CEO. You asked every employee to look in the mirror and truthfully and openly assess what they saw. What was the impact?

NAYAR: “Mirror-mirror” triggered the kind of honest conversation that got the company excited. These employees were suddenly washing dirty linen in public, and they had never seen this as part of our culture before. The result was that we created trust.

But it still takes more for the transformation to really take effect.

NAYAR: Right. Once we were very clear that it’s not about the love for employees but the love for growth, that brought employee-centricity to the forefront as a strategic initiative for competitive differentiation. But once you are zoned in, the question is, “How do you make the transformation happen?”

Step one of the transformation is learning from the past.

When you think about great leaders, heroes like Gandhi and Nelson Mandela, what they did was they created dissatisfaction with today. There are lots of companies which are not growing, but I don’t think they’re unhappy with themselves. So the first thing you need to do is make them unhappy with themselves, and then you need to create the romance of tomorrow, where you can be free or you can be great or you can be number one.

And then you must tie those strategies together. And that’s what the “mirror-mirror” exercise is all about.

Thus, unless you become uncomfortable with who you are, you will not stop being an ant. You can be a fast ant, you can be a rich ant, but you’re still an ant and you’ll never be a butterfly.

And that is just the beginning of the transformation?

How did this translate into value creation?

NAYAR: I think the first logical question to ask is, “What is the business of the company?” To create value. The second question is, “Where is the value being created?” In the interface between the employee and the customer. Okay. So what should the business of management be? To maximize the value creation. How can management maximize the value creation?

By being in the business of enabling, enthusing, encouraging.

And not by controlling. So once we understood the logic in all of this, we were very clear that if the management focuses on the employees, the value for the customers will be created as a competitive advantage.

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NAYAR: Yes. One thing I saw early on was that we didn’t do a good job of having a transparent, trust-based relationship with our employees.

So the trust quotient between the employees and the management was very low. On the other side, the complexity of business was very high. You need to transform, you need to go to emerging markets, you need to drop your price, you need to compete, and for all that, you need employee innovation. In this era of the pink slip, you now have disenchanted employees because of the way you behaved, not with the people you fired but with the people who remain. You are putting them in uncertain situations, and every time they come to the office, they wonder if a pink slip is waiting. The employee doesn’t trust you, and so you’ll have maybe one-tenth of that employee coming to the office. You have to create a culture of trust, and that can only happen by pushing the envelope of transparency.

The Korn/Ferry InsTITuTe

This is a lot tougher than you make it sound.

Gen Y?

NAYAR: The last part, which is extremely important, is to transfer the ownership of change. Once you do that, beautiful things happen. This is how revolutions happen. Nelson Mandela is a great example. He is no longer the president of South Africa, but the amount of transformation and influence he has brought there is significant. When he had the opportunity, he kept himself behind the scenes rather than out front. Nobody else could have done what he has done.

NAYAR: Yes, Gen Y is coming to the company. So how can you maintain the old management style? There is a fantastic opportunity for young managers to adopt a new management style, maybe this, or maybe something else. I hope this book acts as a trigger of thought and experimentation. With the Facebook generation, you have to get deep into what they are thinking and transform your management style to galvanize them. Your ability to deliver transformation is based on this.

This all sounds fine on paper, but I suspect some skeptics will ask, “Can this work for my company?” A lot of corporate leaders are just not comfortable letting go in the way you are suggesting.

How then would you define leadership?

NAYAR: This book is not meant for the CEOs. This book is meant for managers. The question is, “Why do you have to depend on your CEO to change anything?”

Because he gets paid $10 million a year plus bonus.

NAYAR: Forget it. You have to ask yourself, “Are you in the business of making your company better or evolving as a better manager?” That’s the first question to ask. The second is, “Because there are so many skeptics, is there an opportunity?” If everybody gets it, everybody can do it. So what’s the competitive differentiation? There is an opportunity to translate this into competitive advantage because there are so many people out there who don’t get it. Because it needs more than intellect. It needs application. It needs you to take the leap of faith. So if you are a person who gets it and has the capability to take the leap of faith, you actually will outperform everybody else as a team leader.

You will be able to galvanize the entire team, and you will grow much faster.

You say your role as a father taught you lessons?

NAYAR: The family unit has always been about command and control, but it has to evolve. When my dad told me to do engineering, I did. When I told my son I did engineering, he said, “That’s what I will not do! Why? Because that’s what you did!” So if the family unit is to survive, it’ll move toward collaboration. I now tell my children, “I want to be a friend of yours. When you have your first girlfriend or boyfriend, I should be the first to know.” As a father, you learn a lot.

Today, the kids’ aspirations are different, their attitudes are different, their way of collaboration is different and the world is very different, and unfortunately, today, our structures make them square pegs in round holes. Thinking about this got me hugely interested in the “how” of running companies rather than the “what” of running companies. So as the family unit is changing, you must understand that these young people are coming into the companies, and they too need to change.

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NAYAR: It’s very difficult to say. In a Facebook culture, the concept called “leadership” doesn’t exist. We have an obsession with the word leadership. I believe in a collaborative enterprise like Facebook. Who’s the leader? If I want to buy a skateboard, you may be the leader, or if I want to find a good restaurant, someone else might be the leader. Worldwide, 50 percent of the population is less than 25 years old. For them, who’s the leader? There is no leader. They have role models for what is relevant. And everybody has maybe 10 or 15 role models. Some in music. Some in video. Some in social enterprise.

So when somebody asks me what kind of a leader I am, I shudder to think because I don’t have the answer. I don’t truly believe in the concept called “omnipresent leader.” Leadership should be finding role models and connecting them with the people who need those role models.

Not everyone is comfortable with so many choices and so much freedom. Are there people who would not be comfortable at HCL, so you simply do not hire them? Can you know that about people when you are in the hiring process?

NAYAR: In the end, basically, you join a company to be successful. If “Employees First, Customers Second” makes you successful, you’ll adopt it. If it doesn’t, you’ll resist it. It doesn’t matter if it is a corporate culture or written in blue or red.

Does it work? In HCL, in these five years, we have role models who have adopted this and it made them successful. So new employees are not adopting it because they are convinced about it; they are adopting it because it is going to make them successful. We are not in the business of brainwashing you.

Are your reward systems tied to all this? Are there incentives for employees to adopt your methods? Do you pay more than your competitors?

NAYAR: I think there are two very important fundamental issues. Number one, HCL pays as much as it was paying in 2005, when I took over. So there has been no compensation policy changed. The basis of your question is, “Is reward important or recognition important?”

Yes.

NAYAR: Both are, but reward without recognition is a single

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boring line. In fact, in our 360-degree review, when someone gets great scores and everybody in the company sees them, what do you think happens to you? You get extremely motivated. You get recognized. And when employees send a message to the manager that a thousand of us think you are very great? You walk on water that day.

But eventually, you want to buy your house and pay for your kids’ college.

NAYAR: I’m saying we are liberal in our compensation. It’s not an issue. But compensation is table stakes; it’s not the differentiating factor.

A key part of your concept is reverse accountability. You talk about the fact that employees are accountable, not only to their immediate managers but also to enabling functions like finance, HR, quality assurance, service, etc.

How do you turn that around on itself?

NAYAR: We used to believe that our kids were accountable to us, and we were not accountable to them. But nowadays, many parents feel accountable to their children: that their actions, inactions, behaviors, ideas play a big role in influencing their children. How does that apply within an organization? Employees must be accountable to you because you believe control, governance, all that with which we surround ourselves in organizations is very important. So we said, “Okay. Now how can we invert it?” Keep in mind, the enabling functions like HR and finance create no value in the value zone; they enable it. But because of SEC regulations and other factors, they suddenly became very important. They control the value zone without adding any value to it. So I said, “How can we make them and the managers accountable to this value zone?” We created what we call a “Smart Service Desk,” which allows any employee who has a problem to open a trouble ticket on any of the enabling functions. It is similar to the process we use with customers. The open ticket allows a problem to be tracked from the outset until it is resolved. By instituting a similar process internally for employees and the enabling functions, we were able to create a transparent, efficient system for resolving internal issues. The employee who opened the ticket determines when the problem is sufficiently resolved.

is no longer the hand of God. Instead, we will measure those managers by the value they are creating for the employee, and everyone will see that value through the 360-degree evaluation. Through this, we created reverse accountability.

Of course, this requires a tremendous amount of transparency, which could be potentially dangerous, especially in the financial sector or pharmaceuticals or businesses where information is so crucial.

NAYAR: If you become fearful of your competitors, are you also afraid of what happens when two of your employees working on the same project don’t know what is happening in the project? Which is worse? We have most HCL people in synch, marching in one direction. But does some information leak?

Of course it does. But it would leak anyway. I think the power of collaboration through transparency and the trust it creates is a significantly higher gain than the potential negatives.

And there have been negatives. We’ve had a lot of information leak out which put us in very embarrassing positions.

But that’s fine. You make choices in life.

Is there an example of a negative impact?

NAYAR: When a team knew that it was not doing well, it caused demotivation. And if the manager is not capable of handling that demotivation, we have attrition. People don’t want to be working on failed projects or failed businesses.

So you lost some people?

NAYAR: We lost some people. And there were also instances where it didn’t work when things were going extremely well.

People became lazy. But here’s what happened. Those projects which were not doing well suddenly attracted a lot of transformers and they said, “Vineet, give me a chance. I’ll turn it around.” They motivated the team by saying, “Hey guys, we are not doing well. Here’s an opportunity of turning it around.” And you know what? The organization notices turnaround more than it notes happy projects. So suddenly you attracted the right talent to turn around a bad business. And in the end, it turned out positive.

How about the managers?

The transformation at HCL is a continuing metamorphosis, a work in progress. What keeps you up at night when you think about the future?

NAYAR: When you are in trouble, you go to your manager and he or she picks up the phone and makes a call to a friend and fixes things for you. I call that “the hand of God” role. That’s the manager’s value add — not in solving your problem or empowering you or doing anything. It’s just this hand of God role. If the call isn’t made, you don’t get your bonus or something bad happens to you. The manager is not creating value for the value zone. And if information is available to everyone and access to services is available to everybody, the manager

NAYAR: Sustainability. I think the experimental journey we have begun has worked for the last five years. But I still believe that I’m standing on the ledge of a burning building predominantly because I don’t think we have even started understanding how to involve the human being. My book is really all about putting the human being back in business and involving the whole person rather than one part of the person.

I do not think we have done justice toward that objective.

We have just taken one step forward.

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Credit

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The Korn/Ferry InsTITuTe

governance

CASE STUDY: BP in the Gulf By now, the story is well known. On April 20, 2010,

and both BP and the federal government were under

BP’s Deepwater Horizon oil rig exploded, killing 11

intense scrutiny and criticism for the handling of

rig workers and setting off a massive oil leak at the

the crisis.

mouth of the damaged deep-ocean well. Months later,

From a public relations point of view, it was every

the ruptured well, situated 50 miles off the Louisiana

CEO’s nightmare come true. BP’s share price plunged

coast, continued to spew millions of barrels of oil into

and eight weeks into the crisis, the company’s stock

the Gulf of Mexico, causing an

had lost nearly half its value.

ever-widening spread of de-

President Obama expressed

struction and despair among fishermen, residents and businesses that depend on the pristine waters and beaches of the Gulf for a livelihood. From an economic, political and brand perspective, few corporate disasters in industrial history can

“Do the

Right

Th ng ”

$50 million advertising campaign to try to salvage its image and had announced it would pay a dividend to shareholders over the summer. BP, he insisted, should be spending its money on repaying the victims

match the situation in which BP

of the spill. In a speech broad-

finds itself.

cast live from the Oval Office,

At this writing, after three months of gushing

Asaf Hanuka

outrage that BP had initiated a

President Obama said, “We will make BP pay for the

oil, an underwater camera displayed that the oil had

damage their company has caused.” The next day,

finally ceased to flow. BP issued a statement urging

BP’s then-CEO, Tony Hayward, and chairman, Carl-

caution, but also indicating that the leak had most

Henric Svanberg, were summoned to the White

likely been plugged. At the same time, more than

House, where they agreed to put $20 billion into

30,000 vessels, large and small, were scouring the

an escrow account to pay for damages and to cancel

Gulf to clean up the oil. The company had come un-

stockholder dividends for the year. Svanberg then

der fire from all sides — environmentalists, Gulf Coast

held a press conference during which he apologized

residents, business executives, the media and the

for the accident. Shortly after, Hayward removed

president of the United States — and seemed at a loss

himself from day-to-day oversight of the disaster

as to how to put an end to the crisis. In fact, media

and put an American, Robert Dudley, in charge.

reports stressed the chaotic nature of the situation,

Dudley then replaced Hayward as BP’s CEO.

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BP, it turned out, was not unfamiliar with oil-related disasters. In 2005, at its Johnson City, Tex., oil refinery, an explosion killed 15 workers, an event later attributed at least partially to cost-cutting. In 2006, a BP oil pipeline ruptured and spilled more than 200,000 gallons of oil into Prudhoe Bay in Alaska. With such a track record, BP is receiving very little compassion from its critics.

Though BP is a highly profitable and cash-rich giant ($17 billion in profits in 2009), the first whispers on Wall Street were heard in June that the company might indeed have trouble surviving this crisis intact.Rumors of a potential takeover or even bankruptcy were rampant as BP’s shares tumbled and litigants began lining up. Hayward responded by putting out a statement: “There is no objective justification for this share price movement.” This followed an earlier press statement in which he told reporters: “There’s no one who wants this over more than I do. I’d like my life back.” That statement met with widespread criticism.

As the weeks passed, BP’s troubles mounted. Oil continued to flow from the damaged wellhead, and estimates of the actual amount of oil being lost grew exponentially from 1,000 barrels a day, when the crisis began, to as many as 60,000 barrels a day, at this writing. Unable to cap the damaged well, BP’s efforts to focus on both the cleanup and its damaged corporate reputation were under increasing pressure. Britain’s new prime minister, David Cameron, weighed in and suggested that BP was being unfairly criticized in the United States. For its part, BP continued its advertising to try to reassure the public that it was not only sorry for the situation but was also committed to making it right, no matter the cost.

For BP’s board, executives and shareholders, the company’s future was enshrouded in a dark cloud. How would BP recapture its business momentum in the light of a catastrophe of this scope? As this case study unfolded, Briefings asked four crisis and risk management experts to weigh in.

When I speak on crisis leadership, one of the points I make is that it is what you do between the crises that really counts.

You have to look at lessons learned, imagine the risk you are dealing with, strategize, plan, exercise and train. You have to do all these things and even if you don’t identify a risk beforehand, you will be better prepared to address it if it happens. BP, for example, was not new to catastrophic events. The company’s prior oil disasters should have been fresh in executives’ minds.

In addition, executives need to identify the players who are going to be in place when a crisis happens. There is a whole range of advisers you will be depending on, and they have to be identified in advance.

I’m convinced that a fair number of corporate lawyers are advising BP’s CEO and telling him what he cannot do and not enough advisers are telling him what he can do. Every company in the universe ought to be learning from this crisis. You won’t be able to identify every risk. But the more you’ve worked and exercised on what you can identify, the better it sets up behavior patterns and organizational patterns on how you might deal with something you didn’t imagine.

Once a crisis is under control, corporate leadership must focus with laser intensity on what was learned and what will be done differently in the future. Let me tell you how hard that is. You’ve got people working as hard as they can on a crisis, and then you bring in a team to do a post-mortem. It is as hard to be really self-critical as it was to deal with the crisis in the first place. But as a leader, you have to have the fortitude to do it.

There is no book to read for the next time.

Another key lesson: Values matter. There’s an important difference between doing the right thing and doing things right. All the lawyers will tell you to do things right, but you want to do the right thing. The right thing is to be open and share. A CEO sets the course and tone about what are the important values. You are taking care of people, being transparent, open, honest, sharing facts, acting when you can, communicating. Those are critical things you have to do. But from the lawyers’ perspective, being open may not be doing it right.

Also, you must communicate. In a disaster, there’s no such thing as communicating too much. BP has been reactive and defensive. Both the administration and BP are to blame for not communicating clearly what is going on. Early estimates of the damage, the scope of the spill, the existence of underwater oil plumes and a list of possible solutions were all ambiguous and misleading. Things had to be dragged out of BP. There was a sense that it was hiding something.

The board of directors has a key role as well. They must

“There’s an important difference between doing the right thing and doing things right.”

Marty Evans

Rear Adm. , retired, United States Navy, president and CEO of the American Red Cross during and after Hurricane Katrina.

I had the Tony Hayward role at the Red Cross during Hurricane Katrina, then Rita and Wilma too, which came back to back. So I am very sensitive to the BP role in this situation. We had a long-term problem, which required coordinated, joint solutions with many player agents in the mix. People say, “Something should be done.” But sometimes, nothing can be done — at least not as fast as everyone would want.

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find the right CEO. Some people are great leaders but become paralyzed during crises. They just don’t have a natural gift to connect and communicate with the constituencies that they need to connect with. More than ever, it is up to the board of directors to evaluate and hire the right CEO, especially for companies in high-risk industries like oil and finance.

Though it isn’t easy to illuminate in advance how any individual will react in a crisis, corporate boards must do everything possible to identify individuals with not just day-to-day operational skills but with the skill set required to be effective leaders during a crisis.

of the reason was that we didn’t have the Internet then. Today, we have millions of people, all of whom are essentially reporters. Everyone has video, audio, print and an instant way to share all of it. The potential for reputational damage today is several orders of magnitude higher than it was for Exxon.

This incident will live on longer for BP.

Jonathan Bernstein, president of Bern-

stein Crisis Management Inc. in Los Angeles and author of the book, “Keeping the Wolves at Bay.” This is a seminal moment for BP and for the oil industry.

What they do in handling this could determine whether this country finally turns in the direction of finding a safer way of getting energy. It is the oil industry’s equivalent of a nuclear reactor meltdown. For BP’s leaders, there are very few options.

Whatever their technical legal liability is, they’ve been so severely damaged because of their lack of advanced preparedness that my recommendation would be to be bold and proactive. For any chance to salvage the company’s reputation, they should make a public pledge to liquidate any assets they need to in order to make things financially right for everybody damaged, regardless of whether BP is required to or not. They’ve got the assets with which to compensate the fishing industry, the tourist industry and everybody who has been damaged there.

The only thing a CEO should do in this kind of situation is express tremendous remorse for what has happened and tell people what the company is going to do to make it right and prevent it from happening again. It’s very important to come across as being on top and in control, even if in many respects you are not. For example, Rudy Giuliani, New York’s mayor when Sept. 11 happened, was an excellent role model.

His manner of communication was so reassuring and compassionate, regardless of what was actually happening operationally, that people felt better. He said later he was able to do this as a result of relentless preparation, a lot of training about what you should say and how you should say it from a crisis communications standpoint. He was so well prepared that it wasn’t until a year after Sept. 11 that people realized that the operational preparedness was horrible.

When the Exxon Valdez disaster happened in 1989, Exxon’s executives made several big mistakes. They were very slow to respond, and the CEO failed to be on the scene quickly.

Today, when I make presentations, I say the word “Exxon” and everybody in the audience says “Valdez.” That’s the long-term association. That crisis didn’t hurt their bottom line, but part

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Robert Meyer, co-director of the Risk Manage-

ment and Decision Processes Center at the Wharton School of Business of the University of Pennsylvania.

Individuals involved in complex tasks tend to focus myopically, seeing their own risk as minimal. For example, an individual who was responsible for making sure that the methane was released from the pipes might have cut his test time from a recommended 10 hours to just over half an hour to save time.

That one decision may not seem especially risky from a narrow perspective but when viewed in concert with all the other issues involved might greatly elevate the overall risk. There is a tendency for individuals to not be aware of the holistic level of risk that a system faces when there are a lot of different

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compound parts. This is why a strong and competent CEO is so important.

A natural human instinct is to believe that rare events happen to other people, and thus people are naturally optimistic that they are immune from catastrophes. At the same time, business leaders rely heavily on “norms” and “best practices” within a given industry. By seeking metrics that define what competitors and peers are doing, we tend to infer that if everyone else is doing it, it must be safe. That often can be quite wrong if everybody else is making the same risky sorts of decisions. It creates a very false sense of safety.

Short-term quick fixes are usually the more attractive option for corporate leaders, especially those under time and cost pressures.

Risk management must be a long-term focus, not a short-term solution. Enterprise risk management must rise from No. 7 or 8 on corporate to-do lists to No. 1. This goes far beyond a perfunctory “What are possible bad things that could happen?” to an extensive and systematic audit of business risks and the processes in place to take on worstcase scenarios.

By audit, I mean looking at the ways in which the different types of activities in which BP is involved are interconnected and thinking them through: “What happens if a supplier two stages down the chain screws up? How does that affect the overall system? And what does that imply about the overall risk we are facing?”

BP should have looked at the incentive structures in contracts and asked, “Do we have contracts in place that basically encourage someone down the chain to engage in risky behavior, which is ultimately going to bubble up and bite us?”

There is also a tendency within organizations and in politics to embrace an attitude known as “Not in my term of office,” which results in a focus on the short term at the expense of the long term. Getting a company like BP to shift from a myopic short-term view, especially with incentive systems built upon rewarding short-term thinking, is a major challenge.

But companies that think this way face greater risk for trouble.

Finally, we’ve found that people have real difficulty in learning from disasters. We’ve often observed that an individual, a community or an organization will have something bad happen to them and they recover from it, and the same thing happens again down the road. What tends to erode over

Risk management must be a long-term focus, not a short-term solution.

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time is the emotional memory of these things, and that is what is difficult to overcome. The pain that is caused and the emotional trauma tend to fade and that sense of emotion, that emotional trauma, is what really kicks people into action.

BP has obviously had a hard time remembering, given its track record. In the oil industry, if a company is not personally going through what BP is going through, rather than saying, “Why don’t we try to simulate this and believe this is us,” there is instead a natural tendency to say, “Thank God it’s not us.” And once you have that mind-set — that it could never happen to you — you are in trouble.

Jonathon Chandler, partner, Reputation

Inc., London.

With crises in the food and airline and toy industries, once a crisis starts, it ends. If something goes wrong with food on the shelf, as it did with Coca-Cola in Belgium in 1999, the food can be taken off the shelf and at least the problem

The Korn/Ferry InsTITuTe

part of the crisis is over. The same is true with toys. When Mattel imported tainted toys from China, it took them off the shelf and the problem part of the issue was over. The same is true with airlines. If something happens to a plane, it’s a tragedy, but when it’s over, it’s over. You address the tragedy, you take your hits to your revenue, your reputation, your trust, but then you begin building it all back.

In the case of the BP spill, it’s not over. In fact, the leak hasn’t stopped, and it continues day by day. So, it’s different from a traditional crisis because it’s ongoing, which means most things in the traditional crisis manual won’t work in this type of situation.

And then, just think about the impacts. Here’s a British company that’s now affecting the lives of poor fishermen and hoteliers in the Gulf, but also affecting the career and reputation of the president of the United States. So, the first — and perhaps most important — thing to do is to find out exactly how far this can go. How bad can it get? What’s the extent?

And then disclose it.

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But there’s a missing ingredient here, and that is that the people at the top of BP should have moved quickly to close the gap with government organizations in the United States at the federal, state and local levels. They should have done this early on. In fact, putting aside the rules of protocol, the people at the top of BP — Hayward and his team — should have been in touch with the president, or at least as close to him as they could get. They should have said, “We have a problem.”

Then, they should have done whatever they could to close the gap between BP and everyone affected by the spill, from the fishermen to the president.

The idea of trying to close the gap would be to try to create the impression that everyone is working on the same team. So it’s not just BP’s problem. It’s a shared problem and everyone’s working to fix it. Now, all you need to do is look at the president’s comments to see that’s not the situation.

Right now, BP’s the enemy. I’m not saying there should be love between all the parties, only that the gap needs to be narrowed. The aim has to be to collaborate.

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in review

Staying Independent While Staying Involved “The CEO’s Boss: Tough Love in the Boardroom,” by William M. Klepper (Columbia Business School Publishing, 2010)

Boards and CEOs need a new “social contract.” One that’s fairer and tougher.

W

hile CEOs have taken most of the blame for recent cor­

porate failures, their boards certainly share considerable responsibility, according to William M. Klepper, author of “The CEO’s Boss: Tough Love in

the Boardroom.” So, to limit repeats of recent failures, the working relation­ ship between boards and CEOs needs substantial improvement.

In his book, Klepper, a professor of management at Columbia Business School, sets out to describe how boards and their CEOs can most effectively work together at the same time that boards provide independent oversight of their CEOs. Klepper sug­ gests some essential building blocks for productive board­CEO relationships and im­ portant yardsticks boards can use in evaluating their CEOs’ performance.

At the core of a CEO­board relationship should be a cooperatively developed set of principles — what Klepper calls a “social contract” — to which both board and CEO com­ mit themselves. To ensure adherence to these principles, which Klepper recommends should include satisfaction of stakeholders, the board must frequently provide candid and unflinching critiques of the CEO’s performance, what Klepper calls, “tough love.”

Klepper devotes most of “The CEO’s Boss” to explaining what boards should be looking for in a CEO and thus the basis for their feedback.

Klepper’s major insight is that there is an optimal leadership style for each stage of

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What Klepper does not address is how to ensure that board members will remain faithful to the social contract and committed to providing the tough love required to uphold it.

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the business cycle. Boards, therefore, should be continually ensuring that their CEO’s style is what is required, given the company’s stage along the business cycle. A board, for example, may have astutely hired a driver personality to bring its company out of a low point in the business cycle. But, if that CEO maintains that same style as the company progresses into a surge of growth, the board must inform the CEO that he or she needs to adopt a more “ex­ pressive,” spontaneous, trusting­the­gut style.

If the CEO is unable to do so, the board must exercise tough love and find a new CEO. Klepper also says that boards must use soft metrics, such as integrity, leadership, de­ velopment of internal candidates, and stra­ tegic thinking, to supplement hard metrics in assessing CEO performance. These metrics can often produce early warning signs, so that if a board keeps an eye out for them and re­ sponds to them quickly enough, it can fore­ stall deterioration in profitability.

Klepper is thorough and persuasive in his argument for the necessity of a social con­ tract and the merits of using the leadership style/business cycle matrix and soft metrics in evaluating CEOs. The author’s leadership style/business cycle matrix in particular can provide a useful framework for a board’s as­ sessment of how a CEO is doing in view of the company’s needs.

What Klepper does not address is how to ensure that board members will remain faithful to the social contract and committed to providing the tough love required to up­ hold it. There is no discussion in “The CEO’s Boss” of the factors that have been cited by regulators and many other commentators that contribute to boards straying from their responsibilities. What is to keep them from being cowed by a CEO, with his or her power to marginalize them, take away some of their perks or blackball them so they will not be considered for other lucrative corporate board positions? Missing here are sugges­ tions for objective standards and structures to institutionalize the independence of di­ rectors. There is no mention of the many leg­ islative and other proposals that have been made to encourage the independence of boards, such as separation of the CEO’s and chairman’s positions, proxy access for share­

holders to be able to nominate board candi­ dates or requirements that board members have substantial ownership stakes in the company.

These omissions are important because the efficacy of all of Klepper’s prescriptions rests on the good and steadfast intentions of board members — from their commitment to the social contract to their best efforts to evaluate CEOs on the basis of the appropriate­ ness of their leadership style and soft metrics.

But, it is most likely that an overwhelming majority of the Lehman Brothers board mem­ bers who allowed Richard Fuld Jr. to run amok and of the other boards whose companies went bankrupt in the recent financial crisis would affirm that they operated by the prin­ ciples in Klepper’s model social contract. Peer pressure, desire to protect their positions and the lack of hard incentives to keep their eyes on the ball, however, led them to abdi­ cate their supervisory responsibilities.

Klepper provides a reminder of how boards and CEOs should operate. But, his rec­ ommendations can be useful only if they are underpinned by incentives to maintain their commitment to the social contract.

As much as it would be heartening to be­ lieve that we could depend on the appoint­ ment of well­intentioned people to manage­ ment and board positions for achieving high functioning boards, experience has proven that this is hopelessly idealistic. Klepper, like so many others, points to Tyco International under Chairman and CEO Edward D. Breen and Jack Krol, lead director, as the model of how a CEO and board can function effectively.

Breen and Krol committed to a jointly crafted social contract, Klepper observes. But, the fact that they successfully turned Tyco around seems largely a result of their internal com­ passes that steered them to work on behalf of shareholders and other stakeholders and not primarily in their own self­interests.

Certainly, if people who could be counted on to put stakeholders’ interests first populated all boards and CEO offices, there would be no need for laws, leadership style/business cycle matrices or any other schemes to make boards provide the requisite amount of tough love and function ideally as their CEO’s boss.

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in review

Becoming an Authentic Leader “Leadership from the Inside Out: Becoming a Leader for Life,” by Kevin Cashman (BerrettKoehler Publishers)

The best leaders start by evaluating their own strengths and weaknesses

I

n 1998, when the leadership development guru Kevin Cashman

first published his seminal work, “Leadership from the Inside Out: Becoming a Leader for Life,” the business landscape had a decidedly different look and

feel. With a new millennium looming, the tough-minded Jack Welch, the legendary chief executive at General Electric, was the reigning leadership icon in Corporate America. His success running G.E. made him a mythic figure and solidified the image of the CEO willing to “cowboy up” to any challenge.

Back then, books about leadership were generally given a lukewarm embrace, while the best-seller lists were dominated by tomes touting a coming economic boom or offering financial advice. A technology-fueled surge in the economy raised stock prices, filled corporate coffers and rewarded senior executives with outlandish compensation packages. Business leaders felt entitled and empowered and were generally uninterested in self-actualization regimens. But change was on the horizon, and a few visionary consultants and academic voices such as Peter Drucker, Warren Bennis and John Kotter were touting the importance of the examined life of the corporate leader.

At the time, “Leadership from the Inside Out” was a contemporary complement to Peter Senge’s “The Fifth Discipline,” Kotter’s “Leading Change,” and Daniel Goleman’s

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The book’s premise is simple but compelling: there is a powerful connection between our internal selves and our external results.

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“Emotional Intelligence.” The book tapped into a nascent urge to look beyond the accepted command-and-control top-down leadership style to identify the “soft skills” required of new millennium leadership. Cashman, the founder and president of LeaderSource, a consultancy focusing on leadership development, executive coaching and talent management (now part of Korn/Ferry International), has spent 30 years coaching thousands of senior executives seeking ways to enhance performance and master the essence of leadership.

By the time Cashman published a 10thanniversary edition of his best-selling book in 2008, which includes new research from Korn/Ferry International, Lominger, and researchers Daniel Goleman, Jim Collins, Jack Zenger and Joseph Folkman, among others, a global recession was gathering steam, Wall Street was in tattered disarray and the dearth of potent leadership in American companies was startling. Ironically, despite these tectonic changes — or perhaps because of them — “Leadership from the Inside Out” remains as relevant and instructive today as it was at the time of its debut. The book’s premise is simple but compelling: there is a powerful connection between our internal selves and our external results. Prospective leaders must seek personal mastery through self-awareness, authenticity, courage and purpose in order to successfully lead their organizations.

“Leadership is not simply something we do,” Cashman writes. “It comes from a deeper reality within us; it comes from our values, principles, life experiences and essence. Leadership is a process, an intimate expression of who we are.”

The foundation of Cashman’s thesis is authenticity, which he defines as “the continual process of building self-awareness of our whole person — strengths and limitations.”

In order to support sustainable leadership, authenticity may be the single most important principle. Unfortunately, most people, especially executives, have little realization of the lack of authenticity in their lives and the crucial role it plays. Cashman notes that in three decades of work, he has never had a single executive come to him complaining of a lack of authenticity.

And he asks: “If authenticity is so impor-

tant, why don’t we recognize it as an issue?

The answer is both simple and profound: We are always authentic to our present state of development. We all behave in perfect alignment with our current level of emotional, psychological and spiritual evolution. All our actions and relationships, as well as the quality and power of our leadership, accurately express the person we have become. Therefore, we conclude that we are “authentic.”

“There is a big hitch, however,” he continues. “While we are true and authentic to our current state of development, we are inauthentic to our potential state of development.” In other words, leaders are severely limited by their own shortsighted view of how they can achieve significant levels of growth and improvement. Caught up in the daily machinations of a corporate entity, they neglect the future for the present and become trapped.

Given the complexities and intense demands on leaders in the current economic maelstrom, it is the rare executive who seeks his or her own inner light. “Leadership from the Inside Out” is less prescriptive than educational. Cashman ends each chapter of the book with Reflections, a workbook section for executives in which they can pose critical questions for themselves from material in the chapter, such as: “Under what conditions do you shut down communication? What beliefs are causing you to shut down? How can you be more open in future situations?”

There is no denying the provocative impact that Cashman’s insights trigger, particularly in an era of outlandish CEO compensation, a steady parade of corporate malfeasance and the very real damage leaders have wrought on our economy.

“It is no longer possible to discount these principles as soft,” Cashman writes, explaining the reason for an updated version of the book. “They produce measurable results, and they are essential to substantial leadership, team and organizational success.”

It is the rare organization that pays more than lip service to the idea that its people are its most valuable asset. But for Cashman, the payoff is tangible. “Organizations that invest as proactively in people development as they do in business development will thrive for decades to come,” he writes.

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Parting p thoughts

with more people, more work gets done

by Joel Kurtzman

While much of the world has been focused on the human and environmental tragedies surrounding the explosion of BP’s Deepwater Horizon drilling platform in the Gulf of Mexico, another important and related event is taking place, largely unnoticed.

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drug discovery teams, our chances of finally curing cancer or malaria or some other dreaded disease can only increase.

Likewise, if we want to tackle the really big issues surrounding climate and the environment, housing and water, or if we want to correct some of the imbalances in the global economy, the more smart people we have working on these problems, the sooner they’ll be solved.

If we want to find solutions to the world’s really big issues, we can’t do it by erecting bigger barriers, or piling restrictions on trade, or limiting where students can go to learn. We can do it only by building bridges between cultures, companies and people.

When the billionth car rolls off the assembly line, and the owner drives it out of the showroom and onto the streets, let’s hope that person, wherever he or she may be, is getting educated as well as getting rich. We can use a few more people working to solve problems, like those that caused the oil spill.

Upcoming in the next issue of Briefings on Talent & Leadership: • An interview with Muhtar Kent, the dynamic chairman and CEO of the Coca Cola Company, about how the company got back its fizz • A profile of Jeffrey Sonnenfeld, senior associate dean and founder of the influential Yale Chief Executive Leadership Institute at the Yale School of Management And much more …

Robert Risko

This year, perhaps right about now, the world’s billionth car will take its place on the world’s roads. And while we all hope that the billionth car won’t be in front of ours, especially at rush hour, it does represent a global milestone. Nearly one in five adults alive today can afford a car. No matter how much we complain, the world is becoming wealthier, healthier and more integrated.

The world is becoming middle class.

Given the way the world is growing, the billionth car is likely to be sold in China or India or Brazil, where the economies continue to grow swiftly, even with today’s economic headwinds. That car is also likely to have a nameplate identifying it as a Nano or Proton or Geely or Chery. The Asian car market could grow by as much as 40 percent this year, while the Western market is expected to be flat, at best.

One way a Westerner might think about Asia’s rapidly growing economic might is as competition, and not just for jobs and markets — competition for everything. Asian companies are active in Africa, South America, Australia, the Middle East and the areas around the Caucasus. They are locking down long-term contracts for raw materials and new sources of energy. They are vying for the right to explore for oil in waters just as deep and dangerous as those in the Gulf of Mexico. While we could view this as competition, that’s not the way I see it.

What history seems to show is that the more hands we have on deck, to put it in the vernacular, the more work gets done.

If China and India are educating engineers, scientists and physicians, that means more bright minds will be tackling life’s most difficult challenges. If we add scientists from China, India, Brazil, Russia and elsewhere to the world’s

The Korn/Ferry InsTITuTe