Sustainable Capitalism 2.0 is on the march... CEOs Need a New Set of Beliefs - Raymond V. Gilmartin - HBS Faculty - Harvard Business Review http://blogs.hbr.org/hbsfaculty/2011/09/ceos-need-a-new-set-of-beliefs.html
In the past 25 years, CEOs of many major corporations have relied on a flawed set of beliefs to lead their organizations. This set has influenced them to place way too much emphasis on maximizing shareholder value and not enough on generating value for society. Today we are mired in the Great Recession, which was brought about by the near collapse of the financial system. This environment and the behavior produced by the prevailing set of beliefs to which CEOs subscribe have deepened a widespread public distrust of corporations and capitalism. In this blog post, I will offer a new set of beliefs, which can renew and restore faith in corporations and capitalism. The Conventional Wisdom Most CEOs and corporate board members would agree that the theories and beliefs listed below drive their decision-making on how best to meet the challenges they face: The focus of the CEO and the board should be on maximizing shareholder value. The stock market is short-term-oriented. Stock-based incentive compensation aligns the self-interest of management with shareholders, and a performance-based pay system increases employee motivation. Societal concerns should be addressed through corporate social responsibility programs. The “best athlete” from inside or outside the company should be chosen as the successor to the CEO. In my experience, these beliefs have led managers and boards to take actions that have had unintended, destructive consequences. When observing the behavior of management and corporate boards, when reading the management literature and the business press, and when assessing the outcomes of management behavior, it seems as though CEOs are recognized and rewarded handsomely for downsizing and outsourcing, acquiring or merging, and making the quarter — all justified by the responsibility to maximize shareholder value. Any of these actions can be necessary in certain circumstances; most of us have taken one or another. My concern is that these actions have become the standard by which CEOs are expected to manage. Furthermore, these actions are taken seemingly without regard to the consequences for the community, the employees, the survival of the company as an institution, or the creation of long-term firm value. New Guiding Beliefs Listed below are an alternative set of beliefs that guided me when I was the CEO of Merck and Becton Dickinson. I strongly feel that they have greater validity, are more effective in meeting today’s management challenges, will lead to superior outcomes, and will help restore public faith in business and its leaders. Importantly, leading academics and thoughtful practitioners provide supporting evidence for my beliefs.They include the Harvard Business School’s Joseph Bower, Boris Groysberg, Rakesh Khurana, and V. Kasturi Rangan; Michael Mauboussin of Legg Masson; Jeffrey Pfeffer of Stanford; and Michael Raynor of Deloitte Consulting. Shareholders benefit most when CEOs and boards maximize value for society and act as agents of society rather than shareholders. Some CEOs are rediscovering “stakeholder capitalism.” Merck never forgot it. The decisions of its leaders have been and still are guided by founder George W. Merck’s well-known quote, “We try never to forget that medicine is for the people. It is not for the profits. The profits follow…” (By the way, under Delaware Law boards are responsible not just to shareholders but also to the institution. The market favorably receives projects with long-term payoffs, particularly those in research and development. Research by Michael Mauboussin, the chief investment strategist at Legg Mason, supports this view. And I witnessed its truth firsthand as the CEO of Merck in 2004, when our earnings were going to fall short of analysts’ expectations. The conventional course of action would have been to cut investments in research and restructure. Yes, those actions would have boosted short-term earnings. But they would have also undermined our efforts to create new drugs, which typically take 10 to 15 years to develop, hurting the company and the people who depend on us to find new therapies over the long term. To my surprise, investors understood and approved of our decision: Merck’s stock went up 2.9% the day we made the announcement and continued to rise in the following days. Some people may contend that given the high risks and many years it takes to develop a new drug, pharmaceutical companies are different animals from other firms. I disagree. The fundamental challenges that CEOs of drug companies face are similar to those of any CEO: innovate, manage risk and uncertainty, and create long-term firm value. Purpose, meaning, and recognition are more powerful motivators than economic self-interest, and large external rewards can reduce intrinsic motivation. People do work for money but they work even more for meaning in their lives. It was clear to me that working on the leading-edge of science with other talented scientists to develop breakthrough drugs for untreated diseases — not money — was what motivated Merck scientists. Actions to address societal issues should be an integral part of strategy, and operations and should not be isolated as a separate activity under the heading of corporate social responsibility. Instead of structuring a partnership of Merck, the Gates Foundation, and the government of Botswana to expand access to HIV/AIDS drugs as a corporate-social-responsibility initiative, we integrated it into our business and made it the responsibility of Merck’s head of Europe, the Middle East, and Africa. If we had structured it as a CSR initiative, I don’t think it would have been as successful as it was because the business would not have been as fully engaged. And it was beneficial to the business because it helped our managers learn how to bring drugs to developing countries at a lower cost. The most successful CEOs, on balance, are those who are developed inside the company but manage to retain an outside perspective. Are leaders portable? I didn’t think so when I was at Merck and Becton Dickinson, where my successors came from the inside. My view was their institutional knowledge, the values they shared with the rest of the organization, and their emotional commitment to the respective companies made them much more likely to be highly effective leaders than outsiders. I think there are CEOs who subscribe to these beliefs but do not believe they can act on them because of their experiences with Wall Street or because they are counter to the beliefs of their boards. But these beliefs are not just ideals; they are implementable. In additional blogs, I and others will offer specific recommendations for how to do so. (via Instapaper) Sent from my iPhone -- Centroids: The Center of the Radical Centrist Community <[email protected]> Google Group: http://groups.google.com/group/RadicalCentrism Radical Centrism website and blog: http://RadicalCentrism.org
