April 2009, Vol. 13, Number 6
Wharton Leadership Conference: Leading in a Dynamic and Unpredictable World, June 16, 2009
The 13th annual Wharton Leadership Conference is scheduled for June 16 in Philadelphia on “Leading in a Dynamic and Unpredictable World.”
For information on the conference, click here.
Speakers including DuPont CEO Ellen Kullman and presidential historian Richard Norton Smith are described here.
The early bird registration rate of $775 is available for subscribers to Wharton Leadership Digest through April 15, 2009. Simply indicate “Leadership Digest” in the “Special Notes” box on the online registration form to qualify for the discount.
Incoming ICICI Bank Chief Chanda Kochhar Sees Promise for India, Hope for Banks (India Knowledge@Wharton)
In the February 27 edition, India Knowledge@Wharton published an interview that the editor of the Wharton Leadership Digest, Michael Useem, conducted with K. V. Kamath, CEO of ICICI, India’s largest private bank. In this companion interview, Useem speaks with Chanda Kochhar, who will replace Kamath as ICICI’s CEO on May 1. Both conversations took place during the recent World Economic Forum meeting in Davos, Switzerland. Below is an edited transcript of that interview.
Michael Useem: As you take over ICICI Bank on May 1, in the middle of a worldwide financial storm, what will be your priorities?
Chanda Kochhar: My priorities are going to be to play a very balanced role in the sense that I have to keep an eye on the challenges in the environment. At the same time, I have to keep an eye on the optimism that is there for India. So I have to take, for some time, smaller steps so that the bank moves through the challenging times, but at the same time keep some of our capabilities and abilities ready. Because I think the opportunity for India will come back much faster than it comes back for other parts of the world.
Useem: One of the mantras at the annual World Economic Forum this year was to look for opportunity in crisis. Do you see any special opportunities for the bank in this crisis?
Kochhar: Given what is happening to the global financial services sector, Indian banks have to play a much bigger role in funding the growth of India. Let’s not forget, we need to create infrastructure in India. In that sense, it’s an opportunity. It’s upon us now to gear ourselves up to make the most of that opportunity.
Useem: You played a critical role in building up ICICI’s retail services. Last time I looked, retail was something like 60% of your revenue – so it’s a big piece of what the bank has become. Do you have plans or thoughts about rebalancing the bank’s priorities? In particular, do you see retail continuing to play a 60% to 65% role, or are you looking to add in, maybe strengthen, other services?
Kochhar: Some rebalancing will indeed happen. What’s important is that we see each year what the opportunities are, and make use of the opportunity. By the end of the year, you’ll get a resultant mix of what different businesses contribute to the portfolio.
In the past five to seven years, the growth of India has moved on the basis of consumption growth. That is growing the business of banks in India. The next couple of years, funding projects, funding infrastructure, funding corporate could be the next growth opportunity. That will automatically lead to some amount of rebalancing in the portfolio.
Useem: Looking back on your experience in building retail, was there a secret to your success?
Kochhar: I think the secret of success was combining, one, a very big strategic vision and backing it up with a huge amount of institutional capabilities. Successful strategic vision lay in the fact that we visualized the retail business to be much bigger, ahead of what others thought it to be. So it was, for the country, a very small business. But the end result is that this is going to be a big growth opportunity. So we planned for a large network, for large back-office operations, because we were planning for what the business was going to be five years hence, which many people don’t emphasize.
Useem: Observers on the topic of leadership often note that to lead well you need a vision, you need a strategy. But equally, you need a way to make it happen. Call that execution. Could you explain how you executed around building the bank in retail? What were the two or three most critical aspects of the platform?
Kochhar: I think one aspect was that we changed the distribution format in India. We could never have competed with banks that have a large branch network. So we really have to bring to India forms of distribution on the basis of technology, whether it’s ATMs, or Internet banking, or call centers and so on. So we appointed a lot of agents who could take the products to the customers. We had our technology channels, which could reach out to the customers so that the dependence on branches became less so.
Second, we relied on user technology. Because we said, again, this is something that we can create as our core competitive strength, which the incumbents may or may not have. We created scale by use of technology, both in the front-end channels and in our back-end operations, and made sure that the cost of technology was minimal.
The third focus was on risk management. As we were growing retail, and it was a huge growth phase, it was very important to keep our quality under control. Therefore, it was not just distribution, not just back-office operations, but also the risk-management practices. And these we learned together, supported by technology.
Useem: The record of the bank and the record of your own career are to take on one new area, one new kind of technology, after another. You’ve gone into areas where you had no experience. Tell us how you felt about entering into an area for which you had no experience.
Kochhar: Well, it was a very challenging decision, even in my mind, especially in the area of setting up the retail business for the bank. Because this was about ten years ago. So we had been in investment or merchant banking for 15 years, and you don’t find people shifting from investment banking to retail banking very easily. It was a new business for me. It was also a new business for ICICI Bank, because ICICI, until then, had not known about retail. And in a way, it was at the very recent stage for India itself, because retail was very small for the country.
So I think I saw in it, after a little bit of building, an opportunity to really expand my horizons and create a perspective which then made me a total banker. Of course it meant that I learned everything from scratch. It also meant that there was a vast experience in the country to learn from. So one was learning on the basis of what one was implementing. So what I had to do was to hire a team that knew more about the retail business than I did. Though I was their leader, I had to have no ego, but to accept that I was learning from them, while offering my perspective. We put together the domain knowledge of the new retail team with my leadership perspective and rolled out the business. The thought was to keep planning and make our strategies, rather than saying, “Oh, what has somebody else done?” Nobody else had done what we were attempting to do.
Useem: Bank stocks all over the world have had a tough quarter. Many U.S. investment banks have dropped into the single digits in terms of the value of the shares. ICICI itself has lost significant market value. Part of this, worldwide, is the loss of confidence in banks by the investing public. What are your thoughts about restoring investor confidence in ICICI and financial services more generally? What will it take?
Kochhar: I think it will take two things. One, we, as bankers, have to continue to focus on performance, because finally, it will be the performance that will speak. And there is no shortcut to that. Second, the communication with your stakeholders has to be even more frequent, more clear, more transparent, more detailed.
Useem: How will you get in touch with your various stakeholders, including, of course, your employees?
Kochhar: Sometimes you use multiple channels for the same set of stakeholders. As far as employees are concerned, clearly I like to communicate with them, since we are more than 40,000 people. I like to communicate either through e-mail or through video conferencing, which we do very often, and stream out videos and interviews. But more than that, I believe in traveling to my branches. We have more than 1,400 branches in India, and we are present in 18 countries outside of India. And I believe going to the branches, chatting with the employees who are running the branches on a day-to-day basis, because it keeps me close in contact with what’s happening at the bank at the ground level, and, second, makes them feel that here is a person who wants to understand clearly what’s happening.
As far as investors and customers are concerned, I make it a point to answer each and every piece of mail that comes to me. In today’s environment, no customer hesitates to write to the CEO if they think they have to communicate something. So I make it a point to reply to each one of them. For every one of them I may not have an answer right away, because if they have an issue, that issue has to be looked into. But at least the response was for me to say that we will look into it. And then I have my office look at these issues or questions or complaints, or whatever it is, and then get back to them. So I think they feel that there’s at least some responsiveness.
As far as investors are concerned, in today’s scenario, any movement or any part or any humor or any question or any news puts questions in the minds of investors. Again, whether it’s a phone call or whether it’s e-mail, you should be prepared to keep clarifying to them. It’s no use getting irritated by why they have so many questions. I think when the environment is so volatile, they do have questions. So it’s important to be responsive and tell them clearly what the situation is.
As far as the regulator is concerned, the most important message should be, in environments like this: We believe in abiding by the rules, not just in terms of the letter, but also in terms of spirit. Because you’re in an environment like this, I think the regulators want to make sure that the banks are implementing their strategies as they should be. And that’s the confidence that you need to build with the regulator. And that comes, of course, in terms of contact. You have to be in touch with them.
Useem: Let me conjure up three moments in which you are communicating with your stakeholders. I’d like us to imagine that you are now, let’s say, in New Delhi, and you’re talking with somebody in the regulatory world of the nation’s capital, and the regulator says, “We have confidence in you, but we do worry, after the failures at Satyam, about the governance of companies. So can we be confident,” the regulator might say, “that you have the right board in place to work with you to ensure that your strategy is being pursued in the best possible way?” How you would pick up on that kind of question?
Kochhar: I suppose one way is to tell the regulator that even before the regulator tells us. We ought to have looked internally. And if we have done that as an organization, which we, indeed, have, then I have answers to give to the regulator. It’s always important for an organization to be self-regulated, in any case.
You should have some of these governance practices and other practices coming out on your own, because beyond that point, laws have been made. And every time, a regulator cannot be like a policeman to just start enforcing it. You have to understand that it’s in your interest to follow that. And therefore, I think many of these things you ought to have done yourself before even the regulator asks you to do it.
Useem: Along the same lines, you’re now meeting in New Delhi with an international investor, maybe in Mumbai, maybe an investment manager from Barclays, or an investment manager from Fidelity or Vanguard in the U.S. They say, “Ms Kochhar, when you take over on May 1, should we come into your stock? Should we hold it? Are you a good, long-term investment for us?”
Kochhar: Oh, I say that it’s a very good long-term investment for you. I’d actually buy more. Because look at the valuations in India today. I think the valuations have come up substantially. If you look at the multiples, whether it’s in terms of price to earnings, whether it’s in terms of multiples to book value, our bank’s stock is available at a very good price. And since there is a long-term story for India, therefore there’s a long-term story for ICICI Bank. It’s a good time not just to hold, but to buy.
Useem: Tell us briefly the long-term story for India and ICICI’s place in it.
Kochhar: The long-term story for India comes back to the two basics that drive India’s growth. One is consumption, and the second is investment. India has such a large young population base that the consumption growth is going to come back. I think the important factor for bringing that back will be the correction in interest rates and correction in inflation. Inflation has already corrected. I think over three to four months, interest rates should correct substantially, which will then increase borrowing power. So, over a period, this story has to come back.
The other is investment. As I said, India needs infrastructure. Currently, there’s a fault in this. Indian companies have put their new projects on hold, because they’re grappling through their own inventory buildups. But gradually, as domestic consumption starts, and as capacity utilizations start improving for the companies, they will find some stability. And after that, they will start thinking of new projects. I’m not saying this will happen in two months or three months. But gradually, as stability comes back, then the confidence of getting into the investment mode will come back. So, these are the two parts of the sum. ICICI Bank [has] a certain role to play in both these parts. We have a very strong retail franchise. As consumption comes back, and as interest rates come down and loans become more affordable, we will go back to making the retail franchise grow. And as the investments come back – we have been very large infrastructure financiers in the country, so we will start playing that role.
Useem: I’m going to focus now on your own ascent to the position of chief executive. Of all the challenges that you face personally, that the bank faces, that the company faces now, what worries you most?
Kochhar: I won’t really [consider] anything as a worry. Currently, the priority for me, for the bank, would be risk containment, property conservation and liquidity management.... We have to be agile enough as a bank to change course to this mode of operation [during these times]. In India, we have all been used to very fast rates of growth. And therefore, to change to this mode for a certain point in time requires a huge mindset shift. But I think, as I said right in the beginning, that we have to recognize that currently, for some time, for a bank to remain sound, it’s important to focus on liquidity management, property conservation and risk management.
But at the same time, I will not get so bogged down that I make everybody feel that the world has come to an end. No, it’s not come to an end. Actually, for India, as I said, things will start coming back much faster than they [will] come back to the rest of the world. And we have to keep our retail franchise, our corporate investment banking franchise alive with energy during that period, so that when the opportunity comes, we’re [ready to go] back on the road.
Useem: Are you taking any specific steps to anticipate becoming chief executive? Are you initiating, for example, conversations with top people in the company?
Kochhar: One important thing is a huge interaction with the regulators, to understand their mindset, how they think the environment [is], and therefore, how they would want to see the banks in this environment – and to [let them know] that we are here as a responsible bank.
Second is a huge amount of contact with the employees – as I said, not just the senior management team, but even at the operating level – to give them a chance to come forward. We are sitting on a set of opportunities. And you may not see that opportunity arising today, tomorrow [without doing this].
On the other hand, we need to keep the investors comforted [in terms of] whatever questions they have. Because, again, they are [experiencing] a time when they felt that this bank was in a huge growth pattern, and now they are not seeing growth. So, again, to tell them that while a balancing act is currently required, as the growth comes back in the economy, [they’ll] see this bank bouncing back faster than most others.
I’m also having detailed meetings with a lot of the CEOs of the global banks, especially to learn from them what should be done as a CEO and what should not be done as a CEO. I’ve had a few [of these meetings], and I plan to have a few more before May 1. I must tell you, though, I’m very overwhelmed by the kind of response I’m getting from them. These have been big global CEOs running big global banks at certain points in time, either currently or recently. And they’re so happy to share their experiences. And some of them, of course, turn around and say, “Maybe we can tell you more what not to do than what to do.” And I think there’s a lot to learn from them in terms of what to do and what not to do. I’m finding that is a very valuable experience.
Useem: I have one final question. ICICI chief executives often hold that position for a number of years. The current CEO, Mr. Kamath, has served for more than a decade. The day will come when you step down as well. And thinking ahead to that day, what would you like to be, in a sense, your legacy?
Kochhar: Of course, I want to have a long time ahead of me. But what I would like to do, whenever I look back, is to [ask myself], “Do I have the sense of satisfaction that, during my tenure, I was able to make an impact on not just the organization, but all the banking sector in India? And, I would say, on the banking sector globally?”
Because, in a way, this is very important timing. It may be challenging timing. But, as I said, one has to find an opportunity in every challenge. And the opportunity that I’m seeing is that, currently, [regardless of] whatever is happening globally, India is one of the few countries that’s growing fast, and one of the fastest-growing countries. So, this is a time when the world is looking at India, and India’s growth.
Useem: It is.
Kochhar: And ICICI Bank is a very important bank. So I have a big role to play in that sense – to say, “Can I make an impact in shaping India’s growth, and therefore, in a way, impacting the world economy?” And, “Did I play that role, one, in a proactive manner, and two, in a responsible manner?”
Note: This article is reprinted from the February 6, 2009 issue of India Knowledge@Wharton
Thinking About the Planet: Eco-Focus to Antarctica Leadership Venture (by Akihisa Shiozaki)
A herd of chinstrap penguins stood in shock on the dim midnight coast line of Antarctica, as they watched the shadows of Wharton students dance around in circles, pulling on each other’s ears and chorusing “la-la-la” to celebrate the arrival of the new year. It was a very special moment, which at the same time, felt awkwardly surreal; we were on the coastlines of Antarctica. But we knew it was the one new year’s eve, which we would always be bragging to our kids and grand kids on every new years eve to come.
Last December 28, 45 excited participants of the Antarctica Leadership Venture landed on King George Island of the Antarctica Peninsula. Antarctica is one of the few places on earth that is not governed by any nation but only by a treaty, and is now designated primarily to peaceful missions such as scientific research. As we gathered around a rocky foothill overlooking the beautiful glacier mountains, the venture started with an opening address from Rodrigo Jordan, one of the world’s most renowned mountaineers and the president of the professional guides from Vertical S.A., “We govern Antarctica amongst ourselves protecting the extremely fragile ecosystem here. Let us remind ourselves to take responsibility for the planet.”
This year’s Antarctica Venture was unique from past years in its strong environmental focus. The ambitious initiative started when Professor Eric Orts, director of the Initiative for Global Environmental Leadership (IGEL) program, offered in fall 2007 to join the Venture along with three of his hand-picked students from IGEL, Greg, Kate and Anarma (who became the first Mongolian woman to set foot on the island), to add a new eco-dimension to the renowned leadership venture. 142 metric tons of CO2 emissions were purchased through the Wharton Leadership Program Office to offset the carbon footprints arising from the participants’ transportation to and from Antarctica. Students circled up on the pebble beaches neighboring a giant penguin colony, or in the shivering shadows of a collapsing glacier wall, to join a series of environmental discussions led by Professor Orts and other environmental specialists invited from nearby scientific camps.
While the week on the island was blessed with the best weather in many years, survival camping in wild Antarctica still posed its challenges for the urbanized Philly crowd. Clean water was a delicacy. Leveraging all their OPIM expertise, teams passionately debated on how best to boil 6 liters of drinking water with only two small gas stoves. Cooking in -0C weather without gloves also posed a significant challenge tempting teams to stick with the basic oatmeal/risotto combo. However, the situation helped reveal some hidden cooking talents among unexpected team members, resulting to legendary dishes like “Lee Kalowski’s Antarctica Crab Cake” (WG’10). Perhaps not to the extent of what Earnest Shackleton and his crew had experienced during their Endurance voyage but the harsh physical conditions and enormous amount of routine work were clearly forcing teams to quickly bond and build trust among each other.
Trekking through the glaciers was one of the highlights of the venture, but definitely no picnic. On a descent down the slope of the glacier dome, Priya Shea (WG’10) suddenly got trapped in a deep layer of soft mud up to her knees. Walter Czarnecki (WG’10), and Edyta Szczepankowska (WG’10) immediately ran to her rescue but found themselves also caught deep in the mud trap. Realizing the gravity of the situation, others continued desperate attempts to reach the three, throwing ropes, building rock bridges and digging out mud with their pots and pans. Approximately 45 minutes later with the help of other teams, the three were finally rescued from the horrible quick sand situation. Brandi Herman (WG’10) says “the experience was tough, but really allowed us to see people’s strengths.”
The seven day expedition served as a great opportunity for us to learn about the planet and also about ourselves. What really made the venture so special was the great group of people we were fortunate to have on this expedition, not only from the MBA program but also from WEMBA and IGEL and of course the extraordinary guides from Vertical SA. Through the constructive feedback exchanged at the day-end debriefs, during the cozy dinners chats in the yellow triangular tents, or even just trekking in a single line tied together with a rope of trust, we were able to introspectively evaluate while also reflecting on each others’ experience, values and actions. While Wharton enjoys the most professionally experienced and internationally diversified student body among our peer schools, we (I?) sometimes question ourselves how often we truly appreciate this greatest asset of our school. The Antarctica venture, I believe, proposed a powerful example of the enormous potentials Wharton and its students could achieve by cherishing further the personal qualities brought to the community by our fellow colleagues. Let us echo Rodrigo Jordan’s principles on mountaineering, “It’s not about where you go, but who you go with.”
Note: This article appeared in the January 26, 2009 issue of The Wharton Journal.
One Former Investment Banker's Take on Restoring the "Financial Quality, Integrity, and Soundness of our System" (Knowledge@Wharton)
At the recent World Economic Forum in Davos, Michael Useem talked with Suzanne Nora Johnson, vice chairman of Goldman Sachs until 2007, about the global crisis, executive compensation, the Goldman Sachs culture and CEO succession, among other topics. Johnson currently serves on a number of for-profit and non-profit boards, including AIG, Intuit, Pfizer, Visa, Women’s World Banking and the American Red Cross. An edited transcript of the conversation follows.
Michael Useem: Suzanne, thank you for taking the time to talk with us today. I’m going to begin with a question about your background. You worked for Goldman Sachs for 22 years, but left the company before the crisis really hit in full force. Goldman has been one of the investment banks that people thought would survive and yet it has faced its own meltdown in recent months. When you were there, did you see any signs in the financial services industry that we were headed for the type of global disaster we are experiencing now?
Suzanne Nora Johnson: Mike, thanks very much for the opportunity to speak with you today. I think that the most important warning sign was the fact that if you look back several years ago – and even as late as 2007 – the only undervalued asset class that you could find was risk. Literally, you could go to traditional asset classes, whether it was real estate, commercial/residential, whether it was emerging market debt or equities, whether it was private equity alternatives from venture capital to private equity – clearly the risk premiums were mispriced.
Why I say they were mispriced, literally, [is that] there were no differentials from one very sterling credit to one lousy credit. That was a warning sign. You also had the warning sign that volatility was at an historic low. There were, again, no differentiations on the volatility front. The flipside of it was that we were going through an extraordinary period of time when the globalization revolution actually had created quite [a lot] of profound change – meaning many countries around the world were part of an active trading regime. Around the world, you saw many people pulled out of poverty. The two kinds of macro trends that were positive were that you were going through a period of historically low inflation around the world and also low interest rates – which, again, for the average man or woman around the world, was a positive in terms of their standard of living. That said, this produced profound imbalances. Those imbalances really were the underpinning of the asset pricing problem that I referred to when I first answered your question – which really was kind of a tip off that something was probably amiss.
Useem: We have often heard it said that J.P. Morgan Chase and Goldman Sachs had taken more steps [than others] to protect themselves, especially from the subprime mortgage meltdown when it did come. We’ve often heard it said that at Goldman in particular, a management culture had developed over many decades which helped people in the ranks bring bad news up to the top. So therefore the CFO and CEO at Goldman, in effect, had more early warnings than might have been the case at other firms.
Johnson: Goldman Sachs was extraordinarily lucky and fortunate that, in fact, it had come relatively recently from a partnership culture. If you remember, the firm went public in ‘99. But there was still a large number of people – both in the partnership and non-partnership ranks – who had grown up with a partnership structure. That partnership structure meant that there was relative transparency from one division to another, from one desk to another. People could ask questions about what was going on. And you knew the real live individuals there who had everything on the line. It wasn’t just their own personal capital, it was the livelihoods of thousands of employees.
That was a great foundation going into both the expansionary period at the beginning of the decade, and then the problems toward the end. You don’t lose that overnight. Also, there was a view in [recent] years that we didn’t need to be biggest. We wanted to be “Best in Class,” and we wanted to be very good at what we were doing. So there was extraordinary accountability inside. In terms of – were you good at what you were doing? What kinds of risks were you taking to get there? How high-quality were the activities that you were exercising? I would also say that, just from a diligence perspective ... it was fortunate that you had ... market share leadership positions in so many businesses. You didn’t have to stretch everywhere. And, again, if you look at many people in the financial services industry, it was clear that they were stretching very, very far afield.
Useem: When you joined Goldman, you were the inheritor of a culture, a way of doing business that had put Goldman on top for many, many years. But as you rose up through the ranks – as you became vice chair – you were also the maker of the culture. So, thinking back about how you and other executives helped create and sustain a culture that you just described very tactically – what does it take to create that kind of ownership, of everybody taking responsibility, everybody feeling they are a leader, wherever they may be in the bank? It’s a cultural statement, but that was the mindset created. The question is, how do you create and sustain that kind of a culture of ownership and responsibility?
Johnson: I know this sounds too simplistic an answer, but at the end of the day, it comes down to: Do you walk the walk, not just talk the talk? In an organization as large as Goldman Sachs – it was several thousand when I joined and close to 25,000 when I left – when you have that large an enterprise, everyone who’s in a leadership position is watched very, very closely to see what their actions are. So starting with Hank Paulson, he put in some very formalized what I’ll call “ethics training programs,” or kind of “true north programs,” that were cross-firm, cross-divisional, where they were taught by both Hank and the other members of the management committee and then other partners. Again, there was formal training with real live situations discussed. But also, in everyday business, people felt comfortable talking about kinds of moral dilemmas – not just compliance dilemmas or legal dilemmas, but really, “Were there ethical issues?” I can think of a number of situations where people celebrated if someone turned down a piece of business, or decided not to go all the way on it.... Once you could celebrate or reward non-revenue generation – or risk-avoidance, is another way of looking at it – that helped reinforce the messages.
Useem: Given that culture, given that mindset, given that dominance of the markets, the last 12 months have not been kind to Goldman – along with everybody else. I realize you have now been gone for a couple of years, but looking back on the company, what do you think has happened that led it to become officially, now, a commercial bank? Just comment on the events of the last 12 months, as Goldman, along with everybody else, has struggled to get through them. What happened at Goldman?
Johnson: Again, with the very fair caveat that I haven’t been there formally in the last two years, the observation I would make is that, historically, the business’s success was highly correlated to what global GDP looked like and how active the capital markets were. As you know, in the last 12 months, we’ve seen a significant reduction in global GDP growth, and also a real quieting of the markets, a lack of market activity. So, that being kind of the soup, if you will, from which they fed, it being greatly reduced also made it much more challenging for them. One, you just have to understand, as a market participant, that this single issue was the biggest one. Again, I really credit the leadership, over many years, of having risk management systems that were quite thoughtful and rigorous – for example, Goldman Sachs looked at liquidity VAR [value at risk] as well as VAR for many, many years to get a feel for what would happen in the case of a true liquidity crisis. But we’ve had events now that are at the tail [the unlikely extreme of a probability distribution]. If you had tried to probability weight – how likely is it that we would have the kind of meltdown – most people would have commented that it would have been a very, very low probability that you would have this kind of interconnected meltdown. Did certain commentators absolutely see it coming? No question. But I think the kind of depth and magnitude of it was hard for even the best minds, and the most rigorous risk management systems, to understand.
Useem: Arguably, one of the problems that we’re all now working to overcome is a mindset that did not see the tails, that did not anticipate the once-in-a-century kind of event. Other factors, though, we need to be mindful of as well – which include the relatively short-term thinking that seemed to dominate many financial decisions in the financial market. Picking up on all of the above, as you think about the culture of American business, not just financial but beyond – do we need a change in mindset? Do we need a cultural shift? Is it a matter of tweaking, or should we really be rethinking our business model? And then, to add one last quick, final question to that long question, if a culture shift of some kind is required, who’s going to make that happen? How difficult is it going to be to push through?
Johnson: I’ve actually thought a lot about this question because so many thoughtful people I know have said, “I’ll never take a management position in a public company. I’ll only do it in a private company.” When they say that, I always ask them: “What is it that’s motivating you?” And they generally come back with something that says, “I want to be able to do the right thing.” Then I say, “Well, what does that mean?” And they say, “Well, I want to be able to balance the need to optimize shareholder equity with other constituencies, to do it somewhat under the radar screen.” And, again, I always look at the radar screen as a double edged sword. “Are you doing that because you don’t want to be transparent? Or are you just doing it because you want to find a way to do some of the difficult decisions that might be challenging?” The other element of that which is relevant is that the U.S. and much of the Western world – and much of Asia – has a public company model that still is very short-term focused in terms of what institutional investors are rewarding. So, as I think about ways to change a culture, often it revolves around compensation structures. Again, I think compensation structures will likely be more transparent, rather than less, going forward. To the extent that those compensation structures are more long-term focused, that isn’t necessarily always in line with what your shareholders – particularly your more active shareholders – are demanding. For example, I can see compensation structures making incentives multi-year. And I don’t mean stock vesting. I literally mean that your revenue targets – your earning targets – are multiple years, not single years. I could see clawbacks. I could see looking at internal rates of equity – meaning how much differentiation is there from the top to the bottom. All those things would have significant culture changes.
But to go back to the beginning – of private company versus public company – I think a lot of people sense that they would have a lot more flexibility in a private company setting to do some of those things, which means doing the right thing, making longer-term incentives, having ... clawbacks, having the kind of thing that helped justify a culture of “one for all,” not “all for one.”
Useem: As a non-executive director at Pfizer, AIG, Intuit and Visa, you’re in kind of the hot seat on this very question right now.
Talk through a little bit what it means to move compensation towards more long-term. Are we talking three years out? Are we talking five years out? How would you structure it? Be as concrete as you can here – to ensure that the top people, say at Pfizer, Visa, or you name the company – are ready to look at what those companies need [in long-term executive compensation].
Johnson: I actually like seeing kind of multi-year timeframes. Clearly, you need to have some annual timeframes, because often budgets and investors are on that timeframe, at the very least. So you obviously have to have some annual metrics. But I think two, three, five-year metrics can be very, very healthy protocols to go through. It generally lets you live in and out of business cycles. It gives you a sense of who performs particularly well in adverse conditions. And hopefully there’s a high correlation in the longer term of companies that do this with their shorter-term earnings, although, again, I think that’s the billion dollar question. Can you make it somewhat consistent with those shorter-term expectations of public shareholder growth?
Useem: Suzanne, you joined the board of AIG, attended your first meeting, when AIG was really in the process at that very meeting of deciding it had to be, in effect, nationalized. What was it like to have joined the board of AIG at that particular moment?
Johnson: I would compare it to Ed Liddy’s experience. Ed Liddy – as people probably know – is the CEO of AIG, who was brought in by the (U.S. Department of the] Treasury to replace the then-current CEO. Liddy had been the CEO of Allstate. When he was asked to take on the job, he was told, “This is really an act of public service. It’s a very difficult, challenging situation.” I think that’s the way that you have to look at these situations – it’s critically important that we restore the financial quality, integrity and soundness of our system. Again, I view our whole economy – both domestically and globally – being very closely correlated to the strength of our financial institutions. I view it as, “Can you help make it right at this point,” recognizing that you’re having to balance public and private sector constituencies?
Useem: I’m going to change focus here. Thinking back on your own career – you were trained as a lawyer, you clerked for a judge – you’ve seen many law students as they have come out of law school over these years. You’ve seen many graduates of business programs as well. Do you think that the men and women coming out of law schools and business schools these days should have a different skill set, so to speak, a different orientation, than those who came out 20 or 30 years ago? And now, looking back at the schools themselves, are there some changes that law schools and business schools ought to be thinking about?
Johnson: Mike, it’s a great question. I’ll tell you, I’ve really seen the recruiting landscape change. When I joined Goldman Sachs over 20 years ago – and I had practiced law for a number of years at that point – most of the questions they asked were very broad, global, macro, thoughtful questions that would test my insight, my judgment, my common sense, my ability to deal with difficult questions. Over the last number of years, I have found that we gravitated much more toward asking people, “What was their experience in the business?” meaning at a summer job or as an analyst. “Why did they want to be an investment banker?” “Why did they want to be a trader?” “Why did they want to be an analyst?”
It’s not that I don’t think those questions are important, but I’m hoping we will get back to much broader gauged individuals who really do have extraordinary qualities of accomplishment, leadership and integrity – that manifest themselves more broadly. Because I really do think people who understand the world – no matter what situation they’re in, whether that means globally or even in a domestic context – are being more broadly gauged. It’s not that I don’t want people with quantitative aptitude who can do the rigors of a financial job. But I think those other qualities are more important at the end of the day [in terms of] how successful we will be and how successful your institution will be by having that cohort of people.
Useem: Suzanne, to put you on the spot here. If I’m a newly-minted graduate of a law school, a newly-graduated MBA holder – I’m in your office, you’re considering me for a position – let’s say at a Goldman Sachs or a Pfizer. What would be a question you might pose, now – to get beyond the more particular issues that you said are more typical – to gauge my ability to think broadly, to work effectively, longer-term, within the enterprise?
Johnson: Well, one very simple question I always ask is, “What’s the most difficult situation you’ve had in your life, and how did you overcome it?” Just because I want to try to understand what level of adversity someone has actually really had, or how they think about adversity. Again, what was their game plan for changing it. And then I always ask people, too, to rank certain personal attributes, worst to best. If you can imagine all the very accomplished people I interview, they always answer it, first, best to worst. Then I force the other way around. And I find that by having them rank their worst to their best, in terms of core attributes, I get a lot more thoughtful answers in terms of how they think about those personal traits.
Useem: When you were still with Goldman Sachs, a couple of years back, the media often described you as one of the most influential women on The Street. Looking back on your own career – think about the glass ceiling; you helped break it along the way – talk a bit, if you would, about your own experience with the glass ceiling. Reference what it was like when you began, to what you think it is now, for women coming into investment banking.
Johnson: I think the single biggest change for women is that generationally, people think about differences more broadly [and] very differently. The cohort in business school today thinks about gender differences – ethnicity, racial differences, global differences – much differently. They’re much more used to dealing in a very diverse world and understanding what the benefits of that are. That has changed in mindset. What hasn’t changed – and we have to still continue to push – is you get very different cultural norms and very different value judgments, depending on how diverse a group you get. I find that whenever any one group tends to have a preponderance of influence, or concentration, that always skews the answer – on questions or on modes of behavior. For part of my career at Goldman Sachs, I ran a group in investment banking with another partner – who was an African American, but of African descent. His father actually was an African, from an African country. We had a group that was almost evenly balanced on any metric – gender, ethnicity, race, nationality. I found that our group actually got the best and the brightest, in terms of questions being answered and addressed, problems being addressed, alternative methods of marketing, having insights. I really was still taken by that experience – it clearly had a different cultural vibe than any other group I had worked with at Goldman Sachs.
Useem: [From your vantage point] as an independent, non-executive director on four major boards – it’s often said that for non-executive directors, the single most important decision is picking an executive successor as CEO. As of today, what would you look for when there is a succession event – a CEO stepping down. Maybe you asked the person to step out or maybe that person has come to the end of their natural tenure. If you wouldn’t mind walking us through the three or four criteria – in light of the events of these past 12 months – that you think would be vital to get the right strategic fit between the person you’re looking at, and what one of these companies – or maybe all four of them – would be looking for, going forward.
Johnson: Again, not commenting on any individual company, but just as a general observation, I still find that companies that do the best are the ones where there is a very strong sense of succession planning, and there are multiple internal candidates who could assume the role. Because I do think understanding the culture, having been part of it, having paid your dues, having done the right thing, being rewarded, has incredibly powerful commercial impact – and also has very powerful incentives inside, organizationally. That’s not to say that, at times, you don’t need to go outside and find the best, because there are circumstances where you need to do that. But on the margin, where you can go inside, I think it’s very powerful. In terms of leadership attributes, first and probably most importantly, are they someone who has the kind of strategic vision and articulation – literally, communication capability – to motivate the troops to deliver to that common vision and understand that vision. And to external constituencies, can they make a very compelling enunciation of what the company is all about.
That, again, is reflected in their products, services and people – but that is something that is true north, for both the inside and the outside.
It almost goes without saying that [it should be] someone of impeccable integrity. Related to that is their character. And do they have judgment? Do they have ability to take very tough topics, and, again, 99 out of 100 times, come out in the right place? I say 99 out of 100, because I assume there’s always some gray areas where you could go either way. And then do they have courage? Can they do things that other people can’t?
Useem: Let’s assume you have three – maybe even more – great candidates in the ranks. A chief executive working for you as a non-executive director is about to step down. Or maybe you’ve got a six-to-12 month notice. People in the ranks at the senior level – they’re not there if they’re not very good. But you want to find out who is the best. It’s often a more difficult challenge than I think we sometimes appreciate. And let’s assume that, as a non-executive director, you don’t see them day to day – could you offer up a couple of thoughts on how, as a non-executive director, you can cut through the images? Cut through reputations? Help identify, of three final candidates, which of those three best exemplifies the kinds of qualities you’ve identified?
Johnson: I’d say, first of all, the thing that I don’t like that a lot of companies do is they set up horse races for internal candidates where they make it very clear that two, three or four people are in the running. And everybody knows it. I actually think that often causes more damage than it does good. You find that people are play acting for you more than anything else. But I do think [it’s important to] find ways to make sure that your pool of potential candidates gets some face time, in a formal sense, presenting to boards, so that you see them over a period of time, [and can] interact in a formal setting. I’ve also found that, on some boards – where if you make it a constant practice that every time you have a formal board meeting, you’re having lunch or breakfast with a different member of the management team, getting to know them kind of one on one, or in a small group with a couple of board members – you get a very different perspective than seeing them in a smaller setting. [You see] how they think about the world. Also, seeing their 360s – and really understanding what the organization thinks about them, not just what the CEO thinks about them – is critically important.
Useem: Suzanne, a final question. As the public looks in on, not just Wall Street, but large corporate compensation packages at the very top, there is a public revulsion – maybe that’s too strong a word – but certainly a strong public criticism that for too many people at the top – as their company is going south, their compensation is going north. Aside from that, aside from the poor correlation between pay and performance, many people think that the top people on The Street, the top people in industry in general, are, simply put, overpaid. What’s your thinking on that one?
Johnson: That’s interesting, Mike. I was with Lester Crown, at the Aspen Institute, maybe 10 or 12 years ago – before executive compensation became a hot topic. He was saying how distressing he found it, as a board member, because clearly the way it was justified is you would look at employment comps of outsiders. And often when you would bring outsiders in, it would raise the whole comp level. He was very disturbed about this practice. I think you can use internal equity as a good touch point, and what I mean by internal equity is really looking at the differentials, from top to bottom, in an organization. I do think no matter how good somebody is at the top, if you see that stratification getting too significant, it is a warning signal to you. It is a red flag. And the other thing I have found – and there’s a fair amount of academic literature which absolutely supports this – is that the more unequal you make your compensation structures, the more you pay, in total. Because often people are willing to take lower pay, if they think there is real equity, parity and fairness. The more they think there’s unfairness in the system, the more they are chasing somebody who has a higher comp level who they are perceived to be a lot like. Again, I think we do this to ourselves sometimes.
Useem: I’m going to close with an extra question. The next 12 to 18 months are vital in the U.S., vital in Europe – really, the world – for getting through this enormous crisis that we’ve managed to walk ourselves into. It’s sometimes said now that the private sector has helped create some of the problems, but many other forces are responsible, as well. But to dig out of this crisis, [some say] it is a time for government, for agencies, such as Treasury, for regulators, such as the SEC and their equivalents around the world, to not get the upper hand, but to take a strong hand in the months ahead. What’s your cut on that one?
Johnson: It’s clearly important for the government – the public sector – to provide a substrate for the conditions for reform and basically for rejuvenation of the system. But by providing a substrate, I think they need to make a very healthy, functioning private sector because that is where you still are going to have job creation over the longer term. You’re going to have people build competitive advantage. And you’ll have much healthier systems. So, again, they provide the substrate, but to think that they, alone, could solve this problem would be a mistake. There really does have to be a partnership with the other sectors of the economy.
Note: This article is reprinted from the March 18, 2009 issue of Knowledge@Wharton.
Learning Program: Leadership and Management in Southeast Asia
The Sasin Graduate Institute of Business Administration of Thailand’s Chulalongkorn University will hold a three-week Senior Executive Program (SEP) from August 9-29, 2009. The program is a collaborative effort with the Wharton School of the University of Pennsylvania and the Kellogg School of Management at Northwestern University.
The program originates from the belief that the success of an enterprise is a well-balanced combination of short-term operational efficiency and long-term competitive advantage. To achieve such success, the organization needs executives who are masters of management’s functional disciplines and, at the same time, able to navigate through turbulent and challenging waters and come out on top.
Intended for senior managers, the program helps those moving into cross-functional or general management responsibilities with strong potential for top leadership. It is offered in English at a major hotel southwest of Bangkok and draws participants from the Asian region, including Australia, Indonesia, Malaysia, Myanmar, New Zealand, Singapore, Thailand, and Vietnam. Wharton and Kellogg faculty provide instruction on economics, finance, leadership, marketing, organizational behavior, information technology & innovation, and strategic management.