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Wednesday, November 25, 2009

Leadership Lessons from the past 18 months

The economic crisis and the entanglement of so many trusted financial-services firms have shaken our confidence in business leadership. The failure of expectations has been widespread, severe, and rapid. That discredits past leadership practices — but what will replace them?

The quickest impact on leadership in business will probably be felt at the board of directors level. Driven by fear of the risks that have been exposed, board leaders will start by changing their own behaviours. Directors want more visibility into corporate practices and risks, and more data to directly verify more dimensions of corporate performance. They feel their positions are much more on the line, and they are starting to ask for the staff and capabilities to do more checking up, probing more deeply even in areas historically left to management.

Boards will revise formal governance structures, adjust team composition, and reconsider the personality and skills of the people placed in top positions. As always, they will respond to prevailing interpretations of recent history. In seeking a new form of leadership, boards will start with the oldest truths: Those in authority must have foresight, and they must lead by example. They must motivate and inspire on a moral basis, through aspiration as well as rewards and punishments. It is precisely this calm, considered, and ethical leadership, required to lead large numbers of people when the economy is tough, that seems to have been in such short supply recently.

Guided by their boards, many institutions will recommit to public responsibility. Trust and simplicity will become major selling points. Enterprises in banking or in business in general industry that can command greater trust or offer closer connections with their customers will enjoy substantial opportunities.

Many companies will also need to find structures and processes, both formal and informal, that challenge thinking and retain productive dissent. The leadership team form will be left intact, but its potential will be tapped in new ways. Teams will be populated with more diverse personalities, whose challenge will be to work together to set some new directions and renew moral leadership while paying closer attention to day-to-day execution.

These leadership team members will have to learn to recognise the power of the unknowable. We have found out the hard way that conceptual financial models, which seemed for a time to provide a new means of rapid growth, can actually obscure the underlying realities of the economic system. We now have some catching up to do as we recognise the failure of these models to comprehend and control the complexity and interdependence of our world. Leaders in financial services might do better if they understood that we human beings are all limited, that our best course is to accept that we are intrinsically prone to get things wrong, that we need to keep our wits about us, and that to succeed in the arcane world of finance, we need most of all to stay grounded in day-to-day reality.

We must promote leaders for whom doubt and uncertainty are simply a part of the human condition, not the enemy of action or a sign of weakness. They must tolerate questioning and doubt within their own organisations, and apply it productively themselves. We must make it an organisational habit to regularly challenge even what seems to be most obviously true, to remain open to different types of data, especially including direct experiential and “feet on the street” observations.

The makeup and management of executive teams may have to change. The evidence is clear that the most productive teams contain diverse people. Teams composed of people from a range of backgrounds outperform teams composed entirely of the so-called best and brightest, for example. And those who shrink from conflict or believe that only harmonious teams can be effective will also disapprove of the kind of open dissent that encourages better leadership and decision making. That is a different definition of productive teamwork than has been applied in the past.

If people recognise this, we should see improvements in the organisation and management of executive teams and boards. In composing teams, boards will tend to favour a diversity of characteristics, and they should guard against the drift toward homogenisation.

This type of governance structure is made even more necessary by the fact that only 25 percent of new ceo's today come from outside the company. Consequently, the outsider’s perspective is not coming from top executives. Many corporate leaders will thus need organisational innovations that provide visibility and challenge to management at quite detailed levels. The financial control function at most companies is an excellent and well-established example; this oversight arrangement can be extended to other corporate functions.

The most successful leaders of these newly transformed organisations will do one more thing distinctively well. They will set the overall purpose and mission of the organisation, not just its strategy. Indeed, they will often concentrate on corporate purpose or mission, leaving strategies to the executive team. We already know that companies with an articulated purpose that goes beyond simply the expediency of “making more money” have fared much better in the downturn. They will also fare better in the recovery. But this will depend on the temperament of leadership. If we are fortunate, the leaders who emerge this time will be honest, robust, and farsighted enough that their prevailing style will last for some time.