Leadership Lessons

The Relentless Post-Industrial Decline of Detroit // Book Summary of ‘The Last Days of Detroit’

August 20, 2020 By Nagesh Belludi Leave a Comment

Mark Binelli’s The Last Days of Detroit: The Life and Death of an American Giant (2013) is an astonishing chronicle of Detroit from the initial days of the French settlers, to the arrival of Henry Ford in 1913, the racial unrest in 1967, and the present-day hipster arrivistes who’re trying to resurrect the city.

Binelli characterizes the eeriness of the city’s many impoverished neighborhoods, the administrative corruption, and the underperforming public schools—all climaxing in the city’s bankruptcy in 2013. “Ruin porn” from Detroit evocatively exposes once-majestic, now-decaying buildings and factories overgrown with prairie grasses and wildflowers and on the brink of collapse.

Binelli outlines how Detroit became the hub of industrialized America. Detroit’s decay really began well before 1967, when the racial riots made it worse. In the 1950s, carmakers and their suppliers moved production out of the city to places with cheaper labor and land. Industrial automation superseded low-skilled jobs. The flight of middle-class residents out of Detroit—to its suburbs and beyond—distressed the city’s tax base and left the poorest, more vulnerable residents to fend for themselves.

Binelli includes stirring and occasionally heart-warming interviews with many residents—teachers, volunteer firefighters, students, clerks, union leaders—and a few Detroit figures who’ve become part of the local folklore.

What is particularly bleak about The Last Days of Detroit is how Detroit has become a symbol of the decline of America. In Binelli’s analysis, there’s barely anything particularly grave about Detroit—its decay could be reproduced everywhere else in the post-industrial West on account of ongoing socioeconomic changes.

Recommendation: Read Mark Binelli’s The Last Days of Detroit (2013.) It’s a fabulous piece of Americana.

Never Outsource a Key Capability

August 17, 2020 By Nagesh Belludi Leave a Comment

In 2003, Domino’s Pizza started requiring its franchisees to adopt the company’s own point-of-sale system (POS) system, internally called PULSE, instead of letting franchisees choose third party POS systems that could integrate with Domino’s IT systems.

That strategy gave the company the ability to seamlessly control the entire ordering process and add functionalities such as online- and mobile-ordering, voice ordering, and contactless payments.

At the same time, Domino’s clever marketing convinced consumers that it has the snappiest ordering process among all the pizza vendors.

How Domino’s Pizza reinvented itself

In 2009, Domino’s changed its pizza recipe and admitted that its previous version was awful in a series of brilliant commercials that featured the tagline, “We’re Sorry for Sucking.” Executives even read out vicious customer comments on camera resembling the Jimmy Kimmel ‘Mean Tweets’ show.

Domino’s (which is, incidentally, headquartered a mile from my home in Ann Arbor, Michigan) used its PULSE POS system as the centerpiece of a technology ecosystem that has helped it flourish as an “an e-commerce company that sells pizza.”

Digital sales skyrocketed as the company tapped into greater demand for convenience, and Domino’s carved a bigger slice of home delivery and food pickup market. Morningstar’s R.J. Hottovy notes that Domino’s laser-sharp focus on improving online ordering has paid off leaps and bounds:

Technology plays an important role in Domino’s efforts to develop and enhance its brand image. Domino’s global technology platform includes a digital loyalty program with a rewards system, electronic customer profiling, geo-tracking of pizzas being delivered to customer homes, and customer geo-tracking to have carryout pizzas ready just as they enter the store. Other innovations include high-speed ovens (which reduced cooking time to four minutes) and Pulse (a unified point-of-sale system,) which have re-engineered fulfillment processes to be best-in-class. Pulse integrates all orders (regardless of origin) into a seamless interface that provides detailed monitoring of every aspect of the ordering, cooking, fulfillment, and delivery processes, which reduces bottlenecks and minimizes downtimes, enabling Domino’s to offer faster delivery times than competitors.

By owning the entire customer experience, Domino’s has been able to provide a consistent experience for customers irrespective of how they order, use data to create value for customers, and iterate quickly. No wonder, then, that Domino’s share price is up 28-fold since its 2004 IPO!

Idea for Impact: Don’t outsource what you’re supposed to do best.

Smart companies understand that outsourcing can result in loss of control over key capabilities. That can impede the company’s ability to improve its efficiency in serving customers or introduce changes in response to shifts in the marketplace.

The Key to Reinvention is Getting Back to the Basics

August 6, 2020 By Nagesh Belludi 1 Comment

Leaders of turnarounds often succeed by putting the fundamentals on the table and insisting upon a greater emphasis on the basics.

The turnaround that CEO Brian Niccol has cooked up at Chipotle Mexican Grill [CMG] makes a great case study of the back-to-the-basics approach to management.

The Basics Often Get Lost in a Speedy World

To set the context, here’s a concise history of Chipotle: founded in 1993 by chef Steve Ells, Chipotle found great success in marketing its near-local sourcing of fresher ingredients, using naturally-raised proteins, and on-premises cooking.

Chipotle grew swiftly and established itself as the flag-bearer of the fast-casual trend that spurned fast-food orthodoxy. McDonald’s was a major investor from 1998 until 2006 when Chipotle went public.

In 2015, Chipotle’s star began to fade away when hundreds of its customers got sick from infections with salmonella, E. coli, and norovirus. Worried that this short-term rough patch can turn into a long-term downward slide, the company’s board recruited Niccol from Yum Brands’s Taco Bell division in 2018.

CEO Brian Niccol made Chipotle Fresh Again by Focusing on the Basics

In two short years as CEO, Niccol has returned Chipotle to industry-leading performance and positioned the company for above-industry growth. His Barron’s ‘Streetwise’ interview with the inimitable Jack Hough provides an insight into how strategic business leaders think and make decisions:

When I arrived at Chipotle, I discovered that it was a company full of ideas; it lacked discipline and the focus to figure out the few things we wanted to do really well. Chipotle had lost focus on executing the basics of running a great restaurant.

We modernized food safety practices and emphasized avoiding contamination and educating food suppliers and farmers.

We went back to following the original culinary on how to make great food: getting the right char on the chicken, the right amount of lemon, and the right amount of chopped jalapenos.

Idea for Impact: Getting the basics right is often the first essential step to building a greater organization.

So many companies fail on their fundamentals—and don’t even realize it—especially when their businesses have grown, market conditions have changed, and the companies have taken on all sorts of complexities that have stumbled.

If you want your organization to pull through a slump or hit a new growth trajectory, consider cracking down on the basics.

Focus on your core values and your underlying business model, which are like beacons that can help steer you on the right track. Inquire why your organization exists. How should you operate? What is your market position? What matters to the organization’s mission and vision? Focus on doing the right thing—and doing it consistently over time.

A renewed emphasis on the strategic basics will put your company in the best possible position to navigate new strategic choices, as Niccol’s Chipotle has done.

Steak, Not Sizzle

July 23, 2020 By Nagesh Belludi Leave a Comment

Mark Hurd, the recently-departed executive of NCR and CEO HP and Oracle, recalled this best advice he ever got:

When I moved to a head-office in Dayton in 1988, an NCR executive was giving a presentation; he had great slides and an even better delivery. The CEO, Chuck Exley, listened to the entire presentation in his typically gracious, courteous manner. At the conclusion, he nodded and said something brief but profound: “Good story, but it’s hard to look smart with bad numbers.” And as I reflected on it, the presenter, articulate as he was, as good as his slides were, simply had bad numbers.

That comment has always stayed with me. You have to focus on the underlying substance. There’s just no way to disguise poor performance. I’ve tried to follow that advice throughout my career. Deliver good numbers, and you earn the right for people to listen to you.

Idea for Impact: Don’t Succumb to Hype

Marketing and branding have conditioned society to play up—and be attracted to—sizzle over steak. Style over substance.

Sizzle can only get you so far.

Focus on the steak. It is considerate and farsighted and more fulfilling to focus on substantive ideas, products, and presentations.

For sure, sizzle is important. Only when you have a good steak, add some sizzle to promote the bejesus out of whatever it is you have to offer.

The Biggest Disaster and Its Aftermath // Book Summary of Serhii Plokhy’s ‘Chernobyl: History of a Tragedy’

May 11, 2020 By Nagesh Belludi Leave a Comment

I visited the Chernobyl Exclusion Zone last year. This 2,600 sq km (1,000 sq mi) region spanning Ukraine and Belarus is the ghastly site of the greatest peacetime nuclear disaster in history. Yes, it’s safe enough to visit—with precautions, of course. [Read travel writer Cameron Hewitt’s worthwhile trip-report.]

Chernobyl is a gripping testimony to the perils of hubris and a poignant monument to the untold misery it imposed upon swathes of people.

To round out my learning from the trip, I recently read Chernobyl: History of a Tragedy (2019,) Harvard historian Serhii Plokhy’s haunting account of the nuclear disaster.

An Accident That Was Waiting to Happen

At 1:21 A.M. on 26-April-1987, an experimental safety test at Unit 4 of the Vladimir Ilyich Lenin Nuclear Power Plant complex in Chernobyl went dreadfully wrong. The test instigated a power surge. The reactor exploded and burst open, spewing a plume of radioactive elements into the atmosphere.

The discharge amounted to some 400 times more radioactive material than from the Hiroshima atomic bomb. Deputy Chief Engineer Anatoly Dyatlov, who was in charge of the calamitous test, called the ensuing meltdown “a picture worthy of the pen of the great Dante.” Sixty percent of the radioactive fallout came to settle in Belarus. Winds carried radioactive elements all the way to Scandinavia.

Right away, hundreds of firefighters and security forces consigned themselves to stabilize the reactor and stop the fires from spreading to the other reactors. In so doing, they exposed themselves to fatal doses of radiation, spending the rest of their lives grappling with serious health problems.

The world first learned of the accident when abnormal radiation levels were detected at one of Sweden’s nuclear facilities some 52 hours after the accident. It took the Soviet regime three days to acknowledge the meltdown publicly, “There has been an accident at the Chernobyl atomic-electricity station.” Soviet leader Mikhail Gorbachev addressed the nation 18 days after the accident, “The first time we have encountered in reality such a sinister force of nuclear energy that has escaped control.”

A Soviet Dream Town Then, a Graveyard of Dreams Now

The ghost town of Pripyat, a purpose-built workers’ settlement a mile from the nuclear plant, seized my mind’s eye. It was one of the Soviet Union’s most desirable communities, and 50,000 people lived there when the accident happened. Today, it’s a post-apocalyptic time warp—full of all kinds of dilapidated civic structures that once showcased the ideal Soviet lifestyle.

Pripyat was evacuated entirely on the afternoon of the disaster. Left to rot, the town has been completely overtaken by nature. A Ferris wheel—completed two weeks before the explosion, but never used—has become an enduring symbol of the inflictions. So have unforgettable images of deserted houses engulfed by forest, loveable stray dogs in dire need of medical attention, and a day-nursery strewn with workbooks and playthings.

A Human Tragedy: Disaster, Response, Fallout

Chernobyl: History of a Tragedy (2019) is a masterful retelling of the episode and its aftermath. Author Serhii Plokhy, who leads the Harvard Ukrainian Research Institute, grew up 500 kilometers south of Chernobyl. He later discovered that his thyroid had been inflamed by radiation.

Plokhy offers deeply sympathetic portrayals of the plant’s managers and engineers, the first-responders who risked their lives to contain the damage, and the civilians in the affected areas of Ukraine and Belarus.

Drawing upon the victims’ first-hand accounts as well as official records made available only after Ukraine’s 2013–14 Euromaidan revolution, Plokhy meticulously reconstructs the making of the tragedy—from the plant’s hasty construction to the assembly of the “New Safe Containment” structure installed in 2019.

The cleanup of the radioactive fallout could continue for decades. Robotic cranes will work in intense radiation and dismantle the internal structures and dispose of radioactive remnants from the reactors. The damage from the disaster may last for centuries—the half-life of the plutonium-239 isotope, one constituent of the explosion, is 24,000 years.

Design Flaws, Not All Operator Errors

Plokhy shows how Chernobyl personified the Soviet system’s socio-economic failings. Chernobyl was a disaster waiting to happen—an absolute storm of design flaws and human error.

The Chernobyl nuclear plant was hailed as a jewel in the crown of the Soviet Union’s technological achievement and the lynchpin of an ambitious nuclear power program. The RBMK (high power channel-type reactor) was flaunted as more powerful and cheaper than other prevalent nuclear power plant designs.

Anatoliy Alexandrov, the principal designer of the RBMK reactor and head of the Soviet Academy of Sciences, reportedly claimed that the RBMK was reliable enough to be installed on the Red Square. The communist czars skimped on protective containment structures in a great hurry to commission the Chernobyl reactors.

Commissars at the Ministry of Medium Machine Building, the secretive agency in charge of the Soviet nuclear program, knew all too well of the fatal flaws in the design and the construction of the RBMK reactors. Viktor Briukhanov, the Chernobyl plant’s director, had complained, “God forbid that we suffer any serious mishap—I’m afraid that not only Ukraine but the Union as a whole would not be able to deal with such a disaster.”

Yet, the powers-that-were assumed that clever-enough reactor operators could make up for the design’s shortcomings. Little wonder, then, that the Soviets ultimately attributed the accident to “awkward and silly” mistakes by operators who failed to activate the emergency systems during the safety test.

The Fallings of the Soviet System’s Internal Workings

Chernobyl: History of a Tragedy dwells on Soviet leadership and the ubiquitous disconnects and the vast dysfunctions in the Soviet state’s affairs.

Chernobyl is a metaphor for the failing Soviet system and its reflexive secrecy, central decision-making, and disregard for candor. The KGB worked systematically to minimize news of the disaster’s impact. KGB operatives censored the news of the lethal radioactive dust (calling it “just a harmless steam discharge,”) shepherded the tribunal hearings, and downplayed the political outcomes of the disaster.

Even the hundreds of thousands of Ukrainians, Belarusians, and Russians evacuated from the thirty-kilometer zone weren’t given full details of the tragedy for weeks. In the days following the accident, the Communist Party’s apparatus, well aware of the risks of radiation, did not curtail children’s participation in Kyiv’s May Day celebrations and parades.

Author Plokhy’s most insightful chapters discuss the historic political fallout of the disaster. Moscow downplayed the design flaws in the reactor and made scapegoats of a handful of the plant’s engineers and operators—just three men received 10-year prison sentences in 1987. One of the three, Deputy Chief Engineer Anatoly Dyatlov (whom I quoted above referring to Dante,) was granted amnesty after only three years. He died five years later from a heart failure caused by radiation sickness.

Chernobyl’s outstanding narrative feature is the interpretation of the disaster in the framework of the fate of the Soviet Union. Plokhy explains how Chernobyl was a decisive trigger to the unraveling of the Soviet Union. Chernobyl served as an unqualified catalyst for Gorbachev’s policy of glasnost (“openness.”) Too, it fanned the flames of the nationalist movements in the soon-to-break-away republics of Ukraine, Belarus, and the Baltics.

Recommendation: Read This Captivating Account of a Great Human Tragedy

Serhii Plokhy’s Chernobyl: History of a Tragedy (2019) is a must-read record of human fallacies and hubris. It’s a poignant narrative of the courage and helplessness of the thousands of firefighters, police officers, doctors, nurses, military personnel, and the communities who risked their lives to mitigate the aftermath of the disaster, investigate, and “liquidate” the site. On top, Chernobyl is an edifying thesis on how the disaster accelerated the decline and the downfall of the Soviet Union.

The Checkered Legacy of Jack Welch, Captain of Quarterly Capitalism

March 16, 2020 By Nagesh Belludi Leave a Comment

The legendary Jack Welch, the former Chairman and CEO of General Electric (GE) 1981–2001, died two weeks ago.

Welch was the most prominent business leader of the post-war era. Under his leadership, GE metamorphosed into one of the world’s largest, most profitable, and best-admired companies. He expanded GE’s market capitalization from $12 billion to $410 billion on the back of the steady economic expansion of the 1990s. Welch also became the poster child for “new globalization,” and GE led American companies in gaining access to new markets and lower-cost labor. (Note: GE Medical Systems was one of my first consulting clients out of college.)

For nearly three decades, until his star faded away in about 2008, Welch was the talk of corporate America. He was lionized for streamlining the industrial giant’s top-heavy bureaucracy and empowering managers to spot problems and make changes promptly.

Welch became the font of all sorts of pearls of management wisdom. He was the exemplar after whom American managers patterned themselves—“What Would Jack Do?” became a familiar business mantra. Companies borrowed six-sigma, rank-and-yank, stretch goals, and his other managerial innovations. In 1999, Fortune magazine designated Welch as the “manager of the century.”

Jack Welch Legacy #1: The Messy and Embarrassing $180 Million-Divorce

In 2002, Welch’s reputation took a first big hit when his wife Jane Welch exposed his extramarital affair with Harvard Business Review editor Suzy Wetlufer (later his third wife.) The affair started when she was interviewing him for her publication. Jane, a sharp corporate lawyer whom Jack had extolled as “the perfect partner” in part for taking up golf and playing with his business associates, had even confronted Wetlufer over the phone and cast doubt on her journalistic objectivity.

Welch’s private life became fodder for gossip, and he became a regular feature in New York’s supermarket tabloids. The proceedings of the divorce divulged the extravagant pension benefits that Welch had gotten for himself. Among other lavish allowances, he had kept a company plane and an apartment in New York’s Central Park West—just these cost GE some $1.7 million a year. GE would supply Welch with fresh flowers, wine, dry cleaning, and even vitamins. After a public outcry, Welch was forced to forfeit many of these retirement benefits.

Jack Welch Legacy #2: The Aura Deflated

Welch transformed GE into a super-conglomerate and a Wall Street-darling during his 21-year tenure as CEO. Sadly, Welch’s business model became overly complicated, and many of the mistakes of his strategic deals manifested years later. The most consequential case in point was GE Capital, the finance division that delivered the parent company a near-fatal blow during the 2008 financial crisis. Welch had overconfidently let GE Capital grow unchecked during his tenure, and its easy profits had masked problems at GE’s core industrial divisions.

After a much-publicized “Super Bowl of CEO succession planning,” Welch bequeathed his successor Jeffrey Immelt with a puffed-up corporation. Welch retired in September 2001, and the “house that Jack built” started to crumble right away in the wake of the 9/11 attacks. After failing to curb GE’s sagging profits, Immelt was fired in 2017 following his ill-timed deals for GE’s power division.

All told, Welch’s undoing was his exceptional obsession with shareholder value. He made countless deals—many unrelated to GE’s traditional core competencies—and championed corporate efficiency to the detriment of initiatives that may have sustained GE’s long-term competitiveness.

GE is now a derelict shadow of its former self. Its market capitalization has fallen from a peak of $600 billion in 2000 to $82 billion today.

Jack Welch Legacy #3: The “GE Man” Turned out a Dud

Welch’s other legacy was going to be the “GE Man.” Trained at the knee of Welch, GE’s vast managerial talent was commonly recognized as one of the world’s best. Its leadership development program, headquartered at the famed Leadership Center in Crotonville, New York, was the best training ground for future executives. In April 2005, Fortune magazine noted,

When a company needs a loan, it goes to a bank. When a company needs a CEO, it goes to General Electric, which mints business leaders the way West Point mints generals. … One headhunter estimates the company harbors another dozen execs of FORTUNE 500 caliber.

Alas, Welch’s protégés were mostly disappointments. Much of the long line of managers whom he had mentored at GE has failed to achieve runaway success in running big firms—3M, Boeing, Chrysler, Home Depot, Honeywell, Pentair, ABB, and, undeniably, GE itself.

John Flannery, another “GE Man” who succeeded Immelt, was fired after just 14 months. Flannery was replaced by Larry Culp, the first outsider to run GE in the company’s 126-year history!

Jack Welch Legacy #4: “Jack’s Rules” for Management Success

Welch and his management style earned much criticism for insensitiveness and abrasiveness. Yet, some of his leadership techniques are worth emulating.

Nurture a “boundaryless” culture. Cultivate an open organization by removing the barriers that inhibit people and organizations working together. Foster an informal culture that expedites the free flow of ideas, people, and decisions.
Involve everybody to enhance productivity. Welch instituted a brainstorming process called “Work-Out” that enabled frontline employees and workers to propose improvement ideas to the bosses who are required to take action “on the spot.”
Empower people. Delegate and get out of the way. “We now know where productivity-real and limitless productivity-comes from. It comes from challenged, empowered, excited, rewarded teams of people.”
Embrace meritocracy. Let ideas and intellect rule over hierarchy and tradition. “The quality of the idea is determined by the idea, and not the stripes on your shoulder.”
Eliminate bureaucracy. “Anything that you can do to simplify, remove complexity and formality, and make the organization more responsive and agile, will reduce bureaucracy.” Welch once called bureaucracy “the Dracula of institutional behavior,” since red tape and rules and regulations tend to rise from the dead every few years.
Simplify. Drop unnecessary work. Work with colleagues to streamline decision-making. “The way to harness the power of these people is not to protect them … but to turn them loose, and get the management layers off their backs, the bureaucratic shackles off their feet and the functional barriers out of their way.”
Focus on continuous improvement. “Don’t sit still. Anybody sitting still, you can guarantee they’re going to get their legs knocked out from under them.”
Act with speed. “Speed is everything. It is the indispensable ingredient in competitiveness.”
Get good ideas from everywhere. Study competitors. Abandon the “not invented here” mindset and embrace best practices that are “proudly found elsewhere.”

Welch’s playbook has been studied in dozens of management books, including the three best-sellers he wrote: Jack: Straight from the Gut (2001,) Winning (2005; with wife Suzy Welch,) and The Real-Life MBA (2015; also with Suzy.)

Jack Welch: Captain of Capitalism Whose Star Faded Away

Welch’s most significant legacy will be the Wall Street-orientation of business corporations. He promoted an obsessive focus on creating shareholder value, and in so doing, helped incite the current fixation on quarterly earnings. That, and the burn out of the General Electric that Welch left behind, is testimony to the potential after-effects of sacrificing the long-term well-being of corporations to meet short-term targets.

This is Not Responsible Leadership: Boeing’s CEO Blames Predecessor

March 12, 2020 By Nagesh Belludi Leave a Comment

In January, Boeing’s former Chairman, David Calhoun, became CEO after the board fired Dennis Muilenburg. Less than two months later, in a New York Times interview last week, Calhoun blamed Muilenburg for the misfortunes plaguing Boeing:

Asked why he wouldn’t give up his salary (he gets a $7 million bonus if he can get the 737 MAX back into the sky) in light of the 737 MAX-related woes, Calhoun declared, “… ’cause I’m not sure I would have done it [taken the job without a salary].”
On Boeing’s systemic culture problem (a steady trickle of revelations has exposed software problems and corners being cut in the engineering and certification processes,) Calhoun characterized the contents of the leaked emails as unacceptable but also downplayed the issue: “… I see a couple of people who wrote horrible emails.”
Calhoun has been on Boeing’s board since 2009. While the MAX crisis snowballed and Boeing’s crisis management went from bad to worse, Calhoun took over as the board’s chairman. In that capacity, he fully endorsed Muilenburg saying, “from the vantage point of our board, he has done everything right,” “he didn’t create this problem,” and “shouldn’t resign.” Now, in the last week’s interview, Calhoun had a different take: “Boards are invested in their CEOs until they’re not. We had a backup plan. I am the backup plan.”
Acknowledging that Muilenburg boosted production rates before the supply chain was ready, Calhoun declared, “I’ll never be able to judge what motivated Dennis, whether it was a stock price that was going to continue to go up and up, or whether it was just beating the other guy to the next rate increase. If anybody ran over the rainbow for the pot of gold on stock, it would have been him.”

Calhoun and the rest of Boeing’s board of directors were part of the context right from the outset. The roots of Boeing’s current crisis embody decisions made by the company’s leadership over a decade and fully sanctioned by the board. The board is wholly accountable for everything that happens under its authority.

Idea for Impact: Blame is an Accountability Killer

This is not responsible leadership. A true leader doesn’t pass the blame for failure but graciously accepts responsibility for the problems he inherited. Even though Boeing’s lapses may not be traceable directly to him in his capacity as a member of the company’s board, Calhoun should have acknowledged his—and the rest of the board’s—failing to keep an eye on Boeing’s leadership team over the last decade.

Leading with integrity means taking personal responsibility. It’s tempting for people to take flight and avoid the personal consequences of what happened, to reject personal responsibility, and to pass the blame on to other people.

Calhoun could have acknowledged that the board’s actions had a role in the situation. By facing up to these criticisms and admitting that Boeing and it’s board could have done things better, Calhoun could have encouraged others at Boeing to do the same, especially considering that he must overhaul the company culture from the top down.

Executive Compensation: Pay Them Well, But Not Too Well

January 23, 2020 By Nagesh Belludi Leave a Comment

Our executive compensation system is broken. Surveys show that the average public company CEO compensation is many hundred times that of the average employee. This gaping disparity in pay vis-à-vis the relative value they bring to their organizations is a moral embarrassment to our society, a point that wasn’t lost on the Occupy movement of yesteryear.

The debate over executive pay won’t die away anytime soon. As election year approaches, grandstanding politicians are vying to outdo each other with pledges to implement pubic policies that limit executive compensation, whereas theorists argue that, in a market economy, compensations should be set by supply and demand for executive talent.

The latter position is commonly echoed by company boards and executive compensation consultants—both of whom owe their cushy jobs to the CEOs and their top teams. They assert that leaders need to be provided with personal incentives to attract and motivate them.

Strangely enough, such incentives often demotivate the leaders’ followers. Financial incentives that are directed disproportionately to the leader in isolation often prove downright counterproductive.

Leadership is an outcome of the relationship between leader and follower, and excessively compensated leaders do not engender followership effectively.

This comports with financier J. P. Morgan‘s observations at the start of the twentieth century that the only characteristic common to his failing clients was a tendency to overpay those at the top. As Peter Drucker commented in The Frontiers of Management (1986,)

[J. P. Morgan found] eighty years ago that the only thing the businesses that were clients of J. P. Morgan & Co. and did poorly had in common was that each company’s top executive was paid more than 130 percent of the compensation of the people in the next echelon and these, in turn, more than 130 percent of the compensation of the people in the echelon just below them, and so on down the line. Very high salaries at the top, concluded Morgan—who was hardly contemptuous of big money or an “anticapitalist”—disrupt the team. They make even high-ranking people in the company see their own top management as adversaries rather than as colleagues…. And that quenches any willingness to say “we” and to exert oneself except in one’s own immediate self-interest.

Idea for Impact: Employees’ efforts are devalued markedly under conditions of gross inequality. Pay leaders well (if you pay peanuts, you’ll get monkeys,) but not too well.

Two Leadership Lessons from United Airlines’ CEO, Oscar Munoz

December 12, 2019 By Nagesh Belludi 1 Comment

United Airlines announced last week that CEO Oscar Munoz and President Scott Kirby would transition to new roles as executive chairman and CEO respectively in May 2020.

Two Leadership Lessons from United Airlines' CEO, Oscar Munoz Munoz was very good for the airline. He deserves kudos for getting United back on track, for improving the company’s culture, employee morale, brand image, and customer experience, and for hiring Kirby.

Munoz, who came to United from the railroad company CSX, had hitherto gained considerable experience while serving for 15 years on United’s (and its predecessor Continental’s) board. But, when he became CEO in 2015, he stated that he hadn’t realized how bad things had got at United. That admission reflects poorly on his board tenure—board members are expected to be clued-up about the day-to-day specifics of the company and have more visibility into the pulse of the company’s culture beyond its senior management. Alas, board members not only owe their cushy jobs to the CEOs and the top leadership but also build long, cozy relationships with them.
Munoz will be remembered chiefly for the David Dao incident and the ensuing customer service debacle. The video of Dao being dragged out of his seat screaming was seen around the world. While the dragging was not Munoz’s fault (the underlying problem wasn’t unique to United,) the company’s horrendous response to the incident was. However, Munoz is worthy of praise for using the event as a learning exercise and an impetus for wholesale change in United’s operations and employee culture. In the aftermath of the incident, many customers vowed to boycott United flights, but that sentiment passed as the backlash over the incident waned. Even so, the David Dao incident need not have happened for United’s operational and cultural changes to materialize.

Scott Kirby is a hardnosed, “Wall Street-first, customer loyalty-last” kinda leader. Even though Kirby has made United an operationally reliable airline, his manic focus on cost-cutting has made him less popular with United’s staff and its frequent fliers. Let’s hope he’ll keep the momentum and preserve the good that Munoz has wrought.

The Business of Business is People and Other Leadership Lessons from Southwest Airlines’s Herb Kelleher

September 24, 2019 By Nagesh Belludi Leave a Comment

Herb Kelleher (1931–2019), the larger-than-life cofounder and long-time CEO-chairman of Southwest Airlines, passed away earlier this year. He is celebrated for establishing a people-oriented company culture that any leader would envy.

What started as a doodle scratched on a cocktail napkin (this account has been disputed) changed the face of flying. Herb’s then-revolutionary vision of low-cost air travel boiled the business down to its essentials. The disciplined execution of this strategy broke the mold of the aviation industry, brought the freedom of travel to millions of people, and encouraged successful copycats the world over—from JetBlue to Ryanair, and IndiGo to Air Asia.

Here are some key lessons that Herb (he preferred to be called just that) had to teach.

Companies are built in the image of their founders. Herb was well known for his competitive chutzpah, his extroverted antics, and his knack for unforgettable publicity ploys (e.g. his paper bag commercial or the ‘Malice in Dallas’ arm wrestling contest.) To the flying public, Southwest became a brand infused with the unconventional, flamboyant, free-spirited personality of its boss. That culture will continue to reflect his vision even after he’s gone—the tone he set at Southwest is not unlike those set by Steve Jobs (foresight) at Apple, Ben Cohen and Jerry Greenfield (social values) at Ben & Jerry’s, and Walt Disney (teamwork.)

Ego is the enemy of good leadership. Southwest stands as the paradigm of the power of a lighthearted culture. Herb’s stewardship of the well-being of employees started with the ego at the top. At a 1997 testimony before the National Civil Aviation Review Commission, Herb introduced himself saying, “My name is Herb Kelleher. I co-founded Southwest Airlines in 1967. Because I am unable to perform competently any meaningful function at Southwest, our 25,000 Employees let me be CEO. That is one among many reasons why I love the People of Southwest Airlines.” An ego-bound leader with no sense of humor can cast a shadow across everyone’s work, whereas a self-effacing leader who engages a genuine, self-deprecating humor can help create an environment in which employees take risks, work as a team, and enjoy themselves more. “Power should be reserved for weightlifting and boats, and leadership really involves responsibility.”

Focus on your people, they’ll take good care of your customers. Southwest’s successes are widely attributed to its highly committed and motivated workforce. From the very beginning, Herb fixated on looking after his employees, so they looked after each other and took care of their customers. And, the devoted customers ensured the growth of the business. He famously declared,

The business of business is people—yesterday, today and forever. And as among employees, shareholders and customers, we decided that our internal customers, our employees, came first. The synergy in our opinion is simple: Honor, respect, care for, protect and reward your employees—regardless of title or position—and in turn they will treat each other and external customers in a warm, in a caring and in a hospitable way. This causes external customers to return, thus bringing joy to shareholders.

Hire committed people who’ll fit your company’s culture. Under Herb, Southwest pursued job candidates who exemplified three characteristics: “a ‘warrior spirit’ (that is, a desire to excel, act with courage, persevere and innovate); a ‘servant’s heart’ (the ability to put others first, treat everyone with respect and proactively serve customers); and a fun-loving attitude (passion, joy and an aversion to taking oneself too seriously.)”

Hire for attitude, train for skill. For Herb, recruiting was not about finding people with the right experience—it was about finding people with the right mindsets. “We will hire someone with less experience, less education and less expertise, than someone who has more of those things and has a rotten attitude. Because we can train people. We can teach people how to lead. We can teach people how to provide customer service. But we can’t change their DNA.”

Get your employees committed. “We have been successful because we’ve had a simple strategy. Our people have bought into it. Our people fully understand it. We have had to have extreme discipline in not departing from the strategy.” Herb’s magic extended to making employees think like long-term business owners. He once reflected,

We don’t just give people stock options. We have an educational team that goes around and explains to them what stock options are, how they work, the fact that it’s a longer-term investment. From 1990 to 1994, the airline industry as a whole lost $13 billion. Southwest Airlines was profitable during that entire time, but our stock was battered. Eighty-four percent of our employees continued with Southwest Airlines stock during that four-year period. That’s the kind of confidence and faith that you have to engender, so people have a longer-term view, and they’re not trying to outplay the market every day.

Southwest has never been in bankruptcy, nor has it had to layoff or furlong employees—an extraordinary achievement in the turbulent airline industry.

Stay focused on the core mission. During Herb’s era, Southwest never wavered from its core operating strategies. “We basically said to our people, there are three things that we’re interested in. The lowest costs in the industry, the best customer service, a spiritual infusion—because they are the hardest things for your competitors to replicate.” Herb’s low-cost recipe, however, did not expand to pinching on his employees’ earnings during tough times.

Herb’s Idea for Impact: “The business of business is not business. The business of business is people.”

Herb left a colossal impression not only on the airline industry and on those who worked with him, but also on people-management as a practice.

Volumes have been written about Herb’s exemplar of how organizations can be responsibly people-centered. Read Kevin and Jackie Freiberg’s Nuts: Southwest Airlines’ Crazy Recipe for Business and Personal Success—it provides an insight into the unique culture and legacy that Herb shaped at Southwest.

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