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How Winning Leaders Make Great Calls

6/23/2008 --

Professor Noel M. Tichy co-authors new book designed to hone judgment.

ANN ARBOR, Mich.—Whether one is talking about U. S. presidents, chief executives, major league coaches, or wartime generals, leaders of all kinds are remembered for their best and worst judgment calls. In the face of ambiguity, uncertainty, and conflicting demands, the quality of a leader's judgment determines the fate of the entire organization.

"With good judgment, little else matters. Without it, nothing else matters," state co-authors Noel M. Tichy (pictured at right) and Warren G. Bennis in their new book, Judgment: How Winning Leaders Make Great Calls (Portfolio). Tichy, a professor of management and organizations and director of the Ross School's Global Leadership Program, recently received the Lifetime Achievement Award from the American Society for Training and Development (ASTD). Bennis is professor of business administration at the University of Southern California.

These two experts and widely published authors have spent decades studying and teaching leadership, and advising top CEOs. Here, they present a powerful framework for making tough calls when the stakes are high and the right path is far from obvious. They show how to recognize the critical moment before a judgment call, when swift and decisive action is essential, and how to execute a decision after a call.

In the following Q&A, Tichy explains why this topic interests him, and how his research with Bennis can help today's leaders transform the corporate landscape.

Why did you decide to tackle judgment as the essence of good leadership?

The more Bennis and I looked at existing decision-making literature, the more we realized there was not much that helped you understand the process of making consistently good judgment calls. And you aren't going to find it in some Harvard Business Review article listing "seven easy steps for making a decision."

We're trying to frame an area that has not been framed before in order to gain a better understanding of judgment. We decided to focus our research on leaders who make big judgments: A.G. Lafley, the CEO of Procter & Gamble; Jeff Immelt, the CEO of General Electric; and the late U.S. Army General and Special Operations Commander Wayne Downing, among others.

There are only three judgment domains that really matter: 1) people (who's on your team, who's off); 2) strategy (what mountain do we climb?); and 3) crisis (every so often a storm comes along). If you don't get the people part right, the other parts can't function well. If you don't have an aligned, trustworthy team, there will be all kinds of game playing and political machinations when you sit down to set strategy. And you certainly can't survive a crisis.

CEO selection by a board is one area in which good judgment makes all the difference. But as your book details, boards too often fail in this critical respect.

There are a few recent instances where it appears board members did not do a good job of asking themselves, "Does this person have the fully scoped capability for handling the complexity of the position we’re putting him/her into?" One such example is former Citigroup CEO Chuck Prince. Chuck is a lawyer without a lot of financial acumen or experience in a complex organization like Citigroup, which at the time was the largest financial organization on the planet. Ultimately, he was pushed out of the company in November 2007.

Then there's former Merrill Lynch CEO Stan O’Neal, who also was fired in 2007. Stan came from General Motors, and all of a sudden he was playing on Wall Street. Those are very different games to play. More important, by all accounts he was a prickly, defensive kind of leader, so people belohim didn’t want to bring him bad news. His own handpicked board actually fired him. In Merrill Lynch's case, the board had to go outside the company to find a new CEO.

Carly Fiorina, the former chairman/CEO/president of Hewlett-Packard, was a sales and marketing person who never really ran anything before she ran HP. She grew up in AT&T, a kind of quasimonopolistic company, then joined Lucent Technologies, which was selling switchgear to the telecommunications industry. To sell switchgear, you basically have seven or eight customers who you wine and dine, and then you get these multimillion-dollar deals. So she looked good—everybody was buying switchgear. But if you haven't run a true profit-andloss organization, it's pretty hard to groom yourself to run a company. Contrast that to current HP chairman/CEO/president Mark Hurd, who ran real businesses and made real trade-offs during his 25 years at NCR Corp. Granted, the businesses he ran were smaller than HP, but he still came in and turned the company around.

Prince, O'Neal, and Fiorina all fall into the same category of "bad people judgments" made by corporate boards. The facts show these decisions weren't very good because the boards had to get rid of their CEOs. And with Merrill Lynch and HP, board members had to go outside the company to replace their chief executives.

That speaks to a very significant issue you address in the book, which is developing leaders within the company to ensure the board can make "good people judgments" when the time comes.

The number-one role of a CEO, besides delivering value to the shareholders, is to have a successor in place. However, Corporate America should get a grade of D- or F on the way that leadership pipelines are handled. When you think about HP having to go out twice; 3M having to go out twice; and about events at Boeing, Merck, IBM, Kodak, and Motorola—these are brand names that historically my colleagues would describe as really great companies with great leadership. Wrong. These companies illustrate that the majority of U.S. corporations have broken leadership pipelines. Of course, there are exceptions—a few companies are doing it right. For example, GE not only had one candidate, Jeff Immelt, but three who could have taken Jack Welch's place, including Jim McNerney, who is now the CEO of Boeing.

Let's look at Procter & Gamble, an interesting case in which CEO Durk Jager failed in 17 months and resigned from the company in 2000. A.G. Lafley, an internal candidate, was waiting in the wings. Since taking charge, Lafley has more than doubled the market cap of the company and done a terrific job. Look at PepsiCo Chairman/CEO Indra Nooyi. I think she is going to be the bellwether female CEO we'd hoped would emerge. Nooyi is the real thing in my book. Again, she was an internal candidate, who was identified more than a decade ago in a corporate leadership development program. Companies such as Yum! Brands and Caterpillar have "bench strength" in terms of a leadership pipeline. But all too often, companies do not focus on this critical component of leadership development.

Much like leadership, judgment is a murky concept, difficult to quantify and teach. But in your book, you create a process people can follow to hone their judgment and become better at making good calls.

Everyone's ability to make judgment calls can be improved, and there's a straightforward way to do it. Judgment is a process that starts with preparation. First, you must sense and identify the need for a judgment call. Dell Chairman/CEO Michael Dell stumbled on this very first step when the market cap of Dell went from twice that of HP to half that of HP in less than two years. He missed the signals, and then he blamed Kevin Rollins, his former CEO. Rollins was a sacrificial lamb, in my opinion. Dell was there every day in a connected office running the company with Rollins.

The second step of the judgment process is framing the issue and naming it. P&G CEO Lafley did this very well when he saw Procter & Gamble's baby-care business going south. He framed and named that issue not as "I have to coach that team," but as "I don't have the right leader for that team."

In the next step of the process, the leader has to mobilize and align the key stakeholders around his or her call. At P&G, Lafley made a big mistake by neglecting to consult senior staff before he appointed Deb Henretta to run his baby-care business. She knew the marketing and consumer side, but she was not an engineer like the leaders who had always dominated and led the business. They typically focused on manufacturing and the cost side of the business. Lafley missed the opportunity to get his team aligned behind Henretta. Although he was confident in his choice, he quickly realized his mistake in the way he executed the decision.

You use this P&G example in the book to illustrate the "re-do loop," which you and Bennis identify as critical to making good judgments.

Good leaders make mistakes along the way, but they self-correct before it's too late. In some ways, that's an intuitive skill. But it's also a learned skill, as indicated in the "re-do loop," which Bennis and I view as an explicit part of the judgment process.

In Lafley's case, he had to realize, "Whoops, I didn't involve people. I need to go back." So he gathered his vice chairmen and presidents, and allowed them to submit their own candidates for the babycare division. He still made the call for Henretta, but it was now within a context everyone understood. And then he did something that was critical to her success in the position: He stayed with her after he made his judgment call on her leadership. If he'd just said, "Good luck, Deb, I hope you can make it happen," the good old boys who dominated the business probably would have destroyed her chance to lead. I have seen Lafley on video, knocking on wood and saying, "Thank God, she made it." She turned that business around, and is now P&G's group president-Asia.

The other piece of the book that's very important is our intent to get leaders thinking about how they can help the upcoming generation develop their capacity for judgment. What judgment stretches need to be built into people's leadership-development journey? There are going to be plenty of bad judgments along the way—no one's perfect—but everyone needs opportunities to learn.

The only way you can develop good judgment is to exercise judgment, and that means putting people at some risk. Running a small profit-and-loss center offers great training experience. When I worked with Jack Welch at GE, the company had more profit-and-loss centers than any other company. Welch would say, "I can send someone to run some small business, and if they blow it up and it fails, it doesn't even show up on the annual balance sheet." So you must have the minor leagues where leaders can be tested and enabled to grow and develop. A lot of companies don't have that.

Where do you see the intersection of analysis and intuition when it comes to making good judgments?

I've been a business school professor since 1972. If you look back at what we teach our MBAs, it appears we've been overselling the analytics. That said, we're not throwing out the analytics in our model. Believe me, when GE CEO Immelt spends $10 billion on an acquisition, it's not a "blink" type of intuitive decision. There's a lot of number crunching and analysis going on. There's a lot of preparation, and then there's the readiness point at which you make the call: We're going to make the offer. And then on the execution, winning leaders are able to stay with the call. It's all about owning that whole process of blending the intuitive and analytical parts together.

The subtitle of your book is How Winning Leaders Make Great Calls. Why no chapter on corrupt leaders who've destroyed companies with criminal calls?

This book is not for leaders who are dishonest, such as those at Enron, Tyco, and ImClone. Once you've crossed that line, we're not interested in helping you make good judgments. You've already made the judgment call to undermine the free-enterprise system. In the book, we talk about the need for "unyielding integrity" in our leaders. Without that, I don't want to teach you about judgment.

Written by Deborah Holdship

For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu