Leadership in turbulent times
Carlos Ghosn, Mitt Romney, Stuart Rose: In troubled times, we need inspired leaders more than ever, suggests corporate turnaround specialist Anthony Holmes
Carlos Ghosn, the Brazilian chief executive of Nissan and Renault, achieved what may still turn out to be the most spectacular corporate turnaround of the decade. He became chief executive of Nissan in 2001 when the carmaker had debts of $20 billion and a loss before interest and tax of $6.1 billion. Within a year he had converted the loss into a profit of $2.7 billion and Nissan returned the best operating margins of any carmaker.
This was at the end of a decade in which the Japanese government’s efforts to revive economic growth had failed and its long-term economic problems were exacerbated by turbulence in the world economy. The major obstacle to reform was Nissan’s adherence to its rigidly hierarchical management structure. Not only was Ghosn’s nationality a cultural shock to a large Japanese company, but he was also prepared to act against traditional practices, which is a common characteristic of successful leadership in difficult circumstances.
Ghosn and his team took only three months in late 1999 to formulate a three-year turnaround plan and he declared his objective of returning the business to profit by 2001. Having a detailed plan that you share with all levels of the business (but keeping plan B to yourself), setting clear and simple objectives for each phase of the programme, incentivising staff and personifying this focus are all characteristics of successful leaders. Ghosn has often said how important it was for everyone remaining in the company to understand that the old way of operating had ended. He emphasised this by making himself visible and shaking hands with everyone he encountered, irrespective of their status – a small thing, but a significant cultural change.
He said that the turnaround was not just the result of the big initiatives such as cost cutting, plant closures and divestments. The most important thing was to change the mindset of the employees and to show them that they could affect performance by first achieving small gains that gave them confidence to reach more demanding targets. He told the story of the turnaround in advance and then invited everyone to act their part in it. Nissan returned to profit in 2001 and by 2003 had zero debt, with an auto-industry world-best operating margin of 10.8 per cent.
Detailed planning, simple and measurable objectives, speedy execution, laser-like focus on the problems that need to be fixed in phase one to facilitate phase two and good internal communication, are the underlying principles of successful change. Taking the hard decisions early, implementing them rapidly, changing the mindset of employees and eliminating unnecessary complexity were the hallmarks of Nissan’s recovery.
There are other examples; Mitt Romney’s rescue of the 2002 Salt Lake City Winter Olympics, Sir Stuart Rose’s turnaround of Marks & Spencer, and Michael Grade’s work-in-progress at ITV. With the right leadership, you do not need to resort to bankruptcy law to rescue a troubled business in turbulent times.
Leadership is not simply a superior form of management; it is a different skill, as Abrahim Zaleznik argued in his classic 1977 article in Harvard Business Review. Managers address problems by selecting actions from an established catalogue of processes, he said, whereas leaders are successful because they tend to formulate original solutions to problems mere managers find intractable.
As a practitioner in the field, I think Zaleznik is right. I would add that we seek leadership most when conditions become turbulent and threatening, because when an economic storm is imminent, the manager’s methodical framework, using conventional techniques, becomes unreliable.
Too few directors and shareholders appreciate the distinction between leadership and management and fewer still understand when a manager should be replaced by a leader.
What is a leader? We agree they are charismatic, probably eccentric, good communicators, who, in less challenging times, have a history of being disruptive. There may even be a clinical explanation: it’s often said that leaders suffer from narcissistic personality disorder, which is characterised by self-obsession and lack of empathy. However, their virtues are imagination, preparedness to consider the unconventional path and an ability to navigate it with an enthusiasm and confidence that inspires others to follow them.
Often, the swifter they rise, the harder they fall. Enron’s Ken Lay was fêted as a leader until it was discovered that his apparent success was a financial illusion. In the UK, Adam Applegarth of Northern Rock was regarded as a leader while he delivered exceptional growth and performance from a novel business model. In July 2007, he said: ‘The medium-term outlook of the company is very positive.’ Six weeks later, the Bank of England had to inject emergency funds.
Managers cannot become leaders on demand. When an organisation encounters a crisis, its managers may adopt the demeanour of iconic leaders, be it Churchill, Napoleon or even Josiah Bartlet, The West Wing’s fictional US President; but onlookers are usually unconvinced.
Managerial politicians often change the tone of their rhetoric in response to a crisis. Prime Minister Gordon Brown is a good example of a well-regarded manager struggling to transform himself into a leader. He was regarded as a technically proficient Chancellor who believed the skills that made him successful equipped him to become Prime Minister. In more stable times he might have succeeded, but in the midst of an economic crisis, the public looks for an individual who has the charisma to reassure them that their worst fears can be overcome. Brown can only attempt to imitate the way he perceives that true leaders behave, but the artificiality of his personality is unconvincing; he has the worst rating for public confidence since Neville Chamberlain in 1940.
Nor should the successful leader be awarded the crown in perpetuity, although many would like it that way. Carlos Ghosn has been unable to sustain Nissan’s performance or achieve Nissan’s success for Renault; by 2007, his star was tarnished by falling earnings. There has been the recent dispute at Marks & Spencer about Sir Stuart Rose’s elevation to executive chairman, and in the political arena, the attempt in 1990 by Margaret Thatcher to remain in office when her support had evaporated.
Leaders are recruited to achieve specific objectives, typically to overcome an imminent threat and return the organisation to stability. Once this task has been accomplished, the leader should step down and the task of rebuilding and consolidation be given to someone with the organisational and administrative skills of a manager.
The classic example of this transition from manager to leader followed by a hubristic attempt to retain power and the return to the manager-leader is that of Neville Chamberlain’s replacement in 1940 by Winston Churchill, followed by his replacement at the height of his success by Clement Attlee.
Chamberlain and Attlee were accomplished managerial politicians with skills that were the antithesis of Churchill’s. In the critical situation of 1940, Prime Minister Chamberlain’s managerial technique failed totally. With the threat of invasion imminent, Churchill, the renegade, inspiring eccentric with a gift for communication, replaced Chamberlain; his success and the adoration that followed are well documented.
After the war was won, Churchill wanted to retain power, but the electorate recognised that the post-war years presented no threat and required someone with the comparatively mundane organisational abilities of Attlee. Attlee became Prime Minister in Churchill’s place, and the cycle of manager to leader to manager over the six years of the crisis that was the Second World War was complete.
The same pattern was followed with Margaret Thatcher’s replacement of James Callaghan’s premiership in 1979 following the winter of discontent – and her own enforced replacement by the managerially inclined John Major.
My own career as a turnaround specialist began during the last serious recession. I realised then the extent to which some directors of major companies deluded themselves about the resilience of their company; they spent too long apportioning blame and too little time making changes to leadership.
The question in the current crisis is whether we can learn from our own past. The artificial suppression of the credit and business cycle, which successfully averted the natural cyclical correction that should have arisen around 2000, means most of those responsible for handling this turbulent phase have little, if any, direct experience of operating in the previous crisis of the early 1990s. As George Santayana said: ‘Those who cannot remember the past are condemned to repeat it.’
Log on to www.spectator.co.uk/business to view this month’s Strategist round-table Vodcast on Leadership in turbulent times, with Martin Vander Weyer, Matthew Lynn, Anthony Holmes and guests, from Monday 12 May
Email your questions to strategist@spectatorbusiness.co.uk on next month’s Strategist discussion: 21st Century business risks
Anthony Holmes’ book, A Time to Lead, A Time to Manage, is to be published in winter 2008. www.anthonyholmes.org