A Topical Update

It’s been a few months since my last Leadership Insight and news reports are rife with interesting observations about leadership.  I have bucketed these into five themes:  It’s all about RELATIONSHIPS, EMPATHY is now fashionable, Resurgence of PERFORMANCE MANAGEMENT, CULTURE Matters, and The Unquestionable Power of SPIN.

It’s all about RELATIONSHIPS

Sadly, Marissa Mayer’s leadership-driven quest at Yahoo came to an end when Verizon agreed to buy its internet business for nearly $5 billion.  As observers of leadership, we have been impressed with Mayer’s use of direction setting and performance management to enhance the viability of the company.  Her efforts follow years of confused direction and serial reorganizations by her predecessors that left the company well behind competitors like Google and Facebook.  She was making good progress with the turnaround until her relationship with activist investor Jeffrey Smith (CEO of Starboard Value LP) deteriorated.  Expectations of cost reductions were agreed between Mayer and Smith but were not delivered.  Missteps and bad language (“words matter”) led to a lack of trust and a toxic relationship that eventually pushed Smith to drive a shareholder revolt – perhaps an emotional rather than an objective move.  Mayer lost her “license to operate” the company not because of poor performance but rather a poor relationship.  It’s a tragic end to a two-decade run of a company that essentially invented the internet economy, and we are left wondering what could have been.  It was not a bad run for Mayer, however, who reportedly earned $200 million over her four-year tenure with the company.

EMPATHY is now Fashionable

There are news reports that companies like Cisco and Ford are upping investment in empathy training to improve management. These companies believe, and we agree, that empathy is learnable and it improves listening and enhances relationships – ultimately boosting company results. In Applied Leadership we focus extensively on empathy as one of the key elements of Emotional Intelligence. One news report noted that as many as 20% of US employers are offering empathy training as part of management development.  As I’ve noted many times, we are just people, loaded with emotions that drive our behaviors.  Paying attention to a colleague’s emotions at work, and not just their words, can unleash the full force of human potential.

Resurgence of PERFORMANCE MANAGEMENT

P&G has overhauled its incentive system for managers to align (not motivate) their focus on the goals of each manager’s business unit rather than the company’s overall goals.  They are looking for a step-change in growth as the company’s sales have declined nearly every year since the recession. If the business units are misaligned there is a risk the company’s overall performance could be jeopardized.  It’s a risk P&G is prepared to accept as they want to influence managerial behavior, i.e., the actions taken and decisions made by managers.  Managing context is key for employees to get the right messages about performance (Message = Data + Context).

GE and Goldman Sachs are also reshaping their performance management systems to leverage growth.  GE is making teamwork a measurable goal by eliminating employee annual performance reviews, and Goldman is replacing annual performance ratings (one to nine ranking) with more frequent performance monitoring conversations.  They want to focus on giving employees specific directives on improving their work rather than grading performance that’s already occurred.  We call that “managing performance” vs. “performance assessment”.  GE’s new system is also structured around more frequent conversations about performance as a way to get employees to adopt new behaviors.

CULTURE Matters

We at Applied Leadership believe that culture is a byproduct of a company’s structure and performance management programs (“We become what we measure”) and the conversations within the company about them.  VW executives concluded that the goal of becoming the best in environmental performance (emissions) eventually led to a “culture of tolerance” for misleading regulators by using software to manipulate emissions tests.  It’s a classic case of “moral disengagement” when a company’s self-narrative causes it to be blind to its own immoral, unethical, and often illegal behavior.  We also call this “goalodicy” as a goal became its identity, and evidence was ignored that the means to achieve it were inappropriate.  It’s a costly flaw for VW as the EPA leveled fines of $15 billion and an executive was arrested in South Korea in June—and that’s just the beginning as the company is facing more claims in the US and other countries.

Companies like Wells Fargo and Container Store have embraced the “byproduct concept” about culture.  Caring about employees can breed a culture where employees care about customers.  It’s called an “employee-first culture”.  It’s more than compensation; it’s about working alongside people who feel appreciated for their contributions.  Wells Fargo reported, “We’ve learned that creating a happier, enjoyable work environment is more significant than some may think.”  They add that “culture is not a poster on the wall … it’s a reflection of the things we talk about.”  Conversations are the collective intelligence in a company, the glue that holds everything together.  A leader’s job is to maintain the conversations that ultimately shape the collective context, i.e., the culture, of a company.

The Unquestionable Power of SPIN

In Applied Leadership we highlight the criticality of spin, or sound bites, in communicating a direction to an organization.  Spin takes strategy and animates it so that people can see it, hear it, and touch it.  It answers the five questions: Where are we going? Who’s going with us? Why are we going there? When are we going? And, what are we doing to get us there?

The bizarre events surrounding the relationship between Walgreens and Theranos may be an illustration of spin going awry.  Walgreens made a deal to use Theranos’s proprietary blood-testing technology, Edison, in thousands of drugstores in the US.  At the time, Theranos was an exciting and unproven startup, with a charismatic and enthusiastic founder, Elizabeth Holmes—a promising entrepreneur with little track record.  Walgreens, craving growth, sought to capture a major share of the $75 billion medical-lab business by combining its store network with a new and innovative testing technology.  The deal involved a $50 million investment by Walgreens. That investment cemented Theranos’s credibility with market investors and was a conduit to obtain new patents on the Edison technology.  The company’s market value skyrocketed to $9 billion.

The problem is that the Edison technology has been repudiated as unreliable, and Walgreens appears to have been enamored with the spin about the new technology and did not fully evaluate the startup’s technology prior to inking the deal.  A federal investigation of Theranos’s lab found that the Edison devices often failed to meet acceptable accuracy standards.  The company now faces criminal and civil investigations by the US attorney’s office and the SEC into whether it misled investors and regulators.  Medicare and Medicaid Services have revoked the certificate of the company’s flagship laboratory and banned Ms. Holmes from owning or running a laboratory for two years.  She can appeal these sanctions.

Walgreens is now faced with embarrassment and potential legal liability from patients whose health may be in jeopardy due to the questionable tests.  It terminated the relationship with Theranos and closed all of its wellness centers that used Theranos technology.  With a faltered market value of $800 million, and as recently as late July, Ms. Holmes continued to put a positive spin on the embattled company, including promises of new remedial actions, shutting down the labs, adding new medical experts, and improving quality control, training procedures, and operating systems.  She says that the issue was bad leadership in the laboratory and not the veracity of the technology.