Part One: The Leader’s Checklist
Would you have surgery performed by a doctor who routinely failed to confirm that the right patient was in the operating room and the correct procedure was about to be performed? Or willingly fly with a pilot who regularly failed to check wind speed, flight plan, and all the other essential ingredients for ensuring a successful takeoff?
Obviously not. Medical centers often require physicians to run through a specific checklist before commencing surgery. Aviation authorities around the globe require the same of pilots before takeoff. Indeed, in many newer jetliners, a commercial pilot is not given full access to the controls until the checklist process has been electronically confirmed. To be sure, mistakes still get made on the runway and in the operating room, sometimes horrible ones, but since every item on each of these lists is critical, mandating them all is a sensible guarantee against missing any, as Atul Gawande’s The Checklist Manifesto and recent research have made clear.21
How surprising, then, that those in leadership positions often fail to require the equivalent of themselves. We take for granted a pilot’s thoroughness, or a surgeon’s, but we too often give ourselves a pass on reviewing an analogous list, or merely having one to check, even when we are facing moments during which a complete leadership inventory might be essential for sensibly directing or even saving the enterprise.
If executive compensation could somehow be directly linked both to creating a personalized Leader’s Checklist and routinely applying it— in the same way pilots have to move through a checklist before being allowed to proceed to the next phase of flight—I am certain there would be far fewer botched takeoffs and landings, and fewer midflight failures, in the corporate arena. But with no comparable authority or device insisting on the Leader’s Checklist, the enterprising manager must enforce one’s own compliance.
For application to occur, however, managers must work to overcome a host of predictable but preventable behavioral lapses. One of the most important is that of knowing what should be done but then failing to do it, what researchers Jeffrey Pfeffer and Robert Sutton have termed the “knowing-doing gap.” Even the best checklist has no value unless it is routinely activated to guide a leader’s behavior. Doing so for many managers is an acquired rather than a natural skill.22
Drawing on both academic research and interviews with organizational leaders, I have found that managers fruitfully engage in six learning avenues that help them activate the Leader’s Checklist on a regular basis:
A first step for learning to apply the Leader’s Checklist is to become a self-directed student of leadership. This study can take many forms: reading leaders’ biographies, witnessing leaders in action, and joining leadership development programs. What’s critical is witnessing how others have worked with a full checklist or fallen short, often a powerful reminder to examine whether you yourself are employing all the necessary principles. In my leadership development programs, for instance, I often draw upon the experience of teams of firefighters whose commanders invited disaster by employing a less-than-full checklist.
I also frequently employ the following illustration from the pharmaceutical industry, one of the most informative moments I have ever studied for what it reveals about the value of a Leader’s Checklist.23
The director of research and development (R&D) at Merck, the giant U.S.-based pharmaceutical company, faced a critical decision. A scientist proposed developing a drug to combat a terrible disease called River Blindness. Hundreds of thousands had already lost their eyesight, and 20 million were at risk. Since the new treatment would be based on modification of an existing Merck product, a decision to invest might seem obvious—were it not for the fact that most of the victims lived in rural Nigeria and other poverty-stricken areas of west Africa. They could simply not afford the drug if it were developed, whatever its sight-saving powers. Even worse for Merck as a commercial enterprise was the fact that if it created a cure, it was likely to find itself pressured to pay for its manufacturing and distribution to millions of victims living in some of the remotest regions of Africa.24
This might seem like a nonstarter for anybody with responsibility for the near-term performance of a publicly traded company. But quarterly and annual returns were only one of the R&D director’s priorities. He also required long-term strategic thinking on behalf of the company, and that focused his attention on building income streams for years in the future. This line of thinking led him to conclude as well that although Merck would in fact have to give the drug away once it was developed, the company would ultimately gain. Given a strengthened reputation among doctors and regulators, renewed ability to recruit top scientists, and fresh brand recognition in countries like Nigeria, where Merck would long be remembered for its generosity, the company was likely to more than make up for its immediate losses in producing a drug that no customers could afford.
With a balanced focus on both short-term returns and long-term gains as part of his checklist principle of strategic thinking, the director of R&D decided to invest in the sight-saving product. And while it was indeed costly in the near term, it proved providential over the decades. When the company sought scientists for its R&D operation years later, the fact that it had combated River Blindness at its own expense proved a powerful recruitment tool. Merck’s seeming “loss-leader” decision also helped make it a consistent winner in Fortune magazine’s annual listing of America’s most admired companies. And in the future, a significant portion of Nigeria’s 140 million people might well give preference to Merck’s products over those of rivals because of the cure’s free distribution to some 10 million of their compatriots exposed to River Blindness. Although Merck did not explicitly follow a Leader’s Checklist at the time, the company’s success demonstrates the effectiveness of an ordered, principles-based approach.
Solicit personal feedback from individuals who can provide informed, fine-grained advice on not only the leadership capacities that you already exhibit but those that require better display. It is hard to correct what you do not know you are not doing.
Ask for and accept new responsibilities outside your comfort zone. By testing fresh territories and experiencing the setbacks they can bring, you can grow to appreciate the shortfalls in your own Leader’s Checklist even as you learn to more consistently apply it. The absence of strategic thinking and honoring the room, for example, are not so evident in the early years of a career, but the diverse experiences that come with expanding responsibilities often strengthen the need to apply such principles, especially after one personally witnesses the costs of not doing so.
Look back on leadership actions just taken, asking what worked, what was not invoked, and even what was missing from the Leader’s Checklist. Such after-action reviews have been critical to the success of the Chinese computer maker Lenovo. At the end of every week since the company’s founding in 1984, chief executive Liu Chuanzhi and his top aides have reviewed their decisions of the past five days, looking to identify what they did well and did not do well in order to avoid repeating what has been done poorly. Through such consistent application, Liu has built a Leader’s Checklist that helped his company acquire the IBM personal computer division in 2005 and emerge as the world’s fourth largest computer maker in the years since.25
Transform a chilling experience into a learning opportunity. We often learn as much from setbacks as successes—sometimes we learn even more from setbacks than successes—and with unflinching study of the stumbles, you should have a greater readiness to apply the Leader’s Checklist the next time you are required to do so. This is partly why Cisco Systems’ John Chambers had been one of the longest surviving chief executives in Silicon Valley. Chambers took the Cisco helm in 1995 and rode the Internet wave in the late 1990s to make his company one of the world’s most valued entities, with a market capitalization soaring above $500 billion. But when the Internet bubble burst at the end of that decade, Cisco flipped from extraordinary growth to stunning contraction. Chambers and Cisco survived the collapse, and he attributed much of the company’s success in the decade that followed to what he learned when it felt as if he were touching the void.26
The final step is to vicariously or directly experience a leadership moment when application of the Leader’s Checklist is much in order. When you walk in another’s shoes during a critical test of leadership or replicate such a moment in microcosm, you will build a better appreciation for when and how to invoke the Leader’s Checklist—and underscore what may still be missing from the checklist. To appreciate how a study of leadership moments can influence the development of the Leader’s Checklist, read on.
What happens when there is no Leader’s Checklist, or no attempt to fully apply one? Sometimes, very little. As every manager learns with cathartic relief, there are times when muddling through works just fine. But the higher the stakes, the more dire the consequences if a leader goes into a moment unprepared and the muddling falls short. For graphic illustration, American International Group’s financial meltdown of 2008 is hard to top.
Under the leadership of just three chief executives since its founding in 1919, AIG had by 2007 become one of the world’s most successful companies. With more than 100,000 employees and annual revenue exceeding $100 billion, the company ranked tenth on the Fortune 500 list, ahead of Goldman Sachs and not far behind Citigroup. AIG had become one of the 30 blue-chip companies that defined the Dow Jones Industrial Average.
A key driver of AIG’s ascent had been one of its newer and smaller divisions, Financial Products (AIGFP). AIG’s chief executive created the division in 1987 in response to rising demand for protection against debt defaults. Other financial institutions had been rapidly expanding their debt holdings, and AIGFP stepped forward to write insurance against their failure. Customers were promised that AIG would make them whole on defaults in securities ranging from auto loans and credit card receivables to subprime mortgages and credit default obligations.
At the outset, AIGFP charged relatively modest fees—in some cases just 0.02 cent per year for each dollar of insured risk—but across billions of dollars in such policies, it proved to be a lucrative business. Slow at first to grow, Financial Products accounted for only 4 percent of AIG’s operating income by 1999, a dozen years after its launch. Over the next six years, though, AIGPF’s share soared to 17 percent of the parent company’s operating income. With fewer than 400 employees, AIGFP eventually came to back more than $1.5 trillion in credit default obligations, including some $58 billion in mortgage-backed securities—in all, the equivalent of well over half the GDP of France.27
The rapid growth in AIGFP earnings appeared to come with just modest risk to the company. AIG’s chief executive reported to a group of investors in 2007 that the firm’s risk metrics were “very reliable” and that they provided management with “a very high level of comfort.” The head of AIGFP affirmed that promise: “We believe this is a money-good portfolio” and “the models we use are simple, they’re specific and they’re highly conservative.” Enterprise risks, he added, were acceptable: “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”28
As they built the business, AIGFP executives learned that they could back large portfolios of debt at competitive rates in part because their parent held an AAA credit rating, the highest grade. Bestowed on just a handful of firms, it proved an invaluable advantage. Under the prevailing practice at the time, AIGFP was not obligated to set aside cash or assets to back its obligations because of its AAA status. If any of the insured debt defaulted, the company would of course have to pay its customers, but, using historical data, executives calculated that they could readily muster the cash that would be required to cover the relatively small number of losses expected at any given time. And the AAA rating assured customers that AIG could indeed meet those obligations.
That calculus, however, proved lethal. After investment bank Lehman Brothers failed, on September 15, 2008, institutional investors and rating agencies turned to see if other companies held large amounts of the toxic subprime mortgages that had pushed Lehman over the edge. AIGFP did, and on September 15, a major rating agency dropped AIG to A-. Because of the industry convention of requiring collateral if an insurer was rated only A, the downgrade instigated massive collateral calls from AIGFP’s customers, some $18 billion in just hours after Lehman’s collapse from banking heavyweights such as Barclays, Deutsche Bank, and Goldman Sachs.29
Investors rushed to sell their AIG shares, sending the company’s stock plummeting by 60 percent in one day. The resulting credit concerns brought on a requirement that AIGFP post still another $15 billion. To cover the mushrooming demands for collateral, AIG was forced to draw $28 billion on September 17 from an emergency U.S. fund created the night before. Still further losses followed, $32 billion by the end of September and another $61 billion by end of the year, the largest annual shortfall in corporate history. The U.S. ultimately injected more than $170 billion to save the firm and assumed control of nearly 80 percent of its voting shares.
How to explain such a spectacular collapse? Historically bad market forces were certainly in play in 2008, as were unusually good times before that. With the long-serving Maurice Greenberg at the helm until 2005, the firm had repeatedly found advantage in entering risky markets worldwide where others did not, from insuring Russian trade to Nigerian oil. Strategic resourcefulness and audacious expansion had helped lift the company up to the Dow 30 and Fortune 10. But it is the duty of top management to anticipate bad times as well as good ones, and that is precisely where a thorough Leader’s Checklist could have prevented or drastically softened AIG’s fall.
Greenberg and his successor, for example, had extended the London-based Financial Products division a leash that proved far too lengthy, especially in light of how the division’s aggressive instincts had already been blessed by AIG’s executives and board. AIGFP employees reported that their division president had received relatively little oversight from the company CEO and that the chief executive in turn received scant oversight from the directors. The board’s limited vigilance in turn may have stemmed from AIG’s relatively weak governance at the time. Not long before the fall, a governance-rating agency had given AIG governance a nearly failing grade of D.30
Company leaders had been repeatedly warned of the exceptional risks that its Financial Products division was taking. One federal regulator, for example, reported in 2005 to the AIG governing board that it had found “weaknesses in AIGFP’s documentation of complex structures transactions, in policies and procedures regarding accounting, in stress testing, in communication of risk tolerances, and in the company’s outline of lines of authority, credit risk management and measurement.” Regulators came back in 2007, now warning of mounting subprime mortgage dangers and insisting that the board improve AIGFP’s internal controls. AIG’s outside auditor in 2008 found fault with a host of its accounting practices.31
In hindsight, it is easy to understand why the company CEO and division president paid so little attention to admonitions from the regulators, auditors, and increasingly the market itself. AIGFP was a shooting star whose rapid expansion contributed mightily to its parent company’s results and assured annual bonuses across the board. We know from academic studies that company success can result in excessive confidence and risk taking, and we know from human nature that we are loath to look a gift horse in the mouth. What’s more, robust growth traditionally has led to unrealistic appraisals of latent risks, particularly low-probability, high-impact threats that can prove catastrophic.32
Yet since this is, in fact, a clearly marked and predictable path of human behavior, one of the obligations of AIG’s leadership was to recognize such behavioral shortcomings before they could wreak havoc on the enterprise. If the AIGFP president was not heeding the warning signs of excessive risk, that responsibility fell to his boss, the AIG chief executive. And if the chief executive was unable to foresee the gathering storm, the board was duty-bound to guard against his over-optimism. Intervention at any one of these levels might have helped prevent a catastrophe of historic proportions, while the absence of such intervention at every level virtually assured it.
The 13th principle of the Leader’s Checklist is readily drawn from this account. It will help leaders see beyond and around the momentary euphoria of flush times so they can concentrate on steering an enterprise through both the prosperous and the hard years ahead.
13. Dampen Over-Optimism. Counter the hubris of success, focus attention on latent threats and unresolved problems, and protect against the tendency for managers to engage in unwarranted risks.
If AIG’s collapse is a story of unmitigated disaster, the 2010 rescue of 33 trapped Chilean miners is its polar opposite, a tale of unalloyed success. Regardless of outcome, I believe that close study of leadership at its worst and at its best is an essential source of fresh insights into what is essential for a complete Leader’s Checklist, and the miners’ rescue in Chile is certainly among the finest examples available in recent years. It reinforces the value of the consistent use of the Leader’s Checklist for guiding action—and underscores still another principle for the core checklist.33
Laurence Golborne made his mark as chief executive of Chile’s largest retail chain, Cencosud, an enterprise with more than 10,000 employees and annual turnover of $10 billion. In early 2010, the newly elected president of Chile, Sebastián Piñera, asked Golborne to serve with him as the nation’s mining minister, and they took office together on March 11, 2010.34
Though he had initially questioned whether he should accept the government ministry in the absence of any prior experience in the industry, Golborne believed that his management know-how would more than make up for the lack of technical grounding. The mining ministry is “where I can contribute my management skills,” he had explained to his family. And now, without miner rescue experience either, he would eventually conclude that his management capacities were enough for him to assume responsibility for rescuing the 33 miners trapped in the Atacama. “Although I do not come from the mining world,” Golborne explained, “and was questioning myself what I could do in the mine—how I could help in the rescue given the magnitude of the problem—I understood I had to be there.” But getting to that point entailed a wrenching encounter.35
Golborne arrived at the San José mine, the scene of the disaster, two days after the cave-in, uncertain about the role he should play but determined to see the situation for himself. Later that same day, a rescue team returned from the depths and reported that the entire mine had become so unstable that nobody could safely enter most of it for any reason, let alone descending all the way down to the stranded miners some 2,000 feet below. A member of the rescue squad confided to the mining minister, “They must be dead,” and “if they are not dead, they will die.”
In the interest of transparency, Golborne decided to immediately disclose the bleak appraisal to the miners’ relatives who had converged at the mine’s entry. But when he noticed two daughters of one of the trapped miners weeping after he reported the dispiriting assessment, he lost his own composure and for a moment could not continue. “Minister, you cannot break down,” shouted one of the relatives. “You have to give us strength!” For Golborne, it became a turning point. The meeting with the miners’ families ended his ambivalence about whether he and the government of Chile should assume direct authority over the rescue, even though the accident had occurred at a privately owned mine—and despite the fact that the nation’s top mining official had never assumed full responsibility for a mining rescue in the past.
Taking direct control, Golborne decided to initiate a plan to drill five-inch bore holes to locate the miners. The miners’ precise location was unknown, and such drilling normally required a tolerance for a seven-degree variance in alignment, more than enough to miss the miners’ refuge even if its location had been pinpointed. Though he had trained as an engineer before going into retail, Golborne quickly saw that the engineering challenges inherent in the rescue attempts went far beyond his own proficiencies. “I realized that in the technical issues we did not have the needed leadership,” he confessed. “I could not provide that leadership. Although I am an engineer, I do not have any technical knowledge about mining.”
With volunteers flooding onto the site—some 20 organizations were soon offering their services—a range of other rescue proposals began to emerge. To cope with the flow, Golborne set out to assemble a band of specialists, starting with an experienced engineer from Chile’s state-owned copper company who brought both the know-how and credibility required. “There were too many voices,” Golborne complained, “and nobody at the site seemed to have the leverage to cut the cake.” When the specialist arrived at the San José site, Golborne was unequivocal about the role that the engineer must play: “You have to take charge!”
Working with the miners’ families became a separate challenge, as they forcefully pressed for regular updates and, above all, speedy extraction. “We’re not going to abandon this camp,” declared one of their spokespersons, “until we go out with the last miner left!” Their skepticism ran deep, and emotions ran high. Banners proclaiming “Daddy, we are waiting for you” and “Son, we are here” waved over the families’ camp. To another specialist, a psychologist and safety director for one of the state-owned mines, Golborne gave responsibility for working with both the miners’ relatives and the many organizations that had arrived to assist.
The government itself was a separate and problematic constituency. Many officials questioned the wisdom of committing the state to an effort that could well end in great tragedy. The mine’s owners would bear most of the onus for a disastrous outcome if Golborne did not become engaged, but once he had committed, the state would inevitably share or even take the bulk of the blame. To overcome the lingering risk aversion among Santiago officials, and also to mobilize the government to secure counsel and equipment from around the world, Golborne handed the assignment off to a well-connected insider, the cabinet chief for Chile’s Ministry of the Interior.
Further consolidating his team, Golborne removed the mine’s owner from any role in the rescue. And he worked to ensure both personal equanimity and single-mindedness among the small band of leaders he had formed—equanimity because of the intense demands, riveting focus because of the human stakes. But with his top team in place, he then faced a decision on his own decision making: Should he take a role in the life-and-death decisions ahead, or should he leave them to the experts on his team? He worried that the decisions could go wrong without his involvement, but he also feared reactions if he made the final decisions but the rescue later faltered or failed. He feared others would later ask why he had gotten in the middle of it if he knew so little about engineering.
Golborne decided to fall back on the management methods that had served his business well in the past. He asked for guidance and the rationale for technical proposals coming from his team but did not shrink from direct engagement in their final resolution. “I did what I normally do,” he explained, and that was to “let the experts talk.” And he made sure that his direct reports had compelling reasons for their strategies before they executed them. “With my style,” he said, “I started asking questions,” but he reserved for himself the final authority for making the decisions.
Underscoring and heightening all of Golborne’s actions was the race against time. He assumed that any of the miners who survived the cave-in would have virtually no food, and he worried about life-threatening injuries among those who had not perished. The mining minister accordingly adopted a strategy of redundancy, seeking to reach and then extract the miners through simultaneous parallel measures. The drilling began with no fewer than ten five-inch bore holes down to locate the miners, and one finally paid off: 15 days after the cave-in, a drill pierced the small cavity where the miners had taken refuge. When the drill head was withdrawn to the surface, taped to it was a message in red letters, “Estamos Bien En El Refugio los 33” (We are fine in the shelter, the 33). For families, it was a moment of jubilation; for Golborne, a personal epiphany and turning point.
Golborne and his team immediately focused on the obvious next task, extracting the miners. They had already vetted some ten different extraction plans, and their attention converged on three that would open man-sized shafts all the way to the miners’ refuge. Each entailed a different approach, and since it was still a race against the clock, Golborne authorized all three to proceed at the same time.
Thirty-three days later, one of three plans, viewed skeptically by some of the engineers at the outset, succeeded before the others. One by one, the miners were transported to the surface in a thin, cable-drawn capsule, and on October 13, the shift supervisor—the last of the miners to be raised—emerged to greet his son and report to the Chilean president, who had joined Golborne for the crowning moment: “I’ve delivered to you this shift of workers, as we agreed I would.”
President Piñera replied, “I gladly receive your shift because you completed your duty, leaving last like a good captain,” adding, “You are not the same after this, and Chile won’t be the same either.” A group of rescuers who were still in the refuge after the last miner ascended displayed a sign seen by millions of television viewers around the world: “Misión Cumplida Chile.”
The rescue required that Golborne use virtually all of the Leader’s Checklist principles identified so far. He thought strategically, conveyed his character, honored the room, motivated the troops, embraced the front lines, and critically took charge even without a formal brief to do so because he had the management experience to handle the job and was optimally positioned for the task.
Like the disastrous AIG experience, though, the victorious Chilean one also points to still another Leader’s Checklist principle: the value of building a top team diverse in capabilities and experience.
14. Build a Diverse Top Team: Leaders need to take final responsibility, but leadership is also a team sport best played with an able roster of those collectively capable of resolving all the key challenges.