Chapter Five
When Leadership Is an Organizational Trait

James O’Toole

Increasingly, the identities of corporations are mere reflections of the personalities of their leaders. Today, for example, a business magazine won’t run a cover story about Ford Motor Company; instead, it will feature the company’s CEO in a full-color spread. Indeed, recent research shows that the perceived image of a high-profile chief executive brings a premium to a company’s stock. Investors thus join journalists in the personification of corporations, focusing on the characters, biographies, and alleged charisma of CEOs. As a result, American business organizations are portrayed as shadows of the “Great Men” who sit in the chief executive’s chair. In the most extreme case, for all intents and purposes Warren Buffett is the Berkshire Hathaway corporation.

Academic theory follows practice. Over the last decade, the parsing of leadership styles has become de rigueur in American business schools, the subject of practical (and arcane) professorial research, as well as stacks of graduate dissertations. In continuing education seminars, in MBA classes, even at the undergraduate level, professors now teach students each to adopt the “right leadership style” for themselves—using “360 degree feedback” to make them aware of how they are perceived by others and to learn how to manage those perceptions. For those severely leadership-impaired, there is always that growth industry called executive coaching.

This focus on personality is peculiarly American, an outward manifestation perhaps of our collective unconscious in which the image of George Washington astride his powerful white steed is indelibly etched. Europeans have resisted such personification of leadership in recent times. Indeed after 1945, thanks to the likes of Hitler, Lenin, Stalin, Franco, and Mussolini, Europeans were more than happy to concede the whole field of leadership studies to Americans. If you don’t count the scads of French books about Charles De Gaulle, Americans have owned leadership studies for most of the second half of the last century. During that time, we applied our theories not only to political leaders but to leaders of business corporations.

And, of course, we got it wrong. “We” meaning those of us in American business, academia, consulting, and journalism who discussed, studied, and wrote about leadership solely as an individual trait. While this obsession on a single personality is occasionally appropriate—particularly when the founding entrepreneur is still running a company—evidence offered here indicates that this perspective skews analysis away from organizational factors that are the more important drivers of performance. My colleagues and I came to this conclusion by accident. In early 1999, we began a research proj-ect on strategic leadership in conjunction with the World Economic Forum. For the previous decade, leadership sessions had been a good draw at the Forum’s annual Davos conclave, but Forum members had grown tired of the thin gruel of CEO war stories, anecdotes, and homilies. We were charged with putting beef on the Davos leadership menu. We formed a research team to create a data base of hard information about the soft subject of leadership.

Working with Forum member corporations, we began our efforts with traditional premises about leaders—but were surprised to discover that the relative performance of large corporations could not be explained adequately by measures of the individuals who head them. We discovered that indeed most of the large global companies we studied operate under a traditional model of strong individual top leadership, and that the quality of that leadership bears on the overall performance of those companies. But we also noticed some companies we studied—and some business units within others—are characterized by a different leadership. Instead of leadership being a solo act—an aria sung by the CEO—it is a shared responsibility more like a chorus of diverse voices singing in unison.

Significantly, this characteristic is more than “cascading” leadership in which a strong leader at the top empowers others down the line. Many of the key tasks and responsibilities of leadership are actually institutionalized in the systems, practices, and cultures of the organization. What we observed is behavior that is not dependent on the personality or continuing support of whoever is the leader of the organization at any given time. In this different form of leadership—and without the presence of a high-profile leader or “superior” goading or exhorting them on—we observed that people at all levels in the organization:

Obviously, we did not invent this model of leadership nor do we believe that it is new. Doubtless, it has been around a long time and we, like others, missed it because we were blinded by the powerful light emanating from high-profile leaders. Thus we are not advocating a newly discovered “best way to lead.” Instead, we call attention to a previously unnoticed—but equally viable—alternative to the traditional leadership model. Among other things, this discovery explains persistent contradictions to beliefs about leadership as solely an individual trait.

Why, for example, do some companies continually demonstrate the capacity to innovate, renew strategies and products, and outperform competition in their industries over the tenures of several, very different chief executives? Intel, for instance, has been a rip-roaring success under the leadership of Gordon Moore, Andrew Grove, and Craig Barrett. Why do some CEOs succeed in one organization only to turn in so-so performances in another? Consider George Fisher, a star at Motorola but less effective at Kodak. Conversely, why is it that some companies headed by singularly unimpressive CEOs rack up good performance records? Finally, why is it that academics are unable to quantify the relationship between CEO style on one hand and organizational performance on the other? In fact, they have found no objective correlation between those factors.

Moreover, history shows that businesses dependent on a single leader run a considerable risk. If that individual retires, leaves, or dies in office, the organization may well lose its capacity to succeed—witness the performance of General Motors after Alfred Sloan, ITT after Harold Geneen, Polaroid after Edwin Land, and Coca-Cola after Roberto Goizueta. Frequently, organizations learn the hard way that no one individual can save a company—and no individual, no matter how gifted, can be right all the time. As one CEO said, “None of us is as smart as all of us.” Since leadership is, by definition, doing things through and with the efforts of others, it is obvious that there is little that a business leader, acting alone, can do to affect company performance (other than “look good” to investors).

In light of this, it should have been no surprise when our research revealed that leadership is an institutional capacity, not solely an individual trait, in many successful companies. In fact, many corporations whose names perennially appear on “most respected” lists have the highest institutionalized leadership capacities. Like individual IQs, these companies seemed to have collective LQs—leadership quotients—that can be measured, compared, and bolstered through direct efforts. Hence, we are now able to explain why companies like Intel, ABB, GE, BP, Ford, Nestlé, and Motorola continue to renew themselves year after year and over the tenures of different leaders. They have made conscious efforts to build their overall organizational leadership capacities. Instead of asking “What qualities do we need to develop in our leader?” these companies ask “What qualities do we need to develop in our organization?”

This kind of organizational leadership model has an additional plus. It allows companies to bypass the egos that are fairly common in executive suites and focus on identifying business-related activities as the source of ongoing leadership development. They stress improving the ability of leaders collectively to do their central tasks, rather than on trying to fix individuals. Again, it is not that individual leadership behaviors are unimportant, but that in some cases, it may be more effective to treat them as secondary to organizational issues. It is far easier for leaders to learn to do things differently in terms of business processes than it is for them to change who they are. In our experience, individual leaders often see more clearly (and with less threat) how and why they need to change when the reasons are business-related.

USING LEADERSHIP DATA AS AN OBJECTIVE FOCUS FOR CHANGE

In effect, our research uncovered an alternative model not only of leadership but of organizational change. By surveying the behavior of over three thousand leaders at all hierarchical levels and buttressing these observations with hundreds of interviews, we are creating an objective data bank about alternative ways leaders bring about strategic and organizational change. This data allowed our research team to pinpoint specific business systems and processes that leaders use as levers to bring about significant shifts in organizational behavior and improvements in business performance.

For example, at one large global high-tech company we surveyed leaders at five different levels to collect data on sixty items related to twelve categories of systems that leaders use to affect behavior:

  • Vision and Strategy: Extent to which corporate strategy is reflected in goals and behaviors at all levels
  • Goal-Setting and Planning: Extent to which challenging goals are used to drive performance
  • Capital Allocation: Extent to which capital allocation decisions are objective and systematic
  • Group Measurement: Extent to which actual performance is measured against established goals
  • Risk Management: Extent to which the company measures and mitigates risk
  • Recruiting: Extent to which the company taps the best talent available
  • Professional Development: Extent to which employees are challenged and developed
  • Performance Appraisal: Extent to which individual appraisals are used to improve performance
  • Compensation: Extent to which financial incentives are used to drive desired behaviors
  • Organizational Structure: Extent to which decision-making authority is delegated to lower levels
  • Communications: Extent to which management communicates the big picture
  • Knowledge Transfer: Extent to which necessary information is gathered, organized, and disseminated

In parallel interviews, we discovered that there were competing theories about why this company was not as profitable as its competitors. When we analyzed the survey data and fed the results data back to the top management team, they were able to compare the effectiveness of their systems to those of other companies. The data was unequivocal, and team members who had been in denial about some of the results—and divided about what was causing the rest—were then able to come to grips with their organizational problems and create an agenda for repairing the broken systems. They were also able, for example, to identify a “concrete layer” in their hierarchy where transmission of messages from top leadership was getting stuck on the way down the line.

The executives then began a change process by feeding the data back to the next two levels of the organization, building consensus about the roles and responsibilities of each level, clearly identifying what needed to be done and by whom. In the process, they asked us to prepare cases of how other companies dealt with similar problems. They discussed these in a series of four workshops over a two-month period, building a common language and approach to leadership. In sum, they were able to consciously raise their organizational LQ by addressing the systems that had the greatest impact on performance. The bottom line is that, by using those systemic levers, the executives became more effective change agents and leaders than they had been—even after having worked with organizational development experts in the past to alter their individual leadership styles.

BUILDING ORGANIZATIONAL COHERENCE AND AGILITY

In the highest-LQ organizations studied, leaders at all levels use ordinary systems like those involving goal setting, communications, capital allocations, and recruiting in a conscious way to create two prime attributes of long-term organizational success: coherence and agility. Coherence means that common behaviors are found throughout the organization and that they are directed toward the achievement of shared goals. Agility is the institutionalized ability to detect and cope successfully with changes in the external environment, especially when such changes are difficult to anticipate. Until recently, scholars had posited that companies with high levels of coherence were “built to last,” and that the task of leadership was to get the right fit or alignment among key institutional systems and processes. We discovered that not all institutional coherence is good. For instance, bureaucratic alignment anchored in the habits of the past is deadly. Similarly, although agility has often been identified with corporate success, too much leads to chaos and wasting resources on duplicate efforts.

We found that organizations need to be coherent and agile at the same time. In fact, not only were the operating systems of high-LQ companies directed to those two ends, leaders viewed their prime task as creating both attributes. The highest-performing companies in our study actually align around agility: that is, their leaders rigorously measure and reward the seemingly loose entrepreneurial behaviors of market-responsiveness and risk taking. In essence, they create organizational coherence around shared business objectives while simultaneously encouraging the agility to meet discontinuous threats and opportunities.

A DISTINCTION WITH CONSEQUENCES

Does it make a real difference whether leadership is treated as an institutional capacity or individual trait? Yes. Fundamental premises drive behavior, and when leadership is thought of as an organizational trait there are profound organizational consequences upon which almost everything follows. For example, because ABB views leadership organizationally, its highly respected former CEO, Percy Barnevik, could retire at age fifty-four in full confidence that the company had the capacity to carry on successfully without him. Interestingly, this freed Barnevik to take on responsibilities for the Swedish Wallenberg family, ABB’s largest shareholders, and enabled that company to make needed structural changes that had been closely identified with Barnevik’s talents and tenure. Because Intel sees leadership as an organizational trait, the company did not miss a beat when CEO Andy Grove retired. In fact, it was positioned to move on to a higher level with the capacity to take on new strategic challenges. How often is it that a company not only doesn’t go into the tank when a respected CEO like Grove steps down, but actually renews itself with a fresh line of products and promising new areas of business? The successful hand-offs at ABB and Intel are not simply good succession planning. Rather, neither company is dependent on any one, two, or even half-dozen key leaders for its success. Observers will note that neither company talks much about individuals but instead focuses on building broad human capacity to manage the systems at the heart of their respective successes. That is what we found at our high-LQ companies.

THE ROLE OF ENABLING SYSTEMS

There is something palpably different about a company that emphasizes building enabling systems versus one that depends on a single personality at the top. Since the contributions of every leader are seen as important, there is concerted effort to define and measure leadership behavior down the line, place parallel emphasis on accountability at all levels for how the enabling systems are used, and make certain that the systems are used. But what do we mean by enabling systems? Here are four examples and how the high-LQ companies use them to institutionalize leadership:

Goal Setting and Planning. Some companies have religiously institutionalized the process of setting challenging goals to drive performance. Although great individual leaders can challenge and stretch followers, institutions can do the same through disciplined organizational processes. In several companies studied, there were formal mechanisms that ensured that leaders at all levels and at all times have a clear sense of how the organization is doing relative to its goals. Moreover, individual leaders are rewarded (and, yes, punished) based on rigorous measurement of performance against goals. While most organizations pay lip service to setting stretch goals and measuring things that are most important to the success of their business, we found few actually do it and stick with it, no ifs, ands, or buts—especially in the personality-based organizations where negative consequences for poor performers either didn’t happen or were seen as a sign of not being the boss’s favorites. In the most structured and disciplined of the processes observed, there is a high degree of involvement in goal setting, and highly participative processes of establishing performance metrics, thus ensuring an overall climate of organizational fairness—a climate previously associated only with the actions of an unusually trustworthy leader.

Risk Management. Perhaps the most surprising finding was the importance of risk management systems in creating leadership down the line. In some companies, this translated into formal processes that make certain that everyone understands the size and likelihood of the key risks facing the business. With this knowledge, leaders at all levels are able to take prudent risks, and they are enculturated to (and rewarded for) avoiding negative financial surprises. Because processes (not personalities) are paramount, capital allocation is seen as an objective process of pursuing business objectives, not pursuit of personal agendas. People are confident that objectively defensible projects will be funded and that the system behaves fairly when making capital allocation decisions.

Communications. There is a striking consensus among scholars and practitioners about the centrality of communications to the role of the leader. Significantly, we found examples of companies where this important task was viewed as the responsibility of every leader at every level. All leaders were also evaluated on how well they performed this task. In companies where leadership is institutionalized, leaders at all levels spend a significant amount of time communicating the big picture—the vision, strategy, mission, and purpose of the organization. At the operating level, they provide others ready access to information needed to do their work. We also found that those with the most relevant information have the greatest impact on decisions.

Recruiting. All companies recruit. But in high-LQ companies, recruiting is a prime task not of the HR department but of operating managers at all levels (including the CEO). These companies explicitly define selection criteria for new recruits that are closely related to overall corporate goals. Some, like sports teams, even recruit “the best talent available regardless of position” instead of looking to fill specific roles. Moreover, they include leadership criteria in their recruitment profiles, like interest in developing subordinates or ability to see leaders as teachers rather than bosses.

DIFFERENT IN COUNTLESS WAYS

What is striking from this study is that none of the companies stresses all twelve of the systems identified. Instead, each focuses on managing a few tightly. For example, one high-performing corporation keeps tight control of vision and communications, but leaves it to business units to make decisions relative to structure, recruitment, planning, and the rest. Significantly, we found no pattern in the choice of systems stressed, and no correlation between performance and systems emphasized. What seems important is a clear focus on any two or three key systems—the particular choices driven by the strategy, industry, or challenge faced by the company.

HIGH LQ: THE MORAL EQUIVALENT OF INDIVIDUAL LEADERSHIP

While having a Larry Ellison, Jack Welch, or Percy Barnevik at the helm is obviously desirable—and companies who have such talented leaders are indeed fortunate—such good fortune is rare. Companies with a high LQ, however, get many of the same benefits even if the top individual in the executive suite is not a superstar performer. More importantly, strong systems can make up for the morale-sapping effects of erratic, indecisive, weak, or egotistic leadership. It is here that students of organizational theory will recognize the link to what Max Weber was struggling with over a hundred years ago when he advocated bureaucracy over the alternative of his day: personality-driven, individual leadership. Weber may have solved the problems of capricious and politicized management with his solution of bureaucracy, but he introduced new ones in the immobility and rigidity that came to characterize not only his beloved Prussian civil service but, in time, the likes of General Motors, IBM, and AT&T. Now, after a century of struggling to choose between the Charybdis of arbitrary leadership and the Scylla of bureaucracy, high-LQ companies have a path to resolve the Weberian dilemma. These companies are not only coherent and agile, they are also no longer burdened with the vicissitudes of arbitrary individual leaders.

LESSONS FOR THE NEXT GENERATION OF LEADERS

A message that emerges loud and clear from our study is that CEOs don’t need to know all the answers, and they don’t have to do all the work of leadership by themselves. In fact, CEOs can create the systems under which others are encouraged to do many of the things that typically end up on the desk of a do-it-all top leader. We believe that it is easier to motivate and reward leaders down the line to take up the mantle of leadership than for a single CEO to try and provide detailed direction to hundreds, even thousands, of managers.

Our message to young leaders is not that the personality-driven model of leadership is headed for extinction, nor do we believe that it should be. Rather, we believe that more CEOs of large companies may be drawn to the organizational model of leadership for the simple reason that it is potentially more productive—and satisfying—to become a leader of leaders than risk trying to look like George Washington on a white horse. The bad news for those who like a People magazine approach to business journalism is there may be fewer “cover boy” CEO leaders in coming decades. The good news is that there may also be much more effective corporate leadership. As we have learned, leadership need not be just a solo act.

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James O’Toole is research professor in the Center for Effective Organizations at the University of Southern California Graduate School of Business. He has authored fifteen books on corporate culture, ethics, and leadership. For more information see www.jamesotoole.com.