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JUDGMENT AND LEADERSHIP

JUDGMENT: the essence of effective leadership. It is a contextually informed decision-making process encompassing three domains: people, strategy, and crisis. Within each domain, leadership judgments follow a three-phase process: preparation, the call, and execution. Good leadership judgment is supported by contextual knowledge of one’s self, social network, organization, and stakeholders.

image  Making Judgment Calls Is the Essential Job of a Leader

image  Long-Term Success Is the Sole Marker of Good Judgment

image  Leaders Make the Calls and See to Their Execution

 

On November 1, 1997, when Michael Armstrong became chief executive officer, AT&T was a $130 billion company. It wasn’t the powerhouse it had been for much of its hundred-plus-year history, but it had a stockpile of cash and plenty of opportunity. For the next eight years nothing seemed to work for AT&T, and Armstrong’s long string of poor strategic judgments finally caught up with him, bringing his career to an unenviable end. In 2005 a nearly dead-broke AT&T was acquired by its former subsidiary, SBC, for a paltry $16.9 billion. Only its name survived on the combined company.

In 1999, when Carly Fiorina joined Hewlett-Packard (HP), she was hailed as a transformational leader. She was going to kick-start the company after years of mediocre performance. For the next six years, she stayed in the headlines, but she never really settled in at HP. She had a mixed scorecard. She had the courage and character to drive change, but did not relate well to the informal, nonhierarchical culture of HP. The optics were not good, nor was her popularity in HP. To make matters worse, HP missed more than half of its earnings targets during her tenure. The share value of HP stock dropped a jaw-dropping 58 percent during her tenure. On May 7, 2002, the acquisition of Compaq was completed. It was a long, bitter fight for Fiorina to get the acquisition closed, a $24 billion stock deal intended to mark her triumph as CEO. Instead the strategic judgment went bad in execution and helped set the stage for the HP board’s messy political firing of her in early 2005.

In 2000, when A. G. Lafley took the reins at Procter & Gamble (P&G), the 160-year-old consumer-products company was in trouble. Shortly before Lafley was named CEO the company announced it would not meet its projected first-quarter earnings. The stock tanked in a matter of two short months, falling from its lofty peak of $116 in January 2000 to $60 in March of the same year, a 52 percent free fall.

Like Carly Fiorina at HP, Lafley was faced with the challenge of finding new markets and new avenues for growth at a mature company with a tired business model and lackluster operations. Like Fiorina, whose “blockbuster” acquisition of Compaq did not turn out well for her, Lafley eventually made a big acquisition. But P&G’s $57 billion purchase of Gillette was a much savvier business move and produced vastly superior results in its first few months as a P&G company.

Even before the acquisition, Lafley had succeeded in turning the company around, having taken the reins after the resignation of an unsuccessful seventeen-month CEO stint by Durk Jager. By the end of 2006, P&G was riding high. Its stock price was up an impressive 66 percent since 2000, versus a mere 10 percent for the Standard & Poor’s 500 index during the same period.

Just a few months after Lafley took over at P&G, Jeff Immelt walked into a very different situation at General Electric. GE’s stock had suffered in the wake of the stock market crash of 2001, but Immelt was succeeding Jack Welch, dubbed “manager of the century” by Fortune magazine1 and BusinessWeek.2

Jack Welch had left GE after failing to complete the huge $47 billion acquisition of Honeywell in the final hours of his twenty-year reign. But the company was still a huge dynamo, and Immelt’s job was to find a way to keep generating more power. With revenues of $130 billion in 2000, Immelt would have to come up with $3.5 billion in new revenue every quarter to maintain the torrid 10 percent annual growth pace set by Welch. To do that, he took bold steps to reinvent the company. He shifted the company’s primary business model to capitalize on emerging technologies and emerging markets. By mid-2007 the stock market was rewarding his efforts. Immelt had succeeded in delivering average growth of some 8 percent per year, no small feat for a $100 billion-plus juggernaut.

Michael Armstrong, former AT&T CEO, and Carly Fiorina, former HP CEO, could not turn their companies around and in a short space of time lost significant shareholder value and ultimately lost their jobs as well.

A. G. Lafley at P&G and Jeff Immelt and Jack Welch at GE faced no easier challenges, yet they and their organizations ride from success to success. When they stumble they are able to recover quickly. Why is that?

It’s a matter of judgment.

 

Throughout our lives, each of us makes thousands of judgment calls. Some are trivial, for example, what kind of cereal to buy. Some are monumental: whom to marry, what career to pursue. The measure of our success in life is the sum of all of these judgment calls. How many good ones did we make? And more important, did we make good ones about the things that really mattered? Our ability to exercise good judgment determines the quality of our individual lives. And, as we rise to positions of leadership, the importance and consequences of our judgment calls are magnified exponentially by their increasing impact on the lives of others. The cumulative effect of leaders’ judgment calls determines the success or failure of their organizations.

As the title of this book states, the essence of leadership is judgment. The single most important thing that leaders do is make good judgment calls. In the face of ambiguity, uncertainty, and conflicting demands, often under great time pressure, leaders must make decisions and take effective actions to assure the survival and success of their organizations. This is how leaders add value to their organizations. They lead them to success by exercising good judgment, by making smart calls and ensuring that they are well executed.

It is our hope in writing this book to demystify the leadership judgment process, to explore and understand why it is that some leaders have much greater success in exercising good judgment than others. We take up this challenge because we are convinced that a keen sense of judgment is what makes or breaks a leader. Without a deeper and more compelling understanding of how leaders exercise judgment, the study of leadership can never be complete. (For those who wonder why and how judgment has been missing in most leadership studies—the proverbial elephant on the dining room table that no one dares speak about—we’ll address that later on. One hint: it’s hard.)

TOUR DE JUDGMENT

As we leave the starting gate on our tour de judgment, we are aware that we are not going to have the last word on this important matter. Judgment is too complex a phenomenon, too dependent on luck and the vicissitudes of history, too influenced by personal style and countless other variables, to pin it down once and for all. Doubly doomed is the hope of creating an elegant theory of judgment. Whenever anyone comes close to formulating a final word about judgment, some unforeseen, history-changing event rewrites all that preceded it.

Today, even as we admire the best that is being thought and written in the emerging field of “judgment and decision making,” we must keep in mind what John Keats wrote in a letter to his brothers in 1817. Keats observed, expressing his admiration for Shakespeare, that “he possessed so enormously, a ‘negative capability,’ capable of being in uncertainties, mysteries, doubts without any irritable reaching after fact and reason.”3 Even as we enter the complex territory of judgment, full of curiosity but without a reliable map, we are reminded that our most glittering insights could be negated in an instant.

Nonetheless, we do know a couple of things for sure about judgment.

1) First of all, judgment is the core, the nucleus, of leadership. With good judgment, little else matters. Without it, nothing else matters. Take any leader, a U.S. president, a Fortune 500 CEO, a big-league coach, wartime general, you name it. Chances are you remember them for their best or worst judgment call.

Can anyone forget that Harry Truman issued the order to drop an atom bomb? When Nixon comes to mind, so does Watergate. If you are thinking of Bill Clinton, there’s the Monica episode. What about CEOs? Coca-Cola’s Roberto Goizueta was demonized for New Coke and won back his corporate superstar status with Coke Classic. Michael Dell is “Mr. Direct.” Carly Fiorina was a pioneer in the ranks of female executives. But what will she be remembered for? For “destroying HP’s redoubtable culture.”

Leadership is, at its marrow, the chronicle of judgment calls; this is the leader’s biography. Good leadership requires good judgment.

2) In decision making, the only thing that counts is winning or losing: the results. Nothing else.

Long-term success is the sole marker of good judgment. It’s not “The operation was a success, but the patient died.” It’s not “He acted brilliantly, but the outcome was poor.” Judgment is successful only when the outcome achieves the espoused goals of the institution. Period. Enthusiasm, good intentions, and hard work may help, but without good results, they don’t count. Management writer Peter Drucker got it right in 1954 in The Practice of Management when he wrote, “The ultimate test of management is business performance. Achievement, rather than knowledge, remains, of necessity, both proof and aim.”

Grady Little, former manager of the Boston Red Sox, exemplifies both of the aforementioned points. In the seventh game of the American League pennant race against the New York Yankees in 2003, Pedro Martinez was on the mound for the Sox. For seven brilliant innings, he destroyed one Yankee batter after another. Then Martinez faltered. He walked a batter, gave up a long single, and was on the verge of walking another batter. At that point, Grady Little walked to the mound, obviously intent on yanking Martinez. Now, even casual fans knew that Martinez loses his stuff after a hundred pitches. He’d already thrown more than 115 and was clearly losing his edge. But Martinez had no intention of being replaced. On the mound, he persuaded Little that he still had his stuff and demanded that he be allowed to continue pitching. The Yankees went on to clobber Martinez, scoring four runs in the interrupted inning, and won the series. Grady Little was fired a short time later.

Grady Little may have relieved pitchers a hundred times before that fateful game with good results. However, when it mattered most, his judgment failed. Little’s single call, made in the context of a pennant game with Boston’s century-old rival, stained his reputation and indeed defined his entire career. A reasonably successful manager up to that point, he will always be remembered for that single poor judgment call.

In world affairs, think of John F. Kennedy and the Cuban missile crisis. Russian ships were steaming toward Cuba with nuclear missiles. Kennedy courageously and skillfully stared the Russians down, defusing the situation and avoiding a potentially catastrophic confrontation. Now that we understand what was really going on during those frightening days, we admire JFK even more for his courageous judgments. But had he gotten it wrong—if there was anyone left to do the remembering—he would not have emerged the hero that he remains to this day, more than four decades after his death. George Bush the elder, “Bush 41,” probably did not have to promise “no new taxes” in order to get elected, but once he had implored us to “read my lips,” his contrary and ill-fated decision made him a marked man.

And often the damning call is a failure to act. Where would Merck now be if it had held off marketing Vioxx, or if its CEO, Ray Gilmartin, had recalled Vioxx two to three years earlier, as evidence mounted that the drug might be risky for cardiac patients? We can answer that: Gilmartin might still be CEO and Merck would not be facing thousands of lawsuits.

Good judgment is the essence of good leadership.

THE LITERATURE ON JUDGMENT

So, if judgment is so important, why the “lacuna problem”? Why has judgment gotten so little attention in the ever-growing literature on leadership? Why have we, our colleagues, and the other longtime chroniclers of leadership ignored what we believe is the core of the complex phenomenon of leadership?

Part of the answer involves the vagaries and uncertainties of the decision-making process. Every situation unfolds in its own unique way at its own unique pace with its own unique cast of actors. Sir William Osler, one of the fathers of modern medicine, ruefully lamented in the middle of the nineteenth century: “If only all patients were identical, medicine would be a science, not an art.” The same can be said about judgment. To paraphrase Sir William, if all problems were identical, judgment would be a science, not an art. In decision making, as Churchill said of war, “the terrible ‘Ifs’ accumulate.”

Then there are also the personal, substantive, and stylistic variations in human nature. On January 9, 1961, eleven days before his inauguration as thirty-fifth president of the United States, John F. Kennedy addressed the Massachusetts Legislature for the last time as a senator. In the course of that landmark speech, Kennedy observed:

When at some future date the high court of history sits in judgment on each one of us…our success or failure in whatever office we hold will be measured by the answers to four questions:

Were we truly men of courage…?

Were we truly men of integrity…?

Were we truly men of judgment…?

Were we truly men of dedication…?4

Thirty-eight years later, during a conference titled “Presidential Decision Making” at Harvard’s Kennedy School, Ted Sorenson, one of JFK’s closest advisers and speech writers, was asked to reflect on his former boss’s decision-making style. Sorenson answered: “I cannot emphasize enough how important that elusive quality is; far more important than organization, structure, procedures, and machinery. These are all important, yes, but nothing compared to judgment” (emphasis added). Sorenson elaborated: “Judgment is more important even than the political sense that he brought to these decisions; and I am referring to political in the broad sense of the term: an understanding of Congress, an understanding of the country, an understanding of what will be acceptable and what can be explained and defended.”5

At that same conference, the decision-making styles of five other former presidents were discussed by once-close members of their inner circles. In looking back, each associate found a different key to the former president’s method of making decisions. There is no one-size-fits-all manner of making a judgment.

At least on the surface, the variations and idiosyncrasies exposed at that conference overshadowed the similarities. Dwight Eisenhower, a formidable soldier and a man of battle-hardened experience, appreciated the role that structure plays in successfully moving large organizations (remember he reshaped the National Security Council to give him a counterbalance to the State Department). Despite the rumors that his secretary of state, John Foster Dulles, called the shots on foreign policy, Ike kept all important decisions in his hands, although he was good at delegating less important responsibilities. Lyndon Baines Johnson and Gerald Ford were shaped by their Senate experiences and, thus, inclined to “build bridges.” They reflexively searched for trade-offs and formed alliances.

For the most part, we don’t think of Gerald Ford as a decision maker, and with good reason. The only truly important decision Gerry Ford made, and the one he will always be remembered for, was pardoning Richard Nixon. That decision, he later admitted, was prompted less by principle than by a sense that he had to perform the expected service to the former president before the brief honeymoon period of his own presidency had passed.

Ronald Reagan was as ideologically motivated as Ford was pragmatic. If the twentieth century had one value-driven president, aside from Wilson in his first term, it was Reagan. His entire presidency was based on a single principle, that “the free individual is the creative principle in a society and an economy…. Democracies are best because they leave most people free.”6

The first President Bush was collaborative, responsive, and accessible. Neither an ideologue nor impulse driven, he probably relied on his advisers more than any of the other presidents we’ve mentioned. His most important decision was made on the advice of his two most influential advisers, Brent Scowcroft and James Baker. Both men strongly urged him not to invade Baghdad and take out Saddam Hussein. The wisdom of that decision has not yet been vetted by time or history.

The second President Bush has also made a series of decisions that history has already judged and will haunt not only the remainder of his term in office but future presidents as well. What is clear is that his 2003 decision to invade Iraq, however well intentioned, was based on flawed information and a serious foreign-policy failure. What still remains unclear is what role the elder Bush has played in the decision making of his president son, although it is likely that the father is a factor in how the younger man views his office and his eventual role in history. Whatever else the story of the two Bush presidents can be said to be, it is a father/son tale of Shakespearean proportions, one whose playing will have a lasting effect on American history.

At that Harvard conference, Ted Sorenson told a resonant and time-honored tale that pretty accurately reflects the state of thinking about judgment until quite recently. It involves two generations of lawyers:

A new associate happens to be seated at lunch next to a senior partner, and the younger man says to the veteran, “Tell me, why is it you have this big reputation for judgment?” “Well,” the great man replies, “there are people who seem to respect my judgment.” “If you don’t mind my asking another question, how is it you have this reputation for judgment?” “Well, I guess I’ve made the right decision enough times.” “If you don’t mind me bothering you, what was the basis on which you made the right decision?” “Oh,” he said, “that comes from experience.” “One last question, what’s the experience based on?” “Wrong decisions,” the elder statesman replies.

AN EMERGING DISCIPLINE

The relatively new discipline of Judgment and Decision Making that is just now beginning to show up in the curricula of better business schools still falls short of Vilfredo Pareto’s 80/20 Rule; we haven’t reached the 20 percent of understanding needed to predict 80 percent of the success or failure of judgments. But we are getting there.

Political scientist Herbert Simon, in 1957, laid the groundwork in his seminal work on the limits of rationality, his famous “bounded rationality.” In addition to its blunt attack on the hyperrational exuberance of classical economics and game theory, Simon’s work made clear the necessity of taking into account the messiness and irrationality of the real world when making decisions. Psychologist Daniel Kahneman gets credit for digging the grave of rational choice theories (including expected utility theory) when he wrote, “Research indicates that people are myopic in their decisions, may lack skill in predicting their future tastes, and can be led to erroneous choices by fallible memory and incorrect evaluation of past experiences.”7 Given all of the above—the abundance of “ifs,” the messiness of reality, the newness of a true science of judgment, and the capriciousness of luck—it would be surprising if there was not a black hole in leadership studies where the appreciation of judgment should be.

One of the problematic realities is that, with good judgment, unlike pornography, you don’t always recognize it when you see it. Can anyone yet say for certain whether President Bush’s 2003 invasion of Iraq achieved its aims or was one of the worst judgment calls of the new century? The poets always seem to do a better job at getting it right than the pundits. Consider Auden’s cautionary words:

The Inevitable is what will happen to you purely by chance.

The Real is what will strike you as really absurd.8

Given Auden’s achingly appropriate words, it might be easier to continue to ignore the question of judgment, however important, or even to question our own judgment in addressing it. But what gives us hope, call it unwarranted optimism if you will, is the potential and momentum of the work now taking place in the exploding field of Judgment and Decision Making.

We can say, without hyperbole, that the promise of this new field is astounding. One reason for optimism is the variety and richness of the roots of the current boom: the “choice” and “utility” theories of the classical economists; the logicomathematical work of Rudolf Carnap, W. V. Quine, and Ludwig Wittgenstein; the advances made by Norbert Weiner, Jay W. Forrester, and J.C.R. Licklider in computer and system sciences; the insights of the social psychologists, including Kurt Lewin, Leon Festinger, Edgar Schein, Irving Janis, and many others, who plumbed group dynamics and the effects of “groupthink” on decision making; and the contributions of the political scientists, such as Richard Neustadt, Ernest May, Fred Greenstein, Graham Allison, Alexander George, and others, whose focus of convenience was presidential decision making.

We must also include an ever-increasing number of biographers and historians. John Lukacs’s brief narrative of Churchill’s leadership, Five Days in London: May 1940,9 is almost as grand in scope as Shakespeare’s Henry V. Also important are the writings of reflective practitioners, decision makers themselves, who are contributing by their willingness to evaluate their own judgments. Self-serving or not, they are an invaluable source of wisdom, full of cautionary tales.

One of the most critical contributions toward the development of any persuasive theory of judgment is the groundbreaking work of psychologists Daniel Kahneman and Amos Tversky. Their pioneering work on what has come to be called behavioral economics is, above all, the study of decision making. Closely related is the wide-ranging and brilliant work of the cognitive neuroscientists and positive psychologists.

Among the most important are Robert Sternberg, Antonio Damasio, Daniel Gilbert, Peter Whybrow, Mihaly Csikszentmihalyi, George Loewenstein, Karl Weick, and Gary Klein. The latter two are of special interest for us because they study leaders and teams in their natural settings and try to make sense of how real leaders make real decisions under pressure. They take judgment out of the laboratory, where highly controlled experiments offer fascinating insights that may or may not provide guidance that leaders can use. Instead, they explore judgment in the messy, ever-changing context in which decisions are actually being made.

Their work is especially resonant for us because our own “make it up as we go along” methodology has a lot in common with theirs. We have come at judgment in a less systematic way than most of these researchers, mainly by “hanging out” with leaders and their teams while they are acting and immediately afterward. It is this real-world experience that convinced us that no study of leadership is complete without an understanding of judgment.

OUR FOCUS OF CONVENIENCE

Everyone makes judgment calls. Throughout our lives each of us makes thousands of them. In our personal lives, these range from the trivial choices of route to work each day to the monumental decisions about picking spouses and careers. But we want, as much as possible in this book, to avoid the platitudinous generalities that might fit all occasions. So we will focus our lens. We will discuss the things we care and know most about. We will talk about leaders and how the good ones make important judgment calls.

The Leader

The leader is the central figure in our complex firmament of judgment. He or she is not only the protagonist but the architect of the action.

Some of the examples of good and bad judgment that we studied were the work of a more or less autonomous actor. But most are not. We will focus on the principal actor most of the time, because, as Harry Truman put it, the proverbial buck stops there. At the same time, however, we are exquisitely aware that judgment calls usually involve a host of complicit individuals. We continue to recognize the importance of the supporting cast.

The play is called Othello, but would it work without Iago? Or take the mythic shift in Intel’s strategy. For years, Intel dominated the memory chip business. Then one day in 1984, as the Japanese gained ground with copycat commodity chips, Andy Grove, Intel’s number two at the time, turned to number one, Gordon Moore, and asked the question, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Moore responded, “He’d probably get us out of memories.” Then, said Grove, “Why shouldn’t you and I walk out the door, come back and do it ourselves?”10 The rest is history. Without Grove’s probing and insistence on assuming an outsider’s perspective, would Intel be a failing “memory company” or the microprocessor powerhouse it is today?

Make no mistake: the leader is the Copernican pivot at the center of the decision-making process. All the satellites, other players, and surprising walk-ons revolve around the leader. Jeff Immelt, who makes decisions affecting hundreds of thousands of people weekly, if not daily, describes the process: “I make every decision, but get lots of advice. I don’t delegate. It’s ‘What do you think? What do you think? What do you think?’ Then boom. I decide.” The responsibility and the accountability is his alone.

The Team/Social Network

While we focus on the leader, we take into account the leader’s relationship to others. Without that supporting cast, there would be no leader or need for one. We wouldn’t need teams or organizations if it were possible for one person to do the job, and, as we all know, we need teams now more than ever.

In all industrial societies, solo acts have become rare to the point of nonexistent. And don’t even think Lance Armstrong. There is a reason his team rides that victory lap with him and passes round the bright yellow victory shirt. So, to look at a leader in operation, we will have on the screen all the significant others, the allies, critics, and all those whose lives are affected, even shaped, by the leader’s judgments. Those stakeholders, from investors to employees, from customers to the broader public, are the ultimate winners and losers whenever judgments are made.

In our byline culture, the leader gets the glory whenever he makes the right call. When Fortune named former GE CEO Jack Welch Manager of the Century, they cited his mantra of speed, his famous rallying call, “Who wants to be slow?” But Jack only set the pace. He accomplished nothing without his team and supporting staff, those he called his “A” players, the purveyors of needed information and the executors of his decisions.

So, engaging and aligning stakeholders will be key elements in our judgment framework. Like a master pianist, a gifted leader knows which chords to strike hard and how to strike them, at certain times fortissimo, at others a subtle pianissimo. That’s called touch. Master leaders learn that, but it takes time. Engaging and aligning are crucial if good judgments are to become successful actions: crucial so that the board won’t be surprised, crucial so that the customers will be primed, crucial so that the staff has the will and the resources to make the plan work.

There is a brilliant scene in arguably Shakespeare’s best leadership play, one that should be required reading for anyone who cares about leadership, Henry IV, Part I. In it, the Welsh seer, Glendower, boasts to Hotspur, “I can call spirits from the vasty deep!” Hotspur deflates him with a quick retort: “Why, so can I, or so can any man; But will they come when you do call for them?”11

These are the questions leaders must ask themselves: Will the followers come when you call them? Can you as a leader engage and align them? Without those abilities, leaders inevitably fail, no matter how bright their promise. Recall how Cato once compared the two famous orators of his age. “When Cicero spoke, people marveled. When Caesar spoke, people marched.” Leadership is not simply speech. It is speech that makes people march. Good judgment without action is worthless.

GETTING THE IMPORTANT ONES RIGHT

When we first began to think about this book, the question we framed was: Why do some people make a better percentage of good judgment calls than others? Nobody is brilliant all of the time. Each of us makes mistakes and misjudgments. But some people have much better track records than others. Then, as we got into discussing it, we realized that we didn’t have the question quite right.

The thing that really matters is not how many calls a leader gets right, or even what percentage of calls a leader gets right. Rather, it is how many of the important ones he or she gets right. Good leaders, we observed, not only make better calls, but they are able to discern the really important ones and get a higher percentage of them right. They are better at a whole process that runs from seeing the need for a call, to framing issues, to figuring out what is critical, to mobilizing and energizing the troops.

Good leaders are able to triage their time and energy, and focus on the consequential. Jack Welch used to say at GE that if he wasn’t careful with his time, he could spend days at the company’s headquarters knee deep in bureaucratic crap and add no value to the company. Peter Drucker wrote in The Effective Executive that “the executive’s time tends to belong to everybody else…[that he or she is] captive of the organization.”12 All too many leaders let Rome burn while attending to the trivial.

WHAT DO WE KNOW?

Earlier we mentioned our “methodology”; methodologies would be more accurate. We’ve used about every social science method in our quiver, from formal surveys and structured interviews to “hanging out” and schmoozing with leaders and their teams.

If you counted each of our encounters with leaders, they would number in the thousands. In this book, we look at relatively few cases and focus on “representative anecdotes” to make our points. We also draw on history and literature for illustrations. Whatever our sources, our primary purpose is to develop a useful framework that will help leaders make better judgments and help shape the next generation to do the same.

In order to do that, we address the most vexing questions and conundrums leaders confront when making their most important judgments.