The Leader's Dilemma
The Leader's Dilemma
The organization as an adaptive system
What ultimately constrains the performance of your organization is not its operating model, nor its business model, but its management model. 1
Gary Hamel, The Future of Management
Most of you will remember Aesop's fable about the tortoise and the hare who decide to have a race on a sunny day. The brash, confident hare thinks he has won the race before it even starts and decides to have a nap under a tree half way through. But when the hare awakes, the tortoise is at the finish line.
Too many business leaders think and act like hares. They think they can grow shareholder value at unrealistic rates each year by setting aggressive targets and incentives and then (like the hare) "predict and control" their future results through detailed budgets and short-term decisions. Tortoises don't make such promises, predictions or assumptions. Instead they keep their eye on the path ahead and continuously improve their performance. Tortoises always win in the end. Their aim is to adapt to changing conditions, beat their peers and endure over long periods of time. The best organizations are adaptive systems that continuously learn, adapt and improve.
Unfortunately, in the business world, when tortoise-type organizations appoint new leaders they can turn into hares. Royal Bank of Scotland (founded 1727), Citigroup (1812), Lehman Brothers (1850), Washington Mutual (1889), Merrill Lynch (1914) and AIG (1919) had all adapted and endured for, in most cases, a century or more but collapsed when a new leadership generation changed the way they were managed. The result was the credit crunch of 2007–9, when trillions of dollars were wiped off corporate balance sheets, leaving governments around the world with no option but to step in with taxpayers' funds to avoid a catastrophic collapse of the financial system.
What followed was the worst recession since the 1930s. Everyone is asking the same questions: How did it happen? How did the banking sector, full of mature organizations with long histories of steady growth and run by highly professional people, suddenly collapse? Why did governance and regulatory systems fail so badly? Who is accountable? What lessons can we learn? And how do we prevent it from happening again?
Commentators have pointed their fingers at naïve central bankers, inept regulators, unrealistic ratings agencies, passive politicians, greedy executives, aggressive salespeople, unscrupulous mortgage brokers and short-selling hedge funds. While all these actors in this tragedy (or was it a farce?) are culpable in one way or another, the roots of the crisis lie elsewhere. They are deeply embedded in the management model itself. Hijacked by financial engineers a few decades ago, lent credence by academics and pseudo-management science, and seized upon by macho leaders and private equity partners, it was a slow-burning fuse waiting to explode.
The harbingers of this crisis were visible several years ago when Enron, WorldCom and many other large corporations collapsed, triggering the Sarbanes-Oxley (SOX) legislation. Like today, fingers were pointed at greedy executives and inept regulators but, also like today's crisis, the root causes lay in a corrupt culture and a flawed management model.
If you doubt this conclusion, think about how the typical management model works. 2 Like the hare in the fable, leaders sit down once a year and plan the annual race: "What target will excite the market and boost the share price? Fifteen percent growth in earning-per-share feels good, so that's what we'll choose." The next step is to cascade this target down the organization so each division, business unit, function and department owns a piece of it. Tough negotiations take