The Edge

CHAPTER 1

FINDING YOUR EDGE

Leaders Still Require What They’ve Always Needed, but Now Also What’s New at the Edge

“Being big does not give you the right to live forever.”

Leading a company is a hot seat, whatever the era, and few days come easily to those who occupy that chair. For many, the duties are weighty, the decisions thorny, the demands incessant. And they come with personal risks and recriminations when things go wrong. You are always on the line, especially today, when your decisions can make the difference between a firm’s prosperity and its poverty. “The bosses always worked in a frying pan,” offers a former Disney and Comcast executive, and “now they work in an inferno.” Executing well when so much is at stake has thus become one of the great callings of our times.¹

Working directly with company leaders in a range of industries and countries, I had earlier identified fifteen capacities that are universally expected of company leaders—regardless of time, place, or product. Like mission-critical checkpoints for pilots before takeoff or for physicians before surgery, these capacities include such fundamentals as thinking strategically, communicating persuasively, and acting decisively. Ignoring any one of these foundational abilities can prove disastrous.²

But you may have come to management in an earlier era, one without the coronavirus pandemic; without protections against harassment; without protest movements for diversity, inclusion, and Black Lives Matter; without the popular drumbeat for greater investment in community prosperity and less spending on executive perquisites; and without company headlights on climate change and extreme inequality. These and other disruptions are signaling an entirely new era for enterprise leadership.

In addition, powerful institutional investors of publicly traded companies have become far more demanding of their leaders. We might look with nostalgia to the “old days,” circa 1950, when individual and family holders owned most of America’s biggest companies and simply collected their dividends, rarely challenging those running their firms. Small investors, however, have been replaced by BlackRock, Fidelity, State Street, and Vanguard, institutions with trillions of dollars under management and index funds at their core. For perspective on just how much economic power has been concentrated in such firms, consider that the $5 trillion-plus at each of two largest firms exceeds the GDP of almost all the world’s economies.

Exercising their power through ratings, proxies, and media campaigns, professional investors have pressed executives and directors to junk their poison pills, pay with stock options, create “lead directors,” and make boards less ceremonial and more consequential. The age of investor capitalism—in which institutional owners calling the shots supplant senior managers exercising complete control—has triumphed.³

Yet if institutional investors stop there, they will have provoked a revolution without framing a constitution, overthrown the old order but left the new one rudderless. Thankfully, professional owners in recent years have allied with company directors to finish the job, empowering the latter with a roadmap for coleading their enterprise. Yes, genuine leadership, including a working partnership with the chief executive for setting strategy, building capability, and preventing catastrophe. Boards are becoming more of a high-performance squad, less an assortment of disparate individuals.⁴

Research confirms that boards now depress company value when their directors are not steeped in business leadership. One university study, focused on directors of Fortune 500 companies, asked what happens when several directors hold significant ownership stakes in a firm but lack experience in leading a big enterprise. As the number of such “SOLE” directors—those with significant ownership but low expertise—increased on a board, it found, company value decreased. Investors played a role in this, the study also discovered: when SOLE directors stepped down from a board, shareholders drove up the company’s share price, judging the firm to be undervalued because those directors had provided less leadership for the company.⁵

Another study of publicly held US firms examined stock prices after the unexpected deaths of nonexecutive directors. Investigators found that when directors had served between seven and eighteen years—enough time to learn the business but not so much that they resisted change—their unexpected death in office led to a share price decline, and for good reason. When companies have more directors in that optimal seven-to-eighteen-year range, they more tightly link their executives’ pay to the company’s performance, thereby driving better financial results. “Director leadership,” to give this historic shift its own term, had risen on the back of investor capitalism’s earlier triumph. Debates over investor authority have now been replaced by questions of director strategy.⁶

“WE HAD OUR WORK CUT OUT FOR US”

The demands from such outside forces for expanded company leadership capacities converged in 2018 on America’s largest supermarket chain, Kroger Co., headquartered in Cincinnati, Ohio, and selling through more than 2,700 store across thirty-five states. Despite its heft, chief executive Rodney McMullen had been struggling since 2014 to lead the company through a period made difficult by Amazon’s move into groceries, by Walmart’s move into online sales, and by supermarket delivery becoming increasingly digital. Same-store revenue had flatlined in the industry while internet-driven revenue had been growing annually by some 40 percent.⁷

McMullen’s predecessor had hesitated. “Most of us, when we say the digital world, automatically conclude that e-commerce is where everything is going,” then-chief executive David Dillon had told investors in 2013, but “I don’t draw that same conclusion.” New CEO McMullen, however, would draw that same conclusion.⁸

As an instructive warning from shareholders about the unrealized potential of e-commerce, in the wake of Amazon’s 2017 acquisition of Whole Foods, investors pushed down Kroger’s share price by 15 percent during a single trading day. Another warning sign came from customers: after years of annual growth, Kroger’s same-store sales were starting to decline, and the company was feeling the heat from below as well. The discounter Grocery Outlet Holding Corporation had gone public in 2019 with a plan to expand its shelves by 10 percent a year.

Amid these fateful changes, McMullen’s experience-based mastery of a world that was fading into history proved a potential millstone. He had risen through the ranks from bagging groceries during his college days to chief financial officer and then CEO. “You are in Cincinnati,” warned an institutional holder skeptical of the headquarters’ culture, and “you are a conservative bunch of people.” The investor questioned whether executives could adopt the “entrepreneurial bent” now required. Still seeking to stimulate store sales when others were already stoking delivery services, Kroger’s managers had initially proven cautious. Managers quarreled over whether to accept online payments by Apple Pay or PayPal. In a meeting with a technology provider, the provider stalked out in protest.

Though McMullen was buoyed by same-store growth in his first years as chief executive, it did not last, and he later acknowledged a contributing factor. Under his direction, Kroger had been slow to invest online. “There was no doubt that we were behind,” he confessed, and now they had “to get our butts in gear.” He sought to reassure shareholders that his investments in everything from new product categories, including apparel, to new operations, including warehouse automation and home delivery, would pay off. “You have to start somewhere, and you have to learn” the additional leadership skills that were now required, he said. He found some traction, turning the firm modestly around from declining sales to a 2 percent uptick in 2019, though still hoped for more. “We had our work cut out for us,” he declared, and rethinking his own leadership would be step one.⁹

HOW EXECUTIVES MASTERED THE NEW WORLD OF LEADERSHIP

Executive coach Marshall Goldsmith captured the imperative of surmounting these new frontiers with the phrase “what got you here won’t get you there,” also the memorable title of one of his books. Though focused on shedding annoying habits that get in the way of rising responsibility, such as berating associates or withholding information for personal gain, the phrase is also central to our main point here. The factors that led others to select you to manage a team, an office, or even an enterprise, are going to change as markets and methods evolve, pushing you to the edge, and making it vital to continually consider the additional leadership capacities required now. The best capacities of an earlier time thus remain informative but also incomplete for the challenges we face ahead.¹⁰

Through chronicles of leaders’ pathways in real time—drawn from my experience in observing and interviewing them—we will see how they learned to lead in the new ways without abandoning the tried and true. A starting exemplar is John Chambers, who for twenty years was chief executive of Cisco Systems, one of America’s largest technology companies.

Chambers had earlier worked for IBM Corporation and Wang Laboratories, where leadership at both fell behind when the company’s markets morphed, resulting in deep losses at IBM and the complete ruin of Wang. Personally seared by these leaders’ failures to embrace what was becoming new at that time—mini-computers and distributed computing—Chambers reported, in his subsequent years at Cisco, that he conscientiously sought to grasp what was new while not giving up what was still true. Among the former, he recalled, he came to appreciate that in fast-moving industries like high technology, one must preemptively disrupt oneself from time to time to forestall disruption by others. Among the latter, he still followed the enduring principle of remaining tranquil during a crisis in order to orchestrate a disciplined comeback from it. As a result, “my management style evolved at each of the stages,” said Chambers, “and I had to reinvent myself at each one.”¹¹

RISING CORPORATE MORTALITY

In times past, some incumbent organizations had remarkable staying power. Nokia, the Finland-based telecommunications company, was founded in 1865; Brown Brothers Harriman, an American private bank, dates its ancestry to 1818; Germany’s Merck, a pharmaceutical and chemical company, goes back to 1668; and Japan’s Sumitomo Group traces its origins to 1615. Even Standard Oil, founded in 1870, is still alive one hundred fifty years later through its many offspring, including Exxon Mobile, Chevron, and Marathon. Most companies will fail to outlast a typical human lifespan, but some have stayed on top for decades and a few for centuries. They are, alas, increasingly the exceptions.

The rule of military promotion and college tenure—“up or out”—and business watchwords such as churn and creative destruction instead rule the day, as indicated by the thirty blue-chip companies the Dow Jones Industrial Average comprises. With General Electric’s removal from the index in 2018, a precipitous fall from grace for a company that had stood as America’s most valued fewer than two decades earlier, none of the index’s original cast remained on its roster.

Or consider the ranks of the Standard and Poor’s 500, a roster of the largest publicly traded firms in the US that serves as a benchmark for long-term index investing. Together, the five hundred firms account for about 80 percent of the worth of all publicly traded equities in the US, a total value of more than $25 trillion at the beginning of 2020. Drawing on a seven-year rolling average of company lifespans, the average longevity of companies on the S&P 500 dropped from more than sixty years in the early 1960s to fewer than twenty-five or even twenty years during the past decade. If the current churn continues, and is likely exacerbated by the COVID-19 pandemic in 2020–2021, about half of the S&P 500 on the roster now will disappear within the coming decade.¹²

It should be cautioned that a fraction of the declining survivability metrics is a product of mergers, acquisitions, public listings, privatizations, and evolving criteria for inclusion on the lists. Those considerations aside, however, the long-term trend nonetheless points unequivocally toward shorter company preeminence at the top. Of the Fortune 500 firms in 1955, only sixty still remained in 2017. To make those failure rates more tangible, one analyst created three company subsets, each set off by its inclusion on the Fortune 500 in 1955, in 2017, or in both, displayed in Figure 1.1.¹³

FIGURE 1.1. Companies on the Fortune 500 in 1955 and/or 2017

Here’s another way to slice the same data: nine out of ten denizens on the Fortune 500 in 1955 had merged, contracted, or closed by 2017. Projecting this rate into the future, 90 percent of the companies on the current Fortune 500 will not be there in 2077—unless of course their leaders can avert their likely exits. As summed up by an executive at Johnson & Johnson, a fixture of the Fortune 500, “Being big does not give you the right to live forever.”

The S&P and Fortune 500’s rising turnover in recent years points to the fateful fact that those who run large enterprises find it increasingly more hazardous to do so. And at the heart of these leaders’ chances to nonetheless survive will be their ability to identify and embrace the essential leadership capabilities for confronting the emerging moments of truth and sustaining growth through both the good and hard times ahead.¹⁴

Even more startling than firms’ shortened lifespans at the top are self-reported data about executive obsolescence. Three researchers surveyed more than 7,000 executives of medium and large companies in 145 countries in 2018, asking them what fraction of their personal skills became outdated each year. The executives reported that their own obsolescence had risen to 20 percent annually, twice the rate of loss a decade earlier. The inescapable conclusion: a fifth of what you knew last year is no longer relevant this year.¹⁵

While self-disruption has become more important, though, strategic thinking has remained no less important. In a dogged quest for immortality, some companies have completely reinvented themselves. Wipro, an India-based information technology enterprise with more than 160,000 employees in 2020, began as a cooking-oil producer, and preserved its original name, “Western India Vegetable Products Limited,” in its present-day acronym, even though the company no longer has anything to do with cooking oil. Finland’s telecom giant Nokia, with 98,000 employees in 2020, began as a pulp maker; Nucor Corporation, America’s largest steelmaker with more than 26,000 employees on its payroll in 2020, came from Nuclear Corporation of America Inc., which initially applied radiation to inspect steel products, not make them. Whatever the successful reconfiguration, each situation required the firm’s executives to adopt an additional set of leadership capacities without relinquishing their original template.

By 2020 even IBM, originally International Business Machines, was drawing only a fraction of its revenue from machines. Thomas J. Watson, who joined the company in 1914 and became president in 1915, bestowed its name. International was more aspirational, but business machines described the company’s core products for years, which included clocks, tabulators, bombsights, typewriters, and, eventually, computers. The company prospered on that diet and so did most of Watson’s successors, who hired workforces in the hundreds of thousands, but when a later CEO failed to staunch massive losses in the early 1990s, the board hired an outsider to engineer one of the largest turnarounds of the era, forcing a streamlined workforce to focus more on the market, and less on itself.¹⁶

Two IBM successors later, in 2012 Virginia Rometty, the incoming CEO, pressed still another redirection, this one out of software and hardware and into artificial intelligence, cloud computing, and data analytics. By 2018, she’d raised IBM’s revenue from cloud computing and related services, for instance, from 15 percent of total revenue to 35 percent, selling off large parts of the company’s hardware business and acquiring Red Hat, Inc., a provider of open-source software for the hybrid cloud market, for $34 billion.

Still, when Rometty stepped down from the corner office in 2020, she had not revived the company’s overall fortunes. IBM’s annual revenue had fallen from $81 billion in 2002 to $77 billion by 2019, and its market value from $220 billion to $120 billion. For shareholders, the company’s financial performance had been woeful, dropping its share price by 25 percent while the S&P 500 index rose by more than 150 percent.

Yet, in my view, IBM’s executive leadership had not stalled. Rometty appreciated that, while making mainframes and selling software was no longer enough, her earlier ways of directing the company would no longer suffice. To lead through the wrenching changes required, and to avoid the fate of now-defunct technology companies like Kodak and Wang, she needed to place huge bets on new arenas, and fast, a leadership capacity not always required of her predecessors. “I have trained my life to fly a 747,” Rometty explained, and that was “way different than piloting a two-prop engine plane,” her metaphor for the speed and agility now required at IBM. Or as a business partner, Apple chief executive Tim Cook, affirmed: “It’s not the same IBM.” And though Rometty had come up during the mainframe era, the company anointed as her successors Arvind Krishna, who had engineered IBM’s acquisition of Red Hat, to serve as CEO, and James Whitehurst, who had run Red Hat, to serve as his number two.¹⁷

More generally, three-quarters of the CEOs responding to a 2019 survey of large companies reported that they were now looking for greater expertise on their executive team in digital transformation, artificial intelligence, and data science. They were self-critical as well, stressing that they needed to gain greater proficiencies in domains well beyond what had brought them to the apex. As Surya N. Mohapatra, a former chief executive of Quest Diagnostics, put it, “The next CEO, apart from having the qualities like integrity and high values, has to be a subject matter expert” in the new subjects.¹⁸

A prime example of this kind of transition occurred at Walt Disney Company in 2020. Its long-reigning CEO, Robert Iger, stepped down (one film producer called it “the King abdicates his throne”) in favor of a less charismatic and more unexpected successor, Bob Chapek. Iger had been known for his hands-on insistence on perfection. But “comparing Mr. Chapek to Mr. Iger,” suggested the New York Times, “may be missing the point.” The successor would not be filling his predecessor’s shoes so much as presiding over the far more complex enterprise that the company had become.¹⁹

Over Iger’s tenure, Disney had created two streaming services, expanded from two cruise ships to seven, grown from two movie studios to eight, and increased theme-park attendance by 45 million. Given its far greater scale, Disney now called for a top executive who could lead that complexity on an entirely new level. Chapek was characterized by those familiar with his style as making his intent clear but then delegating its execution to his direct reports, defining unambiguous targets and holding his managers accountable. Iger and Chapek “may share the same first name,” explained two reporters, “but there are few other similarities.”²⁰

The greatest leadership dissimilarity of all, however, hit with a vengeance just days after Chapek took the reins on February 25, 2020—in the historical moment that New York Times columnist Thomas Friedman described as marking a new divide between eras, “BC” and “AC,” before the coronavirus and after the coronavirus. Much of Iger’s business model depended on people in close proximity—think four thousand customers on his largest cruise ships and more than four hundred thousand visiting his parks every day—but that also made for a perfect storm when the virus raced through. During his fifteen years as chief executive at Disney, Iger had grown the company from a market value of less than $50 billion to more than $275 billion. Now, in Chapek’s very first quarter, his profits plunged by 91 percent.

With cruise ships anchored, theme parks shuttered, Broadway shows closed, movie theaters darkened, television ads canceled, and film productions halted, Chapek would have to lead the enterprise with a playbook he, his predecessor, or anyone else could never have imagined. Iger had presided over a “bulletproof business plan,” in the apt characterization of one observer, but his successor would preside over just the opposite. The company faced “unrivaled earnings risk for the foreseeable future,” warned an equity analyst. Chapek cut his own salary by half and furloughed one hundred thousand employees. “We’re doing everything we can to mitigate the impact of the cash burn,” he reported, a pledge no doubt inconceivable to his expansive predecessor.

Iger had led well in BC, and now Chapek would have to master the new moves required for leadership in AC, going from growth time to wartime, somehow bringing visitors back to the Magic Kingdom without spreading the virus through it.²¹

Updated leadership for a new era is just as essential for smaller companies, nonprofit firms, and government agencies as it is for the giants like IBM and Disney. Consider Ayla Göksel, the chief executive of the Mother Child Education Foundation, which operates in Turkey and the Middle East on women’s empowerment and rural development. Though an experienced social service leader who’d reached more than a million beneficiaries during the past quarter century, she warned in 2019 that her existing leadership template was no longer sufficient: “What worked twenty-five years ago won’t necessarily work today. We have to have the bandwidth to explore new areas,” including program diversification and distance learning to reach the underserved, empower families, and advocate policies.²²

Much the same was urged by the former top American military officer General Martin Dempsey, Chairman of the US Joint Chiefs of Staff from 2011 to 2015. “My instinct tells me,” he observed, “that the twenty-first century will be a period where we will be asked to apply our military instrument decentralized” without at the same time losing our “ability to aggregate it when necessary.” In other words, senior officers will need to master the additional leadership skills required for both disaggregating and then reaggregating the nation’s military assets.²³

College and university administrators are confronting their own moments of truth. With student enrollments languishing and public funding plunging in 2020, the Chronicle of Higher Education advised presidents, provosts, and deans to think of themselves as less like a “steward” of their venerable institutions and more as a “change maker” for a species endangered by spiraling operating costs, student indebtedness, and COVID-19. Incumbents and aspirants would need to preserve their rituals and assuage their alumni—the faculty senate and football tailgates will remain important—but also need to innovate like a start-up, tweet carefully, and teach remotely.²⁴

HOW DO WE FIND OUT?

In a study of networks among business leaders in New York and London, I asked executives in both cities why they had, in many cases, agreed to serve on the governing boards of publicly traded companies in addition to their own companies’. Such service can be an enormous time-sink—one hundred hours or more annually for each board seat—and thus seemingly not in the narrowly defined self-interest of the executives’ home companies, nor within the fiduciary role that the executives had pledged to them. Their answers were unexpected but informative. They had accepted service on additional company boards, they reported, because it was a better way to learn about company practices and executive leadership than any other single activity.²⁵

The same point has become evident at the CEO Academy, which I help run. This annual program, with a heritage stretching back two decades, brings together forty to fifty CEOs and heirs apparent for a two-day intensive look at the practical decisions and pragmatic challenges that they face, with presentations ranging from “How Global Business Is Changing” to “How Should CEOs Think About the Tradeoff Between Short-Termism and Going Long?” We bring in a half dozen Wharton faculty to share their research-informed guidance on topics ranging from acquisitions to governance, but we also recruit a number of current or recently retired chief executives, which in past years have included Verizon’s Ivan Seidenberg, DuPont’s Ellen Kullman and Ed Breen, and ITT’s Denise Ramos.²⁶

Similarly, for the past eight years William Lauder, executive chair of Estée Lauder Companies, has offered our MBA students an elective course called Decision Making in the Leadership Chair. For each of his seven three-hour class sessions, he hosts the cream of the corner office, ranging from Ford Motor Company executive chair William Clay Ford Jr. to Rockefeller Foundation president Judith Rodin, New York Times publisher Arthur Sulzberger Jr., and Focus Brands (owner of Auntie Anne’s, Cinnabon, and Jamba) chief operating officer Katrina Cole. The classroom comes to life with their tangible insider accounts of executives who have led major organizations, and the degree of student interest in that content has soared. With just forty-eight openings for the course and admission essays required, they filled the room during its first year, but by 2020, its eighth year, more than 280 of our MBA students applied for acceptance.