In a guest article Chris Bones, dean of Henley Business School, addresses the “crisis of confidence” in business leadership

The focus on the role of the leader in society has been at the heart of the development of much of modern political and social thought. Aristotle captured the essence of the proposition of the “altruistic” or “virtuous” leader:

But since we say that the virtue of the citizen and ruler is the same as that of the good man and that the same person must first be a subject and then a ruler, the legislator has to see that they become good men and by what means this may be accomplished.

But for the want of a few good men (and women) at the top of the world’s financial services industry and its regulators the world’s economic system was nearly destroyed. Now, business leaders are as ill-regarded as politicians. Indeed, there is a crisis of confidence in them that is global and worsening.

At the heart of this shift in the perception has been the concept of “talent”. Malcolm Gladwell spotted this early, arguing in the New Yorker in 2002 that it was the corrosive influence of the “war for talent” that was undermining corporations and their ability to do the right things:

This “talent mind-set” is the new orthodoxy of American management. It is the intellectual justification for why such a high premium is placed on degrees from first-tier business schools, and why the compensation packages for top executives have become so lavish. In the modern corporation, the system is considered only as strong as its stars, and, in the past few years, this message has been preached by consultants and management gurus all over the world.

This has resulted in the creation of a narcissistic cadre of senior executives who knew no right but their own perception and brooked no criticism or check on their ambition. In their demands for personal rewards we have seen them in their true light.

Yet despite the promises from politicians and regulators in North America and Europe the disparities and inequalities in pay continue to grow. The hair-shirts being hastily donned by bank executives will not last much past the first cries of “talent war” and “market forces”. Unless a significant and structural shift in remuneration at the top of organizations is adopted, recent restraint will fall away.

The cult of leadership

How did we come to this? The answer lies in the increasing focus on leadership in organizations as the 20th century progressed. With that came a perception that leadership is somehow a “bigger and better” version of management; something strategic and somehow more critical than just managing people. Attending a leadership program has far more kudos than attending one on management.

Yet leadership is not management. Fight your way through all the nonsense and one thing comes through: power is not the issue. The issue is how those with power exercise it and what we as citizens perceive as the outcomes of the use of that power. Those of us who believe that the creation of wealth and the use of it to better humanity in a sustainable way should be the foundation on which the exercise of power should be built are looking for leadership we can trust.

With this lies a need to move away from the “Mary Poppins” model of leadership, which calls for a leader who is “completely perfect in every way”. There is too much uncertainty for perfection to have a chance. It is now time to accept imperfection, fallibility and humanity; to expect less of one person and more of a team; in other words to reposition the leadership model in the realities of the new world.

The value of values in leadership

To judge those of whom we have expectations, we must understand and appreciate the difference between values and value. Values define us as individuals. They shape our actions and reactions. They drive our view of the world and the solutions we choose to deal with the problems we face.

Value and its creation is the bulwark of a free-market economy. If the crash of 2008 has taught us anything, it is not that the market system is wrong. It has reminded us that there is no such thing as “perfect competition” and that unregulated and unconstrained markets are more likely to be distorted and ultimately become destructive. But the market is our only hope of surviving and thriving, so value creation has to sit alongside values adherence to create real and sustainable value. For that we have to look to leaders.

Leadership is all about being granted permission by others to lead their thinking. It is a bestowed moral authority that gives the right to organize and direct the efforts of others. But moral authority does not come from simply managing people effectively or communicating better or being able to motivate. It comes from many sources, including being authentic and genuine, having integrity, and showing a real and deep understanding of the business in question. All these factors build confidence.

Leaders lose moral authority for three reasons: they behave unethically; they become plagued by self-doubt and lose their conviction; or they are blinded by power, lose self-awareness and thus lose connection with those they lead as the context around them changes.

Having said all this, it has to be assumed that if someone becomes a leader, at some point they understood the difference between right and wrong. It is up to them to abide by a moral code and up to us to ensure that the moment we suspect they do not, we fire them or vote them out.

Going forward

So how should companies, boards and shareholders—and indeed governments—respond to this crisis in leadership? First, leaders should be identified and recruited through values alignment and the right attitudes. This should be reinforced by linking leadership to the sustaining of a strong values base and the consequential positive reputation. A deep understanding of the business should be insisted upon.

Secondly, a responsible organization should set limits above which senior reward will not stray. I cannot see a reason why any annual bonus plan should be worth more than 100% of salary or should pay out more than 50% of this in the year in question. I do not think there is any justification for the annual value of chief executives’ rewards to be more than 20 times that of the average employee. Rocketing executive pay is in no one’s interests, except the small number of executives involved, and limiting it voluntarily is a better solution than the state intervening through taxation changes.

Thirdly, the key to building more robust organizations is robust governance. Reform reporting and audit. Make the remit wider than financial compliance and ensure that reports and accounts are transparent and enable all shareowners to make decisions with real information. Have one set of standards and take a stand to impose them through regulation with teeth. Legislate to reserve one seat on every board for the small shareowner—promoting both the importance of share-owning and of the shareowner in decision-making at the top.

Business schools can help rebuild confidence in business leadership. But they too have to change—to become critical friend rather than fawning supporter. MBA programs have to produce values-driven general managers, not finance-driven technocrats. They must build critical thinkers with the ability to make decisions that benefit all stakeholders, not just themselves.

The leadership we need cannot afford to be timid: too little, too late and we play to those who would suffocate innovation and entrepreneurship in a welter of regulation. Depressingly, the response so far from those charged with reviewing the future—such as Sir David Walker’s review of British banks—looks to do just this. Worse still is the response from business. Stephen Hester’s package at Royal Bank of Scotland hardly suggests a feeling of a need to change.

Leadership that builds confidence is built on making tough choices. It is not built on burying your head in the sand and hoping that difficult issues will just go away.

Source: Economist.com