The CEO’s New Agenda

In the past year or so, business leaders have learned about a phenomenon usually reserved for athletes: that it is possible, in an astonishingly short period of time, to change from hero to goat — the one who gets blamed, rightly or wrongly, for the whole team’s failure. The image of the CEO as Alexander the Great has faded; comparisons today are more likely to be made with Charles Ponzi.

When applied indiscriminately to all CEOs, the goat label is no doubt as unfair as the hero worship was unjustified. But even if corporate crimes are a matter of a few bad apples rather than a blighted orchard, the reality is that the public is outraged and the politicians smell blood.

It may seem like odd timing, then, for an important thinker on corporate leadership and public policy to be issuing a call for CEOs to undertake a serious, committed engagement with a whole range of social, economic and environmental issues — topics that for years have been at the bottom of most top-executive agendas. But that is precisely what Jeffrey Garten envisions in “The Politics of Fortune: A New Agenda for Business Leaders,” published by Harvard Business School Press. Garten — dean of the Yale School of Management, former undersecretary of commerce in the Clinton administration, a veteran of Wall Street in the 1980s and author of “The Mind of the CEO” — seeks a new kind of leadership from chief executives, yet one that hearkens back to a period in our history that also required people from all walks of life to come together in the pursuit of common goals.

In an interview with SMR senior editor David A. Light, Garten spoke of the need to balance regulation and free markets, the historical precedents for business leadership on public-policy questions, and the urgent need for institutions that can manage the progress of globalization. He also discussed the important first step that CEOs must take before they can exert leadership on a bigger stage: restoring their reputations.

SMR: You talk about how CEOs need to actively repair their reputations, but wouldn’t it be more prudent for them just to lie low for a year or so and let the storm blow over?

Jeffrey E. Garten: As a strategy for dealing with our current crises, that won’t work. The issues aren’t going to blow over, and people aren’t going to forget. I’ve been part of many discussions in places like barbershops and diners, and almost no one is giving the corporate sector the benefit of the doubt. There’s a pervasive sense that the whole sector is somehow corrupt. And the problem is getting worse with every fresh scandal and with every bad day on Wall Street. We are on the cusp of a very serious societal backlash, not just against CEOs but also against the very structure of our economic and business system. That’s why CEOs have to make a massive effort to repair the damage to their reputations and their credibility.

SMR: So the backlash isn’t just an issue affecting certain individuals or even the companies they run — you see the survival of our system at stake.

JEG: Right. The problem of CEO reputations is the first and easiest problem to resolve. Beyond that lie the defects of the entire global economic system, which in normal times CEOs should be trying to fix. The threat is not that capitalism will be replaced by another system but that the momentum behind increasing economic dynamism —spurred by deregulation and trade liberalization over the past couple of decades — will be hobbled. That would be disastrous for emerging markets like China and Mexico, and because the world’s economies have become so intertwined, it would also damage the U.S. economy.

The global economy needs a lot of direction in areas such as free trade, health-care distribution, and environmental and labor standards. And if these issues are left to the governments to decide unilaterally, we will find ourselves with a kind of capitalism that is far less than optimal because governments are not equipped to handle them on their own. The failure of business leaders to participate in solving these problems could mean that, rather than too much regulation, essential standards do not get put in place. The domestic economy also has serious problems that call out for the input of corporate leaders — preserving the social safety net, for example. But CEOs first have to regain their credibility, because without that, they can’t do anything constructive in the public-policy arena.

SMR: In your new book you favor some new business regulations while opposing others. Is there an optimal point between two extremes?

JEG: That would be very hard to find. I do think, however, that events of the past year have shown that the sustained swing toward less regulation and more markets over the past two decades went way overboard. The question now is, How do you restore the balance without overshooting the other side? Business leaders ought to be a countervailing force that says, “If we have to regulate, let’s do it in a promarket way.” But corporate leaders are discredited: Even if they had the knowledge and the will, they don’t have the standing now. The business community was very slow at the switch in admitting that there were real transgressions. Had they moved more quickly, I don’t think we would have seen as much momentum behind the legislation that has been passed — which may be only the beginning of a really sweeping wave.

SMR: Do you see the push for new legislation as dangerous?

JEG: The system definitely needs some change, but I fear that regulation will become a tool of micromanagement at the very time when micromanagement is simply not possible. I worry that the regulation will be aimed at the last war, not the next one, and that it is going to result in auditors of auditors of auditors. Take the fact that CEOs have to swear on oath that their businesses’ accounts are accurate. Right now, as far as I know, this is just a one-shot oath. But once it starts, there will be pressure to continue the practice. And that will mean that every CEO will have every one of his or her direct reports sign off on the numbers, and all down the line there will be double and triple checks. That kind of legalistic thinking could put a real monkey wrench in the wheel of entrepreneurship and innovation — it will change the bias of the entire system. No longer will taking an educated risk be paramount; instead, covering your rear end will be first on everyone’s mind. That’s just one example. There’s a similar desperate search for quick solutions involving issues that are not black and white, such as board members’ responsibility and the reform of accounting standards.

The other big issue of the day is terrorism, which is naturally pressing the government to become more ubiquitous. Combine that response with the major new regulation aimed at business, and you’ve opened up the possibility for a very radical shift in the balance of public and private power that almost no one is capable of controlling.

SMR: What can executives do to regain their credibility so that they can exert leadership in these public debates?

JEG: To start with, they could end their practice of making political contributions. A group of the top CEOs in the country could stand up and say, “We are not giving any more money to political campaigns. The system is pernicious — it’s a shakedown — and we are staying out of politics.” If only two CEOs opted out, it would probably have no impact, but if, say, the 140 members of the Business Roundtable agreed on this, it would send a message to the public that times and attitudes had changed. This is a perfect example of a new law — on campaign-finance reform, in this case — being a very small part of the solution. For the law to work, people have to absorb its spirit.

Another important way for CEOs to regain credibility is by ending the practice of providing Wall Street with short-term guidance. There’s no way to hit earnings targets in a volatile global economy without managing the earnings, and people understand that now. And they would take notice if 50 top CEOs said, “We’re not giving guidance. You’re very welcome to look at our accounts. And this is our target for return on capital over the next five years, here are our plans for new products and services, here is what we envision in terms of workforce structure, research, supply-chain management and so on. Feel free to make your own estimates, but you can’t hold us to anything.” CEOs need to take a stand on both these issues.

SMR: Those are two “negative” tasks — don’t make campaign contributions, don’t play the earnings game. What’s a positive step that CEOs can take?

JEG: Saying no in those two areas would do a lot to help restore reputations. CEOs can also take action and meet with their counterparts on matters of public importance. Many top executives are members of one powerful business association or another, and while most of those groups are just glorified lobbying agencies, they are venues where people could get together and talk about a concrete agenda.

And that agenda is potentially huge. In the United States, for example, a lot of people’s retirement savings have been wiped out or have taken a major hit in recent months, and so the viability of the Social Security system is more important than ever. Business, by employing people and paying half the taxes, has a big role to play in keeping the system solvent. In the international arena, there’s a real need for institutions and rules to manage globalization. There is no global central bank or global SEC or global FDA, and these are huge shortcomings in a market where everything is so interactive. Business leaders should also be speaking out on foreign policy. They deal on the global scene all the time and ought to be a countervailing force to strident unilateralism from the government. CEOs of multinational companies recognize that problems of terrorism, poverty, environmental standards and the like require cooperative solutions.

The agenda that business leaders face today is similar to the one confronting people after World War II. At that time, a group did step up to the plate: the Committee for Economic Development. The CED was founded in 1942 by about 20 public-spirited business leaders, Democrats and Republicans. From the late 1940s through the mid-1960s, this group had a good deal of influence through its analysis of issues affecting all Americans and the recommendations it issued. We need an organization with similar authority today.

SMR: The period from the 1940s through the mid-1960s may have been the high-water mark in terms of public respect for business and government. Can another group today really replicate that kind of authority?

JEG: It’s always risky to draw parallels, but I think that there are some common features. One is that after World War II, there was a need to look at the world through fresh eyes; the terrorist attacks of Sept. 11 and continuing fears of terrorism have had a similar impact. Another common feature is the need to restore balance between the public and private sectors, although in this case we’re moving toward more government involvement, rather than away from it as we were in the 1940s. Third, our society was then and is now very oriented toward business. It would be bizarre if the people leading our biggest companies were not seen as part of the national leadership structure.

The big difference between the CED and anything that exists today is that the CED did not exist to push the interests of a particular company or industry. Today we have a lot of organizations, but it’s very hard to find one that is both prominent and above parochial interests. The members of the CED had no involvement in campaign finance, and they lobbied only for very broad, national policies. They put the public interest before personal gain.

SMR: Do such people exist today? If so, where have they been?

JEG: I believe there are many business leaders in this country that have tremendous public spirit. But in the 1980s and 1990s, society was pushing them in a different direction. When I spoke with CEOs for my last book, they told me they were totally preoccupied with competitive forces and pumping up share prices. And everyone was quite happy with that focus — shareholders, obviously, but also the rest of society, which gained from the spillover. Anyone who thought CEOs were taking too narrow a view of their job had a hard time being heard. CEOs themselves lost all sense that they were members of the public leadership cohort. To the extent that they thought about government at all, it was to stop a particular regulation or obtain a favor.

We’ve entered an era in which the financial returns will be nothing like they were over the last two decades. And society, as a result of terrorism and corporate transgressions, is looking for a different kind of leader. That doesn’t mean that CEOs in this new era won’t be riveted on shareholder value. If they’re not, they’ll soon be unemployed. But the context has changed, and quarter-by-quarter results won’t drive everything. There’s nothing inconsistent in a CEO saying, “My prime responsibility is for our shareholders, but we’ll obtain a more than reasonable level of profitability if we invest in communities and help the government to fashion the right kind of public policies.”

SMR: Is it enough for a CEO to get involved with an issue, or does leadership require someone to have the “right” point of view? Take global warming as an example.

JEG: On most issues, including global warming, the most effective approach would be for a number of like-minded leaders to get together and move their organizations as a group in a certain policy direction. That’s a lot better than trying to include everyone and watering down the outcome; in this optimal scenario, it becomes quite clear that certain companies have a point of view and are willing to act on it. And I think that if you could get the right people in the room, on any important issue, you would find many global CEOs willing to push the ball in what I would consider a forward direction. One of the problems is that it’s hard for them to find a place to get the ball rolling.

SMR: How are they going to come together, then?

JEG: It’s an important question, and I don’t have any easy answers, but nongovernmental organizations could play a constructive role by holding conferences and inviting business leaders. Our great universities could do this, too — in the past, they were much more active in shaping national issues. Dartmouth, for example, used to be at the center of talks on disarmament.

There are some groups that are having an impact and might serve as a model. A good example is the Global Reporting Initiative. Started in 1997, it includes corporations, business associations, accounting firms and nongovernmental organizations as participants. Their goal is to provide an accounting system that measures sustainability along economic, social and environmental dimensions. The organization has a lot of promise. It’s going to gather tremendous force because companies on the outside are going to be forced to justify what they’re doing. And when they put out their own metrics, people are going to compare them with the GRI’s figures. Eventually, all organizations are going to have to use the same measurement system, so the development will probably be very similar to the way formal financial accounting evolved.

SMR: In some cases, individual companies are taking the lead on these issues.

JEG: Yes, and that’s a very positive sign. Nike is a good example. Nike’s market capitalization was heading directly south before it earned a certain level of respect for at least trying to deal with the sweatshop issue. This is a perfect example of how social issues relate to shareholder value. In the next decade, more and more companies are going to respond on questions of social and environmental responsibility. Whatever their personal feelings are, enlightened CEOs are going to have to be very sensitive to potential damage to the brand.

SMR: This may be even more of an issue for attracting employees, right?

JEG: Companies are competing for the most educated people, and most of them want to be identified with progressive causes. At the very least, it’s going to be harder and harder to attract good people to a company that is being accused of oppressing labor, exploiting the environment or taking advantage of a weak country abroad. Again, this is an excellent example of the link between a company’s self-interest and shareholder value and broader social problems.

SMR: Have you noticed changes in attitudes in the people you spoke with two years ago while writing “The Mind of the CEO”? Is there progress in the direction you chart?

JEG: A lot has happened in two years. On the global scale, there is increasing pressure for environmental stewardship and for fair dealings with local work forces. These developments are getting very little attention in the United States because we’re so preoccupied with other matters; the initiatives are coming from European companies and international organizations.

At home, the terrorist attacks have forced people to think about the preciousness of an open society and the fact that we can’t take it for granted. And the collapse of credibility on the part of corporations has made a lot of CEOs look in the mirror and ask, “Who am I? I played the 1990s for all they were worth, and I don’t regret that, but what can I do to create a legacy that is more than that?”

There’s also a growing sense in the upper echelons of the business community that they face a huge problem, and that if they don’t get involved in the solution, the consequences are going to be dire. I myself am fundamentally optimistic that a new strain of executive leadership will emerge. Some may charge that I have vastly overestimated the capability of business leaders; they may argue that CEOs have demonstrated that they are incompetent and that a massive reorientation in favor of government power is necessary and justified. I don’t agree. I think that sometime in the next year, the stench of scandal will have dissipated and then the whole issue of reconstituting the system will emerge.

A lot of the business leaders who are in place now won’t be around then. Instead, we will see a new generation that understands, or is forced to understand, that they’ve got to be a legitimate part of the power structure. That they’ve got to pursue the common good along with what’s right for the company and its shareholders. We haven’t reached that point yet — not anywhere near it — but I don’t think this is a pie-in-the-sky hope on my part. It’s happened before.