Rotman Management - FALL 2013
The
man responsible for introducing the world to ‘a new way to think’ and nearly
tripling the size of the Rotman MBA program describes how Integrative Thinking
was born and the various ways in which capitalism is broken.
by Karen Christensen
In
1997, youwere enjoying a very successful career as a senior
executive
with Monitor Company. What led you to change your
career
course so dramatically?
I have always
believed that successful business people who care
about society should,
at some point, turn themselves to public service.
I always figured I
would do this when I was past the age
of 50 — not 41! But
former University of Toronto President
Rob Prichard, who I
had met through a consulting assignment,
convinced me that this
was the time to do it, and that this was a
place where I could
really contribute to my country. He made me
believe that it was
possible to take the University’s business
school and make it
something that the Canadian business community,
the city of Toronto
and the University itself could be extremely
proud of.
Describe
how the concept of Integrative Thinking took shape.
Back in the early
days of Monitor, we called ourselves ‘Young
Punks Consulting’,
because we were all in our 20s and 30s, and
we were going up
against big, established firms like McKinsey
&Company and
Boston Consulting Group.
I was always curious as to why
anyone would actually hire
us. After a couple of years, I
came to the conclusion that the only
time we were hired was when the
problem at hand did not fit
easily into the context of some
definable kind of practice. Clients
appeared to come to us for
problems that were very messy,
where there was no existing model
to follow. For example, in
the early days of cellular, we
were hired by a Korean company
to look into ‘how cellular will
develop in Korea’. Well, who could
say? We had to sort of 'make it
up' from first principles.
This got me thinking: what was it
that led people to believe
We would be able to tackle such problems?
I had this vague notion
that it was something about
‘building new models from scratch’
—models that crossed traditional
boundaries. The problems we
worked on were not ‘marketing
problems’ or ‘manufacturing
problems’ — they lay somewhere in
between the silos. I started
to believe that there was a
‘there’ there.
This was around the same time I
figured out that business
schools were not producing
anybody who was skilled at doing
this ‘thing’ — whatever it was.
At the time, I was overseeing
training and development at Monitor.
In 1991, I merged the
training programs for
our undergraduate consultants from small
liberal arts colleges
like Amherst and Swarthmore, and the MBAs
we hired out of
Harvard, Stanford and Wharton. I put them all
into the same
program, because there was nothing at all — zero
— that the MBAs had
learned that was helpful for doing what we
were doing.
THE
INTEGRATIVE THINKER’S STANCE
1.
Existing models do not represent reality; they are our constructions.
2.
Opposing models are to be leveraged, not feared.
3.
Existing models are not perfect; better models exist that are not yet seen.
4. I
am capable of finding a better model.
5. I
can wade into and get through the necessary complexity.
6. I
will give myself the time to create a better model.
That’s when it dawned
on me: business education was not
producing people who
could tackle messy problems. I said to
my colleagues,
“Nobody else is training this thinking skill, and
I really think it’s
the ‘secret sauce’ — the missing piece. We have
to start developing
this capability!”
I spent most of the
1990s noodling around on what exactly
this skill was. I
noticed that some of the CEOs we worked with
seemed to have enough
of a capacity for it that they knew they
could hire us to help
them out; so I started watching these people
closely, taking note
of their thinking processes. That’s what got
me believing that
there was an actual form of thinking — which I
came to call
Integrative Thinking — that I didn’t understand entirely,
but that existed and
was very powerful.
You
have said that Integrative Thinking is more than an advantage
in
the modern world: it might be a necessity. Why is this?
The fact is, if
you’re going to be special in today’s world,
you have to go to the
next higher-order level of thought from
the people around
you. Business has become so efficient that
all of the basic
advantages have been competed away, and the
only way to gain an
advantage is by solving some trade-off
that other people
accept. The standard operating procedure is
to say, ‘We can’t
have both flexibility and speed, so we have to
choose one or the
other’; but nowadays, you have to figure out
how to do both.
During
your tenure, ‘Design Thinking’ emerged as a key aspect
of
‘a new way to think’ about leadership. Do you consider
it
to be a branch of Integrative Thinking, or a separate skill?
I don’t think
‘branch’ is the right term, but it is under the umbrella
of Integrative Thinking.
When I finally came to the conclusion
of what Integrative
Thinking really is — which is, instead
of accepting the
choices before you, create a new model
that contains
elements of each, but is superior to both — I then
honed in like a laser
on the question of, ‘What exactly is that
creative act that
gets you to the new model? How does that creative
act happen?’
That’s what got me so
interested in design. I realized that
there are all these
people out there creating new models on a
regular basis. They’re
trained to create, say, a logo from scratch;
they don’t just pick
amongst all the logos that already exist. Their
job is to create
something new. At the same time, most designers
would say yes,
everything we create is new, but it’s not entirely
new — it contains
echoes of other things that came before it. For
example, Apple’s
brightly-coloured iMac computers were manufactured
in exactly the same
tones as the Imperial cameras from
the 1960s; it was an
homage to those cameras.
So my ‘deep dive’
into Design Thinking was really a response
to peeling the
‘Integrative Thinking onion’ one more
layer. I couldn’t
very well say to people, ‘Go away and come up
with a creative
solution that is superior to what currently exists’
without thinking
through, ‘what are the basic operating
principles of
creativity?’ By borrowing design methodologies,
I was able to say,
‘Here is a way to think about getting to that
creative answer’.
You
have said that the smartest organizations embrace both
reliability
and validity. Please explain.
Validity and
reliability anchor down opposite ends of a spectrum
that defines how
solutions are framed. Individuals rarely have
a balanced
perspective, but rather a pre-disposition towards one
or the other.
People with a
reliability orientation seek to produce consistent,
predictable outcomes
from objective data — for instance,
predicting a
customer’s future purchases by using data collected
in a CRM system. To
produce the highest reliability possible, a
system must stick to
quantitative, objective data and use of the
data that does not
involve judgment, because blending subjectivity
and judgment leads to
inconsistency. So considering ‘the
mood of the customer’
or ‘their attitude towards new products’
would be seen as an
abomination in a reliable system.
Validity-oriented
people, on the other hand, seek to produce
outcomes that meet
the desired objective, even if the system
employed can’t
produce a consistent, predictable outcome.
Pursuit of more
validity means adding ‘squishy’ variables and
applying judgment or
‘gut feel’. It makes me think of the movie
Pirates
of the Caribbean, where Keira Knightley says to Geoffrey
Rush, ‘You can’t do
that! Pirates have rules!’ And he says,
‘I don’t think of
them as rules — more like guidelines’. That’s
what a
validity-oriented person would say.
I used to be more
disparaging of reliability-oriented people,
until I realized that
they are the yin to my yang: I need enough
of them around to
make sure the train doesn’t go careening off
the rails while I
dream up the way things could be better.
You
have said that traditional financial planning and reward
systems
must be modified to create a balance between reliability
and
validity. How can this be achieved?
Financial planning is
basically an exercise in reliability. It says,
‘Here’s what we’re
going to do: we’re going to sell this much
within our budget and
we’re going to have this much in costs’. My
view is, as much as
people like to plan for revenues, it’s not really
possible. At the
start of the year, you might decide you want to
sell 5,000,000
widgets, but somehow all these people who are
free agents out in
the world — customers — can decide, of their
own volition, whether
or not to buy them. You can’t force them,
and as a result, it’s
an entirely speculative act to say, “Our revenues
will be X.” You
don’t control revenue. You know who controls
it? Your customers.
This is where
validity triumphs over reliability, because
how can you make
certain that you get those desired revenues?
By making truly great
widgets! Not just good widgets, but great
widgets that lead
customers to say, ‘I really have to have one
of those!’
This is why I have
always viewed revenue planning as an
almost useless
activity. However, you can have some control on
the cost side, and
this is why I would argue that you have to think
about the cost side
and the revenue side in very different terms.
With the revenue
side, you have to ask validity-oriented questions:
do we have an
offering that is highly compelling? And on
the cost side, you
can be more reliability-oriented and ask: how
should we plan to
produce these amazing widgets?
I would also say that
lots of reward systems are oriented
towards reliability:
‘if you achieve this particular number, you
will get a big
reward’. What this does is, it encourages people to
mess around with the
books and other things they shouldn’t be
messing around with
to achieve a reliable outcome — rather than
focusing on achieving
an outcome that is great for the firm, for
your customers and
for the long term.
Walk
into meeting rooms around the world and you will find
people
defending their ‘model’ of the way they see things;
what
should they be doing instead?
People do this all
the time, and it’s not because they’re bad people:
it’s because we all
need to have a certain level of stability
in our world. If
there aren’t a certain number of things we can
count on and use as
anchors, life becomes kind of weird and Kafkaesque.
That’s why people
have this desire to hang on to things
and say, “Well, at
least this, I know.” There is so much randomness
to life that people
long for a degree of certainty.
In the world of
business, people want to have a sense that
the model they hold
for what their company does — how it wins,
how it treats
customers, who its competitors are — is correct.
They want to feel
like, ‘I get this’, and as a result, they don’t love
the idea of asking
themselves, ‘What if all of this is wrong?’ The
problem is, when you
love your current model too much, you are
likely to ignore
warning signs that indicate it might not be as valid
as it was a year or
two ago — because the world has changed, and
consumers have
changed.
Rather than defending
their models, I think what people
should do is say,
‘Until such time as I have a better model, I am
committed to this
model; but I recognize that it might be deeply
flawed.’ Of course,
there’s an element of cognitive dissonance in
that, because people
think, ‘If the model is deeply flawed, why
the heck am I using
it?’ But if you spend all your time fretting
about doing something
else, you’ll never commit to anything. So
you have to take this
stance, and constantly take in feedback and
make modifications
here and there, so that your model sort of
‘bobs and weaves’
over time.
In
recent years you have questioned the very tenets of capitalism.
In
Fixing the Game you laid out five steps that business
needs
to take (see page 14). Are you seeing any progress
in
these areas?
I do see some; but
the fact is, it has taken us 25 or 30 years to totally
screw the system up,
and it will probably take a bunch more
years to fix it. To
use an analogy, it’s like you’ve got this really nice
sweater on, but you
see a string sticking out, and you pull on it,
and it just keeps
unravelling until there is nothing left — just a
bunch of yarn on the
floor. That’s what I’m saying in Fixing the
Game:
the more we keep pulling on the ‘thread’, the more we have
to question the very
fundamentals of the system; it all unravels.
FIXING
THE GAME: FIVE STEPS
1.
Shift the focus back to the customer and away
from
shareholder value – back to the real market and
away
from the expectations market.
2.
Restore authenticity to the lives of our executives
by
rethinking executive compensation. Stock-based
compensation
creates a powerful incentive to keep
expectations
rising, resulting in executives that manage
expectations
rather than real performance.
3.
Address board governance. If executives are ‘agents’,
creating
agency costs, how can another group of agents –
the
board – discipline the first group and reduce
agency
costs?
4.
Regulate and manage expectations-market players
more
effectively, most notably hedge funds, which create
no
value for society. They have huge incentives to promote
volatility
in the expectations market, which is dangerous
for
investors but lucrative for them.
5.
Take on a more expansive view of the role of for-profit
companies
in society, which entails strengthening the civil
foundation
– going beyond laws and regulations to make
the
world a better place.
From
Fixing the Game: Bubbles, Crashes and What Capitalism
Can
Learn from the NFL, page 37 (Harvard Business Review
Press,
2011).
That’s why so many
people want to avert their eyes. They
don’t say to me, ‘Roger,
you’re wrong; your ideas have no merit’.
What they say is, ‘I
really don’t want to think about this. Can’t we
just use longer
holding periods instead of stock options and be
done with it? Will
you just stop talking if we do that?’
People are sort of tweaking
around the edges of the current
system because it’s
too painful to contemplate that maybe — just
maybe — I’m right,
and we need a whole new model. Maybe
hedge funds are really
bad for society, and we’ve allowed them to
become the most
powerful and profitable businesses out there.
Of course, in the
early days of global exploration, the most profitable
business was piracy:
pirates sailed around the world stealing
all the gold. It is
conceivable that we have allowed something
that is truly
terrible for the world to take shape, and it’s hard for
people to contemplate
that.
You
also believe leaders need to take on a more expansive
view
of the role of for-profit companies in society. Are there
current
examples that give you hope?
One that springs to
mind immediately is Unilever and Paul
Polman. I worked with
him in my Monitor days when he was
running the laundry
category at Procter & Gamble. As CEO,
Paul has stopped
Unilever from publishing full financial results
every quarter, and he
refuses to offer earnings guidance to equity
analysts. He has said
things like, “If you don’t like it, please
stop investing in my
company, because I only want shareholders
who care about the
long term.” This is a pretty aggressive stance,
when you think about
it, and I applaud him.
Another one of my favourite
business stories of all time is
the letters that Herb Kelleher
used to write to Southwest Airlines
customers who complained about
not having first class
cabins and swanky lounges. He
would say to them, “I hear what
you’re saying, and I really think
you should fly with another airline.
Thank you, Herb Kelleher.”
I think the bête noire of
all of this is the difference between
maximizing shareholder
value and earning shareholders a fair
return. The rigid
traditionalists characterize me as not caring
about shareholders, but , I
firmly believe shareholders deserve a
fair return. Today we have all
these financial methodologies for
determining what exactly that is
— like the ‘risk adjusted required
rate of return on equity’. These
equations spit out a number and,
if you don’t earn more than that,
you are not compensating your
shareholders for risk. However,
for some reason, we have gone
from ‘earn above this base
number’ to ‘earn as much as humanly
possible’. Says who?
What this does in the
decision-making world is, it shifts
the ‘objective function’ of the
corporation from ‘make more
than this number’ to: ‘maximize
this number’. Of course, when
you do this, you can’t maximize
anything else. Everything else
has to be relegated to minima:
consumers can’t be any less
happy than this, the
government can’t be any less happy with
us than this, we can’t
mess up the environment any more than
this — you set all
these minima. It all becomes about meeting
one objective function, subject to
a bunch of other minimum
constraints.
What a waste of the objective
function! Instead, why not
just agree that your shareholders
deserve ‘at least an x per
cent return’? If you’re not
earning more than that, you aren’t
doing your job; but as long as
you achieve that, you can do other
things, too. Then the question
becomes, what should you be trying
to maximize? And in my view, the
world would be a much
better place (and organizations
would be better off in the long
term) if they had as their
objective function to ratchet up the
civil foundation — the laws,
conventions and customs relating to
behaviour with respect to the
environment and society in general.
Leaders should pick something
that they have the corporate
capability to do really well. If
you’re Paul Polman, that means
creating a sustainable supply
chain. If you buy all this chocolate,
or all this palm oil, or
whatever, make the world a better place
by having fair trade principles
apply.
When you do this, do shareholders
lose out? Not at all.
Because — and this is the most
important insight from Fixing
the Game — by saying ‘Our
goal is to maximize shareholder
value’, you actually guarantee
that you don’t. But if you say, ‘I
want to earn a fair return for
shareholders and make the world
a better place’, guess what’s
going to happen? Shareholders will
do better. This is really
an Integrative Thinking moment, because
at first there appears to be a
fundamental trade-off involved;
but there isn’t.
In
your view, how important is it for today’s leaders to think
about
the concept of legacy?
I think of it in
terms of some fundamental questions: why are
you on this planet?
What is your purpose? If you think your purpose
is ‘to make asmuch
money as possible’, it will not be important
to you to leave a
legacy. But some people say to themselves,
‘My job is to leave
this world a better place in some small way’ in
which case, legacy is
important; and I guess I put myself in this
latter category. But
it’s a very personal choice.
Looking
back on your tenure, what are you most proud of?
Without question,
it’s the people that I have helped to become
the best they can be.
The people I have worked with closely have
achieved things that
I’m pretty sure they never dreamed of, and
that makes me
insanely happy. At the core, that’s what I see myself
as: a developer of
people. When my head hits the pillow at
night, I can say to
myself, ‘I managed to set the context that enabled
these people to do
great things’. I didn’t make these people
great—you can’t make
anybody great; but you can enable people
and set a context for
greatness.
What’s
next for you?
I’mreally excited
aboutmy project for the next five years, which
is to focus on ‘the
future of democratic capitalism’ at theMartin
Prosperity Institute
here at the Rotman School. I think of it as
a time-bound project
that will have, as its output, concrete ways
to tweak democratic
capitalism to make it more sustainable,
so that people can
regain their confidence in it. I’m also looking
forward to doing a
bit more consulting to senior executives,
because I feel like I
can help them figure out how to be beacons
for other companies.
And there is great synergy there, because
doing the latter will
help me understand how democratic capitalism
works best.
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