Think at London Business School
Wednesday 20 September 2023
CEO compensation is in the news again – Lakshmanan Shivakumar explains how his latest research study sheds new light on an old controversy
By Nick Mickshik
From Covid-19 to conflict in Europe, from net zero to navigating the vagaries of digital disruption: the challenges facing organisations today and the chronic uncertainty across our operations, supply chains and markets are of such complexity that they require new ways of thinking and learning.
These are adaptive challenges – problems that cannot be solved from the top down, but that require the people, teams, units and functions across the entirety of the organisation to step up, to iterate and innovate, to learn and to adapt. For leaders looking to build disruption-proof businesses in today’s environment, there’s an imperative not only to become more adaptive themselves, but to inculcate that adaptability across their organisational culture and their workforce.
So says Herminia Ibarra, Charles Handy Professor of Organisational Behaviour at London Business School. And in her own research, her review of current thinking and in her work with firms, she has identified five critical skills that leaders should prioritise in order to build adaptability within their organisations.
“Businesses grappling with adaptive problems today need to embrace a learning orientation that empowers people to become more adaptable – to experiment, iterate and innovate and to share the learning around the organisation. For many, this will mean finding new ways of working – and of course, overcoming the pushback that inevitably accompanies change. Getting people on board with new ways of working, winning hearts and minds, is contingent on building a set of skills as a leader and instilling those skills or capabilities across the entirety of the business,” says Professor Ibarra.
“The five skills that I’ve identified while not exhaustive is nonetheless critical to making this happen. These skills are: cross-cutting, collaborative, coaching, culture-shaping and connecting.”
1. Cross-cutting: Building broader, more diverse networks.
The capacity to build reach and diversity by constructing cross-cutting human networks is a skill that is demonstrably beneficial to leaders and to businesses.
A groundbreaking US study of S&P 1500 CEOs managed to condense leaders’ professional networks of business contacts into a single diversity index – a quantifiable value that weighted things like the gender and nationality, education, professional expertise and global work experience of the CEOs’ networks. These networks were contacts that leaders had proactively forged through school or university ties, work ties and social connections.
When the researchers compared network diversity values and looked for ties to the performance and value of the firms in their study, they found that CEOs with more diverse networks create more firm value—because they are more innovative, as measured by patents, and engage in more productive, diversified mergers and acquisition activity. CEOs who were diversely connected (at the 75th percentile of the researcher's “diversity index,” as based on gender, nationality, academic degrees, professional expertise, extracurricular activity, and global work experience), compared with those who were simply average, improved Tobin's Q, a ratio of market to book value of assets, at a level equivalent to an $81 million increase in market capitalisation for a median-size firm in their sample.
“What this study shows is that CEOs who cross-cut their networks and build more heterogeneous contacts have access to diverse knowledge and expertise. They have greater visibility of emerging and international opportunities. As a result, they enjoy benefits like higher quality patents, more successful mergers and acquisitions and better stock evaluation.”
But there’s a catch. Human beings are hardwired to cleave to the familiar. We bond more easily with those similar to us or who share cultural or societal values. It’s as though we’re programmed to be narcissistic, says Professor Ibarra. And we’re “lazy” when it comes to rooting out the new. So how do we build more diverse networks as leaders? It’s as simple as getting comfortable with being uncomfortable, she says. That might entail involving people from different units, functions, backgrounds, ethnicity, age or thinking style in group decisions to spark divergent ideas. It could be as simple as purposefully sitting next to someone new at lunch.
Whatever form it takes, cross cutting your network will build your perspective, expand your knowledge base, help challenge assumptions and surface new ways of thinking about adaptive problems.
Collaborative leadership harnesses the benefits of diverse and divergent thinking, but getting it right is contingent on setting up the systems, processes and cultures that enable the free exchange of ideas. Keen to codify the secrets behind the perfect team, US behemoth Google embarked on a two-year study, Project Aristotle, published by the New York Times Magazine.
Looking at 180 Google teams and more than 250 team attributes, the study found a group of behaviours or norms that actively promote constructive collaboration. These norms included dependability, having structure and clarity, ensuring that the work itself has meaning and is understood to lead to positive impact. But underpinning them all was one primary characteristic that enabled all the others: psychological safety.
“Creating psychological safety such that everyone feels empowered to speak up without fear of scrutiny or recrimination means learning, as a leader, when to hold back and make space for others to contribute,” says Professor Ibarra. “It means learning to listen and building the social sensitivity to draw out the introverts or those less inclined to speak out. It’s about understanding that sometimes silence is the default, and having the awareness to pull out contributions where necessary.”
Coaching is about empowering your people to make optimal use of their autonomy – of their ability to make their own decisions in a way that is adaptive and agile. And that is about making a shift from ‘know it all’ to ‘learn it all,” says Professor Ibarra.
“At its core, coaching isn’t about telling people what to do or how to make decisions. It’s about asking them good questions that affirm their knowledge, abilities and confidence in their contributions – and thereby encouraging them to bring their own creativity, innovative thinking and solutions.”
Good questions, she adds, are open-ended and not leading: “If you know the answer already, don’t put it as a question because it’s a statement.” Instead, aim to create conversations with employees and take a leaf from the books of firms like Microsoft who have made the shift from a culture of inspection to a culture of coaching – of giving managers the sense of empowerment, agency and the confidence to unearth problems and find solutions for themselves and for their clients.
Microsoft also has valuable lessons for leaders in terms of what Professor Ibarra calls culture shaping. She cites CEO Satya Nadella, who instituted a culture-wide shift from internal competitiveness – an institutional jockeying for position and influence attached to established knowledge or expertise – to a growth mindset: a culture of experimentation, trying new approaches, embracing failure and learning without fear of reprisal, judgement or career limitation.
“Shaping your culture sometimes means having the courage to destroy certain processes or systems in favour or better ways of doing things. Nadella took a risk pitching learning as the core cultural pillar at Microsoft because learning implies getting it wrong, making mistakes and absorbing the lessons along the way.”
Perhaps the greatest example of this was the decision by one of Nadella’s direct reports, Jean Philippe Courtois, to transform the way the company did quarterly business review, says Professor Ibarra.
“The mid-year quarterly business review engendered fear, it took weeks and weeks to prepare, they meant that Microsoft employees had their eyes off the ball – their customers. In transforming how they were done, Courtois was really walking the talk in making the firm more adaptable, more agile, more growth oriented. Sometimes, with culture shaping you need to take a wrecking ball to those things that are no longer fit for purpose.”
Professor Ibarra’s final C ties to the interpersonal dynamics of leadership. Her challenge to leaders is to ask themselves this question: why should anyone work for you?
Building the connections, the trust, the engagement among team members and employees for those people to then buy in and align their efforts around your leadership is contingent on modelling certain attributes, she says. Among these are empathy – a skill like any other that can be learned, developed and improved.
“Empathy may not come naturally to some and it may be something to work on – to reflect on and to proactively think about as a core leadership skill. Certainly, if the last few years have taught us anything however, it’s that human qualities such as authenticity, humanity, transparency and vulnerability – the skills that undergird leaders’ ability to connect with their people – have been critical in withstanding disruption.”
Life has changed dramatically in the last few years, says Professor Ibarra. And what got us here is unlikely to get us there, she warns. Taking regular stock of how leadership – and the expectations around leadership – continue to evolve is key. It is key to remaining relevant, effective and successful as a leader, and key to safeguarding the adaptability and wellbeing of workforces and organisations in times of chronic change and uncertainty.
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