According to Andrew S. Grove, chairman and co-founder of Intel, when a company's understanding of itself shifts, when it changes its strategic paradigm, it sets out on a journey akin to moving from one mountain peak to another through what he calls a "valley of death." How do leaders sort through the confusion to identify the next peak that the company should be moving toward? When they're not sure where they're going, how can they guide and inspire others?
Grove, author most recently of Swimming Across (Warner Books, 2001), sat down with Harvard Business School professor Clayton M. Christensen and Walter Kiechel, editorial director of Harvard Business School Publishing, to discuss these and other questions confronting business leaders today.
Kiechel: You've spoken of high-tech companies, Intel included, moving through a "valley of death" right now. Where is Intel on its trek through that?
Grove: Our last-generation growth has been fueled by a fairly major structural transformation of the computing industry from mainframe, centralized computing to distributed computing, PCs. And that defined the structure for the entire industry, defined the growth opportunities, and defined the opportunities for packet software.
That framework is changing now. The Internet is redefining software. The Internet is redefining the role of computing and communication and their interaction with each other. I still don't understand the new framework. I don't think any of us really do. But some aspects of it are pretty clear. It's proven to be not computing based but communications based. In it computing is going to be subordinated to the communication task. It is going to be very heavily dominated by the increasing portion of all intellectual property being created in digital form, stored in this platform, and therefore ready to be transported in digital form.
WK: Journeying from one business model to another is a formidable leadership challenge, especially in an industry so given to continual technological transformation. How do you handle that?
Decisions don't wait; investment decisions or personal decisions don't wait for that picture to be clarified.
— Andy Grove
AG: None of us have a real understanding of where we are heading. I don't. I have senses about it. But decisions don't wait; investment decisions or personal decisions don't wait for that picture to be clarified. You have to make them when you have to make them. And try not to get too depressed in the journey, because there's a professional responsibility. If you are depressed, you can't motivate your staff to extraordinary measures. So you have to keep your own spirits up even though you well understand that you don't know what you're doing.
Christensen: If you look back in history at companies that have successfully launched new disruptive-growth businesses, with only a couple of exceptions they were run by the founder. Is there something about being a founder that gives you the self-confidence to make an irrational or intuitive decision that goes against the logic of the organization?
AG: I've made the point about pretending confidence and building your own confidence in the face of this valley of death. If you implicitly believe that you have the support of the organization, above and below, by virtue of having been there for a long time and by virtue of people thinking that given that this is your baby—that what you're interested in is in the interest of the organization—that is more likely to happen if you're one of the founders or major investors, somebody whose life is interwoven with the company. Secondarily—and this is a lot more complicated—if you are a founder of a business, you understand the business implicitly. You understand it through your skin.
If you are an outside manager, kind of a store-bought manager, you may be competent in a lot of things, but knowledge of the business is not what got you where you are. So you're less likely to have confidence in your own intuition. This is an intuitive process, because the numbers aren't in and the evidence isn't in.
CC: The problem with the way we teach is that if a student makes a comment in class that isn't grounded in the data in the case, the instructor is trained to crucify her right on the spot. And so we exalt the virtues of data-driven decision making. And then many of the students go to work for consulting firms where they carry data-driven analytical decision making to an nth degree. Thus, in many ways, the whole teaching model condemns managers to act after the game is over. Maybe you can't teach intuition, but maybe you can.
AG: You can promote intuition. You can recognize the innate aptitude of people to grasp what cannot be spelled out and cannot be shown by data, to be in tune with those vague attributes on the other side of that vague valley. And put them in positions where they can act on their intuition. But having said that, this presumes that the person making the promotion has a grasp of the situation. Which goes right back to where you started with your question. The senior leader has to have the understanding and the confidence in his conviction.
WK: Has a deference to the science of management gotten in the way of the art of leadership?
CC: I think the science of management wave already has been upon us for twenty years. I hope that we can figure out how to write and teach in a way that helps people develop an intuition for looking into the future clearly. If you only look into it through the lenses of the past, it's very hard.
I have a theory of why we've had this spate of horrible accounting scandals. I pin the blame on economists, because they articulated the "principal-agent theory."
— Clayton Christensen
AG: I think your question was asked in the context of business strategy. In that context, there is a problem between the scientific approach to strategy and the intuitive approach to strategy. But I don't think we should forget that there is more to running an enterprise, small or large, than strategy. The revolution in quality control and manufacturing techniques that has taken place in the last fifteen years was data-driven and systems-driven and statistical-process-control-driven. The U.S. economy has benefited incredibly over the last fifteen years without a change in strategy, just by seriously embracing the science of manufacturing and quality control.
Figuring out what to do is important. But doing it and doing it well is equally important. And in the second category, the scientific, data-driven approach is absolutely well placed.
WK: We've been speaking of the founder's leadership; what about corporate leadership and the public's confidence in it in this era of accounting scandals? It seems that the entire corporate community is in its own valley of death right now.
CC: I have a theory of why we've had this spate of horrible accounting scandals. I pin the blame on economists, because they articulated the "principal-agent theory"; the idea is that the agents who are the managers of a company can't be trusted to carry out the wishes of the principals who own the stock, because their agendas are quite different. You have to align their incentives, which means heavily weight the compensation of the management team to stock options, so that what makes them rich makes the shareholders rich.
AG: The unstated supposition is that stock options are a means to solve the agency problem, to line up the interests of management with the owners or the top-level managers. When people who own 20 percent of a major public corporation give themselves 20 million share options, that flies right in the face of the principal-agent theory. You're going to tell me that when I own 20 percent of the shares, I don't act like an owner, I need 20 million shares to get me over my motivational hurdle?
When you have a company where practically all employees or professional employees or management employees are stock option holders or stock owners, their motivation in little increments is vectored closer to the interests of the company, and the whole organization works a lot better. So when you look at the use of stock options, and you look at companies that give 50 percent of their options to the top five officers, you get one picture. But when you look at companies where 90 percent or 95 percent of the options are given to people other than the top five officers, you get the other effect. So stock options are not the culprit. What you do with the stock options—who you give them to and in what amounts—is the variable that distinguishes how they work.
WK: Twenty million shares to a CEO—most people's question would be: Where was the board? You've been thinking about how to transform boards for a long time. Where's your thinking now?
AG: Well, bit by bit, under duress, boards are moving in the right direction. But where they started from is where they practically could be described as an advisory body to the CEO: selected by the CEO, working for the CEO, doing a certain amount of rubber-stamping of the CEO's actions, giving a bit of advice if things were going well—for most practical purposes, acting no different than a group of consultants or scientific advisers. Corporate governance is, or should be, exactly the other way around. The CEO is selected by, retained by, renewed by, and supervised by the board.
So you have the pro forma statement of what corporate governance is about, and you have the real-life workings of it. And the two have been diametrically opposite. There's a movement from this advisory-body model to the correct governance model, but with miles and miles to go. And a parameter of how many miles to go is the percentage of Fortune 500 companies where the chairman is a different person from the CEO—in 85 percent of the companies it's the same person.
If the chairman and the CEO are the same person, how the hell can the board of directors supervise the CEO?