THE PRACTISE OF TOP MANAGEMENT.

PART ONE.

HOW CAN TOP MANAGERS' PERFORMANCE BE RATED?

Once upon a time, in the not-so-good old days, some people felt that attaining the ranks of top management was a result of possessing a certain background and some important attributes - not the least of which was the confidence that one had the right background!

To a considerable degree, 'top-ness' represented a state of being, bestowing social position and privileges almost regardless of what the individual actually achieved. Experts describe the process by which people reached the top as one of 'ascription' - suitability was defined by social class, educational background and family connections - and certain characteristics were attributed to individuals as a result of these factors. In Britain, attribution was defined by class and school, in France then and to quite a strong degree now, by social class and attendance at elite educational institutions.

Things are changing. We have entered a new era in which there is much more concern about achievement. Individuals will tend to be rated more on that which they are reckoned to have done - success or 'track record' is now an important guiding light in making decisions about whether people get on. In other words, top managers are expected to perform and this is rated far higher than 'club-ability', school or connections.

The screen through which top managers' performance is judged is the success of the organisations that they lead. These days, managers are not simply rewarded for 'being who they are', but for the performance that they 'deliver' (good word).

So far, quite straightforward - people get rewarded and judged by performance.
All we have to do is to clearly understand what is meant by 'performance', design reward processes around this and all disputation will cease. Or is this too simplistic?

What then, do we mean by performance - especially what defines a 'good' performance by a commercial enterprise.

Let us start with some of our own convictions:

Bringing the existence of a large and established enterprise to an end is very rarely a definition of a good performance. The circumstances in which it might be are industry consolidation or conditions where an enterprise is so seriously disadvantaged in its markets that it cannot compete effectively.

Most terminal events are driven by weakness caused by a lack of appropriate investment, poor management and/or considerations of short-term advantage for investors or managers - and run the risk of destroying financial value or valuable knowledge and skills.
Therefore, a 'good' performance in most circumstances implies that those leading an enterprise have the underlying intention of making it sustainably successful

Bertrand Colomb, President of Lafarge SA, put what he means by 'sustainable' very succinctly:
But everywhere the aims of the financial players are different from what makes a successful and sustainable business. Changing the interface with them is becoming a major challenge for those who, like you and me, believe that management success is passing over to the next generation a better company.

If sustainable, longer-term performance ought to be the aim of most industrial and commercial enterprises, it is important to have some understanding of how 'good' performance can be described and achieved.

This understanding is critical for managers, whose actions can secure or undo the futures of the companies that they lead.
But, it is also of critical importance for those in the investment industry. Why?

Well, investors spend a lot of their time trying to understand and predict how companies might perform in the future - and it is demonstrably true that the most successful of them, those who outperform the norms of their industry, are people who devote a great deal of energy, time and skill in developing a deep understanding of the companies in which they invest.

The fact that a large portion of the investment industry seems to believe that there are constructs and formulae that will obviate the need to develop a rich and deep understanding of markets, companies, organizations and managers, is a topic that we will return to at another time.

HERE ARE SOME DIFFERENT, BUT COMPLEMENTARY WAYS OF DEFINING AND UNDERSTANDING PERFORMANCE.

(Chapter 8 of 'Having Their Cake' expands considerably on these themes).

Through Measurable Outputs.

Short-term financial measures are not of much value. They are historic. They do not directly measure the results of enacting strategy, or most investment and improvement programmes, which may take many years to show sustained results. Nor do financial output measures give much clue as to what is happening inside the organization, and especially why trends and events are occurring.
As we have said in Having Their Cake:
'Perhaps the only satisfactory 'output' measure of performance is to rate a company's results through a complete economic cycle. That way, the relative performance can be assessed in good times and more difficult circumstances.

This approach becomes more potent when the measures used indicate to what degree the company is exceeding the cost of the capital employed in the business. How many FTSE companies have managed to generate cash at a rate that exceeded their Weighted Average Cost of Capital through the boom and decline years of the last decade? Not enough, and there have been some monstrous examples of value destruction, even in the boom period.'

But even using the most sophisticated metrics to measure performance carries the inherent danger of trying to understand the future by looking backwards at a set of synthetic numbers and not trying to look directly at the underlying elements that will drive the numbers and determine future success.
So here is a second dimension.
Through Understanding the Processes that Will Foster Good Performance.

Organisations that have found ways of sustaining superior long-term performance give appropriate and balanced attention to the key facets of their business and to the interests of stakeholders. When they get the balance right, such companies create a Virtuous Cycle of actions that will reinforce and deepen the competitiveness and performance of the business.
Such a Cycle is described below:

Figure 8.1 (Source, Don Young).

This model seeks to identify the elements of a virtuous cycle that will result in an enterprise being able to achieve a sustainably good performance.
At the centre are the enterprises Core Objectives, to 'Serve the Needs of its Customers' and to 'Satisfy the Needs of its Stakeholders'. If these objectives are to be achieved, the enterprise must first do whatever is needed to develop and maintain Competitive Advantage in its chosen Customer Markets. To do this, it must devote permanent attention to internal processes that will enable:
- Its organisation to be the 'engine' of high performance and growth. Different industries and different challenges will mean that the design and functioning of the organisation will be always adapting and changing. Integral to all of this is the development of staff and management to be able to learn and adapt at least as fast as change in its industry.
- The most efficient use of capital assets to support efficiency and low costs.
- The development of customer offerings and customer-serving processes that are at least as good as the best competitors and that are capable of differentiation from competitors in quality, performance or cost. This will entail dedicated investment in innovation, product/service development and customer research.
Developing competitive advantages will mean that the enterprise will be capable of creating wealth at a level equal or superior to that of quality competitors. This is crucial to the maintenance of sustainable high performance, as it enables the enterprise to have the wherewithal to fulfil two critical needs:
1. To enhance Shareholder Value at a level at least equal over the long term to that of its competitors for capital. Satisfying responsible investors will enable the enterprise to realise the capital that it needs to sustain and grow the business at the lowest cost.
2. To enable the enterprise to maintain positive internal investment that will enable it to:
  - Innovate and create new or improved forms of competitive advantage,
  - Enhance the quality and performance of the organisation, systems and processes, and above all, people.
Satisfying shareholder requirements will give access to the Capital needed for investment and growth.
Investing in innovation and organisation building will create the Capability to successfully compete and grow.
Looking at the issue of good performance and the underlying requirements needed to sustain it in this way removes the requirement to regard the needs of any one stakeholder as paramount. Successful enterprises and their top managements will need to reconcile the demands of a range of important stakeholders and satisfy their needs. Failure to achieve a virtuous balance will almost certainly result in eventual underperformance and failure.
A third perspective that will enrich our understanding of current and prospective success is to understand what values, behaviours and actions will foster the likelihood of good performance.

Understanding 'Performance' Through What 'Good' Managers Do

Several serious researchers have sought to observe what differentiates the behaviours of the managers of the long-term leaders in their industries.
The following extracts from a major programme of research by Jay Lorsch and Gordon Donaldson of Harvard Business School typify what the research says about what drives the top managers of sustainably good companies. Interestingly, such 'good' values and behaviours have not changed much over 30 years - what has changed is the nature of poor management!

MYTH	REALITY
Successful top managers are driven to maximise shareholder wealth	Successful top managers are most concerned about the long-term success and survival of the corporation.
Strategic decisions are crucially subject to Capital market disciplines	The most successful companies seek to minimise their dependence on capital markets
The most successful top managers are mainly concerned with investor reactions and expectations	The top managers of the most successful companies are most concerned to be highly competitive in their product markets and to meet the needs and expectations of fellow employees
Successful top managers are mainly concerned about short term results	Top managers in the most successful companies are most concerned with long term corporate survival
Top managers of successful companies regard acquisitions as inherently bad.	The managers of the most successful companies regard acquisitions and diversification as a contingent part of their strategic armoury
Strategic choices and decisions are rationally conceived and executed	Successful strategic change tends to be incremental and often exploratory. It is mostly based on experience and subjective judgement, rather than rational analysis

More recent work by Jerry Porras and James Collins, resulting in a very successful book, 'Built to Last', indicates what the leaders of durably successful companies value and seek to create.

Their findings are very interesting. Their first observation about these highly successful companies might make many people in the financial markets frown in disagreement.

Deeper Purpose.
The top management and staff of these very successful companies firmly believed that their enterprise had a reason for existence that went deeper than 'just making money' or 'just satisfying shareholders'.
The fundamental purpose of these companies was not to maximise shareholder value, but to make or supply something that was significantly useful to customers.
However, the researchers go on to point out that the companies were also highly committed to superior financial performance and to creating greater value for their shareholders than their competitors. It is just that financial performance was regarded as a necessary condition and not the fundamental purpose of being in business.
Strong core values.
The second noticeable feature of superior companies is slightly more complex. Porras and Collins observed that their sample managed to differentiate between those values and beliefs that were absolutely fundamental to the company and those behaviours and traits that were more superficial. The key behaviour of the superior companies was that they were extremely flexible and responsive to change, except for changes that would undermine the core 'ideology' of the company.
Porras and Collins coined an icon that resembled the Yin and Yang symbol, which related the mantras "Preserve the Core" and "Stimulate Progress".
Stretching goals and innovation.
Next, the authors of 'Built to Last' observe that their superior companies are extremely ambitious when it comes to innovation, audacious projects and risk-taking, provided that they do not challenge the core ideology or risk the whole company.
Distinctive culture.
The commitment to a strong and enveloping culture also marked the superior companies, to the extent that they were described by the authors as 'great places to work only for those people who buy into the core ideology; those who don't fit with the ideology are ejected like a virus' (to preserve the Core).
Active and experimental.
Superior companies are extremely active. They are described as "Trying a lot of stuff and keeping what works". The authors observe that they indulge in, "High levels of action and experimentation - often unplanned and undirected - that produce new and unexpected paths of progress and enables visionary companies to mimic the biological evolution of species".
Growing their own leaders.
A major and significant feature is 'Home Grown Management'. According to Porras and Collins the 'best of the best' promote from within, bringing to senior levels only those who've spent significant time steeped in the core ideology of the company. This important practise is seen to be a major way of preserving that distinctive core culture.
Culture of continuous improvement
Last, and obviously, given what has gone before, the great companies studied exhibited a 'relentless' pursuit of self-improvement, with the aim of doing better and better, 'forever into the future'.

To boil it all down, this is what extensive research data show that leaders of long term High Performing companies will seek to do.

They will seek to grow their business from the 'inside-out'. This means that leaders of high performing companies act as a first priority to create a very strong platform for competitiveness and growth by attending to the processes, people and organisation that create customer offerings. Allied to this, they will also aim to create a strong and distinctive internal culture, but one that actively values learning and curiosity about the external world.

Then, when it becomes really necessary to take 'external' routes such as mergers, acquisitions or partnerships to sustain growth, the business and organisational platforms will be sufficiently strong to assimilate acquisitions or work alongside strong partners without becoming weakened or distorted by the relationship.

Secondly, they will ensure that they are strongly 'bonded' with the organizations that they lead.

John Kotter, in his book, "The General Managers" (1986), describes such bonding well. It means that 'good' leaders will ensure that they know and are known by a wide cross section of the organisation's staff as real people. This means networking and often travelling extensively. It also means using every medium and opportunity to transmit and reinforce the key messages about values, priorities and direction, as well as listening extensively. And it means doing these things consistently, for all time, because they come from the heart as well as the brain and not because the communications department feels that they are occasionally needed.

The contrast is stark; 'good' managers know their businesses intimately, are in touch with the detail, 'craft' strategies from a strongly involved position, and have strong commitments to the business and its people.
Such bonding is not founded on soft sentiment in high performing organisations. It is hard work and it is done for hard as well as soft reasons. But, in the end, if leaders have to do unpleasant things, it should be that the organisation knows that they had to be done for good reasons. Out of such bonding comes the mutual trust that binds people in high performing enterprises.
These points are well brought together in the 'Credo' of Johnson and Johnson, a company that has been successful for a great number of years.

OUR CREDO

"We believe that our first responsibility is to the doctors, nurses, hospitals, mothers and all others who use our products.

"Our products must always be of the highest quality. We must constantly strive to reduce the cost of these products. Our orders must be promptly and accurately filled.

"Our dealers must make a fair profit.

"Our second responsibility is to those who work with us - the men and women of our plants and offices. They must have a sense of security in their jobs. Wages must be fair and adequate, management just, hours reasonable, and working conditions clean and orderly.

"Employees should have an organised system for suggestions and complaints......

"Our third responsibility is to our management. Our executives must be people of talent, education, experience and ability. They must be persons of common sense and full understanding.

"Our fourth responsibility is to the communities in which we live. We must be a good citizen - support good works and charity, and bear our fair share of taxes......

"Our fifth and last responsibility is to our stockholders. Business must make a sound profit. Reserves must be created, research must be carried on, adventurous programs developed, and mistakes paid for. Adverse times must be provided for, adequate taxes paid, new machines purchased, new plants built, new products launched, new sales plans developed. We must experiment with new ideas.

When these things have been done the stockholder must receive a fair return......." (Our italics).

In the next Section of our investigation, we will look a little more deeply into the Values, Behaviours and Actions of good and not-so-good top managers and what managers can do to build or ruin the companies that they lead