Negotiation: Art, Science, and Wisdom or the Logic of Leverage
In 1689, the English House of Lords was debating what title to give Prince William of Orange, who had recently chased James II out of the country. Should he become king, regent, or prince consort? Prince William summoned a group of prominent lords to his apartments with this offer: Crown him king, or he and his army would go back to the Netherlands, James would return, and the lords’ heads would be in severe danger. Bingo! Within two days, the House of Lords decided that king was the right job title.
Such stories have a peculiar fascination. There seems to be a kind of innate logic at play, an awareness of the “golden moment,” when one side’s leverage is heightened. In more mundane terms, if you are negotiating a job, you are well positioned to negotiate the terms (including the job title) after the offer has been made (in William’s case, after James had fled), but before you accept it (before a new constitutional settlement had been worked out). If only we could master that logic, we would maximize our chances of coming out on top in all the negotiations we undertake — in business, politics, private life. Hence the stream of negotiation books, which package that logic in different styles — reflective, analytical, or wisecracking.
Among these books, few have rivaled Getting to Yes: Negotiating Agreement without Giving In (Houghton Mifflin), the 1981 book written by Roger Fisher and William Ury. The original edition of Getting to Yes was developed at Harvard University’s Negotiation Project, which introduced an approach that focuses on mutual interests and fairness, not on maintaining positions and winning the contest of will. That approach has been credited with helping political leaders resolve difficult conflicts around the world. (In the spirit of disclosure, I should add that in 1975 I designed and helped Roger Fisher teach the Harvard course that preceded the book.)
Originally Published in Strategy+Business, December 2006
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Henry Ford is the textbook example of a successful businessman finding himself in conflict with shareholders who failed to see the value of his purpose. He lost a couple of times and then went on to win. His first venture was not, as it happened, the Ford Motor Co. but the Detroit Automobile Co., founded in 1899. It lasted a year. The other shareholders, according to Ford, saw the company as a mere “moneymaking concern” rat her than as “a vehicle for realizing my ideas.” His second venture, the Henry Ford Co., was more successful, but he left after eighteen months (it later changed its name to Cadillac), commenting that “thinking first of the money instead of the work brings on fear of failure and this fear blocks every avenue of business.”
By the time he set up venture number three, the Ford Motor Co., he had learned his lesson. In 1906, three years after the company was founded, he threw his original backer, Alexander Malcomson, off the board because Malcomson wanted to develop an expensive car, responding to current market demand. This was out of line with Ford’s purpose, which was to “democratize the auto mobile”; as he put it to one of his mechanics, “the proper system, as I have it in mind, is to get the car to the people.”
This, of course, is what he did. From 1908 to 1917, Ford steadily cut the cost of the Mo del T from almost $950 to just $345. By then he was selling 730,000 cars a year. These price cuts were not needed to match the competition or ensure that demand was maintained, nor did Ford watch the company’s cash very closely. He was happy to throw away comparatively new machinery in order to improve the production process, and he never assessed the return on his investment. He was striving to democratize the automobile—and, in the process, making a fortune for himself and his shareholders.
Strangely enough, his shareholders were not especially grateful. In 1917, they launched a lawsuit, trying to force him to distribute dividends rat her than invest mo re and more cash in lower prices and expansion. They could not have been more wrong—the profits of the company continued to soar as production expanded — but it didn’t seem like that at the time.
The Well-Balanced Board
Does the Ford story show that shareholders and boards should just shut up and let the CEO get on with it? The history of Ford after 1923, when it steadily lost share to General Motors, shows how badly wrong things can go when there are no checks and balances on a leader. Equally, recent corporate scandals have made the country-club style of corporate governance simply unacceptable. Partly for this reason, shareholder activism is on the increase: Funds with large stakes are increasingly finding it worth their while to intervene, threatening to remove and sometimes actually moving against management.
One school of thought, often adopted by those with a private equity background, is that the answer to the problem is for board members themselves to be substantial shareholders, to more directly re present shareholders. Were this to be the case, they would have strong incentives to keep a close eye on potentially way ward executives and to exert themselves when monitoring strategy, succession plans, acquisitions, and the like. In the jargon, directors and shareholders’ incentives would become perfectly aligned, and there would be no agency problems.
Such a system indeed works well in private equity, where lack of liquidity forces shareholders to take at least a medium-term view of their stakes and where everything is geared to the eventual sale of those stakes. The danger with extending the formula to public companies is that boards, under pressure from market- watching shareholders, become excessively interested in short – term share – price movements. Few observers, and fewer CEOs, feel that the market needs more influence in the boardroom. On the contrary, as Warren Buffett has pointed out, part of the value he adds at Berkshire Hathaway is acting as a buffer between the CEOs of operating companies and the pressures of the equity market. Boards generally can also perform this role, but if they are to do so, then, like any mediator, they need a degree of independence.
How Boards Support Purpose
If companies driven by a strong shared purpose are more successful, then part of the board’s mediating role must be defending such a purpose—and if there is none, fostering one. It must be satisfied that the purpose is consistent with advancing shareholders’ interests, of course. But it must also support the company’s leadership and protect it from short-term market pressures.
This does not mean the board should itself discover or create a purpose for the company, but if there is no purpose, it can encourage the top team to discover one, just as it would encourage the team to develop a strategy were it not to have one. In other words, it is the top team’s job to discover a purpose and strategy that the board can back while being true to its fiduciary responsibilities (which may, depending on the jurisdiction, be to the company, the shareholders, or in some cases to other stakeholders).
Once such a potential purpose has been identified, board members can test management’s commitment to it and test whether it is compatible with a strategy to deliver shareholder value. If all is well, they can agree on it and act as its guardian.
This they do by gently reminding management about the purpose when necessary, asking the occasional question about its implications for strategy, and assessing whether it is taking hold among those employees whose support is important. (Of course, the board is entitled to reject a purpose presented by management if it regards it as inconsistent with shareholders’ interests—and this might be a resignation issue for the CEO.) The board must then adopt the purpose as its own and defend it vigorously in public.
The chairman has a particular role to play. He can act as a kind of father-confessor and help team members focus on the long-term tasks of developing and applying the purpose and building advantage. He can reassure them that it is OK not to respond constantly to short-term pressures imposed by analysts, governments, unions, and nongovernmental organizations.
In my experience, within the framework I have just described there are two patterns of useful board intervention. The first pattern is more common in companies with a strong, united, and often quite small leadership group. Such businesses may, for example, have expanded by rolling out a standard business model globally. Companies such as Microsoft, Coca-Cola, and McDonald’s are known precisely for using efficiencies of scale to roll out similar operations and marketing all over the world without much adaptation. They are the icons of American business, in which managers, no matter where they live, are expected to de mo n s t rate not just ability but fealty to the core. This type of organization benefits from its strong sense of collective purpose. The danger is that the purpose can deg e n e rate into narcissism and isolation.
In such companies, the board’s most important role is not usually to foster the purpose or even to promote it to shareholders (although, as always, the father-confessor chairman can encourage and support the CEO in this area). More important is ensuring that it is the purpose — rather than the leadership itself or the institutions of the company— that attracts loyalty. Boards may have to take a strong stand on behalf of the company’s purpose and make it clear to everyone, including the CEO, why the company’s stake in that purpose is so important.
The second pattern is mo re common in the many businesses that do not display this kind of single-mindedness. This might be because they have been assembled by acquisition, or because different divisions are relatively autonomous, or because the leaders deliberately seek to cultivate diversity of style. The leaders of such businesses will often need more active help from the board in reaching a purpose that can be shared across the company, and then promoting it to different stakeholder groups. The board may need to challenge the team to say what unites the company and its leadership: Is it a lowest common-denominator consensus, or are they working to establish a real, positive shared purpose? The board may also help to mediate not just between the leadership and stakeholder groups but between parts of the company. A single purpose does not imply a single style, but the attempt to establish a single purpose may cause concern about cultural imperialism. In such cases, the board has an important role to play as a kind of final court of appeal: Being somewhat above the fray, it can help provide unity.
Few corporate boards currently live up to this ideal. While many have recently advanced from passive governance to active monitoring of executive management and careful probing of company strategy, few take notice of a company’s purpose. For boards to fully live up to their responsibility in our new era of board engagement, a company’s purpose must be at the top of directors’ agenda. The board that can help the top team define the company’s purpose—and direct it there again and again—is a board able to guide any company to excellence.
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Originally published in The Conference Board, March/April 2007
Recognition of Purpose’s importance helps organizations acquire, deploy, develop, and retain its workforce in an environment of intense competition for talented employees, and also recognize the contribution that HR can have on companies’ bottom lines.
To understand the impact that this thing called Purpose has on human capital, you need first to understand what it is. And to best understand Purpose, it is important to appreciate what it isn’t.
For instance, Purpose isn’t another word for mission. Nor is it an alternative approach to strategic planning although it has been found to clarify the process of planning and close the strategy-execution gap that many organizations suffer from.
Purpose is the goal of the organization; that is, it is the reason why a particular group of talented people come together doing particular things. By that, I am not referring to product manufacture or service offerings. Those are the things that the company does to satisfy shareholders and customers. I am looking at the bigger picture, answers to questions like the following: Is the organization here to discover new inventions? To increase people’s happiness? To create quality? To control the direction of our industry? Or for some other reason?
Purpose may change over time with industrial trends and with new leaders, but once delineated Purpose can be a call for action that leaders can use to stimulate staff to act consistently and decisively. It can trigger innovative thinking and a sense of teamwork. In economic downturns, it has the power to bring an organization together and focus all effort in a single direction. While having a Purpose is important to all companies, it is invaluable to those that suffer from complacency or financial shortcomings, enabling top management to rally the organization’s staff around and clarify the company’s vision and overcome lack of trust from previous years of unfulfilled promises and staff cuts.
From an HR perspective, it has been found to increase employee loyalty and reduce turnover, build employee trust and raise levels of engagement and job performance, and support empowerment and learning opportunities for managers and their direct reports.
When a company has a Purpose and that Purpose is shared, employees become more committed and loyal. They work hard to make the plans set to achieve that Purpose a reality, thereby closing a serious gap between strategies and execution that existed in past years.
A strategy-execution gap is serious business. According to one study, nearly half of the leaders surveyed (49%) admitted to a gap between strategy and execution. Worse, that same study found that 64% of the leaders interviewed lacked confidence that the gap could be closed. I believe that purpose can help close that gap. I contend that a key reason for the gap is confusion, and a clearly communicated Purpose can put an end to the confusion. Purpose can serve to motivate and direct staff to make the strategies happen and put an end to the strategy-execution gap. Purpose achieves successful strategic execution by making clear to all in the organization where it is going and then, via strategies built around that goal, aligning resources deliberately and consciously to get there.
In essence, there are three key factors important to a company’s success:
1. Determination of Purpose or corporate vision: why you are in business
2. Strategic plans: how you are going to achieve that purpose
3. Corporate behaviors: how are you going to operate (corporate values and policies and procedures, including people management) to achieve strategic plans and thereby achieve Purpose
Ideally, HR executives should be a part of all three steps. They should be members of the top management team that determines the company’s Purpose, analyzing its past and brainstorming opportunities in the future, as well as considering the problems of the present. They should meet with other members of the top team to better understand corporate moral ideas and values, move on to a study of the company’s history, then be a part of the discussion with team leaders about their view of a Purpose, then together take a creative leap to the Purpose, and finally tests that Purpose through metrics and models. Finally, they should participate in corporate strategic planning to ensure that the final corporate strategies will deliver both the Purpose—that is, its goal or the shared recognition of the reason why the company exists—and profits.
Consider Southwest Airlines. Asked their company’s business, the organization’s leaders would not describe themselves as being in the airline business. That would be something that narrows the relationship between their organization and their customers as a commercial transaction. It wouldn’t allow either the top management or the workforce to consider the all-important role of the campaigns excellent standards—which is an important factor in the case of Southwest Airlines.
Jim Parker, former CEO of Southwest Airlines, recently wrote a book about his time in the position. Entitled Do the Right Thing, it notes how the company always wanted to remember why (think Purpose) it flew airplanes and that it was its customers who rewarded the organization for the high level of customer service. At the same time that Parker writes about the many physical things that Southwest Airlines did, he attributes the airlines success to its “soul.”
As Parker mentions in his book, the key to Southwest Airlines is its people. “They are dedicated. They are spirited. They understand the purpose of the company and believe in it. They make flying fun for our customers, and they have fun themselves.”
In an interview in MWorld, a publication of the American Management Association, Douglas Conant, president and chief executive officer of Campbell Soup Company, talked about his company’s Purpose. “It’s hard to get people to think beyond the myriad tasks they are responsible for on a daily basis,” he said. “We know that we are an economic enterprise, and we exist to create value for shareowners. But to do that, we can’t simply focus on the marketplace. We can’t expect to be sustainably good in the marketplace if we don’t have a superior employment experience in the workplace.” This thinking prompted Conant and his top team to create the Campbell Success Model. It reads: “Maximize shareowner value by both delivering superior business performance (Win in the Marketplace”) and delivering superior employment experience (Win in the Workplace).”
Conant continued, “When you translate strategies into reality, it’s all about execution. But execution depends on a sound corporate culture. This is why creating a high performance culture was mission-critical in reinvigorating Campbell…,” said Conant referring to the state of the company when he joined it six years before. The 160-year-old organization had grown complacent and its whole consumer proposition was suffering.
Significant change was needed, and Conant told the reporters that the establishment of a higher purpose and the winning of the understanding of the organization’s employees enabled him to undertake the significant heroic transformation of the business. Conant said, “Employees had heard a lot of rhetoric about how the company had to do better, but nothing had happened over the last four years except the person to the left and, maybe, to the right of them, had lost their jobs.”
The company’s transformation didn’t occur overnight, but today success can be measured not only on the P&L sheets but also in the behaviors designed to engage employees. For instance, to measure success in attracting and retaining multicultural talent, Campbell has created a diversity scorecard that helps it benchmark its annual program, just as an ongoing engagement survey from the first days Conant came to the organization measures employee engagement and commitment to the organization.
From one of the lowest engagement scores among the Fortune 1000 firms surveyed by the Gallup Organization, Campbell now can boast of having ever-increasing engagement numbers and levels of employee trust and productivity. In 2003, Campbell’s overall employment engagement as measured by Gallup was 2:1, meaning for every two actively engaged employees there was one actively disengaged employee. In 2007, that number has risen to 9:1. Among its top managements, Campbell’s 2007 engagement scores are 35:1, up from 8:1 in 2003. For this and other reasons, Campbell was recently awarded the Gallup Great Workplace Award, which recognizes the most engaged and productive companies in the world.
HR executives and managers are asked to determine learning opportunities for managers and their direct reports as the companies with a clear sense of their Purpose benefit from their work performance. The learning may take the form of participation in public seminars, on-the-job training, or corporate universities that provide training targeted to the strategies geared to the companies’ Purpose. HR Departments find themselves responsible for seeing that their company’s people are able to grow with their company.
If you’d like this entire article, you can download it for free from my website.
To be published in HR Management today in 2008
- The True Purpose of the Board
- Purpose: The Search for Strategic Alignment
- The Return in HR from Purpose
- Purpose-Led Planning & Strategy Execution
- An Interview with Nikos
- Using Purpose to Drive Innovation
- Thinking on Purpose
- Purpose: The Starting Point of Great Leadership
- The Search for Purpose
- Four Routes to Success
- Purposeful Leadership