Got Change?

When leaders run out of "change"the currency that keeps relationships goingthey run out of options. Just look at Bob Nardelli at Home Depot

When Bob Nardelli and the Home Depot (HD) board agreed to his resignation in January, 2007, many people were surprised because the company's earnings per share had increased by about 150% during the five previous years.

Not James Senn, director of Robinson College's Center for Global Business Leadership at Georgia State University. At the time he commented: "This is not about strategy or vision. This comes down to two things. The foundation of leadership is credibility. Bob has run into some problems there. The second is execution."

Nardelli was out at Home Depot because he lost credibility. The company's stockholders didn't like his excessive compensation. They also didn't like his attitude of disdain toward them. And when he wouldn't accept the board's requests that he change his compensation package, that was the end of it.

On Aug. 6, Nardelli was named the new leader at Chrysler. Will he be successful there? That really depends on how much "change" he has in his pocket in the coming months.

Deposits and Withdrawals

The relationships leaders have with their followers are like financial accounts. (In fact, this is true of all relationships between people.) When someone does something positive for another person, it's like depositing money in the bank—or putting change in their own pocket. When he or she does something negative, it's like making a withdrawal.

Let's say I'm your leader. When I help our team to win, I get change. If I send you to a training seminar you've been wanting to attend, I receive more change. Just like when I give you a raise, or tell others what a great job you're doing, or mentor you to help you become a better leader.

On the other hand, if I do something that causes you or the team to lose, or I hog all the credit when we succeed, or I lie, or I humiliate you in front of your colleagues, I lose change. Each negative interaction takes change out of my pocket.

The more change I have in a relationship, the more credibility I have and the better that relationship is likely to go. Having change also gives me more options and a greater margin for error. If I make mistakes, it costs me change, but I don't worry as much if my pockets are full. However, if I use up all my change, our relationship becomes bankrupt, and I've got a problem.

This concept of relational change has several important implications for leaders:

1. You have an "account" with every individual in your life.

You have a relational account with every person in your life: your employees, colleagues, superiors, family, and friends. And you have to manage each of those accounts, making an effort to make deposits and working to minimize withdrawals.

The accounts don't all start out the same. You begin every relationship with a certain amount of change with another person—and you don't know exactly how much there is. If the individual is generally trusting, you will start with more change than if he or she is naturally skeptical. If you have a great reputation, you may start off with more change than would someone who is unknown. If someone vouches for you, that might help you start out a relationship with additional change you wouldn't otherwise possess.

Change is really about trust, and trust comes from the character and competence you exhibit; the more you exhibit, the more change you accrue to your account.

2. You can lose change faster than you can gain it.

Professional relationships sometimes begin with a honeymoon period during which one doesn't easily lose change for making mistakes. For example, when you hire new employees, you are likely to give them grace. Nardelli will likely benefit from a honeymoon period, during which people will withhold judgment—and not "charge" him.

However, most of the time, it's easy to lose change and difficult to earn it. Most people's attention is more easily drawn to problems.

That's in part because of the negative impact they will have. When something good happens, people tend to think that's just the way things ought to be.

To make a relationship grow, we need to make two to five positive deposits to make up for any negative interaction. But here's the good news: If you make repeated deposits without making any withdrawals, each deposit gains additional value and you begin to develop leadership momentum.

3. Character withdrawals cost more than competence withdrawals.

All relational withdrawals are not equal. People will more easily forgive or forget mistakes someone makes when those mistakes are a matter of competence. They will not so easily set aside character problems. The fastest way an account gets depleted is through repeated character-related problems. And similar to the way positive actions compound in a positive direction, negative actions also compound. When there is a series of repeated character failings, each becomes more devastating to the relationship—regardless of how serious the subsequent infractions actually are. What usually ends a person's leadership is the last thing he or she has done—not the worst thing.

4. You won't know you're out of change until it's too late.

Just as it is impossible for you to know exactly how much change you have at the beginning of a relationship, it is also impossible to know that you are out of change—until you are. People who keep drawing and drawing from an account and don't make deposits find themselves in trouble. Leaders who do this lose their followers. Employees lose their jobs. Spouses end up in divorce court. Parents find themselves alienated from their children.

5. Leaders must possess change to make changes.

It is possible to hang on and survive as an employee, a spouse, or a parent by avoiding withdrawals and making just enough deposits to get by. Many people live in this kind of mediocre wasteland. They avoid risks, duck conflict, keep a low profile, and hope for the best. A leader who wants to make an impact can't do that.

Growth requires making changes. So does progress. In an organization, you don't get either without good leadership. And good leadership is dependent on the goodwill of the people being led. If you are a leader and you want to make changes, you need to have change in your pocket. You'll have that only if your people have faith in your character, can rely on your competence, and know from your track record that you can be depended upon.

Bob Nardelli is getting to start over again at Chrysler. He made his reputation when he was at General Electric (GE). He damaged his reputation at Home Depot. Who knows how much change he's starting out with—if he wants to be effective at his new post, he'll need to earn a lot of change with key people. If he does that, he has a chance to lead well and make a positive impact at Chrysler.

More important, how much change do you think you have with the people you lead? If you're not sure, can you at least identify whether you're making deposits? If you're not, you need to start working to reverse the trend and tip the balance in your favor. You don't want to wake up one morning to find yourself out of change, out of options, and out of work.

    Before it's here, it's on the Bloomberg Terminal.