Executives Are Wrong to Devalue Values

McKinsey & Co. released a survey this week on "leadership through the crisis and after." Had Peter Drucker parsed the poll, however, I think he would have found it most revealing in terms of how we got into such a mess in the first place.

When asked what are the most important organizational capabilities for managing corporate performance, the 763 executives who responded—representing a range of regions, industries, and functions—picked two more often than any other. The first was "leadership," which was described as the facility to "shape and inspire the actions of others." The second was "direction," or the "capacity to articulate where the company is heading and how to get there" in an aligned manner.

Stuck at the very bottom of the list, meanwhile, was the ability to "foster a shared understanding of values." A mere 8% of respondents cited this factor as crucial, compared with 49% for leadership and 46% for direction. What's more, those taking the survey indicated that ensuring shared values has become less vital since the economic crisis began, while the other two qualities have become more significant.

For Drucker, these numbers surely would have been troubling. The way he saw things, any organization needs to demonstrate achievement in three major areas if it's to be successful: generating "direct results," "developing people for tomorrow," and the "building of values." If a business is "deprived of performance in any one of these areas, it will decay and die," Drucker warned in The Effective Executive, his 1967 classic. "All three therefore have to be built into the contribution of every executive."

Leadership and Values: Bound Together Of course, it is tempting to dismiss any discussion of values as pure pablum—the mushy stuff written into corporate social responsibility reports and uttered at the company's annual awards banquet. But that's a misreading of what values are all about. Every employee knows, deep down, what his or her organization stands for. And unless it stands for the right things, it is terribly easy for its people to go astray.

"We hear a great deal of talk these days about the 'culture' of an organization," Drucker noted in a 1988 Harvard Business Review piece. "But what we really mean by this is the commitment throughout an enterprise to some common objectives and common values. Without such commitment, there is no enterprise; there is only a mob. Management's job is to think through, set, and exemplify those objectives, values, and goals."

Perhaps the oddest aspect of the McKinsey findings is the suggestion that providing leadership is somehow separate from promoting values. In fact, the two are bound together—the double helix of any corporation's DNA.

As Drucker wrote: "Leadership is … example. The leader is visible; he stands for the organization. He may be totally anonymous the moment he leaves that office and steps into his car to drive home. But inside the organization, he or she is very visible, and this isn't just true of the small and local one; it is just as true of the big, national, or worldwide one. … No matter that the rest of the organization doesn't do it; the leader not only represents what we are, but, above all, what we know we should be."

Which goes a long way to explain why so many banks exhibited such a high degree of recklessness in the runup to the financial meltdown. In a report this year on lessons about corporate governance gleaned from the crisis, the Organisation for Economic Co-operation and Development cited "tone at the top" as a big part of the problem. In looking at remedies, the OECD highlighted standards calling for directors not only to approve a bank's strategic objectives but also its "corporate values," and to ensure that they "are communicated throughout" the firm.

For Every Business, a Choice The same analysis concluded that in addition to lacking sufficient systems and procedures for properly evaluating certain types of securities, "soft factors were also at work" at some institutions. At French bank Société Générale, the study said, "an imbalance … emerged between the front office, focused on expanding its activities, and the control functions which were unable to develop the critical scrutiny necessary for their role."

In other words, like many others, Société Générale (SOGN.PA) became so intent on ringing up "value," it forgot about its values. Now, according to the OECD, the bank is trying to "move towards a culture of shared responsibility and mutual respect"—one in which risk managers are as prized as traders.

Richard Ellsworth, a longtime colleague of Peter Drucker's at Claremont Graduate University, makes clear that, on some level, every business faces a similar choice. "The company can be viewed either as a moneymaking machine or as a vehicle for satisfying human needs," Ellsworth writes in a new book, co-authored with a group of Claremont faculty members, called (just like this column) The Drucker Difference. "By definition, if the central end value is not shared—if employees do not believe in its intrinsic worth—then this foundation and the resulting corporate culture are weakened, and corporate values lose much of their power to influence and direct actions."

Never mind the survey. Without setting values, offering leadership and supplying direction are hollow gestures at best.

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