There seems no better way for a financial services executive to begin the New Year than by considering Peter Drucker’s most recent comments. Drucker is the dean of management consulting and, even though he is now in his nineties, his ideas remain sharp and on target.
His end-of-year column (December 30, 2004) in the Wall Street Journal, titled, “The American CEO,” highlights his view of a CEO’s responsibilities: “The CEO is the link between the Inside, i.e., ‘the organization’ and the Outside – society, the economy, technology, markets, customers, the media, public opinion. Inside, there are only costs. Results [and revenues] are only on the outside.”
Drucker writes that the CEO first job is “to define the meaningful Outside of the organization…. The definition is anything but easy.” Fittingly, he uses a bank to explore this topic: “For a particular bank, for instance, is the meaningful ‘Outside’ the local market for commercial loans? Is it the national market for mutual funds? Or, is it major industrial companies and their short-term credit needs? All three of these ‘outsides’ deal with money and credit…Each of them is a different business and requires a different organization, different people, different competencies and different definitions of results. Even the very biggest bank is unlikely to be a leader in all these ‘outsides.’ For which of these to concentrate on is a highly risky decision and one very hard to change or reverse. Only the CEO can make it. But also, the CEO must make it. It is the first task of the CEO.”
In effect, banks operate not only with a CEO at the top of the organization but also with business line “CEOs” running retail, commercial banking, and other line and support areas. Those CEOs, like the Chairman, largely determine the fate of their businesses.
Other issues that the CEO, whether focusing on the company or a business, must face include:
– Defining the right competitive set. For example, Drucker writes, “the most meaningful competitors for the toy maker are not other toy makers but other claimants on potential customers’ disposable dollars.” In the case of banks, management needs to continually rethink its competitive set, expanding from the neighboring bank to national players, retailers, and other non-traditional threats.
– Selecting where to operate and where to avoid. In Drucker’s words, “There is constant pressure on every CEO to do a little bit of everything…The CEO’s most critical job – also the CEO’s most difficult job – is to say ‘No.’” Going forward, the best performing managers will be those who develop the fact base allowing them to determine whether to grow, hold, or exit certain businesses. We expect the profit dynamics for businesses such as mortgages and commercial lending to become increasingly volatile. Sub-par results will come to those players failing to understand and address the “differences” Drucker mentions above. We see more clients not just considering how to operate a certain business but also whether to continue to do so.
– Putting people into the key positions. Drucker’s message on this topic highlights one of the weak spots at many banks. “What differentiates organizations is whether they can make common people perform uncommon things – and that depends primarily on whether people are being placed where their strengths can perform or whether, as is only too common, they are being placed for their absence of weakness…Nothing requires such hard work as ‘people decisions.’”
Banks need to become much more rigorous in their assessment of personnel, particularly bankers of longer tenure. One bank we know that is widely viewed as a demanding employer also has the reputation of providing employees of ten years or more of experience with tenure. They simply are not fired, limiting the bank’s ability to respond to market needs and demoralizing better-performing staff. In many cases, banks are paternalistic institutions. While there are positive aspects to that, in many cases the associated negatives may be albatross-like.
Concluding thought. CEOs have to possess the courage and willingness to directly confront the “simple” questions that Drucker lists: “What is our business? What should it be? What should it not be?” Answering those questions requires a willingness to reject self-delusion and lead the development of an objective (or as objective as possible) fact-base, one that replaces anecdotes and assertions with case examples and quantitative analysis.
In the more competitive year of 2005 and beyond, CEOs must confront past approaches and assumptions about the appropriate mix of businesses. To some extent, being directive will replace seeking consensus, and the pace of decision-making must increase as will the demand for “information” to support those decisions. Going forward, the performance gap between the “adequate” and excellent CEO will widen quickly; “adequacy” has become insufficient for the type of leadership required.