future of leadership
future of leadership
Traditional leadership disciplines are affected by emerging technologies and new demands for sustainability. There are significant differences in governance practices between the U.S. and Europe, however, perspectives collected in the U.S. are relevant to shed light on future practices.
The tensions are divided between two categories, directors and executives. The tensions for directors are: Transparency, Social Media, and CEO, while the tensions for executives are: Risk, Executive Team, and Exploration. Read short versions of selected cases below, and download the report to read all the cases.
Netflix has made significant changes to its business since the beginning, from DVD renting to streaming, expanding internationally, and investing in original content. Netflix directors believe that the board processes played an important role in giving the board confidence in management during these challenges. One director says, “It was a huge leap, and it’s hard to imagine we could have done it without the intimate knowledge of the operations and the people.”
Traditional ways of reporting to the board tend to be carefully orchestrated by executives, but when engaging directly, the directors get a less edited source of knowledge. According to founder and CEO Reed Hastings, their practices improve the board’s ability to provide “an extreme duty of care.” “The board isn’t going to have the confidence to make the hard decisions unless they really understand the market and the company.”
By having board members periodically attend monthly and quarterly senior management meetings, in an observing capacity only, Netflix ensures a transparent governance structure that makes for a well-informed board able to make better long-term decisions. The question is whether or not this approach could work in other companies or if the success at Netflix is due to a specific company culture that encourages individual initiative and focuses on results instead of processes.
How can firms find new governance structures when boards and management have different expectations and needs for transparency? Traditionally, the board has been expected to make decisions based on highly condensed material presented by executives, but at the streaming company Netflix, this approach is radically different. Instead of bringing the conclusions to the board, the board gains access to analysis and draws conclusions based on additional observations. Netflix is known for a “genuine transparency” governance structure. Professor David F. Larcker of Stanford Graduate School of Business presented the case "Netflix Approach to Governance: Genuine Transparency with the Board".
“Had WeWork matched its high growth with a business model that created more confidence in a path toward profitability, its CEO, Adam Neumann, might have been able to get somewhat of a “pass” for his eccentric behavior and extravagant spending habits. But with no cognizable path to profitability combined with the unorthodox behavior, it was just untenable for institutional investors. WeWork is a cautionary tale for the dangers of assembling a board of directors that is contractually foreclosed from … governing.”
Boards and investors need to avoid “founder worshipping,” be realistic about the founder’s strengths and weaknesses, and constantly examine and re-examine the most efficacious role for their founder, as the characteristics making the founder capable of potentially transformative value creation can also make them inherently challenging to oversee.
Whether a founder/CEO is a genius is often based on anecdotes or in proximity to the ability of getting investors to write billion-dollar checks in the late stages of raising capital. There is no statistical evidence that founder/CEOs perform better than so-called MBA-CEOs, but the tension still stands. In this case, it is not necessarily about one over the other but more an exercise for boards to be vigilant
Founders in Silicon Valley have historically been attributed tremendous value for the success of their companies. There is an old saying in the Valley that venture capitalists invest in the jockey and not the horse, meaning that founders are often the reason investors invest. This tension investigates the founder’s impact on the company, both when it is good and when it is bad. The case of WeWork is great for illustrating the precautions boards need to take. We spoke to Adam J. Epstein a former corporate attorney and author who advises small-cap CEOs and boards through his firm Third Creek Advisors LLC.
In Jeff Bezos’ letter to Amazon’s shareholders in 2016, he wrote about type 1 and 2 decisions. Type 2 decisions make up for 80%-90% of the decisions made at Amazon; those are the ones that can be reversed. Additionally, Bezos wrote to his shareholders back in 2015, “Wandering is an essential counterbalance to efficiency,” encouraging experimenting and exploring in order to develop the business. When speaking to employees at Amazon, it becomes clear that leadership principles such as take ownership, think big, and dive deep are performed in every decision made in the company.
“Whenever we’re starting a new project, we always check if it’s in line with our leadership principles. If an employee has an idea and the estimated revenue is too cautious, I will ask the employee to “think big” and find a way to tenfold the estimate.”
Amazon tries to create a frictionless environment for rapid decision-making by having a different approach to how the pitch and grant ideas. First, PowerPoint slides are a no-go when someone wants to pitch an idea. When failure does happen, procedures are in place to make sure the same failures do not repeat themselves. A person can make many mistakes, as long as it is not the same mistakes. If a team fails on delivering a product, the objective is to use the components from the disposed technology elsewhere to make sure risks are never a waste.
In a time where digitalization and disruption come knocking, it is important to balance risk averseness with risk appetite for untapped potential. Amazon is one of the most famous risk-takers, which falls back to the ideology of founder Jeff Bezos and how risk-taking is incorporated in the company culture. For this case, we spoke to Flemming Kongsberg, Global Head of Strategic Partnerships at AWS.
“Decentralized Autonomous Organizations” or DAOs can potentially replace the need for executive and board of directors’ decisions with software or so-called smart contracts. A smart contract is essentially software code that ensures that when a rule is met, contracts are executed autonomously.
The first real example of a DAO that failed miserably in its attempt to build a crowdfunded venture capital fund based on the blockchain network is Ethereum. The company now serves as an example of being too ambitious too early with the nascent blockchain technology. However, the idea of DAOs still stands. The principles of DAO can eventually be deployed into businesses outside of the Ethereum space.
“In a company, the process of decision-making about which projects to fund often happens high up on the organization chart. The people who are making these funding decisions, while well intentioned and ideally well informed, are not necessarily closest to the front lines – and thereby customer needs or projects bottom-up demands.(…)”
In its most extreme form, the future perspective is that DAOs will be used to power the growth of decentralized companies and funds and thereby change the rules of the game for executives and directors in the same manner as the development of the internet of information.
What would a company look like if it did not have any executives? This is exactly what the thinkers behind DAOs (Decentralized Autonomous Organization) are imagining when exploring ways in which blockchain can remove human error from decision-making. Many new projects in the Ethereum blockchain space explore ways in which blockchain can remove human error from decision-making. These methods can eventually impact the structure of organizations. We spoke to Kevin Owocki, the founder of Gitcoin, a blockchain project incubated in ConsenSys and a hub for Ethereum development activity.
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