‘Great men all remind us, we can make our lives sublime’

Prelude

In my journey towards seeking answers to questions I stumbled on this particular question from the reading of the autobiographies of four great leaders of our times, namely Gandhi (My Experiments with Truth), Martin Luther King. Jr (edited by Clayborne Carson), Nelson Mandela (Long Road to Freedom) and Warren Buffet (The Snowball: Warren Buffet and the life of business) what does it take to construct the ‘Conduct of Leadership’ in the backdrop of the various (sometimes conflicting) demands of the stakeholders of the business or the entire industry or the society at large?

Gandhi did provide a brilliant answer, ‘The role of a leader is to serve; by this process he would ensure that there are no competitors.’

Martin Luther King Jr. stated, ‘I have always felt that ultimately along the way of life an individual must stand up and be counted and be willing to face the consequences whatever they are. And if he is filled with fear he cannot do it. The ultimate measure of man is not where he stands in moments of convenience, but where he stands in moments of challenge, great crisis and controversy.’

Mandela offered us the Shakespearean quote, ‘Death is absolute; and then either death or life may be sweeter’. He as a leader prepared for the ultimate sacrifice, so everything after that could only be better for him and for humanity.

There are many great stories from the olden times, from Alexander to Napoleon that portrays the same sentiment on the conduct of leadership. These men were willing to make the ultimate sacrifice along with their men. They were not influenced by other worldly desires of any kind; they rose because of their courage and sacrifice in their service to their men and to humanity.

In today’s world of leadership and management what does it take us to? As leaders whom do we serve and what do we stand for?

The Theory of Justice

I find very apt to introduce the topic of justice while discussing the conduct of leadership, as I find in every action of great leaders the concept of justice so innate and coherent. But the concept of justice may look very complex until we find a way of dissecting it in a simple manner. To do that I take refuge in John Rawl’s theory of justice to understand the principles on which the very idea of Justice as Fairness is to be based on. There cannot be a better quote than straight from his book ‘The Theory of Justice’ where he explains the importance of the Initial Position in formulating the Theory of Justice.

He says, “In justice as fairness the original position of equality corresponds to the state of nature in the traditional theory of social contract. This original position is not, of course, thought of as an actual historical state of affairs, much less as a primitive condition of culture. It is understood as a purely hypothetical situation characterized so as to lead to a certain conception of justice. Among the essential features of this situation is that no one knows his place in society, his class position or social status, nor does anyone know his fortune in the distribution of natural assets, his abilities and his intelligence and strengths, and the like. I shall even assume that the parties do not know their conception of the good or their special psychological propensities. The principles of justice are chosen under the veil of ignorance. This ensures that no one is advantaged or disadvantaged in the choice of principles by the outcome of natural chance or by the contingency of social circumstances. Since all are similarly situated and no one is able to design principles to favor his particular condition, the principles of justice are the result of a fair agreement or a bargain.”

In the world of business do these principles apply, as they apply in the very construct of society’s core values on which the concepts of justice is built? Is there a veil of ignorance guiding people to complete impartiality when entitlements would be decided on? Do we keep our eyes closed and our hearts out when we are about to embark on deciding how the distribution of natural assets would be done?

There are on one side the investors and shareholders of the business as key stake holders and managers who act as their agents. On the other side are customers and suppliers and this mix of participants decide what total of society’s wealth in sum would be created by their common interactions and negotiations. The size of the total pie and not in individual parts lay the total wealth that they collaborate and compete to create. They would eventually decide how that wealth would be shared as well amongst themselves. Do the principles of justice apply in this example? How much do the individual participants attach to the individual parts of the pie than to the whole?

What is the role of leadership and what is the good conduct of a leader in this? Eventually it trickles down to the behavior with respect to fair division that takes the better of the enhancement of the whole pie. We need to understand why this happens.

I would like to move to the cake problem to try to understand the problem in a little bit more details.

The Cake problem and the Pareto optimal

I went back to my days in childhood and to the sharing of the cake at our birthdays. Almost always I found the share of the cake to be very unequal, the most was reserved for the guests and the least was kept for our own family and my mother or my grandmother who cut the cake, got probably nothing at the end. My grandmother who had to feed 12 mouths other than her own with some modest income of my grandfather, probably all her life sacrificed for the rest of the family, why should I single out just a birthday cake, other than pointing to the symbolism that the one who actually leads the show, must at the end sacrifice when sharing is concerned.

It is however important that the divider must take the last bit and not take away at the very beginning, just to emphasize the point that a fair division only becomes visible and more than apparent after the division is complete.

But let us first go to Kenneth Arrow and see what his Impossibility Theorem says:

General Impossibility Theorem (Taken from Ariel Scheib)

“Arrow’s impossibility theorem was set out in his Ph.D. thesis, Social choice and individual values.

In its final form it states the following: given the conditions of Pareto Optimality (P), Un-bounded social choice (S), Independence of choices (I) and non-Dictatorship (D), it is impossible to formulate a social choice function which satisfies all of them. This has tremendous implications for welfare economics and theories of justice. It was extended by Amartya Sen to the Liberal Paradox which argued that given a status of “Minimal Liberty” there was no way to obtain Pareto Optimality, nor to avoid the problem of social choice of neutral but unequal results.

An example of this would be to have the following choices to divide a cake between three people. Let us call them A, B and C.

Choice 1: A gets nothing, B and C get half each. Choice 2: B gets nothing, A and C get half each. Choice 3: C gets nothing, A and B get half each. Choice 4: divide the cake equally.

Thus choice 4 would be third from the bottom in everyone’s list, and would, in any direct choice lose 2 to 1 against an unequal distribution. Since all of these choices are Pareto optimal – no one’s welfare can be improved without reducing the welfare of others – choice 4 would not be chosen, since there would always be other preferred choices.”

Our society is fundamentally built on the premise that equal division does not lead to better results, but do we consider this a fair division when more or less is guided by the leader himself, who is an interested beneficiary of a portion and who himself orchestrates the principles on which the division would be made?

The creation of wealth cannot be so simply equated to a cake and nor can the sharing of wealth be equated to the sharing of the cake. However the analogy serves the purpose of drawing us to the shift that has taken place in the manner the family solved the problem of cakes to the manner the greater society now finds a better denouement.

Let me construct a little variation to the problem of cakes and I call it the hierarchy problem. If a cake is to be divided into three and each has a hierarchy of needs and or expectations with a factor of two over the next one, then the fairest share would be as follows:

A = Equity Holders, B= Managers, C= Future Stakeholders

A= 4/7, B=2/7, C=1/7

How does power play a role to decide the hierarchy of needs? What happens when A and B mutually act to extract a higher share from C as A and B together could have a more dominant position to negotiate?

What happens when C would like to give up part of its share, how would that portion be allocated between A and B? What happens when A would like to do that?

How does the slice get divided between equity holders and managers? Who plays the role of the arbitrator, leader, and decider? What does the conduct of leadership in this situation look like? Is it Pareto optimal solution that we pursue at all times?

I would argue that the cake problem isn’t that simple as more number of players with diversified needs and expectations enter the fray. And when we factor in that there are very large of investors who are allowed to bet on the results which in effect has a bearing on the share as well, we have been able to make the puzzle sufficiently complex in its making.

But that is what the real world of business is, with players and expectations to be managed in a fair way, provided there are rules that can be followed with rigor. There are law enforcement agencies appointed by the government to enforce some semblance of rules so that unfair practices may not be adopted. On top of this there are governments themselves, which are accountable to the broader society who finally have the last say. After all laws must serve the overall greater good and many laws have gone through changes in the history of law making.

Wealth making

The creation of wealth is the core purpose of business. But it is the sum total of what the individual constituents of the business make from end to end. Let me take the extreme example of a value chain right from mining Bauxite ore to drinking soft drink from aluminum can. This is a long chain with constituents ranging from mining, refining, smelting, rolling, canning, filling and distributing. The final end consumer drinking the soft drink pays for the entire chain’s sustenance as a business and as a wealth generating engine. But every stage in the process has its own share and the sum total of the whole is a summation of the individual parts.

But do all parts generate its share of value? Are the demands of the stakeholders the same? Which parts take higher share of risks and therefore rewards? Which parts are more cyclical and which parts more stable? Which parts have higher share of capital needs? These questions lead us to the same cake problem as described in the previous section, if mining is A and the final customer is H, there are so many pieces of pie that needs to be shared from the whole cake between A to H eight different constituencies; the role of a leader and the conduct of leadership need to be cognizant of this.

These questions help to frame the overall back drop under which the conduct of leadership need to be constructed. There is no overall beneficiary of the total chain other than the end consumer, which in no uncertain terms is the overall society at large. But individual constituents of the chain either add value or subtract value by their behaviors and by their way of influencing the total outcome.

The engine of growth for the creation of value is innovation (including those that are disruptive in nature). This innovation could be in generating more demand, or creating more supply, which going by Say’s law would eventually find its own demand. The innovation could be areas of reducing cost through improvement of productivity, whose gains are to be enjoyed by the entire society. In the Can example the very fact that recycling of aluminum can has reduced cost of overall can making in the developed world eventually resulted in sharing of gains in the downstream part of the chain and the final end consumer had a much better value at the end in terms of prices. There are numerous examples in the upstream part of the chain where innovation played a role to improve productivity and reduce cost and provide value to the participants.

But growth needs to be harmonious and it needs to be aligned to the overall society’s needs. If some parts of the chain want to grow faster than the balance parts, it creates tension in the chain and there are sufferers in the chain who are links in the chain.

The best example I can give is the airlines industry in U.S. which provided enormous value throughout the decades of 1970-1990 expanding its reach to cover almost the entire geography of North America. Every consumer benefitted from it as people could fly long distances at relatively the same cost they would have incurred in terms of money and time had they used other modes of travel. However some of the airlines wanted to grow disproportionately over the others and they became too big too fast and some of them failed to sustain their growth momentum. The result was at the end of the decades that followed the entire American airlines industry failed to create value for itself.

Growth in assets is another conundrum, that if one tracked the household net worth in U.S. households it was almost constant as a percentage of GDP till the asset bubbles were created, that finally got unwound through a painful correction, once again proving the point that disproportionate growth is never sustainable. The same is true for companies and institutions.

fund Report

The exact dosage of growth for individual entities that are part of the overall growth is never in sync with some commonsense that if everyone wants to grow at a ‘more than normal pace’, more than normal would be the average, which is a paradox. The other very extreme example is the response of the American industry towards outsourcing. While outsourcing jobs to low cost countries created value for some parts of the value chain within United States, it destroyed value in the overall economy as jobs became redundant which created the ripple effect in wages, purchasing power, etc. But this was also due to competition and it was a particular response to competition by the leadership of American entrepreneurship. Response to competition is different in different parts of the world and much of this difference is in the conduct of leadership.

Here we introduce the topic of competition therefore and the conduct of leadership means a lot how we look at competition and what behaviors we display towards competition. Here lies the wisdom that many leaders have failed to demonstrate as a signal, thus creating friction as opposed to collaboration that has destroyed value for the society or the industry at large. But is collaboration possible to create value jointly by two competitors?

 

Conduct towards competition

Competition is healthy and lack of competition destroys value; it helps to stymie the growth of inefficiency as money always seeks the most productive of assets. I have found some extreme examples of competition in the Swiss society which I would like to portray.

In Switzerland, competition is not very apparent and visible, as there are very few firms actually operating in the same space as others; here number of firms is not the metric, the ‘same space’ is the key word. So while the number of watch makers could be very large, the numbers who compete in the same customer space is very few. The same applies to any other industry.

No one is replicating the other and no one is stepping into other’s shoes. That is the way competition must be understood.

The Italian joint on the road in Zurich does not have the exact replica of itself on the other side of the road, as the former could have a completely different menu served thus differentiating itself from the other. In this example the two owners could actually work jointly to improve conditions of service as the customers of one could be the customers of the other. There is no need to compete on prices as each is serving a different need (one could serve pizza while the other could specialize on pasta) whose price needs to be different.

Conduct of leadership needs to facilitate the demands of competitiveness to be rightly unwound through either policy interventions or behavioral stances that shape the nature of interactions with the customers and competition in the market to provide value to the society. If the conduct of leadership is bent on acquiring and stealing space from competition at a cost that does not provide overall value to the society, then it is not the right conduct (the airlines example is very apt). Greater speed than the others in achieving an output is not to be mixed with this.

The entire financial markets of which stock trading is a part gives us a very comprehensive view on the power of market and competition. Every participant in this market is competing against the other participant on one hand and actually collaborating as well because any single participant is too small to influence the total market. There has to be an involuntary collaboration to make any stock movement happen in any direction. The sum total of all knowledge and information available at any point of time determines the overall level of stock, but every individual stock could trade at a different sublevel depending on how the specific market participants reacted on that stock based on all available information on that stock. Such an example of a free market and competition is rare in other smaller examples. This however does not take into account the asymmetry of information that pervades such markets and is the cause of capital concentration in the hand of those who have higher buying power of information and in turn higher power to influence the market. Large firms therefore have higher inherent capability to do better than smaller firms.

This higher versus smaller and monopoly versus oligopoly is a crucial question that our society has still not been able to solve in terms of creating the right balance given a set of conditions. The role of leadership is to look at what the overall society would be benefitting with, not some parts of the society only.

A word on growth, for business to survive and be prosperous, it is mandatory that growth must happen and this means higher market share. This is a myth which has been proved by many successful companies. Growth itself may not be the only metric.

Some lessons from Warren Buffet

I found in the biography of Warren Buffet, in the book ‘The Snowball: Warren Buffet and the business of Life”, some very good examples on how the conduct of leadership could be very different. Warren Buffet identified himself as distinctly different from what the market was. His emotions were different from the market emotions. So by making himself completely dissociated from the market, he could make himself devoid of emotions. With his own internal metrics different he cared less what the market was saying or doing. This only makes it so simple that when the market was busy selling, he was busy buying and vice versa. If he was going to do what the market was doing, he could not do things so differently and this meant that he had the ability to set himself apart from the market.

The other very crucial difference that he made was that he started off with his own money and stayed with his own money for a very long time. He therefore knew the pains of trade because it was with his own money. And since he kept everything in stocks, he virtually had very little set aside for the day to day expenses. He thus lived a normal life like any other frugal person, his life never changed with the increase of wealth.

The life of a leader if it changes with attachments to physical wealth, the conduct of leadership would change. This is the most difficult aspect of leadership.

Did the life of Gandhi change, or Martin Luther King or Nelson Mandela through their life’s struggles?

But how many such examples do we have today?

Here lies the challenge of leadership that the conduct of leadership must be such that there are no friends in this journey. This is what Gandhi mentioned in his autobiography, ‘In God’s work there are no friends’. By friends probably he meant weakness or maybe our marginal propensity to indulgence.

Procyon Mukherjee, Zurich

16th June 2010

The Conduct of Leadership
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