What CEOs Really Worry About

HBR spoke with the top three executives to get their views on short-term pressure, managing Millennials, and the populist rise against business.

Interview by Adi Ignatius

 

Left to right: Lars Rebien Sørensen, photographed by Thomas Skou; Pablo Isla, photographed by Ethan Hill; Martin Sorrell, photographed by Tony Luong

 

HBR: What are the most important challenges CEOs face these days?

Sorrell: The main challenge is volatility. That includes geopolitical issues, like the Brexit vote, the Middle East, China, and the U.S. election. It also stems from the growing pressure from activist investors, who tend to focus on short-term results, and from the shift many companies are making to zero-based cost budgeting, which affects spending. I’m not pleading poverty or overdifficulty, but all of this complexity makes it harder to do our jobs.

What’s something that people aren’t aware of that’s critical to a CEO’s success?

Sørensen: To be honest, I think we’re highly overrated. At least in my business, success is far more of a team effort than the public would like to believe, especially in America.

Point taken. Each of you has been running your company for a long while. I assume your corporate cultures are constantly changing. Has your leadership style evolved to keep pace?

Isla: In managing a company, you of course need to be rational. I lead a company with more than 150,000 employees and millions of customers. But I’m gradually learning to be less rational and more emotional. Motivating people and generating 
a sense of spirit inside a company are essential parts of the CEO’s role. We need to appeal to our employees’ emotions to help create an environment where they can innovate.

Sørensen: For me, it’s been a phenomenal personal journey. I’ve worked for this company for 34 years. I used to be an operational leader. But I’ve had to transform myself, to go from being very good at what I was doing technically, with domain expertise, to being a generalist—and then constantly 
being challenged.

Sorrell: I’m actually somewhat suspicious when people use the C word—“culture”—because it’s often used by people who don’t want to do what we want them to. That said, several things have radically changed organizational culture. One is technology. Digital is now 40% of WPP’s business; data is 25%. Then there’s the fact that we operate 
in 113 countries. It’s impossible to run the company from the center; you have to have local sensitivity. Lastly, we now need to be purpose-driven, 
to appeal more to customers, to clients, and to 
our own talent.

“People today want to move from opportunity to opportunity. Long-term brand building is a diminishing art.” – Martin Sorrell, CEO of WPP

Isla: I think it’s also essential amid all the change 
to preserve an entrepreneurial spirit. At Inditex, 
we try to manage our businesses as if they were still small start-ups. We try not to have many meetings. Instead there’s a lot of walking around, a lot 
of feedback, but few formal presentations. The organization is very flat. That means a lot of people 
are empowered to make decisions.

Sorrell: Sadly, I think that CEOs tend to become more conservative the longer they’re in the role. The risks that I took, say, in the 1980s would 
probably cause me to agonize far more nowadays. As you get bigger, you’re less willing to take risks, especially in this environment. It’s a fundamental problem.

Does that argue for shorter CEO tenures or for bringing in successors from the outside?

Sørensen: It’s contextual. If your company 
is performing well, then you want to promote from within, because that creates a sense of passion 
and engagement among the staff. If the company 
is fundamentally challenged, then you might 
need new capabilities, and the board might want to look outside for someone to transform 
the company.

Sorrell: I don’t know what the ideal tenure is. I think the average span for CEOs in the S&P 500 and the FTSE 100 is something like six to seven years, and that’s probably too brief. It tends to encourage short-term thinking. I’ve been doing this for 30 years. My succession is not in my hands, but our next CEO will most likely come from within, which is probably the preferable route.

Is it difficult managing younger workers these days? Are Millennials actually different, and do they require you to adapt how you handle talent?

Sorrell: Attitudes among young people have changed. Rather than sticking at something for a long time, they go from job to job—like bees going from flower to flower and getting pollen. My father once said to me, “Develop a liking for an industry, build a reputation within it, and build something for the long term.” That’s not in fashion today. People want to move from opportunity to opportunity, start a business, and then sell it. Long-term brand building is a diminishing art.

Sørensen: The Millennials have grown up seeing businesses start from scratch, thanks to the emergence of technology that allows young people to create and communicate and make apps. I think that has influenced their willingness to invest in being part of brand building or make a long-term commitment to companies. But that can change if a company offers a sense of purpose, in which case people are willing to partake in a journey that can last years or even decades.

How important to you are the ESG [environmental, social, and governance] issues that are part of HBR’s CEO ranking? Do they enter your minds as you manage your companies?

Sørensen: Absolutely. Everything we do has to 
be grounded in an assessment of not only the financial implications but whether it aligns with our 
values and brings us closer to realizing our purpose as a company.

Sorrell: I agree. John Browne, who used to run BP, put it simply: Doing good is good business 
if you’re in business for the long term. Our company is focused on the long term. We take into 
account every one of our stakeholders: our people, our customers, our clients, the government, NGOs, suppliers, pressure groups. Everything we say 
or do could appear on the front page of the Financial Times or the Wall Street Journal 
or in Harvard Business Review. We have to think about the implications of what we do in the broadest possible way.

Isla: It’s not only society’s or stakeholders’ demands. We believe that we are a force for good in the world. And that belief is perfectly compatible with shareholders’ interests and the bottom line.

And yet you talk about the pressure you face from people with short-term perspectives. Help me understand that conflict.

Sorrell: If you look at the S&P 500, the most powerful companies in the world returned more to shareholders last year than they earned. In other words, dividends and stock buybacks were greater than retained earnings. That means companies are becoming much more cautious in how they invest and much more short-term in their thinking. The companies that can afford to take risks are those where the executives aren’t afraid of getting booted out if they make mistakes. People are penalized too much for failure, and they’re not prepared to take risks to succeed. Tech companies that are sexy and in demand can get away with it. Traditional 
companies can’t.

Sørensen: In Scandinavia we have a very particular ownership structure. My company is part-owned by a foundation, which basically controls 70% of the votes. In my view this type of block-ownership structure 
allows for very long-term thinking. Many Scandinavian companies have become global as a result of this approach. There are pitfalls, 
as when boards aren’t strong enough to challenge management. But we have been able to be successful because I can say to shareholders, without fear 
of repercussion, that I have a long-term vision for 
the company.

“I’m gradually learning to be less rational and more emotional. We need to appeal to our employees’ emotions to help create an environment where they can innovate.”– Pablo Isla, CEO of Inditex

Isla: Ultimately, what’s even more important is your track record and how you build your reputation. We don’t have problems with institutional investors and short-term pressure. They know the type of company they’re investing in. They know that we’re thinking about the long term but also paying attention to the short term.

There seems to be a rise in populist agitation against business, in part over the issue of income inequality. Do you sense that?

Sørensen: The pharmaceutical industry has always been fraught with controversy. Our popularity ratings are similar to those of the arms industry and tobacco. We make money on people’s poor health. We experiment on animals. We perform genetic manipulations. So for us, there’s nothing new in this. We have had to earn the public’s trust for many, many years. And we haven’t always done a good job of it. What we need to do is be completely transparent about our objectives, to ensure that people see that we’re contributing to society and not just 
enriching ourselves.

Isla: We have to acknowledge that there are justifications for the distrust, that there have been many big corporate scandals. It’s up to us to be transparent, to do the right thing, to believe in what we do, to gain trust. For example, people are concerned that a lot 
of big companies don’t pay taxes. So we now publish in our annual report all the taxes that we pay in 
different geographies.

CEO pay is another lightning rod. Martin, you’ve been caught up more than once in controversy over your pay package. What’s the right way to handle an issue as volatile as CEO pay?

Sorrell: Far be it from me to lay it out, but in my view it’s important to base executive pay on long-term performance. If you don’t succeed, you should suffer. If you do succeed, you should be rewarded. Plus, we have to emphasize the net results of what we do, like creating employment around the world.

Sørensen: I agree that executives’ rewards should be based on long-term performance. But I need to raise another issue, which may be contentious, and that’s the internal cohesion of companies. When we have too wide a disparity between 
executive compensation and workers’ compensation, we create a barrier to the employee passion and engagement that all companies need to achieve their objectives. If there is too big a gap between what 
I earn and what a blue-collar worker at my company makes, it’s going to create problems. Executive compensation explains part of people’s distrust 
of business.

Sorrell: The only thing I’d say is that there’s a difference between CEOs who have been doing the job for 30 years versus someone who has been 
doing it for two years. Nobody gives people like, 
say, me credit for the fact that we have invested in 
the business—that we borrowed money from a bank 
or invested our own money, and retained that stock and paid tax.

Isla: Compensation has to be transparent, long-term-oriented, and really, really based on performance. Even more than closing the pay gap, it’s important to have everybody, if possible, benefiting from the evolution of the company. Last year we approved a profit-sharing plan for all employees, and I think it’s very much valued.

Every year HBR gets criticized for the scarcity of women on our CEO list. We try to explain that, first, the ranking is based on a mathematical formula, and second, it reflects the unfortunate reality that there are simply too few female CEOs out there. Why is that still the case in 2016?

Sorrell: The reason there are so few women at the top is that there are so few women at the top. Let me explain. I’ve seen the greatest traction where women are running operations, business units, or in our case agencies. Because they’re in positions of authority, they go the extra mile to attract other talented, ambitious women. But the problem is, on the whole women haven’t had enough opportunities. One other thing: I’ve said this on a number of occasions, and it may get me into trouble again, but in our business women are better than men. They’re better organized, and they have higher EQs.

Let’s talk about work/life balance. What does that mean to you, and to what extent are you trying to model behavior for the rest of the company?

Sørensen: I’m not a great role model. But it’s 
a complex issue. In Scandinavia we have very 
generous maternity leave. Now many employees are starting to complain that this benefit, which was created to protect families and mothers, 
is actually a hindrance to building a career. If you take maternity leave for a full year, the company moves on. And women who do that a couple 
of times in their thirties are unfortunately being 
left behind. We’re working on the right formula 
for developing female talent, but progress has been excruciatingly slow.

Isla: It’s difficult to find the right work/life balance as the CEO of a global company. You need to work hard and travel often. For me, the most important thing is exercising early in the morning as often as possible, which is essential for my physical and mental health. And to try to have a family life, even if I have to focus more on the quality than the quantity of time.

“If there is too big a gap between what I earn and what a blue-collar worker at my company makes, it’s going to create problems.”– Lars Rebien Sørensen, CEO of Novo Nordisk

Sorrell: I’m not a good role model, either. Ours is a 24/7 business. But my wife is about to have a baby, so this whole work/life balance thing is going to come into sharp relief again.

How would you like to be remembered at your companies?

Isla: It’s too soon to think about that personally, but I would like Inditex globally to be perceived as a company with a sustainable business model and a clear long-term approach, and as an example for other businesses.

Sørensen: My influence, through collaboration with my management team, will be assessed in 15 or 20 years, and only then will people be able to determine whether we made the right choices. Plenty of people will be willing to throw stones at us then. Again, I’m against this personal lionizing of CEOs. It’s very much a team effort. And to 
be honest, the success we’ve had during my tenure is due in large part to decisions that were made by my predecessor.

Sorrell: I share Lars’s view on the cult of personality. But I do think individuals make a difference. For me, I’d like WPP to be regarded as the preferred choice for any potential client looking at an advertising marketing-services problem. And that when people in our industry change jobs or start a new career, their Pavlovian response will be to think of us. I’d like to be regarded as one of the people who helped achieve that.

CREDIT: hbr.org

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