Harvard Business Review

58 The Forgotten HBR.ORG Dimension of Diversity January– February 102 Pay PackagesThat Drive Performance 2021 123 How You Can Help Without Micromanaging When toWork with Rivals Sometimes you need to join forces with your fiercest competitors. 48







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Contents January–February 2021 Photograph by ANDREA STONE 33 SPOTLIGHT DOES BUSINESS NEED A NEW MODEL? 34 GOVERNANCE It’s Time to Replace the Public Corporation We need a model that truly focuses on the long term. Roger L. Martin 42 GOVERNANCE Don’t Let the Short-Termism Bogeyman Scare You Active investor oversight is a plus, not a minus. Lucian A. Bebchuk COVER PHOTOGRAPH Jill Greenberg  5Harvard Business Review January–February 2021

January– February 2021 48 FEATURES 48 STRATEGY 86 The Rules of 86 SUSTAINABILITY 94 HUMAN RESOURCES 102 COMPENSATION 112 MANAGING Gallery Stock Co-opetition ORGANIZATIONS How to Talk to Volunteer Compensation Rivals are working Your CFO About Programs That Packages That Build a Family together more than ever Sustainability Employees Can Get Actually Drive Business before. Here’s how to Excited About Performance That Lasts think through the risks Use this tool for measuring and rewards. Adam the financial returns on To boost engagement, Principles for designing Companies that endure Brandenburger and ESG activities. Tensie avoid these common executive pay Boris do these five things right. Barry Nalebuff Whelan and Elyse Douglas traps. Jessica Rodell Groysberg, Sarah Abbott, Josh Baron and Rob Michael R. Marino, and Lachenauer 58 DIVERSITY Metin Aksoy The Forgotten Dimension of Diversity Social class is as important as race or gender. Paul Ingram 68 NEGOTIATION Negotiating Your Next Job Focus on your role, responsibilities, and career trajectory, not your salary. Hannah Riley Bowles and Bobbi Thomason 76 TECHNOLOGY When Machine Learning Goes Off the Rails A guide to managing the risks Boris Babic, I. Glenn Cohen, Theodoros Evgeniou, and Sara Gerke 6 Harvard Business Review Photograph by STEPHEN LENTHALL January–February 2021

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January– Our Commitment to Sustainability February We’re proud that the paper we use in our print magazine is certified 2021 under the Sustainable Forestry Initiative® program, meaning that it comes from responsibly managed sources and is a renewable resource. 15 123 DEPARTMENTS 28 IDEA WATCH EXPERIENCE 10 FROM THE EDITOR “We’re a 160-year-old company that aims to be New Research and Advice and 11 CONTRIBUTORS around for another 160.” Emerging Insights Inspiration 136 EXECUTIVE –DEANNA MULLIGAN 15 LEADERSHIP 123 MANAGING SUMMARIES YOURSELF Why Rookie CEOs Outperform How to Help (Without Experienced executives Micromanaging) rely too much on old playbooks. PLUS The New research points to downside of creative three strategies. Colin M. superstars, a better way Fisher, Teresa M. Amabile, to manage virtual queues, and Julianna Pillemer and more 128 CASE STUDY 26 DEFEND YOUR RESEARCH When Your Star Player Asks to Stand-up Meetings Go Part-Time Inhibit Innovation A manager grapples with New research suggests the question of flexible that they undermine idea work schedules. generation. Thomas J. DeLong 28 HOW I DID IT 134 SYNTHESIS The Former CEO of Sports and Guardian on Using Social Justice Values to Drive Strategic Planning From Kaepernick’s kneel to the NBA Bubble After Hurricane Sandy, Ramsey Khabbaz Guardian moved quickly to prepare for the next major 140 LIFE’S WORK crisis. Deanna Mulligan Tina Turner 8 Harvard Business Review Photograph by KHOLOOD EID January–February 2021

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From the Editor Connect with HBR JOIN US ON SOCIAL MEDIA CONTACT HBR WWW.HBR.ORG PHONE 800.988.0886 TWITTER @HarvardBiz EMAIL [email protected] FACEBOOK HBR, Harvard Business Review [email protected] LINKEDIN Harvard Business Review [email protected] INSTAGRAM harvard_business_review [email protected] Rivals and Friends Clockwise from the top left: Adi Ignatius, guest Walter W H E N T H E WO R L D went into awkward partnerships: Isaacson, Octavia Goredema, and Josh Macht lockdown last spring, my col- co-opetition. In “The Rules of league Josh Macht and I decided Co-opetition” (page 48), they 10 Harvard Business Review to launch a series of live video offer principles for making deals January–February 2021 interviews with experts who with rivals. could offer perspective on these strange days. We called it HBR Done right, co-opetition Quarantined, and to distribute works out well for both par- it we made an unusual choice to ties. Our first season of HBR partner with LinkedIn. Quarantined attracted nearly 800,000 viewers; in October we LinkedIn is best known as a renamed it HBR Now; added a professional networking site, cohost, Twenty Ten’s Octavia but it also publishes articles on Goredema; and scheduled 11 management topics—competing more episodes. You can find with us for readers. At the same them at hbr.org/video. time, HBR has 11 million follow- ers on LinkedIn, which drives This issue also marks a mile- traffic to our site. Is LinkedIn our stone: Two colleagues, executive friend, our rival, or both? editor Sarah Cliffe and senior editor Gardiner Morse, are We ask ourselves a similar leaving HBR after a combined question whenever we run arti- 40 years of service. If you’re a cles by authors who write books longtime reader, you’ve prob- for other business publishers, or ably profited from some of the partner with competing media hundreds of articles they’ve organizations on events. We bet brought to life. Please join us in this question comes up in your expressing gratitude to them. business, too. Under what cir- cumstances does it make sense ADI IGNATIUS to team up with a competitor? Editor in chief More than 20 years ago, Adam Brandenburger and Barry Nalebuff coined a word to describe these sometimes

Contributors Working in the tropics Colin M. Fisher has Early in her career, Whenever his research Los Angeles–based to help brands source been fascinated by how Jessica Rodell, led Lucian A. Bebchuk photographer Tierney sustainably, Tensie people make sense a professor of to conclude that Gearon’s photos of Whelan (then president of real-time group management at the shareholder rights her children capture of the Rainforest interaction since his University of Georgia, and investor the complexity that Alliance) had an aha days as a professional worked in the nonprofit oversight should be can arise when rivals moment. An insurance jazz trumpet player sector, where she strengthened, he collaborate. The images broker told her that (most notably with the often acted as a liaison encountered warnings: accompanying Adam he’d decided to give Grammy-nominated between charitable Any move in that Brandenburger and coffee brands certified Either/Orchestra). organizations and direction would induce Barry Nalebuff’s article by her organization Inspired by a question local corporations. detrimental short- on co-opetition in a “sustainability” about how team Some companies termism. So over the this issue first appeared discount, because the leaders can learn to she worked with had past several years, in Alphabet Book, rigorous tracking the act with good timing, high levels of staff Bebchuk, a professor published in 2013. certification required he has been studying enthusiasm and made of law, economics, and “I wanted to create often reduced theft processes underlying a significant impact; finance at Harvard images that made during transport. Now leadership and group others just seemed to Law School and the children think when the director of NYU’s dynamics for more be going through the founding director of its they looked at them,” Center for Sustainable than a decade. As an motions. That disparity Program on Corporate Gearon says. “I wanted Business, she focuses associate professor drove her to focus her Governance, set out to to provide a thought, on developing at University College research on the pitfalls test the validity of such a feeling, a story, or a financial tools to help London School of of and best practices for claims. In this issue, conversation.” What’s companies measure Management, he corporate volunteering he explains why the the secret to capturing return on sustainability studies how teams initiatives. She shares policy prescriptions of imaginative images investments, the can foster creativity, her findings in her short-termism worriers of your own children? subject of her article improvisation, article in this issue. should be rejected. “Time, effort, and in this issue. and effective patience,” she says. decision-making. 94 Volunteer Programs 42 Don’t Let the 86 How to Talk to Your CFO That Employees Can Get Short-Termism Bogeyman 48 The Rules of About Sustainability 123 How to Help Excited About Scare You Co-opetition (Without Micromanaging)  11Harvard Business Review January–February 2021

EDITOR IN CHIEF Adi Ignatius EDITOR, HBR CREATIVE DIRECTOR Amy Bernstein John Korpics EDITOR, HBR.ORG EXECUTIVE EDITORS Maureen Hoch Sarah Cliffe EDITORIAL DIRECTOR, Daniel McGinn HBR PRESS Sarah Moughty Melinda Merino Ania G. Wieckowski SPECIAL ISSUE EDITORIAL Juggling life and work has gotten harder SENIOR EDITORS Laura Amico, Alison Beard, than ever this year. Scott Berinato, David Champion Paris, Paige Cohen, Gretchen Gavett, Eben Harrell, Jeff Kehoe, Scott LaPierre, The coronavirus forced employees to work from Toby Lester, Amy Meeker, Gardiner Morse, Curt Nickisch, home. Schools went remote. Businesses faced Steven Prokesch, Vasundhara Sawhney, Thomas Stackpole, existential crises. Erica Truxler As society begins to open back up, the boundaries MANAGING EDITOR, HBR PRESS Allison Peter between our personal and professional lives are becoming even more fluid. How can you avoid SENIOR ASSOCIATE EDITORS Courtney Cashman, burnout in the face of so many competing and Kevin Evers, Susan Francis, Dave Lievens often-changing demands? ASSOCIATE EDITOR Emma Waldman We’ve combed through our archives to find the most relevant and practical advice HBR has ARTICLES EDITORS Christina Bortz, Susan Donovan, published to help ambitious professionals—and Martha Lee Spaulding organizational leaders—reinvent the way they and their companies take control of the balance. AUDIENCE ENGAGEMENT EDITOR Kelsey Gripenstraw Each quarterly Harvard Business Review Special Issue SENIOR AUDIO PRODUCERS Amanda Kersey, focuses on a single, timely theme and includes expert- Anne Noyes Saini authored articles from HBR’s rich archives, along with concise, helpful article summaries. MULTIMEDIA PRODUCER Andy Robinson WINTER ISSUE NOW AVAILABLE ON ASSISTANT EDITORS Ramsey Khabbaz, NEWSSTANDS AND AT HBR.ORG. Rakshitha Ravishankar EDITORIAL COORDINATORS Dagny Dukach, Alicyn Zall STAFF ASSISTANT Christine C. Jack CONTRIBUTING EDITORS Karen Dillon, Amy Gallo, Jane Heifetz, John Landry, Andrew O’Connell, Anand P. Raman, Dana Rousmaniere CONTRIBUTING STAFF Kathryn K. Dahl, Sarabeth Fields, Kelly Messier, JM Olejarz, Amy Mace Stackhouse, Debbie White DESIGN DESIGN DIRECTORS Stephani Finks HBR Press, Susannah Haesche HBR, Marta Kusztra Product & UX ASSOCIATE DESIGN DIRECTOR Karen Player Multimedia SENIOR GRAPHICS EDITOR Macaulay Campbell SENIOR DESIGNER Emily Caulfield HBR PHOTO EDITOR Sasha Patkin DESIGNERS Riko Cribbs Multimedia, Josephine Massey UX CONTRIBUTING DESIGNERS Aaron Atencio, Kristen Nathan PRODUCTION EDITORIAL PRODUCTION DIRECTOR Dana Lissy SENIOR PRODUCTION EDITORS Jennifer Waring, Christine Wilder PRODUCTION EDITORS Victoria Desmond, Jodi Fisher, Anne Starr SENIOR PRODUCTION SPECIALIST Robert Eckhardt PRODUCTION SPECIALIST Alexie Rodriguez CONTRIBUTING STAFF Colin Howarth, Kristin Murphy Romano EDITORIAL ADVISORY BOARD Bharat Anand, Azeem Azhar, John Battelle, Marcus Buckingham, Nicco Mele, Vivek Shah EDITORIAL OFFICES 60 Harvard Way, Boston, MA 02163 617-783-7410 | fax 617-783-7493 HBR.org VOLUME 99, NUMBER 1 | JANUARY–FEBRUARY 2021 Printed in the U.S.A. Copyright 2020 Harvard Business School Publishing Corporation. All rights reserved.

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New Research and Emerging Insights IN THEORY W H E N S E E K I N G T H E best CEO candidate, boards might begin with lofty goals. But directors recognize WHY ROOKIE CEOs that a botched succession could hurt their reputa- OUTPERFORM tions (not to mention their shareholders), so in many cases they end up focusing not only on the upside Experienced executives rely potential of a candidate but also on the downside too much on old playbooks. risk, asking: Who is the safest choice? Who is least Illustrations by TIM BOWER  15Harvard Business Review January–February 2021

likely to fail? And their answer is often CEOs (six years), in part because they she says, are more likely to approach the candidate with prior experience in are generally younger. problems in this manner. the top job. In fact, the share of newly hired CEOs who previously held the Some of the difference in perfor- Experienced CEOs did display some role has quadrupled since 1997 and now mance, the researchers explain, has advantages, including wider access to stands at 16%. to do with mindset. “In many ways, external resources and to talent and these results are not surprising,” says other critical relationships. “There’s In most endeavors, experience is a Cathy Anterasian, who coleads Spencer also a speed component,” says Claudius good thing. But new research from the Stuart’s North American CEO Succession Hildebrand, Spencer Stuart’s CEO data executive recruiting and leadership Services group. “We’ve been talking with and analytics head. One two-time CEO advisory firm Spencer Stuart finds that boards over the past decade about the reported that he accomplished as much for CEOs, it often carries surprising importance of curiosity, adaptability, in the first two years of his second costs. In a study of 855 S&P 500 CEOs flexibility, and the ability to confront stint as he did in the five years of his appointed over a 20-year period, the problems with fresh eyes rather than first stint. And although the research researchers found that those with expe- with rules of thumb.” First-time CEOs, suggests that repeat CEOs focus too rience in the role consistently underper- formed their novice counterparts over the medium to long term. First-timers led their companies to higher market- adjusted total shareholder returns, with less volatility in the stock price. Among CEOs who headed two successive companies, 70% performed better the first time—and for more than 60%, their second companies failed to keep pace with the overall stock market. Why do so many seasoned leaders lag? Having interviewed 50 directors and CEOs, the research team believes it happens because they fall back on the playbook from their last job, become overly concerned with cost-cutting, and are less adaptable than rookies, who tend to pay more attention to top-line growth. “First-time CEOs’ longer-term orientation and more balanced focus between profitability and revenue growth is reflected in their perfor- mance,” the researchers write. “Even in challenged companies, first-timers attempt to lead through a mix of growth and return on capital.” Rookies are also likely to stay in the role longer (nine years, on average) than experienced 16 Harvard Business Review January–February 2021

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much on cost-cutting, their recognition if boards are considering an experienced IN PRACTICE of the importance of short-term results can be a plus. “Experienced CEOs know candidate in this sort of situation, they “Hunger Is how to deliver value to shareholders Worth and the Street, how to free up resources should conduct “an explicit dialogue More Than to fund what they may want to do Experience” next, and how to get some quick wins,” about the type of talent needed based Anterasian says. In addition, she and Before becoming CEO of Hildebrand point out, when a company on the desired outcomes and specific Honeywell, in 2002, David Cote is in trouble, the board may prefer an headed the automotive and outside hire with a track record to an business context,” the researchers say. aerospace firm TRW for seven untested internal successor—so some of months—too short a stint, he the performance differences may reflect Boards should also assess how well says, to be a big factor in how he the fact that experienced CEOs often led Honeywell. But as he began face more-challenging circumstances. candidates listen and whether they preparing for retirement, in 2017, he thought extensively about what Even leaving performance aside, enjoy grappling with unfamiliar prob- characteristics and experiences there’s a troubling downside to relying would increase his replacement’s on existing CEOs. The overwhelming lems. When the research team inter- odds of success. (He shares those majority of people helming large reflections in his recent book, companies are white men: Just 6% of viewed CEOs who had succeeded in both Winning Now, Winning Later.) Cote the CEOs of S&P 500 companies are spoke with HBR about the pros women, and only 10% are ethnic or racial their first and their second assignments, and cons of hiring a CEO with minorities. So when recruiters looking previous experience in the role. to fill a CEO job focus on that pool, they it learned that these executives were Edited excerpts follow. are perpetuating the lack of diversity in the C-suite. The preference for experi- careful not to assume they knew all the How should boards think about enced chief executives, the researchers previous CEO experience when write, “represents yet another barrier to answers the second time around. Rather choosing a new leader? underrepresented groups.” In general, experience is than try to run the same plays again, overrated. Someone can have a How can boards use these findings bunch of different experiences when planning succession? Before they asked questions and explored what but still not be a change agent. homing in on specific candidates, they Experience can make directors should be clear about what challenges was different about circumstances in feel more comfortable with a the incoming leader will confront and candidate, but the question is: what his or her priorities should be. If their new companies. Does he or she have the hunger to the company would benefit most from make a difference? When people a shorter-term leader who’s skilled at “With this research, we hope to shift start to lose that hunger, they cost-cutting and creating quick wins that don’t investigate things as deeply. will please financial markets, an experi- the default,” Hildebrand says. Instead of Hunger is worth a lot more than enced CEO may be the better pick. But if experience. revenue growth and a longer-term orien- presuming that experienced CEOs inher- tation are key concerns, someone new to the role may be more appropriate—and ently have better qualifications than first-timers, boards should view them as having different qualifications—ones that might or might not mean superior performance. And counterintuitive though it may seem, the researchers say that experience might be even less valuable during the current period of high uncer- tainty. “It’s the old adage: ‘What got you here may not get you there,’” Anter- asian says. “During times like these, the ability to understand problems you haven’t seen before becomes much more important.” HBR Reprint F2101A ABOUT THE RESEARCH “Predicting CEO Success: When Potential Outperforms Experience,” by Claudius A. Hildebrand, Cathy Anterasian, and Jordan Brugg (white paper) 18 Harvard Business Review January–February 2021

Are inexperienced CEOs more likely than others to be hungry? If somebody has no real reputation yet, they’re going to be more driven to succeed. When I became CEO of Honeywell, some commentators said they didn’t know if the company could be turned around— and that even if it could be, they weren’t sure I was the person to do it. They pointed out that I wasn’t Honeywell’s first choice for the job. Those comments just increased my hunger. Redux Were you surprised by boosting productivity, we created me at Honeywell, I thought it What other factors do boards the finding that previous the income flexibility to allow important to find somebody who weigh incorrectly? CEO experience can hurt us to perform well in the short could stay in the job for at least It can be really seductive to try to performance? term and also to invest in long- 10 years. If you’re in the CEO role determine what the future will be I’d phrase it a little differently. term growth. for only three to five years, it can and then choose someone suited to Any leader needs to be open be hard to change the culture that vision. That’s usually spurious to all facts and opinions, Inexperienced CEOs tend to be and get it focused the way you reasoning. Who could have recognizing that he or she will younger. Is that an advantage? want to, especially in a large predicted Covid, or 9/11, or the Iraq never know everything. Making None of us want to be sexist organization. So being young War? Nobody knows the future. It’s an educated decision is like or racist or ageist. But when enough to have a long tenure more important to hire somebody making a mosaic—you’re putting considering who should succeed was part of our criteria. who can figure things out.  all the pieces together to form a picture. An experienced CEO might say, “I’ve seen all this before, so I know what to do.” That can get in the way of soliciting all the facts and really listening to what people have to say. As the leader, it’s your job to be right at the end of a meeting, not at the beginning of it. Sometimes experience can be a detriment. Do you agree that experienced CEOs tend to focus more on cutting costs and improving margins and less on growth? I get frustrated by the implication that leaders have to focus either on growth or on productivity. Success is about doing both things at the same time. That’s what we did at Honeywell: By Photograph by MAT T FURMAN  19Harvard Business Review January–February 2021

CORPORATIONS CUSTOMER RELATIONS trade-offs prominently displayed enabled people to select a card that was HQ, Then and Now Honesty Really Is well-suited to their needs, improving the Best Policy their experience and averting surprises. Location is a key part of corporate strategy— They note that the greater transparency and big shifts have taken place since the Conventional wisdom and common did not diminish sign-up rates, although 1950s, when industrial firms tended to cluster practice alike suggest that it’s usually the two groups of customers chose in the Midwest for easy access to labor, wise to highlight the advantages of an different cards. “The costs of being raw materials, and factories. With the rise offering and gloss over any downsides— fully open with prospective customers of knowledge-based companies, the need but a new study casts doubt on that that many managers perceive…may be to attract highly skilled talent has skewed strategy. misplaced,” the researchers write. companies toward “superstar” cities and leading tech hubs instead. The researchers conducted a field ABOUT THE RESEARCH “Improving experiment involving 389,611 consum- Customer Compatibility with Metro areas with the greatest number ers considering a credit card with the Operational Transparency,” by Ryan W. Buell of Fortune 500 headquarters Commonwealth Bank of Australia. Over and MoonSoo Choi (working paper) a five-month period, the bank presented 1955 2017 website visitors with one of two sales BANKRUPTCY pitches: one that emphasized only a Minneapolis Detroit Boston card’s benefits, in accordance with usual Which Companies marketing practices, and one that also Will Make It? Philadelphia prominently featured potential draw- backs (high annual fees or additional The value of U.S. public firms’ assets Bay Area Chicago New charges for overseas transactions, for under bankruptcy protection has surged Los Angeles Cleveland York instance—the sorts of things that must in recent months and now stands at legally be disclosed but are normally its highest level in a quarter century. Pittsburgh buried in fine print). After customers Whether or not companies go under signed up for and activated their cards, is of critical importance not just to the Dallas Washington, the researchers tracked their spending companies themselves but also to their for nine months. Those for whom their suppliers, partners, and other stakehold- DC card’s downsides had been highlighted ers. A new study suggests a novel way to spent 10% more each month, on aver- help those stakeholders assess the odds Atlanta age, than others. Their cancellation rate of survival. was 21% lower, and they were 11% less Houston likely to make late payments. Improve- Given that advertising and R&D ments were greatest among customers increase a firm’s expected future cash Biggest increase in the number over the age of 28, who presumably had flow, it might seem that above-average of Fortune 500 headquarters more experience with credit cards and investments in those activities would could make better use of the highlighted boost the chances of surviving a Chapter Metro area 1955 2017 Change information. 11 filing. But they also increase the value of assets awarded to creditors should the Denver 2 10 +400% The researchers can’t definitively firm be liquidated, presumably exerting explain their findings, but they hypoth- Seattle 2 10 +400% esize that having information about San Antonio 1 5 +400% Washington, DC 4 17 +325% Bay Area 13 52 +300% Biggest decrease in the number of Fortune 500 headquarters Metro area 1955 2017 Change Milwaukee 11 7 –36% Detroit 16 10 –38% Charlotte 11 6 –45% Pittsburgh 13 6 –54% Cleveland 18 5 –72% Source: “Geography as Strategy: The Changing Geography of Corporate Headquarters in Post-Industrial Capitalism,” by Patrick Adler and Richard Florida 20 Harvard Business Review January–February 2021

AFTER YOU! Investors judging entrepreneurial competitions consistently gave the first two pitches lower ratings than they gave to subsequent pitches, even though the entrepreneurs were sequestered and could not benefit by observing judges’ reactions to their predecessors. “In Pitch Contests, Going First Is a Disadvantage,” by Scott Shane, David Clingingsmith, and Mark A. Conley pressure in that direction. The researcher decreased survival rates. Stakeholders The researchers surveyed 676 decided to explore this tension from the “can improve their ability to predict members of R&D teams in 23 Chinese perspective of the main creditors whose whether their customer or partner will firms and 457 members of sales teams in votes influence the bankruptcy court’s survive bankruptcy by considering the two Chinese customer-service compa- determination: suppliers and banks. He firm’s advertising, R&D, and suppliers’ nies and collected information from reasoned that the two groups have com- influence, in addition to the usual finan- the teams’ managers. From this they peting interests. Above-average advertis- cial predictors,” the researcher writes. identified each team’s creative star or ing and R&D expenditures should make stars; they also measured overall team suppliers more willing to accept a firm’s ABOUT THE RESEARCH “The Impact creativity, coordination, and learning reorganization plan and allow business to of Advertising and R&D on Bankruptcy activities and examined the star’s role continue, because the survival of a cus- Survival: A Double-Edged Sword,” by Niket on the team. The more central that tomer helps protect their future revenue. Jindal (Journal of Marketing, 2020) stars were to their team’s workflow, But banks earn revenue from business the greater the direct boost to overall customers primarily by issuing collateral- TEAMS creativity—but nonstars’ learning took ized loans and collecting the interest, and a hit. When teammates depend on a they are given priority when a company The Downside of star for key information or material, is liquidated—so hefty advertising and Creative Superstars they may feel less urgency about R&D spending should incline them to contributing themselves, making them vote for liquidation, because it means It stands to reason that a creative star less likely to pursue relevant knowl- they are likely to be repaid in full. would bolster team creativity. But edge or explore other perspectives, new research suggests that the picture the researchers explain. There was a The outcome, the researcher theo- is more complicated than that. mitigating factor: A high level of team rized, would ultimately be affected by coordination lessened the inhibitory how much influence suppliers have: If effect on nonstars’ learning. they hold enough of the firm’s debt to make large concessions to creditor banks when negotiating the debt reorganiza- tion plan—perhaps allowing the bank loans to be paid off immediately—they can persuade the banks to approve the plan and let the firm carry on. If they don’t, the bank is unlikely to agree to the plan, and the court will probably deny it. An analysis of 1,672 bankruptcies filed from 1996 to 2019 confirmed this theory and allowed the researcher to identify some dividing lines. High levels of advertising increased bankruptcy survival when suppliers held at least 35% of the firm’s debt; below that point, they decreased survival rates. Similarly, high levels of R&D spending increased survival when suppliers held at least 18% of the firm’s debt; below that point, they  21Harvard Business Review January–February 2021

“Solely focusing on the most talented Balancing the need for reasonably accu- shorter initial estimates, creating a sense individuals…is likely an unwise practice rate estimates with the goal of keeping of progress that encouraged them to when trying to promote creative pro- people from abandoning the line can be remain in line. cesses,” the researchers warn. “Manag- a challenge, but a new study offers some ers should strive to promote efficient guidance. Slightly optimistic estimates made team coordination, thereby relieving no difference to dropout rates, while some of the burden placed on centrally The researchers conducted a field more-optimistic ones kept more located stars.” experiment with a global ride-sharing people in line. Still, managers should firm, focusing on its operations in one avoid overly optimistic estimates, the ABOUT THE RESEARCH “The Boon and city over four weeks in 2018. During busy researchers write; although those may Bane of Creative ‘Stars’: A Social periods, the firm places customers in vir- reduce abandonment, they may also Network Exploration of How and When tual queues before matching them with “lead to bad customer experiences Team Creativity Is (and Is Not) Driven by a a driver, provides an estimate of their when customers get stuck on ‘the last Star Teammate,” by Yuan Li et al. (Academy wait time, and notifies them whenever minute’ for too long.” Slightly pessi- of Management Journal, 2020) it drops by a minute. The customers in mistic estimates can only be helpful, the experiment were randomly divided the researchers note; those don’t cause OPERATIONS into three groups. One received a neutral people to give up and may provide a estimate of the wait time, one received pleasant surprise. Indeed, the firm has A Better Way to Manage an optimistic estimate, and one received since incorporated these insights—thus Virtual Queues a pessimistic estimate. All estimates sharply reducing the share of customers were within the range predicted by the who wait longer than initially estimated Virtual lines are nothing new, but platform’s algorithm; actual wait times along with the share who experience social-distancing requirements have did not vary. delays near the end of their waits, accelerated their adoption in novel without raising the overall abandon- contexts, from retail stores to day care The researchers then studied what ment rate. centers. Because people waiting can’t happened. Significantly pessimistic see the line and how quickly it is—or estimates (at least two minutes over ABOUT THE RESEARCH “Delay isn’t—moving, companies often provide neutral ones) caused large numbers of Information in Virtual Queues: information about the likely time people to drop out—but slightly pessi- A Large-Scale Field Experiment on a remaining and issue periodic updates. mistic estimates (a minute over) did not. Ride-Sharing Platform,” by Qiuping Yu, By definition, customers receiving them Yiming Zhang, and Yong-Pin Zhou got more-frequent updates for any given (working paper) wait time than customers who received 22 Harvard Business Review January–February 2021

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FIRST IMPRESSIONS MARKETING level, sales of well-known national brands rose disproportionately during “Just Be Yourself” A Boost for the Tried outbreaks, at the expense of less-familiar Is Good Advice and True ones. Even less-familiar variations on well-known brands—tiramisu Oreos, People in high-stakes first encounters— In recent years U.S. consumers have say—took a hit. interviewing for a job or seeking financial migrated away from large national support, say—often try to cater to the brands in favor of smaller, private-label The threat of contagion creates interests and expectations of whomever foods. During the pandemic, that trend uncertainty and a sense of losing control, they’re hoping to impress. A new study has been reversing. A new study suggests the researchers explain, and when trying suggests that they’re hurting, not help- that deep-seated emotional responses to to regain control, people seek out the ing, their chances. contagious disease are driving the shift. trusted and familiar. The lab experi- ments showed that this response is spe- In a field experiment, the researchers Much research over the years has cific to communicable diseases (subjects studied the presentation styles and shown that people react to contagious did not react this way when prompted to outcomes of 166 entrepreneurs com- disease with disgust and avoidance: think about heart disease, for exam- peting for funding. After pitching, the They instinctively want to steer clear of ple) and that it also held for nonfood founders indicated the extent to which the threat, and that impulse can cause products, such as headphones. Mar- they felt they had been authentic and them to shop less and consume less. keting managers should take note not the extent to which they had catered to But across two large empirical analyses just during the pandemic but beyond. what they thought the judges wanted and four experiments, the researchers The researchers write: “If a product is to hear. Those who had catered were far showed that a second emotion—fear—is novel, marketers might be better served less likely than others to win funding. also activated, mediating the effects on promoting [it] in the summer months, A subsequent lab experiment involving consumption patterns. Analyzing data when people are less likely to encounter a mock job interview found a similar from 2009 through 2014 from the CDC, contagious cues and are more receptive pattern: Participants instructed to “be Google Flu Trends, and Nielsen con- to novelty,” while for familiar products, themselves” got higher ratings than sumer panels, they found that people the converse may be true. those instructed to tailor their responses bought more items when the incidence to what they perceived the interviewer’s of influenza was high in their state, ABOUT THE RESEARCH “Disgusted expectations to be. Questioning the and they gravitated toward products and Afraid: Consumer Choices Under participants provided an explanation, that were familiar. If a household had the Threat of Contagious Disease,” by which was bolstered by additional online historically favored a certain brand, Chelsea Galoni, Gregory S. Carpenter, and experiments: “Catering harms perfor- that preference was more pronounced Hayagreeva Rao (Journal of Consumer mance because trying to anticipate and during spikes of flu. And on an aggregate Research, 2020) fulfill others’ preferences…increases anxiety,” the researchers write. ABOUT THE RESEARCH “To Be or Not to Be Your Authentic Self? Catering to Others’ Preferences Hinders Performance,” by Francesca Gino, Ovul Sezer, and Laura Huang (Organizational Behavior and Human Decision Processes, 2020) 24 Harvard Business Review January–February 2021

A FEW HONEST WOMEN Firms with a female CFO have, on average, a 2.6% lower Financial Statement Divergence score—a proxy for financial misreporting—than firms where a man fills that role. “CFO Gender and Financial Statement Irregularities,” by Vishal K. Gupta et al. MOTIVATION did best when told that observers had of previous participants). Otherwise it predicted poor results. A third study backfired, causing anxiety that detracted Why Underdogs probed the reason for this pattern. In from focus and attention. Frequently Come Out it, business school students told that on Top observers expected them to flounder in “Framing low expectations as an a simulated negotiation did better than opportunity to prove others wrong may Sports and politics are replete with students led to think they would out- have beneficial consequences for per- examples of people defying low perform others and students not primed formance,” the researcher writes, noting expectations. A researcher wondered: with any expectations at all. that it’s important to undermine the What happens when ordinary employ- validity of those expectations. “Manag- ees believe they are not expected to Questioning the participants ers [of underdog employees] may be able succeed? afterward, the researcher learned that to show the ways in which observers this happened because the underdogs lack credibility or point to prior instances Across four studies, such employees wanted to prove the naysayers wrong. in which their expectations have been generally outperformed others. In one The fourth study—a variation on the incorrect.” study, employees of a consumer goods computer-task experiment—found an company who reported being seen as important distinction: The desire to ABOUT THE RESEARCH “The Underdog underdogs were more likely than others prove a critic wrong translated to better Effect: When Low Expectations to get high marks from their supervi- performance only when workers thought Increase Performance,” by Samir sors several weeks later. In another, the critic was not credible (because Nurmohamed (Academy of Management workers engaged in a computer task they were told that he or she had done Journal, 2020) badly on the same task and had been inaccurate in predicting the performance DIVERSITY A Yawning Gender Gap on Joint Venture Boards Joint ventures are an increasingly important part of the economy—and a promising place for women to develop leadership and governance skills. But female representation on their boards remains scant, in part because they face far less public exposure than public company boards and are not subject to the same quotas and disclosure requirements. Female representation on joint venture boards, 2019 10% Female representation on S&P 500 boards, 2019 26% Source: Water Street Partners, an Ankura Company (joint venture data) and Spencer Stuart Board Index (S&P 500 data); analysis by Molly Farber, James Bamford, and David Ernst COMPILED BY HBR EDITORS | SOME OF THESE ARTICLES PREVIOUSLY APPEARED IN DIFFERENT FORM ON HBR.ORG.  25Harvard Business Review January–February 2021

Andy Wu of Harvard Business School and his doctoral student if they aren’t spelled out—which makes Sourobh Ghosh embedded a field experiment in a Google hackathon to people focus on delivering something investigate the impact of stand-up meetings—a core component of by a certain time rather than exploring agile management practices—on innovation. They found that the teams less-well-defined and thus riskier and that engaged in them developed less-novel products. The conclusion: more-time-consuming opportunities. Second, in the stand-up format the Stand-up Meetings team explicitly states its goals, which Inhibit Innovation refocuses the energy on those targets and doesn’t leave members feeling open to Professor Wu, searching for other avenues. Third, novel DEFEND YOUR RESEARCH ideas often bubble up when individuals think deeply about their particular areas WU: More and more companies are combination of two factors: value—or of expertise, and stand-up meetings tend adopting agile practices in product usefulness for a specific customer—and to keep people focused on work that is development, but it isn’t always clear novelty. We found that frequent stand-up easier to integrate with the team’s, so why. There seems to be an assumption meetings at the hackathon resulted they don’t leverage their specializations that agile is a cure-all for innovation. The in products that were rated by judges as much. study that Sourobh and I did, however, as more valuable but less novel. To be shows that one key element of the agile innovative, products must be both. What about other agile practices? approach—regular stand-up meetings— Is it just stand-ups we need to worry is great for implementation but actually Why do you think that happened?  about? I’d say stand-ups are fairly undermines idea generation. Stand-up meetings encourage team representative of other practices and members to coordinate their work at frameworks that derive from the agile HBR: So frequent stand-up meetings the cost of independently pursuing approach, like scrum and kanban. They make people less innovative? The new ideas. Why? First, the meetings all focus on coordination around shared literature defines innovation as the create a perception of deadlines—even goals, so I suspect that they’d have a similarly detrimental effect on new-idea generation. What should managers using agile do to encourage their teams to be more innovative? The short answer is: Have fewer meetings! Just let people work on their own and dig really deep into the problem at hand. Don’t be afraid they’ll fall down rabbit holes, because that’s where real innovation often comes from. Too many managers act as though company leadership is the main source of creativity. In my experience it’s the engineers and designers at the middle and the bottom that come up with the best ideas. Bill Gates had to be told by his subordinates that the internet was worth his attention, for example. But implementation is important too. How do you keep people on track without dampening their creativity?  It’s not either/or. You just need to be intentional about which you want to 26 Harvard Business Review January–February 2021

emphasize now. To shift the focus of design teams in real companies, and Does culture matter? You studied a stand-up meetings, managers can pull they built real software applications. tech environment in the United States. two levers: frequency and content. If The main difference was that the Would your findings be different you want more novelty, have fewer hackathon teams didn’t have to worry in other countries or in nontech work- meetings and keep them short. If your about integrating their products with places? Local culture is absolutely an priority is implementing existing ideas, other functions like compliance, billing, important factor. American culture can greater coordination from more-regular marketing, and customer support. be more individualistic and put less meetings can be helpful. As for meeting emphasis on authority and following content, a discussion of goals focuses Another advantage of doing the rules. In more-collectivist cultures, people on implementing old ideas rather experiment at a hackathon was that we agile might inhibit innovation more, than on coming up with new ones. So if were able to observe the development since people would probably feel greater you don’t talk about goals, you open the process at an incredibly granular level. pressure to adhere to the group goals door to more creativity. Say you’re a tech Instead of just rating the end products, discussed in stand-up meetings. Another company trying to develop a completely we could see how teams coordinated dimension of national and organizational new category of product. A lot of agile and came up with new ideas in real time culture is the extent to which employ- meetings could get in your way; it would by tracking their activity in GitHub. ees are trusted to work hard without be better to just have your engineers We saw exactly when individuals supervision. The coordination provided follow their individual inclinations and leveraged specialized skills by adding by agile is one way to monitor employees, explore randomly. advanced artificial intelligence or but that might not be necessary for all cloud-based tools. We also saw that after organizations. On the other hand, you have each stand-up, engineers would start companies like Microsoft or Facebook merging their code, indicating a focus on That’s especially relevant now, since that frequently generate lots of new integration rather than on new ideas. so many people are working remotely ideas at internal hackathons, but it’s in the pandemic. Definitely. The shift tough to turn them into products that How do your findings apply to other away from offices has led to less constant make it to market. That’s where agile industries, like hardware, or to coordination and more independent can really help. Logitech CEO Bracken creative projects, like music or art?  work. The employees that gained time Darrell has told me that reorganizing Agile practices have been less common and autonomy from going remote can his company around agile management with hardware because it tends to take focus more on their own ideas (with the really paid off. My view is that it worked a lot longer to develop, which makes major caveat that many may have less because the firm had clear goals to the constant check-ins and adjustments time now because of child care and other achieve. For example, when it wanted associated with agile more costly. In needs). Twitter CEO Jack Dorsey noticed to improve its presentation clicker to hardware, “waterfall” practices—a in 2018 that he was more focused and make it easier to see the laser pointer on hierarchical, linear approach—tradi- creative when working at home, and he large screens, it came up with the idea tionally make sense. But a lot of recent just allowed Twitter employees to work of adding motion tracking to the clicker advances in hardware have actually from home indefinitely. In my recent and combining it with software to render been software-based, as we saw with research it appears that virtual meetings, a virtual “spotlight” on the screen. For Logitech’s clicker. So agile is worth adopted during the pandemic, generate that kind of bounded, straightforward thinking about even if your business has less accountability toward shared goals problem, bringing in agile practices offered only hardware products. than in-person meetings do, suggesting to get your engineers and designers to that they may not have as much of a execute is effective. As far as creative projects go, the negative impact on creativity. research suggests that agile practices You studied a software hackathon. aren’t your best bet. If you’re working Ultimately, what we’re all seeing How is that different from a real work with a group to develop a screenplay is that you can’t plan out novelty. All environment? The hackathon setup or a song, it’s better to let people go these companies are looking at Google, is actually very similar to how a lot of at it independently. Of course, it also Facebook, and hip tech start-ups and real-world engineering work gets done. depends on the nature of the project. If saying, “They’re innovative, and they In fact, a number of successful start-ups you’re working on a complex production use agile, so we should too.” But that’s have come out of hackathons just like with lots of moving parts, stand-up not what agile actually delivers. the one we studied. The teams were meetings might be very effective for similar in size to engineering or product coordinating sound engineers, writers, Interview by Dagny Dukach artists, and so on. HBR Reprint F2101B  27Harvard Business Review January–February 2021

HOW I DID IT THE FORMER CEO OF 28 Harvard Business Review GUARDIAN ON January–February 2021 USING VALUES TO DRIVE STRATEGIC PLANNING by Deanna Mulligan W H E N H U R R I C A N E S A N DY hit the mid-Atlantic coast, in October 2012, I was at my home in Westchester County, New York. It’s an old house, surrounded by old trees, so as the rain battered my windows and the wind shook the walls, I took shelter with my dog under a center-hall desk. But I was less worried about myself than about the thousands of Guardian employees who live across New Jersey and New York, within commuting dis- tance of our Lower Manhattan headquar- ters. I had become CEO of the insurance company—which offers life, disability, and dental policies and administers fam- ily and medical leave—just over a year before. How would we help our people and our company get through this? Photograph by KHOLOOD EID

Because the electricity had gone out, that they and their families were safe that time we increased our end user base I listened for the news on a crank radio. and secure. from 5 million to 29 million, doubled our The reports of damage and distress were workforce to 9,500, logged 10 consec- deeply concerning. I prayed for every- Our next task was to find a temporary utive years of growth in assets under one’s safety. And then, after the storm headquarters. Our head of real estate at management to hit nearly $80 billion, had passed, we got to work. the time located a space and suggested and more than doubled our pretax that we lease it until December. Many operating income. More important, our Somehow we managed to pull of us suspected that we’d need it longer most recent engagement surveys, taken together a small crisis-management than that. The infrastructure under the during the height of the Covid-19 crisis, team. We learned that our main office streets of Lower Manhattan is more show a customer satisfaction score of in Manhattan had been wrecked. We’d than 100 years old and, we later learned, 89%, while 86% of our employees say lost phone service; five feet of water riddled with asbestos. It would be nine they would recommend Guardian as a flooded the lobby; and we were told that months before we could return to our great place to work. Those figures are we wouldn’t be able to get back in for headquarters. I’m thankful we ended up well above industry and national bench- several months. Fortunately, we had a pushing for a yearlong rental. marks. We’re a 160-year-old company satellite office in Stamford, Connecticut, that aims to be around for another 160. that was miraculously still up and run- Once we were settled in that tempo- We are preparing for that future in the ning. We printed out lists of employees rary space, with our employees cared present. and began calling their phone numbers. for and back on the job, the leadership We were determined to make sure that team knew exactly what our priorities FINDING MY CALLING everyone was OK. should be. A crisis like that crystallizes your thinking. I knew that Guardian’s I grew up in a small town in Nebraska Two days later all our team members employee- and customer-focused that had been settled by some of my had been accounted for. To find the last culture is strong and something we all pioneering ancestors. My parents raised few, dedicated Guardian employees had wanted to build on. It was clear that we my sister and me to appreciate our family driven to their homes. For those whose needed to be better prepared for the and community, but they also expected properties were now uninhabitable, we next disaster—and our digital future— us to focus on our education and eventu- rented hotel rooms. For those without by migrating all our data and work ally move away and do big things. They power, we delivered generators; when processes to the cloud and becoming ran a small business, with my mother they sold out locally, the head of human location-independent. And we commit- handling the finances, and she con- resources drove to Maine to buy more. ted ourselves—and our company—to stantly encouraged us to focus on math The leadership team also activated our staying ahead of the curve in other areas, and science. She used to walk around in corporate social responsibility function from diversity, equity, and inclusion to the house saying, “Math is easy. Math is to create a fund to cover employees’ globalization to the gig economy. fun.” One time, when I complained about hurricane-related costs—whatever chemistry class, she shut me down by people needed to get back on their feet. I’ve always been a planner by nature. reciting the periodic table from memory. Some used the money for home repairs; But my experience leading Guardian others used it to replace damaged goods. through Hurricane Sandy taught me to My parents also talked to me about One employee who lost a relative in start thinking even longer term: What business. When the Nixon administra- the storm paid for other family mem- were all the things that could go wrong, tion was instituting wage-price controls, bers to fly in and help with the funeral and how could we protect ourselves my father gave a lecture on supply and planning. from them? Also, what could go right if demand at the dinner table. My mother we were poised to seize the opportuni- explained the importance of being prop- Of course, we wanted to get Guardian ties presented? erly insured. Sometimes I think I learned up and running again. But we knew that people couldn’t work unless they felt This mindset served us well through my almost decade-long tenure as CEO. In  29Harvard Business Review January–February 2021

FACTS & FINANCIALS Guardian Founded: 1860 Headquarters: New York, NY No. of employees: 9,500 Revenue Net income $15 billion more at home than at school; that’s than you?” A short time later I accepted $13.5B where many concepts were made real. the position. I was all in. 12 I attended the University of Nebraska FUTURE-PROOFING OUR BUSINESS as a National Merit Scholar and found 9 that of all my classes, statistics most res- Guardian has three central values: We onated with me. After graduation I put do the right thing. People count. And we 6 those skills to work at an insurance com- hold ourselves to very high standards. pany and then, two years later, enrolled As the company’s new leader in 2011, 3 at Stanford’s business school. It might I wanted to see just how far the team sound odd, but I loved insurance—the could take that culture. $0.7B stats, the modeling, the analytics, and, to top it all off, helping people feel protected Technology was now a top priority 0 and get through the worst moments of for us. It was time to move into a new era their lives. So, as a newly minted MBA, and better serve modern-day customers. 2015 2016 2017 2018 2019 I joined New York Life Insurance for two The damage wrought by Sandy was an years and then decamped to McKinsey’s impetus to accelerate our efforts and Source: Guardian financial services group, with a focus on rebuild much better. In 2013 we hired a insurance, where I stayed for nine years. new chief information officer and head we didn’t want to leave any willing and In 2000 I left for an internet start-up that, of operations, Dean Del Vecchio, and engaged employees behind. We built a like many dot-coms of that era, didn’t gave him the location-independence data analytics operation from the ground survive; but I landed, happily, at the mandate. Together, with tremendous up, retraining actuaries to be analysts French insurance company AXA. support from the board, we vowed that through a yearlong course with General our operations would never be shut Assembly, and brought in a team of PhDs. The year 2001 was one of crises down by another crisis. A pandemic was Over several years we created a data and family emergencies as well as the already on our minds, because regula- lake from which to mine information to 9/11 attacks. Like so many other New tors require life insurers to address such improve the business. Of course, we had Yorkers, I decided to take some time scenarios in routine financial stress tests. a lot of internal discussion about whether off to be with my family. After a while, But this wasn’t just about the financial those investments would pay off. But the however, I started my own consultancy. impact; it was about our employees and board understood and fully supported One of my clients was Guardian, a customers. We didn’t want to be telling the plan. And once we were operating in purpose-driven, policyholder-owned, frontline workers to get back to the office a more sophisticated fashion, with better employee-centric company that I greatly when a virus was running rampant, nor technology and data and employees admired. Although going back into a did we want any policyholders to experi- repurposed accordingly, the costs savings corporate job was not part of my plan, ence delays in our response to them. and revenue gains began to accumulate. the executive team eventually talked me into joining the organization. Within Our ambitions were big and expen- The shift also helped facilitate remote two years I was named chief operating sive. We migrated many of our appli- work for the roughly 3,000 employees officer, and in 2010 the board offered me cations to the cloud and modernized who were then based at headquarters the position of CEO. My initial reaction our employee productivity tools. We and the 2,000-some at offices around the was reluctance, but my husband, Steve, hired new technology talent while also United States. In 2014 we began building asked me a pointed question that shifted reskilling existing employees, a process out our operations in India, and our my thinking. He said, “You love this I wrote about in my book, Hire Purpose: workforce there now numbers 2,000. company, its culture, and its people. How Smart Companies Can Close the In 2016 we launched a program to train Who is going to take better care of them Skills Gap. We needed to move fast, but leaders in best practices for managing remote workers and teams. Today we 30 Harvard Business Review January–February 2021

Guardian has three central values: We do the right thing. People count. And we hold ourselves to very high standards. still have a large, relatively new head- questions was born Guardian Strategic measurable goals, team alignment, a quarters in the Hudson Yards area of Ventures: a $100 million venture fund disciplined push forward, and account- Manhattan and campuses in Bethlehem, designed to invest in companies and ability to accomplish them. Pennsylvania, and Holmdel, New Jersey, technologies at the cutting edge of artifi- but I’d estimate that on any given day cial intelligence, data, and automation. Our move to serve gig-economy before the pandemic, 30% to 40% of our customers was the brainchild of an inno- employees were working from home. STAYING AHEAD ON TALENT vative employee in our group insurance We were more prepared than many for AND SERVICES business who worried about the fact that Covid-19 office closures. people could access Guardian’s extensive Guardian has done well to anticipate two benefits and well-regarded customer Our executive and actuary teams other important issues for organizations service only through their employers. spent a good part of January closely over the past decade: diversity, equity, Why couldn’t we take the same offer- monitoring World Health Organiza- and inclusion (DEI) and the gig economy. ings direct to freelancers, part-timers, tion reports and studying the 1918 flu The company was founded by a civil entrepreneurs, retirees, and others who pandemic; they then quickly moved rights attorney and thus has always pri- wanted good insurance? She pitched the to ban meetings of a certain size and oritized DEI. In 1999 we became one of idea of a direct-to-consumer business; institute travel restrictions. By mid- the first Fortune 500 companies to have a the executive team greenlit a pilot; and February we were mapping out a full female lead director. We also led the way by year’s end she had sold 5,000 policies. work-from-home strategy, and in early in offering domestic-partner benefits. That business line continues to gain March we did a test run with nearly Early in my tenure an employee observed momentum, with sales growth of 50% every employee spending the whole day that we weren’t endorsed by the Human in just the first half of 2020. working remotely. Apart from a skeleton Rights Campaign’s “Best Places to Work facilities-and-security crew, we are all for LGBTQ Equality,” so we made that a I N T H E M I DS T of a technology rev- still working that way as of this writing. focus when we refreshed our HR policies, olution, sustained low interest rates, And yet, thanks to our post-Sandy and the organization gave us a perfect globalization, and shifting customer investment, we haven’t missed a beat. score of 100 within two years. expectations, the entire insurance indus- try is facing considerable headwinds. Not surprisingly, we’ve also seen When we began tracking pay across Still, I believe that Guardian is positioned increased interest in life insurance, gender and race, in 2017, we happily not only to meet those challenges but and in this era of social distancing, our learned that it was equitable. If anything, also to seize on new opportunities under salespeople—who had already begun to the women were being paid a little more, the entrepreneurial, data-focused, and embrace new digital tools—have success- on average, than the men. Our latest values-driven leadership of my succes- fully pivoted to an entirely digital sales data indicates that we’re well balanced. sor, Andrew McMahon. I stepped down process, from prospecting to meeting to At the entry level, 50% of our workforce as CEO in early October 2020 but stayed handling policy applications. Where we consists of women or members of on as chair of Guardian’s board, which can, we have also leveraged customers’ other underrepresented groups. At the I’d had a seat on since 2011. On Decem- electronic health records, rather than the executive level the figure is 30%, and our ber 31, just as this article is published, traditional in-person exam, for under- board has received national recognition I will relinquish that position. It’s not writing. You can draw a direct line from for its diverse makeup. Recently we that I don’t love my job or the company our tech investments to this innovation announced that we aspire to double the anymore. I do. But it’s time for a new and flexibility. number of Black and brown managers leader to be that forward thinker who at the company over the next two years. holds fast to our principles and steers Five years ago we asked ourselves Many of these steps may be perceived as Guardian into the next decade. where the marketplace was going and common sense, but it takes leadership, how our policyholders could benefit HBR Reprint R2101A from those shifts. From that set of  31Harvard Business Review January–February 2021

In Jeff Bezos’s own words, the core principles and philosophy that have guided him in creating, building, and leading Amazon and Blue Origin. In this collection of Jeff Bezos’s writings— his unique and strikingly original annual shareholder letters, plus numerous speeches and interviews that provide insight into his background, his work, and the evolution of his ideas—Invent and Wander offers a rare glimpse into how Bezos thinks about the world and where the future might take us. AVAILABLE AT BOOKSELLERS WORLDWIDE store.hbr.org

DOES BUSINESS NEED A NEW MODEL? Photograph by ANDREA STONE  33Harvard Business Review January–February 2021

AUTHOR Roger L. Martin Former dean, Rotman School It’s Time to Replace the Public Corporation We need a model that truly focuses on the long term. t H E P RO F E SS I O N A L LY M A N AG E D, widely held, publicly traded corporation has been the dominant structure in business for the past 100 years. It came to prominence in the wake of the Great Depression because it was effective at mobilizing capital from private investors—who by the 1960s held more than 80% of company stock—for productive ventures. The model enabled executives to focus on long-term growth and profitability, to the benefit of the many individuals who owned shares in their companies. Over the past 40 years, however, the fitness of the public corporation has been called into question. Critics charge that in 34 Harvard Business Review PHOTOGR APHER ANDREA STONE January–February 2021

 35Harvard Business Review January–February 2021

Public corporations no longer serve the interests of their most important shareholders— retirement investors—or the most critical part of their workforce: knowledge workers. today’s far more heavily traded capital Meckling, titled “Theory of the Firm: time, falling transaction costs and new markets, the model increasingly incen- Managerial Behavior, Agency Costs and approaches to portfolio management tivizes executives to manage in tiny, Ownership Structure.” encouraged the large, professionally short-term windows, with an eager eye managed investment institutions to on their stock-based compensation and The paper argued that professional trade more actively. a fearful one on activist hedge funds. managers are imperfect agents who, if Whether or not they’re right, something left to their own devices, are inclined to The corporate raiders who came to isn’t working: The number of public maximize their welfare rather than that prominence in the early 1980s amplified companies in the United States halved of shareholders. The solution to that the effects of these trends. Their activ- from 1997 to 2015, while the number problem came to be seen as stock-based ism gave executives an added incentive of controlled companies (those with a compensation. That idea and its under- to pay close attention to the stock price. dominant shareholder or a dominant lying assumption that the shareholder If they didn’t, a raider could launch a group of shareholders) in the S&P 1500 was the company’s primary stakeholder hostile takeover bid, gain control of the increased by 31% from 2002 to 2012. The triggered an explosion in stock and company, fire them, and possibly tear number of companies with multiple stock-option grants over the following the company apart to wring maximum voting shares among S&P 500 companies decades. immediate value from it—as Carl Icahn increased by 140% from 2007 to 2017. famously did with Trans World Airlines Unfortunately, there is little evidence after his 1985 takeover. Where the In this article I’ll track the decline of (as I have argued elsewhere) that corpo- raiders led, today’s activist hedge funds the public corporation, explain why that rate performance has actually improved have followed, but with far more capital model no longer satisfies the primary as a result. That’s partly because the at their disposal. needs of critical stakeholders, and pre- shareholder-value revolution that Jen- sent a new one that I believe could well sen and Meckling helped trigger has had What constituted good or bad man- displace the public corporation as the the unintended consequence of focusing agement performance became clearly dominant structure in business. top executives on short-term move- defined from one perspective following ments in their companies’ stock prices the creation in 1980 of the First Call The Turning of the Tide rather than on long-term value creation. service, which aggregated analysts’ CEOs started meeting more and more forecasts to come up with a “consensus The shift against public corporations often with investors and the analysts forecast” of each company’s quarterly can be traced back to the late 1970s. A whose advice those investors followed. revenue and earnings. An executive key marker was a 1976 article published To demonstrate the superiority of their team knows that if it doesn’t hit the in the Journal of Financial Economics strategies, they would emphasize how consensus forecast, its company’s stock by Michael C. Jensen and William H. much shareholder value they had cre- will be trounced by traders, increasing ated since last checking in. At the same the danger of a hostile takeover. That IDEA IN BRIEF WHY IT HAPPENS HOW TO FIX IT In today’s capital markets, the model Switch to a model in which the owners are an THE PROBLEM incentivizes executives to manage in tiny, employee stock ownership plan (ESOP) and one The public corporation is short-term windows, thus failing to satisfy or more pension funds—thus focusing governance no longer fit for purpose, the primary needs of its critical stakeholders: on ensuring real long-term performance rather and its popularity as retirement investors and knowledge workers. than on short-term stock price fluctuations. an ownership model is declining. 36 Harvard Business Review January–February 2021

ABOUT THE ART Photographer Andrea Stone documents how reflections of cityscapes distorted by light, glass, steel, and stone invite the viewer beyond the rigidity and solitude of urban architectural forms. provides executives with a powerful incentive to meet the quarterly consen- sus even if doing so means sacrificing longer-term goals. Research confirms that they do indeed make this trade-off. They may even engage in fraud: In the early 2000s executives seeking to boost their stock price were responsible for accounting scandals of a magnitude never seen before: those involving Enron in 2001 and Adelphia, Global Crossing, WorldCom, and Tyco in 2002. The Failure of the Public Corporation Attempts have been made to improve the governance of public corporations. The 2002 Sarbanes-Oxley Act, for example, introduced new rules concern- ing the independence of directors and set requirements for financial expertise on boards in an effort to avoid further accounting scandals. CEOs and CFOs were made personally liable for their financial statements. Stock analysts were obliged to disclose conflicts of interest and breakdowns in buy, hold, and sell recommendations. But such fixes don’t address the root of the problem, which is that public corporations no longer serve the interests of their most important shareholders—retirement investors—or the most critical part of their workforce: knowledge workers. Retirement investors. Peter Drucker was, as usual, right in 1976 when he forecast the rise to prominence of pension funds, arguing that America’s workers would come to own the means of production through equity ownership by the pension funds that held their  37Harvard Business Review January–February 2021

The bottom line is that institutional investors have neither the ability nor the incentive to discipline executives or protect companies against rapacious hedge funds. retirement assets, rather than through no incentive to see any one company do Who are the company’s shareholders? a violent revolution by the proletariat. particularly well, because they own all The share register will feature names People saving for retirement constitute its competitors; any outstanding success such as BlackRock, Fidelity, State Street, the largest group of investors today. on the part of one company will come at and Vanguard. But those are just fidu- the expense of its rivals and their stock ciary institutions that invest on behalf These investors typically have a very prices. One might think that an institu- of the real shareholders. The same holds long-term outlook—20, 30, or 40 years— tional shareholder of Kimberly-Clark for pension funds such as CalPERS, New and defined-benefit pension plans are would like to see the company come up York State Common Retirement Fund, strictly liable for established retirement with a fantastic innovation that enabled and the Teacher Retirement System of benefits (as are life insurers, whose its Huggies disposable diapers to crush Texas and for the activist investors Per- interests largely align with those of such P&G’s Pampers. But because it’s likely to shing Square, Third Point, and ValueAct plans). Although defined-contribution hold as big a position in P&G as it does in Capital. Collectively, these institutions pension plans, such as 401(k)s, and IRAs Kimberly-Clark, its gains on the latter’s represent 80% of supposed shareholders. carry no such liability, the managers stock would probably be offset by its The actual shareholders have no conver- of those investments share the goal of losses on P&G stock. sation with the companies they own, and producing high long-term returns to max- may not even know they own them. imize beneficiaries’ retirement income. The bottom line is that institutional They can and do invest in long-term investors have neither the ability nor the So the dominant model asks workers bonds, real estate, and infrastructure. But incentive to discipline executives, pro- to toil under executives whose financial to earn at the levels required, they must tect companies against rapacious hedge welfare is determined by the stock also invest in equities, which have typi- funds, or even encourage companies to price, in the interests of owners no one cally offered the highest rates of return. compete aggressively. knows. That seems about right for a workplace in which, according to Gal- As things stand, however, execu- Knowledge workers. In 1959, almost lup’s 2020 results, only 31% of employ- tives’ incentives are clearly not aligned two decades before his prediction about ees are engaged in their work, 54% with retirement investors’ need for pensions, Drucker alerted the world to are not engaged, and 14% are actively long-term value creation. What’s more, the arrival of a new breed of employee: disengaged. Drucker would probably the investors are largely powerless to knowledge workers. Instead of the have predicted those numbers had he change this state of affairs. One might muscles in their arms, legs, and backs, known the environment in which his assume that large institutions such as these workers would employ the muscle knowledge workers would be toiling. BlackRock, Fidelity, State Street, and the between their ears. He warned that they The modern public corporation has big pension funds have so much capital would be pickier about the nature of become a terrible home for them. that they can force executives to act in their work because it is done in and by the interests of their clients. Although their minds. They are their work. What might emerge in its place? some are attempting this, their ability to do so is limited, because the large That is at the core of the problem A New Model funds are so big that each of them has with the public corporation. Knowl- ownership in most of the market. That edge workers, the primary driver of a The obvious candidate to replace the means two things: First, the big insti- company’s value, are being asked to publicly held corporation is private tutions can go only so far in punishing work for the benefit of its shareholders. equity ownership. Since 2002 the net any one company, because if they sell They are asked to make sacrifices to asset value of private equity has grown out, depressing the share price, they meet quarterly financial targets. When more than sevenfold—twice as much as will simply provide an opportunity for activist hedge funds circle, they are the value of public equities. That growth a leveraged buyout or an activist hedge asked to acquiesce in the firing of friends has been fueled largely by the major fund. Second, big, diversified funds have and colleagues across the company to pension funds, which have become improve earnings. 38 Harvard Business Review January–February 2021

the biggest investors in private equity. To understand what might displace development companies. The Quebec- Michael Jensen himself predicted the the public corporation, let’s consider based CDPQ took Ivanhoé private in growth of private equity in 1989 in his what’s involved in meeting the needs 1990 and Cambridge Shopping Centres provocative Harvard Business Review of knowledge workers and retirement private in 2000, and merged them to article “Eclipse of the Public Corpora- investors—the critical creators and create a wholly private real estate giant. tion,” and history has proved him right. beneficiaries of sustainable value. To The Ontario Teachers’ Pension Plan satisfy their needs, any new model must (OTPP) took another large realty firm, But private equity is not a substitute overcome the fundamental governance Cadillac Fairview, private in 2000. Those for public corporations, because it is problem of widely held corporations: were not typical PE deals. The investors predicated on their existence. Private that CEOs’ incentives are at odds with were not seeking to turn the companies equity investors expect to realize a return the long-term interests of those stake- around and take them public again five after five to seven years, so PE funds holders. In addition, the model must years later. They were looking for steady must sell the companies they’ve bought diminish the ability of activist hedge returns over the long haul. within that period. Traditionally that has funds to extract gains at their expense. meant returning them to the public mar- To be fair, those acquisitions were in kets, by way of either an IPO or sale to a I believe that the most likely succes- a single business—real estate, not classic public company. But those exit routes sor is what I call the long-term enterprise consumer or industrial enterprises—in (especially IPOs) have become less easy (LTE), a private company in which which pension funds are major buyers to take of late, and a growing trend is ownership is limited to the stakeholders of individual assets. For LTEs to become PE funds’ selling companies to other PE with the greatest interest in long- the dominant ownership model, pension funds. Of course, that doesn’t eliminate term value: retirement investors and funds and other retirement investors an eventual return to public markets—it employees. It would work like this: An would have to become comfortable own- merely kicks the can down the road. employee stock ownership plan (ESOP), ing a wider variety of businesses. That whether existing or specifically created does seem to be happening: In 2019 the The story of Dell provides a textbook for this transaction, would partner with biggest Canadian pension fund, CPPIB, example. In 2013 its founder, Michael one or several pension funds to acquire took an alternative-energy company, Dell, and the PE firm Silver Lake Part- the company and take it private. Gov- Pattern Energy, private for US$6.1 billion. ners took the company private for nearly ernance would focus on real long-term $25 billion, because they felt that as a performance rather than on short-term This approach borrows from the public company, Dell could not trans- stock price fluctuations—because there playbook of the world’s most famous form itself from primarily a player in the would be no stock price. Other classes of investor, Warren Buffett, who is best commoditizing personal computer busi- long-term investors might also find the known for taking huge ($15 billion- ness to an enterprise services provider. model attractive. The likes of BlackRock, plus) stakes in public companies such As a private company, Dell was able to Fidelity, and State Street, for example, as Apple, Bank of America, Coca-Cola, engineer the game-changing takeover of could create vehicles whereby their IRA Amex, and Wells Fargo. But those EMC, which owned a valuable stake in investors could invest alongside ESOPs. investments make up less than half the cloud computing provider VMware. of Berkshire Hathaway’s market capi- It took the transformed company back Let’s look at what this model would talization of $313 billion (as of this to the public market five years later do for its key stakeholders. writing). A larger proportion comes at an approximate enterprise value of from its ownership of fully privatized $70 billion. Pension fund investors who Retirement investors. The model companies such as GEICO, Burlington had sold out at $25 billion could buy is not completely unfamiliar to these Northern Santa Fe, Dairy Queen, Fruit back in at $70 billion, but in the mean- investors. Two of Canada’s three biggest of the Loom, Lubrizol, and Duracell. time, $45 billion in value had gone to pension funds (which are also among The most valuable private stake is prob- private investors—including, by some the top 20 worldwide) have taken ably GEICO (worth about $50 billion), estimates, $28 billion to Michael Dell private very large Canadian real estate himself. If public corporations and capital markets did not exist to enable PE funds to turn their investments into cash, a deal like that could not happen, and PE funds would not exist. That disqualifies private equity as the next new model.  39Harvard Business Review January–February 2021

but perhaps the most intriguing is Bur- Knowledge workers. Working at a in America. Perhaps most impressive, lington Northern Santa Fe, the parent of company solely owned by Berkshire shoppers rank it the number one BNSF Railway, America’s largest railroad. Hathaway has many attractive features supermarket chain in the United States. In 2009 Berkshire Hathaway acquired for employees. They know for whom Other large supermarkets that have the 77.4% of BNSF it didn’t yet own for they are working: shareholders who ESOPs include WinCo Foods, Brookshire $26 billion, which with the acquired debt have legendarily long holding periods. Brothers, and Metcash, the parent of made the holding worth $44 billion. The But it’s not enough to know your share- IGA. Outside retail, we have W.L. Gore & stated intention was to run the railroad holders. In the modern economy, critical Associates, the famous creator of Gore- privately—forever. employees themselves need to have a Tex; Graybar, one of the top distributors long-term stake in the company. And of electrical, communications, and It makes sense that Buffett would as we have seen, stock options don’t data-networking products; and Gensler, figure out something good before every- provide an incentive to engage for the the top-grossing architectural firm in the body else did. He has made a career long term. That’s where employee stock United States. of doing so. He favors concentrated ownership plans come in. and focused ownership, works toward As that list suggests, many of the a long-term horizon, and positions Large companies wholly owned by biggest companies with ESOPs are chief executives to be incentivized by ESOP participants perform remark- either retailers, for which the interac- value enhancement, not stock price ably well. Take Publix Super Markets, tion between customers and frontline movements, protecting them from which is 100% owned by an ESOP. With employees is critical to success, or activist hedge funds, stock analysts, $36 billion in revenue, Publix ranks 87th enterprises dependent on a large number and traders: market actors pushing for in the Fortune 500 and is the 29th-largest of professionals, such as architectural, short-term gains. private-sector employer by head count engineering, and consulting firms. They 40 Harvard Business Review January–February 2021

are typically innovative and highly way and enjoy favorable tax provisions to explain why it’s trying something competitive. for rolling the proceeds into their retire- different, and no bevy of advisers will ment accounts. be standing by to help. Nonetheless, Little or no new regulation would employees, shareholders, and society be required to roll out ESOPs on a It’s surprising that employee stock would be better off if ESOPs were used large scale. A robust infrastructure is ownership plans aren’t more widely more widely. already in place to protect the interests used, but dominant models are hard to of individual employees enrolled in displace. Publicly held corporations are In sum, the model I propose would them. (An ESOP is not equivalent to an the default—the safe choice. Bankers, satisfy the primary needs of both retire- employee retirement plan, which should lawyers, and accountants can facilitate ment investors and knowledge workers not be wholly or even largely invested that structure in their sleep, whereas few without taking away any of the advan- in company stock. It is, rather, a way specialize in creating ESOPs. Addition- tages offered by the public corporation’s to reward and motivate employees for ally, no single person or small group structure. Long-term enterprises can value creation.) All shares vest after six has a huge incentive to drive toward an help channel retirement savings toward years, and ESOPs are required to have a ESOP solution. When a private company investments that will reliably deliver third party establish the fair value of the goes public, a few people—the founding high returns 20 or 30 years later. They shares once a year so that when employ- group and the initial angel or VC inves- also motivate workers in dynamic, ees leave, their shares will be bought by tors—tend to reap very large rewards. knowledge-intensive industries to the plan at a fair price, enabling them to Under an ESOP, each of many employees create the value needed to generate benefit from capital appreciation much stands to benefit by a meaningful but those returns. as employees of public companies do. modest amount. If an employee group Retiring employees benefit in the same starts in that direction, it will have Supporters of the current model point out that public markets have  41Harvard Business Review January–February 2021

been highly effective mechanisms for aggregating and processing information about value and for taking cash in and out of investments—which is why the publicly traded corporation was such a successful model. But it’s no longer clear that this model is the best way to determine fair value. The dominance of short-term factors in corporate decision-making and the activities of short-term investors are making quoted market prices a less- reliable indicator of value than they used to be. At the same time, the widespread availability of information online and the increased sophistication of formal modeling are dramatically improving the quality of market-independent business valuations. PUBLICLY TRADED CORP ORATIONS and the capital markets won’t become extinct. Not all investors take a long- term perspective, and in many industries it can be difficult, if not impossible, to do so. But the stock market increasingly sabotages rather than supports the creation of long-term value, reducing the investment options available to retirement savers and demotivating the people most likely to create the value those savers need. The model I propose here will better serve the interests of these critical stakeholders. HBR Reprint R2101B ROGER L. MARTIN, a former dean of the Rotman School of Management, in Toronto, is an adviser to CEOs and the author of When More Is Not Better: Overcoming America’s Obsession with Economic Efficiency (Harvard Business Review Press, 2020). 42 Harvard Business Review January–February 2021

AUTHOR Lucian A. Bebchuk Professor, Harvard Law School COUNTERPOINT Don’t Let the Short- Termism Bogeyman Scare You Active investor oversight is a plus, not a minus. t H I S I SS U E O F Harvard Business Review includes, as many prior issues did, an article decrying the perils of short-termism and sup- porting measures for insulating corporate leaders from the outside pressures that allegedly make them myopic. But such argu- ments are long on alarming rhetoric and short on empirical evidence or economic logic. Further- more, their supporters overlook substantial benefits that outside-investor oversight produces and that such measures would sacrifice. HBR readers have been warned about the dangers of short-termism for at least four decades. In their 1980 article “Managing Our Way to Economic Decline,” Robert Hayes and PHOTOGRAPHER PETER WEGNER  43Harvard Business Review January–February 2021

William Abernathy argued that the short- err, people who express such concern Of course, some corporate leaders Previous spread: Peter Wegner, Buildings Made of Sky III, 2009. Courtesy of Peter Wegner and Galerie m, Bochum, Germany term focus of corporate managers was have thus far not provided solid empiri- may take the view that the market to blame for a “marked deterioration of cal evidence to justify their alarm. doesn’t adequately appreciate the long- competitive vigor.” Similarly, in his 1992 term prospects of their companies and article “Capital Disadvantage: America’s Indeed, over the past two decades, consequently underprices their stock. Failing Capital Investment System,” as dire warnings regarding short- But such reactions may simply reflect Michael Porter claimed that short- termism have proliferated, growth com- the tendency of those individuals to termism was causing underinvestment panies—whose value largely reflects overvalue or defend their own perfor- in long-term R&D projects and was the expectations about their payoff in the mance. Even if a stock market price reason that “the competitive position of long term—have enjoyed substantial disappoints a company’s leaders, it may important U.S. industries has declined appreciation in value. As of the end of in fact accurately reflect the company’s relative to other nations, notably Japan the third quarter of 2020, the companies long-term prospects. and Germany.” in the tech-heavy Nasdaq 100 made up more than one-quarter of the total Is Hedge Fund Activism Although short-termism has not pro- capitalization of U.S. stock markets, Detrimental? duced the predicted deterioration and and they were trading at high price/ decline during the decades since, calls to earnings ratios, reflecting the willing- Short-termism worriers view hedge fund protect corporate leaders from pressures ness of the markets to attach great value activism as a menace. Consequently, that could induce short-termism have to companies on the basis of their future they advocate for measures that would persisted if not intensified. Indeed, such prospects rather than their current impede it and urge other investors to arguments have for long been a key rea- earnings. avoid supporting activists. But that son provided for supporting measures— view reflects a flawed assessment of the such as takeover defenses, staggered If investors were systematically effects of activism. boards, dual-class share structures, and underestimating long-term prospects, dual-class recapitalizations—that limit growth companies would tend to trade Opponents of hedge fund activists the power of shareholders and insulate at discounted levels, enabling their argue that they profit by pushing corporate leaders. investors to obtain higher returns companies to make short-term improve- over the long term. But the empirical ments that come at the expense of Unfortunately, the superficial appeal evidence indicates that growth stocks long-term prospects and bring about of such arguments has won over many actually tend to offer lower returns over stock price declines down the road. In institutional investors and public offi- the long term—and thus, if anything, a 2012 debate I had at the Conference cials. It’s important that they and others tend to trade at elevated levels—com- Board with Marty Lipton, the prominent learn to recognize the shortcomings of pared with stocks whose valuations are corporate lawyer who invented the short-termism claims. grounded in current profitability. “poison pill” takeover defense, he chal- lenged me to empirically investigate his Does the Market Amazon and Netflix vividly illustrate concern about what happens to activism Underestimate Long-Term that when appropriate, investors will targets in the several years following the Projects? accept with considerable patience a cor- activists’ intervention. In a subsequent porate strategy of investing in the long empirical study, Alon Brav, Wei Jiang, A major premise of short-termism worri- term at the expense of no or little current and I met this challenge. We examined ers is that markets systematically under- profit. Over the past decade the stock the five-year aftermath of such interven- value long-term investments, which are prices of those companies appreciated tions and found no evidence providing consequently not fully reflected in stock steeply, rising more than 20-fold and a basis for Lipton’s concern. Whereas prices. Although markets do sometimes 10-fold respectively, even though their the start of an activist intervention is growth-oriented strategies resulted in commonly accompanied by a stock price relatively small profits along the way. spike, that spike isn’t reversed in the following five years. Supporters of insulation also argue that the shadow of hedge fund inter- vention has a major adverse effect on the operation of all companies, not 44 Harvard Business Review January–February 2021

If the prospect of an activist intervention discourages managerial slack and underperformance, all the company’s investors are rewarded. Following spread: Peter Wegner, Buildings Made of Sky VII, 2012. Courtesy of Peter Wegner and Galerie m, Bochum, Germany just those with which activists actually them and to support insulating manag- in the years following an activist hedge engage. The desire to reduce the odds of ers from it. According to this view, long- fund’s exit from a target’s stock, there such engagement, it is argued, provides term investors should generally lend was no evidence of abnormal negative corporate leaders with an incentive their support to management and avoid returns reflecting a price reversal. to beef up short-term stock prices by cooperating with hedge fund activists, to significantly underinvesting in long- enable managers to focus on delivering Internally Driven term projects. The validity of this view, long-term value without distractions. Short-Termism however, depends on the questionable premise that market prices generally As Doron Levit and I show in a recent Although there is currently no basis reward reducing investment in long- analysis of the interests of short-term for viewing short-termism problems term projects. and long-term investors, however, this as severe enough to justify insulating view suffers from significant flaws. For managers, there is still significant room Furthermore, this view overlooks one, even investors who plan to hold for improvement in the governance a significant beneficial effect that the their shares in a company for a very long of public companies in general and prospect of hedge fund activism should time (in, say, index funds) should hardly decision-making about long-term be expected to have on the performance be uninterested in short-term results. projects in particular. One beneficial of corporate leaders who seek to avoid it. Looking for long-term value does not measure would be to tighten the The threat of such intervention should mean leaning back and counting on alignment between executive pay and be expected to discourage managerial managers to ultimately deliver it. Even long-term results. slack and underperformance, thus long-term investors should be keenly playing an important disciplinary role interested in interim results, which may The attention that corporate leaders and incentivizing leaders to enhance signal needed changes in management give to quarterly earnings and meeting shareholder value. This mechanism is or governance and incentivize manage- analyst expectations could well be especially important given the substan- ment to focus on shareholders’ interests. excessive. But that attention is due more tial impediments to hostile takeovers to internal choices made by leaders permitted by U.S. law. If hedge fund Furthermore, long-term investors themselves than to outside pressures. activists were also impeded, managerial often benefit from the work of hedge In particular, compensation arrange- slack and underperformance could be fund activists, who usually cannot effect ments, which directors and executives expected to increase, to the detriment change unless other investors are willing themselves put in place, incentivize of investors and the economy. to support their proposals. And other managers to attach weight to short-term investors should be expected to provide results and their stock price effects. Long-Term and Short-Term such support only if they believe that Investors: Foes or Allies? they, too, will benefit from proposed Standard compensation arrange- changes. Moreover, if the prospect of an ments have long included consider- Those who want to protect corporate activist intervention discourages man- able bonuses that reward short-term leaders from market pressures often agerial slack and underperformance, all improvements even if they are short- distinguish between long-term (“good”) the company’s investors are rewarded. lived. These arrangements also com- investors and short-term (“bad”) inves- monly grant executives substantial tors and view all hedge fund activists, To be sure, opponents of hedge fund freedom to unload equity incentives even those who hold positions for a activism argue that the activists’ interests and thereby benefit from short-term substantial time, as the latter. They urge diverge from those of long-term inves- spikes in stock prices. long-term investors to see the influence tors because the former bail out before of short-term investors as detrimental to the adverse effects of their interventions Eliminating short-term incentives get reflected in stock prices. That claim, and placing substantial limits on however, is not supported by the data. corporate leaders’ freedom to unload My study with Brav and Jiang found that  45Harvard Business Review January–February 2021

Those who are concerned about short-termism should focus on reforming pay arrangements before considering the adoption of measures to insulate managers. 46 Harvard Business Review January–February 2021

ABOUT THE ART In this series, artist Peter Wegner inverts urban streetscapes to reveal his Buildings Made of Sky. shares, as Jesse Fried and I advocated in The rise of institutional investors has our book, Pay Without Performance: The led to a concentration of ownership. As Unfulfilled Promise of Executive Com- Alma Cohen, Scott Hirst, and I document pensation, would significantly increase in a 2017 study on institutional inves- corporate leaders’ attention to long-term tors, the largest 50 of them commonly value. As we demonstrate in the book account for a substantial majority of and our subsequent work, arrangements the votes cast at shareholder meetings. that provide short-term incentives This concentration of ownership has persist largely because they serve exec- introduced the possibility of meaningful utives’ private interests, not because investor oversight. Although such over- of outside pressure from investors and sight may have some adverse effects, markets. overall it is a substantially beneficial mechanism that serves the interests of Unlike measures that insulate cor- investors and the economy. Measures to porate leaders from investor oversight weaken it would move us in the wrong and intervention, a redesign of execu- direction. tive pay arrangements would temper short-termism without imposing large WA R N I N GS O F T H E perils of short- costs arising from slack and underper- termism are repeatedly used to argue formance. Therefore, those who are for shielding managers from outside concerned about short-termism should pressures and oversight. But those focus on reforming pay arrangements warnings are not supported by evidence before considering the adoption of of the severity of alleged short-termism measures that would insulate managers effects, and they overlook important and bring about such costs. benefits provided by market and investor oversight. Fears of the short-termism The Folly of Going Back bogeyman should not scare us into sup- porting measures that insulate managers. Insulation advocates essentially seek Adopting or maintaining such measures to reverse the effects of capital markets would operate to the detriment of Ameri- developments over the past several can investors and the U.S. economy. decades that have been largely benefi- cial. As Adolf Berle and Gardiner Means HBR Reprint R2101B documented in The Modern Corporation and Private Property, the ownership LUCIAN A. BEBCHUK, the James Barr of large U.S. companies used to be Ames Professor of Law, Economics, dispersed, with owners lacking both the and Finance at Harvard Law School and incentives and the ability to monitor the founding director of its Program on performance and intervene. Managers Corporate Governance, is the author of were largely unaccountable and free “The Myth That Insulating Boards Serves from investor oversight. To be sure, they Long-Term Value” (Columbia Law Review, felt no pressure to produce short-term 2013) and a coauthor of “The Long-Term results; but they felt no pressure to Effects of Hedge Fund Activism” (Columbia produce long-term results either. Law Review, 2015) and “Should Short-Term Shareholders Have Less Rights?” (2019).  47Harvard Business Review January–February 2021

The Rules of 48 Harvard Business Review January–February 2021