TheConductofLeadershipGreatmenallremindus,wecanmakeourlivessublime

By:ProcyonMukherjee

Prelude

InmyjourneytowardsseekinganswerstoquestionsIstumbledonthisparticularquestionfromthe
readingoftheautobiographiesoffourgreatleadersofourtimes,namelyGandhi(MyExperimentswith
Truth),MartinLutherKing.Jr(editedbyClayborneCarson),NelsonMandela(LongRoadtoFreedom)
andWarrenBuffet(TheSnowball:WarrenBuffetandthelifeofbusiness)whatdoesittaketoconstruct
theConductofLeadershipinthebackdropofthevarious(sometimesconflicting)demandsofthe
stakeholdersofthebusinessortheentireindustryorthesocietyatlarge?

Gandhididprovideabrilliantanswer,Theroleofaleaderistoserve;bythisprocesshewouldensure
thattherearenocompetitors.

MartinLutherKingJr.stated,Ihavealwaysfeltthatultimatelyalongthewayoflifeanindividualmust
standupandbecountedandbewillingtofacetheconsequenceswhatevertheyare.Andifheisfilled
withfearhecannotdoit.Theultimatemeasureofmanisnotwherehestandsinmomentsof
convenience,butwherehestandsinmomentsofchallenge,greatcrisisandcontroversy.

MandelaofferedustheShakespeareanquote,Deathisabsolute;andtheneitherdeathorlifemaybe
sweeter.Heasaleaderpreparedfortheultimatesacrifice,soeverythingafterthatcouldonlybebetter
forhimandforhumanity.

Therearemanygreatstoriesfromtheoldentimes,fromAlexandertoNapoleonthatportraysthesame
sentimentontheconductofleadership.Thesemenwerewillingtomaketheultimatesacrificealong
withtheirmen.Theywerenotinfluencedbyotherworldlydesiresofanykind;theyrosebecauseof
theircourageandsacrificeintheirservicetotheirmenandtohumanity.

Intodaysworldofleadershipandmanagementwhatdoesittakeusto?Asleaderswhomdoweserve
andwhatdowestandfor?

TheTheoryofJustice

Ifindveryapttointroducethetopicofjusticewhilediscussingtheconductofleadership,asIfindin
everyactionofgreatleaderstheconceptofjusticesoinnateandcoherent.Buttheconceptofjustice
maylookverycomplexuntilwefindawayofdissectingitinasimplemanner.TodothatItakerefugein
JohnRawlstheoryofjusticetounderstandtheprinciplesonwhichtheveryideaofJusticeasFairnessis
tobebasedon.TherecannotbeabetterquotethanstraightfromhisbookTheTheoryofJustice
whereheexplainstheimportanceoftheInitialPositioninformulatingtheTheoryofJustice.

Hesays,Injusticeasfairnesstheoriginalpositionofequalitycorrespondstothestateofnatureinthe
traditionaltheoryofsocialcontract.Thisoriginalpositionisnot,ofcourse,thoughtofasanactual
historicalstateofaffairs,muchlessasaprimitiveconditionofculture.Itisunderstoodasapurely
hypotheticalsituationcharacterizedsoastoleadtoacertainconceptionofjustice.Amongtheessential
featuresofthissituationisthatnooneknowshisplaceinsociety,hisclasspositionorsocialstatus,nor
doesanyoneknowhisfortuneinthedistributionofnaturalassets,hisabilitiesandhisintelligenceand
strengths,andthelike.Ishallevenassumethatthepartiesdonotknowtheirconceptionofthegoodor
theirspecialpsychologicalpropensities.Theprinciplesofjusticearechosenundertheveilofignorance.
Thisensuresthatnooneisadvantagedordisadvantagedinthechoiceofprinciplesbytheoutcomeof
naturalchanceorbythecontingencyofsocialcircumstances.Sinceallaresimilarlysituatedandnoone
isabletodesignprinciplestofavorhisparticularcondition,theprinciplesofjusticearetheresultofa
fairagreementorabargain.

Intheworldofbusinessdotheseprinciplesapply,astheyapplyintheveryconstructofsocietyscore
valuesonwhichtheconceptsofjusticeisbuilt?Isthereaveilofignoranceguidingpeopletocomplete
impartialitywhenentitlementswouldbedecidedon?Dowekeepoureyesclosedandourheartsout
whenweareabouttoembarkondecidinghowthedistributionofnaturalassetswouldbedone?

Thereareononesidetheinvestorsandshareholdersofthebusinessaskeystakeholdersandmanagers
whoactastheiragents.Ontheothersidearecustomersandsuppliersandthismixofparticipants
decidewhattotalofsocietyswealthinsumwouldbecreatedbytheircommoninteractionsand
negotiations.Thesizeofthetotalpieandnotinindividualpartslaythetotalwealththatthey
collaborateandcompetetocreate.Theywouldeventuallydecidehowthatwealthwouldbesharedas
wellamongstthemselves.Dotheprinciplesofjusticeapplyinthisexample?Howmuchdotheindividual
participantsattachtotheindividualpartsofthepiethantothewhole?

Whatistheroleofleadershipandwhatisthegoodconductofaleaderinthis?Eventuallyittrickles
downtothebehaviorwithrespecttofairdivisionthattakesthebetteroftheenhancementofthe
wholepie.Weneedtounderstandwhythishappens.

Iwouldliketomovetothecakeproblemtotrytounderstandtheprobleminalittlebitmoredetails.

TheCakeproblemandtheParetooptimal

Iwentbacktomydaysinchildhoodandtothesharingofthecakeatourbirthdays.AlmostalwaysI
foundtheshareofthecaketobeveryunequal,themostwasreservedfortheguestsandtheleastwas
keptforourownfamilyandmymotherormygrandmotherwhocutthecake,gotprobablynothingat
theend.Mygrandmotherwhohadtofeed12mouthsotherthanherownwithsomemodestincomeof
mygrandfather,probablyallherlifesacrificedfortherestofthefamily,whyshouldIsingleoutjusta
birthdaycake,otherthanpointingtothesymbolismthattheonewhoactuallyleadstheshow,mustat
theendsacrificewhensharingisconcerned.

Itishoweverimportantthatthedividermusttakethelastbitandnottakeawayatthevery
beginning,justtoemphasizethepointthatafairdivisiononlybecomesvisibleandmorethan
apparentafterthedivisioniscomplete.
ButletusfirstgotoKennethArrowandseewhathisImpossibilityTheoremsays:

GeneralImpossibilityTheorem(TakenfromArielScheib)

Arrow'simpossibilitytheoremwassetoutinhisPh.D.thesis,Socialchoiceandindividualvalues.

Initsfinalformitstatesthefollowing:giventheconditionsofParetoOptimality(P),Unboundedsocial
choice(S),Independenceofchoices(I)andnonDictatorship(D),itisimpossibletoformulateasocial
choicefunctionwhichsatisfiesallofthem.Thishastremendousimplicationsforwelfareeconomicsand
theoriesofjustice.ItwasextendedbyAmartyaSentotheLiberalParadoxwhicharguedthatgivena
statusof"MinimalLiberty"therewasnowaytoobtainParetoOptimality,nortoavoidtheproblemof
socialchoiceofneutralbutunequalresults.

Anexampleofthiswouldbetohavethefollowingchoicestodivideacakebetweenthreepeople.Letus
callthemA,BandC.

Choice1:Agetsnothing,BandCgethalfeach.Choice2:Bgetsnothing,AandCgethalfeach.Choice3:
Cgetsnothing,AandBgethalfeach.Choice4:dividethecakeequally.

Thuschoice4wouldbethirdfromthebottomineveryone'slist,andwould,inanydirectchoicelose2
to1againstanunequaldistribution.SinceallofthesechoicesareParetooptimalnoone'swelfarecan
beimprovedwithoutreducingthewelfareofotherschoice4wouldnotbechosen,sincetherewould
alwaysbeotherpreferredchoices.

Oursocietyisfundamentallybuiltonthepremisethatequaldivisiondoesnotleadtobetterresults,but
doweconsiderthisafairdivisionwhenmoreorlessisguidedbytheleaderhimself,whoisan
interestedbeneficiaryofaportionandwhohimselforchestratestheprinciplesonwhichthedivision
wouldbemade?

Thecreationofwealthcannotbesosimplyequatedtoacakeandnorcanthesharingofwealthbe
equatedtothesharingofthecake.Howevertheanalogyservesthepurposeofdrawingustotheshift
thathastakenplaceinthemannerthefamilysolvedtheproblemofcakestothemannerthegreater
societynowfindsabetterdenouement.

LetmeconstructalittlevariationtotheproblemofcakesandIcallitthehierarchyproblem.Ifacakeis
tobedividedintothreeandeachhasahierarchyofneedsandorexpectationswithafactoroftwoover
thenextone,thenthefairestsharewouldbeasfollows:

A=EquityHolders,B=Managers,C=FutureStakeholders

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

Howdoespowerplayaroletodecidethehierarchyofneeds?WhathappenswhenAandBmutuallyact
toextractahighersharefromCasAandBtogethercouldhaveamoredominantpositiontonegotiate?

WhathappenswhenCwouldliketogiveuppartofitsshare,howwouldthatportionbeallocated
betweenAandB?WhathappenswhenAwouldliketodothat?
Howdoestheslicegetdividedbetweenequityholdersandmanagers?Whoplaystheroleofthe
arbitrator,leader,anddecider?Whatdoestheconductofleadershipinthissituationlooklike?Isit
Paretooptimalsolutionthatwepursueatalltimes?

Iwouldarguethatthecakeproblemisntthatsimpleasmorenumberofplayerswithdiversifiedneeds
andexpectationsenterthefray.Andwhenwefactorinthatthereareverylargeofinvestorswhoare
allowedtobetontheresultswhichineffecthasabearingontheshareaswell,wehavebeenableto
makethepuzzlesufficientlycomplexinitsmaking.

Butthatiswhattherealworldofbusinessis,withplayersandexpectationstobemanagedinafairway,
providedtherearerulesthatcanbefollowedwithrigor.Therearelawenforcementagenciesappointed
bythegovernmenttoenforcesomesemblanceofrulessothatunfairpracticesmaynotbeadopted.On
topofthistherearegovernmentsthemselves,whichareaccountabletothebroadersocietywhofinally
havethelastsay.Afteralllawsmustservetheoverallgreatergoodandmanylawshavegonethrough
changesinthehistoryoflawmaking.

Wealthmaking

Thecreationofwealthisthecorepurposeofbusiness.Butitisthesumtotalofwhattheindividual
constituentsofthebusinessmakefromendtoend.Letmetaketheextremeexampleofavaluechain
rightfromminingBauxiteoretodrinkingsoftdrinkfromaluminumcan.Thisisalongchainwith
constituentsrangingfrommining,refining,smelting,rolling,canning,fillinganddistributing.Thefinal
endconsumerdrinkingthesoftdrinkpaysfortheentirechainssustenanceasabusinessandasa
wealthgeneratingengine.Buteverystageintheprocesshasitsownshareandthesumtotalofthe
wholeisasummationoftheindividualparts.

Butdoallpartsgenerateitsshareofvalue?Arethedemandsofthestakeholdersthesame?Whichparts
takehighershareofrisksandthereforerewards?Whichpartsaremorecyclicalandwhichpartsmore
stable?Whichpartshavehighershareofcapitalneeds?Thesequestionsleadustothesamecake
problemasdescribedintheprevioussection,ifminingisAandthefinalcustomerisH,thereareso
manypiecesofpiethatneedstobesharedfromthewholecakebetweenAtoHeightdifferent
constituencies;theroleofaleaderandtheconductofleadershipneedtobecognizantofthis.

Thesequestionshelptoframetheoverallbackdropunderwhichtheconductofleadershipneedtobe
constructed.Thereisnooverallbeneficiaryofthetotalchainotherthantheendconsumer,whichinno
uncertaintermsistheoverallsocietyatlarge.Butindividualconstituentsofthechaineitheraddvalue
orsubtractvaluebytheirbehaviorsandbytheirwayofinfluencingthetotaloutcome.

Theengineofgrowthforthecreationofvalueisinnovation(includingthosethataredisruptivein
nature).Thisinnovationcouldbeingeneratingmoredemand,orcreatingmoresupply,whichgoingby
Sayslawwouldeventuallyfinditsowndemand.Theinnovationcouldbeareasofreducingcostthrough
improvementofproductivity,whosegainsaretobeenjoyedbytheentiresociety.IntheCanexample
theveryfactthatrecyclingofaluminumcanhasreducedcostofoverallcanmakinginthedeveloped
worldeventuallyresultedinsharingofgainsinthedownstreampartofthechainandthefinalend
consumerhadamuchbettervalueattheendintermsofprices.Therearenumerousexamplesinthe
upstreampartofthechainwhereinnovationplayedaroletoimproveproductivityandreducecostand
providevaluetotheparticipants.
Butgrowthneedstobeharmoniousanditneedstobealignedtotheoverallsocietysneeds.Ifsome
partsofthechainwanttogrowfasterthanthebalanceparts,itcreatestensioninthechainandthere
aresufferersinthechainwhoarelinksinthechain.

ThebestexampleIcangiveistheairlinesindustryinU.S.whichprovidedenormousvaluethroughout
thedecadesof19701990expandingitsreachtocoveralmosttheentiregeographyofNorthAmerica.
Everyconsumerbenefittedfromitaspeoplecouldflylongdistancesatrelativelythesamecostthey
wouldhaveincurredintermsofmoneyandtimehadtheyusedothermodesoftravel.Howeversomeof
theairlineswantedtogrowdisproportionatelyovertheothersandtheybecametoobigtoofastand
someofthemfailedtosustaintheirgrowthmomentum.Theresultwasattheendofthedecadesthat
followedtheentireAmericanairlinesindustryfailedtocreatevalueforitself.

Growthinassetsisanotherconundrum,thatifonetrackedthehouseholdnetworthinU.S.households
itwasalmostconstantasapercentageofGDPtilltheassetbubbleswerecreated,thatfinallygot
unwoundthroughapainfulcorrection,onceagainprovingthepointthatdisproportionategrowthis
neversustainable.Thesameistrueforcompaniesandinstitutions.

Theexactdosageofgrowthforindividualentitiesthatarepartoftheoverallgrowthisneverinsync
withsomecommonsensethatifeveryonewantstogrowatamorethannormalpace,morethan
normalwouldbetheaverage,whichisaparadox.Theotherveryextremeexampleistheresponseof
theAmericanindustrytowardsoutsourcing.Whileoutsourcingjobstolowcostcountriescreatedvalue
forsomepartsofthevaluechainwithinUnitedStates,itdestroyedvalueintheoveralleconomyasjobs
becameredundantwhichcreatedtherippleeffectinwages,purchasingpower,etc.Butthiswasalso
duetocompetitionanditwasaparticularresponsetocompetitionbytheleadershipofAmerican
entrepreneurship.Responsetocompetitionisdifferentindifferentpartsoftheworldandmuchofthis
differenceisintheconductofleadership.

Hereweintroducethetopicofcompetitionthereforeandtheconductofleadershipmeansalothowwe
lookatcompetitionandwhatbehaviorswedisplaytowardscompetition.Hereliesthewisdomthat
manyleadershavefailedtodemonstrateasasignal,thuscreatingfrictionasopposedtocollaboration
thathasdestroyedvalueforthesocietyortheindustryatlarge.Butiscollaborationpossibletocreate
valuejointlybytwocompetitors?

Conducttowardscompetition

Competitionishealthyandlackofcompetitiondestroysvalue;ithelpstostymiethegrowthof
inefficiencyasmoneyalwaysseeksthemostproductiveofassets.Ihavefoundsomeextremeexamples
ofcompetitionintheSwisssocietywhichIwouldliketoportray.

InSwitzerland,competitionisnotveryapparentandvisible,asthereareveryfewfirmsactually
operatinginthesamespaceasothers;herenumberoffirmsisnotthemetric,thesamespaceisthe
keyword.Sowhilethenumberofwatchmakerscouldbeverylarge,thenumberswhocompeteinthe
samecustomerspaceisveryfew.Thesameappliestoanyotherindustry.

Nooneisreplicatingtheotherandnooneissteppingintoothersshoes.Thatisthewaycompetition
mustbeunderstood.

TheItalianjointontheroadinZurichdoesnothavetheexactreplicaofitselfontheothersideofthe
road,astheformercouldhaveacompletelydifferentmenuservedthusdifferentiatingitselffromthe
other.Inthisexamplethetwoownerscouldactuallyworkjointlytoimproveconditionsofserviceasthe
customersofonecouldbethecustomersoftheother.Thereisnoneedtocompeteonpricesaseachis
servingadifferentneed(onecouldservepizzawhiletheothercouldspecializeonpasta)whoseprice
needstobedifferent.

Conductofleadershipneedstofacilitatethedemandsofcompetitivenesstoberightlyunwound
througheitherpolicyinterventionsorbehavioralstancesthatshapethenatureofinteractionswiththe
customersandcompetitioninthemarkettoprovidevaluetothesociety.Iftheconductofleadershipis
bentonacquiringandstealingspacefromcompetitionatacostthatdoesnotprovideoverallvalueto
thesociety,thenitisnottherightconduct(theairlinesexampleisveryapt).Greaterspeedthanthe
othersinachievinganoutputisnottobemixedwiththis.

Theentirefinancialmarketsofwhichstocktradingisapartgivesusaverycomprehensiveviewonthe
powerofmarketandcompetition.Everyparticipantinthismarketiscompetingagainsttheother
participantononehandandactuallycollaboratingaswellbecauseanysingleparticipantistoosmallto
influencethetotalmarket.Therehastobeaninvoluntarycollaborationtomakeanystockmovement
happeninanydirection.Thesumtotalofallknowledgeandinformationavailableatanypointoftime
determinestheoveralllevelofstock,buteveryindividualstockcouldtradeatadifferentsublevel
dependingonhowthespecificmarketparticipantsreactedonthatstockbasedonallavailable
informationonthatstock.Suchanexampleofafreemarketandcompetitionisrareinothersmaller
examples.Thishoweverdoesnottakeintoaccounttheasymmetryofinformationthatpervadessuch
marketsandisthecauseofcapitalconcentrationinthehandofthosewhohavehigherbuyingpowerof
informationandinturnhigherpowertoinfluencethemarket.Largefirmsthereforehavehigher
inherentcapabilitytodobetterthansmallerfirms.

Thishigherversussmallerandmonopolyversusoligopolyisacrucialquestionthatoursocietyhasstill
notbeenabletosolveintermsofcreatingtherightbalancegivenasetofconditions.Theroleof
leadershipistolookatwhattheoverallsocietywouldbebenefittingwith,notsomepartsofthesociety
only.

Awordongrowth,forbusinesstosurviveandbeprosperous,itismandatorythatgrowthmusthappen
andthismeanshighermarketshare.Thisisamythwhichhasbeenprovedbymanysuccessful
companies.Growthitselfmaynotbetheonlymetric.

SomelessonsfromWarrenBuffet

IfoundinthebiographyofWarrenBuffet,inthebookTheSnowball:WarrenBuffetandthebusinessof
Life,someverygoodexamplesonhowtheconductofleadershipcouldbeverydifferent.Warren
Buffetidentifiedhimselfasdistinctlydifferentfromwhatthemarketwas.Hisemotionsweredifferent
fromthemarketemotions.Sobymakinghimselfcompletelydissociatedfromthemarket,hecould
makehimselfdevoidofemotions.Withhisowninternalmetricsdifferenthecaredlesswhatthemarket
wassayingordoing.Thisonlymakesitsosimplethatwhenthemarketwasbusyselling,hewasbusy
buyingandviceversa.Ifhewasgoingtodowhatthemarketwasdoing,hecouldnotdothingsso
differentlyandthismeantthathehadtheabilitytosethimselfapartfromthemarket.

Theotherverycrucialdifferencethathemadewasthathestartedoffwithhisownmoneyandstayed
withhisownmoneyforaverylongtime.Hethereforeknewthepainsoftradebecauseitwaswithhis
ownmoney.Andsincehekepteverythinginstocks,hevirtuallyhadverylittlesetasideforthedayto
dayexpenses.Hethuslivedanormallifelikeanyotherfrugalperson,hislifeneverchangedwiththe
increaseofwealth.

Thelifeofaleaderifitchangeswithattachmentstophysicalwealth,theconductofleadershipwould
change.Thisisthemostdifficultaspectofleadership.

DidthelifeofGandhichange,orMartinLutherKingorNelsonMandelathroughtheirlifesstruggles?

Buthowmanysuchexamplesdowehavetoday?

Hereliesthechallengeofleadershipthattheconductofleadershipmustbesuchthatthereareno
friendsinthisjourney.ThisiswhatGandhimentionedinhisautobiography,InGodsworkthereareno
friends.Byfriendsprobablyhemeantweaknessormaybeourmarginalpropensitytoindulgence.

ProcyonMukherjee,Zurich

16thJune2010