• Strategy
  • McKinsey & Co.

Building the Healthy Corporation

It is difficult, but vital, for managers to strike a balance between the short and long terms.

Management teams should also spend serious time with analysts who follow their companies, in order to explain their views on the industry and to show how strategies will create sustainable advantages. It may also be necessary to highlight metrics tracking performance and health. Vague talk about shareholder value, without a time frame or without addressing the specifics of a business, just isn’t meaningful.

Companies might also be wise to separate discussions of quarterly results from those focusing on strategy, as several major international businesses have recently done. And they should ensure that analysts spend time with operational managers, whose effectiveness is often the crucial factor in attempts to estimate a company’s ability to sustain its performance.

Reaching out to employees is just as important. The complaint that “we don’t know what’s going on” often indicates that a company’s leaders are communicating results rather than long-term intentions.

Leadership. Corporate leaders should remember their obligation to manage both performance and health. Thinking about health typically requires a range of new skills and characteristics — not necessarily those that worked well in the past. One hallmark of great, enduring companies is a willingness to involve future generations of leaders in their own development.

In addition, good leaders understand both the power and the attendant risks of what former Unilever chairman and CEO Niall FitzGerald called their “extraordinary amplification system.” Those who casually or randomly articulate themes for action run a risk of making the organization schizophrenic. The combination of “initiative overload” and a reluctance on senior management’s part to produce a simple and coherent agenda can be particularly damaging. At one defense industry organization, we counted more than 1,000 seemingly disconnected initiatives, 234 of them in procurement alone.

Focusing the leadership on personal behavior is also crucial to maintaining a company’s health. We know of a public-sector body, a financial institution, and a natural-resources group that all refer to the leaders of business units as “princes” rather than “barons.” This terminology resonates with the three organizations because princes are concerned for the whole, while barons protect their own turf — if necessary at the expense of the other parts. Companies can likewise encourage a wider perspective on the business, and stronger linkages across boundaries, by giving senior managers a portfolio of roles. Alternatively, some companies have successfully developed peer groups of business unit leaders who share a collective responsibility for their businesses. Other companies are strengthening their core functions and reversing the trend toward corporate atomization into a number of semiautonomous business units.

To create this kind of leadership, companies must take a longer-term view of the way they manage talent and career tracks and of the incentives created by money, recognition, and promotion. One company’s approach is to implement a long-term incentive plan for top management — a plan that has weakened the direct link between remuneration and short-term earnings. By contrast, the current trend of making people change roles every two or three years isn’t necessarily good for long-term corporate health.

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