Leaders need principles

Leaders need principles

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I recently listened to the lecture “Principled Leadership” [unfortunately, no longer available] by John Allison, my business hero and retired CEO and Chairman of BB&T—a very successful Fortune 500 bank that he led for 20 years. The talk is John’s account how thinking in and acting on principles helped make BB&T one of the most successful banks and weather the financial crisis of 2008 much better than its peers. Building on John’s key points I will explain why leaders in business and elsewhere need principles and which ones are required for long-term profit making.

As the two primary roles of leaders, John identified “creating a sense of purpose for an organization,” and “creating and supporting the principles that allow the purpose to be turned into reality.”

To perform these roles effectively, a leader needs “big picture” knowledge about the organization and its context. Without such knowledge, he cannot set the purpose or help the organization’s members enact it. A Chief Executive, for example, needs to understand his company’s markets and potential demand, competition, available technologies, and government regulations affecting the company and its profit potential. He also needs to know the company’s financial position and the competences and shortcomings of his staff, and more. All this constitutes an enormous amount of knowledge, yet a leader must command it without being bogged down with the details.

The key to grasping a lot of complex knowledge and to developing a big picture view is mental integration. This is where principles come in: they are the broadest integrations of knowledge. When we generalize from countless observations and experience in any field, we form principles. Formulated as brief statements, they capture the essential knowledge about the subject and subsume the relevant details.

By capturing the essential integrated knowledge, principles help project the future and make concrete choices in any given situation. For example, a principle of nutrition, “Eat a balanced diet from different food groups,” helps to project nutritional choices needed for long-term health and to choose what to buy for dinner to achieve that goal.

Business is a complex undertaking even for an entrepreneur running a small start-up alone. He needs objective principles to succeed, to maximize the company’s long-term profits. Principles are also invaluable once he hires others to work for him—when he becomes a leader. A business leader, even of a small company, cannot lead the employees by the hand. He needs to delegate and be confident that the work gets done in a way that accomplishes the company’s goals. Principles are his tools of providing clear guidelines for his employees while delegating authority and responsibility.

In setting BB&T’s direction, John Allison started with the company’s ultimate purpose: superior long-term value creation for the shareholders. He recognized that such a goal could only be achieved when BB&T’s clients were happy. And for the clients to be happy, the staff had to offer excellent service. To lead the BB&T’s employees to achieve this, John wrote the “BB&T Philosophy” outlining his key leadership principles based on Objectivism, the philosophy of Ayn Rand: fact-based decision making using reason, independent thinking, productivity, honesty, integrity, justice/fairness, pride and self-esteem, and teamwork. They condense the essential requirements of long-term profitability.

The most fundamental requirement of long-term value creation is basing decisions on facts. Any pretense—that your cash flow is sufficient when it is not, or evasion—such as refusing to acknowledge your competitor’s new, superior product, will not help your company create shareholder value.

Creating value for shareholders requires independent thinking of employees so they can identify customer needs and better ways of delivering services, as opposed to blindly following others. This requires productivity: offering material values to clients—better or cheaper products and services. Honesty means rejecting anything that is unreal—such as imaginary cash flow—because faking is futile. The principle of integrity means that principles such as honesty are upheld and not compromised when expedient. The principle of justice/fairness means that people are treated based on merit only: those who perform better are rewarded more. Pride is a principle that guides BB&T staff to always do their best and pursue continued improvement—essential to innovation and a source of self-esteem. Finally, while independent thinking is required of all employees, the complex work of BB&T requires integrated effort of all employees.

These principles were shared with all employees. But unlike many company codes of conduct that collect dust on shelves, BB&T’s principles were reinforced in daily action. They guided hiring and training of employees, the delegation of authority and responsibility, and expectations and rewards for performance. These principles were the basis of John, the management team and the Board’s decision making, and they became the core of BB&T’s culture.

In John Allison’s own words: “BB&T grew from $4.5 billion to $152 billion in assets during my tenure as Chairman and CEO and weathered the recent financial crisis as one of the strongest financial institutions in America.  The foundation for this success is unquestionably [its] principles.” Anyone wanting to succeed as a leader in business—or elsewhere—would benefit from studying BB&T and the principles consistently applied by John Allison.

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Jaana Woiceshyn teaches business ethics and competitive strategy at the Haskayne School of Business, University of Calgary, Canada.

She has lectured and conducted seminars on business ethics to undergraduate, MBA and Executive MBA students, and to various corporate audiences for over 20 years both in Canada and abroad. Before earning her Ph.D. from the Wharton School of Business, University of Pennsylvania, she helped turn around a small business in Finland and worked for a consulting firm in Canada.

Jaana’s research on technological change and innovation, value creation by business, executive decision-making, and business ethics has been published in various academic and professional journals and books. “How to Be Profitable and Moral” is her first solo-authored book.