Dennis Nally Remarks
The Denver Forum and the City Club of San Diego
January 5 and 6, 2006
Like many of you here today, I’m an avid golfer. For me – and I suspect for some of you the mere mention of the word “golf” has you thinking about your next tee time.
I am not exaggerating too much when I say golf is a recreation, a relaxation, and maybe even for some, a fantasy.
But, to me, it is also a great metaphor for much of what we experience every day in business.
Golf always forces you to face what’s ahead. The green in the distance and the hazards you face getting to it must always occupy your thoughts.
What you did on the last hole may help you decide what to do next.
But any golf psychologist will tell you, continuously re-living what you did on the last hole, makes it extremely difficult for you to succeed on the next one.
So what makes golf such a great metaphor?
One of the biggest problems in the business world today is that too many of us are doing the equivalent of constantly playing the last hole.
I believe that we've come to devote so much of our time and attention to dealing with the past that often there aren't enough resources left for the present or future.
We've become tied up in rules that are, by design, a reaction to problems of the past.
The irony is that business leaders can follow all the rules and still arrive at the wrong answer.
Think of the Enron situation. That company’s executives and accountants found precise rules to justify what they were doing as technically right, even though their overall judgment was grievously wrong. A rules-based culture allowed Enron’s leaders to ignore the central tenet of a principles-based system: the principle of simply doing the right thing.
History has proven time and time again that rules alone cannot ensure that anyone is doing the right thing.
In a recent PwC survey of top senior executives of U.S-based multinational companies, we came upon an interesting and fundamental issue. Seventy-two percent of the executives indicated that the rules-based accounting standards have enabled companies to design financial engineering techniques around specific accounting objectives, rather than broad economic goals.
In corporate governance, as in my profession, rules can tolerate a shirking of corporate and personal responsibility that principles will not.
Here's an interesting question to think about: Should CEOs set and enforce strict rules for corporate behavior? Or should we provide a set of principles that govern how our companies operate? Better yet, which approach stands the best chance of ensuring responsible, lawful behavior up and down our entire organizations?
Equally important, which one really encourages the appropriate risks and business judgments that allow our organizations to grow and create value?
These are critical questions, and to answer them I can think of only one word - “courageous.”
The new realities of today's dynamic business environment whether they are new technologies, intensified global competition, or ever-changing consumer, investor, and client demands constantly challenge us to re-think what’s possible, what we want, and how we get it done.
Principles, not rules, allow us to deal with these new realities to see and respond to new opportunities and challenges, to exercise courageous leadership.
Principles are exactly what we need in a world where growth comes from new ideas and imagination; intangibles that are much more difficult to measure and value.
Principles throw a light forward. They can help business leaders navigate change and prepare for tomorrow. They require us to think through issues that go far beyond a yes-or-no, black-and-white, absolute set of rules and to take a more nuanced approach to leadership.
So, it’s reassuring to see examples of principles-based leadership at work across the business world.
Principles compel companies to go beyond basic environmental reporting requirements to create more efficient, environment-friendly products and services.
Principles cause them to exceed requirements of labor laws to create better working conditions.
And, in accounting, principles dictate a different course of action to mend a broken business model even when following the rules can mask it and create the appearance of financial health.
It's also heartening to see rulemakers who are willing to listen and take a second look at the rules.
For example, many smaller public companies have been struggling with 404 compliance. A recent Rand Organization study found that the likelihood of small public firms being sold to private rather than public, acquirers, increased substantially in the first year after the enactment of the Sarbanes-Oxley Act.
Other studies have found the costs of 404 compliance to be disproportionately high for smaller companies.
The SEC has been studying these concerns. As a result, it has further extended the 404 compliance deadlines for smaller companies and continues to look at the rules for these companies. That regulators are working through these issues speaks volumes.
It sets an example that says we must all use sound business judgment even in applying the strictest of rules, to remain flexible, dynamic and competitive.
Hard-and-fast rules do have their place, and Corporate America needs both -- rules that structure what needs to be closely managed at the micro level and principles that shape and guide the overall approach, the grand strategy.
We feel this tug-of-war between rules and principles particularly sharply in my industry.
But leaders everywhere, at every level face it, as well: For example, parents confront it at home, corporate executives tackle it in the boardroom, and world leaders shape policy with this balance in mind every day.
U.N. Secretary-General Kofi Annan said in a 2004 commencement address about global leadership:
"I believe the way forward is clear, though far from easy. We cannot abandon our system of rules but we do need to adapt it to new realities, and to find answers to some difficult questions."
When I talk to CEOs and business leaders I sense that today’s U.S. business environment has put all of us in absolute danger of constantly playing the last hole that is, focusing so much on what we’ve already done that we are less able to deal with the sand traps that surround our future opportunities.
This is an enormous threat to our economic growth and, quite frankly, to leadership. In fact, it is making it acceptable for business “leaders” to come up with the wrong solutions as long as they can show they were following “the rules.”
To me, this is not “leadership.” It’s “follower-ship.” And it’s certainly anything but courageous.
I admit that this may sound a little strange coming from the CEO of a firm that has actively supported the Sarbanes-Oxley Act.
My firm and I continue to strongly support that law to halt inappropriate practices of the past and to restore the investor confidence that is critical to our capital markets system.
While the costs of Sarbanes-Oxley have been high -- particularly for 404 compliance -- progress is being made.
In a recent CRA International survey commissioned by the Big Four accounting firms, respondents said they expected Year Two compliance costs to decrease by approximately 40% from Year One costs.
From my perspective, the rules-based mentality that now exists in the business world isn't an outcome of Sarbanes-Oxley. Rather, it’s the result of an environment that says that you and I cannot be trusted to do the right thing. That says you can and will be second-guessed and demands that everything we say and do be documented, annotated, and recorded.
Today, boards of directors are devoting enormous resources and vast amounts of time to strict compliance and, in doing so they are sacrificing the energy they should be using to create a vision for the future.
Let me share with you a recent study done by Corporate Board Member magazine and PricewaterhouseCoopers. It found that 58% of corporate directors said their board should spend more time on strategic planning. By contrast, only 8% thought they should spend more time on compliance and regulatory affairs.
In other words, the directors did not believe they had the right balance between these tasks.
The unease is everywhere.
From the PwC survey of multinational executives I mentioned earlier, 54% believed that liability reform would be necessary before a principles-based accounting approach could replace the current system.
And that, many businesses believe, is simply beyond their control.
So while we in Corporate America may believe there is something wrong with the rules-bound environment we feel somewhat powerless when it comes to fixing it. We feel like we're in a holding pattern, hoping and waiting for change.
However, I do believe that we are NOT powerless, and we can begin to create that change. But first we must allow business leaders to lead. Obeying the law and making sure the people we lead do the same is only a small part of what being a leader is all about.
Unless you guard against the mentality that focuses on just enforcing rules the chief executive officer quickly and, in my view, inappropriately becomes the “chief compliance officer.”
Why is this a problem? Because it means that the CEO's main job will be to make sure that the rules are being followed. That’s looking backward. That’s playing the last hole again, and again, and again. Bottom line: You cannot grow a business and remain competitive by doing that.
Make no mistake about it: It’s easier to be a chief compliance officer than a chief executive officer. But that’s not what a leader does.
To me, being a leader is having the courage to develop, promote, and live a set of values that your people apply no matter the situation is and regardless of whether there is a rule in place to deal with it.
Leading means letting people see the big picture, letting them dream, and empowering them to achieve far more than they would otherwise be able to do by instilling values and insisting they be followed.
And that takes courage.
My job requires me to lead an organization of 2000 “leaders.” Each of my 2000 partners in the United States is a leader in his or her own right; driven, success-oriented, and supremely self-confident. They literally demand results.
I’m going to pause for a moment and let you conjure the image of a person who you think fits this description. Chances are you recently read about such a person. Or you work with one. Or you are one.
Now imagine working with 2000 of them at the same time.
My job is to unleash my partners’ energy, creativity, and drive; to put them in a position to make courageous business judgments and to allow them to lead others.
Yes, they have rules to obey and procedures to follow. But they also have the ability – in fact the permission, incentive, and desire to play the next hole on the course instead of the previous one.
That’s what I want them to do. More importantly, that’s what they want to do. And the strong principles on which our organization is founded have freed them to do just that to be dynamic leaders.
Let me give you a quick but very personal example.
As you might suspect, the decision to merge Price Waterhouse and Coopers & Lybrand in 1998 was made after intense study and planning. It was our path to substantial growth.
However, the future turned out to be very different than we anticipated. Shortly after the merger was completed, new corporate governance and regulatory rules significantly changed what the new PwC was allowed to do and who we could work for.
As a result, we decided to sell businesses that at the time were generating 40% of our revenue. And we had to downsize the new firm by one third, from 3000 to 2000 partners.
Instead of growth, we faced contraction and challenges. The entire firm was under extreme stress and it would have been easy for all of us to be overwhelmed by this new reality. Well, this didn’t happen. I committed to frequent, open and candid communications. I held myself to a high standard of transparency in making key decisions.
These principles enabled me to gain the trust and support of my partners and were critical to our success.
I saw for myself that giving people the vision of what they can accomplish and then letting them achieve it in their own way actually works.
That often means prodding people to step out of their comfort zone and embrace risk. That’s not easy for anybody, nor should it be. For example, as we began to deal with the market reaction to Sarbanes-Oxley, I challenged my partners in our tax practice to do things differently.
Many had to leave long-standing clients and very profitable existing books of business in order to meet new clients and build relationships. That was difficult and often uncomfortable. But it has also been enormously successful. Why?
First, I put my own credibility on the line by asking my tax partners to believe that this significant change was achievable. To their credit they embraced the opportunity and used it to develop new approaches and new ideas.
Second, I challenged them not to just focus on individual performance but also on executing the overall strategy.
What did they do? They invigorated our tax practice in ways that were unimaginable and perhaps even impossible only a few years earlier.
I want to end today by trying to anticipate and answer three questions about what principles-based leadership entails.
First: How do we, as leaders, encourage the highest standards of business conduct and personal judgment? In other words, how do we instill a spirit of integrity that insists the most important of all principles is simply “doing the right thing”?
Well, to me, the answer is that you must understand that following principles does not mean you have permission to break the rules. A principles-based system means that future rules will not have to be as detailed, as numerous, or as onerous as the ones that currently exist.
But in the meantime, following the existing rules allows you to apply principles when dealing with whatever the future holds.
I’ve learned that when you guarantee to your people that you will stand behind principled behavior you empower them to do the right thing: Even when it means turning away from a multi-year revenue stream when auditor independence could be jeopardized; or, when it means resigning an account because our people are not treated well by a client, and even when it means supporting people who courageously bring attention to unprincipled actions of their superiors.
Your people’s courage comes from knowing that you will stand behind them when they do the right thing.
The second question: How do we deal with the inevitable skepticism of our lawyers and regulators who want us to pay more attention to what the past requires than what the future promises? In other words: How do we lead when all of us are on a short leash?
To me, true leaders lead by example. You create the right environment; an environment where people do the right thing simply because it’s the right thing to do. You build trust within your organizations by “walking the talk.”
Being a leader is not something you only do when someone is watching. It’s done continuously so that you’re always building trust and credibility.
And the third question: How do we encourage others to go beyond where we, and they, are today?
My answer is that it’s critical – absolutely critical – to think long-term rather than short-term. Encourage people to dream and to imagine even if our markets demand immediate results and even if it means trying things that don’t work the first time. New ideas might not produce tangible results in the short-term, but that doesn’t mean that they’re not good ideas.
Listening is also essential. Listen to what people are
not telling you, not just what you’re being told. And realize that as a leader, you are the beginning rather than the end of the process.
Also, at some point, instead of approaching the green on the next hole you have to allow someone else to play through. In other words, take responsibility for developing the next generation of leaders in your organization.
I believe that the next great business leaders will understand that leadership is about setting the right tone. It’s also about encouraging an organization to implement principles rather than dictating a set of rules. And perhaps most importantly it’s setting the right expectations and the right environment for people to enjoy their work and their lives.
Finally, I have one simple request of you.
When you leave this event, think about all the lessons golf has to offer as we carry out our responsibilities as leaders.
But in doing so – just don’t take my tee time.
Thank you very much for your attention.
