Why Good Matters Governance: Relevant Business Knowledge

RELEVANT
BUSINESS
KNOWLEDGE
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inside
deep insight
Why Good
Governance
Matters
Microsoft Reboot
From software to services

Constructive Feedback
To give it well, you have to

learn how to take it
Fast Fashion
How does it work, and can it

work for you, too?
Swimming Against the Tide
Olympic tips for performing

at world-class levels
GOVERNANCE: RECOMMENDATIONS TO MEET FUTURE CHALLENGES

TRANSPARENCY: A RISING TREND IN listed COMPANIES
PROXY advisors: ARE VOTING GUIDELINES RULING YOUR BUSINESS?
renewing the mission: 6 ITEMS FOR THE TOP OF EVERY BOARDS AGENDA
Always thinking
Always asking
Always doing
At OMD we are fully dedicated to our clients growth.
Discover what inspires the most awarded media agency network
in the world and how more powerful insights, ideas and results
can unlock greater success for your brand.
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INSIGHTS IDEAS RESULTS

MOST AWARDED MEDIA AGENCY IN THE SPANISH EFFICIENCY AWARDS
GLOBAL MEDIA AGENCY OF THE YEAR 2013 - ADWEEK
MOST AWARDED MEDIA AGENCY NETWORK 2013 - GUNN REPORT
issue 21
second quarter 2014

PERSONAL INSIGHT
EXPERT INSIGHT
Bringing Microsoft
to the World
How Fast Fashion Works: Can It

Work for You, Too?
Csar Cernuda, President

of Microsoft Asia-Pacific,
discusses the shift from PCs
to devices and services. 45
Felipe Caro and Vctor

Martnez de Albniz reveal
the operational keys
behind the fast-fashion
business model..58
Editorial
4 Antonio Argandoa says its time we talk about
the elephant in the boardroom.
MY INSIGHT
Jaume Ribera finds salient lessons on project
management from the construction and
expansion of the Panama Canal.
6 Paul Druckman wishes integrated reporting
would be seen for what it is: the story of how

your company creates value.
early Insight
7 Most attractive markets for food and beverage
exports; the New York Times publisher on
embracing a mobile future; adaptability as a key
leadership trait; at what point does an emerging
country take off?
Are Voting Guidelines Ruling

Your Business?
Gaizka Ormazabal and Allan L. McCall believe

proxy advisors voting recommendations need
to be handled with care. 31

6 Items for the Top of

Every Boards Agenda
Jordi Canals casts a clearer vision of the firms

purpose, calling for a drastic rethink of how the
board can add long-term value. 37
EXPERT INSIGHT
50 Feedback Tips for Less Grumbling,

More Growth
Sheila Heen gives practical tips for improving

the quality of feedback conversations between
managers and subordinates.
deep Insight
Dossier
Deep
insight
Why Good
Governance Matters
Illustrations by RAUL ARIAS
oards need to close the rifts left by the crisis and be

open to change, for the long-term success of business.
15 How Boardroom History

Is Writing Its Future
Recommendations to Meet Future
Governance Challenges
By Jay W. Lorsch
31 Proxy Advisors
Are Voting Guidelines
Ruling Your Business?
By Gaizka Ormazabal
& Allan L. McCall
24 The Age of Activism

Transparency, a Rising Trend
in Listed Companies
By Jos M. Campa
37 Renewing the Boards Mission

Every Boards Agenda
By Jordi Canals
ieseinsight
issue 21 second QuARTeR 2014
Boards need to close the rifts

left by the crisis and be open
to change, for the long-term
success of business.
BUSINESS INSIGHT
13

Jay W. Lorsch admits that while there have been

positive changes in boardroom practices over the
past 25 years, there is still work to do.15


in Listed Companies
Jos M. Campa explains the
trend toward greater
transparency and an
expanded role for
shareholders.
24
ieseinsight
66 Sustainability at Any Price?
How can Henkel achieve its bold targets

without hurting operating profits?
WIDER INSIGHT
71 Swimming Against the Tide
Edward Sinclair knows theres no room for

negativity or complacency on the hard path to
greatness in whatever your field.
LAST INSIGHT
76 Strategy Thats Off the Chart
Massimo Maoret returns to the timeless

wisdom of Igor Ansoff, the father of strategic
management.
issue 21 second QUARTER 2014
editorial
second QUARTER 2014
issue 21
E-mail: review@ieseinsight.com
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PRICE PER EDITION 18/$25
editorial director emeritus

Antonio Argandoa
editorial board
Prof. Antonio Dvila
Accounting and Control,
Entrepreneurship
Prof. Fabrizio Ferraro

Strategic Management
Prof. Philip Moscoso
Production, Technology and

Operations Management
Prof. Javier Quintanilla
Managing People in Organizations
Prof. Julin Villanueva

Marketing
managing director
Gemma Golobardes
managing editor
Jordi Navarrete
editors
Jordi Navarrete
Cintra Scott
Philip Seager
assistant editors
Ivie Edosomwan
Marta Peret
Enric Rodon
editorial contributors
Nicholas Corbishley
Carlos Milla
Javier Moncayo
David Oliver
Lydia Smears
Gemma Tonijuan
Natasha Young
design
Cases i Associats
layout
Javier M. Len
infographics
Alejandra Villar
illustrations /photos
Raul Arias
Giulio Bonasera
Edu Ferrer Alcover
Ana Yael Zareceansky
audiovisuals
Marta Comn
Oriol Gil
Lydia Rodrguez
advertising
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second QUARTER 2014
Antonio Argandoa
The Elephant in the Room
eading this issue of IESE Insight magazine, I was reminded

of the parable of the six blind men and the elephant. Each
one felt a different part of the animal and came to his
own conclusion. For the one who touched the tail, the
elephant was like a rope; the leg, a tree; the tusk, a spear; the trunk, a
snake; the side, a wall; the ear, a fan. All were partly right, but unless
they put their distinctive perspectives together, they were also all
partly wrong.
Corporate governance is a similar
beast. Since the onset of the global
financial crisis, various pundits have
proclaimed what the problems are
and the solutions needed to fix them
whether say-on-pay, shareholder
activism, proxy advisors and so on. They
may be right, and the regulators seem to
think so. But as our authors reveal, there is more to the story.
Our dossier helps to fill out the picture of corporate governance,
adding flesh to what is often a bare-boned treatment of the topic.
They bring rich perspectives on mission and values, leadership
development and transparency, urging caution on the outsourcing
of proxy voting and warning of the unintended consequences of
seemingly progressive actions.
Elsewhere in the magazine, Sheila Heen tackles another beast
the dreaded annual performance review explaining how each side
approaches the process from different standpoints and suggesting
how each can learn from the feedback of the other.
We also present multiple perspectives on innovative business
models: Felipe Caro and Vctor Martnez de Albniz reveal the
logistics secrets of Zara and other fast-fashion businesses; Csar
Cernuda discusses Microsofts shift from products to services under
its new CEO; and our case study on Henkel highlights another key
piece of corporate governance today: sustainability strategies.
Taken together, readers will be able to talk more knowledgably
about the elephants in their boardrooms.
There is more
to governance
than meets
the eye
2014 IESE Insight is published 4 times a year by IESE Business

School, University of Navarra. ISSN 2013-3901. Legal Deposit
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ieseinsight
The historic construction of the inter-American waterway and

its recent expansion offer salient lessons on project management.
my insight
Panama Canal: Hits and Misses
by Jaume Ribera
THIS SUMMER MARKS the 100th anniversary of the opening of the Panama Canal, considered the riskiest, most
technologically complex project of its time. The effort now
under way to expand this corridor, like the original plan to
build an Atlantic/Pacific shortcut, provides salient lessons
on managing grand-scale projects.
One has to remember that in the late 1800s, the scientific management of projects was something new. The
Frenchman Ferdinand de Lesseps, riding high on pulling
off the Suez Canal, aimed to repeat this feat in Panama. In
the end, it bankrupted him, and the United States had to
step in and finish what hed started.
In 1879, a decade after Suez, an International Congress
was organized in Paris to entertain proposals for the Study
of an Interoceanic Canal at Panama. De Lesseps plan to
construct another Suez-style, sea-level canal without locks
won majority backing among the 136 delegates present
only 19 of whom were engineers.
In 1880, de Lesseps estimated the project would cost
658 million francs and take eight years to complete this
was before any surveys had been done or any excavation
work began. Within a few years, he had to admit defeat.
With insufficient capital, the company was declared bankrupt in 1889. Apart from the technical difficulties not
to mention charges of financial corruption later leveled
against de Lesseps one of the biggest obstacles proved to
be the wet tropical work conditions, causing tens of thousands of laborers to die from malaria and yellow fever.
De Lesseps failure underscores the importance of
careful planning and risk analysis prior to the start of any
project. A gung-ho committee is no substitute for a proper
study, with the technical aspects determined by experts.
In U.S. hands, the Panama project had three chief engineers: John Findley Wallace, John Stevens and George
Washington Goethals. Stevens was the foremost civil engineer of his day, having accomplished the Great Northern
Railway across the Pacific Northwest of the United States.
He immediately applied his expertise to build a railway to
cart away the excavated materials. Crucially, it was Stevens
who finally calculated that a sea-level canal without locks
was impossible, and he shifted to an elevated series of locks
and dams, which ultimately saved the project.
ieseinsight
Stevens was also the first to take the working conditions

seriously, understanding that humanitarian concerns were
as vital as scientific management to the projects success.
He enlisted specialized physicians to treat the malaria and
yellow fever, while also introducing an entertainment and
food space for the workers, which boosted their flagging
morale.
There are two takeaways here: first, the need to create
safe work environments; second, the importance of breaking down complex projects into activities that can be delegated and understood by those in charge of executing them.
Theres no substitute for

careful planning and risk
analysis by experts.
A century later, these lessons appear not to have been
learned, as evidenced by problems with the canal expansion planned to be completed for the centennial. A group of
companies, led by Spains Sacyr, won the bid to construct
new locks based on high technical credentials and a budget lower than expected. However, time has revealed the
shortcomings of awarding projects to the lowest bidder,
with cost overruns leading to a bitter dispute and a stoppage of works until Panama coughed up more funds.
This highlights another key point: When risks are
shared between the project tenderer and deliverer, their
interests are better aligned and greater efforts are made
on implementation and, when problems arise, joint resolution. There are fewer legal battles and less finger-pointing
over who should pay for things that were either poorly defined or not properly costed out by one side or the other.
In the case of the latest dispute, a temporary deal was
struck, but the completion date has been put back to at
least late 2015. When that day comes, the canal should be
able to accommodate much larger and wider container vessels, doubling the traffic passing through the channel and
with it world trade.
Project management is not so much a miracle as the
naysayers once said it would take to complete the Panama
Canal under de Lesseps but rather a science for which
executives need to make sure they are fully prepared.
Jaume Ribera is a professor of Operations Management at IESE
and holder of the CEIBS Port of Barcelona Chair of Logistics.
Far from being a mindless exercise, integrated reporting needs to

be seen for what it is: the story of how your company creates value.
my insight
Does Your Board Grasp Its Role?
by Paul Druckman
Many years ago, I found myself in a strange situation in which my company was growing dramatically yet
at the same time we were running out of cash. I realized,
probably too late, that the sales director was manipulating the terms of payment in order to get orders. That was
because our Key Performance Indicators (KPIs) had been
set around sales, but not around sales in the context of
the overall viability of the business. We nearly went under.
That taught me a valuable lesson I will never forget:
Reporting does influence behavior. Too often we treat reporting as a mindless compliance exercise, rather than as
something that actually does influence behavior, in positive or negative directions.
Given its influential role, corporate reporting needs
to be seen for what it is: a tool for creating a more financially stable, sustainable environment for our businesses,
for our societies and for the world. It is not about piling
another burden on business; its about reporting that integrates three key areas.
The first area deals with the kind of information contained in traditional financial statements the financials,
infrastructure, fixed assets and so on. The second area encompasses environmental and social concerns. The third
area includes intangibles, such as intellectual property,
branding and all the softer aspects of a business that are
harder but are no less crucial to quantify. These three
areas cover the full breadth of what a company should be
reporting and what investors and others should be most
interested in knowing. Corporations need to put metrics,
or at least attempt to clarify their performance, against
these three areas. This is integrated reporting. It tells
the story of how your company creates value.
Unfortunately, for some companies, its just that: a
story; a piece of marketing. I prefer to think of integrated
reporting as the doorway to the strategy of a company.
An integrated report is a concise communication of
how an organizations strategy, governance, performance
and prospects demonstrate the creation of value over the
short, medium and long terms. Conceived this way, corporate governance serves not just as a check or oversight
but as a proactive, structured mechanism that supports
a companys ability to create value in the short, medium
second QUARTER 2014 issue 21
and long terms. Boards need to grasp this.

Moreover, good governance is about quality, not quantity. When I see reports of more than 100 pages, I start to
struggle. What these companies are doing is simply bringing together a lot of compliance data the sustainability
report, the CSR report, the financials and producing one
massive document. Certainly combined reporting is a
first step in the right direction, but as integrated reporting
becomes more advanced, the communication should become more concise and relevant no more than 20 pages.
Its better reporting, not more reporting.
Integrated reporting
is the doorway to the
strategy of a company.
The more corporate reporting is able to distill the
breadth of a companys value-generating activities, the
more useful it becomes to investors. Indeed, it conditions the types of investors you attract. Recent research
among U.S. listed companies has found that those companies that reported broader than just the requisite compliance data attracted investors who were less fixated on
quarterly earnings and who tended to take a longer term,
stewardship perspective of the firm.
Over the past 12 months, I have heard quite a lot of talk
about stewardship coming from the investor communities in Canada, Japan, the Netherlands, South Africa and
the United Kingdom. Even Google, I discovered, included
this in its SEC filing before going public: A management
team distracted by a series of short-term targets is as
pointless as a dieter stepping on a scale every half-hour.
This is significant.
For me, this marks quite a staggering change from when
I went to business school and first learned about corporate governance. I think this view of governance which
encompasses corporate citizenship, ethical responsibilities, accountability and fairness is an idea whose time
has come.
Paul Druckman is the CEO of the International Integrated
Reporting Council (IIRC), a global coalition dedicated to
seeing integrated reporting embedded into mainstream
business practice as the corporate reporting norm. He gave
the closing address at the 2nd Annual Board of Directors
Forum organized by IESE Madrid in April 2014.
ieseinsight
early
insight
QUICK KNOWLEDGE. THINKING AHEAD.
MOST ATTRACTIVE FOOD

& BEVERAGE MARKETS
TRADE TRENDS
The Ripest
Markets
The top 3 importers in each

category, by $ value.
Year-over-year changes
Rate at which imports grew
Rate at which imports fell
USA 18%
GERMANY -7%
UK -6%
USA 3%
USA -8%
0.3%
FRANCE 11%2 Beer

3
UK -10%
CHINA 19%
GERMANY 4%
34%
USA
GERMANY -1%
SINGAPORE
JAPAN
1 Water &
2 non-alcoholic
3 drinks
USA 17%
When it comes to beverages, the
SWEDEN -0.5%
United States is the top importer, while Japan
USA 5%
imports the most food products, mainly meat,
UK 0.5%
fish, cereals and baked goods. Other Asian
GERMANY-7%
countries that are significant importers of
GERMANY-9%
food and beverage products are China, India
ITALY -15%
and Singapore, while demand in Europe
NETHERLANDS -1%
is highest in France, Germany, Italy, the
JAPAN
Netherlands, Russia, Sweden and the
-8%
17%
USA
United Kingdom. These are some of
84%
CHINA
the findings of the latest Food and
19%
INDIA
Beverage Attractiveness Index,
CHINA 0.6%
a useful tool for businesses to
17%
NETHERLANDS
analyze evolving market condiJAPAN 0.5%
tions and set their export
RUSSIA 7%
GERMANY -7%
strategies accordingly. With
-11%
82 countries ranked, the index
USA
monitors consumption habits,
GERMANY -12%
FRANCE -7%
demographic trends, short-6%
ages or surpluses and other
GERMANY
USA -0.5%
vital factors that companies
NETHERLANDS -0.5%
need to know as they seek to
internationalize their trade in
14
12
10
8
6
4
2
this sector.
7%
1
2 Sugar &
3 confectionery
1 High
2 alcohol
3 drinks
1
2 Fish
3 products
1
2 Wine
3
1 Dairy
2 products
3 & eggs
1
2 Bakery
3 & cereals
1
2 Fats
3 & oils
1
2 Meat
3 products
1 Hot
2 drinks
3 & spices
1
2 Fruit &
3 vegetables
0 $USB
The Vademecum on Food and Beverage Markets 2014 was overseen by IESE Prof. Jaume Llopis and coordinated by Mara Puig and Jlia
Gifra of IESEs Industry Meetings Department, in collaboration with a Deloitte team led by Fernando Pasamn. Read A Practical Guide
to Food and Beverage Exports at ieseinsight.com.
Just like success, happiness cannot be pursued;

it is rather the consequence of our actions. Therefore, if we are
capable of passion and commitment, of nurturing
our entrepreneurial spirit, of working hard but humbly, and
doing all of these things responsibly, we will have bought
ourselves our surest ticket to happiness,

and by extension, to success.
Pablo Isla, chairman and CEO of the Inditex fashion retail group most famous
for Zara, shares his secret for success during his keynote address at the
graduation ceremony for the MBA Class of 2014 at IESE Barcelona. Read more
about Inditexs fast-fashion business on pages 58-65 of this magazine.
ieseinsight
earlyinsight
Adaptability:
A Vital Competency
Changing roles around three

times during your career,
with just over eight years in each
role, seems to be the optimum for
developing adaptability. So says a
study of high-level general managers,
finding that executives with more
varied career histories tend to become
more adaptable as a result.
Being able to respond effectively
to new contexts, learn new skills
and rapidly deploy them to solve
unfamiliar problems is becoming a
vital competency in todays everchanging marketplace. This is made
easier if executives have been
exposed to a variety of situations
and individuals over the course of
their careers. Several factors help to
develop this.
For one thing, working as an
executive assistant early in ones
career gives early training in being
more adaptable. By shadowing senior
managers, assistants observe how
these leaders deal with changing
circumstances, and this in turn fosters
their own learning as they rise through
the ranks.
Corporate programs aimed at
growing high potentials also help, but
they need to be managed carefully. For
example, rotating managers around
the organization may be helpful for
exposing managers to a wide variety
of situations but not if the changes
are too frequent. Executives need
adequate time to settle into each
new role but not so much time that
they become complacent. Its a tricky
balance to get right.
In aiming for adaptable leaders,
companies may need to adapt
themselves, thinking twice about
individuals changing job-type too
often, as those who stay in each role
for relatively short periods of time
benefit less from the experience.
Read the abstract Fostering Adaptability in
Tomorrows Executives at ieseinsight.com.
WHERE BEST TO INVEST
When Does an
Emerging Country
Take Off?
HIGH RANK
Indonesia, the Philippines,

Mexico and Turkey show the
highest potential for meaningfully
increasing private equity (PE) activity in the near future, with Georgia standing at a critical juncture in
the development of its investment
infrastructure.
So finds the latest Venture
Capital and Private Equity Country
Attractiveness Index prepared
by IESEs Center for International
Finance, in conjunction with EMLYON Business School, to help
investors identify the countries
with the greatest potential for
investment.
Analyzing the socioeconomic
data of 118 countries, the authors
discover a strong link between
their attractiveness scores and
actual PE activity. They determine
that a country with approximately
45 index points or more seems
to mark the turning point when
LOW RANK
PE activity comes alive. Georgia,

rising eight places and with an
index score of 45.9, is considered
increasingly attractive, stay alert.
While the BRICs (Brazil, Russia,
India and China) remain the darlings of investors, the index reveals
several other countries whose
medium-term prospects show
just as much, if not more, promising development. Besides those
mentioned, the authors highlight
Chile, Colombia, Estonia, Finland,
Lithuania, Malaysia, Morocco,
Oman and Peru.
This is not to say that all these
countries boast ideal conditions for
investors. Indeed, many of these
countries still lack certain key
drivers of the six identified by the
authors as necessary for attracting
and protecting investments. But
what they do afford is a chance for
early investors to gain a toehold
before these markets take off.
Read more at ieseinsight.com and see the Venture Capital and Private Equity
Country Attractiveness Index 2014 at http://blog.iese.edu/vcpeindex.
ieseinsight
Steelcase researchers have identiied 8 dierent structural models of

innovation within organizations, each with its own implications for
how to use space to improve the speed and outcomes of innovation
eorts. Simply stated, the right spaces make innovation work.
To read more learn more, visit
www.steelcase.eu/innovate
earlyinsight
G ERMA NY
38%
NEW RETAIL STRATEGIES
Consumers Wont
31%
Accept Returns
Despite the gains that the European retail sector has

experienced over the past decade, companies need to adapt to deal
with post-recession realities. Cautious consumers show no signs of
going back to pre-crisis shopping patterns.
The main retail channels in danger of extinction are small, independent stores located far from main shopping thoroughfares and
malls in the city outskirts. There is a general shift away from sales
channels that require a large investment in real estate.
This is not to say that physical stores have no future. Rather, they
need to be combined with a digital presence, integrating online,
mobile and social channels. Click-and-collect stores, pop-up stores
and shoppable windows are examples of how online and offline
channels can work together profitably.
UNITED
KING DOM
33%
18%
RUSSIA
30%
F RA NC E
S PA IN
I TALY
BARGAIN SHOPPING
IN EUROPE
Low-cost (value) retailers
sales as a percentage of total
apparel-industry sales, in
2004 and 2012
17%
20%
8%
2004
20%
22%
2012
6%
25%
Read the abstract The Return of the Consumer, based on a new book by IESE Prof. J.L. Nueno, at ieseinsight.com.
WORKING CROSS-CULTURALLY
How Stereotypes Affect Teamwork

Working with colleagues
from other countries is not
always easy. A study of U.S., Mexican
and Indian engineers working together
on a common project found stereotypes
led to misunderstandings and communication breakdowns that threatened
the viability of the collaboration.
The Mexican engineers, fearing
that others regarded them as not
smart enough to come up with new
ways of doing things and likely to

spend all day talking, deliberately
did the opposite, believing this would
subvert the stereotype.
Their plan backfired: the U.S. engineers complained that the Mexicans
were always trying to come up with
new procedures and were missing
out on the expertise of others since
they never spent any time talking with
experienced colleagues.
The fact that the engineers relied

on e-mail, phone calls and messaging
may have contributed to everyone
falling back on stereotypes. In the absence of face-to-face encounters, people invent their own reality. As such,
managers of multinational companies
should allocate time and budget for
global partners to visit each others
workplace, learning how it actually is
rather than how they think it is.
Occupational Stereotypes, Perceived Status Differences and Intercultural Communication in Global Organizations, by IESEs Carlos
Rodriguez-Lluesma and Paul M. Leonardi of Northwestern University, was published in Communication Monographs. Read the abstract
Beware of Stereotypes When Working Cross-Culturally at ieseinsight.com.
10
ieseinsight
earlyinsight
SALES NETWORKS
Time to Walk the Talk

Your sales efforts are focused on
83%
75%
Attracting customers
Retaining customers
Recovering lost customers
21%
0
Do you currently offer

any incentives to encourage
your sales teams to bring in
new customers?
Do you have an established
target for customer retention,
loyalty or recovery?
100
Yes
65
Yes
36
35
No
64
No
Although 83 percent of companies surveyed say they place a

strong emphasis on attracting customers, 35 percent do not currently
offer any incentives to encourage their sales teams to bring in new
customers. Surprisingly, just 36 percent of the companies surveyed
have an established target for customer retention, loyalty or recovery,
despite three out of four claiming they make an effort to hold on to their
existing customers. Whats more, almost half of them still do not gauge
their level of customer loyalty, and only a third have some type of loyalty
program in place.
The survey was led by IESEs Cosimo Chiesa and Julin Villanueva. Read the abstract
Sales Networks: A Little Planning Would Go a Long Way at ieseinsight.com.
We are going to produce a newspaper in

print for as long as people want it. But the one
thing we know is that we have got to
continue to adapt and change.
Increasingly our traffic is coming to

mobile. The question is: How do we
adapt to these new formats in a
way that does not diminish
the quality journalistic
experience?
Arthur O. Sulzberger, Jr., chairman and publisher of The New York Times, spoke
on these themes during a Global Leadership Breakfast at IESEs New York Center.
ieseinsight
Presentations
That Deliver
Too often, presentations fail
in the delivery because they dont
follow a clear path to a concrete call to
action. Follow these tips for planning
and delivering persuasive presentations
that get results.
KNOW WHAT YOU WANT. Before thinking
about content, start by thinking about
the outcome you hope to achieve.
WIN YOUR AUDIENCE. Make sure you
understand both sides of the argument.
Prepare ethical and emotional as well as
logical appeals, and gather a variety of
evidence to support your argument.
BENEFITS & OBSTACLES. Consider the
strategic, personal and business benefits of the audience doing what you
propose, and what might prevent them.
Choose the top three benefits and find
supporting evidence for each.
BUILD YOUR ARGUMENT. Successful
rhetoric is built on a tried-and-tested
structure.
The Grabber. Grab the audiences
attention with an anecdote, a question, a startling statistic or a thoughtprovoking quotation.
The Message. Follow the grabber
with a one-line statement that succinctly tells the audience what your
presentation is about.
Signposting. Signposting lays out
the skeleton of the argument for the
audience.
Benefits 1-3. Remember to focus
on benefits rather than features. At
least 75 percent of your presentation
should be dedicated to developing
your three main points.
Closure. This section of your presentation is crucial. Sum up your main
points in one sentence and give your
call to action.
DELIVERING LIKE A PRO. Public speaking
is a performance. Having a clear structure and lots of practice beforehand will
help to lighten the mental load.
Read the abstract How to Persuade
Audiences to Action at ieseinsight.com.
11
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2 BUSINESS SCHOOL IN THE WORLD FOR EXECUTIVE EDUCATION

Financial Times, May 2014
Dossier
Deep
insight
Illustrations by RAUL ARIAS
ieseinsight
oards need to close the rifts left by the crisis and be

open to change, for the long-term success of business.
15 How Boardroom History

Is Writing Its Future
By Jay W. Lorsch
31 Proxy Advisors
By Gaizka Ormazabal
& Allan L. McCall
24 The Age of Activism

in Listed Companies
By Jos M. Campa
37 Renewing the Boards Mission

Every Boards Agenda
By Jordi Canals
13
We need a deeper reflection on the conceptual

framework of corporate governance.
Governance Matters
By Fernando Pealva
Corporate governance has come in for a bashing

lately, ever since the global financial meltdown of
2007-08. Yet even before then, governance shortcomings were already painfully apparent during
the dot-com boom-and-bust of 2000 and the
accounting scandals of 2001-02. And thats just
talking recent history. If we go all the way back to
the 1600s, the Dutch East India Company considered the worlds first multinational corporation and the first to issue stock also endured
perhaps the worlds first governance crisis owing to corruption, and by 1800 the company went
bust. As the saying goes, Those who do not learn
from history are destined to repeat it.
Lest we find ourselves having this same conversation in a few years time, I recommend you
read this IESE Insight dossier and reflect on its
lessons for your organization.
To be fair, corporate governance today is
better than it used be. Progress has been made.
In line with wider social trends revolutionizing
the business world, there is a growing sense of
people empowerment, with shareholders having more of a say over company affairs. Boards are
more conscious of their social responsibilities.
Accountability is up; rubber-stamping whatever
the great and mighty CEO says is down.
True, some of these moves have been reactive. Whats needed now is a deeper reflection
on the conceptual framework of corporate governance to make sure the changes stick. We need
to step back and ask ourselves: What should regulators and firms address next, which goes to the
very heart of corporate governance?
Harvards JAY W. LORSCH opens the discussion
by reflecting back on 25 years of governance history to make four recommendations that must
be addressed for there to be any progress on
meeting the corporate governance challenges
of the future. He questions some of todays categorical thinking: that its always better to have
independent directors serving shorter terms,
for example, or that we need to nix hefty pay.
Lorsch reminds readers that the mere fact of independence counts for little without equal parts
14
wisdom and experience; and until we stop believing that executives are incapable of doing
anything without first being bribed for it, then
debates over pay will remain just as vexed.
Next, JOS M. CAMPA elaborates on one of the
hallmarks of good governance: transparency.
The IESE professor and director of Investor and
Analyst Relations at Santander Bank calls for
more openness at three levels: between management, boards and society. Clear financial reporting is a given; companies need to focus on being
just as clear about business risks, explaining
decision-making processes, justifying executive
compensation and coming clean on potential
conflicts of interest, so that everyone can exercise their voting rights without hidden agendas.
That said, my IESE colleague in the Department of Accounting and Control, GAIZKA ORMAZABAL, and ALLAN L. McCALL, of Stanford Universitys
Graduate School of Business, point to research
theyve done on proxy voting to question whether you can have too much of a good thing. No one
doubts that disclosure, transparency and accountability are good things but blindly trusting proxy advisor recommendations is not necessarily the neatest answer. As other nations look to
the U.S. Securities and Exchange Commissions
regulatory choices as a benchmark, the debate
raised by the authors on the U.S. proxy advisory
industry is worth following.
Rounding out this dossier, IESE professor
and dean JORDI CANALS casts a clear vision of the
firms overarching purpose, rooted in a strong
sense of mission and values. With this in mind,
he sets out six agenda items for the board that will
add long-term value to the company it serves. For
Canals its not just a question of getting a few errant companies back on track but of safeguarding
the future of capitalism itself.
Theres no one-size-fits-all solution. But
hopefully after reading this dossier, you will be
one step closer to resolving the particular governance challenges you face.
Fernando Pealva is IESEs Secretary General and
professor of Accounting and Control.
ieseinsight
Dossier
deep
insight
HOW BOARDROOM HISTORY

IS WRITING ITS FUTURE
Recommendations
to Meet Future
By JAY W. LORSCH
oardroom: the word alone conjures

up grand visions of power, wealth
and privilege. The boardrooms core
the symbol of its power is a massive, highly polished table around which the
directors are supposed to make the decisions
that govern corporations, impacting the livelihoods of many. It is the throne room of the
corporate worlds potentates.
At least, thats what people think. A quarter century ago, in the book Pawns or Potentates:
ieseinsight
The Reality of Americas Corporate Boards, my

coauthor Elizabeth MacIver and I found that
boards were acting more like pawns and not so
much as the potentates they were legally intended to be. More often than not, real power
over corporate affairs and major decisionmaking was being wielded by the CEOs, posing serious problems for the boards that were
ostensibly meant to oversee them.
There have been significant, positive changes over the past 25 years. In spite of and to
15
Recommendations to Meet Future Governance Challenges
In practice, boards can choose to delegate their

authority to manage the company to its officers. But
they need to retain enough power to question and
oversee CEO decisions.
some extent because of the periodic crises that

have occurred during this time, boards are now
more seriously engaged and working harder to
fulfill their duties. Thats the good news.
The other news is that there is still work to
do. This article outlines the major problems
that boards have faced over the past quarter
century and solutions proposed to overcome
them. I warn about the negative, unintended
consequences of some of these solutions.
And I offer my views on how to meet future
governance challenges within the wider context of business.
How We Got to Where We Are

Today: The Norms of the 1990s
To begin, I should note that in the United
States the geographic focus of my studies it
is the boards that have the legal authority, as
enshrined in Delaware law. In other words, the
boards are in charge. They can then choose to
delegate their authority to manage the com-
EXECUTIVE SUMMARY
There have been significant,
positive changes in
boardroom practices over
the past 25 years. However,
there is still work to do, says
the author, whose expertise
in corporate governance
matters was tapped for
lawsuits involving the Tyco
and Enron fiascos at the
dawn of this new century.
Drawing on decades of
research and experience, the
author outlines the major
problems that boards have
faced over the past quarter
century and the solutions
proposed to overcome them.
16
He warns of the negative,

unintended consequences
of some of these solutions,
many of which were not
thought through carefully
and may be based on false
premises. Finally, he offers
four recommendations for
directors, CEOs, shareholders
and other stakeholders
on how to meet future
governance challenges within
the wider context of business.
Put simply, there needs to
be open communication
between all parties and a
consensus on the ultimate
purpose of the firm.
pany to its officers. In practice, boards always

did, and still do, make such delegations. Fulltime employees with the time and knowledge
to manage are the ones who run the company.
That being said, boards need to retain
enough power to question and oversee CEO
decisions. Board solidarity and building a
strong relationship with the CEO are two
sources of board influence. However, these
sources of power were limited by the culture
and norms of the 1990s. In the United States,
these limitations included:
LIMITED TIME. Most board members had other
full-time jobs and some served on several different boards at a time.

LIMITED KNOWLEDGE & INFORMATION. To an important extent, boards limited knowledge and
information was due to the sheer size and pace
of the businesses under their charge, in addition to the limited time mentioned above.
LIMITED EXPERIENCE. Independent directors
usually had limited experience in the companys specific line of business, which forced
them to learn on the job.
INFORMATION ASYMMETRY. In most boardrooms, the management teams not only had
greater knowledge of the issues but they also
controlled the information that the directors
received.
LACK OF CLARITY ABOUT BOARD GOALS. Certain
directors believed that the primary purpose of
a company was to create value for shareholders; others believed that companies should
have broader goals, serving not only shareholders but also customers, employees and
their communities. Because such important
distinctions were never clarified, decisions
wound up being based on fundamentally divergent premises within the same board.
ieseinsight
The diagnoses of the boardroom problems of the 90s

led to a set of agreed best practices. Yet even adopting
best practices did not solve all boardroom problems.
Far from it.
STRONG NORMS. The presence of a strong coalition of board members to counter the power
of the CEO was not the norm at the time. Directors subscribed to the notion that it was
inappropriate to criticize the CEO in board
meetings or to have discussions without the
CEO present.
COUNTERVAILING POWER OF THE CEO. The CEO
and the executives reporting to the CEO

served as the boards primary sources of information. Since the board chair and the CEO
were normally one and the same, it was usually
the CEO who set the agenda and controlled the
discussions of board meetings.
A New Paradigm Is Born?

The diagnoses of these boardroom problems
of the 90s found willing listeners, leading to
calls for change. Among the changes developed
in the United States and the United Kingdom
were a set of agreed best practices, which included:
Smaller boards to facilitate group discussion.
A majority of independent directors.
Meetings without the CEO present. Directors were encouraged to hold executive sessions. They also began to feel comfortable
speaking to each other informally between
meetings.
Board leaders who were not also the CEO.
Independents controlling the selection of
new directors.
Audit, compensation and corporate governance committees in which directors met
without the CEO or the top management
present.
A sharpened focus: The board focused on the
approval and oversight of corporate strategy, CEO performance and management
development to assure a supply of future
executives. Boards also evaluated their own
performance and were supposed to ensure
n
n
n
n
n
ieseinsight
that the company complied with applicable

laws.
Granted, not all boards adopted these practices simultaneously or quickly, and some in the
United States did not do so until laws and regulations required them many years later.
Conversely, in the United Kingdom, the
adoption of recommendations made by the
Cadbury Report such as having a board chair
who was not the CEO, adding independent and
nonexecutive members, and establishing audit
committees was swift and dramatic.
Yet even adopting best practices such as
these did not solve all boardroom problems.
Far from it.
Crises at the Dawn of

the 21st Century
At the beginning of the new century, two different governance-related crises struck. The
first was the bursting of the dot-com bubble
in 2000. Many early-stage, newly listed public
companies had yet to prove they had sustainable business models. Although their subsequent failures were blamed mostly on reckless entrepreneurs and venture capitalists, in
hindsight such failures were at least partially
the fault of boards who wanted to attract public investors even before their companies had
earnings.
A second governance failure was the wave
of fraud and misleading accounting that occurred at companies such as Enron, Tyco
and WorldCom. While the specifics of each
scandal were different, all featured improper
or fraudulent accounting practices and inflation of the compensation packages of senior
managers. In the case of Tyco, a so-called independent director was receiving questionable payments from the company. Notably,
all these boards had a majority of independent
directors, and they also had audit, compensation and corporate governance committees. So
what went wrong?
17
The belief that corporate boards were improving made

the financial meltdown in 2008 particularly shocking.
Many blamed bankers as responsible. But where
were the boards of financial institutions at the time?
At the time, I had the dubious distinction

of serving as a potential expert witness in lawsuits involving both Tyco and Enron directors.
After reading hundreds of pages of documents
on both these cases, what struck me as a common theme was that the directors remained in
thrall to the CEO, regardless of the lip service
being paid to the new boardroom paradigm
emerging out of the 90s. Clearly, the goal of
increasing the power of the board to counter
the CEO had fallen short of the mark in these
companies.
These corporate scandals generated massive outcry from the public, media, business
leaders and politicians alike. This led to the
passage of the Sarbanes-Oxley Act in the
United States in 2002, which imposed new requirements on the audit committees of boards
and for the certification of financial reports by
public-company CEOs and CFOs.
Despite complaints from senior management and board members that Sarbanes-Oxley was too onerous, there were no serious attempts to change or repeal it. In fact, within
a few years, most directors and senior executives with whom I spoke admitted that the
ABOUT THE AUTHOR
Jay W. Lorsch is the Louis
E. Kirstein Professor of
Human Relations at Harvard
Business School, where
he earned his doctorate in
Business Administration. He
is the author of more than
a dozen books, including
Back to the Drawing Board:
Designing Corporate Boards
for a Complex World and
Pawns or Potentates: The
Reality of Americas Corporate
Boards, and the editor of The
18
Future of Boards: Meeting the

Governance Challenges of the
21st Century. His business
classic Organization and
Environment, coauthored
with Paul R. Lawrence, won
Academy of Management and
James A. Hamilton book-ofthe-year awards. He recently
collaborated with IESE on
the Short Focused Program
Value Creation Through
Effective Boards held at IESE
Barcelona in May 2014.
law had improved accounting and financial

reporting for their companies. They felt the
law gave audit committees clear responsibility for overseeing the public accounting firms
that audited them, which in turn improved
corporate governance.
Also in response to the scandals, the New
York Stock Exchange and the Nasdaq revised
their listing requirements. Essentially both
exchanges modified their rules to require that
listed companies implement most of the previously mentioned best boardroom practices.
The combination of the changed listing
requirements and Sarbanes-Oxley added momentum to the improvement of boards.
The Financial Crisis of 2008

and Beyond
The belief that corporate boards were improving made the financial meltdown in 2008
particularly shocking to those of us closely
following corporate governance issues. Since
the media, politicians and the public identified those responsible as bankers or Wall
Street, there was little public criticism of
boards.
Yet where were the boards of financial institutions at the time? Directors were apparently dependent on top management for information about corporate lending practices.
An underlying problem was that because of the
drive to find independent board members, too
few directors of financial firms had any depth
of financial experience.
Although the Dodd-Frank Wall Street
Reform and Consumer Protection Act in the
United States in 2010 focused on the regulation of banks and their officers in the wake of
the financial crisis, the new law had two wider
ramifications for corporate governance. The
first was to allow shareholders under certain
conditions to place nominees for board seats
on the proxy statement of the company. This
was intended to allow shareholders to have
ieseinsight
Boards are part of complex systems. Unfortunately

those who propose a particular change, frequently
in reaction to a sudden public outcry, often do not
anticipate the potential downsides of their proposals.
more of a voice in nominating directors for

board seats, although its implementation was
rather limited.
The second aspect of Dodd-Frank that affected governance broadly in the United States
was its say-on-pay provision, which gave shareholders the right to vote on the compensation
of senior executives, although the results were
non-binding. The idea was adapted from a British proposal that had existed for several years.
One may wonder how say-on-pay found
its way into a law whose purpose was financial
regulation. One reason was the shareholder
and media outcry over executive compensation being too large and unrelated to corporate performance, with the pay for top executives of financial institutions singled out as an
egregious example.
25 Years of Progress?
This historical recap sets the stage for discussing the future steps for continued improvement. That boards are doing a better job of
governance today than they were 25 years ago
seems indisputable. For example, directors
now report that they understand the role they
are expected to play and that they are focusing
on the economic performance of their companies over the next two years or more. They
also report that they have a high level of comfort with the information they are receiving.
What remains problematic is the erratic
and relatively unpredictable manner by which
such improvements have been brought about.
Negative unintended consequences of reforms
have threatened the progress of corporate
governance on several fronts. The following
examples stand out:
SAY-ON-PAY. In 2006 the U.S. Securities and Exchange Commission introduced a requirement
for public companies to report the compensation of their senior executives. The theory was
that disclosure of such information would help
ieseinsight
to curb excessive pay. It was not to be. Instead

what has happened is that senior executives
have used the knowledge of their peers compensation packages to argue for more pay for
themselves.
MAJORITY OR LARGER PROPORTION OF INDEPENDENT DIRECTORS. The intention of having more
independent directors was to reduce potential

conflicts of interest. Outside directors were to
act with complete loyalty to their companies.
But independence has had the unintended
consequence of creating more or a majority of
board members lacking deep experience in a
companys industry or line of business.
ELIMINATION OF STAGGERED BOARDS FOR SHORTER TERMS. The advocates of doing away with
staggered boards argued that shorter terms

provided shareholders with a greater opportunity to replace directors whenever they
believed it was desirable. To me what is more
important is to have directors with knowledge
and experience. Serving longer terms fosters this knowledge and experience, thereby
strengthening the argument for retaining
staggered boards.
I believe there are two major reasons for
such negative unintended consequences.
First, boards are part of complex systems. Unfortunately those who propose a particular
change, frequently in reaction to a sudden public outcry, often do not anticipate the potential downsides of their proposals. Moreover,
they may only understand and care about one
part of the system as in the case of institutional shareholders who believe the best way
to improve corporate governance is to grant
themselves greater influence over corporate
decision-making (see the sidebar The Rise of
Shareholder Power).
These problems are compounded by mistrust between directors and shareholders.
19
Shareholders interpret resistance to their

proposals as veiled attempts by boards to entrench their power, while directors believe
shareholders are only out to protect their own
rights and interests.
Meanwhile, some parties cling to the view
that a corporations sole responsibility is to
its shareholders, while others argue that the
corporations purpose must be broader, considering its long-term health and the value it
adds to society as a whole. So long as disagreements persist over a businesss ultimate purpose, it will be hard to achieve consensus on
future changes to corporate governance. Open
discussions are required.
In my view, the most beneficial changes have
emanated from boards and their advisers who
understand that governance is the result of human relationships. Directors know firsthand
why boards may have difficulty carrying out
their responsibilities and they are well placed
to come up with the solutions that eliminate or
at least minimize these constraints.
Four Recommendations
for the Future
Going forward, I see four things that must
be addressed for there to be any progress on
meeting the corporate governance challenges
of the future.
1. A BETTER PROCESS FOR OVERSEEING EXECUTIVE
COMPENSATION. Current problems related to ex-
cessive executive compensation are to my mind
The Rise of Shareholder Power

Pushes for changes to corporate governance practices are increasingly
coming from institutional investors.
n many cases, the impetus for

adopting best practices in the
boardroom have come from directors themselves, but institutional
investors have also pressed for
certain changes. They rallied for
changes and limits to CEO power,
seizing on the fact that leaders of
public companies do not want to
be embarrassed.
One of the earliest examples
occurred in 1990, when two U.S.
state pension funds wrote letters
to the board of General Motors
asking how the directors planned
to handle the selection of a successor for then-CEO Roger Smith.
When they did not receive a satisfactory response, the parties publicized the episode in The New York
Times and The Wall Street Journal.
Further, they exercised their right
to sponsor shareholder proposals
and changed corporate bylaws.

In the United States, there are
four salient examples of how institutional investors have influenced
boards in a decades time.
SHORTER TERMS. In 2009, 68 percent of directors served one-year
terms, compared with 38 percent
of directors in 1999.
MAJORITY VOTING. In 2009, more
than half of all companies in the S&P

500 had a majority standard for uncontested board elections, up from
the plurality voting of prior years.
SEPARATION OF CEO & CHAIR ROLES.
In 2009, 37 percent of S&P 500

companies split the chair and CEO
roles, compared with 20 percent
in 1999. Despite moves toward
splitting the jobs, particularly in
the United Kingdom, I find the

reasons for doing so can be based
on knee-jerk reactions rather
than on compelling evidence that
it is better than leaving the two
positions combined. I would argue
that a competent lead or presiding director should be capable of
striking the right balance between
effective governance and leadership. Simply separating the
roles without understanding the
complexities involved is hardly the
answer.
POISON PILL. The number of S&P
1500 companies that maintain a

poison pill a tactic that gives
directors power to deter or prevent
takeover bids continues to decrease: 42.5 percent in 2007, 34.5
percent in 2008 and 27.5 percent
in 2009.
SOURCE: Lorsch, J.W. Americas Changing Corporate Boardrooms: The Last Twenty-Five Years. Harvard Business Law Review 3, no. 1
(Spring 2013): 119-34.
20
ieseinsight
symptomatic of larger societal questions and

cannot be fixed by mere disclosure or say-on-pay.
I stand by what my coauthor Rakesh Khurana and
I wrote in The Future of Boards a few years ago:
Rethinking the nature of executive pay within
the context of our larger economic and social
system and the challenges we face may enable us
to create a new model of compensation rooted in
a more realistic recognition of the social context
within which firms operate. It should, and can,
rest on valid assumptions and fundamental values that allow us to build a more inclusive and
sustainable economic future one in which we
dont have to bribe executives to do the duties
we have entrusted to them.
2. MORE DIRECTORS WHO ARE BOTH INDEPENDENT AND KNOWLEDGEABLE. Most boards, espe-
cially in North America but also in European

countries, are now required to be made up of
independent members. The problem is, most
independent directors join boards with limited prior connection to the company and its
industry. As such, to be effective, boards must
be good at educating their members and getting their knowledge base up to speed. A simple
thing to do is make sure that directors are sent
vital information in advance of board meetings with the expectation that they will digest
it and come to the meeting fully prepared. This
will help ensure that board meetings are more
productive.
are all too often an excuse for stock analysts

to probe for hints about short-term results.
Shareholder proposals usually involve some
means of harassing boards and limiting their
power. Neither of these common means of
communication between companies and their
shareholders is very helpful for improving
governance, yet these battles are likely to continue unless other means are found to enable
shareholders and directors to communicate in
a more positive fashion.
In sum, communicating in a more positive
fashion and agreeing on corporate purpose will
be key to meeting the governance challenges of
the 21st century. There is the question of who
could convene such discussions. There are
numerous possibilities from the stock exchanges, to members of the legal community,
to business leaders, to academics. Improving
corporate governance more rapidly requires
not only a more precise agreement about the
purposes of the corporation, but also that the
major actors involved in governance have a
forum in which these issues can be explored
and agreed upon together.
to know more
3. A REEXAMINATION OF STAGGERED BOARDS.
Over the past several years, many companies

have eliminated staggered boards to the point
where most directors, in the United States
at least, are now elected annually. Does this
lead to better governance? Some institutional
shareholders, especially union and pension
funds, believe it does. From their perspective,
it is especially helpful in not allowing boards
to become entrenched and block takeover attempts. But many directors have indicated that
it took them a year or more to understand their
companys business. Terms should be longer
than just one year.
This article was adapted from Americas Changing

Corporate Boardrooms: The Last Twenty-Five
Years, originally published in Harvard Business Law
Review 3, no. 1 (Spring 2013): 119-34, and is used
with permission of Jay W. Lorsch. The following
other works also informed this article:
n
4. IMPROVED COMMUNICATION BETWEEN COMPANIES AND LONG-TERM SHAREHOLDERS. Clearly
the present methods of communication and

dialogue between boards and shareholders
are not adequate. Quarterly earnings calls
ieseinsight
Lorsch, J.W., ed. The Future of Boards: Meeting the

Governance Challenges of the 21st Century. Boston:
Harvard Business School Press, 2012.
Carter, C.B. and J.W. Lorsch. Back to the Drawing
Board: Designing Corporate Boards for a Complex
World. Boston: Harvard Business School Press,
2004.
Lorsch, J.W. and E. MacIver. Pawns or Potentates:
The Reality of Americas Corporate Boards. Boston:
Harvard Business School Press, 1989.
21
KNOWING
WHERE
TO GO
IN A
FUTURE
WITHOUT
MAP S.
REGISTER NOW:
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Patricia Ithau
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DEEP
insight
THE AGE OF ACTIVISM
Transparency, a Rising
Trend in Listed Companies
By Jos M.Campa
orporate governance is essentially a

system of rules and procedures for
regulating the relationships among
various participants in a company
from the executive management team and
board of directors, to shareholders and other
stakeholders. Many people erroneously make
the companys relationship with its shareholders the chief concern, when in fact corporate
governance should encompass relationships
with all groups affected by the companys activities, whether directly (shareholders, employees, creditors, service providers and customers) or indirectly (government bodies and
other social actors).
The global financial crisis has revealed
the inadequacies of many business practices,
24
prompting many companies to rethink the role

of corporate governance. Although the specific
way in which corporate governance is practiced
depends on the company itself, legislators, regulators, shareholders and societal stakeholders
are exerting their influence in this post-crisis
period, having realized the serious consequences of bad governance. As I will explain in this article, the trend is toward greater transparency
and an expanded role for shareholders.
Accounts Getting Clearer

The first priority of corporate governance is to
have clear accounts. This means having consistent, comparable reporting criteria in order
to provide a relevant, reliable picture of the
companys financial activities, which can be
ieseinsight
Transparency, a Rising Trend in Listed Companies
Good governance is not just about presenting clear

accounts. To ensure the clarity and consistency of its
future accounts, there must also be transparency in a
companys decision-making processes.
confirmed by impartial third parties. Even

though this seems pretty basic, many companies reporting standards fall short, with the
following deficiencies being the most common:
UNCLEAR. All too often, the accounts of large,
listed companies are overly complex.
UNREPRESENTATIVE. While the reports may be a
faithful reflection of accounting activities during a fiscal year, they may reveal nothing about
the risks taken to get there or the companys
likely future evolution.
LITTLE STANDARDIZATION. Certain accounting
items may be arbitrarily defined.
INCONSISTENT. The accounting principles used
may change over time as a result of a corporate
decision or a new piece of legislation.
INCOMPARABLE. One companys accounting
criteria may be significantly different from
anothers. This is especially true at the international level.
NO GUARANTEES. Although companies are
obliged to have audits, no third-party audit can
ever give full guarantees.
In spite of these flaws, there is some cause
for optimism, with substantial progress made
in the following areas:
ACCOUNTING & FINANCIAL CRITERIA. As noted
previously, the application of certain accounting and financial criteria can vary widely from
EXECUTIVE SUMMARY
Good corporate governance
cannot guarantee that good
decisions will always be
made: running a business
is fraught with risk and
managers can and often
do make mistakes. What
good governance does do is
ensure there is accountability
and that decisions are taken
in an appropriate manner. The
ieseinsight
recent experience of publicly

traded companies has shown
that good governance requires
both transparency and fluid
communication between the
major interest groups that is,
between top management and
the board of directors; between
the board and shareholders;
and between shareholders and
society at large.
country to country, company to company.

However, moves toward agreeing universal,
global reporting standards are steps in the right
direction.
INTERNAL AUDITS. Internal audits are getting
more rigorous and compliance requirements
have been raised.
EXTERNAL AUDITS. The penalties for negligence
by external auditors have been raised significantly. Also, much greater attention is now being paid to potential conflicts of interest. The
independence of auditors who also provide
consulting services to the same firm is increasingly being questioned and clamped down on
following the wave of high-profile accounting
scandals since 2000.
ADMINISTRATORS. Little by little, administrators
are being required to present clearer accounts.
More Transparent Procedures

Good governance is not just about presenting
clear accounts that reflect the companys financial activities. To ensure the clarity and consistency of its future accounts, there must also be
transparency in a companys decision-making
processes.
Admittedly, even with the best governance
systems in place, there is no built-in assurance
that good decisions will be made all the time:
running a business is fraught with risk and
managers can and often do make mistakes.
Whether to relieve top managers or executives
of their duties for a decision that results in a
negative business outcome is an open question for shareholders. But from a governance
point of view, the key concern is whether that
decision was made in an appropriate manner,
free from procedural bias. Governance ensures there is at least accountability for those
decisions.
Recent history underscores the need for
much greater transparency as well as more fluid
communication between the major stakeholders at three levels: between top management
25
Companies have an undeniable impact on the societies

in which they operate. As part of this, the concept of
sustainability has assumed critical importance in all
business activities. But what does it actually mean?
and the board of directors; between the board
of directors and shareholders; and between
shareholders, or the company owners, and society at large. (See Exhibit 1.)
1. Transparency Between
Management and the Board
To ensure robust decision-making, there must
be healthy levels of trust between the top management team and the board of directors, as
well as between the individual members of the
board. Some measures being taken to deepen
this trust include:
COMMITTEES FOR STRATEGIC ISSUES. In addition
to compulsory audit committees and the usual
committees for appointments and remuneration, companies are increasingly setting up
specialized committees to oversee such areas
as strategy, risk, investment and technology.
A HEALTHY DISTRIBUTION OF FUNCTIONS & BALANCE OF POWERS. There is a trend toward sepa-
rating the chair and chief executive roles, so

that the functions are not concentrated in the
same individual. In the event that both roles
are held by executives, the competencies called
for in each position are being better defined.
THE GROWING IMPORTANCE OF NON-EXECUTIVE
ADVISERS. As the presence of non-executive
board members or external advisers becomes

more common, their role is expanding beyond merely acting as an outside inspector
or observer. In addition to evaluating risks,
management biases and the suitability of decision-making processes, many are assuming
the capacity to act and lead initiatives independent of the board chair. Some may also have
the power to summon the board, introduce
items onto the agenda and evaluate the chairs
performance.
HIRING, EVALUATION & REPLACEMENT OF THE CEO.
These functions by far the most important

responsibility of the board are generally becoming more transparent, with more companies thinking about succession planning.
26
2. Transparency Between the Board

and Shareholders
Transparency between the board and shareholders extends beyond the obligatory presentation of audited accounts to include reporting
on corporate social responsibility, environmental impacts, remuneration, risks and other
aspects of business activity. For some regulated
sectors, like banking, the reporting requirements introduced in the wake of the global
financial crisis have provoked a sharp rise in
compliance costs, with JPMorgan Chase CEO
Jamie Dimon recently stating in his annual
letter to shareholders that the bank had spent
billions and hired an additional 13,000 employees just to keep up with regulatory issues and
compliance. Boards are attempting to improve
their communication with shareholders in the
following areas:
BUSINESS RISKS. Shareholders increasingly expect to receive a risk-evaluation report from
the board of directors. They want to know what
could go wrong, why and which instruments the
company has in place to manage those risks.
Companies are also now openly discussing a
much broader range of risks not just financial or catastrophic risks but environmental or
reputational ones as well.
FUTURE PROSPECTS. Accounts are a reflection of
past actions and operations, not a forecast of
what the company intends to do in the future.
Shareholders and potential investors also seek
information about a companys future activities, management reflections on the environment in which theyre operating and about their
business priorities, and signs of any dark clouds
gathering on the horizon.
There is an inherent tension between this
need for detailed information about the companys future plans and the impossibility of being
able to predict the future. As such, future plans
need to be flexible enough to accommodate any
sudden changes in the business environment,
while still offering some certainties for the
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course ahead to avoid too many nasty surprises

for shareholders.
DECISION-MAKING PROCESSES. Corporate governance is a form of delegated decision-making,
with the board making decisions on behalf of the
shareholders. For this reason, shareholders deserve to know who is taking what decisions based
on which criteria. Even though those who hold
formal decision-making power may be quite different from those who actually wield power and
influence in an organization, shareholders must
be able to know who needs to be held responsible
for decisions taken.
Naturally, people make mistakes, and governance mechanisms should include some
tolerance for mistakes, which are par for the
course when it comes to risk taking and innovation. But accepting that boards may make
mistakes is not to tolerate a lack of analytical
rigor. Decision-making must not be allowed to
get hijacked by a small minority who may only
be serving their own interests rather than the
greater good of the organization.
3. Transparency Between
Company Owners and Society
Companies have an undeniable impact on the
societies in which they operate. This impact includes the generation of employment and economic activity, as well as the provision of goods
and services to customers. It also includes indirect effects such as improvements or deterioration in the quality of life of citizens.
As part of this, the concept of sustainability
has assumed critical importance in all business
activities. But what does it actually mean?
ABOUT THE AUTHOR
Jos M. Campa is a professor
of economics and finance
at IESE Business School as
well as Director of Investor
and Analyst Relations at
Santander Bank. He holds
a masters and PhD in
Economics from Harvard
University, and is an expert
on international finance and
macroeconomics. He has
taught at Harvard University,
Columbia University, N.Y.U.
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Stern School of Business and

Complutense University of
Madrid. He has also been a
consultant to organizations
such as the World Bank,
the International Monetary
Fund, the Federal Reserve
Bank of New York and the
European Commission.
Between 2009 and 2011, he
served as Secretary of State
for Economic Affairs of the
Spanish government.
First, it means having a solid business model

aimed at generating stable, self-sustaining revenue streams that guarantee the firms longterm survival.
Second, it means taking ethical, social and
environmental considerations into account
when making decisions, so as to support the
long-term development of the communities in
which a company operates.
Both issues are interrelated, as consumers
increasingly evaluate companies not only on
what products or services they offer, but also on
the methods they use to produce or sell them.
Consequently, a growing number of companies
have begun to report on their performance in
the following areas:
SOCIAL & ENVIRONMENTAL IMPACT. More annual
reports feature sections dedicated to the firms
impact on the communities in which it operates. A similar trend is happening in the environmental sphere, with firms highlighting the
environmental impact of their activities and
integrating these reports with the financial
statements.
RISKS. Transparency is a prerequisite of effective risk management, founded on explicit
communication.
VALUES & LABOR PRACTICES. Companies are
coming under mounting pressure to make sure
their supply chains are ethically managed, particularly with regard to external suppliers and
labor practices in far-flung locations. Companies must be open and honest about the working conditions not only of their own premises
but of their suppliers in all the markets in which
they operate.
Consumers and investors are now able to
compare the performance of various companies using publicly available indices that rate
businesses according to ethical criteria and
social indicators. Certain investors even base
their investment decisions on such indices.
However, these indices are still in their infancy, making it difficult to track and compare
data on ethical business practices across countries. No doubt we will see greater convergence
over coming years.
Conflict Management
Organizational conflict, though inevitable, can
be preempted and mitigated if companies are
transparent about potential conflicts of interest and develop explicit procedures for dealing
27
with them. This means publicly disclosing situations in which such conflicts have arisen and
suggesting how they will be tackled. There are
three areas of conflict that, due to their prevalence in business, deserve special attention.
The existence of different types of shareholders raises
the likelihood of them having different interests, views and priorities about the companys
future. Managing these differences is an essential aspect of good governance.
The interests of large shareholders differ
CONFLICTS BETWEEN SHAREHOLDERS.
Beyond the Balance Sheet
EXHIBIT 1
IN ADDITION TO CLEAR FINANCIAL STATEMENTS,

TRANSPARENCY IMPLIES MORE FLUID
COMMUNICATION AT THREE LEVELS.
MANAGEMENT
Specialized committees for studying strategic issues
A better balance of power between the CEO
and chair roles
A bigger role and remit for non-executive advisers
Shared responsibility for CEO hiring, evaluations and
succession planning
BOARD OF
DIRECTORS
Producing a risk evaluation report
Providing information about
the companys future prospects
Clarifying who is taking what decisions
based on which criteria
SHAREHOLDERS
Publishing social and environmental impact reports
Explicit communication about how the company
intends to manage the business risks it faces
Open and honest information about how supply chains
are managed, particularly with regard to working
conditions and labor practices involving external
suppliers
SOCIETY
28
from those of small retail shareholders. Some

may wish to exercise their voting rights; others may prefer not to participate in governance
issues at all.
For diluted shareholders who do not want
to be active participants, they risk maintaining the status quo, simply rubber-stamping the
opinions of management. In this case, governance mechanisms need to encourage them to
become more actively involved and engaged.
On the other hand, having too many activist majority shareholders may lead to lopsided
agendas, especially if these shareholders are
also board members or wield undue influence or sway over prominent board members.
When this is the case, governance mechanisms
need to disclose the existence of any alliances
between large shareholders, as well as any financial, business or personal relationships
between shareholders, board members or
company executives.
CONFLICTS BETWEEN EXECUTIVES & SHAREHOLDERS. When it comes to conflicts between ex-
ecutives and shareholders, the biggest sticking

point concerns remuneration a key motivational lever that has been shown to affect managerial decision-making in both positive and
negative directions. The questions on executive compensation typically revolve around:
how much senior managers should get paid;
how that pay should be linked to performance;
and the impact of pay on the risks that senior
managers are prepared to take.
It is not easy to determine before the fact
the optimal level of executive pay, beyond resorting to generalized considerations such as
appropriateness and level of competitiveness
in the top talent markets.
Viewed in retrospect, there are legitimate
concerns about executive pay related to: its
weak relationship with profitability or performance; the ever widening gap between top
executive pay packages and average salaries
in developed economies; and the growing acknowledgement that most remuneration systems tend to incentivize decisions and actions
that favor short-term results.
In response, the governance provision of
say-on-pay invites shareholders to weigh in on
the compensation being offered to top managers and board members, with remuneration
policies and golden parachute arrangements
ieseinsight
The global financial crisis delivered a damaging

blow to public trust in business. Restoring trust and
regaining stable economic footing demand that
companies embrace good governance instead.
having to be disclosed prior to their implementation.

This transparency rule has become a source
of much debate, with no clear consensus on
whether this provision is a help or a hindrance,
nor is there a harmonized approach to this issue
across jurisdictions.
The European Commission recently proposed an E.U.-wide directive to introduce
say-on-pay for the 10,000 companies listed on
Europes stock exchanges. According to a statement by the European Commission, the new
measure would oblige companies to disclose
clear, comparable and comprehensive information on their remuneration policies and how
they were put into practice. There would be no
binding cap on remuneration at E.U. level but
each company would have to put its remuneration policy to a binding shareholder vote. The
policy would need to include a maximum level
for executive pay. It would also need to explain
how it contributes to the long-term interests
and sustainability of the company. It would
also need to explain how the pay and employment conditions of employees of the company
were taken into account when setting the policy
including explaining the ratio between average
employees and executive pay.
Switzerland tried to tackle the issue of compensation with a regulation that would have
limited executive pay to 12 times that of the
lowest paid, but the proposal was defeated by
referendum.
CONFLICTS BETWEEN THE SHORT TERM & THE LONG
TERM. The final area of conflict arises when a
company has too many short-term investors and/or uncommitted senior executives.
The inevitable result is an excessive focus on
short-term goals, often at the expense of the
companys long-term interests.
Yet how this short-term focus translates
into policy is not so straightforward. At the investor level, it can lead to a single-minded focus
ieseinsight
on quarterly performance, share price volatility

and high turnover among fickle investors.
There does not appear to be any easy way of
changing this dynamic between shareholders
and the companies in which they are invested
other than by perhaps giving long-term fund
holders a greater voice in corporate governance affairs.
More measures exist to help prevent an
excessive short-term focus among managers. Some companies are stacking executive
compensation to include a larger element
of deferred compensation linked to pension
schemes, for example, which only pay off in
the long term, rather than allowing too many
quick cash grabs in the form of yearly bonuses.
Others have introduced clawback clauses, enabling compensation benefits to be taken back
in the event of underwhelming performance
by senior managers.
The Financial Stability Board, the body
that coordinates the work of national financial authorities at the international level,
recommends several Principles for Sound
Compensation Practices as well as their Implementation Standards. The FSB calls for
compensation practices to align employees incentives with the long-term profitability of the firm, and for effective governance
of compensation, and for compensation to be
adjusted for all types of risk, to be symmetric
with risk outcomes, and to be sensitive to the
time horizon of risks. It urges that the total
variable compensation pool be linked to the
overall performance of the firm and the need
to maintain a sound capital base.
The Legacy of the Crisis

The global financial crisis delivered a damaging
blow to public trust in business. Bad corporate
governance practices left many crying foul.
Restoring trust and regaining stable economic
footing demand that companies embrace good
governance instead.
29
Since 2007-08, when the magnitude of corporate governance failings became apparent,
there have been waves of new measures driven by a tide of public opinion demanding that
businesses conduct themselves more responsibly, always mindful of the consequences of
their actions on society and general economic
sustainability.
A Larger Role for Shareholders

One of the most ambitious proposals to shake
up the corporate governance of listed companies
has been the adoption of measures aimed at
encouraging, or even enforcing, a much larger role
for shareholders.
hareholder activism has

always been around. But
since the global economic
crisis exposed the failings
of corporate governance,
a case has been made to
empower shareholders even
more so they can make their
voices heard throughout the
worlds boardrooms. This
is especially true for small
retail investors, who are
often ignored due to their
lack of financial clout and/or
specialized knowledge.
The rationale for giving
shareholders greater say
is primarily to ensure that
transparency penetrates all
areas of corporate activity,
and to demand that the
best possible governance
practices get implemented.
In particular:
More Active Participation

in Shareholder
Assemblies
Requirements that
shareholders must hold
a minimum number of
shares to be able to attend
30
assemblies or serve
as advisers have been
scrapped. Information
must be freely available by
request or via the companys
website. Shareholders
should be able to cast their
votes remotely as well as
through proxy advisors.
Procedures for introducing
items onto the agenda have
been made easier.
Increasing the Number

of Decisions Needing
Shareholder Approval
Another means of expanding
shareholder participation in
decision-making has been
to increase the number of
decisions needing their
approval. Examples abound
in which shareholders are
now legally obliged to vote
on decisions related to
remuneration, operations,
the use of consultants
and external advisers,
redundancy and other
measures that might affect
the corporate transactions
market.
These measures have made a difference.

Companies have to be more transparent, open
and honest about their activities and any potential conflicts of interest, not only in their
external communications but also in their internal decision-making processes. There are
tighter reins on executive pay, and compensation is being more closely linked to long-term
performance. Moreover, the definition of those
who qualify as stakeholders has been enlarged
beyond the shareholders.
Formal requirements are undeniably stricter today than before. Companies are now under
much greater pressure to dedicate time and resources to comply with new corporate governance guidelines. However, the goal should not
be limited to formal compliance, but rather to
achieving real, lasting improvement in corporate governance practices. One hopes to see the
greater involvement of shareholders in terms
of both the number and scope of management
decisions on which they are consulted.
The company continues to be a fundamental institution for economic risk-taking in society. Thanks to sweeping changes in corporate
governance, that risk-taking is now being calculated with more care. Any further regulatory
changes must be aimed at assigning appropriate roles and responsibilities to the companys
disparate stakeholders and making sure that
the mechanisms in place are appropriate to
deal with the governance challenges ahead, for
the long-term social and economic welfare of
everyone.
to know more
n
Belcredi, M. and G. Ferrarini. Boards and

Shareholders in European Listed Companies: Facts,
Context and Post-Crisis Reforms. Cambridge:
Cambridge University Press, 2013.
Mayer, C. Firm Commitment: Why the Corporation
Is Failing Us and How to Restore Trust in It. Oxford:
Oxford University Press, 2013.
European Corporate Governance Forum.
Action Plan: European Company Law and
Corporate Governance, a Modern Legal
Framework for More Engaged Shareholders and
Sustainable Companies. Strasbourg: European
Commission, 2012.
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Deep
deep
insight
PROXY ADVISORS

By GAIZKA ORMAZABAL & ALLAN L. McCALL
ver the past two decades, U.S. markets have seen corporate governance failures blamed for a series
of crises, including the dot-com
boom/bust, the accounting scandals at the beginning of the 21st century and the global financial crisis. In response, legislators drafted new
laws such as Sarbanes-Oxley and Dodd-Frank,
which aimed to improve internal controls and
corporate governance. Less well known, at
least outside the world of institutional investment, are the regulatory changes made in 2003
by the U.S. Securities and Exchange Commission (SEC) to require mutual funds to develop
unconflicted policies and procedures in rela-
ieseinsight
tion to their proxy votes, as well as disclosing

their voting on all shareholder proposals.
The reasoning was simple: If conflicts of interest on boards were as widespread a problem
as the corporate governance crises suggested,
then investors particularly institutional investors needed to pay much closer attention
to governance in the companies in which they
invested.
The intentions behind this new legislation
were laudable. After all, what investor would
not want better disclosure, transparency and
accountability?
Critics push back that these potential
benefits need to be weighed against other
31
Are Voting Guidelines Ruling Your Business?
This article discusses the main controversies around

the proxy advisory industry. We also call for a more
thorough investigation of the impact of proxy
advisory firms on company performance.
possible drawbacks of the regulation. In a

2013 speech on the dangers of reactive legislation, Daniel M. Gallagher, a commissioner
at the SEC, argued that the resulting regulatory mandates are often based upon false
narratives and in the end lead to the expansion of a universal law: the law of unintended
consequences.
In the case of the SECs proxy voting legislation, the unintended consequences have been
subtle but impactful for corporate boards and
investors. One of the controversies is the increase in the influence of proxy advisors firms
specializing in corporate governance research
to whom institutional investors frequently
outsource part or all of the analysis of corporate governance matters that are put to a shareholder vote.
This article draws upon research that we
have conducted with David F. Larcker from
Stanford University. We highlight one unintended consequence of this new regulatory

framework and discuss the main controversies around the proxy advisory industry. We
also call for a more thorough investigation of
the impact of proxy advisory firms on company
performance.
This issue concerns firms and investors not
just in the United States but worldwide, as other national and regional regulatory bodies use
the SECs regulatory choices as a benchmark.
The Rise of Proxy Advisory Firms

The traditional view of corporate governance
involves three main actors shareholders,
managers and boards of directors whose interests are not always aligned.
Shareholders provide corporations with
capital, managers make use of that capital and
boards supervise the managers to make sure
EXECUTIVE SUMMARY
Recent legislative and regulatory decisions
giving shareholders more influence over
the governance of U.S. listed companies
has motivated corporate boards and
management to engage with shareholders
with unintended consequences. There
has been a dramatic rise in the number
of proxy issues that have to be voted on
by shareholders. Under SEC rules, many
institutional investors have a fiduciary
obligation to cast a vote on every item
that comes before them, leading many to
outsource their voting decisions to proxy
advisors. The two largest proxy advisory
firms Institutional Shareholder Services
(ISS) and Glass, Lewis & Co. (Glass Lewis)
control most of the proxy advisory market
and have thousands of institutional clients,
meaning that the corporate governance
policies of these two companies affect a
32
significant proportion of shareholder votes.

The authors studied proxy voting on 264
stock option repricings for 251 individual
firms and found that those repricings that
were more aligned with proxy advisory
firm guidelines experienced lower stock
returns, weaker operational performance
and a higher likelihood of executive and
employee turnover. This negative impact
on shareholder value suggests that there
is a need to better understand the role
of proxy advisors recommendations on
other more important voting issues such
as executive compensation, director
elections or equity compensation plans. The
regulatory debate on the U.S. proxy advisory
industry is important worldwide, as the
SECs regulatory choices are a benchmark
for other national and regional regulatory
bodies.
ieseinsight
Doubts are being raised regarding the depth and quality

of the research offered by proxy firms, and whether
enough is being done to understand the economic
consequences of their voting recommendations.
they allocate the capital appropriately. Shareholders are also meant to oversee the boards
actions through periodic shareholder votes.
In the wake of the last decades corporate
governance failures, the U.S. government, financial regulators and major stock exchanges
sought to rectify the balance of power between
these three actors. Shareholders, they decided,
needed greater input on corporate governance
matters.
In 2003, the New York Stock Exchange and
the Nasdaq altered their listing conditions
to require that any new equity compensation
plan or material modification to an equity
compensation plan had to receive shareholder
approval. This was followed by the SECs requirements that many institutional investors
disclose both their voting polices and actual
votes in proxy voting matters, ostensibly to
expose potential conflicts of interest between
mutual fund management and the funds ultimate shareholders.
The result has been a dramatic increase in
the number of proxy issues that have to be voted on by shareholders, putting strain on institutional investors limited time and resources
available to research these issues.
To deal with this burden, the SEC allowed
investment firms to use independent third parties to guide their proxy voting and thereby fulfill their proxy voting obligations. Specifically,
the SEC issued guidance providing that if an investors votes followed the recommendations
of an independent third party (i.e., a proxy
advisor) then its voting would be considered
unconflicted.
Consequently, many institutional investors began relying more heavily some even
exclusively on the recommendations of thirdparty proxy advisory firms in determining their
proxy votes. This, in turn, led to a rise in influence of a small number of proxy advisors on
the outcomes of corporate elections. A decade
later, two firms Institutional Shareholder
ieseinsight
Services (ISS) and Glass, Lewis & Co. (Glass

Lewis) control most of the entire sector.
For institutional investors, hiring proxy
advisors provides a mechanism for sharing the
cost of research on proxy issues. Whats more,
having a proxy advisors seal of approval on
your proxy votes could help shield you against
accusations of conflicted voting.
Although it seems like a win-win arrangement, doubts are starting to be raised with regard to the depth and quality of the research
offered by proxy firms, and whether enough is
being done to understand the economic consequences of their voting recommendations.
Does One Size Fit All?

One concern is that public companies may follow the corporate governance policies of proxy
advisors in order to gain a majority of favorable
votes for management proposals, even though
the policies may not be appropriate for the
firms specific circumstances. Such actions
have the potential to impose real costs on firms
and their shareholders.
As anyone with managerial or executive
experience will know, few rules of corporate
governance can be accurately assessed without
deep knowledge of a company and its management. And herein lies the problem: The recommendations of proxy advisors tend to be based
on best practices applied to all companies. Yet
these general rules could be irrelevant and
even detrimental to some companies in certain
business situations.
To help shed light on this issue, we examined the economic consequences of proxy advisor guidance on underwater stock option
repricings, whereby firms seek to replace stock
options whose exercise price is higher than the
current share price (i.e., underwater) with
new awards of options (with lower strike prices), restricted stock and/or cash.
Critics of repricings including proxy advisors have argued that such moves are used
33
Compliance with proxy advisor guidelines on stock

option repricing limited the recontracting benefits
of these transactions and had a detrimental effect on
shareholder value.
by entrenched managers to extract rents from

shareholders by reducing the downside risk of
their compensation contracts. In other words,
repricings end up insulating managers from
the financial repercussions of their own bad
performance.
However, research has shown that allowing
some exchange of underwater stock options
could be preferable to refusing to adjust initial
contracts after they have gone underwater,
which risks leaving a companys employees
with little or no financial incentive to stay the
course in their current role, or with incentives
to take excessive risks.
In our study, we analyzed a sample of 264
stock option repricings announced between
2004 and 2009. For each repricing, we measured the degree of conformity to proxy advisor guidelines.
We then compared the conformity with
subsequent firm performance and executive
turnover and found that repricing programs
that did not conform to proxy advisor policies
were generally more beneficial for shareholders.
Specifically we found that firms with repricing
about the authors
Gaizka Ormazabal is an assistant professor of Accounting and Control at IESE. He
received a PhD in business
from Stanford University and
a PhD in construction engineering from the Polytechnic
University of Catalonia, where
he also earned a degree in civil
engineering. His research focuses on executive compensation and corporate governance
mechanisms, including managerial risk-taking incentives and
corporate risk oversight.
34
Allan L. McCall is a researcher in the Center for

Leadership and Development
at Stanfords Graduate School
of Business in the areas of
corporate governance and
compensation. He holds a
PhD from Stanford University.
Prior to that, he was a cofounder and principal at Compensia, and vice president of
compensation and benefits
for Providian Financial. He
earned a degree in economics
from Yale University.
programs more aligned with proxy advisors

policies had a smaller increase in stock price,
weaker operational performance and a higher
likelihood of executive and employee turnover.
Put another way, compliance with proxy
advisor guidelines on stock option repricing
limited the recontracting benefits of these
transactions and had a detrimental effect on
shareholder value.
Proceed With Caution

This is not to say that everything proxy advisors do is flawed or damaging to shareholder
value. Admittedly, our study examined only
one management proposal that affected 251
individual firms in our sample.
For example, in the context of mergers
and acquisitions, there is evidence suggesting that proxy advisory firms recommendations may be better tailored to each situation. In these settings, proxy advisors must
typically conduct firm-specific research into
each M&A transaction to determine their
recommendation.
Moreover, some large investment firms
seem to make up their own minds regardless
of the proxy advisors views. Michelle Edkins,
head of governance for the New York-based
asset manager BlackRock, told Reuters that
proxy advisors provide a valuable service by
helping them cast votes in relation to thousands of company stocks, but added that research from proxy advisory firms was just one
of many inputs in their voting decisions.
Advocates of the proxy advisory industry
also argue that critics overstate the influence
of proxy advisors because many shareholder
votes are non-binding and thus can be disregarded by corporate executives and boards of
directors.
That being said, negative non-binding voting outcomes could also introduce significant
costs for the affected companies in the form of
reputational damage and litigation.
ieseinsight
While there is a clear case to be made for a certain

amount of shareholder supervision of boards and
management, we believe it should be done with both
caution and moderation.
However, critics main concern rather relates to the fact that proxy advisors incentives
to produce high-quality voting recommendations are unclear.
First, proxy advisors owe no fiduciary duties to the shareholders of the companies on
which they are advising, nor have they any direct stake in corporate performance.
Second, proxy advisors are deemed independent and thus protected by the current
regulatory framework.
Third, because the proxy advisory industry
is highly concentrated (being controlled as
it is by only two main players), it is not clear
whether proxy advisors are subject to substantial competitive pressure.
Fourth, to the extent that proxy advisors
provide services to both investors and corporate issuers on the same governance issues,
proxy advisors could be subject to conflicts of
interest. For example, the largest proxy advisor, ISS, not only sells proxy voting services to
institutional investors but also offers consulting services to corporations that are the subject of ISS recommendations to institutional
investors.
For these reasons, it seems vital that both
policy makers and regulators scrutinize the
effects of proxy advisory firms recommendations on issues that could potentially have a
very large impact on investor returns, such as
equity compensation plans, executive bonus
plans, director elections and say-on-pay.
Time is of the essence given that countries
and regions far and wide are contemplating
adopting regulatory frameworks for proxy
voting similar to the SECs, including proposals for self-regulation.
Before such measures are exported beyond
U.S. borders, we need to establish a much
broader and deeper understanding of how the
recommendations of proxy advisors impact
shareholder value and the economy at large.
This improved understanding will help answer
ieseinsight
the questions about the proxy advisory industry that are currently on the desk of regulators.
Should the SEC regulate the proxy advisory
industry? Would this regulation stifle a source
of independent research and increase managerial entrenchment? Is competition rather than
regulation the solution to the potential problems of the proxy advisory industry?
Moreover, the debate on the role of proxy
advisors cannot be decoupled from the regulatory debate on shareholder voting. We agree
that investors should vote their shares if doing
so is expected to increase shareholder value.
However, should institutional investors be required to vote in every election?
While there is a clear case to be made for a
certain amount of shareholder supervision of
boards and management, especially in light of
recent scandals, we believe it should be done
with both caution and moderation.
Otherwise, we risk solving one problem
only to create a potentially bigger one namely the loss of independence of company boards
and management and, by extension, their ability to create value for both their institutional
and retail investors.
to know more
n
Larcker, D.F., A.L. McCall and G. Ormazabal.

Proxy Advisory Firms and Stock Option
Repricing. Journal of Accounting and Economics
56 (2013): 149-69.
35
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Financial Times, May 2014
DEEP
insight
RENEWING THE BOARDS MISSION

Every Boards Agenda
By JORDI CANALS
overnance failures have led to

corporate failures in recent years.
There have been serious problems
with executive compensation,
director-nomination processes, accountability and reporting, and boardroom decisionmaking. Granted, important changes have been
made: Executive compensation seems to be under greater scrutiny, more independent directors
have been nominated, boards are making clearer
proposals to shareholders, and there are more
open discussions between boards and investors.
Yet, however welcome these changes may
be, they are not enough to steady the ship.
What is ultimately needed is a sea change in
the way companies view their activities and
responsibilities.
ieseinsight
Going Back to Basics

to Rebuild Trust
Part of this change means remembering that
corporate success depends primarily on people and the relationships they build among
themselves and with other stakeholders. It
demands trust, which can only be nurtured
over the long term.
Boards of directors play an essential role
in building trust, making sure that it pervades
every corner of the firm and that every decision
the organization makes conforms to the highest levels of professional excellence.
Boards also need to have a crystal-clear idea
of how the firm can create sustainable value
over the long term and how it can get the right
people, starting with the CEO.
37
6 Items for the Top of Every Boards Agenda
We need to redefine the firm, addressing nonfinancial

as well as financial aspects of governance. Although this
increases boards responsibilities, the complexity of the
real world demands it.
Failure to do so has serious repercussions,

including: confusion over strategy; inadequate reporting and accountability, leading to
strained relations with shareholders; poor financial performance; executive compensation
scandals; high levels of management turnover;
and reputational damage. In the end, this lethal
combination of factors poisons innovation and
entrepreneurship, stirring up popular resentment and mistrust of business in general.
The main purpose of this article is to remind readers that effective boards of directors
are not just the CEOs backstop but stewards of
the firms survival. Making boards more effective requires a much clearer definition of their
functions, responsibilities and agendas, based
on a holistic view of the firm. Ultimately, to be
effective, a board of directors needs to develop
and share a long-term purpose for the company
and think long and hard about how it can add
value to the firm.
A Broader Mission for the Board

Over the past decades, corporations have been
mostly shaped by CEOs, with shareholders
and boards of directors taking the back seat. In
many cases, boards have limited themselves to
executive summary
The role of boards of directors
is in the spotlight. Can boards
do a better job at protecting
their companies? Theres
certainly good reason to think
so. Today, some experts are
calling for tougher regulations
on boards and a larger role for
shareholders in key strategic
decision-making. Others
advocate for more professional
board directors.
Neither of these solutions
38
is enough. What is needed is

a clearer vision of the firms
overarching purpose, as well
as aligning and measuring
its long-term success. Also
required is a drastic rethink of
how the board can add longterm value to the company it
serves. Such changes will be
necessary not only to shape
up corporate governance
practices, but also to safeguard
the future of capitalism itself.
simply rubber-stamping the decisions made by

top managers.
Recently some boards have taken a firmer
hand, regaining some of the decision-making
power tacitly ceded to the CEO. In a sudden
break from the past, some boards have even
openly expressed their full disagreement with
their respective CEOs. In extreme cases such
as with Mike Hurd at Hewlett-Packard, Bob
Diamond at Barclays or Ken Lewis at Bank of
America the clashes culminated in the ousting of the CEO and a real shift of power back in
favor of the boards of directors.
But such cases are the exception to the
norm. Many boards still take a back seat in
governance matters. By limiting themselves
to designing financial incentives for senior
management, they forsake their responsibility
to monitor the CEO. The inevitable result is a
sharp decline in corporate governance.
The path toward renewal should begin
from two basic starting points: first, a more
comprehensive view of the firm; and second,
a mission of the board that is fully aligned with
that view.
We need to redefine the firm so that it is
more in tune with the on-the-ground reality of
todays business world. This means addressing nonfinancial as well as financial aspects of
governance. Although this increases boards
responsibilities, the complexity of the real
world demands it.
Good governance is not just about fiduciary duties or defending certain areas of responsibility; it is also about improving performance and pursuing new opportunities to
build long-term success.
Practices may differ enormously among
countries and industries, and good corporate
governance does not follow a one-size-fits-all
model two companies may have completely
different practices and yet both can be successful in the long run.
Some firms recent practices help us to
ieseinsight
identify key areas that are critical for improving corporate governance. These include:
creating positive environments in which
people can work and grow (related to corporate culture, mission and values); defining
the companys strategy and approving sound
strategic decisions; monitoring performance
and controlling risks; selecting, appraising
and replacing CEOs; nurturing and developing leadership competencies; and managing
the firms social responsibilities and risks.
(See Exhibit 1.)
As diverse as these areas are, they share one
common denominator: They all help create a
context for good decision-making to flourish.
They also depart from the assumption that the
board of directors can go it alone. Instead, they
underscore that boards must forge strong, collaborative relationships with the CEO and the
senior management team.
Quality of
Corporate Governance
exhibit 1
THESE AREAS HAVE EMERGED AS KEY FOR IMPROVING CORPORATE

GOVERNANCE IN THE WAKE OF THE GLOBAL FINANCIAL CRISIS.
PROFESSIONAL
CONTEXT
Creating positive environments
in which people can work and
grow (related to corporate
culture, mission and values)
STRATEGY
RECRUITMENT
Selecting, appraising and

replacing CEOs
LEADERSHIP
DEVELOPMENT
Defining the companys

strategy and approving
sound strategic decisions
Nurturing and developing

leadership competencies
CONTROL
SOCIAL IMPACT
Monitoring performance
and controlling risks
Managing the firms social

responsibilities and risks
ieseinsight
Boards Key Tasks

Based on this understanding, boards must become stewards of the mission and values. They
should work with the CEOs and senior management teams, while promoting leadership
development across the organization. They
must establish effective financial and control
systems to monitor risks. Finally, they must
foster their companies institutional development and their commitment toward the communities in which they operate.
These functions might not guarantee longterm financial success, but they will help ensure that the principles followed by boards are
consistent with a long-term view of the firm
and the stated mission and values.
MISSION & VALUES. Being profitable is a condition for a company but not the purpose of a
company. A strong sense of mission and values
is a key driver of good performance.
Without having an explicit mission, it is all
but impossible to improve the quality of governance. Pursuing a mission also offers the organization a broader focus that goes far beyond
mere financial performance.
The French food giant Danone is an interesting case in point. Since its early beginnings,
it has had a strong passion for consumer health.
Franck Riboud, its current CEO, has built upon
the companys mission to provide consumers with healthy food products and turned it
into one of its main strategic drivers. Danone
also espouses strong corporate values such as
openness, enthusiasm, proximity and humanism, which in turn foster improved decisionmaking, closer attention to customer needs
and a more fertile ground for innovation.
The mission encourages the CEO to think
long term a task that is made much easier
when the CEO shares the same values, as is the
case with Paul Polman. On taking over as CEO
of Unilever in 2009, one of the first things he
did was to set out a clear mission for the firm,
based on much longer term thinking. As he
told me in an interview for the previous issue
of IESE Insight, We dont and shouldnt make
decisions based on 90 days. Were here for the
long term, not to hit quick goals.
Companies with a clear sense of mission are
not guaranteed to be successful. But by having
deeply engaged people, they certainly stand a
better chance of having long-term success.
39
Companies with a clear sense of mission are not

guaranteed to be successful. But by having deeply
engaged people, they certainly stand a better chance of
having long-term success.
STRATEGY & STRATEGIC DECISIONS. Corporate

governance best practices consistently underscore the value of board involvement with
strategy. Naturally, the CEO and his or her
team are ultimately responsible for strategy
formulation, but they should not do it alone.
The board of directors should serve as a sounding board, weighing up management proposals and, whenever necessary, challenging the
CEOs views. To do that, the board must understand the industry structure, customers needs
and preferences, and the companys strengths
and weaknesses.
The multinational telecom Telefnica provides valuable lessons on how a board of directors can contribute to strategy. At the end of
2001, Telefnica, like many of its peers, was
struggling from the dot-com crash. Its problems included excessive financial leverage,
bad investments, too much diversification and
overcapacity.
With the help of the board, the company
sold off its bad investments, stepped up efforts
to increase market share and profitability in
Spain and Latin America, reshuffled key management positions and improved its overall
financial health.
As the global economy improved, Telefnica began expanding its activities in its
core markets. It also acquired firms in the
United Kingdom and Germany and strengthened its presence in China through an alliance.
Throughout this process, the board played an
about the author

Jordi Canals is IESEs Dean and Professor of
Strategic Management and Economics. He
is the author of numerous books and articles
in the areas of corporate governance,
leadership and globalization, including
Building Respected Companies (Cambridge,
2010).
40
active role, helping the firm to get back on its

feet and rebuild strength.
The Telefnica case underscores the importance of the board having deep, strategic
knowledge of the company it serves and the
industries in which it operates. This is not to
say that the boards role is to run the company;
rather, it must engage in strategy development
with the CEO and top management. And to do
that, it must have a clear understanding of all
the issues at hand.
CONTROL & RISK MANAGEMENT SYSTEMS. Inadequate control systems played a major role in
the buildup to the 2007-08 global financial crisis. In many cases, the systems were designed
neither to prevent a crisis nor to steady the ship
during a crisis. Indeed, for some boards, crisis
management was not even viewed as part of
their responsibilities.
The banking industry provides instructive
lessons on the importance of risk management
in todays business environment. For example,
the banking group BBVA withstood the recent
financial crisis better than many of its peers because it was particularly effective at risk management, identifying early warning signals of
deterioration in some markets and reducing its
exposure to them. It also managed its capital
ratios better than many of its competitors.
The design and implementation of efficient
risk management and control systems are vital for a firms longevity, especially in times of
turbulence. As such, each board must design
its own set of performance indicators that reflects the realities facing both the company and
its industry. Some indicators, such as cash balances, mean different things to different companies. The board must also carefully track the
evolution of these indicators.
Quality information is indispensable for
effective corporate governance. However,
even good boards of directors have a tendency
to focus excessively on short-term financial
ieseinsight
For the CEO, the board of directors must be more than

just a supervisor. The board can help the CEO develop
leadership capabilities and provide a testing ground for
ideas and projects.
information. While this information is valuable, it is not enough.

To gain a rounded picture of the firms positioning and prospects, the board needs a comprehensive scorecard that includes not only
financial indicators, but also indicators for
competitive positioning, customer loyalty, employee retention and development, risk management, innovation, new product and service
development, and operational efficiency.
CEO SELECTION, ASSESSMENT & LEADERSHIP DEVELOPMENT. CEO selection is one of the boards
most complex duties. The CEO must support

the values of the firm, define the strategy, appoint senior managers and other key people,
and shape the way the executive committee
works. The CEO is also the direct link between
the board of directors and the rest of the firm.
For the CEO, the board of directors must
be more than just a supervisor; it should be a
sounding board and a mentor. The board can
help the CEO develop his or her leadership capabilities and provide a testing ground for his
or her ideas and projects.
CEO selection is a key board decision.
Ideally, the board should first identify a diverse pool of potential internal candidates to
find the next CEO from within the company.
Leadership development programs help nurture vital talent for the companys future and
enhance the firms attractiveness for young
professionals. To reflect the global markets in
which most companies now operate, this talent
pool should represent as broad a spectrum of
backgrounds as possible.
The CEO may have the final say in appointing senior management, but it is the boards
job to make sure that the right leadership development practices are in place across the
organization. This means regularly reviewing
their implementation and progress, as well
as identifying and supporting those people
who exhibit the greatest potential to scale the
ieseinsight
companys ranks. How much time the board allocates to this area speaks volumes about the
firms concern for people development.
INSTITUTIONAL DEVELOPMENT & SOCIAL IMPACT.
Firms have a bigger impact on society today

than ever before and not always for the good.
Corporate scandals have done untold harm to
stakeholders and firms reputations. As such,
social impact must be weighed and controlled.
By developing a robust institutional strategy, companies minimize the danger posed by
political and social risks. It is the board of directors task to assess those risks, reduce the
companys institutional footprint and make
sure that it positively impacts the communities in which it operates.
Companies growing concern for social issues represents a step in the right direction.
But real progress means going beyond what
is currently understood by corporate social
responsibility.
Nestl offers a fitting example of how a successful business model can be forged from the
sense of purpose shared by large stakeholders
and the board of directors. The company is a
leader in many of the markets in which it operates, focusing exclusively on tried and tested
businesses and products and staying well clear
of reckless diversification. Nestl has also consistently demonstrated a strong commitment to
the communities in which it operates by developing long-term relationships, embracing social
challenges such as sustainability, following the
advice of medical doctors and experts on nutritional issues, and designing new business models for cheaper products in emerging countries.
The Indian IT multinational Infosys is
another company that is committed to serve
and improve the societies where it operates.
It does this by helping governments and NGOs
improve the quality of their IT services as well
as offering some of the worlds poorest citizens the chance to connect to the Internet. By
41
The boards role is to define long-term goals, monitor

performance and develop a positive corporate identity.
Boards need to view the company as an institution
embedded within society.
offering basic technology training in neglected
communities, Infosys has shown how to use
corporate resources to tackle fundamental
social challenges.
Institutional development encompasses
a companys strategies, policies and values
in relation to certain stakeholders, including
governments. These, in turn, shape a companys institutional profile i.e., the way in
which it interacts with the broader society.
The boards role is to define long-term goals,
An Agenda for
Boards of Directors
exhibit 2
THESE 6 ITEMS NEED TO BE REGULARLY

CONSIDERED BY THE BOARD.
s h o r t TE R M
Strategic positioning
Implementation
1
STRATEGY
2
PEOPLE &
LEADERSHIP
DEVELOPMENT
FINANCIAL
PERFORMANCE
5
CUSTOMERS &
INNOVATION
6
INSTITUTIONAL
DEVELOPMENT
42
New capabilities
Business portfolio
Strategic
investments
Talent pool
Recruitment and
turnover
Work atmosphere
Mission and values

Leadership
development
Commitment
CEO assessment
Leadership
development
Succession planning
CEO
L ONG TE R M
Liquidity, ROE, ROI

Risk management
Value creation
Capital markets
Customer satisfaction
Efficient resource
allocation
Growth boosters
Customer loyalty
Stakeholder relations
Becoming a
respected institution
approve new initiatives, define policies, monitor performance and develop a positive corporate identity.
While it is true there can be no sustainable
corporate reputation without good products,
good products may not be enough to sustain a
solid corporate reputation these days.
An Agenda for Boards of Directors

In their quest to support their companys
long-term success, boards should consider
the following basic questions: How can we add
value to the company? How should our work
be organized so as to have the greatest possible
impact? How can we assess our performance?
Based on the functions and responsibilities
described previously, there is a broad agenda
that needs to be regularly considered by the
board. Some issues need to be examined often
in particular those that have a strong shortterm dimension. Others need only be considered periodically, perhaps just once or twice a
year. Lets examine these issues, grouped into
six broad areas. (See Exhibit 2.)
1. STRATEGY. The board has an important role
to play in the strategy agenda. This should

start with a solid understanding of the company and its industry. In the long term, the
board should focus on strengthening the
business portfolio, resource allocation and
investment, and supporting innovation and
developing new capabilities.
2. PEOPLE & LEADERSHIP DEVELOPMENT. People
development is a key task for the board, especially when it comes to ensuring the quality of current and future leadership. The
board should consider three main factors in
this area: managers and employees sense of
purpose; the quality and breadth of talent in
the organization; and the effectiveness of the
recruiting process and the level of employee
turnover.
ieseinsight
Corporate governance and management are social

functions that can only be developed in the long term.
Investors who are not committed to the long term
should ideally not be given a place on the board.
3. CEO. The board should develop a functional,
working relationship with the chief executive

and senior management team. This relationship
should go beyond the normal processes of exchanging information and upholding accountability, to include the development of leadership capabilities among the top management
team as well as succession planning for both the
chief executive and other key senior managers.
4. FINANCIAL PERFORMANCE. Finance is of criti-
cal importance for boards. In the short term,

boards need to monitor the companys return
on equity, liquidity levels, return on investment
and investor relations. With a view to the long
term, boards should focus on value creation,
risk management and solvency. Of particular
importance is the alignment between the firms
strategy and its financial strategy.
5. CUSTOMERS & INNOVATION. The board should
keep a close eye on how to serve customers better. This means using certain indicators to measure customer loyalty and customer service,
which may be influenced by the firms level of
innovation.
certain shareholders.
Corporate governance and management
are social functions that can only be developed in the long term. As such, investors who
are not committed to the long-term development of the firm should ideally not be given a
place on the board of directors.
As social institutions that must earn public trust, companies need to be represented
by long-term owners, not short-term investors. As Polman said, Businesses cant be bystanders anymore. Yes, we need growth and
job creation, but we need to do it in a more
sustainable way. We need to become part of
the solution that gave us life in the first place.
As one of the central institutions in modern society, the firm is not just an engine of
wealth creation and jobs, but an agent of
change, a driver of innovation and people
development. Its long-term success requires
good governance. There is still a gap between
the kind of governance needed to run complex
organizations and the governance currently
offered by many of todays boards. Boards
should realize how critical their role is for the
companies they lead and the well-being of
societies at large.
6. INSTITUTIONAL DEVELOPMENT. The board

needs to view the company as an institution
embedded within society. As such, it has a number of nonfinancial functions and obligations
to fulfill. The boards long-term goal should be
to bolster the companys reputation, while in
the short term setting basic guidelines to shape
the firms relations with its stakeholders.
Planting Seeds of Good Governance

Good governance is essential for companies to
survive and thrive. Boards must take a frontrow seat in monitoring their firms.
Beyond overseeing financial and nonfinancial performance indicators, the board has a
moral obligation to support the long-term
success of the whole firm and not only for
ieseinsight
to know more
n
Canals, J. Building Respected Companies. Cambridge: Cambridge University Press, 2010.

Canals, J. Rethinking the Firms Mission and
Purpose. European Management Review 7 (2010):
195-204.
43
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Financial Times, 2013
personal
insight
INTERVIEW WITH CSAR CERNUDA, PRESIDENT, MICROSOFT ASIA-PACIFIC

By JAVIER ZAMORA
We need
the
Photos by EDU FERRER ALCOVER
to harness
energy,
innovation
and
speed
of the start-up.
ieseinsight
45
Bringing Microsoft to
the World
Csar Cernuda began his career in the

banking industry before joining Software
AG. In 1997, he joined Microsoft Spain.
Once there, he quickly made a name for
himself, launching bCentral, an online
services portal, which was awarded
best product of the year in Spain and
best initiative worldwide at Microsoft.
While at Microsoft, he attended IESEs
Management Development Program
(PDD).
Over the past 17 years, Cernuda has
gone on to perform a wide variety of
managerial roles at Microsoft around
the world: leading the merger of
Navision; running Microsoft Business
Solutions (MBS) Europe, Middle East
and Africa; driving sales and marketing
as Vice President of MBS Worldwide;
and becoming Vice President of Sales,
Marketing and Services for the Latin
America region, which was recognized for
its use of workplace flexibility. In 2012, he
joined the exclusive Microsoft Executive
Bench.
Now, as the President of Microsoft
Asia-Pacific based in Singapore, Cernuda
is responsible for more than 7,000
employees and 100,000 partners in
32 countries. He manages commercial
and consumer products and services in
the regions fast-growing consumption
of cloud, mobile, big data and social
technologies.
Though born in Mexico, Cernudas
family hails from Asturias in Spain, and
he maintains close links to the region. He
is an honorary patron of the Plataforma
Solidaria de Asturias, a foundation that
helps children in Bolivia.
46
ieseinsight
personal insight
INTERVIEW WITH csar cernuda
Tech That Works for Users
hen Csar Cernuda joined

Microsoft in 1997, a cell phone
without an antenna was
considered high-tech, Google
was a student research project and the iPhone
was just a glimmer in Steve Jobs eye. At the time,
Microsoft was heading for world domination,
with an estimated 90 percent market share of all
popular applications and operating systems.
In the intervening years, Cernuda has witnessed the dramatic changes that technology and
Microsoft have undergone. Most recently Microsoft has been attracting media attention ever since
Satya Nadella was appointed as the new CEO,
taking over from Steve Ballmer, in February 2014.
First came the announcement that the company
would be releasing a touch version of Office for
Apples iPad even before such a version existed
for its own Windows. Then, Nadella announced
that Windows would be free on all devices with
nine-inch screens or smaller. For a company whose
traditional business model has been based on
licensing its software, to now be giving its product
away signals a significant shift in direction toward
getting people to pay less for products and more
for services.
As the President of Microsoft Asia-Pacific, Cernuda has a unique insight into this ever-evolving
industry in one of the fastest growing regions of
the world. IESEs Javier Zamora caught up with
Cernuda when he came back to his alma mater
to deliver a special session on Leading Business
Transformation while he was in Barcelona to attend the Mobile World Congress.
JAVIER ZAMORA Microsofts vision under Bill
Gates was to put a computer on every desk
and in every home. We are now living in an era
where tablets and smartphones are outselling
PCs. In light of this, how is Microsoft
redefining its strategy and business model?
CSAR CERNUDA The world has changed, its true. This
is a time of great transformation and it is affecting
how we all live, experience and communicate.
Today we may be talking about smartphones and
tablets, but tomorrow we are going to see different
types of devices becoming part of our everyday
lives. For us, this is a great opportunity.
ieseinsight
In the Asia-Pacific region last year, there were

around 27 million new PCs on the market compared with 24 million tablets and 90 million smartphones. Rather than seeing all those smartphones
and tablets as a challenge, we see them as an
opportunity for Microsoft to create a more holistic
experience around Windows. Our focus today as a
company is very much on devices and services.
JZ How does Microsofts acquisition of
Nokias Devices and Services business fit with
that?
CC Nokia is a key part of our strategy to penetrate
the mobile phone market. For us it is about having
first-party hardware manufacturing and mobile
phone expertise.
In the future, we are going to see more and
more devices coming onto the market, which
will provide consumers with a wealth of different experiences to choose from. We have already
seen the launch of Windows Surface, a two-in-one
tablet designed to be the one device you need for
everything. It combines the power and portability
of a tablet with the keyboard, ports and software
functionality of a PC.
By partnering with other companies, we see
this as a huge opportunity for us to offer users the
chance to embrace the Windows experience across
a range of platforms using the same apps.
JZ Does the appointment of Satya Nadella,
with his background in cloud computing,
signal an evolution in the strategy of
Microsoft?
CC Yes. It is an exciting time for our company.
Satya has great vision and extensive experience in
both devices and cloud computing. Innovation is
key to his vision and he has been very clear about
that. Bill Gates, at Satyas request, has also agreed
to spend over 30 percent of his time on research
and development with Microsoft, which will
really help us to drive that innovation. As CEO,
Satya will be leading the company through its
transformation into a device and services focused
company. I am sure that we are going to see great
things to come in the next few years.
JZ
There seems to have been a distinct shift
47
personal insight
For small and medium-sized businesses, cloud

computing is not just a cost reduction, it is a
breakthrough.
48
away from Microsoft installing licenses on

computers to becoming the custodians of
data. How is cloud computing changing the
way we all work?
CC Cloud computing is going to be growing 25-35
percent in developing and emerging markets.
That is a big opportunity for us to capture a new
way of using technology. Years ago, we used to
say, Information is the power of organizations.
Today, the key challenge is how to access that
information. Which type of device are you going
to use to access it? How do you structure the data
there?
For companies, both large and small, cloud
computing means that the total cost of owning a
business is going down. Businesses no longer have
to invest large amounts in hardware, rent or buy
real estate to house servers in the office, pay for
server maintenance or waste a lot of money on
upgrades. With cloud computing, companies can
effectively outsource these services and pay only
for what they need.
For small and medium-sized businesses, this
is not just a cost reduction, it is a breakthrough.
In the past, SMBs didnt have access to the best
technology because they couldnt afford it or
didnt have the space for it. Now a small business
can have the same technology as a large organization. They are going to pay per use and per number
of users, so a small business with five employees is
going to be using the same technology as a business with 100,000.
your information stays secure. I would encourage

companies to think not just about the cloud, but
also about ensuring that they have the right device
that will keep their information protected.
JZ There has been much debate in the industry

about privacy and the protection of data in the
cloud for companies and consumers. How is
Microsoft dealing with these issues?
CC I am frequently asked about the security of
the cloud, but to be honest I think people often
fail to think about the security of the devices
they use. The cloud is quite secure, provided you
understand from your cloud suppliers where your
data are kept and how they work.
When it comes to devices, users smartphones
and tablets are full of information and yet these
can easily be lost or stolen. This is something that
Microsoft is very vocal about. For example, with
PCs and tablets, we use device encryption so that
JZ How are you motivating employees to

subscribe to this new strategy?
CC Ensuring that Microsoft employees understand
and share in our strategy is a big part of my job.
However, so often it is not about strategy, it is
about having the right R&D to go and deliver: to
walk the talk.
As a leader, this is not something that can be
achieved by enforcement. It has to be about motivation and inspiration. It is about really believing
that what we are doing is the best thing for our
customers and our partners. It is about understanding that we have been part of the transformation of the world and that we continue to have a
positive impact.
JZ Back in 1975, Microsoft was a start-up

that nipped at the heels of big companies like
IBM. Today, you have other start-ups trying
to challenge the position of Microsoft. Do you
think Microsoft will ever be able to regain the
speed and agility common to start-ups?
CC When you say we are being challenged by
new start-ups, I would say we have always been
challenged. As we have moved into new markets,
we have been challenged everywhere we have
gone.
With regard to our past, technology is different today from how it was 40 years ago. Today our
kids are growing up with technology and using
it in a different way from how we did. It is no
surprise to see how much more agile start-ups are
today. As a company with 100,000-plus employees, and with the market capitalization we have,
we cant very well say that we are a start-up but
that is definitely where we came from. So we understand it.
In terms of transforming the company, we are
striving to harness the energy, innovation and
speed of the start-up movement within our own
organization. We need to be nimble, we need to
be innovative and we need to make sure that is the
mind-set of all our employees.
ieseinsight
personal insight
Technology is not something we should be

dependent on. It should be there to make us better at
communicating, to help us have better lives.
For us, it is about practicing what we preach.
It is all well and good for a company to talk about
mobility, but we need to make that a reality for our
employees. We have to be flexible enough to allow
people to work from home or wherever they are.
When we achieve this, as we did in Latin America,
it makes people feel much more engaged.
A good example of this is Yammer. This is a
technology that we acquired and which is now
integrated within our Office 365 package. It works
as an internal social network for companies.
There was a study that said more than 70 percent of employees are not really engaged with the
companies for which they work. Social networks
like Yammer are a great way of fostering that engagement and the willingness to share
information.
In the past, if you had a problem and rang a call
center, it might take a week to get the answer you
needed. With Yammer, you can post your problem
to everyone within the company and somebody
can get back to you right away with an answer on
how to fix it. Thats agility, thats speed, thats
engagement.
Within Asia-Pacific, I have one Yammer network for all our employees, another for my leadership team and another for managers. It is a great
way to share experiences and ideas. I think Yammer will really help a lot of organizations become
much more agile and communicative.
JZ The theme of Barcelonas Mobile World
Congress this year was Whats Next? In
your opinion, what does the future hold for
the industry and for Microsoft?
CC First of all, I have to say that the Mobile World
Congress is an amazing setup. We have had a lot
of productive meetings here. It is a great place to
share, learn and discuss our vision with the real
movers and shakers in the industry.
As for whats next, I think technology is going
to be everywhere in our lives but in a less intrusive
way. Perhaps you are going to go into your kitchen
and have your fridge tell you that you need to buy
milk. You are going to be talking to your TV and
asking it to find a program or record something
for you.
ieseinsight
Over the next few years, technology is going to

be embraced even more. Our job at Microsoft is
to make sure that the technology works for us as
users. Technology is not something we should be
dependent on. It should be there to make us better
at communicating with others. It should help us to
have better lives.
Csar Cernuda was

interviewed by Javier Zamora
Javier Zamora is Lecturer in the Department

of Information Systems at IESE. His
areas of interest include big data, cloud
computing, digital media innovation and
business transformation in the digital age.
No stranger to devices and services himself,
he is cofounder of InQBarna, a company
specializing in the development of apps for
smartphones and tablets. He is also the author
of two international patents on Digital Home
architecture and services.
49
expert
Illustration by GIULIO BONASERA
insight
WHOEVER HAS EARS, LET THEM HEAR
Feedback Tips for Less

Grumbling, More Growth
By SHEILA HEEN
ach year around the world, an estimated 825 million work hours a
cumulative 94,000 years are spent
preparing for and engaging in performance reviews. Afterwards we all certainly feel
a thousand years older, but did anyone actually
learn anything? Will anyone improve as a result?
The statistics arent encouraging. According to a Summer 2013 Workforce Mood Tracker
Report by Globoforce, 51 percent of employees
felt their performance review was inaccurate
or unfair.
H.R. managers seem to agree, since another
Globoforce survey with the Society of Human
Resource Management found that 45 percent
of people managers and H.R. professionals did
not believe that performance reviews were
an accurate appraisal of employees work.
50
SECOND QUARTER 2014 issue 21
Perhaps this is why a quarter of employees surveyed said they dreaded their review more than
anything else in their working lives.
Managers dont seem to be enjoying the
process either. According to a 2010 Report
from WorldatWork, only 28 percent felt they
focused on having effective performance conversations, rather than just completing forms.
If feedback conversations arent working,
whose fault is it? Managers report that when
they try to give honest feedback, employees get
defensive, argue or disengage. Even if they appear to get through to the employee, little actually changes. Given how much time and energy
it takes to give honest feedback, why bother?
Those on the receiving end claim that the
feedback they get is off base and unfair, fails to
appreciate the constraints they are under or
ieseinsight
Feedback Tips for Less Grumbling, More Growth
expert insight
This article addresses why feedback is so hard to get

right, provides a new way to think about how to change
the culture around learning and suggests some practical
tips for jump-starting that change immediately.
isnt helpful. When the feedback is right and

useful, they say it is great, but this seems to be
the exception rather than the rule.
Of all the organizations I have worked with
large and small, for profit and non-profit,
across various industries and on six continents
I have yet to encounter anyone who believes
that feedback is truly working in his or her
organization or that the quality of feedback
conversations is as good as it should be.
And feedback needs to be good because we
rely on it, not just to determine whom to promote and how to reward, but to provide coaching and mentoring, to retain and motivate
key talent, to address performance problems
and to maximize the value of collaboration. If
feedback isnt working, teams get stuck, morale sinks, business results are suboptimal and
talent is lost.
This article will address why feedback is so
hard to get right, provide a new way to think
about how to change the culture around learning in your organization and suggest some
practical tips for jump-starting that change
immediately.
First, lets look at two common diagnoses
for why feedback isnt working in your organization: Either the people are good but the
EXECUTIVE SUMMARY
Thats wrong. You
dont understand. Do
these performance review
reactions sound familiar?
Why is it that managers and
subordinates alike find feedback
conversations so difficult? After
15 years of working with clients,
the author believes that efforts
to improve these conversations
by teaching managers how
to give feedback have been
misdirected. The best way
to achieve more productive
feedback conversations is for
ieseinsight
everyone to become more

active and skilled receivers of
the feedback they get. This
requires overcoming three
challenges: understanding what
is actually being said, being
able to separate the message
from the messenger and, finally,
knowing the triggers that will
make you more or less receptive
to the advice being given. The
aim is to change the feedback
culture so that everyone can
accelerate their ability to learn,
improve and grow.
performance management system is broken or

the system is good but the people are broken.
There Are No Perfect

Feedback Systems
Lets be clear: there are no perfect performance
management systems. Debates abound as to
whether to force a curve, how much to centralize the process or how best to ensure mentoring. Anyone choosing a particular system must
grapple with the inevitable tensions and tradeoffs associated with it.
In any system you choose, many feedback
givers will find that the costs outweigh the
benefits. Lucinda, for example, who works in
pharma research, is clear about this aspect of
her firms performance system: It takes time
away from my primary tasks, and there is no
reward or acknowledgment for doing it well.
Moreover, she is unsure how to assess her
subordinates. She knows they are not all top
performers, but she worries about the effect
that giving negative evaluations will have on
morale: If I score my people on the rigorous
scale that we have been given, many of them
are going to be disheartened. In a tight labor
market, I cant afford to lose any of the talent
I have or to erode the performance we have
achieved.
Forcing a manager to make stark distinctions may be designed to make things fair
across the organization as a whole and to make
it easier to identify key talent or poor performers. But for Lucinda and her team, she only sees
the downsides. Worse, Lucinda hears that other managers arent paying any attention to the
scale, so if she were to apply it strictly, then it
would be like penalizing people just for being
on my team, she says.
Another manager at a mountain resort, Jim,
also feels caught by the performance system
but for a different reason. As a team leader for
search and rescue, he knows that performance
is critical to survival. Ive put in the time to recruit and select the best people, he explains.
If I have the wrong person out there in a blizzard, its dangerous for everyone. I only have
issue 21 SECOND QUARTER 2014
51
expert insight
A players. Unlike some of my fellow managers,

Ive already done the work of having the hard
conversations and making the tough calls. A
forced curve punishes me for managing well.
Cant Live With It,

Cant Live Without It
From where Jim and Lucinda sit, their feedback
Three Kinds of Feedback
Feedback means different things to different

people. The challenge is knowing which kind you
want and which kind you are getting.
Appreciation
This is the kind of feedback that says, I see you, I get you
and You matter. Appreciation is what keeps us motivated,
feeling that our efforts are valued. Sometimes when people
say, I wish I got more feedback at work, what they really
mean is, I wish someone noticed that I work here. Studies
show that most organizations have a chronic appreciation
deficit a key cause of losing talent. Although appreciation is
usually well-received, we may be suspicious if we think that it
isnt sincere or that there might be a hidden agenda.
Coaching
This feedback is aimed at helping you to get better at
something; it is the engine of learning and development.
Coaching is needed in real time and year round, but often
gets put off until the performance review, where it gets lost
in the shuffle. We may resist coaching or mentoring because
it suggests that what we are doing now isnt right or is no
longer applicable.
Evaluation
This tells you where you stand and what to expect. It is your
performance review, whether you do or dont get the new
position or land the account. Although we need evaluation to
reassure us that we are on the right track, this feedback is also
the loudest emotionally and can drown out coaching and
appreciation, which are at least as important. Evaluation has
profound consequences for pay, promotion and reputation, so
no wonder we experience it as high risk.
Few organizations are good at helping givers and receivers to
be clear about which kind of feedback is needed and which
kind they are currently offering. Even when managers say they
want to offer coaching, it comes across as evaluation. Heres
how you could do that better is another way of saying, Youre
not doing it as well as you could. The defensiveness that
results short-circuits opportunities for learning.
52
systems look pretty flawed. Giving fully honest

reviews poses risks. If handled poorly by either
the giver or the receiver, such conversations
can be damaging to trust, work relationships,
motivation and team cohesion.
Then again, not giving fully honest reviews
is equally risky. Problems fester, the manager
and the system lose credibility, the team underperforms and high performers resent that
low performers arent pulling their weight yet
face no consequences.
When managers feel stuck, their typical reaction is avoidance. In the 2010 WorldatWork
survey of 750 senior H.R. professionals, 63
percent said their biggest challenge to effective performance management was that their
managers lacked the courage to have the difficult discussions. They gave artificially high
reviews to even mediocre employees, which
diluted the usefulness of reviews for addressing performance or guiding decision-making.
Susan Heathfield, in her article Performance
Appraisals Dont Work, reports that in one organization, 96 percent of employees received
the highest rating.
This should not be taken lightly, given
that a lack of meaningful feedback is the No. 1
reason cited by talented people for leaving an
organization, as researcher Bren Brown has
observed.
It is easy to complain about the system and
the people who populate it. Whats hard is to
figure out what would help, especially because
of the vast range of goals that performance
systems are supposed to accomplish, which
include:
to provide consistent evaluation across
roles, functions and regions;
to ensure fair compensation and distribution
of rewards;
to incentivize positive behavior and discipline negative behavior;
to communicate clear expectations;
to increase accountability;
to align individuals with organizational goals
and vision;
to coach and develop individual and team
performance;
to help get and retain the right people in the
right roles;
to assist succession planning in key leadership positions;
to promote job satisfaction and high morale;
to get it done on time in the moment, as well
as quarterly and annually.
Accomplishing all of these goals cant be done
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ieseinsight
expert insight
The very fact of feedback suggests that how you are now
is not quite okay. For this reason, advice like dont take
it personally or dont be defensive doesnt work. The
challenges go deeper, and so must the answers.
with a single system or even with a combination of systems. As such, the trend has been to
centralize and standardize systems, collecting
data across employees, functions, regions and
markets.
While this can be helpful, you cant metric your way around the fact that feedback
is a relationship-based, judgment-laced process. Or as Dick Grote put it in a Harvard Business Review article, The Myth of Performance
Metrics, you cant evaluate the performance
of a language translator simply by counting
the number of pages he translates; you have
to make judgments about the quality of the
translation its success in capturing nuance,
meaning and tone. Whether the feedback lives
or dies depends on the trust, credibility, relationships and communications skills between
the giver and receiver.
Although there are no easy answers and no
system will ever be perfect, we can still work
to improve it. However, we need to be realistic and recognize the limits of what a feedback
system can and cannot do. You cant create the
perfect family by building the perfect house.
There Are No Perfect

Feedback People
Perhaps you need to work harder at perfecting the people. When trying to improve the
human side of performance management, the
focus is typically on teaching managers how to
give feedback more skillfully and more often.
Globally, organizations spend billions of dollars every year doing just that. Helping managers become better communicators is valuable,
and yet it doesnt seem to be solving the feedback problem in organizations.
After spending 15 years working with clients
on helping givers give feedback more skillfully,
a thought eventually occurred to my coauthor,
Douglas Stone, and me: What if we have been
going about this backwards? Maybe instead of
teaching managers how to give feedback, we
should be teaching everyone how to receive
feedback more skillfully.
After all, if the receiver isnt ready or able
ieseinsight
to take in the feedback, there is only so far that

skillfulness or even persistence can go. No
matter how much power or authority the giver
has, it is the receiver who decides what to let in,
what sense to make of it, and whether and how
to change. Helping us all to become better receivers turns out to be where the real leverage
is. It also turns out to be a real challenge.
Why Is It So Hard to
Receive Feedback?
You would think that learning from feedback
wouldnt be so difficult. After all, we couldnt
have made it to adulthood without some kind
of learning capacity from learning how to
walk and talk, to mastering a myriad of subjects during our school years, to developing
skills specific to every job we have ever had.
But this kind of learning is entirely different
from learning about yourself. This is because
receiving feedback sits at the junction of two
core human desires.
On the one hand, we all share a basic desire
to learn and grow, beginning from when we
doggedly pulled ourselves to standing as toddlers, and continuing as we take up new hobbies during retirement. Research shows that
this human drive to keep growing or getting
better at something is a key to enduring happiness and life satisfaction.
Yet alongside this desire sits another: the
need to be accepted, respected and loved just
the way you are now. The very fact of feedback
suggests that how you are now is not quite okay.
This makes us feel conflicted. For all the
feedback or coaching we have received during
our professional lives that profoundly changed
our thinking or improved our capabilities, we
can also point to feedback that was brutally
painful and disorienting, regardless of whether
it was justified.
There is no way to make this tension go
away. It is baked into the human condition.
For this reason, advice like dont take it personally or dont be defensive doesnt work.
The challenges go much deeper than that, and
so must the answers.
53
expert insight
Getting good at receiving feedback means you are able

to sort, sift and understand what the giver is trying to tell
you. You are willing to try out new things, even if at first
they dont seem to fit.
It is worth noting that getting better at

receiving feedback does not mean you have
to accept it, even if it is wrong. Getting good
at receiving feedback means you get better at
understanding your own reactions triggered
by the feedback you get. You are able to sort,
sift and understand what the giver is trying to
tell you. You are willing to try out new things,
even if at first they dont seem to fit. Ultimately, you can make decisions about what
feedback to take on and what to leave behind.
Sometimes this even means knowing how to
establish boundaries redirecting or stopping unrelenting criticism, unhelpful, unsolicited coaching, or simply a kind of feedback
that isnt what you need right now. (See the
sidebar Three Kinds of Feedback.)
Honing these core skills pays off in myriad
ways. Research shows that people who solicit
negative feedback at work genuinely looking for what they can improve, rather than
simply fishing for compliments adapt more
quickly to new roles, report higher satisfaction and receive higher performance reviews.
Receiving feedback well doesnt just enable
you to take charge of and accelerate your
own growth; it can also change how people
see you.
about the author
Sheila Heen is a graduate
of Occidental College and
Harvard Law School, where
she teaches negotiation
and for the past 20 years
has developed negotiation
theory and practice as part
of the Harvard Negotiation
Project. She is also a founder
of Triad Consulting Group in
Cambridge, Massachusetts,
helping executive teams
work through conflicts. Her
corporate clients include
everyone from BAE Systems to
54
Unilever, and she has provided

training in the public sector
to the Singapore Supreme
Court and the Obama White
House. She is coauthor of the
international business bestseller Difficult Conversations
(Penguin, 1999) and Thanks for
the Feedback (Penguin, 2014).
She was a keynote speaker at
IESEs Fast Forward Executive
Education Program for
international executives and
H.R. managers held at IESE
Barcelona in June 2014.
Three Challenges to
Receiving Feedback Well
To get better at receiving feedback, you need
to understand and navigate three challenges at
the center of our triggered reactions to feedback.
The Challenge to See. To see what the feedback means and to see yourself accurately.
The Challenge of We. All feedback comes
wrapped in the relationship between giver
and receiver. You can have a reaction to who
is giving the feedback that colors your reaction to the feedback itself.
The Challenge of Being Me. Differences in
our wiring mean that individuals range from
being very sensitive to feedback to being
largely insensitive to feedback. Being upset
can distort your sense of the feedback itself
as well as your sense of self.
Understanding these three challenges will
help you to navigate your reactions to feedback more successfully and enable you to find
value in even off base or unfair feedback. Lets
examine the components of each challenge in
more depth.
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The Challenge to See:

First, Understand the Feedback
When feedback is incoming, we immediately
ask ourselves, Is this feedback right or is it
wrong? If its right, then we may need to do
something about it. But if its wrong, then we
can safely relax, set it aside and move on with
our lives.
As humans, we are very good at finding
something wrong with the feedback, quickly
honing in on any and all of the things that
are wrong with what is being said. Do any of
these examples of wrong-spotting sound
familiar?
What they are saying is totally not true, or
at least it is not true anymore.
They dont understand the constraints I
was under.
They have completely missed what I was
trying to accomplish.
When, where and how they delivered the
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ieseinsight
expert insight
In focusing on the aspects of the feedback that are

wrong, you ignore what might be true. Even when the
feedback is 90 percent off base, that last 10 percent
might be what you need to learn in order to grow.
feedback (e.g., by text message or in front
of customers) was incredibly unskilled and
inappropriate.
I am suspicious of their real reasons for
giving me this feedback. I dont trust them.
They are jealous or controlling or projecting
their own issues onto me.
The problem with wrong-spotting isnt that
you are wrong about what is wrong. Indeed,
any of the above claims might well be valid.
The problem is you can always find something wrong. In focusing on the aspects of the
feedback that are problematic, you ignore
what might also be true or helpful. And even
when the feedback is 90 percent off base, that
last 10 percent might be the very thing you
need to learn in order to grow.
Start by making two lists. First, go ahead
and list everything that is wrong with the
feedback. Making this list is emotionally satisfying. The goal is not to pretend that wrong
feedback is anything but what it is patently
false, poorly delivered, driven by ignorance or
a hidden agenda.
Exhibit 1
Understand the
Feedback
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WHEN FEEDBACK IS VAGUE, TAKE TIME TO

UNDERSTAND ITS PAST AND ITS FUTURE.
ASK: Where is
the feedback
coming from?
Now make a second list next to the first

one. This time ask yourself if there is anything
that might be right about the feedback. Even if
there is only one item on this list, it forces you
to think about what might be worth considering and what you might have to learn.
There is a second challenge here: to see
what is meant by the feedback. Part of the
reason feedback is often so easy to dismiss is
that it frequently arrives in the form of vague,
generic labels:
Show more confidence.
Be more proactive.
Take your game to the next level.
Work on your people skills.
Before accepting or rejecting such labels,
pause to see what the giver means by them.
For example, the advice to show more confidence might mean standing up straighter,
looking people in the eye or pretending to
know the answer when you really dont. Or the
giver could mean the opposite: that you need
to relax and admit you dont know the answer
when you dont know.

Your feedback has a past and a future. In
order to understand the feedback, you need to
understand:
Where the feedback comes from. What specific observations led the giver to give you
this feedback? Did they see you doing something that caused concern or upset? Did you
miss an opportunity? Have they seen others
do it differently or did they expect you to
handle it differently?
Where the feedback is going. What, specifically, do they want you to do differently in
the future?
Asking these questions will raise the quality and richness of the conversation, helping
both sides sort out what the givers are trying
to describe and what they are suggesting. Regardless of whether you ultimately decide to
accept or reject their advice, this conversation
will serve to strengthen your relationship as
both of you learn something new about the
situation and each other. (See Exhibit 1.)
Labels
used
ASK: Where is the

feedback going?
Examples:
Advice or coaching:
what specifically do
they want you to do
differently?
Observations,
data or
expectations
that led the
person to
give you this
feedback
Show more
confidence.
Be more
proactive.
Take your game
to the next level.
Work on your
people skills.
ieseinsight
55
expert insight
The Challenge of We:

Separate Who From What
Our first response to feedback is often not so
much a reaction to the advice itself, but to the
person giving it. The advice was unsolicited
(Who asked them anyway?), their timing was
terrible (at the annual shareholders meeting!)
and their so-called people skills were nowhere
in evidence. If only you could find a proper
mentor someone with experience and credibility, someone you trust, who has your best
interests at heart then their feedback would
come preapproved. Certainly, great mentors
are invaluable, and you should cherish those
you have.
That said, the fact remains that most of us
are stuck with colleagues and supervisors who
do not embody this ideal. They may be bosses
who dont have time for us, colleagues who are
Train Your Leaders

Want to give better feedback?
Then learn how to take it.
he most powerful thing you can do to improve the quality

of feedback conversations in your organization is to teach
your leaders how to receive feedback more skillfully.
When leaders become skillful receivers:
They start to get honest feedback from those below

them. The higher you get in any organization, the more
reluctant people are to give you candid feedback since they
dont want to jeopardize their relationship with you.
If you dont know what you need to work on as a leader,
chances are that the people who work for you can tell you.
They will likely have a list of all the things you do or fail to
do that make their jobs harder. Ask them and persuade them
that you really want to know. This will accelerate your own
growth as a leader.
They become better feedback givers. By understanding

what is so challenging about receiving feedback, you become
a more empathetic giver. You can anticipate defensiveness,
improve clarity and strengthen the relationship.
They become role models for what is valued in the
organization. Instead of just saying you want a culture
of learning, you actually live that attitude of continuous
improvement, showing people the skills needed to turn even
unfair, poorly delivered feedback into opportunities for growth.
56
difficult themselves and clients who are just

plain awkward or rude. Most feedback is going
to come from people like these, so if you want
to learn from the feedback you get, you need to
be able to separate the people who are giving
you the feedback from what it is they are saying. They may not be trustworthy. They may be
dead wrong about how you could improve your
sales. They may have poor communication
skills and express themselves ineptly. You may
be right about their personality defects. Even
so, their suggestion for how to run the weekly
meetings better might actually help.
Interestingly, some of the most valuable
feedback can come precisely from the people
with whom you find it most difficult to work.
When we ask colleagues for feedback, we tend to
seek out the people we like and whom we know
like us. But those people are less able to help us
with our edges because they dont see our edges
we work easily and happily together.
The people whom we find difficult do see
our edges, in part because they are so adept
at provoking them. They see us under stress,
frustrated and when we arent at our best. They
bring out the worst in us and its at our worst
where we have the most room to grow.
Go to those people whom you find challenging and ask for coaching. Dont say, Do
you have any feedback for me? That is too
broad a question and it is not clear how honest
you want them to be anyway.
Instead ask: Whats one thing you see me
doing, or failing to do, that is getting in my own
way?
Or ask: Whats one thing I could change
about how we are working together that would
make a big difference?
Not only are you likely to get something
concrete and specific, but by asking the question, you begin to change the relationship. (See
the sidebar Train Your Leaders.)
The Challenge of Being Me:

Your Wiring Affects Your Feedback
Neuroscience research by Richard Davidson,
among others, has found that in terms of sensitivity to feedback how far you swing emotionally in the wake of feedback and how long it
takes for you to recover individuals can differ
by as much as 3,000 percent.
Some people are relatively insensitive
to feedback. When they are offered indirect
coaching from a colleague, for example, they
may not even realize it is feedback. It simply doesnt get through. Others are highly
ieseinsight
expert insight
In any team, it is important to open up a discussion

around how each person reacts to feedback and how we
can best help each other to hear it, understand it, sort it
and act upon it.
sensitive to feedback, and an offhand correction from the boss during the opening of their
presentation causes them to lose focus and
stumble through what was otherwise a wellrehearsed talk. This leads the boss to give
them additional feedback: to grow a thicker
skin and not take things so personally.
This advice isnt very helpful because
whether you swing wide emotionally in the
wake of feedback or you remain even-keeled,
this is the way you are built. This also means
that the receivers are in the best position to
guide any feedback conversation, since they
are the ones who know what will be most helpful for them and how they learn best.
This does not mean you can say, I prefer
solely positive feedback. No criticism, please.
It does mean you can say, I would love your
suggestions for how to make my presentations better, and Ill be able to hear them best
and learn the most if you give them to me afterwards, on a one-to-one basis rather than in
front of the entire crowd. Or alternatively: If
you have a suggestion, I really want to hear it,
and dont be afraid to be blunt. I actually appreciate that.
Your wiring affects not just your emotional
reaction; it can distort your thinking and your
sense of the feedback itself. It becomes supersized, where one thing becomes everything and
it seems you can do nothing right. What began
as a comment about correcting your typos is
experienced as one more piece of evidence that
you are hopeless.
Dismantling these distortions begins by
recognizing your patterns when you receive
feedback. Do you argue back out loud or only
in your head? Do you accept the feedback in the
moment but later come to discount most of it?
Do you feel ill for days and avoid the person indefinitely?
Positive feedback has its own pattern. For
some people, a positive e-mail from a customer will put a bounce in their step all day. For
others, that positive feeling has disappeared
by the time they open the next e-mail. The
idea that a critical comment can be balanced
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by sandwiching it between positives may help

some people but wont do anything for others.
In any team, it is important to open up a
discussion around how each person reacts to
feedback and how we can best help each other
to hear it, understand it, sort it and act upon it.
Team members can coach others on how best
to help them learn and can actively solicit feedback on the one thing that drives their own
learning. These conversations can change the
feedback culture of the team almost instantaneously.
As each of us works to become more skilled
at receiving feedback, we no longer need perfect givers, perfect timing or perfect advice. We
begin to be able to turn even unskilled or unfair feedback into learning and improvement.
Soon, giving feedback on this team becomes
easy, since we trust our colleagues to help us
be clearer and we explore what it is we can learn
and improve together.
to know more
n
This article is adapted from

Thanks for the Feedback: The
Science and Art of Receiving
Feedback Well (Even When
It Is Off Base, Unfair, Poorly
Delivered and, Frankly, Youre
Not in the Mood) by Douglas
Stone and Sheila Heen
(Penguin, 2014).
57
expert
Illustration by ANA YAEL
insight
OPERATIONAL INNOVATION
How Fast Fashion Works:

Can It Work for You, Too?
By FELIPE CARO and VCTOR MARTNEZ DE ALBNIZ
ver the past decade, two European retailers have experienced

explosive growth, in spite of a record-long recession that saw the
retail sector hardest hit as consumer spending
nosedived due to the global economic crisis.
Ironically, the retailer that has grown the
most is based in one of the countries that
has suffered the most: Spain. Inditex, with
its eight brands Zara, Zara Home, Massimo
Dutti, Pull & Bear, Bershka, Stradivarius,
Oysho and Uterqe has 6,300 stores in 87
markets. It is the largest apparel retailer in
the world in terms of sales. In second place is
the Sweden-based Hennes & Mauritz with six
brands H&M, COS, Weekday, Cheap Monday, Monki and Other Stories sold through
3,200 stores in 54 markets.
58
The success of these retailers is attributed

to a business model known as fast fashion
rapidly churning out fashionable designs
at affordable prices. Though there are many
imitators, these two giants are considered
the pioneers responsible for popularizing the
model and for transforming the global apparel
industry and consumer purchasing patterns
as a result.
How they do it is of great interest to other
retailers, not only in the clothing business but
also in electronics, food and entertainment.
What can we learn from the successful execution of the fast-fashion business model?
We have been following fast fashion for
several years, writing numerous research
papers and studies that have led us to collaborate with Zara and others in the field.
ieseinsight
How Fast Fashion Works: Can It Work for You, Too?
expert insight
In this article, we highlight the operational keys and

basic attributes underpinning the fast-fashion model,
which are applicable to many different industries.
We also suggest some downsides.
In this article, we highlight the operational
keys underpinning the fast-fashion model,
which are summarized in each of the four
graphics that you see in the following pages.
These basic attributes are applicable to many
different industries.
We also suggest some downsides. Businesses looking to exploit fast fashion would
do well to consider the societal and ethical repercussions of the model, as consumers and
businesses begin to express greater concern
for sustainability in this post-crisis era.
The Fast-Fashion
Value Proposition
As with any business strategy, fast fashion starts with a value proposition.
That proposition is to benefit the
customer with fashionable clothing at an accessible price point
DYNAMIC
ASSORTMENT
(Value = benefit cost). Fastfashion companies set up and
align their operations and management systems to best satisfy
their potential customers, keeping
clothing styles up-to-date and prices
down. Notice that this two-pronged
proposition fashionable and affordable
VALUE PROPOSITION
Fashionable & Affordable
QUICK
RESPONSE
SUSTAINABILITY
EXECUTIVE SUMMARY
When people hear fast
fashion, the retail giants
Zara or H&M usually spring
to mind. However, few really
know what fast fashion is,
operationally speaking,
and how it takes advantage
of Quick Response (QR)
production and dynamic
assortment planning to reduce
traditional design, production/
purchasing and distribution
processes from years and
months to just a few short
weeks.
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This article walks readers

through a more precise,
illuminating definition of fast
fashion as a business model.
No discussion of how this
model is able to create value
would be complete without
also mentioning the ethical
and environmental concerns
associated with it. The
authors also suggest possible
applications of the fast-fashion
model to other industries
from food to phones to
entertainment and more.
leaves out many apparel retailers who are

often erroneously lumped in with the fastfashion crowd. Many retailers offer low-price
clothing Gap and Uniqlo, for example but
T-shirts, sweats, jeans and chinos are not catwalk-inspired. And if prices are too high, then
high fashion retailers dont fit the definition
either.
Main-street apparel retailers that do fit
the bill include: Topshop and New Look from
the United Kingdom; Wet Seal and Forever
21 from the United States; and C&A from the
Netherlands. These companies use a fastfashion model for at least part of their retail
businesses. Still, Inditex and H&M are the
epitomes of the model and dominate the sector by far.
The fast-fashion value proposition makes
companies compete on both price and product freshness. Neglecting either is costly.
Teenagers, for example, are said to be turning their backs on logos or labels as important
criteria for purchases in favor of freshness.
As such, rotating in new products each week
feeds demand for changing fads. Recognizing
this, brands that rely on the youth market,
such as Esprit and Abercrombie & Fitch, are
now adding a fast-fashion element so as not to
be left behind. Moreover, prices tend to start
and stay relatively low, and there are fewer
discounts at the end of a season.
The fast-fashion value proposition is supported by two operational pillars: Quick Response (QR) production and dynamic assortment planning with frequent
assortment changes.
Lets examine each
VALUE PROPOSITION
in turn.
Pillar 1:
Quick
Response
QUICK
RESPONSE
Quick Response
(QR) was originally developed
in the textile and
apparel industry as a
DYNAMIC
ASSORTMENT
SUSTAINABILITY
59
expert insight
The design phase of a fast-fashion operation behaves

like a surfer catching a wave. Raw materials are ready
and waiting for orders. Design iterations are limited.
Authorizations happen quickly.
set of standards for information exchange and

supply chain management that allowed lead
times to be shortened and increased supply
chain efficiency.
Over time, the use of the term QR has
evolved into a broader interpretation, which
is conceptually very simple: postpone all risky
production decisions e.g., commitments to
purchases that may not be needed in case of
low sales until there is enough evidence that
the market demand is there. QR thus allows a
reduction of excess inventory, although perunit costs related to manufacturing and shipment may increase.
To understand QR, lets compare the process of releasing an apparel collection from
design to production/purchasing to distribution for a traditional versus fast-fashion
business. (See Exhibit 1.)
1. DESIGN. For a traditional firm wanting to
release a collection in, say, January 2014, the
process may need to start in November 2012
in order to have the full collection designed by
May 2013. A product concept is first rendered
digitally, before being made physically from
fabric samples. One of the key determinants
here is the fact that some apparel firms have
a wholesale channel and need to show their
wares early to sell to multibrand stores and
department stores. This takes time.
Right off the bat, the fast-fashion model is
already different, in that it is not predicated
on releasing a collection timed with seasons, as traditional retailers do. Instead, it
works at the item level and eschews wholesale
channels. The goal is to respond to nascent
demand trends, so as to provide and capture
more value from consumers.
This makes the design phase of a fastfashion operation behave more like a surfer
catching a wave. Raw materials are ready and
waiting for orders. Design iterations are limited, and standard methods and materials are
used, to speed up samples. Authorizations to
move from sample stage to full production
happen quickly.
60
2. PRODUCTION/PURCHASING. Once the design
phase is completed, a traditional apparel firm

contacts suppliers and places orders with
them. Then the production phase begins.
First, the fabric is made from cotton thread or
some other raw material.
Second, the fabric undergoes a treatment, including dying, washing or printing, to improve
its touch and feel.
Third, the fabric is cut into pieces for the various products.
Fourth, the product is assembled and sewn together into the finished product.
Finally, the product is packed and shipped to
the retailers warehouse.
As this phase entails specific equipment and
labor, economies of scale become important. These labor-intensive steps may have
a steep learning curve, due to quality issues,
and require sufficient volume to be costcompetitive.
The timing of the traditional production
phase varies depending on supplier leadtimes. For example, a firm making knit fabrics
in China and transporting them by sea to be
sold in Europe may need a lead-time of three
to six months.
Working item by item allows fast-fashion
companies to accelerate lead times across the
board. Also, because they better utilize their
resources on a constant basis throughout the
year, they avoid the peaks and troughs of traditional production processes. This enables
them to keep costs low and reduce response
times to a few weeks.
One way that fast-fashion production
schedules are sped up is through the use of
near-shore suppliers, located close to the
main target market, even though sales may be
global. For U.S. companies, near-shore suppliers may be located in Mexico and various
countries of Central America. For European
companies, factories may be located in Portugal, Morocco, Romania, Bulgaria or Turkey.
Inditex locates more than half of its supply
chain in three countries: its home base of
Spain as well as nearby Portugal and Morocco.
n
ieseinsight
expert insight
Fast-Fashion
Process
4 months
Traditional Process
21 months
2012 2013
months
of work
2014
N D J F M A M J
J A S O N D J F M A M J
DESIGN
Concept
Sample
Presentation of collection
PRODUCTION/PURCHASING
Production order
Fabric production
Fabric treatment
Cutting
Traditional vs.
Fast Fashion
EXHIBIT
Exhibit 12
WITH FAST FASHION, TRADITIONAL
Sewing
Ship to warehouse
PROCESSES ARE REDUCED FROM YEARS

AND MONTHS TO WEEKS.
DISTRIBUTION
Initial loading
Replenishment
Sales at full price
Sales at a discount
3. DISTRIBUTION. Once the product is in the retailers warehouse, it needs to be distributed

to the stores. The transportation process
itself is fairly quick days if by air or within
Europe by road.
However, the types of shipments involved
are what lengthen traditional distribution.
Initially, stores are loaded with large quantities of inventory at the beginning of the
season. They are then restocked during the
season in smaller quantities, which is called
replenishment. To make room for the new season, items go on sale after five or six months.
Again, QR serves as a powerful source of
competitive advantage for fast-fashion companies, as we have found in our research. By
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deciding distribution at the last minute, inventory can be sent to where it is needed most.
To measure the effectiveness of QR, an
appropriate metric is the gross margin return
on inventory (GMROI), defined as the ratio
between the gross margin and the average inventory. Improving GMROI can be achieved
by using early sales data to generate more reliable forecasts. Information is key.
We are currently studying how demand
forecasts can be improved over time. The
models are sophisticated, and a company
committed to getting QR right needs to
employ specialists mathematicians or
statisticians to work with big data.
Competition also matters when deterissue 21 SECOND QUARTER 2014
61
expert insight
Store offerings are updated often weekly, every third

day or even daily. These inventory updates are attractive
to acquisitive customers. These constant changes have
been proven to increase store traffic.
mining the scope of limited, time-sensitive
orders produced via QR. In our research, we
have found that QR is a no-brainer regardless
of the competitors business model, whether
they also use QR or, on the contrary, they are
slower, even when this comes with a lower
cost structure. Indeed, the cost of keeping raw
materials ready and postponing decisions pay
off with tighter inventory controls and higher
gross margins.
VALUE PROPOSITION
QUICK
RESPONSE
SUSTAINABILITY
Pillar 2: Dynamic
Assortment
The second operational pillar supporting the fast-fashion

DYNAMIC
ASSORTMENT
value proposition is the use of
frequent assortment changes
throughout the season. In other words, store offerings are
updated often weekly, every
third day or even daily not just
twice a year, as under the traditional
seasonal model. These inventory updates
about the authors

Felipe Caro is an associate
professor in Decisions,
Operations and Technology
Management at UCLA
Anderson School of
Management. His research
interests include decisionmaking under uncertainty,
demand learning for dynamic
assortment, carbon allocation
in supply chains, pricing and
inventory decisions, and
forecasting. Prior to earning
his PhD from Massachusetts
Institute of Technology, he
taught at the University of
Chile. He has collaborated
with Zara and is the author of
the case study, Zara: Staying
Fast and Fresh.
62
Vctor Martnez de Albniz

is an associate professor of
Production, Technology and
at IESE Business School.
He earned his PhD from
Massachusetts Institute
of Technology and an
engineering degree from cole
Polytechnique in France. His
research focuses on supply
chain management, especially
in the retail and fashion
industries. His work has been
published in Management
Science, Operations Research,
Manufacturing & Service
and Production & Operations
Management.
are attractive to fashion-conscious, acquisitive customers. These constant changes have

been proven to increase store traffic.
To best time the entry of new products,
managers employ dynamic assortment planning, which is becoming more of a science
than an art. In our studies of the topic, we note
that demand for any new product will typically decrease over time as newer products tend
to get better displays and generate more interest, all else remaining equal.
This means that properly timing the release of products has the potential to alleviate competition between them and, at the
same time, ensures that traffic remains high
throughout the entire season.
Currently we are working on the best formula to locate the ideal moment to introduce
a product and then introduce the next product. This is a similar optimization problem
that a film distributor faces when deciding the
ideal time to introduce movies to maximize
box office sales.
Our research yields some simple but interesting rules of thumb. For example, basic
products with stable demand should be introduced at the beginning of the season. In
contrast, fashionable products for which customer interest quickly drops should be spaced
over the entire season and used to refresh the
assortment.
How to measure the success of dynamic
assortment is not as straightforward as it is
with QR. However, the use of certain models
to time in-season introductions is yielding
promising results.
By allowing closed-loop controls with
real-time feedback between sales and assortment decisions, we have found that revenues
can jump by up to 10 percent using dynamic
assortment planning and frequent product
introductions. (In control theory, a closed
loop refers to decisions made with dynamic
inputs, such as a cars cruise control staying
at a set speed by constantly measuring the
current speed, as is especially important on
a hill.)
ieseinsight
expert insight
A byproduct of this amped-up supply-and-demand

is waste. In response to outcries over such waste,
fast-fashion companies are now rolling out recycling
programs to reuse garments.
When production costs are not too high

nor too low, and when there is significant uncertainty about the decay rate of products,
as in fashion retailing contexts, the success
of new product introductions beats sticking
with basics as soon as a drop-off in demand
is detected.
Frequent assortment changes work when
apparel makers control their own stores.
This does not work with a wholesale business
model in which preorders are key. As noted
before with QR, another advantage to frequent assortment changes is that they even
out resource requirements over time, reducing production bottlenecks.
As such, constantly changing inventory
seems to work best in combination with QR
production, controlling inventory and keeping margins healthy. Fast fashion becomes a
truly compelling business model when solidly
resting on both of these pillars.
Sustainable Grounds
average pieces of clothing that each person

bought per year went from nine to 14 worldwide; in the United Kingdom, the average
climbed from 19 to 30.
A byproduct of this amped-up supply-anddemand is waste. According to a report from
the University of Cambridges Institute for
Manufacturing, the average British person
throws away more than 66 pounds of clothing
and textiles a year.
In response to outcries over such waste,
fast-fashion companies are now rolling out
recycling programs.
H&M, for example, now has in-store collection boxes for unwanted clothes. In 2013,
the company collected more than 3,000
tons of unwanted garments enough fabric
to make 15 million T-shirts. In 2014, H&M
launched a clothing line made partly from
recycled cotton derived from this recycling
initiative. The company has pledged to continue to collect and reuse its garments to help
reduce waste.
At the base of the fast-fashion model are

people, communities and production eco- 2. PEOPLE AND THEIR WORKING CONDITIONS. Fast
systems. For fast fashion to last as a business fashion creates a lot of employment opportumodel, a long-term view is required, and this nities in many different countries. But regurequires corporate social responsibility and lating working conditions is another area of
sustainability checks.
great concern.
Critics argue that until this longDeciding where to produce a
term view is fully established, the
garment usually depends on
VALUE PROPOSITION
fast-fashion business model
economic aspects namely,
rests on shaky grounds. Specost competitiveness of
cifically, they point to three
the production site, takQUICK
fundamental challenges.
ing into account wages,
DYNAMIC
RESPONSE
ASSORTMENT
material costs, energy
1. DEALING WITH WASTE.
costs and freight chargMore items sold means
es. But offshoring based
store revenues are piling
on economic motives and
SUSTAINABILITY
up but so are the articles of
considerations may ignore
clothing. Fashionable items disethical elements.
appear as fast as they appear. But
The consequences of turning
where do they disappear to?
a blind eye to working conditions can
Between 2000 and 2012, sales in the global be deadly. The collapse of the Rana Plaza
apparel industry grew an average of 4.3 per- factory in Bangladesh in April 2013 shocked
cent a year, reaching a market worth of $1.7 the world, leaving more than 1,100 dead and
trillion in 2012. During the same period, the 2,500 injured. At Rana Plaza, workplace safety
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63
expert insight
The general ideas and practices of the fast-fashion

model are robust and can be applied to many industries
where products rotate frequently and consumers are
searching for novelty.
standards were not being followed, with fast

fashion blamed for driving factories into noncompliance. Since then, over 170 brands and
retailers have signed the Accord on Fire and
Building Safety in Bangladesh to improve conditions in the countrys garment factories.
Though an important collective step, individual companies should draft their own codes
of conduct, if they havent already. Acceptable
working conditions need to be stipulated with
suppliers and manufacturers, backed up with
inspections to ensure compliance.
3. GLOBAL INDUSTRY, LOCAL CONSEQUENCES.
Besides putting workers in other countries

at risk, offshoring or moving core business
processes away from a particular region poses other long-term challenges.
For instance, we have worked with an Italian
jeans manufacturer that can no longer source
and treat denim fabrics in Italy because most of
the suppliers disappeared during the offshoring
waves of the 1990s and 2000s. Likewise, there
are very few suppliers with QR capabilities left
in Spain, after most retailers moved their QR
operations to Portugal, North Africa and Eastern
Europe.
We would recommend that fast-fashion
companies pay closer attention to the cost
dynamics and longer term implications of
their sourcing decisions, ever mindful of the
fact that their business strategies may end
up irrevocably shaping a particular regions
capabilities.
Inditexs Working in Clusters program
may yield improvements in this regard. Working in cooperation with local unions, NGOs,
trade associations, governments, international purchasers and members of civil society, Inditex states it is seeking to promote
a sustainable productive environment
around its supply chain in a given region.
The company has clusters in Spain, Portugal,
Morocco, Turkey, India, Bangladesh, China,
Vietnam, Brazil and Argentina, representing more than 85 percent of Inditexs total
production.
64
What Next?
Regardless of whether these companies rise
to the challenges, we believe the general ideas
and practices of the fast-fashion model are
robust and can be applied to many industries
where products rotate frequently and consumers are searching for novelty.
The food sector
including convenience stores and restaurants is a prime candidate for the fast-fashion formula. Constantly changing offers and
menus, based on locally sourced ingredients
combined at the last minute and prepared on
the spot, satisfies customers appetite for new
tastes.
Seven-Eleven Japan already has these
capabilities. Thanks to a retail strategy that
emphasizes freshness, combined with a sophisticated information system that forecasts
future trends, Seven-Eleven Japan achieved
the highest average sales per store per day
in its category, according to a Stanford case
study.
To make sure customers did not get bored
by its offerings, the convenience store rotated out old items food, beverages and magazines in favor of new ones as soon as demand
dropped.
For example, Seven-Eleven Japan caught
a fresh-noodle fad early and developed a new
product with a manufacturer, rotating out
its dry ramen offerings in favor of its highermargin fresh noodles while the food fad lasted. At the same time, traditional Bento lunch
boxes were introduced three times a day and
color-coded by shelf life. Milk products were
rearranged a few times a day to better suit
customers evolving needs over the course of
a single day: small containers of milk to bring
to work in the morning; lunch-sized servings
for students around midday; larger cartons
for parents bringing milk home in the evening.
Keeping up with changing customer preferences and always offering something new
worked for Seven-Eleven Japan. Analyzing hourly sales trends for individual items
WHATS ON TODAYS MENU?
ieseinsight
expert insight
The fast-fashion model suggests operational strategies

that might apply to your own business. QR can keep
your product line fresh; dynamic assortment planning
can optimize the scheduling of new releases.
helped the convenience store optimize
delivery schedules and minimize waste.
Another area with potential is
consumer electronics. A fast-fashion-style
electronics manufacturer or retailer would
have to significantly reduce the time between
new product introductions, and be able to
install flexible production capacity so as to
respond quickly to demand, with low supplychain inventories.
Interestingly, releases of smartphones
and tablets have been more and more frequent, and product upgrades have less to do
with technology breakthroughs and more to
do with aesthetics.
Consumer electronics companies that
want to be fast will have to pay special attention to their sustainability efforts, reusing
discarded products.
FAST PHONES?
In many other industries

namely, books, music, movies and any digital
content delivered online novelty provides a
big sales boost. Stores provide special, better
displays for novel items. Movie theaters do
something more drastic, removing movies
from the bill after only a couple of weeks.
It makes sense to apply dynamic assortment planning to these industries. This can
help decide when to release new songs for
radio play, for instance, or when a movie or
museum exhibit should open and close. By
detecting immediately when demand starts to
wane, releases can be better timed to engage
new customers.
WHATS PLAYING?
The fast-fashion model suggests various

operational strategies, like these, that might
apply to your own business or industry.
Start by analyzing the three main decision
areas related to design, production/purchasing and distribution. Look for new ways to
serve your customers better in each individual area. QR works best for keeping your product line fresh while minimizing excess inventory. Dynamic assortment planning can help
ieseinsight
you optimize the scheduling of new releases,

taking account of variables such as fluctuating
market conditions.
Whatever you decide to do, make sure your
model is built on strong, sustainable grounds
that prioritize people and communities. The
long-term viability of fast fashion as a business model depends on it.
to know more
n
Caro F., V. Martnez de Albniz and P.

Rusmevichientong. The Assortment Packing
Problem: Multiperiod Assortment Planning
for Short-Lived Products. Forthcoming in
Management Science, 2014.
Caro, F. and V. Martnez de Albniz. Fast
Fashion: Business Model Overview and
Research Opportunities. Forthcoming in Retail
Supply Chain Management: Quantitative Models
and Empirical Studies. New York: Springer, 2014.
Caro, F. and V. Martnez de Albniz.
Operations Management in Apparel Retailing:
Processes, Frameworks and Optimization.
Boletn de Estadstica e Investigacin Operativa
29, no. 2 (2013): 103-16.
Caro, F. and V. Martnez de Albniz. Product
and Price Competition With Satiation Effects.
Management Science 58, no. 7 (2012): 1,357-73.
Caro, F. and V. Martnez de Albniz. The
Impact of Quick Response in Inventory-Based
Competition. Manufacturing & Service Operations
Management 12, no. 3 (2010): 409-29.
65
business
Scott Mangham/iStock/Thinkstock
insight
henkel
Sustainability
atAny
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Price?
ieseinsight
business insight
henkel
HENKELS NEW SUSTAINABILITY STRATEGY aims to achieve a

30 percent increase in efficiency by 2015 and to triple its efficiency by
2030. Can this be achieved without hurting operating profits?
s a leading producer of detergents, household cleaning products and adhesives, the

German multinational, Henkel, has an even
greater responsibility to demonstrate sustainability, given the potential impact of its products on
the environment.
Although sustainability always formed part of Henkels
business commitment indeed, it set up an ecology department as long ago as 1953 to assess the environmental
impact of its products the relevance of sustainability to
the development of Henkels business was getting more
intense, due to the heightened global challenges, as well
as competitors and customers stepping up their own efforts in this area.
Charlotte Kuszewsky*, head of a Henkel subsidiary in
the European Republic of Esperanto* (*both composites
based on interviews with Henkel country managers of
several different countries), was in charge of drawing up
an action plan to advance Henkels sustainability agenda.
One of the largest economies in the European Union, the
Republic of Esperanto was suffering the effects of the global financial crisis, with high inflation and unemployment,
and no growth.
In this tough economic context, Kuszewsky had ambitious new sustainability targets to meet. She needed to
come up with a clear strategy that would benefit the local
business and meet corporate-level goals set by top management. And with Henkel reaching its 2012 targets two
years ahead of schedule, the bar was already set high.
Meanwhile, Henkels main competitors were just as
busy reworking their own strategies: Procter & Gamble,
Unilever, LOreal and 3M had boosted their efforts, ranging from tree planting, to eco-labeling, to campaigns such
as P&Gs Future Friendly educational initiative to encourage consumers to reduce their waste as well as their
water and energy consumption. Kuszewsky would have
her work cut out trying to maintain Henkels reputation
as a sustainability pioneer.
Achieving More With Less

In 2010, CEO Kasper Rorsted began to feel that Henkel was
not progressing fast enough in the area of sustainability, so
he requested a new approach. Henkel brought in external
experts to offer fresh ideas, resulting in a new strategy
covering six focal areas: water and wastewater; health and
safety; social progress; energy and climate; materials and
waste; and performance.
Henkels new sustainability target was to increase the
efficiency of its operations by a factor of three by 2030:
This meant either creating three times more value for so-
ieseinsight
ciety using the same level of natural resources, or diminishing its environmental footprint to one third of todays
while delivering the same value. In many cases, that meant
approaching its sustainability target from both sides, reducing input while at the same time improving output.
This strategy of achieving more with less was a challenge that Kuszewsky felt keenly. While she understood
how the Factor 3 target would further Henkels corporate
sustainability strategy, she wondered whether the rest
of her team would be so enthusiastic. After all, the economic downturn in her market wasnt showing any signs
of abatement, and introducing yet bolder targets on top
of the tremendous efforts the company had already made
could place even greater strains on its limited resources.
Ready for the Challenge?

So far, the production plants in the Republic of Esperanto
had been working on lowering their wastewater output
and improving their energy efficiency. In fact, they had
offered monetary incentives to achieve this, and one of
their plants had gained the latest ISO 50001 energy management certification.
The marketing department made sure that consumers
knew that Henkels products were not only green, but that
they had excellent performance. The department also provided recommendations on how consumers themselves
could contribute to protecting the environment.
Henkel targeted not only the few consumers who were
willing to pay more for products with a reduced environmental impact, but also the vast majority of consumers
who expressed some environmental concern. In Kuszewskys experience, the companys top customers regarded
sustainability as extremely relevant.
Yet, coming fresh from a corporate summit at which
Henkels leaders had thrown down the gauntlet, Kuszewsky wondered how Factor 3 would go down with her team.
How could it be positioned as a positive step forward, rather than as a potential drain on their resources?
Worsening market conditions had already forced them
to close one plant and lay off nearly a third of staff. How
could she ask her team, who had already been through so
much, to embrace yet another corporate initiative? What
was the best way to leverage the knowledge and skills of
the sustainability experts at corporate headquarters for
the benefit of her business?
The case study Operational Sustainability: From Vision to
Strategy at Henkel (SM-1603-E), by IESE Prof. Mike Rosenberg and Victoria C. Moreno, is available from IESE Publishing
at www.iesep.com.
67
business insight
henkel
Sustainability should be included in the strategic objectives of any

company that intends to be viable in the medium and long term.
Educate Your Leaders
Involving experienced leaders helps to identify objectives as well as ensuring they are met. This
by Julio Rodrguez
will strengthen the credibility of the program.
Executive Vice President,
Consider the initiative of optimizing energy
Global Operations,
resources. This has a direct impact on operating
Schneider Electric
costs while reducing the risks associated with
the rising costs of energy and raw materials. It
Sustainability strategies arent just also decreases CO2 emissions. In relatively little
good for the environment, theyre good for bu- time, improved energy management can translate
siness. Shareholders and investors increasingly into a 15 percent reduction in consumption. For a
focus on this variable, as do governments, which company with an annual energy bill of $2 million,
this would amount to savings of
have ramped up regulatory pressure; employees,
$300,000 a year.
who want to work for companies that strive
For any sustainability profor sustainability; and customers, who are
gram, there must be clear metrics
increasingly more demanding when it
for measuring the benefits. Several
comes to their purchasing choices.
platforms are readily availaIn a few years time, sustainability
ble for controlling, mahas gone from being added value to
naging and forecasting
being a critical factor that should be
the main indicators related
among the strategic objectives of any
to sustainability, providing
company aspiring to be viable in the
secure access to data, reports and
medium and long term.
management tools.
In reflecting on how Schneider
This brings us to another critical sucElectric got to be named one of the
cess factor: making the data visibly available
top 10 most sustainable companies
across all levels of the organization
in the world, I recommend the foand sharing tangible results, such as
llowing steps for Henkel: develop
how much youve reduced your cara strategy; educate executives;
bon footprint or how much energy
assess your carbon footprint; esefficiency youve achieved.
tablish an optimization plan; and
In a recent global survey of busishare the results.
ness executives titled Long-Term
A successful sustainabiliGrowth, Short-Term Differentiaty program starts by educating
tion and Profits From Sustainable
company stakeholders about its
Start by educating key
Products and Services, Accenture
strategic importance. It must company stakeholders about
have the commitment, from the
the strategic importance of the found that 78 percent of respondents agreed that sustainability was
outset, of the CEO and the enti- sustainability program.
vital to the future growth of their bure senior management team, as
Involve experienced leaders:
sinesses. This echoes Kuszewskys
well as a road map for setting new
Let them identify objectives,
own finding that Henkels top custogoals and marking out the path
which will increase the
mers regard sustainability as extreto achieve them. I use the word
likelihood they are met and
mely relevant. As such, committing
program deliberately since one
strengthen the credibility of
oneself further to sustainability,
of the biggest risks related to susthe program.
though it may bring some shorttainability is launching a number
Use clear metrics and share term pain, cannot be resisted but
of initiatives without having any
must be embraced as strategic for
specific plan or overall manage- tangible results across all
levels of the organization.
the companys future.
ment system in place.
Wringing Out
Savings
68
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business insight
henkel
In making this aspirational leap, Henkel must make sure

its words are matched with deeds.
A Step Forward
somehow represent a step backward. She needs
to draw upon the full support of management to
communicate a clear, consistent message.
by Jaime Martn
Global Director, Safety and
When companies make announcements of
Environment, Repsol
this nature, they need to make sure their words
are matched with deeds. Workers will be watching to see if Henkel dedicates the necessary
In establishing Factor 3, Henkel is mar- time and resources to realize its ambitious goals,
king a paradigm shift and taking an aspirational and whether it invites their input. There should
leap forward. This is not just another lofty envi- be a program, with financials included, that actironmental ambition. Instead, by linking the con- vely promotes activities related to Factor 3, with
cept of sustainability with business performance the results communicated to all employees. There
and results, Henkel is setting clear targets for needs to be transparency, and if there are failures,
what the company wants to be in the future.
they should be recognized and corrected.
No longer can these concepts be treated
In addition to employees, Henkel
independently of one another. Henkel
needs to convince consumers that its
sustainability goals are genuine. Given
is effectively saying to its employees
that the competitive gains from
and to the world that its financial goals
cannot be understood without taking
sustainability are realized over
environmental goals into account.
the long term, consistency beThis is a bold move that carries
comes all the more important, and
risks. First, it risks breaking up the
Henkel must keep its eyes fixed on the
team previously responsible for
prize of what sustainability can deliver:
health, safety and the environment.
It drives innovation in the search for teIn declaring that sustainability is
chnological solutions that increase energy
not their job but all our jobs, comefficiency and reduce emissions.
panies going down this path need
It boosts creativity to find alterto make sure that those who have
natives to reduce its environmental
been carrying this agenda are
footprint.
successfully integrated and that
It promotes a radical rethinking
their experience is not lost but leof how to produce in order to add
veraged. This transition has to be
value to products.
handled carefully at each local orIt measures success not only in
Set up a special
ganizational level, otherwise the
terms of financial performance, but
committee to monitor the
global vision will get lost.
by the value created for society.
implementation of Factor
It may help to set up a special
To achieve these goals, Henkel
3, with members who have
committee to monitor the implewill have to modify factory procesdecision-making authority.
mentation of Factor 3. The people
ses, convince suppliers to deliver
Launch a program,
on this committee not only need
in a more ecologically friendly way,
showing financials, that
to represent key areas of the busiand teach its customers how to use
actively promotes activities
ness, but they must also have deits products with responsibility
related to Factor 3 objectives,
cision-making authority, so their
and care.
and communicate the results.
recommendations carry weight.
Perhaps the most compelling
Dont lose focus along the
In delivering news of Factor 3
argument for Kuszewsky to make is
way, as the competitive gains that successfully creating value for
to her workers, Kuszewsky must
are only realized over the
try to avoid giving the false imsociety is what will ensure the suslong term.
pression that this move might
tainability of Henkel itself.
Wringing Out
Savings
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69
business insight
henkel
Real gains come by replacing the linear take-make-waste logic

with the Circular Economy.
The Circular Advantage
able energy, bio-based or fully recyclable input

material (e.g., solar or bio-plastic).
by Peter Lacy &
2. OUTPUT RECOVERY. Recover resources/energy out
Alexander Holst of disposed products or byproducts (e.g., paper reSustainability Services,
cycling or heat waste that powers the next process).
Accenture Strategy
3. PRODUCT LIFE EXTENSION. Extend the life cycle of
products/components by repairing, upgrading and
reselling (e.g., remanufacturing auto parts).
The era of abundant, ever cheaper resources 4. PLATFORM SHARING. Increase the utilization rate
is over. Most commodity indices have risen sharp- of products by enabling shared use/access/ownerly and, crucially for business planning, become ship (e.g., ride sharing or home sharing).
volatile and uncertain. Upward price pressure will 5. PRODUCT AS A SERVICE. Offer product access but
continue as a global middle class of 2.4 billion con- retain ownership to internalize the benefits of cirsumers is expected to more than double by 2030. cular productivity (e.g., pay per use for cars).
Champions of the Circular Economy
Businesses are waking up to the impact that
prove that resource efficiencies are possia take-make-waste consumption model
ble without compromising on price, quality
is having on the planets finite resources.
or availability, or forcing consumer/customer
In this context, Henkel is right to fotrade-offs. Desso has developed
cus on resource efficiency, aspiring to
an innovative technique that uses
deliver more with less. But simply optiold yarn to make new carpets. Canon
mizing existing activities wont go far
remanufactures printing equipment,
enough. Henkel needs to consider a
reusing over 90 percent of raw materials by
two-pronged approach optimizing
weight. Ecovative produces biodegradable
current systems to achieve efficiency
packaging from agricultural waste and mushgains while at the same time piloting
rooms instead of petrochemicaland scaling fundamentally new approaches that replace the prevailbased foam.
ing take-make-waste logic. The
Ecovative is a salient example for
Circular Economy based on reHenkel. Petrochemical-based prodstorative product, component and
ucts rely on a global supply of petromaterial loops can deliver these
leum, which is scarce. Meanwhile,
new approaches.
agricultural waste is abundant and
Adopt a two-pronged
available anywhere. Whats more, it
If delivered in a way that oriis cost-competitive today and likely
ents R&D and marketing to put approach: optimize current
to undercut petrochemical-based
consumers/customers at the systems while piloting new
material by as much as 30 percent
center of the value proposition, business models that chalonce produced at scale.
such approaches can enhance the lenge the prevailing takeBesides helping the environment,
brand experience and impact, in make-waste logic.
circularity presents real opportuniaddition to boosting the bottom
Look for non-petrochemicalline. We find five business modties for reaping attractive economic
based alternatives: The soluels that reduce resource needs
returns today while repositioning
tions may not be easy, obvious
while creating economically atbusiness for tomorrows resource
or immediate, but when scaled
scarcity. Even though getting there
tractive opportunities, many of
will reap rewards over time.
may not be easy, we believe Henkels
which translate into consumer/
Put the consumer/customer
Kuszewsky should apply and scale
customer-focused gains.
at the heart of disruptive in1. CIRCULAR INPUTS. Replace single
the principles of the Circular Econolife-cycle inputs with renew- novation to enhance the value
my to achieve breakthrough results.
Wringing Out
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proposition/differentiation.
70
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wider
Alexander Hassenstein/Getty Images
insight
Two-time Olympian Edward Sinclair knows

what it takes to perform at world-class levels.
Success is determined as much by the battles
waged in teams and in your own mind as by
the caliber of the competition.
Swimming
Against the Tide
razil is playing host to two of the

worlds premier showcases for
sporting achievement and greatness: the FIFA World Cup in summer 2014 followed by the Rio 2016 Summer
Olympics. World-class sporting events, like
these, can be performed with such seeming
ease that the spectator may sometimes forget
the years of tireless dedication and long psychological battles that the athletes have waged
to reach these pinnacles of their careers.
Two-time Olympian Edward Sinclair understands the complex path to become the
best in the world. This record-setting freestyle
swimmer has won eight medals competing in
World and European Championships, and he
represented Britain in the Sydney 2000 and
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Athens 2004 Summer Olympic Games. He has

had his fair share of challenges along the way.
After Team Britain placed fifth in the mens
4x200 meter freestyle relay in Sydney, Sinclair
was diagnosed with chronic fatigue syndrome
but fought his way back to form part of the
mens swimming squad in Athens.
After retiring from professional swimming
in 2005, Sinclair decided to give back to his
sport through coaching and inspiring the next
generation of athletes, starting at the Millfield
prep school. He currently runs Maximum Performances (www.maximumperformances.
com), is the head coach at Teddington Swimming Club and is part of the coaching team of
the England National Talent Program, aimed
at identifying high potentials and supporting
71
wider insight
Ive worked with some very talented people who

didnt have the right mentality. They didnt want to
put in the work, they didnt want to sacrifice.
their development to achieve future success

at senior international level. He has coached
swimmers all the way to the British National
Team, and one swimmer he used to coach at
Millfield, James Disney-May, competed during the London 2012 Olympics.
To the uninitiated, athletic training looks
deceptively one-dimensional: you just see
people swimming lengths in a pool. But dive
deeper and you see that achieving greatness
whether in sport or in business depends
on managing expectations, group dynamics,
mental stamina and maintaining priorities.
Managing Ambition Without Labels

Sinclair, who started training when he was
10, says it helps to start when you are young,
so that you develop in the right way during
each key stage of growth.
While it can be good to find you have a talent for something early on, being labeled prematurely can be limiting and keep you from
achieving your full potential, he warns.
You might do one good sprint event and
everyone will say that youre a sprinter. But
you might be a distance swimmer and not
know it yet.
Having too narrow a focus not only stops
you from excelling in areas in which you
might have a hidden talent, but it can also
hold you back from the area you practice
most. Variety will lead to a stronger overall
performance, so its important to keep the
spectrum as wide open as possible during
your early training years.
Labels can be put on you by other people
telling you to stick to what you know and
never try to do anything different or they
can be self-imposed the inner voice telling
you that you dont have what it takes to ever
do anything else. Even the most talented
people need to resist their own mental barriers, especially those concerning success.
One of these false beliefs is that success
happens overnight. People love instant
gratification. But you cant wake up one
morning and suddenly be a champion. Success comes from putting a set of processes
in place and staying with it over time. If
72
someone underperforms, I say, Okay, lets

try something different and try to do better
work next time. Well attack it over a month
or six months or six years. With some people
its a longer journey.
Natural ability is essential, but it counts
for little if people quite simply dont have
the drive to go along with it. Ive worked
with some very physically talented people
who didnt have the right mentality. They
didnt want to train, they didnt want to put
in the work, they didnt want to sacrifice.
With them it takes a lot of perseverance and
extreme patience.
However, there is little point in pushing
someone even if they are supremely talented to achieve success on a national or
international scale if they are only doing it
for fun. For the sake of the team, each person
needs to agree on where he or she is heading
and set clear goals from the outset.
To show that they take their success seriously, Sinclair has the people he trains fill
out and sign a goal sheet at the beginning
of each term. Seeing the goals on paper and
pledging to work toward the same objective
together makes a big difference, he believes.
Regardless of whether they end up going to
the Olympics or not, the main thing is that
they are expressing a commitment to being
the best they possibly can be; they are endeavoring to reach their full potential.
Getting the Group Dynamics Right

Although swimmers compete as individuals on the whole, they train and develop in
ieseinsight
wider insight
If you get the group dynamics wrong, and the wrong

people working together, then the younger ones will
get influenced by people they shouldnt.
groups. As such, getting the group dynamics

right is vital. The group affects each persons
motivation, self-perception and performance. Though crucial for success, having
good team chemistry is one of the trickiest
formulas to get right.
You might have a couple of big personalities who will influence everyone else on the
team. If you get the group dynamics wrong,
and you have the wrong people working together, then the younger ones will get influenced by people they shouldnt.
You have to have the right balance of personalities. This applies to those managing
the team as much as to the individual team
members themselves. Putting two loud
coaches together on the same team, for example, wont work either. Achieving the right
balance comes from considering the individual abilities of each person and then playing
to the strengths of each one.
One of the strengths that top performers
grapple with is confidence. Believe it or not,
a lot of athletes struggle with confidence,
even at the top, says Sinclair.
To help build up those with less confidence, you simply start by giving praise. Tell
them theyre doing a good job. Obviously if
theyre doing something wrong, pick them up
on it, but by all means tell them theyre doing well. You can also pair them with more
naturally confident performers to help bring
them up.
Each athlete will be motivated by different things, so you have to tailor your coaching accordingly. This requires taking time to
get to know each individual and finding out
what makes each one tick.
You might have athletes who love to be
told theyre great and that they are going to
do an amazing job. Or you might have someone who needs to be told, That wasnt good
enough. You could have done better. You
know youre better than that. When they
stand up on the blocks, theyre on their own,
so you have to find things that work for them.
Its fundamental you get to know them, and
this takes time as there are many different
personalities.
ieseinsight
The team captain has a key role to play in

this effort. And the right captain isnt necessarily the best athlete. Athletes can be quite
selfish, given their extreme focus on their
own individual performance. A great captain,
on the other hand, is someone who is more interested in others.
Traditionally, the best player or the best
performer gets chosen to be captain, but one
of the best captains that we ever picked was
one of our weakest swimmers. He would go to
all the competitions, and he gave emotional,
passionate speeches at the end of the season
that inspired everyone. He was just an amazing motivator. This is the kind of team leader
and role model worth having in place.
Analyze Yourself as Well as Others

As a coach or manager, you need to keep a close
eye on how personality placement affects the
team. But you also need to equip individuals
to assess their own performance. You need
to challenge them to question themselves:
could I have done this or that better?
This applies just as much to the coach or
manager, who is also part of the process. Im
constantly testing them, says Sinclair, but
Im also constantly testing myself. I walk away
from every training session asking myself if I
could have done it better and if I approached
things in the right way. Its important to analyze other people but its just as important
to analyze your own relationship with them.
He adds, If youre the head, and youve
got nowhere else to go, and no one else is analyzing you in terms of your performance, then
it is crucial for you to develop this self-awareness and find ways to evaluate your
own performance.
Diving In
After Defeat
In the Sydney Olympics, the U.S., Dutch,
Italian and British mens
freestyle teams all touched
at the same time of 7 minutes
and 12 seconds. The final tally
came down to fractions of a
73
wider insight
I Dont Do Negativity
How do you ignore the naysayers and come back fighting when the chips are down?
n 2001, having won his first

national title and competed
at the Sydney Olympics, Edward
Sinclair (pictured) was given
the potentially career-ending
diagnosis of chronic fatigue
syndrome.
Training for at least 20 hours a
week, its normal to be constantly
on the verge of getting ill. When
his performance times started
to drop, his coach pushed him
to train harder. But there was
a lingering sore throat and a
tiredness he just couldnt shake
off. After seeing some medical
specialists, the penny dropped.
It was a real setback. As a kid, I
had always dreamed of winning an
Olympic gold. It was everything to
me. After Sydney, I really thought

I had a chance of finally getting a
medal in the next Olympics. I felt
capable of doing that.
He had to stop swimming
altogether. To fill the sudden void
in his life, he surrounded himself
with friends and family. After six
months, he attempted to start
training again but it was no good.
Another six months went by.
One day he decided to call the
trainer who had coached him
through the first Olympics. He
knew me well and we connected.
He knew what worked and said
we could plan it. It was 2003 and
they had 12 months to get in shape
for the Athens 2004 Olympics.
His training was limited to
second, with the Americans getting the silver

(7:12.64) and the bronze going to the Netherlands (7:12.70) with a slim margin between
them and the Italians (7:12.91) and Team Britain (7:12.98). Think about it: in a third of the
time it takes for you to say one second youve
missed out on a medal.
After a disappointment like that, its
easy to go into a slump and feel like you want
to quit. I see this happening quite a lot with
young people: They build something up and
when they dont get it, they just quit and leave
it all behind, which is a real shame.
Instead of giving up after a setback, Sin-
74
15 minutes a day to start with

much less than the typical five
hours of his competitors. If that
wasnt disheartening enough, he
found himself being overtaken by
13-year-old girls in the pool. And
then there was the tide of public
perception to deal with.
After I pulled out of the
Commonwealth Games, people
said I was finished. People said I
was never going to make it. There
were a lot of people doubting me.
But he was determined to prove
them wrong, even though the
odds were stacked against him.
Mentally he was desperate to
train, but physically he couldnt.
While this mental energy meant
he pushed himself too far at times,
it was what got him to Athens.
Where did he pull this selfbelief from? How did he manage
to ignore all the gloom, overcome
the obstacles and represent
Britain once again?
I dont do negativity, he says. I
dont believe in it. I might not have
had a good swim that day, but I
look at what did go well: I had a
good start or my turns were good.
That is what has helped me most
in my career. I always try to see
the positive in every situation.
clair urges that you take stock of the positives

and consider other sets of goals. Rather than
focusing on the missed medal, he made a list
of what had been achieved in that race: going
to the Olympics at the age of 19; swimming an
Olympic final; breaking the British record.
Its probably taught me a lot more, missing that medal, he says, speculating that
winning might have made him complacent
or a bit lazy. Sometimes one of the biggest
barriers to success can be feeling satisfied
to be among the best and simply stop there.
The visceral stab of disappointment that
comes from failure can be a better stimulus
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wider insight
for pushing you forward.

Sinclair believes its important in life to
always be chasing something because it keeps
you strong. If youre satisfied with mediocrity, you wont just stay where you are, youll
go backward. You need to take the disappointment and use it to help you win the next race.
Ive raced against some of the greatest
people in history Ian Thorpe and Pieter van
den Hoogenband. And every time I stood on
the blocks I believed I could beat them. People
might have thought I was arrogant or deluded.
But I truly believed that I could go on and beat
those guys.
How often do you play at second best simply
because you dont believe youre good enough?
And might this defeatist attitude be limiting
your performance and keeping you from ever
competing at the level of the big leagues? See
the sidebar I Dont Do Negativity.
Staying Afloat
Chalabala/iStock
All heroic epics need an element of toil and

struggle to a point. For your own sense of
health and wellbeing, you need to keep things
balanced and in perspective, otherwise you
Sinclair: I love getting

up early on Christmas
morning and going
training. Its training
when other people
arent training. Those
sorts of things keep you
one step ahead.
ieseinsight
risk getting burned out. You have to have a

life and make time to go out and have fun,
admits Sinclair.
As important as it is to combine your dedication to your profession with a life outside,
you have to learn to do it on your own terms,
without compromising your devotion. For
example, if youre going out with people who
dont share your same concerns, you have to
be a bit more self-disciplined.
When I was going out with friends who
werent athletes, I would still make sure to eat
well and look after myself as I knew my performance was at stake. I once went to a party,
had a ball, but then changed into my trainers
(sneakers) and went for a run afterwards.
Working hard doesnt mean you have to
rule out a social life; you just need to adapt it
to your own agenda. I love getting up early
on Christmas morning and going training. Its
training when other people arent training.
Those sorts of things keep you one step ahead.
Technology No Substitute
for the Basics
Technology has revolutionized the world of
competitive sport as much as any other field.
Underwater camera technology, for example, has considerably increased the reach of
coaches. As most of the stroke techniques take
place underwater, the analysis is now able to
be much more all-encompassing and precise.
Yet while technology has upped the possibilities for analysis, its important not to
exaggerate what it can do for you. I love
technology, says Sinclair, but you cant depend on it. A bit of equipment comes out and
you think you have to go out and buy it. But if
you havent got the basics right, no amount of
technology will help you.
Sinclair likes to keep it simple, because
being the best, he argues, is ultimately about
being the best at the basics. Michael Phelps
does the simple things in swimming better
than everyone else and thats why hes the
best. Its not because he has the best equipment; its because hes amazing at the simple
things like starts, turns and dolphin kicks. He
has just perfected the essential things.
Throughout my career, I pushed myself to
the absolute limit. Until you go to that limit,
youre not going to understand things and be
able to reach your potential.
Lydia Smears, former Assistant Editor of IESE Insight
magazine, interviewed Edward Sinclair for this article.
75
Need help with your business strategy? Time to return to the timeless
wisdom of the founding father, H. Igor Ansoff (1918-2002).
last INSIGHT
Strategy Thats Off the Chart

mathematical background, he sought to structure, model
and formalize his business findings in a scientific manner.
by Massimo Maoret He essentially opened a new field strategic management
and as one of the founding editors of the Strategic Management Journal, he gave it an audience.
Ansoffs approach to strategy stands apart for two reaThe man considered to be the father of strategic sons. First, he focused on the needs of the end user namemanagement, H. Igor Ansoff, who passed away 12 years ago ly, practicing managers. His theoretical models pulled off
this July, left his mark with business research that was not the twin feat of being as general as possible applicable
only academically rigorous but also directly applicable to to for-profit and not-for-profit organizations alike while
managers. In this sense, he would have made a welcome also being practical, with his rigorous theories accompacontributor to IESE Insight magazine.
nied by summary tables, flowcharts and
Born in Russia in 1918, Ansoff trained
checklists. He never lost sight of helping
as an engineer and a mathematician. As
managers navigate the relationships cona thinker, he introduced the world to
necting his concepts, and then using that
seminal management concepts such as
understanding to take action.
Second, Ansoff injected a strong orgacompetitive advantage, organizationnizational flavor into his views on stratal capability and the Ansoff matrix
egy and its implementation. For instance,
his product/market matrix for mapping
he studied how to overcome organizagrowth alternatives. He specialized in
tional resistance to strategic change and
the behavior of complex organizations
analyzed the role of organizational power
in turbulent environments, looking for
and politics in defining and implementdeterminants of success a specialty
H. Igor Ansoff (1918-2002)
ing strategy.
that would only grow in relevance over
He was a prolific author of books and
the years.
articles throughout the 60s, 70s and
Before becoming a professor at Carnegie Mellon University in 1963, Ansoff worked as a general 80s. Throughout that time, he never lost touch with
manager at Lockheed, the U.S. aerospace company. This the real business world in all its complexity. And during
practical experience had a deep impact on his later work those decades, there was plenty of complexity and indusin academia.
trial change.
Ansoff investigated whether the problems and chalHis 1976 book, From Strategic Planning to Strategic Manlenges that he faced at Lockheed were unique or general- agement, first outlined a strategic success hypothesis,
izable, taking into account the business environment and which he elaborated on in subsequent works. The idea was
functional inputs, such as marketing and R&D. By borrow- that success could be realized when strategic aggressiveing the scientific methods tools of theoretical generaliz- ness and general management capability responsiveability and empirical validation from his engineering and ness were aligned with the prevailing environmental
turbulence level from 1 (repetitive) to 5 (surpriseful).
Environmental
Turbulence
1. Repetitive
2. Expanding
3. Changing
4.Discontinuous 5. Surpriseful
No doubt, many industries
Levels
today are experiencing turbuEntrepreneurial:
Anticipatory:
lence level 5, and his call for creStrategic
Stable: Based on Reactive: Based
Based on
Creative: Based
Based on
Aggressiveness Precedents
on Experience
Expected
on Creativity
ative strategies coupled with
Extrapolation
Futures
flexible management in such
General
an environment remains just
Custodial:
Production:
Strategic:
Flexible: Seeks
Management
Marketing:
Precedent
Efficiency
Environment
to Create New
as applicable to todays generaCapability
Market Driven
Driven
Driven
Driven
Environment
Responsiveness
tion of business leaders.
Massimo Maoret is an assistant professor in the Strategic Management Department of IESE Business School.
76
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6 Paul Druckman wishes integrated reporting

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6 Items for the Top of

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50 Feedback Tips for Less Grumbling,

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15 How Boardroom History

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Recommendations to Meet Future

Jay W. Lorsch admits that while there have been

Transparency, a Rising Trend

66 Sustainability at Any Price?

How can Henkel achieve its bold targets

71 Swimming Against the Tide

Edward Sinclair knows theres no room for

76 Strategy Thats Off the Chart

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Production, Technology and

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