THE LEADERSHIP COVENANT: DOES IT APPLY TO COMPANIES WITH HIGH TURNOVER?

Last week I had the pleasure of speaking to a group of 13 MBA students from the Ohio State University Fischer College of Business. They are on a six-week internship program at a number of Silicon Valley companies. The gathering was also attended by two well-known and successful Silicon Valley entrepreneurs and by the Director of the OSU Center for Entrepreneurship. One of the entrepreneurs asked an important question, which prompts this post.

The subject of the question relates to my concept of covenant introduced in Letter 3: “Absorbing Uncertainty: the Entrepreneurial Covenant.” The central concept of that Letter is the role the entrepreneurial leader plays in absorbing uncertainty in an organization. The leader, with the broadest understanding of the organization and its business, is expected to have the greatest capacity for absorbing uncertainty. Putting their trust in the leader permits people with valuable skills but perhaps more limited capacity for uncertainty to operate in the inherently risky environment of an entrepreneurial organization. Offloading uncertainty onto the leader frees these organization members to focus on their jobs. They are giving the leader “trust packets,” and each time the leader accepts such a “packet” a covenant is established between leader and team member — an intangible bond that becomes part of the fabric of the organization. While this concept of trust packets and covenant comes from my experience of building companies in technologically complex industries such as pharmaceuticals and energy, where innovation is an intense multi-disciplinary process often taking many years before commercial success, I have generalized it.

So, the question I was asked:

Has the nature of this covenant changed over time, as organizations have shifted from the tradition of a career with a company measured in decades to the standard more typical of today, whereby organizations have a much more fluid employment pattern?

This question applies particularly to Silicon Valley, where annual turnover of 10+% is not unusual, and where engineers and scientists move to different companies every year or two. It brings up a plethora of issues I have wondered about often: How can we build a lasting organizational culture if there is high turnover? How do you harness the energy of a team if the individuals consider themselves temporary? Does the concept of allegiance apply? How do you develop esprit de corps when each employee is more interested in accumulating a ”portfolio of stock options” than in being passionate about the company’s vision? How do you build a company identity when one-third of the personnel turns over every few years?

It seems reasonable to suggest that the special bond between the entrepreneurial leader and his or her team should be different when the individuals are only engaged for a temporary specific mission as opposed to absorbed with a long-term shared vision for a company. The argument is that the nature of the link — the fabric — is different when the employee anticipates a short association rather than an enduring career within the organization. Nevertheless, my answer to the question I was asked is unequivocal: the covenant into which the leader enters is the same regardless of the nature of the organization. Sure, there may be situations where a professional arrangement is short term from the beginning. But even then, the leader expects full dedication that transcends just the details of the transaction, and a special connection needs to be made between the leader and the individual if one expects the best out of the service. I believe this applies to external attorneys and consultants as well, although it is all the more true when we make a full-time hire. The moment I engage someone to join my organization, I am not thinking of that individual’s departure. I am thinking of how he or she can be part of my dream. I describe the concept of the company, highlighting the unique role I expect the individual to play, and enter into a relationship which, at that moment, has only one possible outcome: success. Whether a person will re-consider the decision later is something neither of us can predict at that moment. I am not hiring that person on the basis of doubt, but of positive expectation.

The important factor to realize: the covenant is about “relationship” rather than “transaction.” Of course there are transactional elements in any hiring relationship – after all, there must be clarity of roles, tasks, skills, reporting, compensation. But at a deeper level, it is about the individual getting excited about the mission of the company, putting trust in the leadership, and then diving fully into the action. That is the essence – and the fun – of being in an entrepreneurial organization. And in making this happen, the leader fills a crucial role at the “apex of a pyramid of trust,” as he or she builds this fabric of relationships – both internal and external.

I do accept that people will move on. It has happened to me often in building companies, and at times it has distressed me – especially when I put my trust in someone only to find that a “better offer” woos the individual away. It is a burden the entrepreneur must carry: we cannot expect everyone to be “grabbed” as deeply by the excitement of the dream as we are. But I still proceed as if everyone is fully in the game, even if this sometimes leads to what I call the “asymmetry of the covenant.” When I find I’ve made a mistake in hiring someone — especially a senior executive — and I ask this person to leave, I go out of my way to make it easy. I consider what effect my decision has on the person’s family and career. So, for example, I go the extra mile to give the individual time to find another position. On the other hand, so often when a senior executive is lured by “a better offer,” the notice that I am given is very short – presented with the argument that the other opportunity “needs to know immediately.” I find that to be very asymmetric, but have reconciled it as part of the leadership predicament.

When I hear of the high turnover rate in Silicon Valley I remind myself that there are many companies here and elsewhere that do have long-term employment. The extreme may be Lincoln Electric, a model we might do well to study. See for example Koller, Frank (New York: PublicAffairs, 2010) Spark: How Old-Fashioned Values Drive a Twenty-First-Century Corporation: Lessons from Lincoln Electric’s Unique Guaranteed Employment Program.

3 thoughts on “THE LEADERSHIP COVENANT: DOES IT APPLY TO COMPANIES WITH HIGH TURNOVER?

  1. This is a very interesting and important subject and I would like to provide a different way of looking at some of the issues.

    While a leader may be thought of as absorbing uncertainty, I prefer to think of the leader as the one who structures an opportunity and builds a team around a common vision to realize the opportunity. Yes, there is uncertainty in making it happen; the job of the leader is to find solutions that drive the team toward a successful result.I therefore would not characterize all employees as having less capacity for uncertainty than the leader. This might be condescending to the employee. An employee risk profile might be higher than the CEO. In fact, the employee maybe exceedingly aggressive in the pursuit of excellence. Empowering the employee is the source of greatness in a company. This often occurs when the employee feels ownership for the total burden of success. Don’t underestimate the employee’s capacity for uncertainty and hunger to achieve.

    Employees are capable of looking at the direction of a firm and making their own judgment of whether progress is being made on results. They always “grade” their leaders. Trust packets can be given but also taken away by the employee. The bond between employee and company is often based on needs and expectations being fulfilled.

    Think of the professional sports model with constant recruiting and talent scouts. Athletes know they must perform to keep their job and to find a better one. For me, success and meeting and exceeding expectations is the key to esprit de corps, and the covenant is a ledger where needs of the company and the employee are balanced. Yes, some of these needs are emotional and relational, but people move on because the ledger no longer balances.

    The question of whether the nature of the covenant has changed is very pertinent. The world today includes such activities as “Flash Mobs”, “Speed dating”, “Just in time relationships” and “Tweets”. Relationships and communications have changed. The real answer to this question requires some more field research. Go out to lunch at Google and ask the team there.

  2. Ricardo,

    First of all, thank you for the kind reference to my book SPARK, about Lincoln Electric and its “guaranteed employment program.”

    Second, and just briefly, I think that one of the real strengths of what Lincoln has been able to do for so many decades through its incentive management system (of which the no-layoff policy is just one component) is to generate an understanding across the firm (and up and down, in a very flat organization) of the inevitably ongoing uncertainty which the whole firm faces every day, not just felt by the CEO of the moment.

    I think that is extremely important because it contributes to the trust manifest in the company and the willingness of employees at every level to be so flexible as the firm responds to market uncertainties.

    Third, if I can return the favor owed by mentioning a fascinating book which I have just stumbled on: “Profit at the Bottom of the Ladder” by Jody Heymann (Harvard Bus Press, 2010.) It is a survey of many companies across the world whose leaders have come to understand that sustainability is enhanced and profits ensured by continuous investment in the “lowest on the ladder” in their firms, not just the upper echelons.

    I shall keep reading your posts and am about to order your book.

    cheers

    Frank Koller

  3. Ricardo,
    This is a very tough economy today and many folks are losing their jobs. As the leader in a business that has had to cut back significantly I have tried to give as much time, notice and severance as possible to the folks that have believed in me and the vision. They have generally been able to find work thank goodness but I think this topic needs to be discussed and vetted more given the reality of today’s workplace, banking, equity markets, and in general the Great Recession. I have always found that there are management principles that work in a more robust and stable environment like empowerment, delegation, seeking to understand before being understood, etc. but in a war-of-survival mode the General Patton type management style may be necessary to make rapid and lifesaving moves for the company. In that light, many deposits you have made in the “stable” or profitable era are depleted quickly and folks are unable to reconcile the leader’s shift into a perceived autocratic mode. We see the same situation with a Gulf of Mexico Oil leak or a Lehman meltdown… things get done over weekends with heads of state calling the shots… and employees on the team walk out the following Monday with all their belongings in a box. How does one reconcile the leader’s principles and style in both circumstances (stable vs. crisis mode)? I think some of us in the trenches would like some wisdom from their elders given the tough environment we are managing our businesses in today.

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