Chapter 3 “First Who….Then What”

Step 1 The executives began the transformation for good to great by getting the right people on the bus and the wrong people off the bus.

The 3 Simple Truths If you begin with “who” rather than “what”, you can more easily adapt to a changing world. If you have the right people on the bus, the problem of how to motivate and manage people goes away. If you have the wrong people, it doesn’t matter whether you discover the right direction; you STILL won’t have a great company.

The case of Wells Fargo In the 1970s, CEO Dick Cooley began building one of the most talented management teams in the banking industry. He predicted that the banking industry would undergo change. Instead of mapping out a plan to prepare for this change, Cooley just kept hiring outstanding people whenever and wherever. When the changes in the banking industry did eventually occur, no bank handled the challenges better than Wells Fargo.

Wells Fargo’s Approach “You get the best people, you build them into the best managers in the industry, and you accept the fact that some of them will be recruited to become CEOs of other companies.”

Bank of America’s Approach “The weak generals, strong lieutenants” model, by Sam Armacost. This means of you pick weak generals for key positions, their competitors will leave, BUT if you pick weak generals (placeholders), rather than highly capable executives, THEN the strong lieutenants are more likely to stick around.

The fall of Bank of America In the 1980s Bank of America lost over $1 billion, and had to recruit a “gang of strong generals” to turn the bank around. Where did it find those gang of generals? ~ Wells Fargo! BUT, it was “too little too late” and Bank of America’s cumulative stock returns didn’t even keep pace with the general market.

Wells Fargo vs. Bank of America

Fannie Mae CEO, Maxwell, rescued Fannie Mae during its darkest days by hiring the best management team. Fannie Mae has been losing $1 million every single business day, and Maxwell turned this around by FIRST hiring an outstanding management team.

Distinction in the Good to Great Companies Dick Cooley from Wells Fargo and David Maxwell from Fannie Mae both used the idea that “who” questions come before “what” questions (before vision, strategy, tactics, organizational structure, and technology).

Cooley’s and Maxwell’s Classic Level 5 Style “ I don’t know where we should take this company but I do know if I start with the right people, ask them the right questions, and engage them in vigorous debate, we will find a way to make this company great.”

“Not a Genius with a Thousand Helpers”

The Genius with a Thousand Helpers Model In this model, the company is a platform for the talents of an extraordinary individual. With this model, the company usually only performs well when the talents of that extraordinary individual stay with the company.

Eckerd’s Brief Summary Eckerd’s suffered the liability of having a leader who had an uncanny genius for figuring out what to do but didn’t know how to assemble the right “who” for the team.

Jack Eckerd vs. Cork Walgreen Knew how to pick stores No executive team Didn’t know how to pick a great successor Basically had many helpers to carry out his ideas Corporation’s secrets were in Jack’s head. Knew how to pick people Developed multiple outstanding successor candidates which could take the company to the top Built best executive team in the industry Corporate strategy taught to all executives

The Genius with a Thousand Helpers Model

Classic Case of Genius with a Thousand Helpers Henry “the Sphinx” Singelton Ph.D. from MIT Founded Teledyne Through acquisition the company made it to Fortune’s top 300 list at number 293. Had too many helpers Once he left, the company began to crumble

Teledyne Corporation

It’s Who You Pay, Not How You Pay Them “ We found no systematic pattern linking executive compensation to the process of going from good to great. The evidence simply does not support the idea that the specific structure of executive compensation acts as a key lever in taking a company from good to great.”

Analysis Cash vs. Stock Long-term vs. Short-term Incentives Salary vs. Bonus

The Difference Good to Great executives received slightly less total cash compensation

The First Who Principle It’s not how you compensate your executives, it’s which executives you have to compensate in the first place. The Bus Example

Nucor Built their system on the idea that you cant teach a farmer work ethic to people who don’t have it in the first place

“We have the hardest working steel workers in the world.” Paid workers more than any other steel company Built the pay system on a high-pressure team- bonus mechanism Workers showed up for work thirty minutes early Created an environment where hardworking people would thrive

“The Right People” Specific educational background Practical skills Less Emphasis More Emphasis Specific educational background Practical skills Specialized knowledge Work experience Character Work ethic Basic intelligence Dedication to fulfilling commitments Values

Rigorous, Not Ruthless Good-to-great companies are rigorous, not ruthless, and the distinction is crucial Ruthless: hacking and cutting without consideration Rigorous: applying exacting standards consistently

Ruthless or Rigorous? In 1986 Wells Fargo acquired Crocker Bank Wells Fargo terminated 1,600 Crocker managers on the first day “The only way to deliver to the people who are achieving is to not burden them with the people who are not achieving” – Wells Fargo executive (p.53)

How to Be Rigorous

Three Practical Disciplines 1. When in doubt, don’t hire – keep looking! “Packard’s Law: No company can grow revenues consistently faster than its ability to obtain the right kind of people to implement growth and still become a great company.”(pg.54) A company’s success can largely be attributed to that company’s discipline to finding the right people.

Practical Discipline #2 When you know you need to make a people change, act. “The moment you feel the need to tightly manage someone, you’ve made a hiring mistake. The best people don’t need to be managed. Guided, taught, led – yes. But not tightly managed.”(pg. 56) Wasting time and energy on one poorly hired employee takes your time away from the great ones “Waiting too long before acting is equally unfair to those who need to get off the bus.”(pg.56)

Practical Discipline #3 Put your best people on your biggest opportunities, not your biggest problems. Marlboro moved George Weissman, their number one executive from domestic business to international At the time domestic sales accounted for 99% of the business and international less than 1% Marlboro became the number one selling cigarette in the world three years before it was number one in the U.S. Good to Great companies put their best people on their biggest opportunities, not their problems

Be Great