Ivey Business Journal: In your book you make the case that Indian managers are changing managing. How are they doing that?

Michael Useem: Three colleagues and I became intellectually curious about why Indian companies are on such a roll when 10 minutes in the streets of Bombay or Delhi would tell you that it’s a tough environment, crazy, chaotic infrastructure, weak at best. The world economic forum does ratings country by country on the challenges of doing business. The U.S. is often at the top, good for doing business, contracts are honoured, the courts don’t have terrible delays, employment law pretty clear. If you look at the ranking of maybe the top 180 countries worldwide, India is way down that list in terms of the simplicity and ease of doing business, which is to say that India is a tough place to do business. Having said that, we did make note of the fact that so many Indian companies are on an incredible roll when it comes to their own growth. To pick one example that symbolically sums up the story, if you look at Infosys, everybody knows the company now, 10,000 people worked there in ’02, well north of 100,000 are working there 8 years later, but that’s symptomatic of so many companies, even in more traditional areas like steel making. Tata Steel has doubled its employment. So it does help to have an economy with a little wind at your back which is growing 7-8 percent a year. That helps. But that’s only part of the story of course because if it’s 7 or 8 percent in terms of annual GDP year- upon-year growth, companies like ICICI and Reliance and Tata Motors and well beyond, they’re typically growing 30, 40, 80 percent a year. I was in Bangalore in January of this year. I spent some time with the U.S. company Xentor. The Indian operation is now number one in the world in terms of employment, and this year alone, 2010, they are in the process of hiring 10,000 new employees. It’s almost a paradox, a tough place to do business, historically almost impossible, going back to the pre-1990s, that’s when IBM got out. If you were a carmaker, you couldn’t go in, period. If you were a filmmaker like Kodak, you couldn’t sell. Having said all that, we set out to answer the question, “How can they do it.” Our working hypothesis was that they had learned, the leaders of Indian enterprise, had learned Peter Drucker and Jack Welch and Warren Bennis better than we had learned it and they had applied it more effectively. They all read all these great American management gurus. If you look at the top 10 best-selling books in India on the business side, nine out of 10 are coming from the U.S. or maybe from the UK. So they know it, so many of the top people have been educated in MBA programs in Canada, the U.S., UK and beyond. But what we stumbled over was our observation when we interviewed essentially 100 out of the top 150 companies there, that they know the western way of doing business and they adopt a lot of it but they’ve also pioneered. We came up with four other ways of doing business that in our view is better than the way it’s done here. Four other ways to manage that are just different and better than what we’ve got here and, number two, all four of those ways of the India way are not unique to India. They could, with some hard work, be imported back here. A quick summary is, to understand how to do business in India, you’ve got to know how they do it.

IBJ: What can North American managers learn from India?

MU: After spending quite a bit of time with the leaders of industry in India, we concluded that much of what they do would be totally recognizable to a manager from an American, Canadian or European country. So they’ve got a board of directors, they think about strategy, they have divisions, they pay somewhat according to your performance, so they’ve read Peter Drucker. They know how to run a company or they’ve gone through an MBA program that offered the western way. It took a long time for us to get to this, but we ended up picking out four themes running through what they were doing that looked different from what you see in companies in North America or in western Europe.

Number one, and keep in mind we’re talking about the overall picture, Indian managers put a huge priority on engaging with employees. We call it holistic engagement, which means, to sum it up in a phrase, employees are always seen as assets and not costs to be cut. You invest in them; they are the future. And they say that in all kinds of ways. There’s one well-known Indian company called HCL that has as its tag line, its mantra, it’s on the website, employees first, customers second. How’s that for something that wouldn’t work in some other settings? It’s an eye catcher.

Number two, Indian companies, by virtue of so many potholes — metaphorically speaking — challenging anybody trying to get from point A to point B — and with electricity that is often out, government red tape that even now feels Kafkaesque, with all that in the world they live in, Indian managers are exceptionally good at adaptation and perseverance. Adaptation means or it’s almost like an improvisation element, we’ve just got to solve it. So we don’t get electricity six hours a day. Don’t complain about it, solve it, and they do, in the most amazing jury-rigged ways. I think part of it is that the people who have survived the incredibly difficult conditions are those that have learned to be adaptable. Improvisational.

Number three, kind of the magic of so many of these Indian companies now is to come up with these really different, what we would tend to call value propositions. So take one of the most famous cases out there right now. You can buy an automobile in India, four tires, steering wheel, windows that go up and down, for under $2,500 and if you really want to push the envelope, they’ll send it to you in a box and you can put it together in your back yard. Isn’t that something? And you save some money by doing that. It would never work here, but the point is that Indian executives, most of whom are pretty entrepreneurial, have spotted these places where there is money to be made, with huge underserved populations, in a way that’s inconceivable by the way that we go about thinking about business. So take mobile telecom, companies now do very good mobile service for less than a penny per minute. In a sense they had to do that because there are 500 million people that want telephones over there who don’t have more than a penny a minute to spend, people who would ordinarily only buy a motorcycle can’t spend more than $2,500, so in the latter case, the chief executive said to the engineers, “Just do it. Find a way to make a $2,500 car.”

Number four, which for us is the most unusual and most interesting of the four elements, is that Indian executives consistently foster the notion that they’re in business not for shareholder value, not for total shareholder return, not for earnings per share, but for family. They want to be rich, for the community, to give back to the community, and then — this is going to sound really corny — for country. It’s hard to imagine a whole lot of North American companies saying that we are on Earth to make our North American economy better. But a lot of Indian managers say exactly that. It’s about purpose, it’s about mission and they genuinely believe that. But they also get enormous energy out of employees who think that’s pretty cool. I’m not working for Wall Street, I’m actually working for the betterment of Indian humankind. Which is universal. People in any Canadian city, any U.S. city, are thinking, “I would like to look for a place that believes we’re actually doing good for a lot of people.”

IBJ: What are you working on these days?

MU: I’ve got two or three projects, like most academics, and I’m happy to pick up on any of those. We’re looking at catastrophic risk and leadership, think BP, think earthquakes in Haiti and China, and think of all of the above as an issue of actually governance and of leadership. The question you might pose in the case of BP is what might that board have done, what might Tony Hayward have done, in advance to have created a world where the kind of events we’ve seen unfold in the gulf did not happen? What could Haiti have done, unlike Chile, a tough earthquake in Chile not too long after the Haitian earthquake, what could Haiti have done or what could international donors have done, in advance to ensure that the catastrophe that hit Haiti was not quite as deadly as it was? In our view, it’s partly a matter of what you might call a combination of forecasting and just the technical aspects of such things as building codes, or long-term insurance, but equally on a project I’m working on with several people. It’s a little bit of a collaboration with the World Economic Forum, and we also view it as a leadership question. How do you get people like the BP board, those responsible for Haiti, to put in place in advance a mindset to be ready for the worst, hope for the best but prepare for that catastrophe that may lie out there?

Just to make that very tangible, in terms of what we’re doing, we’re planning to identify 25 to 30 best-in-class companies when it comes to anticipation of catastrophic risk. We’re looking to compare them to companies that are at the other end of the spectrum, keeping in mind that all these companies are not bad about the enterprise risk management to begin with. Then what we’re looking to do, very inductive, is to go into the top 25 to 30 and then the top 25 to 30 at the other end of that spectrum and then ask the question, what is the difference? What are the management, what are the leadership practices, that really make a difference? It’s going to be done within a year.

Here would be an example of what we anticipate coming up with. You think about the BP disaster. As we know from the enormous media coverage, there were tangible frontline shortcomings on the oil rig itself, so the alarm system was turned off. And as soon as I learned of that, as I’m thinking this through, it becomes apparent that this really is a leadership question with a particular twist to it. How do you, as Tony Hayward, tens of thousands of employees around the world, most of whom you’re never going to talk with or see, how do you put into place a mindset, a culture, that puts a premium on frontline employees appreciating risk and doing something about it? For bigger companies, that becomes pretty essential.

Second topic that we’re looking at at the moment, is the role of top executive teams and working with their board of directors, in this case in the pharmaceutical industry, to press for innovation versus pressing for more efficiency with what you already have. So here, just to give a twist to it, here our concern is to what extent should you think about the relationship between top management teams and the board as one of the board playing the role of shareholder monitor, keeping management managing effectively, cutting costs, exploiting what they’ve already got, versus the role of the board doing more partnering with management to encourage the R&D function and the CEO to think outside the current box. Should you be getting into generics, should you go into biotech? So we’ve actually been interviewing the executives and directors on that one.

IBJ: There isn’t that depth and expertise on most boards where they could effectively contribute some value …

MU: That’s precisely one of the topics we’re looking at. You think about boards of directors, — and I tend to look at this as a leadership question – and ask if the board can play a leadership role? Historically, boards more or less play no role, as required by law. We’ve looked at governance in India, in China, all over the world regulatory authorities in the last 10 years have tightened the screws on directors to be more vigilant and not just provide the kind of symbolic blue chip presence. Having said that, I think that what’s happened, this is my assessment, I’m trying to work out the evidence to support it, that is as executives of big companies facing all the turbulence that we know about, globalization, tough competitors, just a rocky period, my belief is that executives have increasingly said, “Whoa, we’ve got some really smart people in the boardroom who know a lot about how to manage risk, kind of want to open up a China office, so why don’t we, instead of having them only monitor us, why don’t we talk to them and see what ideas they may have?” That’s the direction the world’s moving.

IBJ: Why do you have to have certain CEOs looking at their directors that way when they were chosen to do that very thing?

MU: Here’s my illustration. I actually have a Lenovo laptop. Lenovo, if you recall, bought the IBM PC line and overnight it picked up 12,000 IBM employees and all the IBM PC customers around the world. Overnight it became a multinational company. The people that run the company — and we’ve interviewed the principals there several times around –recognized that they didn’t know a whole lot about how to run a multinational, and they didn’t. So they said we’re going to hire consultants and they did. But then they also said we’ve got to get some heavy hitters on the board who know how to manage cross-nationally. And if you work out that logic of that, they put a bunch of new people on the board who had operating experience around the world and then they created a strategy committee, two people from the inside and then two non-executive directors, who were in this category of people who weren’t there to monitor for shareholders. They really were there to render strategic advice. Lots of companies don’t do this but I think the trend line is in that direction.

I’ll give you one more line on that as well. A lot of ways to get data that speak to that, and it’s hard to get the right kind of data, but my appraisal of the data that we tend to stumble on, is that as directors now, non-executive directors, are recruited to boards, increasingly, unequivocally, it’s for the strategic advice that they can render. Historically, you wanted people from government backgrounds or great blue chip prominence, sometimes even celebrity people, but I think that’s an era that’s in the mirror.

IBJ: We live in tough times. How does a leader lead?

MU: Here’s one way to answer the question, which we did a few months back, with two colleagues as the financial crisis was still more explicitly upon us than it is this particular month. We managed to get to 14 chief executive officers of large U.S. firms. So we said, in tough times, we know what you do in good times, what is it about tougher times that’s different? So the basic underlying question there is, given the universals of leadership, you need to be strategic, got to communicate decisively, got to be a decision-maker at all times, in all countries, in all industries. Nobody argues with that. At issue here is, in really tough times, what are the distinctive qualities that are really important? Having framed it quite that way, going forward the next couple of years, on the basis of that inquiry, more face time with employees, stockholders and customers. Now executive time is already incredibly spoken for, so this is not a no-brainer. Number two, total straight-up transparency and honesty about how tough it is, so in that sense, coming to terms with the reality and saying here’s the reality. But then the flip side of that is “It is the reality but we have the talent, we’ve got a sustainable advantage of some kind.” While the economies are going to grow at 2.8 percent in the next couple of years, we really do have the talent here, we’ve got the model, we’re going to beat that. So realism and optimism, some combination.

IBJ: Michael Jensen (A Theory of the Firm) is now focussing on leadership. He’s saying that a leader has to be authentic, have integrity, and believe and project that he believes in something larger than himself. Just how does a leader drill those values down through the rank and file?

MU: To me it’s probably the most fundamental question because, just the way companies have evolved the last five or 10 years, I think people in the senior ranks have come to appreciate what the front ranks have long appreciated. And that is that a lot of the ideas on how to make things happen really come from those who are directly in contact with the market, customers who see what’s out there. I think the challenge that top people face these days is how to do two things. How to create, first of all, call it organizational design or structure, a way in which people can upwardly provide information and ideas. Easier said than done, but many companies, Cisco among them, have created councils where people cross-functionally get together. John Chambers, the guy who runs the thing, doesn’t tell them what to do, he learns from them what he should be doing. More of the bottom-up approach. So call that the organizational design element. But the other element which you alluded to which is how the heck do you create a world, call it a mindset, call it a culture, where everybody says, I’ve got to take responsibility, this is my company as much as that of the CEO, and therefore I’ve got to take responsibility as if I am the CEO. I’m not, but in my small area I’ve got to think that way, and for me anyway, I and some of my colleagues have actually looked a lot at how the armed forces function, U.S. armed forces, because big mission, probably getting close to 2 million people in uniform these days, and if you think about the Chairman of the Joint Chiefs of Staff, top uniformed officers in the US, they have to communicate right down to the front line, the combat unit leader, what the mission is and then be pretty self-confident that the people on the front line are trained and able to act like a leader in their own setting. How do you do that? When you’ve got a big organization, it’s really all about the culture, sustaining it and perpetuating it. In my view I think that is very much a tactical business of many small things, many small steps taken, that lead to a big culture left in place. So the way that the chairman comports him/herself, the messages that you send out, the insistence, the phraseology on commander’s intent without trying to micromanage, just so many pieces that go into it. Most of them, though small, but take a dozen such pieces together and hopefully at a restructured BP, the people at the top can be confident, they don’t lose sleep over this, hopefully in the future that people on a rig won’t turn off the alarm system.

IBJ: American business prowess isn’t what it used to be. Do you see this slow decline as a permanent or temporary phenomenon?

MU: I’ll get to a bit of it in a backward mode here. I’ve been genuinely privileged to end up at the World Economic Forum in Davos, several years in the late ’90s and then for the last six years ’05 through ’10. When I was there in 1997 and 1998, before the dotcom bust, when Cisco was pushing over $400 billion in market value, when telecoms were putting down cable all over the world faster than they could pay for it, everything looked like the future was bright. The American method of doing everything on behalf of shareholder value seemed to be the way, so that was a period of American triumphalism. I was not in Davos for the next five years but returned in ’05, when we were back in the same mindset, with so many U.S. companies again on a roll, doing really well domestically, doing very well internationally. HSBC was there, Royal Bank of Scotland was there, but the big dominant banks were no longer Japanese banks but they were the Citis and the Goldmans of the world, and so I think in that success is the source of some of our downfall. We know this from lots of research, from success is the enormous danger of beginning to make suboptimal decisions, a product of overconfidence, a product of hubris, and thus I think with a much more humbled country, a much more humbled business community in the U.S. because of what happened with the financial crisis, here’s why I’m more optimistic about going forward. I think that with that triumphalism now a part of our past, I think we’re much more able to look, in our case, to Canada, to Great Britain, to Brazil, India and China, for their way of doing business and to bring some of those ideas back to revitalize American business. I don’t think that’s going to be reversible, I think this idea, Tom Friedman was on it years ago, of globalization means looking for best practice around the world. I think some Chinese companies have just an amazing way of doing business, same thing in India, same thing in Brazil, and hopefully with this self-centred triumphalism now a part of the past, we’ll have a way to grab some ideas from around the world that might get us out of the doldrums. We’ll see.

IBJ: Thanks very much for your time.

MU: You are welcome.