When Jack Welch was running General Electric, one of his most fundamental rules was, “Confront reality – not as it used to be, and not as you wish it were, but as it is.” It’s such an obvious rule, yet so hard to follow, as recent news reminds us.
One of the world’s champion reality-ignoring leaders at the moment is Greek Prime Minister Alexis Tsipras, assuming he supports his deputy finance minister’s demand for $300 billion in World War II reparations from Germany. Guys, this is not going to work, and you know it. Your country owes a lot of money that it doesn’t have, and there’s no painless way out. Your recurrent trips to fantasyland just waste time.
Tsipras won the last election by promising voters that he could ignore reality – that he could end the misery of austerity just by commanding it to stop. It’s an irresistible path for many aspiring leaders, though it doesn’t always work, as we just saw in the Chicago mayoral election. Jesus Garcia, challenging incumbent Rahm Emanuel, promised he would reopen the public schools Emanuel had closed and add 1,000 officers to the police force. He had no idea how he’d pay for it all; the promises were completely unrealistic. Yet they still deprived Emanuel of a clear majority in the first-round election and forced Tuesday’s runoff, which Emanuel won.
Business leaders don’t have to win elections, but they do have to persuade investors, employees, suppliers, and customers that they’re facing reality and have a winning plan. One of the very best at doing this in recent years is Samsung CEO Oh-Hyun Kwon. As McKinsey global managing director Dominic Barton told me last year, “While achieving record profits [in 2013], he’s pounding it out there to say, ‘We’re not moving fast enough. We have to shift.’”
Kwon faced the uncomfortable fact that Apple was supreme, and he changed Samsung so it could make Apple-like phones that could compete. When Apple responded with strong new models, Samsung again stepped up its products, and it seems to be staging a comeback. As Barton observed, admiringly, “This was a chairman who at one point said to his organization, ‘Next year I want you to be willing to change everything except your spouse and your children.’”
Two business leaders being tested right now on facing reality are Fidelity’s Abigail Johnson and American Express’s Ken Chenault. Johnson’s unpleasant reality is that actively managed mutual funds, the basis of Fidelity’s huge success, on average underperform index funds, and investors are finally getting the message. That’s why they’ve been pulling money out of Fidelity funds and putting it into Vanguard index funds, as the Wall Street Journal recently explained. Confronting that big, unfriendly reality could require changing Fidelity’s business model. We’ll see how she responds.
Chenault’s reality is that competitors are paying him their sincerest compliment by copying parts of AmEx’s business model, cutting into the company’s profits. As a result, Oppenheimer has just downgraded the stock. Will he accept that he must disrupt the company before others do?
In 14 years as CEO, Chenault has mostly been fearless in confronting reality. As he once told me, “A leader’s job is to define reality and give hope.” Doing the first part – realistically – is the hardest.