Leadership and the nature of confidence

2011

We hear a lot about "business confidence" in the current climate, but one lesson we can learn from the past few years of uncertainty is that there are actually two forms of confidence governing leadership behaviour – external and internal.

Usually, "business confidence" means external confidence, where leadership takes a view on the state of their organisation and the economic environment – including the apparent or perceived confidence of others (consumers and businesses) - and makes decisions according to how they feel.

This type of confidence influences decisions about expansion, investment, product development, marketing, debt or financing. And it is also where caution creeps in, be it through 'gut feel' or as a response to economic data. Yet this is all quite normal. Economic cycles are a fact of life and business leaders have largely learnt to weather the conditions and batten down the hatches as trading conditions dictate.

But this recession is very different. While the economic slowdown hasn't been dramatic by historical standards - the fuel crisis of the 1970s was a bigger shock and the depression of the 1930s was far worse – it has been sustained, unpredictable and fraught with new types of doubts derived from credit and liquidity issues at both bank and sovereign level. And neither politicians or anyone else seems to have an answer to a crisis that has been unfolding in many phases since mid-2007.

The crash of late 2008 led to the recession of 2009 and with it, an entirely unsurprising drop in external confidence. And therein lies a huge paradox. Because partly due to a 'lag effect', the crisis of confidence never reached into the commercial or consumer economy in a significant way. In fact 2010 looked like being the recovery year and enough people believed it for external confidence to rise and signs of recovery to emerge.

Then it all slowed down again in late 2010, the Eurozone crisis kicked in and growth in the western world has been flat ever since. But in truth, as illustrated by the stagnant US economy, the recovery – and the confidence that fuelled it - was always fragile and liable to be derailed at the slightest nudge.

But what is different about 2011 is that it isn't just external confidence in the economy that seems to be eroding fast. There is also evidence of a weakening internal self-confidence on the part of business leaders and their leadership teams.

Compounding this, the framework within which business leaders operate has changed. They face profound economic uncertainty, political turmoil, regulatory change, environmental challenges, more competitive markets and rapidly changing events. This VUCA – volatility, uncertainty, complexity and ambiguity - is unchartered territory. There is no looking back and saying, "When we faced this X years ago, here was the course we took, and this is why it made sense".

In the face of downturn whose nature (if not scale) is unprecedented, many business leaders are afraid. They simply do not know what to do when their self-confidence has taken a knock. Many are sitting on their hands – as if hoping that the storm will pass and that they will be able to ride on the coat tails of the sunnier economic climes to come. They are deferring decisions – even those with few cost implications – and their organisations are suffering as a result.

There are two particularly damaging ramifications of this fear. Firstly, corporations in the US, UK and elsewhere are sitting on more cash than at any time in history. In the US, the figure is $20 trillion. That's 50 per cent more than the staggering US national debt of $14.3 trillion. No wonder Obama is imploring businesses to invest and hire.

This is a remarkable and unwelcome state of affairs. Large corporates are taking the view that cash is the safest insurance against any further economic shocks. But this causes huge damage to the economy, particularly at a time when headline unemployment is nudging 10 per cent.

Rather than hoarding cash, large corporations need to be investing to support the smaller businesses that employ the majority of their customers. Without this stimulus, the wider economy is starved of the opportunity to grow that it would otherwise have. Left unchecked, this will cause real long-term damage. But the question is, does the political will exist to break this cycle?

The second manifestation of the confidence crisis is that mergers & acquisitions (M&As) are continuing at a surprisingly high rate. If there's one thing companies ARE spending their cash on, it is buying other companies. Why? Again, it's a form of protectionism based on the belief that with cash can come growth through acquisition.

The trouble is that acquisitions do not add value to the economy. In fact they usually lead to shrinkage as the combined resources are consolidated. Not only do they normally fail to achieve the savings or synergies claimed by their instigators, but M&As rarely lead to any net aggregate growth.

But what they can do is to make a CEO look good in the eyes of shareholders – however fleetingly. Investment banks, too, play a key role in encouraging this behaviour – unsurprisingly, since they net millions in fees whether an M&A works or not.

Meanwhile, as corporations either hoard cash or chase acquisitions, the drive to achieve real growth – the type delivered by innovation, performance improvement and inspiring leadership – is taking a back seat. The net result will be reduced global competitiveness and a sapping of the enterprise culture.

Why boards and shareholders haven't woken up to this impending disaster is a moot point. One reason is that very few people recognise it; another is that business leaders have lost their grip on their own raison d'etre as well as the purpose of their business itself.

It also speaks volume that although leadership has become some kind of holy grail that is pursued incessantly, it remains persistently elusive in many organisations. Companies are hungrier than ever for strong leadership, yet we see far too few examples of real leadership courage.

So where are our companies and their leaders going wrong? Why do they seem unable to cultivate leaders capable of making courageous yet low-risk decisions? There are no easy answers. But some areas they can start to look at include focus, simplification, structure for organic growth; balancing the short term and long-term demands of shareholders and stakeholders and having respect for the wisdom of their people.

About The Author

Stephen Archer
Stephen Archer

Stephen Archer is Director, of UK business consultancy, Spring Partnerships. He is a chartered director and a consultant to FTSE 100 and multinational companies in the UK and internationally.