Capitalizing on capabilities

By making the most of organizational capabilities--employees' collective skills and fields of expertise--you can dramatically improve your company's market value. Although there is no magic list of proficiencies that every organization needs in order to succeed, the authors identify 11 intangible assets that well-managed companies tend to have: talent, speed, shared mind-set and coherent brand identity, accountability, collaboration, learning, leadership, customer connectivity, strategic unity, innovation, and efficiency. Such companies typically excel in only three of these capabilities while maintaining industry parity in the other areas. Organizations that fall below the norm in any of the 11 are likely candidates for dysfunction and competitive disadvantage. So you can determine how your company fares in these categories (or others, if the generic list doesn't suit your needs), the authors explain how to conduct a "capabilities audit," describing in particular the experiences and findings of two companies that recently performed such audits. In addition to highlighting which intangible assets are most important given the organization's history and strategy, this exercise will gauge how well your company delivers on its capabilities and will guide you in developing an action plan for improvement. A capabilities audit can work for an entire organization, a business unit, or a region--indeed, for any part of a company that has a strategy to generate financial or customer-related results. It enables executives to assess overall company strengths and weaknesses, senior leaders to define strategy, midlevel managers to execute strategy, and frontline leaders to achieve tactical results. In short, it helps turn intangible assets into concrete strengths.     

The young and the clueless

It's natural to promote your best and brightest, especially when you think they may leave for greener pastures if you don't continually offer them new challenges and rewards. But promoting smart, ambitious young managers too quickly often robs them of the chance to develop the emotional competencies that come with time and experience--competencies like the ability to negotiate with peers, regulate emotions in times of crisis, and win support for change. Indeed, at some point in a manager's career--usually at the vice president level--raw talent and ambition become less important than the ability to influence and persuade, and that's the point at which the emotionally immature manager will lose his effectiveness. This article argues that delaying a promotion can sometimes be the best thing a senior executive can do for a junior manager. The inexperienced manager who is given time to develop his emotional competencies may be better prepared for the interpersonal demands of top-level leadership. The authors recommend that senior executives employ these strategies to help boost their protégés' people skills: sharpen the 360-degree feedback process, give managers cross-functional assignments to improve their negotiation skills, make the development of emotional competencies mandatory, make emotional competencies a performance measure, and encourage managers to develop informal learning partnerships with peers and mentors. Delaying a promotion can be difficult given the steadfast ambitions of many junior executives and the hectic pace of organizational life. It may mean going against the norm of promoting people almost exclusively on smarts and business results. It may also mean contending with the disappointment of an esteemed subordinate. But taking the time to build people's emotional competencies isn't an extravagance; it's critical to developing effective leaders.     

The work of leadership

More and more companies today are facing adaptive challenges: changes in societies, markets, and technology around the globe are forcing them to clarify their values, develop new strategies, and learn new ways of operating. And the most important task for leaders in the face of such challenges is mobilizing people throughout the organization to do adaptive work. Yet for many senior executives, providing such leadership is difficult. Why? One reason is that they are accustomed to solving problems themselves. Another is that adaptive change is distressing for the people going through it. They need to take on new roles, relationships, values, and approaches to work. Many employees are ambivalent about the sacrifices required of them and look to senior executives to take problems off their shoulders. But both sets of expectations have to be unlearned. Rather than providing answers, leaders have to ask tough questions. Rather than protecting people from outside threats, leaders should let the pinch of reality stimulate them to adapt. Instead of orienting people to their current roles, leaders must disorient them so that new relationships can develop. Instead of quelling conflict, leaders should draw the issues out. Instead of maintaining norms, leaders must challenge "the way we do business" and help others distinguish immutable values from the historical practices that have become obsolete. The authors offer six principles for leading adaptive work: "getting on the balcony," identifying the adaptive challenge, regulating distress, maintaining disciplined attention, giving the work back to people, and protecting voices of leadership from below.     

Personalize your management development

Most organizations struggle with leadership development. They promote tope performers into management roles, put them through a few workshops and seminars, then throw them to the wolves. Managers with the ability to survive and thrive are rewarded; those without it are disciplined or reassigned. The problem is, an alarming number of people fall into the second category. This happens not because managers lack skills but because companies fail to realize that there is no single kind of leader-in-training. In this article, Natalie Shope Griffin, a consultant in executive and organizational development at Nationwide Financial, describes four kinds of manager-in-training, each embodying unique challenges and opportunities. Reluctant leaders appear to have all the necessary skills to be excellent managers but can't imagine themselves succeeding in a leadership role. Arrogant leaders have the opposite problem; they believe they already possess all the management skills they'll ever need. Unknown leaders are overlooked because they don't develop relationships outside of a small circle of close colleagues. Finally, there are the workaholics who put work above all else and spend 100 hours a week in the office. The author outlines specific training approaches tailored to each type of prospective leader. By focusing on the unique circumstances of individual managers, investing in them early in their careers, offering effective coaching, and providing real-life management experiences, Nationwide's leadership-development program has produced hundreds of successful leaders.     

Herbal Pharma Inc.: Conducting an Effective Group Audit*

As the relative weight of global economic activity continues to shift toward non-OECD countries (OECD 2018), audit firms are more likely to encounter clients with significant business operations in foreign jurisdictions. The associated need to engage and oversee local component auditors in these jurisdictions can lead to challenges arising from different business cultures and the resulting intra-audit miscommunications. Audit deficiencies related to these challenges have been detected by regulators (PCAOB 2011, 2010; CPAB 2012, 2015). Standard setters such as the IAASB and the Auditing and Assurance Standards Board (AASB) have responded by issuing an exposure draft proposing revisions to ISA 600 (IAASB 2020) and CAS 600 (AASB 2020) to strengthen the auditor's approach and provide enhanced guidance to practitioners. In light of this evolving area of assurance, this case was developed to deepen students' understanding of both group and component audits in an international context. The case takes the perspective of the group auditor and features an audit senior in a specialized role overseeing the component audit of a client's increasingly material Chinese subsidiary. Deficiencies in the prior year component audit, along with a change in the component auditor, further underlines the importance of robust risk analysis for the upcoming engagement.     

Corporate fraud and the audit expectations gap: A study among business managers

This paper presents the findings of an empirical study on the audit expectations gap concerning the role of the auditor in corporate fraud cases. The purpose of the study is to assess the significance of a reasonableness gap, a deficient performance gap and a deficient standards gap in the specific context of corporate fraud. In order to distinguish all three elements of the expectations gap, respondents need a certain level of expertise on fraud. Therefore, in this research the audit expectations gap is studied primarily from the perspective of three groups of business managers, based on the fact that they typically have a special responsibility in fraud cases. Bankers are used as a control group to assess the potential differences between the views of business managers and ‘society in general’. This study provides clear evidence of a substantial audit expectations gap in the context of fraud, both with respect to the auditor's performance as well as the auditor's formal obligations as laid down in existing standards. However, compared to bankers, business managers are less inclined to judge auditors’ performance of existing duties as inadequate, and see fewer points where auditing standards should be amended.     

Leadership run amok. The destructive potential of overachievers

The desire to achieve is a major source of strength in business, and it is on the rise. The authors' consulting firm has seen a steady increase in the extent to which achievement motivates managers. There's a dark side to the trend, however. By relentlessly focusing on tasks and goals, an executive or company can damage performance. Overachievers tend to command and coerce, stifling subordinates. Psychologist David McClelland identified three drivers of behavior: achievement, meeting a standard of excellence; affiliation, maintaining close relationships; and power, having an impact on others. He said the power motive comes in two forms: personalized, in which the leader draws strength from controlling people, and socialized, where the leader derives strength from empowering people. Studies show that great charismatic leaders are highly motivated by socialized power. To look at how motives and leadership style affect a group's work climate and performance, the authors studied 21 senior managers at IBM.The leaders who created high-performing and energizing climates got more lasting results by using a broad range of styles, choosing different ones for different circumstances. Rather than order people around, they provided vision, sought buy-in and commitment, and coached. If you're an overachiever seeking to broaden your range, you can study your actions and ask your team, peers, and manager to give you honest feedback. You can adopt specific new behaviors, such as engaging your team in a discussion of how to achieve goals, rather than issuing a set of directives. The company as a whole can play a part, too: Organizations must learn when to draw on the achievement drive and when to rein it in.     

The acceptance and adoption of continuous auditing by internal auditors: A micro analysis

The umbrella of “advanced technology” covers a range of techniques widely used in the U.S. to provide strategic advantage in a very competitive business environment. There is an enormous amount of information contained within current-generation information systems, some of which is processed on a real-time basis. More importantly, the same holds true for actual business transactions. Having accurate and reliable information is vital and advantageous to businesses, especially in the wake of the recent recession. Therefore, the need for ongoing, timely assurance of information utilizing continuous auditing (CA) and continuous control monitoring (CM) methodologies is becoming more apparent. To that end, we have conducted interviews with 22 internal audit managers and 16 internal audit staff members at 9 leading internal audit organizations to examine the status of technology adoption, to evaluate the development of continuous auditing, and to assess the use of continuous control monitoring. We found that several companies in our study were already involved in some form of continuous auditing or control monitoring while others are attempting to adopt more advanced audit technologies. We also made a large number of surprising observations on managerial, technology training and absorption, and other issues. According to our audit maturity model, all of the companies were classified between the “traditional audit” stage and the “emerging stage,” not having yet reached the “continuous audit” stage. This paper,¹ to our knowledge, is the first to study CA technology adoption in a micro level by an interview approach.     

Leading by feel

Like it or not, leaders need to manage the mood of their organizations. The most gifted leaders accomplish that by using a mysterious blend of psychological abilities known as emotional intelligence. They are self-aware and empathetic. They can read and regulate their own emotions while intuitively grasping how others feel and gauging their organization's emotional state. But where does emotional intelligence come from, and how do leaders learn to use it? In this article, 18 leaders and scholars (including business executives, leadership researchers, psychologists, an autism expert, and a symphony conductor) explore the nature and management of emotional intelligence--its sources, uses, and abuses. Their responses varied, but some common themes emerged: the importance of consciously--and conscientiously--honing one's skills, the double-edged nature of self-awareness, and the danger of letting any one emotional intelligence skill dominate. Among their observations: Psychology professor John Mayer, who co-developed the concept of emotional intelligence, warns managers not to be confused by popular definitions of the term, which suggest that if you have a certain set of personality traits then you automatically possess emotional intelligence. Neuropsychologist Elkhonon Goldberg agrees with professors Daniel Goleman and Robert Goffee that emotional intelligence can be learned--but only by people who already show an aptitude for it. Cult expert Janja Lalich points out that leaders can use their emotional intelligence skills for ill in the same way they can for good. "Sometimes the only difference is [the leader's] intent," she says. And business leaders Carol Bartz, William George, Sidney Harman, and Andrea jung (of Autodesk, Medtronic, Harman International, and Avon respectively) describe situations in which emotional intelligence traits such as self-awareness and empathy have helped them and their companies perform at a higher level.     

Leadership in literature

Business students nowadays are not, for the most part, poets. A growing proportion come to business school with a background in investment banking or management consulting and an undergraduate business major, rather than a degree in the arts and sciences. MBA students are already very familiar with business. A number of scholars and businesspeople have begun to question the scientific model that dominates business research and teaching. Formalized management tools work well enough if you're studying techniques for financial valuation, but less so when you're studying leadership and organizational behavior. Some argue that students could learn a lot more about these subjects if they took a course in literature. Examples from fiction can be as instructive as any business textbook. HBR senior editor Diane Coutu recently met with Joseph Badaracco, Jr., for a wide-ranging discussion of what leaders can learn from literature. For the past decade, Badaracco, the John Shad Professor of Business Ethics at Harvard Business School, has used classical literature to provide well-rounded, complex pictures of leaders in all walks of life-particularly leaders whose psychological and emotional challenges parallel those of senior executives. Fiction provides some of the most powerful and engaging case studies ever written. Unlike contemporary management literature, which is relentlessly upbeat, classical literature is unsparingly realist. Leaders often struggle and sometimes fail-and the stakes are high. When business leaders read about the conflicts of literary characters, they can better understand their own circumstances. We pay far too little attention to the inner lives of leaders. Business school courses seem to suggest that you can treat executives like lab animals and control their behavior through their environment. But behaviorism is not enough. Literature suggests that leaders should learn more about themselves if they want to succeed.     

Enterprise Risk Management: Theory and Practice

The Chief Risk Officer of Nationwide Insurance teams up with a distinguished academic to discuss the benefits and challenges associated with the design and implementation of an enterprise risk management program. The authors begin by arguing that a carefully designed ERM program—one in which all material corporate risks are viewed and managed within a single framework—can be a source of long‐run competitive advantage and value through its effects at both a “macro” or company‐wide level and a “micro” or business‐unit level. At the macro level, ERM enables senior management to identify, measure, and limit to acceptable levels the net exposures faced by the firm. By managing such exposures mainly with the idea of cushioning downside outcomes and protecting the firm's credit rating, ERM helps maintain the firm's access to capital and other resources necessary to implement its strategy and business plan. At the micro level, ERM adds value by ensuring that all material risks are “owned,” and risk‐return tradeoffs carefully evaluated, by operating managers and employees throughout the firm. To this end, business unit managers at Nationwide are required to provide information about major risks associated with all new capital projects—information that can then used by senior management to evaluate the marginal impact of the projects on the firm's total risk. And to encourage operating managers to focus on the risk‐return tradeoffs in their own businesses, Nationwide's periodic performance evaluations of its business units attempt to refl ect their contributions to total risk by assigning risk‐adjusted levels of “imputed” capital on which project managers are expected to earn adequate returns. The second, and by far the larger, part of the article provides an extensive guide to the process and major challenges that arise when implementing ERM, along with an account of Nationwide's approach to dealing with them. Among other issues, the authors discuss how a company should assess its risk “appetite,” measure how much risk it is bearing, and decide which risks to retain and which to transfer to others. Consistent with the principle of comparative advantage it uses to guide such decisions, Nationwide attempts to limit “non‐core” exposures, such as interest rate and equity risk, thereby enlarging the firm's capacity to bear the “information‐intensive, insurance‐ specific” risks at the core of its business and competencies.     

Is the objectivity of internal audit compromised when the internal audit function is a management training ground?

We conduct an experiment with 74 internal auditors to examine the effects of using the internal audit function as a training ground for future senior managers. Specifically, we investigate internal auditors' willingness to resist current management's aggressive revenue recognition policies, assuming that internal auditors expect to move into senior management positions in the future. We also examine whether increasing the power of the board of directors can reduce threats to internal auditors' objectivity. This is the first study to empirically examine whether training grounds influence internal auditors objectivity. Results of our study indicate that internal auditors are less objective (i.e. they are more likely to side with management's aggressive revenue recognition policies) when they expect to move into senior management positions, relative to when internal auditing is not used as a training ground. We also find that empowering the audit committee further decreases the objectivity of internal auditors. These results suggest that board power can have unintended consequences on the behaviour of internal auditors and that board empowerment does not guarantee improved governance or improved oversight of financial reporting.     

The dominant senior manager and the reasonably careful, skilful, and cautious auditor

This paper examines a paradox in corporate audit history that threatens the credibility of the current audit as a means of protecting stakeholders from corrupt senior managers. Using a historical analysis of legal cases of fraudulent reporting and subsequent public accountancy responses, the study reveals the paradox of a corporate auditor denying or limiting responsibility to detect material accounting misstatement (MAM) facilitated by dominant senior managers (DSM), while relying on the honesty of senior managers. The primary finding of the legal case analysis is the persistent presence of a DSM or team of DSM in the context of various contributing features, and the creation by Victorian lawyers of a model of excuses for the corporate auditor. The primary finding from the responses of public accountants is, within the context of the model of excuses and the assumption of managerial honesty, continuous denial, or limitation of auditor responsibility for detecting MAM facilitated by DSM. The consequence of this history is that DSM intent on MAM currently face corporate auditors generally untrained to assess the audit risk of managerial domination facilitating MAM. The paper's single recommendation is that corporate auditors be educated and trained to assess the audit risk associated with DSM facilitating MAM. The paper's contribution to corporate auditing is its use of historical analysis to bring together previously known but relatively disparate matters into a coherent whole that signals a fatal flaw in existing practice.     

Public discourse and cosmopolitan political identity: Imagining the European Union citizen

European Union citizenship has thus far been constructed largely in national and economic terms, which are unlikely to redeem the promise of a rich and vibrant political future in the wake of the EU constitution. Therefore, one of the central challenges facing scholars, political leaders and citizens is to fashion new argumentative spaces that enable citizens to forge cosmopolitan political identities that may help to fulfill the vision of alternative futures. This paper addresses the rhetorical dimensions of European Union citizenship as it focuses on public discourse as constitutive of new models of political participation and engagement. Tracing the idea of citizenship in the writings of Hannah Arendt, Immanuel Kant, and Giambattista Vico, discourse and imagination become necessary for a new dimension of European Union citizenship.¹     

Corporate Portfolio Management Roundtable

The dean of a top ten business school, the chair of a large investment management firm, two corporate M&A leaders, a CFO, a leading M&A investment banker, and a corporate finance advisor discuss the following questions:

• ? What are today's best practices in corporate portfolio management? What roles should be played by boards, senior managers, and business unit leaders?
• ? What are the typical barriers to successful implementation and how can they be overcome?
• ? Should portfolio management be linked to financial policies such as decisions on capital structure, dividends, and share repurchase?
• ? How should all of the above be disclosed to the investor community?

After acknowledging the considerable challenges to optimal portfolio management in public companies, the panelists offer suggestions that include:

• ? Companies should establish an independent group that functions like a “SWAT team” to support portfolio management. Such groups would be given access to (or produce themselves) business‐unit level data on economic returns and capital employed, and develop an “outside‐in” view of each business's standalone valuation.
• ? Boards should consider using their annual strategy “off‐sites” to explore all possible alternatives for driving share‐holder value, including organic growth, divestitures and acquisitions, as well as changes in dividends, share repurchases, and capital structure.
• ? Performance measurement and compensation frameworks need to be revamped to encourage line managers to think more like investors, not only seeking value‐creating growth but also making divestitures at the right time. CEOs and CFOs should take the lead in developing a shared value creation model that clearly articulates how capital will be allocated.

     

Lessons in power: Lyndon Johnson revealed. A conversation with historian Robert A. Caro

No one can lead who does not first acquire power, and no leader can be great who does not know how to use that power. The trouble is that the combination of the two skills is rare. Amassing power requires ambition, a focused pragmatism, and a certain ruthlessness that is often at odds with the daring, idealistic vision needed to achieve great things with that power. The tension is as real in business as it is in politics. This magazine is replete with examples of successful senior managers who could not make the switch from ambitious executive to corporate leader because they did not know what to do with the power they had so expertly accumulated. Robert Caro is a student of power. For the past 27 years, the two-time Pulitzer prize-winning biographer of Robert Moses and Lyndon Johnson has focused on the question of how Johnson amassed and wielded power. Caro's deep understanding of the inner workings of power offers senior executives a nuanced picture of leadership at the highest level. In this wide-ranging conversation, Caro shares his insights about the nature of power, the complexity of ambition, and the role that the greater good can play in the making of a leader. Power doesn't always corrupt, he insists. But what it invariably does is reveal a leader's true nature. "Today, when CEOs have acquired more and more power to change our lives," Caro says,"they have become like presidents in their own right, and they, too, need to align themselves with something greater than themselves if they hope to become truly great leaders."     

Building a leadership brand

How do some firms produce a pipeline of consistently excellent managers? Instead of concentrating merely on strengthening the skills of individuals, these companies focus on building a broad organizational leadership capability. It's what Ulrich and Smallwood--cofounders of the RBL Group, a leadership development consultancy--call a leadership brand. Organizations with leadership brands take an "outside-in" approach to executive development. They begin with a clear statement of what they want to be known for by customers and then link it with a required set of management skills. The Lexus division of Toyota, for instance, translates its tagline--"The pursuit of perfection"--into an expectation that its leaders excel at managing quality processes. The slogan of Bon Secours Health System is "Good help to those in need." It demands that its managers balance business skills with compassion and caring. The outside-in approach helps firms build a reputation for high-quality leaders whom customers trust to deliver on the company's promises. In examining 150 companies with strong leadership capabilities, the authors found that the organizations follow five strategies. First, make sure managers master the basics of leadership--for example, setting strategy and grooming talent. Second, ensure that leaders internalize customers' high expectations. Third, incorporate customer feedback into evaluations of executives. Fourth, invest in programs that help managers hone the right skills, by tapping customers to participate in such programs. Finally, track the success of efforts to build leadership bench strength over the long-term. The result is outstanding management that persists even when individual executives leave. In fact, companies with the strongest leadership brands often become "leader feeders"--firms that regularly graduate leaders who go on to head other companies.     

The cross section of conditional mutual fund performance in European stock markets

This paper implements strategies that use macroeconomic variables to select European equity mutual funds, including Pan-European, country, and sector funds. We find that several macro-variables are useful in locating funds with future outperformance and that country-specific mutual funds provide the best opportunities for fund rotation strategies using macroeconomic information. Specifically, our baseline long-only strategies that exploit time-varying predictability provide four-factor alphas of 12–13% per year over the 1993–2008 period. Our study provides new evidence on the skills of local versus Pan-European asset managers, as well as how macroeconomic information can be used to locate and time these local fund manager skills.     

Globalization and the coordinating of work in multinational audits

This paper examines how the processes of coordinating a multinational audit impacts, and is effected by, the structuration of globalization. Using a detailed field study of an audit involving multiple locations, we argue that the coordination of work in multinational firms links the local and the global in a dialectical manner. In particular, we analyze the relationship between the global and the local through an examination of two key coordinating mechanisms used by audit firms––inter-office instructions and the firm's risk based audit methodology. In so doing, we discuss the local appropriation of global systems, as well as the importance of trust and professional identity in the coordination and management of the multisite audit. Our study suggests two key globalizing tendencies associated with reflexivity in audit––the increased risk of litigation and the commercialization of the audit industry. These changes are intimately linked at the work practice level to changes in documentation, new technologies and methodologies, and a diversification in business advisory services requiring new skills and client relationships. We discuss the implications of these changes for the future of auditing, audit work and large audit firms.