Selker Leadership

Our latest Leadership Interview is with Richard (Dick) N. Foster, the Managing Partner of the Millbrook Management Group, LLC. Prior to forming Millbrook, Mr. Foster was with McKinsey & Company for 30 years. While at McKinsey, he served as a Senior Partner and Director for 22 years and retired from the company in 2004.

Mr. Foster co-founded the firm’s high technology practice in the late ‘70s, the chemicals practice in the early ‘80s, the healthcare practice in the late ‘80s, and the private equity practice in the ’90s. He also led McKinsey’s worldwide knowledge development from 1995 to 1998. He served over fifty leading global companies primarily in healthcare, electronics, and chemicals as well as a number of nonprofit institutions.

Mr. Foster’s research interests are in the relationships between capital formation, innovation, and regulation. Mr. Foster has written two best selling business books: Innovation: The Attacker’s Advantage (1986) and Creative Destruction (2001), that focus specifically on the relationships between technological change, innovation and capital formation, and destruction. In 1999 – 2000, he led the Study Group for the Council on Foreign Relations on Innovation and Economic Power which led to the publication of, Technological Innovation and Economic Performance (Steil, Victor, and Nelson, editors, Princeton University Press, 2001).

Mr. Foster was elected a Fellow of the American Academy of Arts and Sciences and the President’s Circle of the National Academies. Mr. Foster is also member of the board of directors of: athenahealth (chairman of the Governance Committee); Trust Company of the West, a wholly owned subsidiary of Société Général (Audit Committee); Memorial Sloan Kettering Cancer Center (Member of the Executive and Finance); Yale School of Medicine Dean’s Advisory Board; W. M. Keck Foundation (Executive Committee); Council of Foreign Relations (Nominating and Membership Committees); Council for Aid to Education (chairman, Strategy Committee); and a member of the Chambers Street Executive Network of Goldman Sachs. Mr. Foster was director of the Santa Fe Institute from 1996 until 2004.

Mr. Foster received his BS, MS, and PhD from Yale University in Engineering and Applied Science.

In the first of this four part series, Dick discusses our current economic conditions and the types of leaders that need to emerge in the midst of these crises.

Greg Selker: Thank you for doing this interview. I appreciate it.

Dick Foster: You’re welcome. It’s a pleasure to do it. This is a good moment in our economic cycles to be discussing these matters.

Greg Selker: How do you see the current economic recession affecting the importance of a management team’s leadership in terms of their ability to balance the rate of change against the rate of stress that results from introducing change?

Dick Foster: During these periods we need more leadership and we probably need different kinds of leadership. There are so many firefighting exercises we have to go through today, and so we certainly need the field generals out there who have the ability to take us through all this. We probably also, by the way, need a few “conceptualizers” that analyze the deeper causes of how we got into our economic situation. And more particularly, of why it is that even the most knowledgeable people in the country who spend their whole lives thinking about these things have been so surprised that we are here now.

Almost none of them would have predicted this a year ago October, maybe half a year ago in April. But one year ago I think it would be very hard to find anybody that was quite as pessimistic as people are today. So we need these leaders to sort out the mess.

Greg Selker: Why do you think that is? Why do you think very few people saw this coming?

Dick Foster: First of all, we all know at some level that the system has globalized, but we don’t really know what that means, and we don’t understand how this level of globalization has resulted in these instabilities. This is a very complex system. Somebody was saying to me, “it’s like forecasting the weather”, and I think it’s actually quite a bit more difficult than forecasting the weather because the weather is relatively predictable based on strong scientific models. While there are also strong economic models, the outcomes can be manipulated because we think and act based on the forecasts of our economy and that induces further changes.

For example, someone says, “I think we may go in that direction” and that may trigger ten other people saying, “I think you’re right.” Then everything is amplified. Weather doesn’t respond to outside influences with the exception of seeding clouds. Weather is unbelievably complex, of course, but it doesn’t have that all-important feedback loop which is what has been driving a lot of economic uncertainty.

I think what’s happened in the current environment is that trust has gone away. There was a story I read the other day about scrap metal providers. The scrap metal market has totally dried up because people don’t trust each other. Somebody will say, “I’m going to pay you $10.00 a ton for that pile of scrap,” and nobody believes him so they won’t ship the goods. Actions and responses like this stop a market cold, and we have not integrated this kind of phenomenon into our current economic theories.

So the first kind of leadership we need is economic leadership. We need economic leaders to think deeply about our current situation, how we got into it, and how we can move forward. Obviously, the G20 is doing this. There’s also a group of economists called the G30 that has no official status, but they’re pretty good economists that include Paul Volcker, Roger Ferguson, and others. I hope they will start to look at this. But in spite of the current upheaval, we also need to remember that every time we lose one of our national forests to forest fires, six months later the little green shoots start coming up and start making the next forest.

And while this has been the worst and the most comprehensive pull back that I can ever remember, the little green shoots in our economy are coming up now. I look at 8,000 securities every day and it’s very hard to find any of those that are compelling. I look at ones that are mainly over half a billion dollars in size. Around the world it’s very hard to find anything that’s a compelling case for investment right now.

That being said, if I go a little bit smaller, if I look at securities that are $100 million to a half a billion, and I look for companies that have been growing at least 20 percent a year for the last three years and that have a forecast of at least 20 percent in earnings going forward, I can find several hundred of those around the world, many of which are here in the United States.

These companies are in the fields of healthcare, education, and interestingly, offshore drilling, and a variety of others. If this recession is like every other one, some of those will turn into really great companies going forward. This is the second kind of leadership we need now. Leadership that sees new opportunities and introduces new ways of operating that changes the fundamental rules of the game for their individual market segments.

When our economic downturn happened in the mid ‘70s, The Limited emerged. Nobody had ever heard of The Limited in the late ‘60s but it was really starting to move fast through the recession in 1974 and then produced an average annual rate of return for shareholders of 52 percent for the next 15 years. That’s not so bad. In addition to The Limited there was also The Gap, Home Depot and Wal-Mart. All these companies got started after the ’74 recession.

Then in ’86 when we went through it again, Microsoft really took off, Oracle ascended from the pack of database companies, and Amgen really started. Every time we’ve had a downturn, some of the little shoots grow into great trees. I’m pretty certain that will be the case now.

Greg Selker: Some of these “big trees” have fundamentally altered and transformed the businesses and markets in which they were in.

Dick Foster: All of them have that common characteristic, Greg. That’s absolutely correct. To do that and sustain this growth requires a special kind of leadership. By the way, there are some big companies doing this now, Amazon and Google to name a few. This is the third kind of leadership we need now: the leadership of the existing companies who represented the recent and past breakthroughs. We need these individual leaders within these companies to carry us forward now as well.

We may need a fourth kind of leadership, which again like the second group of leaders, is a little bit more abstract because it is emerging rather than existing. The next phase of the world’s growth, no matter how you calculate it in the next 15 to 25 years, is going to occur in China and India. Their growth will not occur because they’re going to leap ahead of the United States in advanced technology applications. Their growth is a look back in time, similar to the late 1800’s. China and India are now building the power plants and putting in place the basic infrastructure that we’ve been building for the last 100 years. They’re going to build their telecommunications networks, power grids, and physical transportation grids.

They’re going to have to build the hospitals, the schools, all these core infrastructure components which exist in our society, and they will be building these in numbers that are impossible for us to imagine. All of this is not really technology work. In China alone, the people moving into cities over the next 25 years will be the greatest human migration ever, if my colleagues at McKinsey are correct. And there’s a migration into cities of equal size which will occur in India.

This is just unprecedented in the history of humanity, so we’re going to need extraordinary leadership to pull all this together. You probably saw as I did recently, that the Chinese are saying they are going to build a battle group, and they have designs now they’re considering for an aircraft carrier. This will be the first time we’ve had a Chinese battle group floating around the world. We dominate this area right now. I think we have 13 naval battle groups in the United States. France has part of one. Nobody has anything remotely approaching what we have.

The Chinese say, “we’re not interested in whether you think we should have one or not. We are going to have one. We’re happy to talk about how it’s used.” We need to remember that it is 1 compared to 13, and maybe by the time the Chinese launch their naval battle group we’ll have 15. Maybe we’ll have 10. Who knows?

The point is that the next 25 years are not going to be a repeat at a larger scale of the last 25. Politically, we’re going to need plenty of leadership at the national and global level, and similar to the different kinds of economic and business leadership I’ve talked about; our political leadership will also have to think about themselves and what they’re doing differently than they have before, because we’ve never faced the kinds of issues we are facing now. This is the fourth kind of leadership we need now.

So I think in answer to your basic question, we need different kinds of leadership, and we need these different leaders to have the flexibility to lead differently dependent on the circumstances. Sometimes they will need to focus on planning and strategy. Sometimes they will need to be field marshals. But we need these different leaders now more than ever.

Let me elaborate a little bit more on the leadership needed to sort out our financial crisis right now. To do this will require operating leadership. We saw the other day that Circuit City is no longer. It’s not a circuit town or it’s not even a circuit village. Circuit City is going away. Neiman Marcus had the worst month on record in October. Christmas is shaping up to be absolutely awful. We need a lot of field marshals now to get us through this period of time with minimal damage. I think we’re vastly better positioned than we were in the ‘30s to do this. We know with the help of cost reduction, our productivity has been going up through this whole period of time. We shouldn’t forget about that.

Our guys that are down there in the trenches, the leadership of their current companies, non-financial companies, are doing quite a good job. Their leadership is incredibly important to us as well, and will help us move through this down period as quickly as possible.