“Leadwise” principle is a word. You have heard this word before, or you would never have picked up this book. The thinking process operates by association, and all sorts of ideas are associated with the word ‘leadwise’.
When discontinuity is the only constant, the ability to lead wisely has nearly vanished. All the knowledge in the world did not prevent the collapse of the global financial system three years ago or stop institutions like Lehman Brothers and Washington Mutual from failing.
No one could slow down the recession as it sped across the world, or ensure that market leaders like General Motors and Circuit City didn’t go bankrupt. No one realized that despite enormous government stimuli, the road to recovery would be torturous, with so few jobs created in the U.S. and Japan. Never did we expect more of leadership—and never have we been so disappointed.
It isn’t uncertainty alone that has paralyzed CEOs today. Many find it difficult to reinvent their corporations rapidly enough to cope with new technologies, demographic shifts, and consumption trends. They’re unable to develop truly global organizations that can operate effortlessly across borders. Above all, leaders find it tough to ensure that their people adhere to values and ethics. The prevailing principles in business make employees ask, “What’s in it for me?” Missing are those that would make them think, “What’s good, right, and just for everyone?” The purpose of business, executives still believe, is business, and greed is good so long as the SEC doesn’t find out.
The gulf between the theory and practice of ethics exists in business for several reasons: There is a big difference between what top management preaches and what frontline people do. There’s a philosophical tendency in the West, following Plato, to conclude that if a theory isn’t working, there must be something wrong with reality. People behave less ethically when they are part of organizations or groups. Individuals who may do the right thing in normal situations behave differently under stress. And common rationalizations, such as that you are acting in the company’s best interest, or justifications, such as that you will never be found out, lead to misconduct.
Hit by fraud, deceit, and greed, people are angry about the visible lack of values and ethics in business. There’s something wrong with the way B-schools, companies, and leaders are developing managers. As Bent Flyvbjerg pointed out in Making Social Science Matter (Cambridge, 2001), instead of trying to emulate the natural sciences, we should have ensured that management asked questions such as “Where are we going?” “Who gains, who loses, and by which mechanisms of power?” “Is this development desirable?” “What should we do about it?”
Why doesn’t knowledge result in wise leadership? The problem, we find, is twofold. Many leaders use knowledge improperly, and most don’t cultivate the right kinds. The types of knowledge we discussed in our book are now well known: explicit and tacit. Managers tend to rely on explicit knowledge, because it can be codified, measured, and generalized. Wall Street firms thought they could manage greater risk by using numbers, data, and scientific formulas instead of making judgments about loans one at a time. The same holds for the U.S. automobile industry, which relies on offering financial incentives rather than understanding customer needs.
“Doing the right things, when required, is a calling from on high. Do it boldly, do as you believe, do as you are.” –Eiji Toyoda, Toyota
Dependence only on explicit knowledge prevents leaders from coping with change. The scientific, deductive, theory-first approach assumes a world independent of context and seeks answers that are universal and predictive. However, all social phenomena—including business—are context dependent, and analyzing them is meaningless unless you consider people’s goals, values, and interests along with the power relationships among them. Yet executives fail to do just that. Leaders will continue to rely on new scientific discoveries to deal with the environmental, energy, and biodiversity issues facing the globe and on technological advances to develop smarter systems. Creating the future, however, must extend beyond the company; it must be about pursuing the common good. CEOs need to ask if decisions are good for society as well as for their companies; management must serve a higher purpose. Companies will then start thinking of themselves as social entities charged with a mission to create lasting benefits for society. Unless companies create social as well as economic value, they will not survive in the long run.
In addition, the world needs leaders who will make judgments knowing that everything is contextual, make decisions knowing that everything is changing, and take actions knowing that everything depends on doing so in a timely fashion. They will have to see what is good, right, and just for society while being grounded in the details of the ever-changing front line. Thus they must pair micromanagement with big-picture aspirations about the future.
Over the past two decades we have been studying leadership in different kinds of organizations; teaching business leaders, especially in Japan; and interviewing generations of leaders in some of the best companies in the world. Our goal has been to identify how leaders can systematically make decisions that will allow companies to live in harmony with society rather than clash with it. Our studies show that the use of explicit and tacit knowledge isn’t enough; CEOs must also draw on a third, often forgotten kind of knowledge, called practical wisdom. Practical wisdom is tacit knowledge acquired from experience that enables people to make prudent judgments and take actions based on the actual situation, guided by values and morals. When leaders cultivate such knowledge throughout the organization, they will be able not only to create fresh knowledge but also to make enlightened decisions.
From Knowledge to Wisdom
The origin of practical wisdom lies in the concept of phronesis, one of the three forms of knowledge that Aristotle identified. In Nicomachean Ethics VI.6, he wrote that phronesis is “a true and reasoned state of capacity to act with regard to the things that are good or bad for man.” He identified two types of wisdom: esoteric or metaphysical wisdom, and practical wisdom, which Samuel Coleridge later wryly interpreted as “common sense in an uncommon degree.”
Practical wisdom, according to our studies, is experiential knowledge that enables people to make ethically sound judgments. It is similar to the Japanese concept of toku—a virtue that leads a person to pursue the common good and moral excellence as a way of life. It is also akin to the Indian concept of yukta, which connotes “just right” or “appropriate.” For instance, executives who believe that the purpose of a business—and even of making profits—is to serve people and enhance society’s well-being observe yukta and shy away from excess and greed.
Aristotle also identified episteme, or universally valid scientific knowledge, and techne, or skill-based technical know-how. If episteme is know-why and techne is know-how, phronesis is know-what-should-be-done. For instance, because no universal notion of a good car exists, episteme cannot answer the question “What is a good car?” That will depend on who is using the car and why, and it will change over time. Techne is knowing how to make a car well; phronesis is knowing both what a good car is and how to build it. Thus phronesis enables managers to determine what is good in specific times and situations and to undertake the best actions at those times to serve the common good.
To make the right decisions, managers need to understand why a company exists—its raison d’être. Companies often behave as though they’re willing to do anything to survive, even if that means destroying the world in which they operate. They would do better to pursue the common good—not because it’s right or fashionable but to ensure their sustainability. No company will survive over the long run if it doesn’t offer value to customers, create a future that rivals can’t, and maintain the common good.
We have observed the use of phronesis most often in Japan, although it isn’t specific to any country or culture. Governments in Japan may have come under fire for the mistakes they have made, but people still respect Japanese companies even though they haven’t proved to be world-beaters in recent times. Before the devastating earthquake and tsunami, there was no crisis of confidence in Japan’s corporate world as there is in America’s, partly because what happened on Wall Street did not happen in Japan. Japanese companies have often been criticized for not being sufficiently capitalistic—that is, not returning enough capital to investors, not maximizing shareholder value in the short term, not moving quickly with offshoring, not laying off employees to reduce costs, not paying compensation that will incentivize top management. But the flip side is a continuing belief that the best Japanese companies live in harmony with society, have a social purpose in earning profits, pursue the common good as a way of life, have a moral purpose in running a business, and practice distributed phronesis. These beliefs will influence tomorrow’s management theory and practice. Indeed, they are the very essence of what Gary Hamel described in his article “Moon Shots for Management” (HBR February 2009). In contrast to the old notion of capitalism, which pitted business and society against each other, the best Japanese companies, we believe, can become the exemplars of a new, communitarian approach to capitalism, as long as their leaders continue to imbue it with a social purpose.
[ Sources: hbr.org, ]