Why It's Hard To Do What's Right Today's CEOs are being swayed by every voice--except their own.
By Bill George

(FORTUNE Magazine) – Tall and straight-backed as a church pew, Bill George has a way of speaking that conjures up a single word: vicar. His even, Midwestern speech is sprinkled with words like "mission," "calling," and "service"; his blue eyes have a kind of calming clarity. It's almost enough to make you forget that he was, for many years, a hard-charging captain of industry--a guy who took a second-tier Minnesota medical-device maker and turned it into a juggernaut. When George joined Medtronic in 1989 as president and COO (in short order becoming CEO and then chairman), the company had $755 million in annual sales and 4,000 employees. By the time he left, in 2001, Medtronic was a $5.5 billion giant with 26,000 on its payroll.

Medtronic also became a model for its peers, dominating its industry group in FORTUNE's Most Admired list, an annual survey of some 10,000 corporate executives nationwide, and being voted one of FORTUNE's "Best Companies to Work for" in five of the past six years. Its shareholders have also done quite well. While George was CEO, Medtronic's market cap rose from $1.1 billion to $60 billion, a compound return of 35% a year.

George, 61, whose career included top-management positions at Honeywell and Litton Industries, now pours hundreds of hours a year into work as a corporate director for Goldman Sachs, Target, Novartis, the Harvard Business School, and other institutions. He also mentors and teaches young MBAs. It's not that he's a workaholic. George is setting an example of the commitment it takes--or should take--to run a big company. He's distilled his wisdom in a compelling new book, Authentic Leadership (Jossey-Bass). After spending several hours with George recently, FORTUNE invited him to present his ideas to readers directly.

Thank you, Enron and Arthur Andersen and WorldCom and HealthSouth. You woke us up. The business world has run off the rails, mistaking wealth for success and image for leadership. We're in danger of wrecking the very concept of the corporation. It's not often that a business leader (make that a recently retired business leader) gets to sound off in a major magazine, so let's not mince words: Many, many leaders in my generation have failed.

It's too late to undo those failures. But it's not too late for the next generation of leaders to learn from them. Legislation like Sarbanes-Oxley alone won't do the trick. What tomorrow's leaders need is a tough preparatory course on the pressures and temptations they'll face once they've arrived in the executive suite. Those forces are powerful enough to drag down even the most well-intentioned leaders.

I know. It almost happened to me.

My generation of CEOs, like many of today's business students, embarked on our careers with a mixture of ambition and idealism. But something happened along the way. We began listening to the wrong people: Wall Street analysts, media pundits, economists, compensation consultants, public relations staffs, hedge funds, fellow CEOs--all the players in what I call the Game.

That Game has stopped today's chief executives from focusing their energies on their company's customers, employees, and--ironically, since the Game is supposed to be all about them--shareholders. That's right. The biggest losers of the shareholder-value movement have been the shareholders themselves.

The rules of the Game are fairly simple: Report quarterly earnings that rise with the smooth predictability of a bunny slope. Treat yourself as a god for managing those smooth quarterly earnings. And pay yourself accordingly. When anybody suggests that you have made a strategic blunder, fold to those instincts and bury the mistake in divestitures and a series of restructuring charges. Wall Street, after all, loves to be right. Mastering the Game can make you feel like a master of the universe. Then one day you wake up and realize the Game has mastered you.

I started out idealistic in the way many business students are--though that idealism was tempered by reality. When I was barely 10 years old, my father lost his job. He was president of a small automobile-parts supply company in Grand Rapids, and GM was squeezing suppliers so hard that the company was forced to sell out. That gave me a bad feeling about the way big business operated--but also impressed me with a sense of its power. I figured that you could also use that power for good. What's more, I was very ambitious, to the point that I lost seven consecutive elections at my fraternity. Finally some of my fraternity brothers pulled me aside and told me that no one wanted to follow me because I was so self-centered, and I learned to pay more attention to others. All the same, I was already dead certain that I would be CEO of a major corporation.

At Litton Industries, the big conglomerate I joined after stints at the Harvard Business School and the Pentagon, I felt as though I was on the fast track to that goal. By age 27, I was running its microwave-oven business. I was secretly thrilled when a trade magazine put me on the cover with the headline LITTON'S GEORGE CHANGES THE WAY AMERICA COOKS. And I was confident that we were supplying a solid product.

But it was also part of the Game, you see. The parent company, with 55 consecutive quarters of earnings growth, was a phe-nomenon on Wall Street. Yet, those miraculous numbers, I learned, were engineered through a complex shell game that involved creating reserves that would be bled down in tough quarters and other accounting tricks. And Litton, I discovered, was prepared to do anything to make its numbers. Shortly before I left the company, for example, I overheard the CEO upbraiding the chief of oil exploration. "I know you have to do what you have to do to get the business," he said, "but if you ever put it in writing again, you're fired!"

At Litton I learned that young managers are promoted not for espousing high-minded values, but for making their numbers.

Once you've been promoted all the way to the top, the pressure to make those numbers simply ratchets up.

It was February 1999--ten years into my tenure at Medtronic--when we missed our quarterly numbers for the first time. At five o'clock in the evening on Presidents' Day, I went to the Denver airport's Red Carpet Club for an earnings preannouncement. The securities analysts that cover the company had raised their expectations by 20% in recent months. I had to tell them that we would fall short of those estimates by 2 cents. Never mind that our profits grew by 15% for the quarter. I sat there and listened to 350 people call me a liar on the telephone. CEOs, naturally, are supposed to know the future, and the analysts on the conference call couldn't figure out any other reason for Medtronic's falling short of their expectations than the fact that I had cravenly misled them. Could actual business or economic conditions have changed during the interim? No, CEOs are supposed to manage such problems away. Above all, they'd better keep their stock prices on an unwavering incline each day of each year!

Myron Scholes, the Nobel-winning economist, once told me straight out, "A company's stock price is the value of the firm." It is amazing that myths rise to that level. I responded, "Myron, I sit in the CEO's chair, and I can tell you how easy it is to raise our stock price in the short term. First, we can pump up the earnings. Second, we can go out and hype the stock." I remember him flinging his pencil down on the table.

The outside pressures to keep share prices and profits in a straight-upward arrow, of course, are lunatic. There's nothing natural about an earnings chart that rises in an unbroken line. Kids don't grow that way. Neither do companies. My main sin in February 1999 was letting the company's reported earnings reflect economic and business reality. Yet the experience was no less painful.

It's the sort of embarrassment that drives many top executives to massage their numbers to meet Wall Street's expectations. But we've heard plenty about the accounting scandals of the past few years. Far more pervasive--and insidious--is the way that outside pressures have become a substitute for corporate leadership. Take the case of a leading pharmaceutical company: Its managers recently asked employees to take pay cuts to help pay for the launch of an expensive new drug. And why should employees make that sacrifice? Not so that fellow employees might keep their jobs during lean times, but so that the company could still meet the earnings targets it had promised Wall Street.

I can't imagine telling a worker at Medtronic she needed to make the best pacemaker she could to please Wall Street--or for that matter to please the company's shareholders. What does my employee care about some fund manager or trader? She doesn't. So what does motivate her? I once asked a Medtronic worker who was making heart valves that very question. "I'm making these valves to save lives," she said. "I'm saving 1,000 lives a year. And if I make one bad valve, someone is going to die."

I learned the importance of what she was saying the hard way. Soon after joining the company, I was visiting a doctor performing an angioplasty procedure with a Medtronic balloon catheter to open up clogged arteries. The product literally fell apart in the doctor's hands as he was threading it through the patient's arteries. He was so angry that he took the catheter, covered with blood, and threw it at me. I ducked as it went sailing across the room.

It was one heck of an eye opener: The CEO can't have the shareholder centrally in mind when making decisions. To many, that will sound like heresy. However, America's leading corporations became great not by getting their share prices up but by doing what they were set up to do incredibly well--whether that's making catheters or selling discount dog chow. Sam Walton wasn't saving lives, but he was on a mission to better them, building a company in which "customer service" is meant in the very literal sense of being in the service of the customer. Wal-Mart's rocketing share price was the result, not the cause. Yet somehow many CEOs confuse cause and effect. By striving so hard to please shareholders, they often end up pleasing no one--not their customers, not their employees, not their communities, and ultimately not their shareholders.

Besides, even if it made sense to focus on the shareholder, which should you listen to? The long-term shareholder, who holds the stock through ups and downs? The retiree who counts on dividends to meet monthly expenses? The employee shareholder who's depending on the stock to pay for a child's college education? The speculator who demands instant results? Or the short-seller who makes money only when the stock goes down? The shareholder, in fact, has no single voice.

So which voice should you listen to?

You could take counsel from your fellow CEOs. After all, you're now a member of an elite society in which your compatriots have made the same tough calls you have, right? CEOs love to spend time with other CEOs--if you have any doubt, just spend an afternoon at the Greenbrier. The only downside is that you may start to feel underpaid.

That's where the compensation consultants come in. They'll tell you that you're not only woefully underpaid but dangerously so. In fact, they'll warn your board of directors: "He could bolt the company at any moment!" Never mind that no CEO actually jumps ship because he is paid at the 40th percentile instead of the 60th. There's a factor other than the truth at play. The board wants to send Wall Street the message that the company has the very best CEO money can buy. Put too low a pricetag on a bottle of wine, the fear is, and people might assume it's a mediocre wine.

I could tell you about my debates with the compensation committee of my board, in which I requested that they keep my compensation down, but you wouldn't believe me. As a result of the rapid rise in Medtronic stock, my compensation was a true embarrassment of riches. The only time I lied to my son was about my salary. I told him I was making $100,000 a year. Then one day he read in the newspaper that it was far more than that.

It would be another lie to say I was never tempted by all those outside voices--or by an equally dangerous inner one. Ambition, ego, call it what you will--it's a demon I've struggled with throughout my career.

In the late 1980s I found myself in striking distance of my original teenage goal. After several promotions, I was now in charge of 18,000 employees at Honeywell. I was on my way to the CEO's job. I felt that it was just a matter of time. When a Minneapolis company called Medtronic approached me about taking the No. 2 job, I rejected the assignment as way too small--Medtronic was not the major corporation I pictured myself running. It offered the job twice more, and twice more I said no.

At Honeywell I had become a seasoned corporate warrior. I paid close attention to my appearance and my attire. I'd learned to mask my emotions to fit in with Honeywell's stolid culture. Here was my reputation: I was Honeywell's Mr. Fixit, getting handed one troubled division after another. I'd put out the fires, make the numbers, then move on. But something was wrong. The job was making me miserable. I wanted to be CEO badly--I just no longer knew why.

Driving home one afternoon it hit me: Honeywell was changing me more than I was changing Honeywell. I wasn't building anything; I wasn't creating anything. Sure, I was leading, but I no longer knew where my leading was leading to. I realized that I too was becoming imprisoned by the Game.

I called Medtronic and asked if the job was still available. The fact that it was was the luckiest break I ever got. It was during that long, agonizing process that I discovered the voice I should listen to.

In business school we watched the 1962 film The Loneliness of the Long-Distance Runner, yet only recently have I come to relate to the film's protagonist. During his solitary cross-country runs through the woods, he's accompanied only by voices and images from his troubled past. In the CEO's case, those voices are very real: "Manage for the short run," they say. "Take the shortcut. Beware the short-sellers."

The test of leadership is ignoring those outside voices and learning to hear the one deep within. As a CEO, your attention ultimately has to be on the long run--and that is, of necessity, a lonely run. The voices clamoring for your attention will be many. Your job is to find your own.