Grandfathers of Scrum on Leadership

In an era 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?”

For leaders to cope with these myriad pressures, knowledge is more critical than ever before. Sixteen years ago we published The Knowledge-Creating Company. Since then executives have come to recognize that knowledge can yield sustainable competitive advantage. Companies have learned to capture, store, and distribute knowledge, so it continually catalyzes innovation. However, as we have seen, leading a knowledge-creating company is difficult.

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.