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2014/07/31

Are Some Emerging Markets Setting Themselves Up for a Fall?

 In part two of an interview with Simon Johnson, the former IMF chief economist looks at problems brewing in emerging markets, which have “gone crazy borrowing in foreign [currencies].” He also weighs the different approaches bank regulators take in the U.S. versus Europe. “In Europe, they’re still shell shocked from the sovereign debt crisis [and] very scared of doing anything that would destabilize … their recovery. As a result, the bankers are able to dictate the terms to the regulators.” Johnson also expresses skepticism at the idea that national banking regulators will look after each other’s interests during a crisis. 
An edited transcript of the conversation follows:
Knowledge@Wharton: [A recent] Martin Wolfe column in the Financial Times ended with a recommendation [similar to the one] you were making — that Europeans should be upping equity requirements rather than the road they’ve gone down, or in addition to the road that they’ve gone down. 
There’s the state of mind of the regulators, and then there’s whether they actually have the resources to do it, even if they had the will. Where do the resources come from? You said the 60 billion euro is too small … relatively speaking to the problem. How would you evaluate the resources that are being thrown at this issue? 
Johnson: I think the main resource is one of legal authority. And also … the intellectual dimension. Do the regulators have a sufficiently skeptical view of these large complex financial institutions? Do they force them to simplify? Do they require more safety measures, such as larger buffers of equity, which is by far the most important issue right now? How do the regulators see this? Do they have the legal powers to push for the right kind of changes?
In the U.S. they do. In Europe, they’re still acquiring those powers. I think intellectually there’s a split within the U.S. official community. But the people in favor of making the system safer and more resilient have a slight upper hand at the moment. It may change. I may regret saying this, but that’s the current direction — a little bit encouraging.
In Europe, not so much. In Europe, they’re still shell shocked from the sovereign debt crisis, and they are very scared of doing anything that would destabilize, in their view, their recovery. As a result, the bankers are able to dictate the terms to the regulators. So, I don’t think it’s a lack of resources, per se; it’s a lack of intestinal fortitude. But you have to understand that in the broader European context — with the macro economic problems — it’s hard not to be somewhat sympathetic to the regulators. 
Knowledge@Wharton: You have different approaches on different sides of the ocean…. In a real crisis, there are no borders, and there’s contagion and all the rest of it. So … if there’s a problem … how do you resolve this? It may be a U.S. bank, but they have enormous holdings overseas…. I know there have been moves for cooperation across the ocean, but where does that stand? And does this recent European legislation change that state of cooperation or improve it in some way? 
Johnson: The Europeans are trying to get better cooperation for resolution within the euro area, which would be a very important step. 
Knowledge@Wharton: That’s the bank union step? 
“It’s an awful lot to bet on regulators and liquidators treating each other in a pleasant way: British regulators looking out for American interests? Why would they look out for American interests?”
Johnson: Well, it’s part of the banking union. Banking union has many dimensions — agreeing to have a common approach to resolution, a common resolution framework, clear rules for sharing the losses depending on where the activities are and what went wrong in the bank. I think we’ll only believe it when we see it — when we actually see one or more banks go through that.
But they definitely understand that they need to move in that direction. The big issue is the cross border piece between the U.S. and the U.K., the U.S. and the eurozone, the U.S. and other jurisdictions, and of course between all these jurisdictions — between each other. That remains really problematic. There are not binding agreements on how to handle it. 
We have some memos of understanding. And there is some, perhaps, better communication [than] in August and September 2008. But we haven’t stress tested that. We haven’t seen it under pressure. And we haven’t seen what happens when, as you said, a large American bank that has a big operation in the U.K. is in trouble. Do the U.K. authorities move to seize assets because they’re concerned [about the] abilities [of that bank] in the U.K.? [Do] they move to seize those assets in the U.K.? Or are they comfortable with some of those assets coming back to the United States as part of an integrated resolution in the U.S., believing that value will be available to satisfy creditors and other counterparties in the U.K.? That’s a very complicated and delicate matter. And I really don’t think it’s all sorted out. 
Knowledge@Wharton: After the Asian financial crisis in the 1990s, there were a lot of agreements among countries to have cooperation when it came to foreign exchange, because that started out as a foreign exchange panic or crisis. But that wasn’t the problem that came up in 2008. And the next crisis, whenever it might be, we don’t know how it will start. Can you describe what steps have been taken that might help with this cooperative effort that could be effective, between say Europe and the U.S. or other banks in Asia and so forth? 
Johnson: Well, the main steps that have been taken are in the form of these statements of agreement of principle. The Bank of England has said they understand what the FDIC would do in the event of a crisis here. And they appreciate that that could well be the right approach for the bank on a global basis.
From the point of view of what matters in a crisis, it’s all a bit loose. And you’re relying on a lot of good will. There will be, remember, enormous time pressure when these crises develop. Big decisions have to be made in a 24-hour window, if not faster. And it’s an awful lot to bet on regulators and liquidators treating each other in a pleasant way: British regulators looking out for American interests? Why would they look out for the American interests? Or Koreans looking out for American interests? Their job, their responsibility — in some countries it’s a legal responsibility — is to look out for their own citizens, their own exposure and their own taxpayers’ potential losses.
So it’s very hard, unless you have a binding treaty. Unless the countries were actually writing down what they would do, when and how, I don’t think you’re actually ever going to get there. 
Knowledge@Wharton: You make an appearance in a book written by Jeff Connaughton — The Payoff: Why Wall Street Always Wins.
He’s a former lobbyist and Congressional staffer. So he’s got a view of both sides of the street. And he gives a pretty devastating look at the inner workings of Congress and the influence of Wall Street lobbyists, and money and fund raising and so forth. I know that you were working with former Senator Ted Kaufman to try to add some more bite to some of the financial legislation. Some of it made it through, but a lot of it didn’t, at least what he and [Senator] Sherrod Brown wanted to do. It is now probably two years since the book was written. Has much changed since that time in regard to the issues that were discussed in the book? 
Johnson: I think Jeff’s points about the structure — the influence industry around Wall Street — are now just as true as they were then. What has changed is that the crisis woke people up and people began to realize that just allowing the financial sector, including big banks, to do whatever they want, any kind of innovation, any kind of change in their size and structure — this was not necessarily good for economic growth, not necessarily good for the rest of the economy. And the notion of systemic risk, I think, is very much on the minds of many officials.
Sometimes these banks can get big enough and leveraged enough so they cause danger to the financial system. And that can have big negative effects. Even if you avoid a Great Depression you can have a Great Recession, and you can lose more than 8 million jobs and struggle to come back five, six years down the road. 
What’s changed a little bit is there’s no more of a push back against the influence industry. Now they’re very powerful. They have a huge amount of money. They put money into explicit lobbying, but also in many ways they can influence opinion in and around Washington, primarily, and also around the country. 
There are more people concerned about that, more people pushing back and more officials inclined to push back now. So, the outcome of the process of financial reform, I think, remains in question. But I am a little bit more encouraged than somebody might have been just after reading Jeff’s book, for example. I think it’s not over, and it’s not a foregone conclusion that the same dangerous power structures prevail as before. 
“The outcome of the process of financial reform, I think, remains in question. But I am a little bit more encouraged…. It’s not over, and it’s not a foregone conclusion that the same dangerous power structures prevail as before.”
Knowledge@Wharton: What’s your latest project? 
Johnson: I’m interested in the history of bailouts. I think we have a long history of protecting individuals, protecting different kinds of firms in various settings in the United States and in the Western tradition. But we’ve changed over time a lot. The terms of the bailout, what you need to do in order to get it, who we regard as being critical, what justifies a bailout — I think that’s an important story to tell people, preferably in a relatively gripping way, because there’s lots of drama. There are lots of compelling individual characters. 
Knowledge@Wharton: The latest being maybe the U.S. auto companies? 
Johnson:  Yes, absolutely. Auto companies. But also the banks and the financial system going forward. Because sometimes you get the impression when you listen to, I don’t know, a top official at the Federal Reserve, that a certain set of activities will be bailed out because that’s what the science says. And everything else is on its own. In fact, it’s much more of a give and take, and it’s much more about a sequence of events and what particular individual’s in the hot seat at the moment. What did Hank Paulson want to do? Why did he do it? Tim Geithner also is a fascinating character. A lot of decisions made in these periods of turbulence are huge. 
It’s better to have a more open debate and discussion about the nature of bailouts. When does a bailout make sense, and when does it not make sense? It’s better to have that discussion now in a period of relative calm than to try and have it on a Friday night when you know that you have to make a decision one way or the other by Sunday evening before the Tokyo market opens. So that’s what we’re trying to do. 
Knowledge@Wharton: When should there be bailouts, and when shouldn’t there be? 
Johnson:  Well, I think the answer depends on how you define the national interests and the nature of — in economist jargon, externalities. 
Knowledge@Wharton:  So how many jobs are affected? 
Johnson:  Well, the externalities, yes. And what’s interesting about the United States, and a big advantage we have relative to a lot of countries, is we have a relatively efficient commercial bankruptcy procedure. Meaning the bankruptcy process through which firms have to go doesn’t destroy a lot of value. In some countries it does destroy a lot of value. In the United States, the value of the firm may well be heading down before you go to bankruptcy, but the act of actually going through Chapter 11 or some other part of the bankruptcy code — even liquidation — that act doesn’t reduce the value in a discreet way. And you can often come back out of bankruptcy, which is a remarkable American phenomenon, I must say.
So we can do that for some firms. Now we didn’t do it for the auto firms. That’s very interesting and important. We didn’t do it for the airlines after 9/11, by the way, because of what were regarded to be important overriding interests there. They got some additional support. And we didn’t do it for the big banks in 2008/2009.
Now I think it’s a fair question: Would you do it again for General Motors? If not, why not? Would you do it again for J P Morgan Chase? If not, why not? I think those are very interesting and important questions to debate now and to have a much broader understanding. Don’t let the technical experts decide it in a dark room. 
Knowledge@Wharton: What else happening on the world stage in finance would be important to think about? 
Johnson: I think emerging markets are lining themselves up for more problems. The official sector has been relatively restrained in terms of borrowing through the latest cycle. But the up-and-coming globalized multinationals from some of these countries have gone crazy borrowing in foreign exchange.
“The terms of the bailout, what you need to do in order to get it, who we regard as being critical, what justifies a bailout — I think that’s an important story to tell people.…”
If you remember back to what we might consider to be the first modern emerging market crisis, which was Chile at the end of the 1970s — 1982 is when it really got bad — most of the debt taken on in Chile in foreign currency in dollars was by the private sector, not by the government. It became a public sector responsibility. There was a form of bailout, if you like, a very messy form.
But it was private borrowing. And I think that there are some people in emerging markets — India would be one country that springs to mind – [who] have forgotten that. They think that as long as the public sector remains relatively restrained and we don’t have a lot of foreign-currency-denominated debt on our balance sheet in the government sector, we’re OK. But foreign-currency-denominated debt held by the private sector or issued by the private sector can also be very damaging. 
That’s what happened in the Asian crisis 1997-1998. In Indonesia, Thailand, Korea, the main problem was that the corporates had borrowed either overseas or in mostly in dollars, not that the government had. But then it becomes a government responsibility, and the government has to take steps to try and stabilize the macro economy when that debt turns against you. 
Knowledge@Wharton: So the same is true for Ireland and Spain, is it not, for the recent financial crisis — mostly private debt taken over by the government. 
Johnson: Yes, but the important difference maybe is that it’s in euros, right? So it is their currency — it’s not a currency controlled by the Central Bank of Ireland, Central Bank of Spain, it’s controlled by the Central Bank of Frankfurt.
And you might also argue it’s actually more difficult to get out of the Irish/Spanish/Greek version of this debt crisis because your currency doesn’t depreciate. You can’t become more competitive relative to countries with which you’re competing. You’re stuck at this same exchange rage. Wages and prices can change, but that’s a relatively painful adjustment process. But you’re absolutely right: It was private borrowing in Ireland and Spain. And that makes them different from Greece. 
Knowledge@Wharton: In Asia, then, because they had their own currency, as painful as it was and as big as the drops were, they bounced back relatively quickly compared to what’s happened to places like Spain and Ireland, which are still struggling with very high unemployment. 
Johnson: That’s exactly right. Now they have a different structure of the economy. They were much more export-oriented in Thailand and Indonesia and Korea, for example. But the recovery was absolutely without question faster than what we’ve seen in most of Europe. And it was in part because of the depreciation of the currency. Iceland would be another case. Very traumatic. Nothing nice about the Icelandic crisis. But the depreciation of the currency has played a role in facilitating a better recovery than what otherwise might had been the case. 
Knowledge@Wharton:  They took over their banks too, didn’t they — the government [in Iceland]? 
Johnson: There was no alternative. The banks defaulted first. And then the defaulted banks were taken over. So the debt, which was at least 11 times GDP, was written down massively. The government went from being a low debt government to a relatively high debt government. But the debt burden is manageable because they wrote it down before the government takeover. 

MasterCard’s Ajay Banga: Why ‘Yes, If’ Is More Powerful Than Saying No

Talk to any MasterCard employee today about the key tenets of the company’s mission, and you’re likely to get one answer, according to president and CEO Ajay Banga: Creating a world beyond cash.
At the recent Wharton Leadership Conference, Banga, who joined MasterCard in 2009 after 13 years with Citigroup, talked about leadership, his mentors, life at the helm of MasterCard and the aforementioned goal of bringing about the demise of cash.
Banga said that although people might assume that his company’s main competitors are firms that handle digital transactions (or, as he put it, “the Pay Pals, the Googles, the Amazons, the Visas, the AmEx’s, and the next kid in Silicon Valley or in a garage in Delhi”), such companies’ activities actually make up only 15% of the world’s retail purchases. A whopping 85% of all global purchases (and in the U.S., a still-sizable 50%) are in cash or checks.
“By the time you come to understand this number, you realize that if all you do is focus on the 15%, you’ve just put yourself into a box that’s smaller than what you’re capable of dealing with,” Banga noted. “So one of the biggest things we did was to redefine our competition. Once we got [that] right, then the vision of the company became very clear.”
According to Banga, in addition to being bad for MasterCard, cash is bad for countries and governments. To print, produce, and distribute cash, he said, costs society between one half and 1.5% percent of global GDP. “In fact, the best company’s shares you can buy are not mine. They are Brinks’,” he quipped. “Because anytime you install a new branch, put in a new ATM, or open a new cashier, you need a Brinks truck.” 
Plus, he added, each Brinks truck has to have two employees in it to make sure neither does anything dishonest. Retailers and banks engage in a similar practice: Two people have to count the cash at the beginning and end of each shift. “Labor costs are very high. This is not good economics,” Banga said. 
“Cash is the dirtiest secret of the modern economy. It belongs to a 200-year-old economy. It’s being allowed to play a role because it suits vested interests.”
Moreover, according to Banga, the existence of cash enables illegal activity such as tax evasion, street drug dealing and illegal weapons sales. “Cash is the dirtiest secret of the modern economy. It belongs to a 200-year-old economy. It’s being allowed to play a role because it suits vested interests,” he noted. Changing the way the world pays for goods and services is central to the vision, mission and competitive strategy of MasterCard, Banga said. (Of course, he added, he will “fight the Googles and Amazons for the 15%” already paying digitally as well.)
MasterCard today is “desperate to win everything that comes our way. We were not that way five years ago,” Banga said. Banga characterized the firm’s former attitude with phrases like “‘Yeah, we could have done that deal…. Well, we didn’t really want it. The pricing wasn’t right.’” But, he noted, there is no such thing as a deal you do not want to win: There is only a deal that “the other guy won and you lost. That was my company’s problem,” Banga stated. “Now, people say ‘I can win this.’”
Another major change — which began about eight years ago but has continued under Banga’s watch — is that MasterCard went from being merely an “association owned by banks” to being a profit-making enterprise. He noted that banks now own only 2% of the company. According to Banga, MasterCard is growing its workforce and expects to end the year with 10,000 employees. Revenue is approximately $9 billion, increasing at a rate of between 10% and 15% per year, which Banga noted is eye-opening for “this industry and this environment.” The company’s market capitalization is about $90 billion.
The Power of ‘Yes, If’
Before joining MasterCard, Banga held various senior management positions at Citigroup, eventually becoming CEO of Citigroup Asia Pacific. He spoke fondly of his 13 years with the company, saying that working there would make someone “a far more complete and thoughtful manager than you were before you went there.” He talked about some of the leaders who influenced him, including Sanford I. “Sandy” Weill, CEO and chairman of Citigroup in the late 1990s to early 2000s. Weill, according to Banga, had “a little bit of what I call the Bill Clinton methodology,” in that he appeared to focus completely on whomever he was speaking to.
“[At MasterCard] we are desperate to win everything that comes our way. We were not that way five years ago.” 
“He was amazing,” said Banga. “Sandy could talk to the president of a country … [or someone on the management team] with the same level of compassion and involvement…. When you were talking to him, you felt you were the only important person in his life at that time. He’s not looking over his shoulder to check out the other guys in the room and figure out who else he should schmooze.”
Banga credited one of the most important leadership lessons he has learned not to someone at Citigroup, but to the managing director of Nestle India, where Banga started his career as a young management trainee. The director, he said, would never take “no” as an acceptable answer. One had to rephrase it to “Yes, if…” and describe what kind of support they needed to get the job done. “You can change the entire feel and look of a company by making people realize that they’re not empowered to say no,” Banga noted. “They’re empowered to say “yes, if.” It changes the bureaucracy, the culture, the passion, the purpose — it changes everything.” 
Moves in Microfinance
One of Banga’s roles in his former life at Citigroup was overseeing its forays into microfinance during 2005-2009. Microfinance makes financial services available to unemployed or low-income individuals who otherwise would not be able to save and borrow money, start businesses or buy insurance.
It is an effort that Banga said he still believes passionately in. “We discovered as we went along that what was holding back principally women from advancing along the socioeconomic ladder was the inability to access finance.” All it took to change their lives, he noted, was the money to start a small business such as selling fruit or newspapers, or running a grain machine.
One of the challenges of microfinance, Banga stated, is that most fledgling businesses are fronted by philanthropies or NGOs. Those organizations have limited balance sheets, he said, and continually find themselves on a treadmill of constantly having to raise more money. He became involved in securitizing projects in order to break this cycle. “That was revolutionary at that time, because these were small amounts of money. Nobody had a market for securitizing $50 or $100.” He noted that the first effort that Citigroup securitized was BRAC (formerly Bangladesh Rural Advancement Committee), an NGO that lends to women and disadvantaged communities.
“You can change the entire feel and look of a company by making people realize that they’re not empowered to say no. They’re empowered to say “yes, if.” It changes the bureaucracy, the culture, the passion, the purpose, it changes everything.”
Banga observed that 80% of microfinance today goes to women, and he called that a good thing. “I don’t mean this in any bad way, considering I’m a man [myself] — but if you give the man money, he uses it for … drinking, some [form] of hedonism,” he said. But, if you give the money to a woman, “the first thing it goes into is the kids: their education, hygiene in the house, clean drinking water and better food,” Banga noted. “I cannot understand why the world doesn’t get it: If you get these women to be economically and socially independent, you can transform the future of many people in this world.”
Bringing Your Heart and Mind to Work
Asked how he leads and motivates his workforce, Banga said, “You’ve got to bring your heart and your mind to work.” People who lead with both their minds and their hearts have the tools to be outstanding, he noted.
Leaders, he added, also need to keep in mind that their position is a privilege and not a birthright. “If you have been lucky enough to have one person work for you, you just have to realize how much [the job] means to that person, and then you feel the privilege.”
According to Banga, a key message he conveys to his employees is that one person can make a difference. Employees should ask themselves what they can bring to the table with their time, and how they are going to make a make a difference in the way people around them perceive the company, a given opportunity and themselves.
He added that employees need to be empowered with a sense of true ownership, which goes beyond standard company rewards involving compensation or recognition. “What really helps them realize they can make a difference is [the ability to make] a decision — and that not making a decision is a criminal offense.” He says that making a decision — saying “Yes, if…” — is much better than saying no. “If you can do that [for your employees], then you can, I believe, set free the animal spirits of a company. And — I am telling you right now — we have animal spirits in our company.”

When to Come Out: The Challenges Facing Gay CEOs

Being gay or lesbian in America in the past half decade has meant watching barriers fall in some surprising quarters. Institutions as seemingly unyielding as marriage, the military and professional sports have opened their doors to a degree unimaginable just a few years ago. But the way is still barred to one coveted spot: In the U.S., where attitudes have evolved most dramatically, no openly gay CEO exists in the Fortune 500, many note.
Why it matters and what’s at stake in the continuation of such a vacancy is decidedly different than, say, the dearth of women, Hispanics or African Americans in the top perch. That’s because gay men and women can hide what sets them apart, and they sometimes pay a terrible price for their secrecy. John Browne, the former CEO of British oil firm BP, lived in the closet for decades as he worked his way up in an industry dotted with a curious mix of others like him as well as macho roughnecks, stepping down in 2007 after a London newspaper paid a male escort to expose his relationship with Browne.
But that was then, and Browne’s story as told in the tabloids had some unique contours to it — some true, some not. Today, as change accelerates, there is a growing feeling that the rewards of a major CEO coming out outweigh the risks. “Once that top CEO comes out, which I think will be in the next year, then you’re going to see some others,” notes Kirk Snyder, a corporate diversity consultant and professor of clinical management communication at the University of Southern California. “Whoever that first guy or woman is — wow, they are going to go down in history forever. Once we have one, two or three CEOS out of the closet, and everyone sees that the companies are just as successful, the other folks in the closet thinking ‘I can’t’ will [come out]. It’s an extremely important message to send.”
Monica McGrath, vice dean of Wharton’s Aresty Institute of Executive Education and an experienced coach to Fortune 500 executives, says she has come across gay CEOs in the closet, and “it’s don’t ask, don’t tell,” she says, referencing the Clinton-era directive toward gay people serving in the military. But her familiarity with several company succession plans leads her to believe that change is on the way. “The C-suite is younger, and younger people are confused as to why this is an issue,” she points out.
In fact, business students coming up are eager for role models. “I think the choice of where and when you come out is a very personal one,” notes Mira Patel, an MBA student and co-president of Out4Biz, Wharton’s gay, lesbian, bisexual and transgender (GLBT) student group. “I lost the support of my parents when I came out, so I understand…. But as more of our leaders come out, part of the sea change of progress continues to be that we will see more and more other people come out, and it will be increasingly true that people from business schools will change what our world looks like.”
“Once we have one, two or three CEOS out of the closet and everyone sees that the companies are just as successful, the other folks in the closet thinking ‘I can’t’ will [come out].”–Kirk Snyder
Rapid but Incomplete
After decades of being silent on the subject of its GLBT workers, or sometimes being openly hostile to them, corporate America has largely decided that they are good for business. Last year, as the Supreme Court was weighing whether to strike down the Defense of Marriage Act (DOMA), a wide swath of American corporations from BlackRock to Walt Disney signed on to a friend-of-the-court brief urging its repeal. DOMA was infringing upon the rights of companies to conduct business as they saw fit by asking firms to renounce their principles, “or worse yet, betray them,” the brief stated. Marriage equality, these corporations concluded, was a positive step for American business.
But gay- and lesbian-supportive laws and policies do not exist across the board by industry, or geographically. As in the U.S., views on homosexuality have changed in Europe, Asia and Russia, often becoming more liberal, though not always. Russian president Vladimir Putin has made gays and lesbians a special target of government harassment and hostility in recent years. Much of Europe has enacted GLBT-supportive laws, though generally, rights grow more restrictive from Western Europe moving east. In China, homosexuality was removed from the government’s list of mental disorders in 2001, but the issue has sprung to life in recent years, with Chinese gay activists advocating anti-discrimination laws and same-sex marriage. No one predicts the government will capitulate anytime soon, but advocates go about their business without being harassed. Violence against gays persists in India, where homosexual behavior is still a crime, although in recent years gay issues have become more widely accepted and discussed in media and through popular films like Don’t Know Why.
In his recent book titled, The Glass Closet: Why Coming Out Is Good Business, Browne points out that in 77 countries, homosexual acts between consenting adults is still illegal. It is punishable by death in five countries, though he predicts that change is on the way. In 2013, United Nations secretary-general Ban Ki-moon began a major drive to repeal anti-gay laws around the world, calling such laws “an outrage.”
And yet, even in the progressive U.S., gays and lesbians face obstacles. The Human Rights Campaign notes that laws prohibiting workplace discrimination on the basis of sexual orientation are non-existent in 29 states. In a recent study by the HRC of 800 gay and lesbian workers across the U.S., 53% said they were not out in the workplace. Gays and lesbians have other reasons to worry. In a 2011 Harvard University study published in the American Journal of Sociology, fictitious resumes were sent to companies in the South and Midwest in response to postings for more than 1,700 entry-level white-collar job openings. Resumes listing experience at a gay organization were 40% less likely to elicit a call for an interview.
Moreover, working at a company with posted gay-friendly policies does not guarantee the same path to success for gay and lesbian workers as straight ones. “There are organizational values and beliefs that are often unstated, and it doesn’t take very long to understand what these values are and what is acceptable,” says McGrath. “[Your company] can have the most moving vision statement, but you know that it’s not the right thing to have your gay partner’s picture on your desk in the executive suite. There are subtle discriminatory practices that you pick up, and if you really are ambitious, you are not going to buck the tide. I can think of some incredibly successful, bright people who simply do not feel safe coming out.”
For a CEO, being gay is even more complicated. Everything a CEO says and does, McGrath notes, becomes magnified — to the board and staff, and to customers and shareholders, many of whom may live outside of the more liberal coasts and big cities. “Let’s be frank. We may be moving in a direction that many of us feel was a long time coming, but not everybody is on the same wavelength around this,” she says. “If you are at the CEO level — and I am thinking of someone I worked directly with — [coming out] can be a distraction to you and the message you are trying to deliver.”
“Let’s be frank. We may be moving in a direction that many of us feel was a long time coming, but not everybody is on the same wavelength around this.”–Monica McGrath
She points to JPMorgan Chase’s $2 billion market cap drop (about 1%) after CEO Jamie Dimon announced July 1 that he had throat cancer as evidence that “everything you say in that most senior role has a really high profile. Everything you say matters.”
From Liability to Commodity
Ironically, many of the same workplace dynamics keeping gays and lesbians from reaching the top rung may have, at the same time, forced them to develop skills that make them better leaders. In a five-year study involving 3,500 professionals, USC’s Snyder examined employees of out gay bosses and found 25% to 30% higher levels of job engagement and satisfaction. It had nothing to do with the sexual orientation of the boss per se, he says, “but with the management style of the boss.” While being a closeted gay boss was read by employees as “closed, angry and unfair,” the “process of coming out of the closet manifested itself in seven principles of leadership that not everyone had,” Snyder notes — inclusion, creativity, connectivity, adaptability, community, intuition and collaboration.
“I think it’s about an appreciation of what an individual brings to the workplace, taking the time to recognize what the individual talents are, and that was met very positively by employees,” says Snyder. “I will never forget one woman who said that her [gay] boss was the first boss she ever had who recognized that she was a single mom and gave her time off to attend her daughter’s dance recital.” She was so grateful, Snyder adds, “that she would stay up until 2 a.m. to write the best report she could.”
Because gay people are often examining the world around them for clues about acceptance and rejection, they have a heightened sense of intuition, and that translates into better hiring decisions, says Snyder, whose research was published in the book, The G Quotient: Why Gay Executives are Excelling as Leaders… And What Every Manager Needs to Know. “Growing up [gay] in a straight world manifests itself in positive leadership traits,” he notes.
This idea resonates with Glen Senk, the former CEO of Urban Outfitters who is now working with Berkshire Partners on co-investing in innovative, high-growth retail and consumer businesses. “I think going through that struggle probably made me a better CEO,” he says. “It built character and gave me a high level of empathy, which is one of the most important traits in a CEO.”
Senk, 58, who once identified himself as the only out gay CEO at a major U.S. corporation, was never in the closet, and says he never encountered any friction for being gay. But he allows that his particular field, retail, might have had something to do with it. “One reason I went into the industry I chose is I felt it would be easier than investment banking. It was gay-friendly when I joined it.” Still, he notes, “I wish I had had a role model when I was in college telling me it was OK to be who you are, and you can do anything you want.”
Being an out gay CEO might not have been a liability in retail, but in John Browne’s realm it was a dangerous idea. In his book, Browne tells the story of what it was like to be an oil-industry executive in the closet. “After becoming chief executive, I regarded personal discretion as vital to the company’s interests,” Browne wrote. “I became more reserved and less willing to seek out companionship. I had regular dealings with business and political leaders in a number of socially conservative countries. I was worried that any disclosure would damage business relationships, particularly those in the Middle East, in some countries in which homosexuality was still punishable by death.”
Making his case that being out is good for business, Browne argues that there are hidden costs and psychological tolls for being in the closet that no business can afford; that coming out benefits the productivity of other, non-gay co-workers, and that teamwork is only possible when workers bring their whole, authentic selves to the workplace. He quotes Peter Sands, CEO of Standard Chartered Bank: “In a world where business success is all about unleashing people’s creative energy and imagination, it makes no sense to cripple so much talent.”
“I wish I had a role model when I was in college telling me it was OK to be who you are, and you can do anything you want.”–Glen Senk
Senk puts it this way: “When you are running an organization and have thousands of people you are trying to align around an objective, there’s not time for hidden layers. You need trust, and in order to have trust, you need to be honest. Who wants to live a double life? Look at the burden. I do hope that anyone not open feels able to come out.”
The How and When of Coming Out
One highly visible American CEO appears to be taking a more nuanced approach to the question of being out. Apple’s Tim Cook has written in The Wall Street Journal about the importance of Congress passing the Employment Nondiscrimination Act, marched alongside other Apple workers at San Francisco’s Pride Parade, and occupied the No. 1 spot in Out Magazine’s Power List 2013 of influential gay men and women (in 2014, he slipped to No. 2). He has, however, not publicly addressed the question of whether he is, in fact, gay.
Some, such as gay blogger John Aravosis, say that trying to occupy two spaces at once — defending gay rights, but not proud enough to admit it himself — means that Cook is signaling that there is something wrong with being gay. Why isn’t he responding to the question of whether he is gay? “We can all hypothesize about why, but no one knows but him,” Snyder notes. “Some people say that it’s because the market share of Apple is so tremendous in Asian cultures and in the Middle East, and maybe we can give a little credence to that. But I don’t know that that’s true in 2014.”
But when and how one chooses to come out matters, according to Wharton management professor Katherine Klein, vice dean of the Wharton Social Impact Initiative. “One of the things that research with leaders who are out says is that coming out is a reiterative process — you do it over and over again,” she says. “So I suspect the strategy of coming out slowly and getting people used to the idea is not a bad idea. By the time it’s announced, people say ‘We all knew that.’”
How a person explains his or her choice to come out publicly may also be important and influence how the public responds, Klein notes. “Announcing that you’re doing so for positive reasons seems appropriate and wise — [saying] I want to be an authentic leader, I want others to feel safe within the company, I want teenagers not to commit suicide, and as a leader I know that we need all the talent we can find and I don’t want anyone to feel uncomfortable at this company. There are lots of ways of framing that.”
Klein says the longer Tim Cook — presuming he is gay — waits, the easier it will be, because CEOs of smaller companies will have inured the media to the news value of a gay CEO. “In Washington, D.C, the principal of my kids’ high school made a very public statement that he was gay with the mayor by his side. As more and more of those kinds of events happen, the reverberations for larger companies when their CEOs announce they are gay will be less and less.”
Of course, as the news value diminishes, so does the chance to be a pioneer. Who will seize the moment? “I think [Cook’s] being circumspect seems appropriate. Does authentic mean full disclosure? I don’t think so,” says McGrath. Still, she adds, it’s an opportunity to focus on how well the job gets done rather than other aspects of a CEO’s identity. “We are on the cusp of enormous change. If we can forge that kind of mindset change in corporate America, I think we will pave the way for a lot of marginalized groups to feel encouraged.”