Ram Charan Grades the President

Last Updated Apr 24, 2009 6:35 PM EDT

Management guru Ram Charan

For almost four decades, Ram Charan has worked behind the scenes
to help improve many of the world's great companies, including href="http://finance.bnet.com/bnet?Page=Quote&Ticker=GE">General
Electric, href="http://finance.bnet.com/bnet?Page=Quote&Ticker=DD">DuPont,
and Procter
& Gamble
. A former faculty member at Harvard Business School,
he is a corporate problem solver and an acclaimed expert in corporate
governance, innovation, knowledge management, and leadership. Among his many
fans are former GE chief Jack Welch, former href="http://finance.bnet.com/bnet?Page=Quote&Ticker=HON">Honeywell and AlliedSignal CEO Larry Bossidy, and current href="http://finance.bnet.com/bnet?Page=Quote&Ticker=VZ">Verizon chairman and CEO Ivan Seidenberg. Charan's latest book, titled Leadership
in the Era of Economic Uncertainty
, is about managing effectively amid the
global downturn.

Here he discusses President Obama's handling of the
economic crisis, whether we're on the right track to solving it, and
what the U.S. auto industry must do to turn itself around.

Think of the Obama administration as a company, with Obama as CEO. How
would you rate his performance so far?

Given the context of the times, the bottom line for me is
that as a leader, he is doing well. Obama’s central strength, other
than inspiring and communicating, is consensus building. He has this innate
ability to build consensus, which is so important. He’s also selected
good people. The president, [Federal Reserve Chairman] Ben Bernanke, and [Treasury
Secretary] Timothy Geithner — it’s a very good team.

Internal to the U.S., there has been a widespread lack of
confidence, a ton of anxiety, and great fragmentation of opinion, so people
were feeling a lack of leadership. Externally, there is the perception that the
U.S. is a declining nation, and that it has to accommodate itself to that
reality. It cannot lecture others when it comes to the correction of the
economy, because it is widely perceived — and there is a lot of truth
to this — that the downturn has emanated from the U.S. In this
context, despite several mishaps, I think there has been real progress. There
is a definite deceleration in the deterioration of the economy. It is not
rescued yet, but the pace of decline has been reduced.

What, specifically, do you think has worked?

I think several actions of Bernanke and Geithner have been
very important to change the psychology of the situation. Bernanke has used the
balance sheet of the Fed to flood the market with money and to reduce interest
rates to close to zero. In effect, this has given credit to large, robust
creditors, without taking huge risks. When the time comes, the Fed can contract
the balance sheet, and there are incentives for the institutions to pay back
sooner rather than later.

Second, both Bernanke and Geithner have attacked the major
cause of the downturn — the flow of credit within financial
institutions. The key point here has to do with toxic securities on balance
sheets. The majority of these securities are in less than a dozen institutions,
including href="http://finance.bnet.com/bnet?Page=Quote&Ticker=AIG">AIG.
As the Financial Times recently reported, the notional value of credit
default swaps has gone down from $60 trillion to $28 trillion in two years.
That is an important part of ungumming the balance sheets.

What else has the administration done to facilitate the exchange of
information and thereby restore order and confidence?

In early March, href="http://finance.bnet.com/bnet?Page=Quote&Ticker=ICE">IntercontinentalExchange became the clearinghouse for credit default swaps. The idea is to
create a centralized market in order to reduce counterparty and systemic risks.
In effect, CDSs will be traded in a similar manner to bonds, creating a more
transparent and efficient market. That is important; this was not the case six
months ago.

How would you rate Geithner’s performance?

You need people with domain expertise, which he has.
Geithner is able to figure out solutions; he is not a pawn of any constituency
in the financial market. I’ve seen him in action and found him a very
clear thinker — he is able to see the second- or third-order
consequences of a given plan. He has made some errors in communication, but he
has moved ahead, and I think his plan to stabilize the banking sector, if done
quickly, could correct the system.

At least now there is a mechanism for banks to find some
kind of price point for their assets. If banks are not selling assets, that is because
they think prices will rise. Private equity will come back to banks if
[investors] see the banks have cleared the toxic stuff. Then we will see the
flow of capital again. I think we will see that in six months.

How well do you think the administration uses information?

Obama has a platform of transparency — I think he
wants to explain the situation and show the public what is being done so that
they have a better understanding of what is happening. The problem is that the
information we are getting is structured on an old framework of 30 or 40 years
ago. We are using the same metrics, when we need new ones for this context.
Right now, for example, the most critical need is to show information from 30
or 40 major banks — how much lending is going on and in what
categories. Then people can see progress and get more confident. At the moment,
though, we do not have this kind of information — or, if we do, it
has not been publicized.

Evaluate the administration’s management of the auto industry.

The Detroit Three [ href="http://finance.bnet.com/bnet?Page=Quote&Ticker=GM">GM,
and Chrysler] today serve some 45 percent of the U.S. market. That’s
down from 50 percent in 2007, but the market is there, and some of the products
are very good. It is the structure of the business model that has been
defective for some time. So the administration’s approach is to use
both carrot and stick: You guys — suppliers, creditors, unions,
management — figure out a way to make sacrifices to get to a viable
cost structure so that the companies become healthy. If you fail, you will go
bankrupt and [a plan] will be designed for you.

This is a good approach, much better than giving a handout
or a guarantee. The administration is saying, “You have to have a
plan, and there’s a time limit to do it.” It is forcing the
various parties to do what they haven’t been able to do on their own
for years.

What is a broadly applicable piece of advice that companies today can
benefit from?

First and foremost, you have to tailor your approach to
changes in the external context. For example, in 2007, 71 percent of U.S. GDP
came from consumption. That is not coming back; the new context will be
somewhere between 60 and 65 percent. Why? Because I expect the sense of anxiety
to remain for a while; people will therefore href="http://moneywatch.bnet.com/economic-news/feature/are-you-saving-too-much/280981/">keep
saving. Also, the availability of credit will be lower, so there will be
less leverage. That means people will be spending their money differently. You
have to do the analyses and get operations ready for that change. And then you
have to match your investment to the new realities of consumer behavior.