From the August 2013 issue of Investment Advisor • Subscribe!

Charles Ellis: The Key to Being a Great Leader and Building a Great Company

The legendary consultant explains that being on a mission to serve is the vital concept that will take your firm to the next level

Photography by David Johnson. Photography by David Johnson.

A word of advice if you ever plan on speaking professionally with Charles Ellis: Be prepared.

The best-selling author, consultant and Ivy League professor swatted away a number of our carefully crafted questions, and it was only after his explanation of why that we understood our mistaken premise. Ellis (who goes by Charley) had something to say and, alternating between genial and intense, he was going to say it. It was a refreshing change from so many interview subjects who fear to contradict in the belief it will make them “look good” in the eyes of the interviewer, and by extension, the reader.

It’s this straight talk that’s made Ellis so valuable to the businesses with which he consults and the firm he founded, Greenwich Associates, the standard by which other consultants are measured.

When someone begins by referencing Jesus and Mohammed in answer to the first question, you know it’ll be an interesting conversation.

Although best known for his seminal work, “Winning the Loser’s Game,” his latest book, “What It Takes: Seven Secrets of Success from the World’s Greatest Professional Firms” was largely the reason for our conversation. In the book, he profiles some of the institutions he’s worked with and studied over the years: McKinsey and Co., Goldman Sachs and Mayo Clinic among them. Although all large firms, the lessons about what makes an organization great (and sustainable) are perfectly scalable to a smaller RIA; indeed, they’re lessons for life as well as business, Ellis remarked.

Leadership, culture, mission, recruiting—of course they all determine the level of success a firm will reach. Yet how many employees can recite, and truly understand, their employer’s mission? How many feel comfortable enough to speak up in an environment of open communication and innovation?

If the number were high, Ellis, Simon Sinek and others who constantly point to where we go wrong wouldn’t make the fantastic living they do.

Throughout the interview, Ellis stressed the sense of gratitude he felt for the people he’s known, the businesses he’s worked with and the system that’s helped achieve his success.

He begins “What It Takes” by recounting a contentious company-wide meeting at McKinsey and Co. in 1996. Marvin Bower, one of its legendary leaders, interrupted a presentation by senior staff to point out what should have been an obvious conflict of interest. A nonagenarian at the time of the meeting, Bower famously turned down Howard Hughes on five separate occasions because he felt Hughes would never implement his advice. We wondered how valuable someone like Marvin Bower, that elder statesman, was to a company’s success. More importantly, what happens when they retire?

“In many ways you’d say people have religious faith in, let’s say Mohammed, Jesus or Buddha, that was enormously important to all the things that happened thereafter,” Ellis said. “I think it’s very clear that a decisive, inspiring, compelling leader with a real message will carry on and on and on.”

A student of many great leaders throughout history, he referred to George Marshall, who Ellis argued is widely recognized as one of the greatest soldiers and statesmen of all time.

“Not to be presumptuous, but I have paid attention to what he did and how he did it when thinking about how I want to do what I’m doing,” he continued. “His message was compelling, consistent and so clearly the right way of doing things. If you have the privilege of having an extraordinary leader who has an extraordinary message that he’s able to articulate over and over again, people will keep it for a very long time.”

Noting the “tremendous tension” between doing what’s right for the client and what’s right for the organization, he believes it’s more difficult now because organizations are often very large, and large organizations have thousands of different people, each with different internal values, “some of which they know and some they don’t know unless they spend a lot of time with a psychiatrist.”

“They all have different experiences and come out of different cultures with different value orientations,” he added. “It is very, very hard to have that consistency of understanding that leads to consistency of commitment.”

Goldman Sachs is one firm profiled in the book and one that was heavily criticized for actions that came to light after the economic crisis of 2008. Specifically, one complaint was that it marketed products like CDOs to clients as appropriate investments without ever taking an investment in the products themselves. Ex-Goldman vice president Fabrice Tourre was charged by the SEC in 2010 with misleading investors related to the practice. Would popular former CEO John Whitehead have allowed something like that to happen?

“First, I should just caution you that I have had the privilege of knowing John for a long time,” Ellis coolly answered.

He noted that while Whitehead was always smooth and graceful, he was also rigorous and “ready to make decisions,” albeit safe decisions.

Using the movie “Saving Private Ryan” as a reference, “because it pleases me,” Ellis related that Whitehead, as a young naval officer, was in charge of five landing crafts during the Normandy D-Day Invasion.

“As the machine guns were blasting away he saw an obstruction. The landing crafts were a heavy metal door in front and a light weight plywood hull. The Nazi obstructions would have sunk Whitehead's boat if he had followed explicit orders to make no turns and head straight into the beach. He also broke orders to maintain radio silence. He signaled to the other guys to turn on their walkie-talkies and said, ‘Be prepared to turn 90 degrees left. Now!’ All of the boats turned left. Then he said, ‘Be prepared to turn 90 degrees right. Now!’ And they all turned right and landed on the beach having avoided the obstruction and the machine gun fire. The details make clear how much of a real leader he was then and later in life. Getting everyone on the same page and moving in the right direction are certainly the leadership lessons he carried with him to Goldman Sachs. He knew where the firm was going, was able to articulate it and get people going in that direction.”

Charles Ellis, Greenwich AssociatesMoving from leadership to culture, the book praises the law firm of Cravath, Swaine & Moore. Culture, he said, is what makes people come together and feel that the group is more important than the individual. Therefore, they will do everything they can to advance the interests of the group. Separately, though, the group has to have a commitment.

“I believe if you’re going to be a great firm, a commitment is to put the client’s interest first,” he explained. “Culture then translates that aspirational objective into day-to-day behavior: ‘We all do it the same way.’ It’s bonding glue. It’s what makes people think that the other people in their group are special and they are so glad to be part of that special group.”

At one point Ellis writes, “Not all great leaders are servants to their organizations. For Paul Cravath, his organization was there to serve him.” We thought it a controversial statement to make in today’s politically correct corporate culture, and said as much. When we asked Ellis what he meant, there was a long pause, followed by, “Help me out with the question.”

After a stumbling second attempt at our query, Ellis laughed and said, “If you’re the lawyer and I’m the witness, I’ll just say, ‘That’s my story, and I’m sticking to it.’”

Thankfully he continued, arguing, “You’d have a very hard time proving the thesis that most senior executives are entirely focused on serving the organization. I know they’ll say it’s what they want to do, but look at Wall Street. A large number of people get to the top of the hierarchical structure and really care a lot about what’s in it for them rather than if they’re really doing the right thing for the organization.”

We counter that it’s at least true at the level of a one- or two-man RIA, with the executive as entrepreneur; they would certainly have a vested interest in the organization.

He didn’t flinch.

“Now you’re talking about a very specialized group of people. They went into a line of work where skills and knowledge put into service of the client is highly important. The RIAs that I have met with all had this enthusiasm for being able to do what’s right for their clients. But for large organizations, you look back at them and say, ‘Gee, what happened?’ Fairly often it is the absence of outstanding leadership.”

Why? Because he thinks it’s very difficult for people who have worked to get to the top of a large, complicated organization to then devote the rest of their life to the organization.

“The temptation is to say, ‘Well, I earned it and it’s mine and I’m going to take what I can and my fair share.’”

He backtracked a bit, adding he didn’t want it to sound “quite so strongly,” but noted it’s hard to be a devoted, committed servant-leader at the top of a large and complex organization. He once again referenced George Marshall, arguing he was the epitome of a servant-leader.

“He didn’t give a damn about anything that happened to him. He cared about the 8 million people he had in uniform. You saw it in ‘Saving Private Ryan.’ It was George Marshall who said, ‘Find him, bring him home. His mother has already suffered enough.’”

We then moved to what is undoubtedly a hot topic, especially in this age of increased access to alternative investments and non-correlated asset classes: Ellis’ friend and colleague, David Swensen. “What It Takes” is dedicated (touchingly) to the uber-successful manager of Yale University’s endowment. We noted that we recently heard a speaker claim that, when referencing money managers, “everyone wants to be like Yale.” We added that although Swensen doesn’t attempt to “win the loser’s game” by timing the market, he nonetheless makes very active moves.

Ellis wouldn’t bite.

“Without trying to go anywhere near answering your question because I think it takes us in the wrong direction, here are a couple of characteristics of David Swensen,” he diplomatically deferred. “No. 1, he is absolutely Mr. Integrity. Here is a guy who has given up a multimillion dollar annual income in favor of working for Yale. That’s what he wants to do.”

Referencing “What It Takes,” he pointed to Swensen’s strong sense of mission and culture, as well as his rigorous training and how he “embodies all of the characteristics outlined in the book.”

“Yes, everyone wants to be like Yale, but they are not like David Swensen,” he astutely noted. “If they try to copy David Swensen, they will fail. They have to be able to find a way that works for them.”

He informed us there was one thing we didn’t touch on that he hoped to come back to before concluding. It was something of a surprise, as it identified the most important of the seven secrets detailed in the book.

“The first chapter is mission; it’s all about defining a truly inspiring, long-term purpose to which you would dedicate your life and career and so would others. If you get that right, you’ve really got it. What’s the big idea? Why are we all gathered together? It’s that sense of mission. If it isn’t clearly defined, it won’t take long for the firm to fail.”

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