Character of an Institution Is Reflected in Its Leader

In September 2015 the German carmaker Volkswagen admitted that it had installed software in diesel engines which detected when a car was being tested for emissions and reduced pollution only for the test. The company said that around eleven million vehicles worldwide were affected. Its chief executive, Martin Winterkorn, resigned within days. Investigators later asked whether the deception was the act of a few engineers or the product of a culture in which targets were set that could not be met honestly. The question is the one raised by the topic, that the character of an institution is reflected in its leader.

An institution is an organisation with rules, purposes and traditions that are meant to outlast its members. Character, in a person, means settled habits of conduct, honesty, courage and fairness. To speak of the character of an institution is to speak of its collective habits, what it rewards, tolerates and punishes. The topic claims that these habits mirror those of the person at the top, because the leader decides what gets noticed.

Leaders shape character in several ways. First, by example. Staff watch what the leader does when no one is looking, and what he does becomes the standard. A chief who comes late, takes favours or lies will find these habits copied. Second, by choices. He appoints and promotes people, and each choice tells the organisation what is valued. Third, by stories. Institutions pass on tales of how the founder or an earlier chief acted in a crisis, and these tales teach new members what is expected. Fourth, by tolerance. What a leader overlooks becomes permitted.

India offers many cases of institution builders. Jamsetji Tata, the founder of the Tata group, built a steel plant, a hydroelectric project and the Indian Institute of Science, and held that the community, not the shareholders, is the principal stakeholder of the enterprise, an idea that still marks the group. Verghese Kurien, who built the Amul dairy cooperative and the Anand pattern, insisted that the farmers should own the business, and Amul carries his ideals of fairness and professional management. Vikram Sarabhai laid the foundation of the space programme with the principle of using science for national development, and the Indian Space Research Organisation still emphasises service to the nation. E. Sreedharan's insistence on punctuality and integrity shaped the culture of the Konkan Railway and the Delhi Metro.

Staff watch what the leader does when no one is looking, and what he does becomes the standard.

The reverse examples are equally instructive. The American energy company Enron collapsed in 2001 after its executives hid debts through complex accounting. Its chief executive, Kenneth Lay, and his colleagues had fostered a culture of aggressive risk taking in which employees who questioned the books were sidelined. In India, B. Ramalinga Raju, the founder of Satyam Computer Services, confessed in January 2009 that he had inflated the company's profits and cash balances for years. The firm that had been seen as a model of Indian enterprise collapsed in days. Such failures are not simply the acts of one bad person. They show how a leader's willingness to bend rules gives permission to others.

Yet the claim should not be accepted without qualification. The causal arrow runs the other way as well. Institutions select and shape their leaders. A politician rises in a party whose rules, finances and culture reward certain behaviour, and a civil servant works in a system of postings and promotions. A leader who is honest in a corrupt institution may be forced out, or may be changed. The social psychologist Philip Zimbardo, in his Stanford prison experiment of 1971, claimed that ordinary students given the roles of guards behaved cruelly because of the setting, and that the barrel mattered more than the apple, though his experiment has since been criticised on methodological grounds. A leader is, in part, the face of what the institution has become.

There is also the matter of how far the leader's influence reaches. In a small firm the owner's character is everywhere. In a large bureaucracy, the people at the middle levels and the formal procedures may dilute it. Jim Collins in Good to Great found that the best companies were led by people who combined personal humility with intense professional will, and who built enduring systems and not personal followings. A true test of a leader is what the institution is like after he has left. Institutions that depend wholly on one personality, like many family run firms and personality driven parties, often decline when he goes.

The way a leader handles failure is a particularly revealing sign. An institution learns most about its character when something goes wrong. If the chief takes responsibility, protects those who spoke up and corrects the fault, the staff learn that honesty is safe. If he blames juniors and hides the facts, they learn to hide as well. Lal Bahadur Shastri, who resigned as railway minister in 1956 after a train accident, took moral responsibility in a way that is still remembered, and it set a standard for public life that few have matched since.

The pace of change also tests leaders. Under pressure to show quick results, a leader may reward those who deliver numbers without asking how. The same pressure produced the Volkswagen scandal. A leader who sets an impossible target and then asks no questions about the method has chosen the method in effect. Character is therefore revealed not only by what leaders say, but by the incentives they leave in place.

The practical implication is that institutions must be built with checks that do not rely on the virtue of the leader. Transparent rules, independent audit, protection for those who report wrongdoing, term limits and a free press can limit the damage of a weak leader. At the same time, the selection of leaders should look for character as well as skill, since skill without integrity is dangerous. And leaders should understand that they are teaching with every decision.

If the leader is the mirror of the institution, then the institution is also the mirror of those who choose the leader. A citizen who votes, a board that appoints and a staff that tolerates have all played a part in the character that is reflected back. What is seen in the glass depends partly on the one who stands before it and partly on the people who polished it, and which of them deserves the larger share of blame or credit is rarely clear until it is too late.