The emergence of the Internet has changed many things about business. One thing that hasn’t changed, however, is that building a lasting, values-based company takes leaders who passionately believe in their vision–and are willing to change themselves to achieve it. David S. Pottruck, co-CEO of Charles Schwab, and Terry Pearce, a teacher at the University of California in Berkeley and a communications officer at Schwab, explore these themes in their new book, Clicks and Mortar: Passion Driven Growth in an Internet Driven World. Reviewing the book for The New York Times, Fred Andrews wrote: "If there is a better handbook on adapting to the Internet economy, I have yet to find it." Pearce discussed the key themes of the book in a recent conversation with Knowledge at Wharton.


Knowledge at Wharton: How did you come to write this book?

Pearce: In 1992 Dave Pottruck was searching for a consultant who could look over some of his speeches and articles, and I worked with him to see what we could do to publish them. We soon made an amazing connection and became close friends. I have a background in teaching and in business–I spent 16 years in IBM–and have always been very interested in leadership. I started introducing Dave to some leadership theory, and frankly, we were both single at that time so we spent a lot of time together talking about theory. He was clearly on the fast track at Schwab, and Dave felt that he had a long way to grow. Over the next several years we not only developed theory but we were also able to put it into practice.

It became clear that what kept Schwab in the lead was the fact that it had the ability to change rapidly–almost to reinvent itself. That pace accelerated because of the Internet. We put together a lot of conversations on what actually had to happen. Since Dave is a marvelous speaker, we had a chance to document these changes as they were happening through his speeches, through my own writing, and through some articles that we worked on together. In 1995 Schwab documented its vision, and right after that we started talking about writing this book. The more we discussed it, the more we realized that the book could become a legacy for Schwab’s leadership as the company was reinventing itself.

The interesting sidelight was that we became very good friends at the same time and realized very early on that in order to change the company, you had to change yourself. You could not change the organization unless you had first drunk the water yourself. You had to go through internal changes.

Knowledge at Wharton: What do you mean by "drinking the water yourself?"

Pearce: My earlier studies in leadership and communication dealt with people who saw things that others did not see–and who worked to make their vision a reality. But in today’s world, a leader must be authentic in order to inspire people. And inspiration, I believe, is the coin of the realm. It is no longer possible to lead a company in this environment by telling people what to do. Leadership has become much more private and personal–and yet, much more public at the same time. Leadership doesn’t begin with emotion any more; it begins with personal decisions. You have to know what your values are, and what is important to you, in order to inspire people. That was not always the case. In the past you did things to get 2% more of market share or to drive 10 more automobiles off the plant floor. But today you must inspire people with the values you hold. Unless you have gone through internal changes yourself, you cannot inspire people.

There’s a great story about Gandhi. A woman brought her young son to him and said, "Would you talk to him? He eats too much sugar." Gandhi asked her to bring him back in two weeks. She brought her son back two weeks later, and Gandhi spoke very eloquently about why the boy should stop eating too much sugar. The mother told Gandhi, "That was very effective. But why did you ask me to bring him back in two weeks?" Gandhi said, "I first had to stop eating sugar myself." He knew that he could not express his argument authentically unless he first went through that change himself.

The same principle now applies to business. With the coming of the Internet, people know everything, and that creates a fertile ground for cynicism. If you are authentic, you have a tremendous advantage over someone who is trying to manipulate or hide things. Such people will eventually be found out, and that adds to the cynicism. But authenticity breeds productivity. That’s the corollary. The more excited and passionate you are about what you are doing, the more your enthusiasm will catch on.

Knowledge at Wharton: In your book you tell a story about Tom Seip, an executive who was passed up for the president’s job at Schwab. Could you please summarize that story, and comment on what it means to build such values into a company’s culture?

Pearce: Tom Seip had been a headhunter, and he actually recruited Dave for Schwab. He was then asked to come in and take over as head of HR. He was very smart and rose very rapidly, but in 1997 there were several changes in the upper structure of management at Schwab. Tom was considered for the president’s job, but there was another person, who had been with the company for less time than Tom, and he was very, very smart. Dave and Charles Schwab and others felt that this other person was better qualified than Tom to become the company president, and so they passed Tom over.

This was a very difficult decision, because they had all been friends, and Tom, frankly, took it very hard. But there is something about executives who get that far in building a values-based company, that they are very self-aware. Tom was introspective enough to know exactly what was going on. He first said that he would leave, and then he said he would reconsider.

Finally he wrote to the Schwab senior management team after being passed over for the biggest promotion of his career, and he said, "Leaving would be the worst thing I could do. It would be contrary to everything I believe in, and I would be sorry in 15 days…The only reason for me to leave would be petulance, because I did not get to play the position I wanted…I asked myself, ‘How am I going to explain this to Jake, my 12-year-old son, that I left because I didn’t get to be starting center forward? I had no answer to that…and I couldn’t find one. It’s nice to go to work every day feeling like you are doing something important..fundamentally to help people…and doing it with people you care about. It doesn’t get a whole lot better than that." And he stayed.

Let me now address the question about how you build that kind of culture. At Schwab, it started with the individual. Charles Schwab, the entrepreneur, was a person with those values. So it was not as though a bunch of people who came in said they had to change the culture. That was always the case. Where Charles Schwab Co. was smart was in recognizing what the company had. It saw that its values-based culture–a part of its DNA–was a fundamental competitive strength, and it spent a lot of time building and sustaining this culture. That is what companies have to do. This is particularly important in a company where you can have people coming from organizations with different cultures.

Knowledge at Wharton: Which companies, other than Schwab, have done a good job building a values-based culture?

Pearce: There aren’t too many such companies. Most of them have the founders’ stamp on them still. One of them that comes to mind right away is Hewlett-Packard. Apple is another good example.

Knowledge at Wharton: When companies merge, you sometimes have a situation where two CEOs have to share power. This is often difficult. And yet, at a time when organizations are becoming so complex that no individual has all the skills needed to manage them, how can executives learn to share power while still exercising leadership?

Pearce: If I had the answer, I would be out sailing somewhere. But we have some great examples. It seems to me that leaders have to understand the difficulty of putting the cultures of their organizations together. That goes beyond just the financial engineering of the merger. So how can CEOs work together? Nothing drives the ego like failure. If executives refuse to share power, there will be enough failure to make even the biggest of egos think again.

The entrepreneur who builds his company into something big has to gravitate to becoming a flag-carrier for the company and has to delegate operational jobs to others. A couple of things happen when the leader does that. First, the quality of the operations improves, because one person cannot do it all. And second, it gives people the message that they have power, and they can be effective. When you do that, you not only spread the company’s financial wealth but also its psychic wealth. Spreading psychic wealth is one of the most important qualities of a leader. Leaders who don’t do that tend to fail.

Knowledge at Wharton: How should leaders manage the trade-off between meeting short-term goals and long-term goals? When a company is busy planning how to meet its quarterly performance targets, isn’t there a real danger that long-term goals will be pushed aside? What advice do you have for executives who have to navigate through such situations?

Pearce: Well, I have this advice: Any time you make a choice between doing this or that, you have to do things that are important in the short-term or in the long-term. The secret really is to do both.

You cannot disregard the fact that the company’s first obligation is to stay in business, so you must do the things that keep the company going. But even in the midst of what appears to be greed on Wall Street, there is also a counter-force. The wealthiest people are recognizing more and more that joy in life comes from serving others. Money is part of the game–and a necessary part of the game–but the key to keeping your customers loyal lies in serving them well over the lifetime of their relationship with you. So the two things should go together. When they do not, you have a problem. When any CEO loses this perspective, he or she is bound to fall into difficulties.

I often remind my students that society is older than business. Business has grown over the years into a very complex phenomenon, but we should not forget that society began with human beings sharing and serving one another. In that sense, sharing and service are fundamental to our existence. We sometimes lose sight of that fact because of all the complexity of business. We are all bound to one another at the hip.

Knowledge at Wharton: How can passion be sustained? It may be easy to be passionate in a start-up, but as a company grows large and routines set in, it tends to lose its entrepreneurial fervor. How should executives deal with that?

Pearce: I think about this a lot. When you get together with someone and say, "Let’s do something great together," it feels wonderful. It gets your juices flowing–you have the excitement of setting goals together, seeing what can be done, and it’s fun. It also has an impact. The end point is to go and do something else together. That’s the way to keep the excitement alive, by doing things together. When people build something together–something great that will not just be remembered in the future, but will also make a mark on society and establish a legacy, they can keep their entrepreneurial spirit alive.

You’ve got to remember two things. One is the excitement of doing something well with your team. The other is the matter of making a difference, leaving a legacy and giving something back to posterity. That is why you’ve got to make sure that the leaders of the organization are focused on inspiring passion, and maintaining and building a culture in which people are excited about what they are doing. Unless they do that, people will stop reinventing themselves. You’ve got to constantly emphasize to the company as a whole, "Don’t forget what really matters." You sustain this culture through stories that are told and re-told not just once in 10 years but once in a year or even once in six months. You must do this throughout your organization, over and over again. That’s what it takes to become and remain passion-driven.