In his monthly column for the Harbus, Professor Kevin W. Sharer shares his thoughts on the issues facing HBS students.
California is America’s most populous state, the world’s seventh largest economy, a region of boundless diversity and riches, and the home of Hollywood and Silicon Valley—it is not called the Golden State without reason. California also faces a crisis of enormous magnitude, challenge, and consequence. That crisis is a combination of an often near-Third World level of electric power grid unreliability for almost half the state and the role of that power system in sparking to some degree the disastrous fires that annually wreak havoc with enormous cost to wide swaths of the state.
The power company is a publicly owned, heavily regulated entity now in bankruptcy with no clear way forward. Commissions have been appointed, bankruptcy judges have opined, lawsuits have been filed, management has been changed, bondholders are fully engaged, and accusations and condemnations abound from the bully pulpit of the press, radio, and the ever raucous Internet and Twitter. This is a case study to match anything you have considered at HBS in complexity, consequence, and scale. Let’s try to put ourselves in the shoes of Gavin Newsom—who was sworn in for his first term as California’s governor in January of this year and who, prior to that, served as the mayor of San Francisco as well as the lieutenant governor of California.
What is the context that the governor inherited and now faces? A predecessor, Gray Davis, was recalled a decade or so ago over electric grid management issues. PG+E is publicly owned. The utility commission has significant authority, but not as broad and consequential as the Federal Reserve’s in its ability to, in effect, manage the banks. There is no substitute for PG+E in providing service. There is no central authority with bankruptcy courts, management, regulators, bond holders, shareholders, and municipalities all vying for their piece of influence. The public debate is fully formed, with serious political overtures and each advocacy group in the great climate-change and role-of-capitalism debates weighing in. Voters are angry and frustrated as they endure power interruptions for sometimes days at unpredictable intervals as PG+E tries to avoid sparking fires during the dry and windy fall. There is no end in sight, with the only respite being the approaching winter rainy season. The only precedents observers can offer are giant hurricanes, earthquakes, or even massive financial crises. Let’s walk in to counsel the governor. What will we say?
First, we should tell him we appreciate the nature of the challenge; the lack of any obvious or risk-free path operationally, financially, or politically; and our appreciation at being given a chance to contribute our thoughts. The most important point is that he needs to bring clarity to all the complexity and risk and develop a path forward. To do this, he needs a process that will give him options and the means and power to see the option he picks through.
The nearest process example is the Cuban Missile Crisis in the early 1960s when Russia based nuclear missiles in Cuba, and President Kennedy had to act. He had in his brother an overall process manager, and two separate groups were formed, with one arguing for bombing Cuba and the other a blockade. Each group fully studied their assigned option and advocated for it. They then switched sides and looked at the opposing point. This back-and-forth between two groups that were fully diverse in background and expertise proved successful. The groups each felt empowered to say what they thought, argument was robust, facts and precedents were separated from pure judgement, and mutual respect was sustained. Debate was lengthy, rigorous, and intense. Kennedy chose the blockade.
What should the governor’s two possible courses be? He needs to decide based on his appetite for political risk and the degree to which he has conviction that only he can bring resolution to this existential crisis. This choice could well be his defining moment as a leader and potential for advancement in the American political system at the highest national level, up to and including President. The stakes could not be higher. We might offer one choice to be a continuation of today’s route and a second choice to be an effort to more forcefully and publicly take on the crisis and own its resolution. The status quo might seem low-risk politically, but who can know?
Who should be on each group in background? How big should the groups be? How long should they be given? How interactive should they be with the governor? Should they hold public hearings? What are the powers that exist or could be created if the governor wants to exert maximum leverage? Is the big idea to fix today’s PG+E, break it up, or have the state take it over? How much capital will be needed to fix the long-deferred maintenance items? How much will taxpayers tolerate in rate increases? How will the plans relate to demands for a more carbon-free environment? A number of complex questions abound.
The most important of these questions relate to who is picked, what they are charged to investigate, and how long they will have to come up with a hypothesis. The governor needs to know first whether the state can take over or, in effect, take over. If not, what is the path of maximum influence? How much political capital and personal time will the governor be willing to commit?
The point for you as rising leaders is to appreciate how similar this political and operational crisis is to what you will face as senior leaders. All the elements are here. Recognition of the severe nature of the problem. The need for an evaluation and design process that is rigorous, timely, and effective. The need for advisors and partners. The need to simplify and pick a course with an implementation process that can work. But, most importantly, the need for the leader to act with wisdom, courage, and commitment. This combination is rare but worth striving for as you head out on the trail. Good luck to Governor Newsom who will need some.
Professor Kevin W. Sharer joined the HBS Strategy unit in the fall of 2012. Before HBS, he was CEO of Amgen for 12 years and, before that, Amgen’s president for eight. He has served on the boards of directors of Chevron and Northrop Grumman and is currently on the board of Allied Minds. For a decade, he was chairman of the board of the Los Angeles County Museum of Natural History. Professor Sharer is a Naval Academy graduate and has master’s degrees in aeronautical engineering and business.