• MANAGEMENT
• JUNE 9, 2009, 12:22 A.M. ET

A.G. Lafley's Advice for Future Leaders

By CARI TUNA

Longtime Procter & Gamble Co. Chief Executive A.G. Lafley, who is expected to step down July 1, wrote just last month about the CEO's most important duties in a Harvard Business Review article called "What Only the CEO Can Do."

The piece, which appeared in the May issue of HBR , was an in-depth look into the mind of a sitting CEO. Now, it also sheds light on how Mr. Lafley views his managerial legacy at the consumer-goods giant and offers lessons for up-and-coming CEOs – like his expected successor, Robert McDonald.

Mr. Lafley is already a darling of management professors, who celebrate his tenure as an example of wise, focused and progressive leadership. Mr. Lafley led a turnaround at P&G after taking over in 2000 in the wake of a big share drop and a "crisis of confidence," as Mr. Lafley put it.

Drawing on the work of the late management guru Peter Drucker and his own nine years at P&G's helm, Mr. Lafley outlined the four key responsibilities of every CEO:

1. Defining the "meaningful outside"

Mr. Lafley argued that the CEO's foremost job is to act as a bridge to the outside world. He wrote the CEO alone can determine which stakeholders – consumers, retailers, suppliers, investors, employees or shareholders – matter most and which results are most meaningful.

"People view the importance of various stakeholders according to where they themselves sit," he wrote. "The CEO has both a clear perspective across the organization and accountability to the outside."

For Mr. Lafley, that meant driving home one point – "the consumer is boss" – and developing a performance metric to link managers' pay to consumer behavior, he wrote.

2. Asking "what business are we in and what business are we not in?"

Mr. Lafley advised CEOs to consider three main points when deciding where to invest the company's resources: the "structural attractiveness" of a business, the company's position relative to competitors, and the strategic fit of the business with the company's core strengths.

These principles spurred Mr. Lafley to expand P&G's core businesses by focusing on its most popular products and making closely-related acquisitions, such as the $57 billion purchase of Gillette Co. Also during his tenure, he orchestrated the sale of less central businesses, like Crisco, Jif and Folgers, and weak brands, like Comet and Noxzema, he says.

Other executives and managers "find it exceedingly hard to recommend shutting down or selling a business they're a part of," Mr. Lafley observed. "Disposing of assets is not as sexy as acquiring them, but it's just as important."

3. Balancing short-term results with long-term goals

Balancing short-term yields against long-term investments is "as much art as science" and "entails the riskiest choices a CEO can make," Mr. Lafley wrote .

He suggested CEOs first define realistic growth goals, recognizing that both fast-growing and slow-growing segments are valuable. He also recommended creating a flexible budget and fostering innovation aimed at both the mid-term (three to five years) and the long-term (10 to 15 years).

He added that CEOs should identify and groom talented employees with an eye to the future, allowing them to tackle not only problems but opportunities. "I know the top 500 people in the company, and I am personally involved in career planning for the 150 who are potential presidents or function heads," Mr. Lafley says. "Little if anything else that I do as CEO will have as enduring an impact on P&G's long-term future."

4. Shaping the company's values and standards

The CEOs fourth and final task is to interpret the company's values and set its standards, Mr. Lafley wrote. Focusing on P&G's core values of trust and competitiveness helped Mr. Lafley as he struggled to alter employees' internally-focused mindset upon taking control earlier this decade, he said.

"Trust had come to mean that employees could rely on the company to provide lifetime employment," he wrote. "We redefined it as consumers' trust in P&G brands and investors' trust in P&G as a long-term investment."

Lastly, Mr. Lafley said he set a new standard for business performance – operating total shareholder return – to align employees' interests with those of P&G's shareholders.

Write to Cari Tuna at cari.tuna@wsj.com