Setting a Gold Standard of Leadership: A Day in the Life of Dallas Fed CEO Rob Kaplan

On this week’s episode of World Reimagined, we talk to Dallas Federal Reserve President and CEO Rob Kaplan. Tune in to hear Rob’s insights on communicating as a leader, managing in times of crisis, and more.

Imagine determining the course of the American economy.

Twelve people in the United States actually have that job. They sit on the Federal Reserve’s Open Market Committee. Their votes affect hundreds of millions of people. And it’s just one of their many responsibilities.

Rob Kaplan is one of those twelve. How does he do it? He focuses on communication - no small task when you help lead one of the most tight-lipped institutions on the planet.

In this episode, Host Gautam Mukunda speaks with Rob Kaplan, the President and CEO of the Federal Reserve Bank of Dallas, a giant institution responsible for everything from setting interest rates to keeping the economy growing at a steady pace to running a contest on economic analysis for high school students. Kaplan has a long and distinguished career in global finance, notably serving as the Vice Chairman of Goldman Sachs. He is the author of several bestselling books, and served ten years as a professor at Harvard Business School.

Follow @GMukunda on Twitter or email us at WorldReimagined@nasdaq.com 

Books Referenced in World Reimagined, Season 2, Episode 1:

What You Really Need to Lead: The Power of Thinking and Acting Like an Owner, by Robert S. Kaplan

Guest Information – Setting a Gold Standard of Leadership:

Rob Kaplan has served as the 13th president and CEO of the Federal Reserve Bank of Dallas since September 8, 2015. He represents the Eleventh Federal Reserve District on the Federal Open Market Committee in the formulation of U.S. monetary policy and oversees the 1,200 employees of the Dallas Fed.

Kaplan was previously the Martin Marshall Professor of Management Practice and a Senior Associate Dean at Harvard Business School. He is the author of several books, including What You Really Need to Lead: The Power of Thinking and Acting Like an Owner; What You're Really Meant To Do: A Road Map for Reaching Your Unique Potential; and What to Ask the Person in the Mirror: Critical Questions for Becoming a More Effective Leader and Reaching Your Potential. Prior to joining Harvard in 2006, Kaplan was vice chairman of The Goldman Sachs Group, Inc. with global responsibility for the firm's Investment Banking and Investment Management Divisions. He became a partner in 1990 and served as co-chairman of the firm’s Partnership Committee. He was also a member of the Management Committee.

Following his 23-year career at Goldman Sachs, Kaplan became a senior director of the firm. He serves as chairman of Project A.L.S. and co-chairman of the Draper Richards Kaplan Foundation, a global venture philanthropy firm that invests in developing non-profit enterprises dedicated to addressing social issues. He is also a board member of Harvard Medical School. Kaplan previously served on the boards of State Street Corporation, Harvard Management Company, Bed Bath & Beyond, and Heidrick & Struggles International, Inc. He was also a trustee of the Ford Foundation, co-founding board chair of the TEAK Fellowship, co-founder and chairman of Indaba Capital Management, LP, and chairman of the Investment Advisory Committee at Google, Inc. Kaplan was appointed by the Governor of Kansas as a member of the Kansas Health Policy Authority Board. Born and raised in Prairie Village, Kansas, Kaplan received a bachelor of science degree in business administration from the University of Kansas and a master’s degree in business administration from Harvard Business School.

Transcript:

GAUTAM MUKUNDA:

Imagine determining the course of the American economy. Twelve people in the United States actually have that job. They sit on the Federal Reserve’s Open Market Committee. Their votes affect hundreds of millions of people. And it’s just one of their many responsibilities. Rob Kaplan is one of those twelve. How does he do it? He focuses on communication - no small task when you help lead one of the most tight-lipped institutions on the planet.

WORLD REIMAGINED INTRO

GAUTAM MUKUNDA:

We hear a lot about the Fed whenever we turn on the news. But how many of us know what the leader of one of the Federal Reserve’s banks actually does every day? When I stopped to think about it, I realized - I didn’t. I knew Rob had influence over the money supply. And interest rates. But I also knew that his office sits, literally, on top of a vault filled with a billion dollars in cash. What was that about? And how does he actually make his decisions? The Fed probably has more influence on the American economy than any other institution. Which is why it has to be so hush-hush, because even a tiny slip can move markets. And that’s why it’s such a rare thing to have a Fed CEO open up.

ROB KAPLAN:

There are 12 Federal Reserve Banks in United States. Each of them has a quote unquote "district." So ours is all of Texas, parts of New Mexico and parts of Louisiana. Our district alone makes up approximately 10% of the country's GDP and we're growing very fast.

GAUTAM MUKUNDA:

Rob Kaplan is the CEO of the Dallas Fed. He manages 1300 people at their home office, and in branches in Houston, San Antonio and El Paso. Through these offices they coordinate with banks throughout the southwest on issues such as payments, oversight, and technology. The Houston and Dallas offices even have two of the largest vaults in the United States, where they keep cash supplies which banks can access when they need them. That’s what the billion dollars is for. Before that he was a professor at Harvard Business School - - and the Vice Chairman of Goldman Sachs. He’s also written several bestselling books on leadership and career development.

Fed CEOs are notoriously careful about what they say in public. They have to be. Anything they say can and usually is interpreted as a bellwether for the economy. I didn’t even get an answer from Rob when I asked who should play him on an upcoming prestige drama about the Fed. But given that mandate to play things close to the vest and the complexity of his job, what does Rob Kaplan’s average day look like?

ROB KAPLAN:

First and foremost I spent a lot of my time on monetary policy. So we have 30 PhD economists. Our job here, for starters to understand all economic conditions, not only in our district on the ground, but in the United States. And we have a view globally. And then we bring that to the Federal Open Market Committee once every six weeks. We also, at the Dallas Fed, supervise all the banks in this district. So we have 300 plus people in supervision. We have people involved in payments, treasury services. We have a giant cash operation, big logistics operation. We have literally 70 law enforcement people, because we keep so much cash. We have run a very large facility as a result. We've got a lot of facilities people. And we have a big effort outreach in our community.

GAUTAM MUKUNDA:

This was something that came up a lot when we talked. Because managing the Fed, it turns out, isn’t just about managing the economy. It’s about managing a giant institution that’s responsible for everything from setting interest rates to running a contest on economic analysis for high school students. Meanwhile, they’re making decisions that can affect the lives of tens, or even hundreds, of millions of people. That means trying to take an incredible variety of perspectives into account. How does he do that?

ROB KAPLAN:

So we're convener for early childhood literacy, digital divide, skills training, a lot of these topics. And we have a big effort in the community and we do a whole range of events literally every day of the week that are broadcast to the community and nationwide. And so that's the range of things we're doing. But first and foremost, I've always got monetary policy in the economy in the back of my mind. But then I'm dealing with people issues, management issues and a lot of time, like this morning, system issues on issues like technology, budgeting for the system. There's a whole Federal Reserve system, so I spent a lot of time on that.

GAUTAM MUKUNDA:

Despite six million hits for the google search “federal reserve explained,” dozens of episodes of Planet Money, and even a lengthy explainer from John Oliver on “Last Week Tonight,” the mission of the Fed remains out of sight to most of the public. So what does the Fed actually do?

The Federal Reserve system was founded in 1913. It’s tasked with pursuing both full employment and stable prices, regulating banks and other important financial institutions, maintaining the stability of the financial system and containing systemic risk, and operating and overseeing the country’s payment systems. Every time you write a check, for example, the Federal Reserve processes it. 

So the Fed has a very complex set of tasks. This hasn’t always gone well. Former Fed Chair Ben Bernanke, for example, said of the Great Depression, “we did it. We’re very sorry.” Research by Selgin, Lastrapes, and White suggests that the Fed’s performance has greatly improved since then, but that it still struggles to maintain stability.

Perhaps the Fed’s hardest job, though, is keeping the economy growing at a sustainable pace. The Fed is tasked with both maintaining full employment and price stability - but these can be antagonistic. Grow too fast, and the increase in demand can outstrip supply resulting in inflation. Grow too slowly, and you won’t keep up with an increase in population and improvements in productivity, increasing unemployment. The Fed has to constantly steer between this Scylla and Charybdis. Its major tool is its influence over the interest rates banks charge each other on overnight loans. The lower the rate, the less it costs all of us to take out a loan. In theory, that makes people borrow more, spend more, and even invest more. Raise the rate, and they do less, slowing down the economy. Raise rates too high, and you might tip the US - or even the world - economy into recession. 

Rob spends half of his time making sure that the organization he leads - the Dallas Federal Reserve Bank - is in alignment. He’s written books about how to do just that.

So the mantra that I took from what you really need to lead is think like an owner, is that right?

ROB KAPLAN:

Right.

GAUTAM MUKUNDA:

Okay. So what does that mean from the perspective of the Fed? Who's the owner of the Fed?

ROB KAPLAN:

So here's what I've learned. In the business world, you want people to think and act like owners, but you have a bunch of aligners to get them to do that. One of them is everybody owns equity in the company, let's say. They know that their year end bonus is going to be based on how well the company does. We have competitors, you're petrified, you're going to lose share, you don't want to lose customers. 

At the Fed, you don't have a lot of those aligners. We're not going to go out of business. Nobody's going to take share from us and we don't have a P&L. Okay. And so you have to create other tensions that keep people focused on those aligners, because a lot of times by definition, alignment means it's something you haven't been doing well and you've got a bore in on it. And lots of times, normal human beings would prefer not to do that. If I'm overweight or I'm out of shape and I got to change, I'd be happy to put that off for a few months. Same way at the Fed. 

So that means over communication, sharing information, persuasion and it means following up a lot, and having a team that follows up a lot. And when you share information with people and they're clear on what we're trying to do, they then can act like owners, but there's a tendency even more than in private sector, in a government or in the public, you'd have more silos. People don't think about the whole organization as much, because they don't own equity. There's not as many aligners. And so my job is to break down those silos, share information, make clear to each person, clear expectations, "Here's what we expect you to do and be thinking about." And so that when you're not around, they know what you want, they know what we're trying to do, they believe it. And that allows people to think and act like owners. Without sharing information and having people be able to understand what we're trying to do very clearly, it's hard to act like an owner.

GAUTAM MUKUNDA:

Getting people to act like owners is good for any organization. If people take ownership of a project they’re invested in it. They become curious, engaged, and always on the hunt for ways to better align what they’re doing with the organization’s goals. It’s hard enough to make this happen at a company. It’s even harder at the Fed, which doesn’t face competitive pressures and has to meet the needs of Americans from every walk of life. That means understanding what’s happening both inside the Fed and outside of it. How bankers feel. But also how grocers feel. How does Rob do that?

ROB KAPLAN:

A good part of my time is coaching and mentoring, not only people at the Dallas Fed, but also people throughout the system. So that's number one. Number two, I spent a lot of time every day talking to the public CEOs, community leaders and yeah, people of all ages through the district and talking to them and also listening to them. And so for me, that's a lot of fun and that you've got the internal work in the system, you've got all the economic models, but a big part of what we do and makes us different is understanding what's really going on, on the ground. We know what it's like, what business leaders are going through. We know what communities are going through, we know what kids in school are going through, we know what the high school superintendents are thinking, because I talk to them regularly. And I walk around a lot, always before COVID, but during COVID. And so my job is to understand reality as best I can.

GAUTAM MUKUNDA:

So it sounds to me like you have a system that you have in your head for how you keep your, I guess I want to say fingers on the pulse?

ROB KAPLAN:

Yes.

GAUTAM MUKUNDA:

So that strikes me as being incredibly important, because it's so easy to [interrupted]

ROB KAPLAN:

Here's how I do that. First thing, and you'll laugh because I wrote a book on this methodology, but I brought my methodology from business and from Harvard Business School that I wrote about, I brought it here to the Fed. So that starts with what do we do that's distinctive at the Fed? And for me, we've got to be a thought leader and we've got to understand economic conditions. We have to be a leading citizen in our communities, and we have to track, retain and develop superb people. If there's an opportunity to talk to a business leader in the community, I'm going to overweight that, because one of the things we've got to do is understand the world and how that feeds into economics. If there's a chance to recruit somebody to the Fed, I'm going to be all over that. If there's a coaching situation, I'm going to be all over that. 

GAUTAM MUKUNDA:

So, running the Fed would be insanely hard on an average day.

When was the last time you had an average day? 

When Hurricane Harvey hit Texas and Louisiana in 2017 - Rob’s Federal Reserve District - it caused billions of dollars in damage. The big freeze that hit Texas earlier this year also left a costly trail in its wake. And then, of course, there’s the economic devastation from Covid-19, and that we’re still feeling today. Managing those sorts of disasters and getting the economy going again afterwards is a big part of the Fed’s job. So how do you lead the Fed in a time of crisis?

GAUTAM MUKUNDA:

And if you were to write a diary entry and article saying, "This is what I learned from the year of the pandemic about leadership in this time," what would it be?

ROB KAPLAN:

Stay focused on the issues, try to understand, listen, the normal playbook. Don't sit in your office, get out there and try to understand what's going on. Talk to people, get out there. Number two, you're not going to be able to deal with a situation like that unless you're part of a team. Find where you can add value and play your role with other people. And then the third lesson, which I think we're going through right now is it's not so easy to go from leading in a crisis to the aftermath. 

On the way out, people may be hanging on and saying, "Please don't do less." And plus, you got all these pats on the back during the crisis and you got to realize the thing that people patted you on the back for nine months ago would be the same thing they're going to kick you in the teeth for today unless you adjust.

GAUTAM MUKUNDA:

So what is it that makes someone good at leading that transition?

ROB KAPLAN:

Making sure you, A, understanding reality, never stop learning, never stop going out there trying to understand what's going on. Don't be rigid or predetermined. And secondly, you can't do it alone, you got to have a good team. You got to do it with other people. But the biggest mistake I've seen people make is not understanding the current context, because they're isolated, they're blind spots. They don't realize what's really going on.

GAUTAM MUKUNDA:

William McChesney Martin, the ninth and to this day longest serving chair of the Fed, famously quipped in 1955 that the Fed’s job was to take the punch bowl away right when the party was getting going. Which is a great line, so great it’s still getting quoted today. But what he meant was, you don’t want the party - that is, the economy - getting too rowdy or it’ll wake up the next morning with a terrible hangover - in this case, inflation. But how long is too long when we’ve had two once in a century crises in the past thirteen years? Would it hurt to keep the punch bowl out, just a little while longer?

GAUTAM MUKUNDA:

Since the financial crisis really, the Fed has directly intervened in the American economy in ways that would have been inconceivable before continually and at scale. And you've been pretty open that you're more concerned about the effects of this than other members of [interrupted]

ROB KAPLAN:

Yeah.

GAUTAM MUKUNDA:

Yeah. So what are you concerned about? What worries you?

ROB KAPLAN:

So here's the issue, when you go through a crisis, as you know, your style has to change more directive, more prone to action and you want to err in the crisis on the side of doing more not less. History is full of examples of leaders who did very well brilliantly in a crisis and a little more trouble adjusting to peacetime. But Winston Churchill in 1945, others, I can think of other examples. What you got to be careful about when you come out of a financial crisis, it's not easy to shift gears and wean off what made you successful in the crisis, but it's necessary because if you don't make that adjustment, the economy gets a little bit addicted to some of these excess extraordinary tools.

And when the economy gets addicted, in my opinion, it creates fragilities. And they're easy to see in hindsight, not so easy to see in real time. And each crisis is different. So we just been through a crisis on the pandemic and we took extraordinary action and we did it boldly and it was appropriate. Now, we're coming out of the crisis, the pandemic, we're starting to weather it, the effects are waning. And so I think it's just as big a challenge, maybe bigger challenge than to shift, wean off these extraordinary tools that were appropriate in the crisis. But the tendency is that's very, very difficult. And there's a little bit of a sense where, well, let’s err on the side of doing more for longer, let's not do less. And there's a point in the recovery, where doing more rather than less creates its own set of side effects that can be tough to deal with.

GAUTAM MUKUNDA:

So what's the side effect you're most worried about?

ROB KAPLAN:

Excess risk taking in the financial markets, excesses in the real estate market, in the single family home market. And then you worry about excesses and imbalances in the economy. So what's an example, on the economy, coming out of the great recession, we had a demand problem. Okay. Households were over leveraged in the crisis, and there was more savings needed and people needed to get back employed increasingly to de-leverage. So the consumer spending was sluggish and it was sluggish for a while. So it was a set of tools that made sense.

Today, our problem ironically is not demand. Household spending and consumer spending were strong during the crisis. They've stayed strong. They're strong now. Our problem is supply. There's a whole range of supply issues on goods, materials and labor. You gotta recognize if your game plan is the aftermath of the great recession, not a good idea because in trying to stoke even more demand, you may be creating greater supply demand imbalances, which can create other side effects that you need to be able to manage. And so as a risk manager, I'm a fan. If you're climbing out of a ditch, you may need to floor it to a high level of RPMs, but as you're getting out of the ditch, you'd be wise to scale back on the RPMs or you're going to have trouble once you're out of the ditch. You need to realize where you are and you need to make the adjustment. That's easier said than done.

GAUTAM MUKUNDA:

The Fed has been taking historically unprecedented actions for more than a decade. Starting in 2008, it began massive purchases of bank debt, mortgage-backed securities, and Treasury notes. Those continued through October of 2014. That was supposed to be the end of it. But then Covid-19 hit, and its effects on unemployment made the 2008 financial crisis seem like a mild recession. So the Fed started those purchases again. Those are emergency measures, the equivalent of intubating a patient who’s struggling to breathe. You might need to do it to keep the patient alive. But you can’t keep a patient intubated forever. And once the crisis is over, weaning someone off their breathing tube can be even harder than inserting it in the first place. And if the Fed gets it wrong, millions of people could suffer. Rob’s concerned that that is exactly what we’re doing right now.

ROB KAPLAN:

Well, you have to get worried. Listen, if you step way back over the last 50 years, if you look at a very high level, the United States has had a tendency to use increasing its leverage, debt to GDP, as a way to stimulate GDP growth. It is not always focused as much on the fundamentals, which is how to grow the workforce and how to improve productivity. Okay. And so that's number one. What's the effect of that? You can create excesses and imbalances that actually don't make it, so you don't have the money to invest in things like education, early childhood literacy, skills training, infrastructure, access to WiFi.

GAUTAM MUKUNDA:

What Rob’s saying here is simple. For the last two generations, instead of investing in what it takes to create real, sustainable growth in the economy, we’ve just been borrowing money. For 50 years we’ve been like a wealthy family that’s living off credit, spending down our capital instead of investing it. If you do that for long enough, you might start to forget that it was investing - not borrowing - that made you wealthy in the first place.

ROB KAPLAN:

Sometimes ironically you can crowd out the things that you've got to spend on if you're going to create sustainable growth. And you get a little bit addicted to the financial engineering as a way to grow. That's number one. Number two, on monetary policy, these extraordinary measures, asset purchases and others will tend all things being equal, to encourage or create greater valuation and financial assets. Yes, benefit those that have them versus those that don't and encourage people to increase their risk. If I can earn zero in my bank account, as a normal rational person, even if I'm about to retire or have retired, I need to make a return. I'm going to have to take more risk. And if you get across the board excess risk taking, I would call it, you can get yourself in a position where it creates excesses that when things normalize, you're going to have people de-risk or better yet precautionarily de-risk. And that's going to create a severe tightening in the financial markets, which is going to slow the economy.

Engineering those phases is very challenging. And you got to worry if you keep, I guess, for your word, the punchbowl there for too long, it may feel good at the moment, but you've got some hangover and excesses in the aftermath to deal with. Our trick is you don't want to be too preemptive in taking things away, but you don't want to be so reactive as to be late. Or to put it in a different analogy, I'd rather take my foot off the accelerator gently and sooner than be forced to hit the brakes later. Hitting the brakes can have a jarring effect on the economy.

GAUTAM MUKUNDA:

Right. As we worry about that jarring effect. Are you also worried that if you take it away too soon, you're going to continue to see the slack labor markets and low income growth?

ROB KAPLAN:

Of course. And this is why we're spending a lot of time right now trying to figure out why there's slack. Why is the unemployment rate this high? And I will go through a few reasons, but you got to realize the situation. This is where our work on, not just our models, but being out there and talking extensively is an enormous advantage. You got two million people since February of 2020 that are 55 year old and older, who've retired. You've got a million and a half women since February of 2020, who have children, who've chosen to leave the workforce. You've got unemployment insurance, which is making it much harder for businesses. We're hearing this widely, much harder for businesses to lure employees back because it's a better economic deal at least in the short run to collect unemployment benefits.

I don't see evidence of a lack of demand. If I saw evidence of a lack of demand, I'd feel differently. So you got to analyze the situation, make sure you've got conviction about what you're seeing. And then my job is not to predict the future with certainty, because even if it was I couldn't, but it's to realize there's a range of outcomes and then manage monetary policy to take into account those outcomes and guard against tail risk.

GAUTAM MUKUNDA:

Because the job of the Fed is just as complex as the economy it oversees - there’s plenty going on beyond the aftereffects of Covid-19 that Rob has to keep his eye on. Perhaps the most important problem facing not just Rob, but the entire world, is climate change.

ROB KAPLAN:

So one other tool I have is our economic analysis and publicly calling out these risks. So I talk a lot about this issue, climate change, because, one, it's affecting already economic outcomes in the State of Texas. Hurricane Harvey price tag of 70, $80 billion, the freeze we just had recently, which only lasted a few days and look at the devastation, dislocations it created.

And so I already have to take into account and understanding economic conditions, but I also call it out. The other thing we've got here uniquely in Texas is we've got the biggest fossil fuel industry in the country, but we're also a leader in wind, solar. And so helping call out the issues with making the transition so we can transition away from fossil fuels without destroying the ability of fossil fuel companies to continue to supply the product as we go through this multi-decade transition. So a lot of my power in this area is jawboning and laying it out clearly and then talking to policymakers on both sides of the aisle to explain it.

We don't have powers outside our ability to achieve our dual mandate, but I talk about this all the time. This is a tail risk and if our job is to full employment and price stability on a sustainable basis, mitigating tail risk is very critical to doing that.

GAUTAM MUKUNDA:

Rob isn’t the CEO of just any Federal Reserve member bank. He leads the Dallas bank. J.R. Ewing might as well be his neighbor. His district is the home of the American oil and gas industry. He has to be conscious of the people who will be hurt by climate change, and of the people who will be hurt if we aren’t careful during the transition away from a carbon-based economy.

ROB KAPLAN:

There's a few risks. There's the risk that we don't reduce our greenhouse gas emissions fast enough and we reach a tipping point where the impacts are so negative we can't reverse them. That's a real risk. So what would cause us to fail to do this? Obviously, we have to explain it to the public, but if you saw, as we make this transition for those who still... Even with the most aggressive scenario we can come up with, there's going to still be solid global demand for fossil fuels for a long time, decades, not years.

So what would create a problem with the transition aggressively moving to alternatives? Every bank, every financial provider, the industry can't raise capital, which is currently the case. And also people in it are tainted where they don't even want to work in the industry. They drill dramatically less, they return more capital to shareholders, which is they're doing all these things. And that's all great in getting to the transition, except the price of oil goes up dramatically and heating fuel. And all of a sudden, consumers are really struggling with the increases and they start to push back on what we're doing.

You want to handle this transition properly. So I've said we're going to have to walk and chew gum at the same time. And I don't think we talk enough about the transition risk. You're going to have to aggressively move away from fossil fuels toward wind solar, battery storage. And then for those who do produce sequestration, all that. But part of the transition is also making sure you've got a healthy enough fossil fuel industry to ease the transition for consumers, because whether you like it or not, they're going to demand the product, because we can't move fast enough and you don't want to make it such a jarring experience that they don't want to go along with the transition.

GAUTAM MUKUNDA:

If you know anything about the Fed, you know that it’s incredibly secretive. So for a Fed CEO to be this open - that’s rare. Why? It’s a product of the leadership philosophy that took Rob from Prairie Village, Kansas, to the heights of Wall Street, Harvard, and government service. To me, to his students, and in his books, he’s emphasized the importance of bringing people in from the community, making them feel like owners in your organization, and fostering clear, open, and honest communication. 

So that sharing information part was actually something I came in wanting to ask you about, because I think of the Fed as second only to the CIA as the most secretive of all American government institutions.

ROB KAPLAN:

Right.

GAUTAM MUKUNDA:

How do you share information in an environment where being closed lipped is the coin of the realm?

ROB KAPLAN:

So everybody's got certain clearance. So, for example, on a monetary policy discussion, I have a rule which we instituted years ago here at the Dallas Fed. The first thing you'd think is, oh, it's going to be a monetary policy discussion or about the economy, let's have a quote unquote "small group." And my attitude is, no, let's have the entire department involved in every conversation that doesn't involve what we refer to as Federal Reserve restricted, classified information, let's include them. So if I'm talking about the economy or what's going on in the economy, there's nothing classified about that. Let's have the whole darn department. Everything I've said publicly about monetary policy, it's now public. It's not classified. I want to share with them what I'm worried about. And by the way, ask them what their views are.

So every younger person or new person at the Dallas Fed, who walks into that research meeting, we've a big research, I said, 30 PhD economists, probably 60 or 70 people total, they know from experience to me, if you walk into that meeting, you better be prepared. I may turn to them and say, what do you think we should do with rates? Or what do you think we should do with our asset purchases? And by the way, I don't know, is not going to fly. Now, to give your answer, and here are the pros and the cons and the uncertainties, that's fine, but you better come in with a point of view. And so that's a dramatic change in culture, but what it means is, "Oh my God, I better prepare for that meeting, because this guy is crazy enough, he may call on me." That creates ownership. 

GAUTAM MUKUNDA:

It always amazes me how many leaders default to secrecy instead of openness. You can’t take ownership if you don’t even know what you’re supposed to own.

So communication is valuable. But that’s one-way communication - a leader telling his or her followers what they need to know. The most valuable communication, though, is two-way. Where leaders learn what they need to know from the people they work with - the people who feel empowered to tell their boss that he or she is making a mistake. At Rob Kaplan’s Fed, you’re expected to do exactly that. How does Rob go about creating a culture where that kind of transparency is encouraged?

So when you and I were working together, I remember I was writing an article on the financial sector. And I was well aware that my knowledge of the financial sector was about equal to what was in your fingernail. But something about the way you handled yourself meant that I was actually not afraid to go to you and ask, not just get educated about the topic, but ask questions that could have been uncomfortable, right? Because my perspective was maybe not one that I was sure you would agree with.

ROB KAPLAN:

Right.

GAUTAM MUKUNDA:

And so first is on the personal level. There's something about Rob Kaplan that meant extremely frightened junior faculty members, somehow didn't feel that way when he was talking to you. How do you do that?

ROB KAPLAN:

So first is I ought to be able to explain any monetary policy or economic concept. My view is I should be explaining it so anyone in this bank or in the public should understand it. Okay. And if I can't, it's not their failing, it's mine. You with me? And as a professor, one of the things we were taught as a good case study professor, you got to go to where the students are, right? So if you're teaching executives, you might teach a case one way, if you're teaching 25 year olds, you're going to teach them another way, because each of those groups is in a different place.

And so my job is not only to do it myself that way, but I'm constantly coaching people, here don't use acronyms. I don't know what you're talking about. Or if I do, 70% of the people are not going to know what the hell you're talking about. Don't do that. You can explain this. And by the way, if you can't explain something or someone cannot explain something to you in a way that's understandable, maybe they don't understand it. 

GAUTAM MUKUNDA: 

So my rule was always that if I can't explain it, it means I don't understand it, it means (interrupted)

ROB KAPLAN:

That's right. And that's where I'm coming from. I agree with that. So then the other thing I do is I basically pull people in. There's a power asymmetry between the boss and the subordinate and the private sector, multiply that 100 at the Fed.

GAUTUM MUKUNDA:

These frank conversations might not have been easy to have before, but they’re a lot harder now thanks to Covid. The days of walking down the hallway, knocking on someone’s door and asking ‘hey, got a minute’ are a thing of the past, at least for now. But according to Rob that’s no excuse for not having them - because they’re too important. At the Fed, and everywhere else too.

ROB KAPLAN:

It's so easy to get isolated. And by the way, the pandemic has made that risk greater because it's harder to get out. So it means you got to pick up the phone and dial. A lot of the interaction you naturally have goes away. But I have a zeal for learning and I have in the back of my mind that what worked six months ago, if you don't adapt is not going to work today. And I think that's particularly true. For sure, it's a good reminder at the Fed, but it's true in a lot of places.

GAUTAM MUKUNDA:

How leaders communicate with others is incredibly important. But just as important is how they communicate with themselves. We all have a narrative of our lives. Actually, we all have more than one.

Rob likes to say that everyone has three narratives about their life. There’s the basic facts narrative - when you were born, where you grew up, what you do now and so forth.

Then there’s the success narrative, the one you tell at parties or to friends or on dates about how you got where you are today. And yes maybe there was some adversity, or some bumps in the road along the way, but everything worked out fine. You prevailed.

But then there’s the third narrative, and Rob calls this one the failure narrative. This is the story we would almost never tell other people, even though some of us tell it to ourselves all the time. I’m not good enough. I can’t do it. I have failed.

What do we do with this third narrative, this story we tell ourselves that frustrates us and holds us back?

So here's the thing, when we were teaching together, I was roughly the same age as the students. So they would say things to me that they wouldn't say to other people. And they would tell Rob Kaplan stories to each other, because you were the person they wanted to be. They look at HBS and be like, "If everything goes right, I'll end up as Rob Kaplan."

And as I once said to you, I considered it part of my job to confirm any rumor no matter how outlandish that they would ask me about. I just thought that was part of my job at HBS. But how does Rob Kaplan write with such sensitive understanding and get inside people's heads who are telling themselves this failure story, and we both understand how toxic it can be, and how do you help people get out of it?

ROB KAPLAN:

Well, it helps I've got my own. And you know this, when you get up in front of the classroom and you talk about the subjects, I used to share some things about myself in the authentic leader class. And my nephew used to come occasionally and observe. And he'd say to me afterwards, "Why did you have to say that? Why do you need to tell them that? They do not need to know that. Why did you have to do that?" And I'd say, "Relax, relax. I'm trying to get these kids and these students that are executives to change what they're doing and I've got to share with them, because it might get a few to realize it's okay to admit this, this and this, admit their vulnerabilities. I've got to do it."

If you're focusing on always how to add value to someone else, and you have a passion for what you're doing, you enjoy what you're doing, you have a passion, it's a good fit for your skills. It gets you to do things that you'd say, "Oh my, that's crazy." But it becomes obvious, it falls out, "Here's what I need to do." So in the job I'm in now, same thing, how do I add value? What's the problems out there? How can I add value? And it pulls you into doing some things that you'd say, "Boy! I don't know about that," but it's natural if your whole focus is on adding value.

GAUTAM MUKUNDA:

So I think, especially when you're a teacher, but a leader, and a teacher is a type of leader, I think, sometimes you can only do it by exposing your own vulnerabilities to other people.

ROB KAPLAN:

Right. And if you're focused on the task, which is how to transform people and give them the courage or the permission to do stuff that they don't think they're supposed to do, that will help them, you don't have a choice.

GAUTAM MUKUNDA:

Do you think leaders are too reluctant to show themselves as vulnerable to-

ROB KAPLAN:

Yeah, no, so this gets into a common discussion we've had, why do leaders fail? Unwillingness to learn, inability to be vulnerable, a fear of showing their vulnerability and a fear of being themselves, lack of authenticity. And usually those things are driven by the so called quote unquote "I talk about the failure narrative." People naturally, because of experiences in their life, they're taught don't do that, don't be vulnerable, don't be authentic. If I'm myself, they're not going to like me or this is not going to work or I'm one way in my personal life, but I would never act that way at work. Well, why not if that's who you are? People have been trained for years and then their upbringing and their life story that it's not a good idea to do it. And that's a challenge.

GAUTAM MUKUNDA:

And how do you, as the CEO of the Dallas Fed, remind yourself that it's okay to admit to failure?

ROB KAPLAN:

Well, I just do it. It's very disarming. I tell people a lot of time, "I'm sorry, I apologize I was wrong I screwed up, you know what? I didn't handle myself the right way in that meeting, I was too this, I probably screwed this up." Just do it. It's very disarming. I don't do it to disarm people, but it works well. Just tell them the truth.

GAUTAM MUKUNDA:

But it works.

ROB KAPLAN:

Well, they know I'm trying to do my best and that I've got strengths and weaknesses, I've got no illusions about it and I'm just trying to do my best. My heart's in the right place

GAUTAM MUKUNDA:

In this extraordinary career, you've gotten to know extraordinary people. Who was the person you got to know who you found most impressive? And why? What about him or her is it that spoke to you?

ROB KAPLAN:

Well, there's a bunch of them. I'll work backwards. Nitin

GAUTAM MUKUNDA:

Nitin, of course.

We’re talking here about Nitin Nohria, the Dean of Harvard Business School when we were both professors there.

ROB KAPLAN:

...was a great coach. Jay Powell has been a great relationship. Hank Paulson for me, I sometimes didn't always do what he wanted, but he was a great coach and a critical relationship for a long, long time. But I have lots and lots of them, but those were two or three.

GAUTAM MUKUNDA:

Okay. And so last question - What scotch should I be drinking?

ROB KAPLAN:

I'm still a fan of Macallan 18.

GAUTAM MUKUNDA:

I've still got the bottle you gave me.

ROB KAPLAN:

All right. Good.

GAUTAM MUKUNDA:

It’s rare to hear a leader talk this candidly about their struggles, their issues and their own insecurities.

Because it’s not how we’re taught to lead. It’s not the image we’re taught to project if we want people to take us seriously, if we want to live that success narrative.

But communicating with your team is about more than making sure they understand your goals. It’s about making sure they understand you. Who you are, warts and all. And that you understand them too. And that means that even though it’s unpleasant, even though we don’t want to, we have to come down into the vault sometimes, to really look at ourselves and who we are in an honest light, and then bring that to our team so that they can see that we’re human too, just like them. Only then will they trust us enough to do the same. And then you can really lead as a team.

Now, that’s hard. No matter how often you do it, it never becomes really natural to open yourself up to others. To show them at least some of your failure story.

But Rob finds the strength to do that - not just once in a while, but over and over again. How? Here’s my guess.

It’s all about responsibility. Rob knows that we’re counting on him. Literally. Every American - maybe everyone in the world - needs the Fed to make the right calls, particularly as we exit Covid. And we need the Fed to keep getting it right as it deals with everything from crypto to climate change. Before Rob was at the Fed he was a professor - a teacher. Speaking from personal experience I can tell you that there’s nothing better than teaching. But you always feel a deep responsibility. Because, to a greater or lesser extent, these people are putting their fate in your hands, making major choices in their lives based on your words. The scale is nothing like the Fed, of course. But it’s a lot more intimate. And the feeling is very real.

That kind of responsibility can weigh you down. It can also lift you up. When you look into the faces of people who are relying on you, it can inspire you to find a strength you didn’t know you had. The strength to be vulnerable. The strength to be human. The strength to be the kind of leader who’s worth following.