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September 14, 2012 - The Wall Street Journal

Driving Change Without Rocking the Boat

Joann S. Lublin

Whether they’re promoted from within or recruited from without, executives in new roles had better be ready to drive change.

The tricky part, of course, is knowing what to change–and how much. Executives chosen from inside tend to not shake things up enough, while external hires often transform too much, harming staff morale, management experts say.

As boards increasingly seek players adept at steering change, executives who can handle crises and transitions “with a calm and clear approach” are in greater demand these days, says Stephen Miles, head of Miles Group, a New York consultancy that advises boards about succession.

For instructive lessons on doing change right, consider the examples of two chief executives who helped revive ailing businesses without wrecking their corporate cultures.

James D. Wehr was promoted from within to lead one of the oldest insurers in the U.S., while Keith Wandell, was hired from outside to run Harley-Davidson Inc., HOG +0.51%the iconic maker of motorcycles. Though each took different routes to make change work for their employers, both agree that new leaders must figure out—quickly—what to keep and what to fix.

The Insider: James D. Wehr

Mr. Wehr joined Hartford-based Phoenix Cos. right out of business school as an operations analyst. He worked his way up the corporate ladder, becoming chief investment officer in 2004. After he took command in 2009, he quickly shed more than 35% of the ailing firm’s workforce – its biggest ever layoff. But the 55-year-old CEO only considered company insiders for his top team.

When he took on the CEO role, Phoenix Cos. chief James D. Wehr chose trusted insiders for his top team.

He didn’t look outside for new senior lieutenants because he needed known and trusted colleagues “to get things done in a very challenging environment,” he says. Also, “we didn’t want to change the culture dramatically.”

He next devised a concise action plan, identifying four “strategic pillars.” Mr. Wehr chose areas needing stabilization, such as the balance sheet — and change, such as new-business growth. Publicly sharing priorities, mainly through town-hall meetings, helped employees buy into the plan. “People remember clear lists,” he says.

Mr. Wehr also decided to let some things be. Analysts called for the company to shed underperforming assets in its $9.8 billion bond portfolio when rating downgrades all but stripped financially troubled Phoenix of its ability to sell new life-insurance policies in 2009. Mr. Wehr says he refused, noting that a sale at depressed prices “would have been a big mistake.”

He suspects an outside CEO might have taken more radical actions, such as drastically cutting the ranks of Phoenix actuaries. Instead, he eliminated just 16% of actuaries, so that the company would not be hobbled when it rebuilt its product line, says Peter Hoffman, the company’s finance chief.

Partly due to its expanded emphasis on annuity sales and lower expenses, Phoenix returned to profitability in 2011 for the first time since 2007. But the insurer remains saddled with low ratings.

The Outsider: Keith Wandell

In 2009, Mr. Wandell, now 62, became the first outsider to run the nearly century-old manufacturer since the Milwaukee company went public in 1986. The former Johnson Controls Inc. JCI +1.95%executive quickly ditched two poorly performing sidekick brands and persuaded unions to accept more flexible work arrangements.

He also set out to identify the ingredients of Harley’s past success—an especially smart move when you’re an outsider, says Ronald Fry, an organizational behavior professor at Case Western Reserve University’s Weatherhead School of Management. Using listening tours to ask questions such as, “When we are doing our best, what are the causes?” newly chosen executives can gain valuable insights and win over the rank-and-file, says Prof. Fry. “It gives people a sense of being part of a solution,” he adds.

Conferring with key Harley customers and dealers, Mr. Wandell realized that passion for the Harley brand “made the company great.” But those sessions also confirmed the depth of Harley’s recent and sudden sales plunge — fortifying the CEO’s commitment to change. “I was running around wanting to put out the fire,” Mr. Wandell says. Few associates believed anything was wrong because the sales drop happened so fast, and many wondered aloud why he was in such a hurry, he recalls.

Mr. Wandell unveiled his roadmap in late fall 2009 – with his own set of four “strategic pillars.” He slashed costs so Harley could survive on lower sales. Sharpening its focus on the main brand, the company stopped producing Buell motorcycles and sold Agusta, an Italian motorcycle maker acquired in 2008. Harley lost a record of $55.1 million during 2009.

Also on his agenda: introducing motorcycles tailored for women. Longtime Harley employees and customers resisted Mr. Wandell’s attempt to alter the brand’s macho image. They didn’t “want to see a lot of changes to how the products are made,” conceived and marketed, he says.

Since introducing models such as the Softail Slim, with a lower seat designed for female riders, Harley has come to dominate the U.S. motorcycle market for women, a spokeswoman says.

When it came time to shake up Harley’s leadership, Mr. Wandell sought to make fellow executives feel they had skin in the game. He recruited two executives, then let senior management approve the man he brought in as general counsel. “Having the team be part of the process helps makes sure it’s a good fit,” he explains.

Both Messrs. Wandell and Wehr say their change-agent days are far from finished.

“We have made a lot of progress,” Mr. Wehr says. But “we need to make more.” And despite a 30% surge in Harley’s second-quarter profit, Mr. Wandell has ambitious plans to improve manufacturing and product development. In his view, a corporate transformation never really ends for would-be change agents.