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Dennis Nally
U.S. Chairman and Senior Partner
PricewaterhouseCoopers

Editor's note: Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today. If you'd like to participate in this section in the future, please email Scott Chase.

You frequently use golf to illustrate business trends and realities. What makes golf such a great metaphor?

One of the biggest problems in the business world today is that too many of us are doing the equivalent of constantly playing the last hole. I believe that we've come to devote so much of our time and attention to dealing with the past that often there aren't enough resources left for the present or future. We've become tied up in rules that are, by design, a reaction to problems of the past.

The irony is that business leaders can follow all the rules and still arrive at the wrong answer.

Think of the Enron situation. That company’s executives and accountants found precise rules to justify what they were doing as technically right, even though their overall judgment was grievously wrong. A rules-based culture allowed Enron’s leaders to ignore the central tenet of a principles-based system: the principle of simply doing the right thing.

History has proven time and time again that rules alone cannot ensure that anyone is doing the right thing.

In a recent survey of top senior executives of U.S-based multinational companies, we came upon an interesting and fundamental issue. Seventy-two percent of the executives indicated that the rules-based accounting standards have enabled companies to design financial engineering techniques around specific accounting objectives, rather than broad economic goals.

In corporate governance, as in my profession, rules can tolerate a shirking of corporate and personal responsibility that principles will not.

Should CEOs set and enforce strict rules for corporate behavior? Should they provide a set of principles that govern how our companies operate? Which approach stands the best chance of ensuring responsible, lawful behavior up and down entire organizations? Equally important, which one really encourages the appropriate risks and business judgments that allow organizations to grow and create value?

These are critical questions, and to answer them I can think of only one word -- “courageous.”

The new realities of today's dynamic business environment whether they are new technologies, intensified global competition, or ever-changing consumer, investor, and client demands constantly challenge us to re-think what’s possible, what we want, and how we get it done.

Principles, not rules, allow us to deal with these new realities to see and respond to new opportunities and challenges, to exercise courageous leadership. Principles are exactly what we need in a world where growth comes from new ideas and imagination; intangibles that are much more difficult to measure and value.

Principles throw a light forward. They can help business leaders navigate change and prepare for tomorrow. They require us to think through issues that go far beyond a yes-or-no, black-and-white, absolute set of rules and to take a more nuanced approach to leadership.

So, back to golf . . .

When I talk to CEOs and business leaders I sense that today’s U.S. business environment has put all of us in absolute danger of constantly playing the last hole -- that is, focusing so much on what we’ve already done that we are less able to deal with the sand traps that surround our future opportunities.

This is an enormous threat to our economic growth and, quite frankly, to leadership. In fact, it is making it acceptable for business “leaders” to come up with the wrong solutions as long as they can show they were following “the rules.”

To me, this is not “leadership.” It’s “follower-ship.” And it’s certainly anything but courageous.

From my perspective, the rules-based mentality that now exists in the business world isn't an outcome of Sarbanes-Oxley. Rather, it’s the result of an environment that says that you and I cannot be trusted to do the right thing. That says we can and will be second-guessed and demands that everything we say and do be documented, annotated, and recorded.

Today, boards of directors are devoting enormous resources and vast amounts of time to strict compliance and, in doing so they are sacrificing the energy they should be using to create a vision for the future.

So what’s the solution?

While we in Corporate America may believe there is something wrong with the rules-bound environment we feel somewhat powerless when it comes to fixing it. We feel like we're in a holding pattern, hoping and waiting for change.

However, I do believe that we are not powerless, and we can begin to create that change. But first we must allow business leaders to lead. Obeying the law and making sure the people we lead do the same is only a small part of what being a leader is all about.

Unless you guard against the mentality that focuses on just enforcing rules the chief executive officer quickly and, in my view, inappropriately becomes the “chief compliance officer.”

Why is this a problem? Because it means that the CEO's main job will be to make sure that the rules are being followed. That’s looking backward. That’s playing the last hole again, and again, and again. Bottom line: you cannot grow a business and remain competitive by doing that.

Make no mistake about it: it’s easier to be a chief compliance officer than a chief executive officer. But that’s not what a leader does.

To me, being a leader is having the courage to develop, promote, and live a set of values that your people apply no matter the situation and regardless of whether there is a rule in place to deal with it.

Leading means letting people see the big picture, letting them dream, and empowering them to achieve far more than they would otherwise be able to do by instilling values and insisting they be followed.

And that takes courage.

What questions should directors and board members -- and corporate leaders -- ask themselves?

They need to ask and answer three questions about what principles-based leadership entails.

First: how do we, as leaders, encourage the highest standards of business conduct and personal judgment? In other words, how do we instill a spirit of integrity that insists the most important of all principles is simply “doing the right thing”?

Well, to me, the answer is that you must understand that following principles does not mean you have permission to break the rules. A principles-based system means that future rules will not have to be as detailed, as numerous, or as onerous as the ones that currently exist.

But in the meantime, following the existing rules allows you to apply principles when dealing with whatever the future holds.

The second question: how do we deal with the inevitable skepticism of our lawyers and regulators who want us to pay more attention to what the past requires than what the future promises? In other words: how do we lead when all of us are on a short leash?

To me, true leaders lead by example. You create the right environment; an environment where people do the right thing simply because it’s the right thing to do.

And the third question: how do we encourage others to go beyond where we, and they, are today?

My answer is that it’s critical -- absolutely critical -- to think long-term rather than short-term. Encourage people to dream and to imagine even if our markets demand immediate results and even if it means trying things that don’t work the first time. New ideas might not produce tangible results in the short-term, but that doesn’t mean that they’re not good ideas.

Listening is also essential. Listen to what people are not telling you, not just what you’re being told. And realize that as a leader, you are the beginning rather than the end of the process.

Also, at some point, instead of approaching the green on the next hole you have to allow someone else to play through. In other words, take responsibility for developing the next generation of leaders in your organization.

I believe that the next great business leaders will understand that leadership is about setting the right tone. It’s also about encouraging an organization to implement principles rather than dictating a set of rules. And perhaps most importantly it’s setting the right expectations and the right environment for people to enjoy their work and their lives.

Dennis M. Nally is the chairman and senior partner of the US Firm of PricewaterhouseCoopers LLP.