Great leaders are celebrated for their judgment. But what is good judgment and how do the best leaders sustain it? It's not a matter of intellect or of the ability to make the right decision in an instant, but of character. Character provides the moral compass--it tells you what you must do. Then there's courage. It produces results, ensuring that you follow through on the decision you've made. No matter what processes you follow, no matter how hard you try, without character and courage, no one can clear the high bar that is judgment. You may luck into making some good decisions and sometimes obtain good results, but without character and courage, you will falter on the most difficult and most important questions.

Jim Hackett, the CEO of Steelcase (NYSE:SCS), the office furniture company, has spent much of his career thinking about what it means to be a leader who operates based on a clear set of values. He began to develop this way of thinking, he says, after a meeting with the hotelier Bill Marriott. The men met at a pivotal moment in Hackett's business career. He was 39 and had become president of Steelcase only six months earlier. Marriott, meanwhile, was then in his seventies and had been running the Marriott (NYSE:MAR) hotel empire for decades. Despite the gap in their ages, the two men had some things in common and they hit it off. "I was young, trying to change an old family business and he was old, trying to change an old family business," Hackett recalls.

Much of their conversation focused on values, with Marriott encouraging Hackett to build for himself and for his company a reputation of "unyielding integrity." On the plane trip back from Washington, D.C., to his home in Grand Rapids, Michigan, Hackett couldn't stop thinking about that conversation. A few months later, he gave a talk to his management team on the subject of integrity. It's important to develop these points of view within an organization before trouble occurs, Hackett says, and to ask your team, "How are we going to act when we get in trouble because I can guarantee you in business, you will."

Ten years after that meeting with Bill Marriott, Jim Hackett was faced with a business judgment that had far greater implications than he could have known at the time.

The issue was fire retardant. Steelcase had begun selling a new line of products, designing panels that could be used either for waist-high office cubicles or to cover floor-to-ceiling walls. Building managers embraced the product because it made their lives easier. Instead of buying, storing, and repairing two different products, they could use only one.

With a successful new product launched, what could possibly go wrong? As it turned out, Steelcase, which had a lot of experience in the cubicle business but none in the wall business, soon discovered that the rules governing fire standards for floor-to-ceiling walls were stricter than those for cubicles, and the product might not be up to the higher standards. When the first inkling of a problem arose, however, there was an impulse on the part of some people within the company to ignore it. "We had not had one damaged installation," Hackett recalls. "I was getting the crap beaten out of me by the analysts. Our customers even called us and said 'Oh, don't worry about it. What you're worried about--no one will ever have a problem." Despite these reassurances, Hackett sensed that this was a volatile situation, and one that required careful consideration. So he told his managers to look into it further.

As Steelcase executives began to focus on the problem, a numbers of rationales for inaction were developed. It was a new product after all, and there was no track record to suggest how customers would install it. Fire codes vary by municipality, so there was no one standard that Steelcase had to live up to. Nobody could say definitively just how fire-retardant would be fire-retardant enough or how far off the mark Steelcase's panels were. Within the company, some managers wondered if customers in places with stricter fire codes had already exchanged the panels for a more fire-retardant product.

Still, Hackett felt that if Steelcase's standard of unyielding integrity was to mean anything, he had to act. So he made the call to quietly recall the panels through Steelcase dealers and replace them with ones that met stricter fire codes. Implementing the decision was time consuming and expensive. Steelcase took a $40 million write-off. Along the way Hackett and all of his executives lost their annual performance bonuses.

Soon after, however, Hackett's decision was vindicated. One of Steelcase's customers for the surface panel product line was the Department of Defense. Panels with the added fire-retardant material were installed in the perimeter walls of the Pentagon, coincidentally in the part of the building that was destroyed on 9/11. After the attack, Hackett recalls, "it was determined, with all the jet fuel and fire, if the new fire-retardant material was not there, the fire would have spread in a far more disastrous outcome." Character and courage are the bedrock of good judgment, and Jim Hackett displayed them both in this instance.

Judgment is a complicated subject, of course. It is about more than decision making or having high standards. And it is too intertwined with luck and with the vicissitudes of history, too influenced by personal style, to pin down entirely. Sir William Osler, one of the fathers of modern medicine, ruefully lamented at the end of the 19th century: "If there were not so much variability among individuals, medicine would be a science, not an art." The same can be said for the study of leadership.

But one thing is striking: When you ask people, as an exercise, to make a list of bad decisions they've made in their lives, an alarming number of them will include a statement to the effect of "I really knew in my gut what I should do, but I didn't do it." Having a set of standards or values isn't enough. Even character isn't enough. Having the courage to act on your standards is an integral part of the bundle of what it takes to exercise good judgment and to be a good leader.

Adapted with permission from the book Judgment: How Winning Leaders Make Great Calls, to be published this month by Portfolio/Penguin © 2007.