Failure: The Dreaded Word in CEOs' Lexicon
by Jahna SR

It is common to attribute business failure to the CEO. Predictably, he is replaced and the task of bringing back the lost glory is thrust upon the new CEO. While it is a painstaking and highly expensive process, changing the chief executive seems to be the obvious repercussion of a company's troubles.

If numbers are any indication, a study by Chicago, US, based Challenger, Gray & Christmas Inc., an executive search firm, revealed that about 451 CEOs had departed from their jobs during the period from August 1999 to February 2000. Though the firm did not specify the causes, one can be sure that a lot of the exits were prompted by the company's failure to meet Wall Street expectations. Because the management's poor performance is reflected in the company's dismal performance, the blame rests on the CEO, who heads the management. So, why do CEOs fail?

There may be several reasons for the failure of these otherwise successful and capable people. A CEO from a small company may disappoint in a large one, while a large-company CEO may stumble in a small company. Then again there are CEOs who have risen through the ranks and fail because they antagonize their boards. Worse still, the paucity of execution and indecision can ruin a CEO beyond recovery. Execution may not be the only cause of CEO downfall; a defective strategy or the unwillingness to face market reality, could also bring about the doom. Just as a great strategy and a seamless vision is of no good unless executed, a bad strategy even if executed impeccably would not lead one to gold.

According to George A Miller, Harvard Psychologist, the human mind cannot deal with more than seven units at a time. In the business context, it means that group decision-making performance falls sharply as the group size grows beyond six. If an organization is considered as a group, its complexities multiply as it grows. An organization starts as a small group. As it grows, it has to evolve into an array of small groups and not into a bigger one. Moreover, because the structures or processes suited to a smaller company may not fit a bigger one and vice versa, they have to be adapted to the changes that come with the company's growth. And CEOs, as leaders of the group, accustomed to working with a particular structure or process fail if they don't recognize and adapt to these critical changes in the organizational setup.

Size 'matters'

In a small company, there is little specialization; members are few who work by consensus and share a feeling of mutual support; decisions are made fast, objectives are clear and communication unambiguous. As the company grows, new people are added and jobs are delegated. The group which the company started with feels threatened. The group members feel that the new people are trying to do their job. They can't come to terms with the fact that they no longer wear all hats; there are people for each job. At this juncture, some key discontented employees leave, some redouble their efforts and start working harder. Few others feel betrayed and retract into shells; fewer still would adjust.

Such a stage is critical for a leader's success. A CEO, if he is insensate, may consider his people as being ungrateful and will withdraw. A perceptive CEO, in contrast, will intensify his efforts to communicate. Both will fail. Researchers at Booz, Allen and Hamilton have established that under such circumstances, the CEO must gradually give up consensus-based decision-making and assume the role of a chief, guiding and motivating his group.

The key to success, in growth companies, lies in having a small-company environment with big-company resources. In fact, that's just what Jack Welch, the most successful CEO of our times, has created in GE. Fortune puts it aptly, "Indeed, the decades have failed to diminish for Welch the potency of combining big-company might with small-company nimbleness. Welch has been preoccupied with harnessing the brute strength of bigness while ridding GE of big-company paralysis."

'Small' trouble

It is a totally different ball game if a CEO from a large company is hired to head a smaller one. This has become quite a trend in today's tech era. Many CEOs from big companies are hired to head startups. Such a leadership challenge is also typical of spun off divisions. These highly capable CEOs, from large corporations, often are alien to consensus-based decision-making. They are so used to delegation that they overlook the need for consensus. Edward F. Tuck and Timothy Earle of Booz, Allen and Hamilton, in their article- Why CEO's Succeed (and why they Fail): Hunters and Gatherers in the Corporate Life, put it thus, "In the absence of knowledge, people do the things that have worked for them in the past, and when they fail to work, simply do the same things more intensively, like a tourist in a foreign country who just shouts louder if he is not understood." They say that these familiar failure modes can be avoided if the CEO and the company's employees understand and conform to the deep structure of their organization. They also point out that many failures of companies and their CEO's can be avoided by setting the goal to have the training to understand the differences between the organization he is entering and the one he is leaving.

The problem with 'climb up the ladder' CEOs

CEOs who have risen through the ranks sometimes fail to realize that their role has fundamentally changed. They are surprised when faced with the need to immediately lead the board. If they have always given or received orders; they have always been told what to do, or have told others what to do, they may consider the board as their new boss, a part of the organization that they must supervise. If they are told that the board of directors is there to offer guidance and to provide inter corporate information; and that it cannot solve problems; it can only approve or disapprove courses of action suggested by its leader, they find it incomprehensible.

Studies on the psyche of the board have indicated that though the CEO is the natural leader of the board, the outside board members strongly assert their equality. The CEO must work through consensus because the outside members do not openly acknowledge the CEOs leadership role. Research also indicates that if the chief executive refuses to lead, then the CEO and board will flounder or another individual member will assume leadership. Board members expect the CEO to be their leader and will treat him or her as such until they decide to fire the person.

The above-sighted failure modes reinforce the fact that successful management techniques are fundamentally different for companies above and below a critical size. Techniques that succeed in a company above the critical size will fail below it, and vice versa. The comparisons also explain why CEOs who are successful as division or subsidiary managers in large companies are unable to run independent companies. The solution to the problem may lie in identifying the right fit between the organization and the leadership.

The problem of the "fit"

Each stage in a company's life cycle has an analogy in the leadership style. The perfect 'fit' can be achieved by matching the stage of the life cycle with the type of leadership. A company in its infancy needs a visionary leader, an entrepreneur, and a risk-buff. He should be similar to a Prophet in having a foresight; he should be a futurist who shows the path and preaches it. He must be a creative person who supports a new system of beliefs and principles; he should be an innovator who believes in changing the status quo. (Figure 1)

As the company grows, a more aggressive leader is needed. This leader should be more like a barbarian, a capriccio, who attacks the markets and garners as much market share as he can lay his hands on. He can be ruthless with savage instincts and can be quite impulsive, making decisions off the cuff. With further growth and market share, the need for a builder/ explorer CEO arises. This leader is often a team builder and assigns tasks to well organized teams. As the company nears maturity, it has to find new markets - it has to explore and, spread its wings. And for it to expand its realm, the leader should be an acquirer, assimilating resources, partnering and strategizing for new market entry.

Figure 1

The next stage in a company's life cycle has to be led by an administrator who deals out, dispenses tasks and manages by direct supervision. He paves way for a Bureaucrat who governs through carefully laid rules and systems. He believes in strict conformance to the rules and controls the operations or arrangement of the company through them.

Next comes the Synergist who tries to optimize the incumbent systems and processes to suit the new order of things. He stretches the team, the culture and existing systems to adapt to the changing environment. The Emissary who is the best representative of the organization follows him. When team leaders become Emissaries, the company may succeed or fail and it is time for a culture change, if performance declines. And if the emissary sets new paths, he becomes a prophet and the cycle starts again. If he doesn't, then a change agent, who is capable of a turnaround, is required or in cases where the decline is sharp, a sell off or bankruptcy expert is needed.

While the Futurist, Capriccio and Developer follow individual approach and develop systems, the Administrator and Bureaucrat follow a systems approach and are numbers and tact oriented. When systems can't take further pressure, team approach - reflected in the Synergist, has to take over.

The leadership styles are never constant; they evolve and adapt with the leader. So, each time the organization makes the transition to the next stage in its life cycle, it doesn't need a leadership change. Rather a leadership style change is warranted. A CEO can well adapt his/her style to suit the requirements of the organizations. And, leaders who don't adapt, fail.

Plan, but also act!

So far we have discussed the problems associated with the structure of the organization and how leadership style has to "fit" the organizational stage. These may sometimes be beyond the CEOs control. But there are things, which are very much in the CEOs control, such as strategic planning and execution.

Most CEOs are crippled by indecisiveness, which leads to bad execution and not delivering on commitments. A 1999 Fortune cover story of prominent CEO failures concluded that the emphasis placed on strategy and vision created a mistaken belief that the right strategy was all that was needed to succeed. "In majority of cases ... 70 percent of time, the real problem isn't bad strategy but bad execution" asserted the authors.

The author of the Fortune Story, Ram Charan, Harvard Business School professor, says that the common form of failure is the failure to put the right people in the right jobs - and the related failure to fix people problems in time. Particularly, he says, "Failed CEOs are often unable to deal with a few key subordinates whose sustained poor performance deeply harms the company." These CEOs are victimized by what Charan calls "intellectual seduction"- a mindset that places too heavy an emphasis on the talent of the subordinate, so much so that the possibility of failure is negated. The issue may seem trivial but the fact is that, under such seduction, strong CEOs, otherwise decisive, become blind to this fatal flaw.

This is typical of CEOs who carefully select their subordinates and more so in the case of the COO. CEOs realize that execution or operations are highly important and assign the task to people who they feel are capable. Sometimes it so happens that they recognize the problem but are hesitant to fire the subordinate for fear of hearsay or otherwise. (Especially, if the subordinate happens to be the successor). But if the subordinate is failing, even a slight delay in action can worsen the problem considerably. Jeff Skilling, for instance, was the 'Star' of Enron. Kenneth Lay pulled him from Mckinsey and appointed him as the COO, later elevating him to the CEOs post. Now, Enron has tumbled largely because of Skilling and Lay's blind trust in him.

The best CEOs, on the other hand, never hesitate to fire when they must, but the larger point is that they're deeply interested in people far more so than failed CEOs are. GE's Jack Welch, for instance, has the right people in the right jobs, he can leave them there and things tend to get better, not worse. Right people at the right place ensure that execution is automatically taken care of. Few would dispute that Welch is seen as a demanding, no-nonsense executive who arouses a mix of awe and fear. Welch sets precise performance targets and monitors them throughout the year. Welch's leadership style is continually reinforced up and down the organization. He exhibits the most important trait of great leaders - he holds people accountable, always.

So what makes successful leaders? The following figures (Figure 2a and 2b) illustrate the differences between best leaders and leaders in trouble. The chart is based on a study conducted in the US by Hagberg Consulting Group. According to the study, visionary leadership, effective execution and team and consensus building abilities characterize best leaders. Best CEOs score higher on these attributes over their troubled counterparts.

Figure 2a

Figure 2b

The CEO, COO equation

When it comes to the issue of COO as the successor, a lot of caution has to be exercised. The COO taking over the reins of the company has become quite a trend these days. But how many face up to the challenge?

Doug Ivester , who was the hand-picked successor to Roberto Goizueta, lasted only a year. Is it because he lacked talent? The resounding answer is no! Ivester had worked along side Goizueta through Coke's record performance levels. The problem stems from the fact that the traits, skills and styles which make an effective COO are very different from those that make an effective CEO. The chief operating officers job is to generate sales and make profits - year after year (rather quarter after quarter.) The time horizon or decisions is shorter for the COO and thus his style tends to be more directive. On the contrary, CEOs have to think and plan long term, they must be big-picture visionaries who can come out with new and better ways to benefit their stakeholders - the investors, customers, suppliers and employees. As evident from the diagram, the two jobs are quite different having dissimilar implications; yet the COO typically succeeds the CEO in many companies. (Jeff Skilling was the COO before heading the now troubled Enron).

This may prove to be a grave mistake. Some COOs may possess the required leadership skills but many do not. And, since the stakes are high, CEOs better not risk it. They can instead smoothen their relationship with the COO to ensure meticulous implementation.

The diagram below (Figure 3) shows the relationship between strategy implementation and its effect on the company as well as defining the realms of the CEO and COO.

Figure 3

   
Implementation (COO)
 
Good
Bad
Strategy (CEO) Good
Companies Thrive
Companies Survive
Bad
Companies Die Slowly
Companies Die an Early Death

All things considered, we realize that when a CEO's reputation is high, outside observers tend to attribute the cause of a firm's performance to the CEO rather than to other factors in the environment. But the opposite effect of ascribing a stock market dip to the CEO rather than any number of structural factors is also apparent.

CEOs are highly capable individuals. They are efficient managers of execution, are team and consensus builders, and are futurists. They recognize changes and adapt to them, they rise to the challenge and lead their team to bravely tide over crises. But more importantly, CEOs are humans. And humans fail a lot. Successful CEOs are different from failed ones in that, they learn from their failures and thrive hard not to repeat their mistakes.

In retrospect, a comprehensive and exhaustive list of things to do to succeed:

  • Adapt and lead. Mold your leadership style to suit the organizational requirements.
  • Depart from excessive focus on day-to-day functions and not be unnecessarily trapped in detail. Never disregard the big picture.
  • Most importantly, hold people accountable.


Jahna SR heads JS Associates, a consultancy engaged in coaching executives based in Chennai, India. The firm also prepares fresh management graduates for undertaking corporate jobs. Jahna places heavy emphasis on people-orientation and believes that most organizational problems have their roots in people-problems, and these can be resolved by a free and fair talk with the concerned employees. She can be contacted at jahnasr@rediffmail.com.

Many more articles on Executive Performance in The CEO Refresher Archives

   


Copyright 2002 by Jahna SR. All rights reserved.

Current Issue - Archives - CEO Links - News - Conferences - Recommended Reading