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The 7 Reasons CEOs Fail
by Jacqueline Moore
So you’re going to be chief executive one day.
But once you’ve got there, how are you going to hang on to your job?
Because the bad news is there have been many high-profile failures in recent months and years.
The good news is that it IS possible to learn from those mistakes.
This is leadership training from the real world, not the ivory tower. Are you ready?
I can reveal to you now that there are seven main reasons CEOs fail and I want you to learn from these failings. I don’t want you to make the same mistakes.
Now some of the mistakes and failures may seem obvious - keeping an eye on the financial results, for instance, or watching for backstabbers in the boardroom. But they are still dangerous. So I urge you to prepare so you can meet them head on.
Interestingly, some dangers are more subtle - the changing fashions in leadership style, for example, may mean that one day your leadership style just doesn’t fit any more. (You are the weakest link. Goodbye.)
So, here are the seven main reasons chief executives lose their jobs - read them twice. I’ve also prepared some hints for avoiding the same fate. Read these THREE times.Why CEOs fail:
1) They don’t keep the bottom line up.
When it comes to the finances, the buck stops with the chief executive. You’ll get fired if the numbers don’t add up. Count on it.
One year on from the start of the global credit crunch, the bodies of several high-profile victims lie in its wake. Among them is Martin Sullivan of American International Group (AIG), who resigned after $30bn in writedowns and losses at the insurance group. AIG said Mr Sullivan had resigned for “good reason”.
Then there is Chuck Prince, chairman and chief executive of Citigroup until November 2007, who had boasted: “It’s all about: are you growing the bottom line? That is the proof of the pudding. And I’m perfectly prepared to be judged by that.” He was, and he lost his job when Citigroup after revealed $11bn in mortgage-related losses.
What you can do
So what can you do to keep financial performance up? Well, as CEO you must constantly strive to motivate the leadership team. But to do what? You must ensure that your top leaders spend most of their time and energy motivating the rest of the business to higher levels of performance. Only the front line is out there doing the business and closing the deals that generate the revenue.
This is a hard business case for teaching your top leadership team how to motivate others. This is your strongest lever as CEO, unless you’re out there closing all the big deals yourself. (And do you have that kind of time? Probably not.)
So make sure you get great leadership development programmes in place that explicitly focus on how to motivate other people to higher levels of performance.
Looking at how you reward your top team can also help. At Citigroup, Vikram Pandit, Chuck Prince’s successor as chief executive, plans to overhaul the bonus system for top managers: he aims to increase co-operation and minimize infighting among the different divisions of the group. A Citigroup executive said: “We have to put a premium on partnership-like behaviour.”
2) They don’t communicate in the bad times.
Communication is essential. And especially in the bad times. Let me explain.
While a dip in profits can often be weathered, when a profits announcement is mishandled, you will quickly lose the confidence of your investors, the board, and the employees. The pressure to go is impossible to resist.
If you remember that communication is key then you understand that you can’t dodge the bad news. But you also have to make sure you give bad news in the right way. Because when you get it wrong, the impact is fatal.
The current credit crunch is threatening the future of Jean-Paul Votron, chief executive of Fortis, the Belgo-Dutch financial services group. But it’s not just the group’s financial position that has made Votron’s position vulnerable.
Shareholders are particularly angry that they were told earlier in the year that their dividend was safe and the company had no reason to raise fresh capital. Only a couple of months later, the company said it would cancel the interim dividend and issue €1.5bn of new stock.
The Dutch association of small shareholders was alarmed by the failure in communication. “Our most pressing concern,” it said, “is the information between April and the end of June - what exactly happened at Fortis to make them change their position so drastically.”
What you can do
In contrast, let’s look at what Samsung, the South Korean technology giant, did when it suffered a 52 per cent first-quarter profits fall one year. It turned the fall into good news. “The comparable figures were so good last year and this year’s business environment is not favourable, especially because of high oil prices and the strong won. Taking all these [factors] into account, we had good results,” the company said - and many stock analysts were convinced.
So work hard to explain what has happened and help people see the strategy is coherent and credible. A good explanation is worth gold to you.
You can also make sure you have great media training. The media can be influential at times like this and you need to know their agenda. Find out before it’s too late.
3) They’re first against the wall in the investor revolution.
These days, more investors are taking an active role in companies whose shares they own - and you’ll get the chop if they decide you’re not doing enough to boost their money.
Taking one example from recent history, Michael Eisner of the Walt Disney Company learnt the hard way what happens when you lose shareholder support. After 18 years at the top of the company, Eisner was found wanting by 43 per cent of shareholders at the US media group’s annual meeting in 2004. They withheld their support for his reappointment as both chief executive and chairman, and Eisner had to resign as chairman. Not enough for the shareholders. He had to leave the CEO role early, too.
What you can do
You can help to reassure investors by having non-executive directors on the board, even if you don’t have to. It also helps to keep the non-executive directors fully in the loop on your communications and your strategy.
Non-execs won’t make your life easy - independent directors are increasingly holding executives to account. But they are the single most important thing to prove you and your board have the shareholders’ best interests at heart.
4) They lose the boardroom battle.
ABB, the Swiss-Swedish engineering group, amazed investors when it announced the departure of Fred Kindle, its respected chief executive, after “irreconcilable differences about how to lead the company”. Kindle had enjoyed both personal success - being named Swiss Entrepreneur of the Year a few months earlier - and professional triumph, sorting out ABB’s big asbestos litigation problems in the US, improving group performance, and achieving a successful restructuring.
Investors concluded that Kindle didn’t get on with the chairman, and he paid the ultimate price.
What you can do
Some leaders seek to avoid disagreement by surrounding themselves with friends. But this can backfire. By excluding critics from the boardroom, you may set them loose to undermine your position. So there needs to be room for all views within the boardroom - and you need particularly to listen to those who disagree with you.
Make sure you can have a good fight with the board. Hire a high-level facilitator to get your issues out in the open as much as you can. The time to do this is in the easy times. When the going gets tough, it’s too late.
5) They fall for merger mania.
When Carly Fiorina lost her job as CEO at Hewlett-Packard, the computer-maker, in 2005, a failed merger was largely to blame. She had made merger with Compaq such a key part of her strategy, and fought so hard for it, that she became vulnerable. When the merger didn’t push profits up, she took the blame.
Similarly, investors were surprised when the CEO of Kuoni, the premium Swiss travel group, quit at the end of 2007. Armin Meier’s shock move followed his company’s failed merger with First Choice of the UK, a collapse that prompted boardroom ructions and the resignation of its chairman.
What you can do
Recognize that few mergers work instantly. Make sure you manage the expectations of all the players - keep them realistic. Your job is to broadcast as much news about the ongoing success as possible. Stress any and every success the merger has. Promote any innovation or new market entry, even if these haven’t yet fed through to the bottom line. And when they do, shout it from the rooftops.
You must keep everyone - board members, investors, employees - informed of the long-term prospects for the merged company, and hold your nerve.
6) They forget the damage media pressure can cause.
Sometimes CEOs become victims of a media campaign. Investors are stirred up by journalists’ attacks on issues such as ‘fat cat’ salaries, and your actual business performance becomes irrelevant.
One classic example is Gerald Ratner, who headed the Ratner jewellery chain in the UK. At an Institute of Directors meeting he described one of his company’s sherry decanters as ‘crap’. From then on, every article about him repeated this story. The company’s share price sank. He resigned.
What you can do
Don’t forget your wider audience. In Ratner’s case, the audience comprised not only the business community but also reporters. If handling the media doesn’t come naturally, there are skills you can learn to promote your business and limit damage.
If you haven’t already put yourself through a ‘handling the media’ programme, do it now. Better still, take the whole board.
7) They don’t change their leadership style.
There is a fashion in leaders, just as there is in clothing. This season, the diplomatic leader is in and the autocrat is out. If you need proof, look at the appointment of Sir Howard Stringer as chairman and chief executive at Sony, the Japanese media conglomerate. Words used to describe Sir Howard and his style include ‘willing to chat genially’, ‘humour’, ‘charm’, ‘rejuvenating’, ‘persuading’.
In contrast, Carly Fiorina was criticized for her imperious style when she was removed as head of HP.
What you can do
Few CEOs pander to fashion. But frankly it’s always useful to be known as a CEO who listens and learns. Strength and decisiveness are important, yes, but in the bad times it’s the way you yourself can learn and change that can save your neck. And - importantly - do people actually believe you can listen and learn? (You can’t fake this.)
An imperious style may work in certain companies at certain times, but a leader who truly listens to peers, employees, investors and customers has the advantage. And keeps her job.
8) They are economical with the truth.
Let me add a final mistake CEOs make, as a bonus.
Now ‘be more than honest’ might seem like a no-brainer as a piece of advice. The shock waves caused by fraudulent activities at Enron and WorldCom are still being felt around the world. But an action doesn’t have to be criminal to result in a leader’s downfall. The mere suggestion that the whole truth wasn’t revealed, or that there was a cover-up, can do tremendous damage.
At Royal Dutch/Shell, the concealment of a gap in the oil giant’s oil reserves led eventually to the resignation of chairman Sir Philip Watts. And even though the business still performs dramatically well, Sir Philip had to go.
At a time when corporate governance is such a hot issue, CEOs must be careful not only to act with complete honesty, but also to be seen to act with complete honesty.
What you can do
If it’s not clear what you ought to do, ask yourself whether you would be happy for your actions to be reported fully in the financial press. And talk to your fellow directors and staff: make sure they’re asking themselves the same question.
When in doubt, play the integrity card and tell it like it is. Even in the event of your going, your next role will be easier to come by and actually your integrity will stand you in good stead.
Know how to communicate with all your key stakeholders
Well, that’s it for the key reasons CEOs fail. It boils down to having clear channels of communication and clear direction. This is a hard business case for making sure you know and understand how you come across as a CEO. Hire someone who can work with you to communicate in the good times and the bad.
Your job depends on it.
Many more articles in Executive Performance in The CEO Refresher Archives