HIDDEN TRUTHS WHATLEADERSNEED
TOHEARBUTARE RARELYTOLD
DavidFubini
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Contents
Thisbookisdividedinto15chaptersthat,collectively,delineateimportantlearningthatallnewCEOsandleadersmust understand.Thetitleofeachchaptercompletesthefollowing sentences.
NewCEOsmustlearnhowto:
1. ArrivePrepared—newCEOsmusthittheground runningwithagameplanandacoreteam;timeis nowoftheessence,andboardpatienceislimited.1
2. AvoidHalf-TruthsandMisperceptions—thereality forCEOsistheyarerarelytoldthewholetruthby theirteams:Itarriveswithshadesofmeaningand manymisperceptionsandpoliticalposturing.23
3. AdoptaConstituentConsciousness—newCEOs areeasilyoverwhelmedbythesheervolume, breadth,andintensityoftheconstituenciesthey mustnowpersonallyhandle.49
4. StartChangeManagementbyChangingthe Management—toleadinnewdirectionsandcreate momentumforchangemeansyoubeststartby changingkeyexecutives.59
5. AvoidBecomingIsolated—beingaCEOsisalonely job—mostarecutofffrompriorsupportteamsand colleagues—fartoofewareavailabletodeliver unvarnishedadvice.73
6. ManagetheMentorshipConundrum—CEOsneed tomanagetheconflictbetweentheirdesiretobuild ateamthatfollowstheiragendaandtheexpectation oftheboardofdirectorsthattheCEOwilldevelopa successorwhoisabletocreatetheirown leadershipagenda.89
7. UseRoleModelingasaChangeTool—howleaders act,speak,allocatetheirtime,andsetprioritiesare someofthemosteffectiveandleastusedCEO managementpractices.99
8. UsePsychicRewards,NotJustMonetaryOnes— monetaryawardshavenaturallimits,soit’sbetter touseothermeaningfulincentivesthatappealto people’ssenseofselfandbelongingtosustain change.115
9. GetonBoardwithYourBoard—theCEO-board relationshipisoneofthemostcomplicatedand challengingofallCEOsrelationships.MostCEOs underinvestinthisrelationship—oftentotheir detriment.127
10. DoGoodWhileDoingWell—CEOsmustnow balancetheneedsofshareholdersandstakeholders; thisisatrickybalancetomaintainandrealaction ishard.143
11. EmbracetheValueandRealityofDiversity— leadersneedtodeeplyembracethelong-termvalue ofdiversity,committooutsizedefforts,welcome demandingconstituencies,andcommittothe personalleadershipthisgoalrequires—allwhile meetingshorttermcommitments.157
12. KnowWhentoLeave—toofewleadersare sufficientlyself-awaretorecognizewhenthey haveplateauedandneedtodepart.165
13. PlanaPost-LeadershipLife—CEOsshouldn’tdrift thoughtlesslyornaïvelyintothenextphaseoftheir livesbutcreateapurposefulstrategypriortotheir exit.177
14. StriveforAuthenticity—beingoneselfrather thanactingthepartiskeytobeingasuccessful leader.193
15. SeekTruthsintheFuture—Whythetruthsthatare importanttodaywillbeevenmorerelevant tomorrow.205
Foreword
Astheleaderoftwocompanies—DanaherandGeneral Electric—I’velearnedthehiddentruthsaboutbeingaCEO thehardway.DavidFubinimakesiteasierforfutureleaders andCEOs.
InbetweenthesetwostintsasCEO,ItaughtattheHarvard BusinessSchool,whichiswhereIgottoknowDavid.We co-taughttheintroductorycoursesonOrganizationalBehavior andLeadership.Wealsojoinedtoteachsecond-yearstudents aboutthechallengeofexecutingstrategyandwehavetaught executivestogether.IalsolearnedmyowntruthaboutDavid: HeunderstandsCEOs;healsounderstandstherealityofthe jobandwhathappensbehindthecurtainoftheCEOrole.
I’lladmit,Ihaveacertainwarinesswhenitcomestomanagementconsultants.Ithinkitiscriticalforanorganization tobuildtheirowncapabilitiesanddeveloptheirowninsights tobeabletoaddressimportanttopics.Yet,thevalueofa third-party,impartialview,informedbythebestpracticeof otherscanbeenlighteningandhelpful.Suchisthecasewith David’sthreedecadesexperienceasamanagementconsultant
atMcKinsey,providinganinvaluablesourceforinsightsfor newleaders.DavidhastorntheveneerofftheroleofCEOtolet othersseetherealityofthedifficulttrade-offs,thechallenges ofday-to-daymanagement,andthehighsandlowsofthejob inamannerthatisilluminatingandbeneficialtootherCEOs andleaders.Inthisway,itisnotatraditionalmanagement consultant’sperspective.Thisisamorepersonalcounselor’s viewofthechallengesofbeingachosenCEOorleader.
David’sbeliefthatfewpeoplereallygraspwhatthistop leadershipjobentailsisrightonthemark.Hisconvictionthat knowingthe14hiddentruthscanbeahugehelptoleadersis equallyvalid.
IknowthisbecauseI’vewalkedit—andIwishIhadthese 14truthsinhandfromthestart.
AtDanaher,aglobalscienceandtechnologycompany,I establishedadecentralizedleadershipstyle,focusedmuch ofoureffortsonhiringandtraining,andimplementeda seriesofmeasuresthathelpedDanaherachieveagreatdealof success.AlthoughIwaspreparedforalotofwhatleadingthis companyinvolved,IdiscoveredthatthemomentIassumed theCEOrole,theclockwasticking—loudly.Theboardwanted tobesurethattheyhadmadetherightchoiceforthejob.Wall Streetanalystswereeagerlywatchingtoseewhatchanges we’dmake.Employees,suppliers,andotherstakeholders wereobservingandanalyzingmyeverymove.
Davidemphasizestheneedtoarriveprepared—thiswasa truththathithomeduringthoseinitialweeksandmonthson thejob.
Hisobservationaboutbeingcautiousaboutbecoming isolatedfromtherestoftheorganizationisimportant.CEOs arefacedwithmanybigdecisionswithhugeramifications, andtherearefewwhoshareintheconsequencesoftheresults ofthoseactions.Thatcanbeisolatingandsomewhatdifficult togetyourmindarounduntilitactuallyhappens.Isoughtto counterthischallengebybuildingateamaroundmetoget diverseviewpointsandarangeofperspectives.Ilearnedthe valueofseekingouttruthtellers,creatingaculturewhereyou encourageputtingboththegoodandthebadonthetable.
Youcan’tdothisfromtheCEO’sdesk;youhavetotravela lot,meetdirectlywiththoseclosesttoyourcustomers,and talkwithoutsiders,notjustinsiders.AsI’mfondofsaying, there’sahugebenefitfrom“noteatingoffthesamemenu.” ThisapproachwasoneofthehallmarksofmytimeatDanaher andwhatweareunderwaybuildingatGE.
CEOsoftendon’tknowwhatthey’regettinginto,even whentheyknowagreatdealaboutthebusinessesthatthey’re hiredtolead.AtGE,Iwasontheboardpriortomycolleagues turningtomeandaskingifIwouldconsidertakingthejobas chairmanandCEO.Davidremindedmethatwhenwewere teachingatHarvard,astudentaskedwhyIacceptedwhen IcouldhavejustrestedonmylaurelsearnedatDanaher. ItoldthestudentIwastooyoungnottowantthechallenge ofanotherleadershiproleand,perhapsmoreimportantly, thatIrelishedboththechallengeandtheopportunityto saveaniconicAmericancompany—onethatwasstartedby ThomasEdison.
Youworkhardtobepreparedforanewleadershiprole andyetit’sonlywhenyougetintheringthatyoureallyknow thefullscopeofthefight.Noonereallyunderstandsthefull nuanceofthesituation—theinevitableconstraintsontime toact,talentyouhaveinherited,andcapital,whichnever seemsenough.I’vealwaysbelievedthatorganizationsmust continuouslyworktoimproveanddrivechange,butchanging inthemidstofacrisissuchastheoneGEhasgonethroughis somethingelseentirely.There’stheexpression“Changingthe tiresonamovingtruck”thatisapplicable.Davidwritesabout theimportanceof“changingthemanagementasacriticalstep inmakingchangehappen,”andI’vehadtograpplewithalot ofthesechangesintalentinmytopteam.It’snevereasy,but it’snecessary.
IalsofoundDavid’sdiscussionofboardsenlighteningand alignedwithmyownexperiences.Havingservedonanumber ofboardsindifferentindustries,includingGE,T.RowePrice, andGlaxoSmithKline,Iknowhowchallengingitcanbefor first-timeCEOstodealwiththisnewtypeofoversight.Boards
canbequicktoprovideperspectivesandcritiquesdespitethe facttheymeetroughlysixtotentimesduringthecourseofa year.Plus,newCEOsmustnavigatethetransitionfromhaving onebosstonowhavingmany.Usingbaseballasananalogy, asIhavebeenbothaplayerandanowner,Icantellyouwith certaintya90-milefastballsureseemsalotfasterwhenyou’re inthebatter’sboxthanwhenyouareintheowner’sbox.
Atthesametime,IagreewithDavidthatifCEOsestablish truepartnershipswithboards,itcanbeanincrediblyvaluable relationship.Why?Becauseoftheircombineddiverseexperienceandwisdom,theirnetworksofvaluableexperts,and theirwillingnesstoprovidehonestfeedbackthatmaynotbe availablefromanyoneelse.
Andyes,humilitymatters—alot.Leadersneedtoremember,it’snotaboutyou.OneofmyfirstactionsatDanaherwas tostartthediscussionaboutmyeventualsuccessor.Theboard wassurprised—“Hey,wejustpromotedyou”—butthisisa crucialCEOtaskfortheenterprise’scontinuedsuccess.David correctlynoteshowimportantthisresponsibilityisforCEOs, aswellasknowingtherighttimetodepart.IleftDanaherwhen thecompanywasdoingwellandtheboardhadmultiplesuccessioncandidates.Iassesseditwastimefortheorganization tocontinuetochange—fornewleadershipwithafreshview. Ididn’thavetoleave,butIknewitwastime.
WhenDavidandIwereteachingtogetheratHarvard,we’d informaclassaboutsomethingthatappearedtoustobean obviousmanagerialtruismaboutleadership.We’dlaterask eachother,“Wouldn’tstudentshaveknownthis?”Butthey didn’t.Similarly,IlearnednottoassumethatbecauseIknow somethingaboutbeingaCEO,otherswouldknowitaswell.
Andthat’sthebeautyofthisbook.It’stheultimateinside baseballlookatbeingaCEO.WhatDavidknowsaboutthis challenging,fascinating,andattimesfrustratingjob,mostpeopledon’t.Untilyoureadthisterrificbook.Thenyou’llknow thetruths.
Preface
AsaconsultantatMcKinsey&Co.fornearly35years,Ihave helpedCEOsnavigatesomeofthemostdifficulttransitions andotherchallengestheyfaceonthejob.Thesedecisions centeredoncriticalissuessuchas:sellingpartoftheirown companyormergingwithanotherone;drasticallyreorganizingthewholeorganization,makingamassivestrategic shiftinthemarketplace,anddealingwiththedemandsof consumers,boards,andshareholders;andnavigatingthe non-marketforcesshapedbygovernment,demographics, andculturaltrends.Allofthesesituationsareenormously complicated,andthestakesarealwayshigh.Corporatelegacy, jobs,revenues,investments,careers,personalreputations, andshareholdervalueareontheline.Whiletherewardsof runningacompanyaregreat,therisksofthejobaresometimes evengreater.Afterthose35years,Icameawayconvincedof thistruth:BeingaCEOisasingularlytoughjob,andtobe successful,theseleadersneedhelptoknownotonlyabout basicleadershipprinciplesbutalsothe“hiddentruths”that arepartoftherole’sdailychallenges.Toooften,thesetruths arethedifferencebetweensuccessandfailure.
SinceretiringasaseniorpartneratMcKinseytoteachat HarvardBusinessSchool,I’vebecomefamiliarwiththeadvice offeredinbusinessbooksandarticlestohelpleaders.Imust admitthatmanyoftheseworkshaveleftmeabitdisappointed. Whiletheirauthorsofferinterestinginsights,theydosofroma vantagepointthatdoesn’tseemtoreflecttherealityandpracticalaspectsofCEOs’dailylives—livesthatIobservedfirsthand. Iwasacutelyawareoftheseaspects—themultipleagendas ofseniorstaff,theunknownsimbeddedinmanysituations, thevarietyandconflictingdesiresofvariousstakeholders,the intensestressofthejob—andtheywereoftenmissingfrom books,articles,andformerCEOs’loftyspeeches.Theirauthors frequentlywroteasifleaders(orleadershipproblems)existed withinanidealbusinessstate,whereproblemswereanalyzed dispassionatelyandsolutionsensuedlogically.
Here’sanothercrucialtruththattheseauthorsmissabout thechallengesbusinessleaderscontinuallyface:CEOsand theirexecutiveteams,nomatterhowaccomplished,have veryhumanreactionstobeinginhigh-stakessituations. Whenthathumannatureisputunderconsistentpressure inacontextthatdemandsclearandquickdecision-making, poorprocessesandbadhabitsoftenresult.I’vewitnessed countlesssituationsinwhichverysmartbusinesspeoplemade awfuldecisionsbecauseoftheemotional,interpersonal,and communicationsmessesthey’vemanagedtomake.
HiddenTruths:Whatleadersneedtohearbutarerarelytold offersapproachesandframeworkstodealeffectivelywith therealbusinessworldofhumanbeingsunderpressure. ItassumesthatCEOshaveweaknessesandfoiblescommon toallofuswhilealsounderstandingthatthesituationsCEOs faceareuncommonandextraordinary.Indeed,asofthis writing,weareinthemidstofaworldwidepandemicanda newsocialdialogueintheUSaroundracialdisparity,which hasgeneratedarangeofuncommonandextraordinaryissues thatareposingdauntingchallengestoCEOs.Nodoubt,more suchissueswillariseinthecomingmonthsandyears.
Asthetitleofthebooksuggests,CEOsareoftensurprised bythestarkrealityoftheirroles—surprisedintheirinitial weeksandmonthsonthejobaswellasyearslater.CEOs mayenterthejobwithhighexpectations,buttheyoften becomeoverwhelmedbynewcircumstances,findingthemselvessurprisinglyisolatedfromtherestoftheorganization andlearningthatthedataandinformationdeliveredfrom seniorleadershipoftenlacksclarityortransparency—orboth. ManyCEOsalsostruggletoinitiateorganizationalchanges. Thisstrugglecanoccurinarecentlyinheritedorganization wheretheiroften-complicatedrelationshipwithanewboard increasesthesetransitionchallenges.Itcanalsooccurwhen CEOshavebeenonthejobforasustainedperiodoftimeand theygrapplewitharapidlyevolvingcompetitivelandscape,a moreengagedboard,andanentrenchedcultureatoddswith newstrategicdirection.
Throughthemanycasestudiesandstoriesincludedin thisbook,readerswillseethewidevarietyofproblemsthat arisewhenCEOs don’t takecaretohearthetruthand don’t embracetherealityoftheirnewroles.ToooftennewCEOs thinkthescholarlyarticlesandframeworksandflowcharts thatbusinessandacademictextsoutlinearewhattheyneedto master.Therealtyisfarmorechallenging.
Inwritingthisbook,I’mforcingmyselftorelivesome ofthedifficultsituationsIsawduringmycareerandassess whattookplace—themistakesmade,themistakesthatmight havebeenavoided—withthebenefitofhindsight.Without therestrictionsinherentintheconsultant-clientrelationship, Icanassesswithcompletefreedom.Butfarmoreimportantly, writingabookcreatessomedistancefrom theheatofthe moment (formeandforCEOsandleadersreadingthis),when emotionsrunhighandreasonissometimesinshortsupply. Usingthatdistance,Ihopetoimprovetheperformanceof currentandfutureleadersbyprovidinghelpfulperspectives, processes,andmindsetsthatcanbeemployed before their leadershipis(almostinevitably)pushedtoacrisismoment.
JustbecauseIamfreedfromconsultant-clientrestrictions doesn’tmeanI’mabletonameeverynameintheexamples mentionedinthisbook.IwillidentifyCEOsandotherleaderswhenthey’vegivenmepermissiontodoso,ortheirstories areamatterofpublicrecord,orwhentheyhaveappeared aspartofHarvardBusinessSchoolcasestudies.Ihavealso reliedonmyownpersonalinteractionswithsomeclients thatIdonameastheyareinthesomewhatdistantpastbut whoselessonsremainrelevanttotoday’schallenges.Insome instances,however,Iwilldisguiseidentitiesbecauseofthe sensitivityofthematerial.
ThisbookisparticularlyfocusedonCEOsbecausethese leadersfacesituationsthatareparticulartotheoffice.Keepin mindthatwhenpeoplebecomeCEOs,theyfacetwotransitionsatonce:dealingwiththeirownpersonaladjustmentstoa verynewrole,whilesimultaneouslyhelpingtheorganizations theyrunadjusttonewleadership.Thisisespeciallydaunting forfirst-timeCEOs,eveniftheyhaveenjoyedenormous successinotherexecutivepositions.TheCEOoccupiesarole thatislikenootherinacompany,makingthestakes,the responsibilities,andeventhemechanicsofdecision-making trulynovel.Thehighlydistinctivenatureofthejobcanbe challengingnotonlyduringtheearlypartoftheirtenure,but alsoforyearsafterward.
Today,mostCEOsneedtobeawareoftherealitiesofthe job.Theyneedresourcesthataddressissuesthatarecomplex andconfusingandforwhichtheirpreviouspositionshaven’t preparedthem.TheyneedtheinsightsofCEOswhohavegone beforethem,whospeakhonestlyandsometimesprovocatively aboutthechallengestheymet—andinsomeinstances,didn’t meet.Ihopethisbookcan,atleastinpart,satisfytheseneeds.
ArrivePrepared
EverydayasnewCEOisarudeawakening.Just-arrivedleadersofanorganization,inarolethattheyhaveaspiredtoand workeddiligentlyforyearstoachieve,soonfacethestarkrealitythatthehighlydevelopedskillsthatpositionedthemforthis leadershiproleareoflittlevaluetotheirorganizationalsuccess.Fromthefirstfewweeksintheroletofiveyearsdown theline,thedemandsofthepositionarevastlydifferentfrom theoperationalleadershipskillsthatproducedtherecordof achievementallowingforadvancementtoaCEOrole.Thisis surprisingand,formany,shocking—giventhecomplexitythat comeswithbeingamodern-dayCEO.
Thisharshrealityisevenmorepronouncedsincethemost immediatechallengeforallnewCEOs,betheyoutsidersor promotedinsiders,istoarriveprepared.
TheCEO’sjobhasbecomeexceedinglymorechallenging thanevenintherecentpast.ManyCEOsdon’trealizehow theymustpreparethemselvesforthechallengeahead.The intensityoftheleadershipchallenge,thetsunamiofissuesand constituentstobeaddressed,andthelimitedtimeandhigh expectationsforimmediateresultsarerarelyfullyanticipated bynewleaders.Whiletheymaybeawareofthestrategic challenge,fewanticipatethetalentdeficits,thecompetitive
marketdemands,legalnightmares,regulatorygauntlets,and financialconundrumsthatareintegraltotheposition.
Intoday’smarketenvironment,theCEO’sjobisn’tas simpleasleadinganorganizationtodeliverareturntoshareholdersexceedingthecostofcapital.NowCEOsmustaddress avastarrayofconfoundingissues,balancingmanymanagerialtrade-offs:time(toact),talent(toexecute),andcapital (tofinance).NewCEOsareexpectedtobeabletorespond immediatelytoavastnumberofwide-rangingquestionsthat include:
•Howdoyouplantodelivershort-termresultswithoutsacrificinglong-termsustainability?
•Doesyourexistingorganizationhavetherightstructure, systems,andtalenttodelivertheseresults?
•Isyourbalancesheetandcapitalstructuresufficientto fundtheprogramsyouanticipateneedingtolaunch?
•Whatdoyouwanttosaytothevastarrayofcustomers whowanttoknowwhatyouplantochangeandhow quicklyyou’regoingtochangetheproductsandservices thataffecttheirbusinessesandinterests?
•Howwellpositionedareyouwithinyourcommunityand withthepoliticalleadersthatallbelievetheyhaveastake inthedecisionsthatyouareabouttomake?
•Howdoyouplantopositionyourdiversecompanyto analystswhowanttocategorizeyourcompanyintoneat segmentsthatalignwiththeirpredeterminedpositionsof value,growth,andsoforth?
•HowdoyourespondtoviralsocialmediapostsandTwittertrafficthathaveanuninformed,yetpubliclyinfluential impactoninternalandexternalcompanyaudiences?
•Howdoyougeneratecashflowtofundoperationsbutnot attractactivistswhosemodelstrackcashasanearlyindicationofavalueplay?
•Howdoyouensurecompliancewiththevastarrayofregulatoryagenciesalldictatingever-increasingnumbersof demands?
•Howcanyouremainsociallyconscious,giventhatitseems likelittletime,money,orenergyremainsfornecessary causes?
•Howdoyoukeepyourboardofdirectorshappyandmeet theexpectationstheyhadinhiringyou?
ConsiderarecentlyappointedCEO—let’scallhimJack. Hearrivesathislargeorganizationwithbigplansforhis upcomingtenure.Jackhaswaitedhiswholecareeractively planningandpositioninghimselfforthisleadershipopportunitytoarrive.Foryears,he’sthoughtaboutwhathewoulddo whenhewasincharge.Jackiseagertoputhisextensiveglobal managementexperiencetouse;heknowsthetechnological innovationsandoperationalmovesthathebelieveswillcreate aquantumleapinperformance.Givenhisextensiveexperience,Jackisdeterminedtoleadothersdifferentlyandmore effectivelythanthewayhehasbeenmanaged.Heisthrilled theboardhaselectedhim,andheisanxioustomeettheir loftyexpectations.
WhatJackdoesn’tknow,however,isthathisnewcompany isheadingintoahurricaneofissues:withinamonthofhis appointment,acombinationofacompetitor’sbreakthrough products,theweaknessofhisinheritedmanagementteam, thedemandsofthemultipleconstituentsseekinghistime andattention,andafailedacquisitionhasattractedanactivist investorwhoisquestioningthequalityofthecompany’s strategyandthereturnfromitsoperations.Jackisforced intofirefightingmode,scramblingtorespondreactivelyand quicklyrealizingthatheneverwasabletodeliveronhis carefullyplannedseriesoftechnicalandoperationplans.
Jack’sstoryisn’tunusual.Anunrelentingdemandfor fastturnarounds,improvedperformance,andfinancial
resultsiscommonplace.CEOsmustgrapplewithshareholder requirements,achanging,diversifyingworkforce,employees strivingforprofessionalandpersonallifebalance,andthe needforcommunityacceptance/service.Ratingagencies, buy-andsell-sideanalysts,theever-threateningpresenceof activists,andpreyingprivateequity(PE)firmsallratchetup theintensity.
Ontopofthat,CEOsareontheclock.Theynolonger havetheluxuryoftime,theabilitytowaitforthingstosort themselvesout.Inafast-changingenvironment,seconds count.CEOsneedasharpandcleardirectionshapedbya visionofthefutureofthecompany—andthepathtothat visionmustbetakenquickly.
Tomeetthesechallenges,CEOsdon’tjustneedtoarrive; theyneedtoarriveprepared.
ANEWANDDEMANDINGERA
Inthepast,CEOshadamuchdifferenteconomicclimatewith moreleisurelytimeframestoenactchange.Boardsofdirectors oftenhiredthemmainlybecauseoftheirdemonstratedpast talent,notnecessarilytheirdetailedfuturevision.Many newleaderswereexpectedtohaveareasonableamount oftime—oftenmonths—tofigureouthowthecompany reallyworkedandtodevelopaprescriptionforchange andbeginenactingmajornewinitiatives.Referredtoasa “honeymoonperiod,”thisinitialtimeframemightinvolve meetingindividuallywithexecutives,goingonroadshows tovisitfacilities,hosting“listeningtours”withmajorchannel participantsandcustomers,andgenerallyenjoyingaperiod ofreflectivethinking.Afterthehoneymoonended,CEOs couldpresentthoughtfulplansandapproachesinformedby thehomeworktheyhaddone.Thisishardlyeverthecase anymore.Now,traditionaltimeframesfornewCEOstoform ateam,diagnoseneededchanges,anddefineactionplans havebeendramaticallycompressed.Inthepast,turnarounds necessitatedbythepreviousCEO’sfailuresometimesrequired
thisacceleratedapproach.Now,evenanormaltransitionof leadershiprequiresdecisiveandspeedyactions.
CEOsareoftenshockedbythisdemandforimmediate action.Iftheyhaven’tdonetheirhomeworkorlackatheory inthecasethathelpsthemimplementchangeinconfusing, complexsituations,theymaywellfindthemselvesunableto act—andintoday’senvironment,inactionisalmostalways counterproductiveandcostlytoallstakeholders.
Inmid-2017,GeneralElectricchangedCEOs.AfterJeff Immelt’slong-planneddeparturewasexecuted,theboard choseJohnFlannerytobeCEO.Inanearlyinterview,Flannery letitbeknownthatitwouldbeapproximatelyfourmonths beforenewstrategyshiftsandupdatestoearningstargets wouldbeannounced.Duringananalysts’conferencehesaid hisreviewwouldtaketimebutsaidithadnotalteredGE’s 2017outlook.Themarketreactednegativelytothenews, drivingthestockpricedown3%inasingleday.The Wall StreetJournal quotedJeffWindau,ananalystatEdwardJones, assaying,“Peoplewanttogettheanswerssooner.”Deane Dray,ananalystatRBCCapital,seemedtoconcurashewas quotedobservingthatGEwouldbe“inastateoflimbo”until thereviewwasfinished.Themarketabhorsanyvacuumand sofillsitwithconcernandasenseofdownsiderisk,anda negativecyclecanbelaunched.
Moreconcerning,whentheturnaroundplanwas announcedincrementallyovertime,itcalledforaradical redefinitionoftheentirecompany.Theshocktomanyconstituentswasprofoundasfewwerepreparedforthestep functionnatureofthesuggestedchanges.Thedelayalso reinforcedtheresistancetomajorchangethathistorically alwaysexists.ThenewCEO’sradicalchangeintoneand expectationsshookinvestors,analysts,andshareholders. Ultimately,Flannerylastedlessthanayearintherolebefore beingreplacedbyLarryCulp.Partiallyasaresult,GEdropped fromtheDowJonesIndexandthecompanypreparedtobe brokenapart,aswholeunitsdivested,majorlayoffswere enacted,andnewmanagementwasboughtin.Arethinking oftheentirecorporationstructurealsotookplace,including
aradicalresizingofthecorporateheadquarters.We’llnever know,butifFlanneryhadarrivedbetterprepared—ifhehad hitthegroundrunningwiththeseplansfinalizedandreadyto beenacted—thereactionwithinandoutsideofGEmighthave beendifferent.
Asdifficultasitisforlong-tenuredCEOstomakefast decisions,it’sevenharderforthosenewtotherole—andmore newCEOsexistthaneverbefore.Arecent WallStreetJournal articlenotedthatinthefirstfivemonthsof2017,13companies withmarketvaluesinexcessof$40billionhadinstalled newCEOs—someoftenquitesuddenly.Thisincludedsuch householdnamesasFord,Caterpillar,Fiat/Chrysler,andAIG. InJuneof2017alone,newCEOswereappointedatGE,Uber, Whirlpool,BuffaloWildWings,Perrigo,andPandora.Of these,onlyWhirlpoolwasnotfacingactivistpressureatthe timeofthesemanagementmoves.
WhyareCEOsundersuchintensepressuretotakequick action?HerearethreefactorsthateveryCEOshouldbeaware ofandpreparethemselvesfor:
1. TheImpatienceofMarketsandInvestors. Analysts andthebroadermarketwereconditionedtoallowfor ahoneymoonperiod,butthemarketnowdemands shorterinvestmentcyclesaccompaniedbyactionsthat aretheresultofstrategicclarity.Theywanttosee forcefulpersonalitiesprescribingforcefulactions.New CEOshavetoworkinanenvironmentofincreased marketsophistication,digitaltransformation,and cutting-edgemodelingandsimulations;theyalsohave todealwithincreasedtransparencyasaresultofsocial mediaandthemultiplicityofglobalcommunication forums/exchanges.Boardsthatusedtohaveabalanced viewoftheshortandlongterm,areincreasinglyforced bytoday’smarketcontexttofocuslessonlong-term strategicrenewalinfavorofmoreimmediateactions.
2. EmergenceofthePrivateEquitySecondaryMarket andtheRiseofActivism. PEfirmsnowprovidean
attractivesecondarymarketforunwantedassets,and allmannerofactivistsstandreadytoactasacheck onslow-actingmanagement.Historically,anewCEO mighthavehadtolivewithaslowwinddownorsaleto astrategicbuyerofunderperformingbusinesses.Now, privateequityprovidesthemeansforstrategicacceleration.ThemarkethascometoexpectthatCEOswill addressunderperformingbusinessesandunwanted assetsquickly,inpartbyusingPEfirmstomarketand monetizeunwantedassets.Thissecondarymarketalso enablesactivistsandothermarketinfluencerstoforce divestituresandreshapecorporateportfoliosfaster thaninthepast.Activismhashadaprofoundeffect onboards,andboardsinturnhavepressuredCEOsto respond.Anewandgrowinginvestorclassofactivism hasemergedwithawidecontinuumofinvestorsrangingfromthe“radicalandconfrontational”tothosewho are“accommodatingbutinsistent.”Finally,corporate socialresponsibilitygroupsbringtheirownformof activism,motivatingboardstomeettheneedsofthese stakeholdersandavoidthenegativepressthatmight accompanytheirfailuretoactforcefully.
3. ChangeinBoardAttitudestowardCEOTenure andSelection. Boardsandshareholdershavenever welcomedfailure,buttheyarefarlesstolerantofit todaythaninthepast.Asaresult,boardsaremuch morewillingtofireCEOs.GettingridofaCEOused tobeanathemaforaboardbecauseitwasasignof failureoftheirgovernance.Nowitmaybeconsidered agovernancestrength,andattheveryleast,it’samore acceptableboardbehavior.Similarly,boardsarelooking tohirestarswhohave“beenthere,donethat.”They wanttobeabletosay,“WehiredJuliebecausesheturned aroundCompanyX;weknewshehadthiscapability.” Atthesametime,theyareincreasinglyunderpressure toquestiontheperceivedvalueof“qualified”internal candidateswhohaveneverbeenCEO.
