Fortune on Why CEOs Fail

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Fortune on Why CEOs Fail

Source: STYBEL PEABODY LINCOLNSHIRE

Fortune On Why CEOs Fail
In our role as providers of senior executive outplacement services, we have the unique perspective of talking to BOTH sides of a failed relationship. We find the enclosed FORTUNE article a little simplistic, but worth your reading. What do you think? e mail us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . If you want us to publish your response, we will. Laurence J. Stybel,Ed.D. & Maryanne Peabody STYBEL PEABODY LINCOLNSHIRE Boston, MA e mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it THE BOARD OF DIRECTORS CAREER RESOURCE CENTER: www.stybelpeabody.com tel: 781-736-0900 SINCE 1979, HELPING COMPANIES ACHIEVE "SMOOTH TRANSITIONS" FOR VERY SENIOR LEVEL PEOPLE: retained search, coaching, and outplacement. FORTUNE Vol. 139, No. 12, June 21, 1999 Why CEOs Fail It's rarely for lack of smarts or vision. Most unsuccessful CEOs stumble because of one simple, fatal shortcoming. Ram Charan and Geoffrey Colvin What got Eckhard Pfeiffer fired? What fault did in Bob Allen? Or Gil Amelio, Bob Stempel, John Akers, or any of the dozens of other chief executives who took public pratfalls in this unforgiving decade? Suppose what brought down all these powerful and undeniably talented executives was just one common failing? It's an intriguing question and one of deep importance not just to CEOs and their boards, but also to investors, customers, suppliers, alliance partners, employees, and the many others who suffer when the top man stumbles. The answer even matters to the country; America is the world's most competitive nation, thanks in large part to the overall high quality of its CEOs. If people knew how to spot CEOs headed for failure-even if the company's results still looked fine-they could save themselves much pain. Trouble is, they usually look in the wrong place.

Consider the Pfeiffer episode. The pundits opined, as they usually do in these cases, that his problem was with grand-scale vision and strategy. Compaq's board removed the CEO for lack of "an Internet vision," said USA Today. Yep, agreed the New York Times, Pfeiffer had to go because of "a strategy that appeared to pull the company in opposite directions."

But was flawed strategy really Pfeiffer's sin? Not according to the man who led the coup, Compaq Chairman Benjamin Rosen. "The change [will not be in] our fundamental strategy-we think that strategy is sound-but in execution," Rosen said. "Our plans are to speed up decision-making and make the company more efficient."

You'd never guess it from reading the papers or talking to your broker or studying most business books, but what's true at Compaq is true at most companies where the CEO fails. In the majority of cases-we estimate 70%--the real problem isn't the high-concept boners the boffins love to talk about.

It's bad execution. As simple as that: not getting things done, being indecisive, not delivering on commitments. We base our conclusions on careful study of several dozen CEO failures we've observed over the decades-through our respective work as a consultant to major corporations and a journalist covering them. The results are beyond doubt.

Here's what we aren't saying: That failed CEOs are dumb or evil. In fact they tend to be highly intelligent, articulate, dedicated, and accomplished. They worked hard, made sacrifices, and may have performed terrifically for years; Pfeiffer, for example, transformed the company more than once and multiplied Compaq's revenues, profits, and market values, a remarkable achievement. And failure as a CEO is never final. These are strong people who can come back successfully in other roles.

Nor are we saying execution is the only reason CEOs falter. Sometimes they adopt a strategy so flawed that it's doomed, or they refuse to confront reality in their markets, or they antagonize their board. And when a CEO really goes down in flames, there's almost always more than one reason. But business people learn to focus on the main thing, the explanation that accounts for most of what they're worried about, and in the realm of CEO failures that explanation is clear.

It's clear, as well, that getting execution right will only become more crucial. The worldwide revolution of free markets, open economies, and lowered trade barriers and the advent of e-commerce has made virtually every business far more brutally competitive. The frantic spread of information through technology is making customers everywhere more powerful and pushing toward the commoditization of everything. Institutional investors now own more than half the equities in U.S. corporations and relentlessly demand results. Indeed, two of the nation's preeminent headhunters, Tom Neff and Dayton Ogden of Spencer Stuart, calculated recently that while average CEO tenure in the biggest companies has remained fairly steady at seven to eight years, those who don't deliver are getting pushed out quicker. (See the graph later in the article.) A new academic study reaches the same conclusion-poorly performing CEOs are three times more likely to get booted than they were a generation ago. Even if their boards spare them, their companies often get taken over, like Digital Equipment under Robert Palmer and Rubbermaid under Wolfgang Schmitt. Bottom line: whatever cover CEOs used to hide behind has been blasted away. Either they deliver, soon, or they're gone.

So how do CEOs blow it? More than any other way, by failure to put the right people in the right jobs-and the related failure to fix people problems in time. Specifically, failed CEOs are often unable to deal with a few key subordinates whose sustained poor performance deeply harms the company. What is striking, as many CEOs told us, is that they usually know there's a problem; their inner voice is telling them, but they suppress it. Those around the CEO often recognize the problem first, but he isn't seeking information from multiple sources. As one CEO says, "It was staring me in the face, but I refused to see it." The failure is one of emotional strength.

Five Signs of Failure: A Self-Test for CEOs Ram Charan and Geoffrey Colvin
How's your performance-and your performance credibility? Of course you have to deliver results, but you're unlikely to do so if you haven't developed performance forecasts for the next eight quarters, not just the usual four. You should have ideas now for changes you may have to make six to eight quarters out.
Are you focused on the basics of execution? You should feel connected to the flow of information about your company and its markets; that includes regular, direct interaction with customers and front-line employees. Are you following through on all major commitments from your direct reports? Are you listening to the inner voice telling you whether these things are going well or badly?
Is bad news coming to you regularly? Every company, even the most successful, has bad news, usually lots of it. If you're not hearing it, are you letting the trouble build? The information you get should force you to take competitors seriously.
Is your board doing what it should? That means evaluating you and your direct reports, asking for information about your markets, and demanding a succession plan-but not formulating strategy (your job) or trying to manage operations.
Is your own team discontented? Top subordinates often start bailing out before a CEO goes down.
Why CEOs Fail I'll Even Pay Ya to Leave - Geoffrey Colvin -Why failed CEOs take so much of their shareholders' wealth with them.
It makes shareholders steam: When a CEO gets shoved out for poor performance, why does the board so often reward him with a mammoth severance package? EDS fires Les Alberthal and announces that his exit pay will knock down the quarter's earnings 12%. Waste Management crashes, and former CEO Dean Buntrock gets a $14 million goodbye. What's going on?

In this, as in most matters of CEO pay, there's more happening than meets the eye. Yes, the boards may have been profligate-but then again, maybe not.

In many of the highest-profile cases, directors were simply abiding by contracts negotiated months or years earlier. That was the case with John Walter at AT&T (who left with $25 million) and Michael Ovitz at Disney ($100 million), both of whom were hired as president and lasted less than a year. Attorney Joe Bachelder, America's No. 1 negotiator of top CEO employment deals, estimates that most Fortune 500 CEOs now have contracts, and many have learned that the time to negotiate severance is when the board still loves you and divorce seems unthinkable.

When a divorce does happen, much of what a CEO gets is what he would have received upon ordinary retirement. In Buntrock's case, most of that $14 million was a garden-variety supplemental retirement plan that had been building for 30 years. Even so, some Waste Management board members believe that Buntrock ought to contribute at least some of his pension toward the settlement of lawsuits stemming from accounting irregularities during his tenure.

With a contract, whether the booted boss gets a lot or a whole lot depends on whether he was fired "for cause." If so, he'll probably have to forfeit his unvested restricted stock and options and be forced to exercise vested options almost immediately, a penalty that could cost him tens of millions of dollars. Directors may believe they had ample cause for firing the S.O.B., but proving it is tough, so they often give him the big money and get it over with.

The Stock Holds a Going-Away Party
Indeed, getting it over with-whatever the price-is sometimes the best thing for shareholders. Look what happened when Joe Antonini left Kmart, EDS fired Les Alberthal, Bill Smithburg departed Quaker Oats, and GM booted Bob Stempel. In each case the stock jumped immediately after the change at the top was announced-even though no successor had been named. That is a pretty clear indication that investors had already made up their minds that the CEO had to go, even if the board hadn't. And the severance package was worth every penny.