CEOs in Tumultuous Times
December 12 2008 by Ram Charan
Even before the recent Wall Street debacle, CEOs had begun asking: How much more difficult, complex and volatile is the CEO job going to get? Can it get any bigger? The increasing turnover of CEOs in recent years is clear evidence that some people are finding the job very hard to carry out. Fortune 100 CEO departures increased 91 percent from 2002 to 2007, and Booz Allen reports that nearly one-third of CEO departures in 2006 were forced. And that’s before the meltdown on Wall Street, which continues to rattle CEOs across the nation. The business environment can suddenly become deeply hostile because of near failures in the macro environment that no CEO can control. The uncertainty and complexity are unprecedented.
The demands of the job are causing some CEO candidates to question whether they even want the job. Younger generations of leaders see how much time CEOs have to spend on items that are necessary for the head of a publicly held company but are essentially non-productive and wonder whether that’s really what they want to do. A number of incumbent CEOs have a similar distaste for the regulatory, media, compliance and SEC matters that seem to be a distraction from the activities that create value. Private equity is seen as a way to rid themselves of some of those issues.
Yet even today there are some people who can’t wait to get into the CEO saddle. A generation of leaders is emerging who are accepting the challenges and adapting to the new game. They recognize what’s different about the job now and are finding ways to thrive in the new era. As I’ve observed and worked with CEOs, I’ve begun to see that those who relish and have command of the job as it is today- with all its complexity, volatility, media transparency and legal wrangling- have a different modus operandi than their predecessors. They are showing that it is possible to succeed in today’s business environment, and their leadership is a source of guidance for others. Let me describe the emerging unique aspects of the CEO job and follow with some suggestions for those who aspire to be chief executives.
What’s Different about the Job Now
Those who succeed as CEOs-and enjoy doing it-take charge of the job not only as it is today but also as it will be tomorrow, not as it was even yesterday. That starts with accepting four current realities:
- CEOs now have an active boss.
Boards are not the rubber stamps they once were. They are your new boss. While some boards have their act together and make a huge contribution, in many cases this boss is not yet well organized to carry out its new required accountability and is intrusive. It is going through teething problems of how to work cohesively and yet independently. In many situations boards are taking up an undue amount of the CEO’s time and are focused on non-value-creating items. Some directors delve deep into operational details largely to demonstrate their own expertise. Their micromanaging drains energy. One or two directors can make the life of the board miserable and distract the CEO, for instance, by requesting studies on tangential issues. In other cases, this new boss misses the point and does not permit the CEO to make bold moves, even when the fast pace of change in the external landscape demands making timely strategic bets. Some boards themselves are under attack by the activists and thus get distracted from the meaningful work they need to do.
Now CEOs have to deal with their boards as they face the coming downturn. Most boards have not faced such a storm, especially when the liquidity flow is frozen. It remains to be seen how well they will set targets and how they will award CEOs in a tougher environment where earnings and margins are likely to be revised downward.
risk continues to increase. Enterprise
The number of sources from which risk can arise continues to multiply, and the abruptness with which risk can emerge can be life threatening. Some risk is unavoidable. Some is backward, meaning it comes from actions taken in the past. That’s what hit Siemens in
Risks will continue to come. Capital markets continue to be volatile and lack transparency. Surprise attacks by hedge funds or from businesses based in other countries can put a company into play and cause irreparable damage. Other factors not foreseen only a few weeks ago are causing risks. Factors like the lack of liquidity, lack of available credit, and sudden rise in short-term interest rates pose big risks to companies that are highly leveraged, especially in the face of newly cautious rating agencies. Reputational risks can arise from inside the company through internal blogging. They can spread very fast in this digital age. Almost all of these things are nonproductive. They can consume a huge amount of the CEO’s personal time and psychological reserves. Not all chief executives have the temperament to deal with it.
- There are many more uncertain variables in running a business than only a few years ago.
What makes the CEO job so incredibly complex is an increasing number of forces internally and externally that can materially affect the business, each of which is moving at a different speed. Changes in markets, technologies partnerships; volatility in currencies; uncertain and fragmented regulation; competitors; and suppliers-all of these things must be considered, separately but also in combination. Some variables can suddenly emerge or sneak in from unknown corners to impinge on the company. CEOs must be able to see how the moving parts mesh together despite the constant shifts in these variables and prepare to deal with them swiftly, even the “unknown unknowns,” the variables they didn’t even know would matter. It’s up to the CEO to make sense of the complexity, provide the right focus and choose the right goals.
Surprises will always take place. Very few people saw how the price of oil might affect food prices, or knew when the perfect storm would erupt on Wall Street. Those connections were unknown. Now leaders have to think about whether high food prices could cause political riots in some countries if people at the lowest income levels can’t keep up with inflation. And, how will the fallout from Wall Street affect consumer demand of various products? Pepsi CEO Indra Nooyi said in a Wall Street Journal interview that people used to open their bottles and not finish, but now “they’re carrying the bottle longer and finishing the beverage.”
- Time demands are increasing.
When the top team of one company did a 360ï¿½ evaluation of the CEO, they said they wished the CEO would spend more time coaching them. The CEO responded: “There are only so many hours in the day. I go home every night feeling that my job is never done.” This CEO is hardly alone. Many are saying they’re lucky if they can spend 40 percent of their time on activities directly related to managing and leading the business. The result is that they often feel they’re on the defensive, in catch-up mode rather than being masters of their destiny and on the offensive.
Thriving in the New Era
To succeed today, above all else you have to love the job. You have to want the challenges and have a burning desire to realize your potential. You have to thrive on and be psychologically comfortable wrestling with external trends and risk. It’s a different mentality than focusing on sheer EPS numbers. Be selfish in evaluating how well your natural talents and aspirations fit with what the job requires now and going into the future. If the fit is wrong, you will suffer more than the company will. No two CEO jobs are identical, but complexity will increase for almost all of them. Only those who thrive on it and can personally grow will be able to rise above it.
If you want the CEO job, you need to take control of it. Figure out what will drain you and what will make you energized. Those who are succeeding are finding effective ways to manage their time and expand their capacity through other leaders and networks of trusted relationships.
Time is the one single item in life that is constant for all human beings. Everyone has the same amount of time per day. To succeed in the job, you have to take charge of how you use it. Think about the “return on your time”: what are you focusing on personally and getting others to focus on so as to create a multiplier of your time? Some things you have to do yourself. For example, you personally must attend board meetings, go to Wall Street, and meet with congressmen and congresswomen. You also have to keep on top of regulatory changes and other shifts in the external environment and ensure the company is on track strategically. You can’t ignore NGOs, and you have to pay close attention to new legislation that affects the business, such as the sudden proposal for corrective legislative measures to aid the faltering financial system.
If the board is draining time and energy, engage the lead director or governance committee chair to help improve how it functions, and look for ways you can help. Improving the information flow to the board, for instance, can conserve time and help the board focus on the most important issues.
Other things have to be done through other people and organizational processes. Here CEOs have options. One common approach is to have a COO (or someone with a different title) who does the day-to-day managing of the enterprise, with line functions reporting to the COO and staff functions reporting to the CEO. This arrangement worked well at Colgate for 20-plus years and at Coca- Cola for almost 16 years in the 1980s and 1990s, but in some places it has created acrimony. Success depends on the quality of the No. 2 person and the chemistry of the CEO and the COO. The two must work together with complete transparency so the COO’s direct reports do not drive a wedge between them. The COO must be superb at execution, and the CEO and COO must be able to communicate well and resolve any differences without consuming an extraordinary amount of time. COOs must contain their ego and not work behind the scenes to usurp power from the CEO, even if the person aspires to the CEO job. When appointing a COO, the CEO should be sure everyone, including the board, understands the distinct roles and talents of the two top leaders.
Another arrangement is to decentralize, appointing the best talent to run the business units, giving them goals and empowering them with heavy autonomy. Staff functions do the monitoring. This can work well in a divisionalized organizational structure. Judgments about the business unit managers and a reliable control system are keys for success here. Warren Buffett is a master at this. GE, Honeywell and United Technologies are other examples.
One diversified Fortune 100 company with an excellent record of shareholder value creation uses transparency as a kind of externally driven control system, a novel approach that can work for other diversified companies. Every business unit publicly announces to investors its three-year plan, and each business unit leader’s compensation is tied to accomplishment of that plan. The leaders regularly update investors on where they stand and where they need to be. They can draw on the central corporate organization as needed, but the corporate center does not impose itself on them. If the business unit does not perform, the leader is replaced.
A New Option
Another approach to organizing work is to create a close-knit, informal but disciplined CEO-CFO-top HR executive team. Though it is still rare, I have known this arrangement to be very effective. Jack Welch and Larry Bossidy excelled at using this approach, with great results.
The CFO, of course, looks after that which correlates to financial health, financial performance and resource allocation. A strong HR person does the same regarding people and organization. When the three top leaders have a tight working relationship, they can do a superb job of linking operational performance with people issues. And because people issues are a leading indicator, the trio can diagnose and correct problems early on-for instance, by dealing with leaders who are slipping before things go too far off the rails. The leaders become sounding boards for each other, reinforcing each other’s best judgment.
This approach works well under several conditions: the three people must have good chemistry and mutual respect so they build trust and openness; they must meet together frequently and talk informally virtually all the time; there must be safeguards against the CFO or HR person becoming filters or exclusive funnels for communication between the CEO and other direct reports; and the HR person must understand the business as a whole, not just how to administer HR benefits. Bill Conaty, former head of HR at GE, started his career as a line manager and understood the business issues as well as the people issues.
The Fundamentals Don’t Change
As always, organization structure must be simple, with clear accountabilities and systems that facilitate and reinforce collaboration. The more complex the organization structure, the less likely it is going to be understood by the people working in it, which in turn has a significant impact on corporate performance.
You also have to be sure you have the right leaders around you. Most large companies have somewhere between 50 and 100 leaders whose behaviors, actions and decisions make the difference. These people are the multipliers of your capacity. How well do you know each of them? How well are they developed and evaluated? How good is the collaboration among them? And how dispassionately are decisions made about their performance and rewards? Do you have the discipline and systems in place to do this regularly? One CEO carries with him the names of people in the company’s top two leadership layers so he is constantly thinking about and reviewing them. Another CEO reviews his top people with his HR person every two months.
No matter how you structure your work, the world will always look to one person for accountability of performance for the corporation as a whole. How you structure your work and the job is at your discretion, with the concurrence of the board. Make that decision consciously, but only after you consider whether you really relish the challenges and are willing to devote the emotional energy and time to the job. Volatility will continue, and some risks will threaten the company’s existence. It’s imperative to have a psychological affinity for the external world as it is. Do you thrive on it? Are you disciplined enough to manage your time? Do you do what you like to do or what is required to be done?
Let me remind us all that leaders with vision will see the opportunities over the horizon. They will figure out how to get those opportunities. This is the gist of leadership. The context has changed, but what makes a leader a leader has not.
Ram Charan is an award-winning teacher at the