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Restoring Confidence In Chief Executives

It could take many years and require significant changes in how CEOs do their jobs.

It’s been years since the spectacular combustions of Enron, Tyco and WorldCom sent the image of the chief executive officer as visionary leader up in flames. And even though the pace of scandal has slowed dramatically, the image of the CEO hasn’t recovered. Chief executives are still being raked over the coals, suspected of the greed, dishonesty and isolationism exhibited by a handful of their high-profile peers. Surveys show that 87 percent of the general population feel CEOs cannot be trusted.

In this disillusioned-and even downright hostile-environment, rebuilding trust among customers, employees and other constituencies will be an uphill battle, agreed CEOs gathered for a roundtable sponsored by Russell Reynolds Associates. “Changing the current negative perceptions will require time,” said Steve Halverson, CEO of The Haskell Company. “It’s unrealistic to think they will be corrected overnight.”

  • Jay Desai is CEO of the Institute of Global Competitiveness, a consultancy based in Cary, N.C.
  • Thomas R. Evans is president and chief executive of Bankrate, a $36 million company that provides lending information to consumers. It is based in North Palm Beach, Fla.
  • Jerry A. Greenberg is co-chief executive of Sapient, a $200 million technology consultancy based in Cambridge, Mass. He is based in Los Angeles.
  • Steve Halverson is CEO of The Haskell Company, a $630 million design and construction company based in Jacksonville, Fla.
  • Thomas L. Harrison is CEO of Diversified Agency Services, a division of the $8 billion Omnicom Group based in New York.
  • William J. Holstein is editor-in-chief of Chief Executive Magazine.
  • J.R. “Rick” Hundley is president and chief operating officer of Snecma USA, a subsidiary of the $8 billion parent company, Snecma of France. He is based in Arlington, Va.
  • Farooq Kathwari is chairman and CEO of Ethan Allen, the $900 million retailer based in Danbury, Conn.
  • Edward M. Kopko is chief executive of Butler International, a $263 million a year strategic outsourcing firm, and also CEO of the Chief Executive Group. Both are based in Montvale, N.J.
  • David Moses is president of OneCoast Network, a $250 million distributor and marketer of home furnishings and gifts. It is based in Atlanta.
  • John B. Osborne is president and chief executive of BBDO New York, the advertising firm.
  • Sandra E. Peterson is a director for Dun & Bradstreet, a provider of global business information, tools and insight based in Short Hills, N.J. She is also a former senior vice president of Merck Medco.
  • Andrea Redmond is coleader of Russell Reynolds Associates’ CEO and Board Services Practice. She is based in Chicago.
  • Joseph Scarlett is chairman and chief executive of Tractor Supply, a $1.5 billion retailer of tractor supplies based in Brentwood, Tenn.
  • Charles A. Tribbett III is coleader of Russell Reynolds’ CEO and Board Services Practice based in Chicago.
Several CEOs lamented the fact that they all have suffered damage to their reputation because of the actions of a relative handful of corporate leaders. “Just because you have a few dishonest politicians doesn’t mean that every politician is dishonest,” said Tom Evans, CEO of Bankrate. “We’ve had a few dishonest journalists-Janet Cook, Jayson Blair and Jack Kelley-and that doesn’t mean every journalist is a crook. Business is the same as every other sector of the economy: You’ll always have some dishonesty, but it doesn’t mean the entire area is bad.”

Some CEOs, however, said the public’s swing toward an anti-CEO stance was a sure sign that stakeholders’ faith in companies and corporate leaders was already shaky. “It’s a mistake to dismiss the current public sentiment as an overreaction to the misdeeds of a few CEOs,” asserted Halverson. “The fact that the public so readily extrapolated the corrupt behavior of a few CEOs to all CEOs shows that the notion that CEOs can’t be trusted resonates with the public. We have to face up to the gravity of the situation and assess how things got so bad.”

The solutions are complex. It may be that the pressure to achieve short-term results for shareholders, which has been deeply ingrained in the U.S. variation of capitalism, must ease before CEOs will avoid taking shortcuts. Their relations with their boards of directors must overcome the current state of tension and confrontation. Indeed, the very style of CEO leadership may have to change. Chief executives have to become even better at communicating the value of what their companies do. Increasingly, the emphasis will be on team-building, not autocratic rule. And further strides have to be made in linking CEO compensation to the underlying performance of the business.

It’s telling that the majority of the business scandals took place in the U.S., where the market boom of the ’90s bred the fiercest focus on short-term performance, said Rick Hundley, COO of Snecma USA, the American subsidiary of the French aerospace company. “There’s less pressure in Europe than in the U.S.,” he noted. “The stock market there doesn’t see the wild fluctuations that we see in the U.S., which contributes greatly to that lack of pressure. Compensation packages are also much smaller and with less stock participation. Board structures are also more independent; in many countries, it’s customary for an employee from a trade union and a government representative to sit on the board.”

For good reason, noted Charles Tribbett, coleader of Russell Reynolds’ CEO and Board Services Practice, who sees board composition as playing a critical role in Corporate America’s trust-rebuilding effort. “Where you find a weak board you will find a CEO who has the ability to do whatever he or she wants,” noted Tribbett, who coauthored the recent book Business Evolves, Leadership Endures. “In the past, cases that became public embarrassments occurred predominantly at companies where the board allowed the CEO to conduct himself in a manner that was wrong.”

But the more CEO-centric management style long favored by U.S. companies is falling by the wayside as regulatory action and public scrutiny spur changes in the structure and function of boards. By mandating that a majority of a board’s members be independent, and outlining the respective functions of the CEO and the board and how they should interact, regulations like the Sarbanes-Oxley Act of 2002 have made strong, independent boards mandatory for public companies.

Getting Directors on Board
Board composition, however, is just one piece of the oversight equation. These stronger, more proactive board members must also gain a deeper understanding of a company’s culture and strategic mission to fulfill their part in the trust-rebuilding effort, argued Jerry Greenberg, co-CEO of Sapient. “It’s unlikely that most boards have any idea what the culture inside the company is like,” he said. “No matter how hard they try, they don’t live there. It is very difficult for them to know the culture of a firm by merely being on its board.”

Companies, however, can take steps to ensure that their board members are ready, willing and able to do their part. General Electric board members, for example, are now required to spend time with the management and employees of a business unit at least twice a year without an escort from headquarters. The company also limits the number of boards its directors can serve on-to two for sitting CEOs of another business and four for non-CEOs, Hundley noted.

At Tractor Supply, board members visit stores and attend board meetings at the retail chain’s distribution centers, where they are able to meet with executives and store employees. “We take them on the road with us and to dinner with people in leadership roles within the company,” explained Joe Scarlett, the retail chain’s chairman. “We really force that involvement because a board can be a better board if they understand what’s going on in the business.”

For Ethan Allen’s Farooq Kathwari, connecting employees and board members is a fundamental part of fostering a culture of trust. “It’s the responsibility of the CEO to get the board really deeply involved in the culture,” said Kathwari. “If I, as the CEO, am concerned about board members hearing things I don’t want them to hear, then there’s a problem of trust.”

Instilling trust throughout the company, in turn, enables Ethan Allen to build external credibility. “We cannot create credibility with our customers if we don’t have credibility with our own people,” said Kathwari, who cites a set of leadership principles that serves as a cultural foundation for his employees. “One of our principles is ��justice,’ or making decisions fairly, which, in turn, builds motivation, teamwork and honesty within the organization. For us, those aren’t just words. Our business model depends on building trust and credibility with our customers.”

OneCoast Network finds credibility with the vendor community equally key. “We represent 500 different suppliers, including Caswell-Massey, a personal-care brand in one part of the United States, and Crabtree & Evelyn, another brand, in another part,” explained David Moses, president of the gifts and home furnishings marketing company. “The only way we’re able to do that is because of the mutual trust and respect we have nurtured, which assures them of the integrity of our company and that trade secrets are not being shared.”

Another thread of the new leadership style that may be necessary to restore trust revolves around the concept of teams. “I see a trend towards team-based leadership, a more holistic approach as opposed to autocratic leaders just driving organizations relentlessly,” reported Jay Desai, CEO of the Institute of Global Competitiveness. “We’ve seen many examples of that. Future leaders will be working a lot more with the head, heart and body, creating excitement within the organization and then changing the mind-set, attitude and behavior.”

“Team-building is the name of the game,” agreed John Osborne, CEO of BBDO New York. “But if you have a leader who’s constantly trying to build teams, that person can become overconsumed in a New York minute. We run an organization based on teams dedicated to the businesses and the clients and brands we represent. We strive for a sense of shared accountability where we’ve got the various leaders of the businesses pollinated across the organization, each acting in their own CEO role.”

CEOs: Show More Heart
In some ways, CEOs have to become a little bit more, well, human, rather than hiding behind the numbers. They have to show more “heart,” said Andrea Redmond, coleader of Russell Reynolds’ CEO and Board Services Practice. “When former CEO Jim Cantalupo came back to McDonald’s, his love for the company is what turned the company around,” said Redmond. “He energized the people, who then brought that energy to implementing the strategies. That’s what made the difference for the company.”

One hotly debated point at the roundtable was whether embracing an outside social cause helps a CEO and his or her company build trust. At some companies, uniting the organization around a cause communicates a “beyond bottom line” mission that nurtures a sense of ownership and pride. Tom Harrison, CEO of Diversified Agency Services, pointed to Avon’s support of breast cancer awareness as aligning the company with a worthy cause, sending a signal internally to its employees and externally to the public that the company and its leadership stand for something worthwhile.

OneCoast Network’s employees appreciate the company’s philanthropic endeavors, reported Moses, who says the company has raised money for American Foundation for AIDS Research for the past seven years. “The common thread in emails I get from employees about the program is that it’s part of what makes them feel good about what they do,” he said. “We want them to feel passionate and excited about the company’s products and mission but also to know that this company is not only thinking about business-that there are other things that are important. I think that helps create a solid culture.”

But other CEOs think it’s a mistake to focus on other causes. The core communication challenge is to explain what the company itself does and why that is so valuable. And while embracing a cause can enhance a company’s reputation with employees, shareholders and other stakeholders, it’s no panacea for the image troubles that have befallen today’s CEOs and large corporations, argued Bankrate’s Evans. “I don’t think there was a bigger benefactor in the state of Texas than Enron,” he pointed out. “So I don’t see adopting a cause as a solution.”

Hiring the right people for the right reasons and focusing on developing employees, he added, is a far more certain route. “I hire for attitude, for work ethic, for judgment and for business ethic,” reported Evans. “It doesn’t matter whether someone went to Harvard or only graduated from high school; it really is all about character. If you surround yourself with people of high character and have a level of expectation that they will reinforce the character, goals and the mission of the company in a professional way, usually people live up to your expectations.”

CEOs blinded by a market that favored short-term stock gains lost sight of the importance of cultivating engaged, ethical employees-and suffered the consequences. While unquestionably disruptive, the scandals that shook the faith of boards, investors, customers, employees and the public at large in recent years are now forcing CEOs to return to the basic business fundamentals essential for long-term sustainable growth. “People who are passionate about working at a company and feel good about it are the ultimate ambassadors of the organization and the image of that company,” said Sandra Peterson, a director at Dun & Bradstreet, who noted that a culture of trust can serve as a foundation for survival in a crisis. “When there are a couple of bad apples at an MCI or Enron, if the rest of that employee base felt good about the business and about what they were accomplishing, those organizations would have weathered that storm much more easily. To me, it’s about putting the right people in place and making sure that the individuals throughout the organization feel good about what they do-because ultimately they’re the ones who are going to make a big difference.”

So digging out of the CEO’s reputational hole is going to take longer and be more complex than many corporate leaders might have assumed. Many thought that after the scandals dramatically slowed and a handful of bad apples did the “perp walk” and in some cases went to prison, customers, employees and others would simply forget about sins of the past. But so far at least, that doesn’t seem to be happening. It could require structural change in how CEOs do their jobs before all of their constituencies once again have faith in their leadership.

Communicating Culture

It’s a burning passion at Tractor Supply.

Tractor Supply’s Joe Scarlett comes across a bit like a country minister about to hold a revival meeting. Except his message is that each and every one of his employees is important-and that it’s his job to basically get out of their way. “I make almost no decisions,” says Scarlett, who handed the CEO hat off to his successor, Jim Wright, in October, but retains the title of chairman of the 6,200-employee farm and ranch retailing company. “We have built a team where people understand the mission, the value structure and the market so we can empower them with confidence and trust that they will make the right decisions.”

That culture of autonomy enables employees in 500 retail locations spread across 31 states to fulfill the “satisfaction guaranteed” motto posted over the registers at every store. “Underneath that sign is the statement: ��All team members have the authority to do whatever it takes,'” explains Scarlett. “So when a customer comes back in our store with a problem, they hear, ��Yes, sir. We’re going to do whatever it takes to make it right for you.'”

An incentive-based pay program helps align employees around that customer orientation. “We believe in having fun and in making money,” says Scarlett. “And part of our philosophy of making money is that everyone in our company, part-timers included, is on a performance-based incentive plan.”

But it’s all the communication-talking and listening to employees at every level-which ensures that Nashville-based Tractor Supply’s customer-commitment culture and mutual trust between management and employees is inculcated across the company. “I visit at least 150 stores a year,” says Scarlett, who notes that his management team members also spend the bulk of their time in the field, visiting with employees on the retail floor and in the company’s distribution centers. “We make a point of talking to every single person in each location, spending a little time listening to their concerns and talking about what we are as a company. We’re out there touching people all the time because that’s how you maintain a culture when you’re spread out across the country.”

Ultimately, he adds, instilling a culture of trust is all about humility. “Too often, CEOs think they know it all,” says Scarlett. “And CEOs who have big egos have a big problem, because they don’t listen. If you have a big fat head and think you know it all, people tend not to want to talk to you. If you are humble, people will communicate with you and trust you.” You might call this crusader a “Chief Evangelical Officer.”

In Change We Trust

How Tom Evans reshapes companies

Tom Evans left as publisher of U.S. News & World Report to become a serial entrepreneur, taking over the helm of GeoCities, Official Payments and now Bankrate. He shared his insights on how he’s been able to build trust in his leadership and change those companies’ strategies.

How does your approach to shaping a company’s culture differ at a startup like GeoCities versus the more established U.S. News & World Report?
I’ve run companies in different industries, of different sizes and at different stages of growth and, in some ways, the approach is fundamentally different. But some things are the same. You have to have a clear point of view and communicate that as often and as directly as possible so that people understand where the company is going, how it will get there and why what they are doing on a day-to-day basis is valuable. Then you have to watch for buy-in or the lack thereof. When you walk into smaller, entrepreneurial companies, there are usually pockets of people who resist changes that are in the best interest of the company. Once you decide on a direction, you have to explain to people why it is important and that obstructionists will not be tolerated.

How do you gauge and overcome resistance?
You constantly monitor whether you are making progress. At GeoCities, where I was brought in to take over from a beloved founder and prepare the company for an IPO, I held weekly meetings. Every Friday all of the employees would gather in our makeshift cafeteria and I would answer every question they had.
I believe every single day you are either doing better or worse-and you better know which. You can feel the changing culture, the buy-in by people and the resistance. As people find out this will be good for me, fun or fulfilling, they tend to get on the bus pretty quickly.

But there are usually some people who end up not wanting to work in that environment, who like the way things were and will drag their feet on changes and impede improvement. One of the unfortunate parts of the job is that you have to weed those people out.

What was the toughest question you fielded?
Someone at GeoCities once asked, “Why do you have so many [stock] options? You just got here, and we’ve all been here four years and have many fewer.” I answered that it was a logical question, but from my perspective, why would I leave a job where I was making a lot more money, commute to Los Angeles from New York every week and take a chance that this company might or might not be successful? I asked this person, “What would you have required to take that chance in terms of an incentive?” I think they understood.


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