Why CEOs Fail

Rob Enderle

Of all of the executive levels I've studied, CEOs are the most interesting. I was sitting next to a new CEO on the plane this week and we were chatting about what makes a good one and why most fail. I've recently been dropped into a pool of people considered for board seats and I'm using this to help me think through my own potential future duties. There really doesn't appear to be a good training process for CEOs and most seem to drop into the job ill-prepared for it. Still, some clearly do much better than others. After watching and working with CEOs over the last several decades, I think we can point to a number of endemic causes for failure. Let's look at the ones I think are most important.


Failure to Prioritize


Unlike a typical manager who needs to focus on employees, a manager and the manager's manager, a CEO has to focus on employees, customers and investors. The right priority is employees, customers and investors. This came up in a meeting between NVIDIA's CEO and financial analysts this year, and they confirmed this order. The reason for this order is that if employees are properly motivated and taken care of, they take care of the customers, and if the customers are highly satisfied, then the financial performance of the company is more assured and the investors are happy. Use any other order of focus and the company will likely spiral the wrong way. Investor focus typically sacrifices customer satisfaction and employee retention for short-term gains; customer focus tends to drive pricing actions, which reduce margins, causing job outsourcing, employee erosion and profit decline.


Excessive Complexity


One of the best lessons this decade is Apple, which went from a failing company to the top company in the technology segment. It did this largely because the CEO, Steve Jobs, dramatically reduced the complexity of the firm and integrated marketing. We'll talk about marketing later, but Apple went from having three customer groups to one. It had clone companies (OEMs), IT, and consumers as customers and was in a wide variety of businesses. When Jobs was done, it only had consumers as customers and PCs (and some peripherals) as products. It has since expanded, but initially Jobs focused the company and created the biggest recovery I've ever followed.


The Peter Principle says that people rise to their level of incompetence. The corollary for CEOs is that they often increase complexity until they are no longer competent to run the company. Jobs showcased that a more successful path is to reduce complexity until the CEO can execute competently. Sam Palmisano at IBM has also showcased this path. During his tenure, he has reduced the product complexity sharply and the firm is in vastly better shape than it was when he got the job. As Oracle got more complex, Larry Ellison created the office of the CEO to manage the complexity. In his case, instead of contracting the company, he expanded the office of the CEO. The goal in both cases is the same, to match the capabilities of the office of the CEO to the responsibilities.


Legal Cancer


In today's hostile world, it is critical that CEOs look at and mitigate legal exposures. However, excessive reliance on legal advice can cause a firm to become catatonic. Sony is an example of this problem; a massive number of attorneys have learned there that "no" is vastly safer than coming up with a way to do something. Sony has hog tied itself into inaction. In Sony meetings, it is common to see idea after idea shot down because one of the attorneys highlights a risk. Part of the job of the CEO is to balance risks and rewards. Cisco, Oracle and Apple all are firms that appear willing to take major risks. And in recent years, they haven't seemed to take unreasonable ones.


Excessive Isolation


Isolation appears to be an endemic problem with aging companies. CEOs can't possibly talk to everyone who might want to talk to them. But they need to be able to get reliable information about their market, employees, products, and investors in order to make well-balanced decisions. Over time, those that report to the office of the CEO learn that good news is rewarded and bad news is generally punished. They also learn to manipulate the office and person(s) in it in order to further their own agendas. These agendas often have to do with maximizing their own compensation and power (we saw this in the financial industry collapse). As a result, the CEO is increasingly fed bad information and makes increasingly bad decisions -- or doesn't make timely decisions that are critical to the company's future.


When someone is brought in to fix the office, like Louis Gerstner was in IBM, one of the first things they do is fix the reliability of the information they are getting by replacing much of the executive staff with people who are loyal to them and are more interested in fixing problems than in making themselves look good. Granted, over time, the organization will likely slip back into old bad habits. EMC, by elevating customer satisfaction to a CEO direct report, assured that the information regarding customers was not filtered. And according to Pat Gelsinger, who just took over as one of the top executives there, customer loyalty is now EMC's greatest asset.


No Marketing Skills or Understanding


Image is important to a company. This is something IBM's Louis Gerstner seemed to have as a keystone for his success. He staffed corporate marketing with some of the best people in the world, irrespective of industry, and took the IBM brand from a place where it was largely perceived negatively to one of IBM's greatest assets. Trusted strong brands lead to stronger margins and higher sales. Distrusted and weak brands lead to collapsed margins; employee, investor and customer retention problems; and new CEOs. If a CEO doesn't at least understand the basics of marketing, they don't know what to look for in a CMO or how to fund the function adequately. Even if they get someone good, without funding the person can't do the job effectively.


Company image is one of the most important and least cared-for assets in the corporate world. With the DoJ anti-trust trial (often seen as one of its biggest mistakes) of the '90s, Microsoft's biggest cost was likely the degradation of its image. One of the primary reasons Intel recently settled with AMD was to avoid a similar degradation.


Failure to Step up to the Job


Executives promoted into the job of CEO often fail to move on from the job they had. If they come from sales, they focus on sales, from finance they focus excessively on numbers, from manufacturing they'll spend too much time looking at manufacturing operations. The jump to CEO is unlike any other because the breadth of the job significantly exceeds any other in the company. They have to be able to learn about the aspects of the company they don't understand well (as opposed to attempting to cover up their understandable lack of breadth) and they need to make sure they have trusted advisors who can fill their experience and education gaps.


Failure to do this was one of the reasons Carly Fiorina failed as CEO of HP. She didn't understand operations and was very light on finance. She learned the finance side over time but failed to either learn or retain a competent operations executive she trusted. As a result, she was fired and Mark Hurd, an operations expert, was able to take her place and get most of the credit for projects that she had actually instituted.


Wrapping Up: Is the Biggest Problem Ineffective Boards?


One of the primary tasks of the board of directors is to assure they have the right person in the CEO spot, and that that person is properly incented to do the job successfully. Generally, from the selection of the CEO to how the CEO is compensated, this job is not done well. Most CEOs are poorly selected and their personal financial interests are decoupled from the firm's interests. A successful employee often is successful because of a capable manager; most CEOs fail because their boards are not doing what needs to be done at a board level. You can have a great CEO and a bad board, but with a bad board you will eventually get an incompetent CEO.


Boards that did their job: IBM's with the selection of Louis Gerstner and Sam Palmisano, EMC's with the selection of Joe Tucci, HP's former board that fired Carly Fiorina and hired Mark Hurd, and especially the Apple board that brought back Steve Jobs.


In the end, the CEO job requires unique skills, the right priorities, and good internal and external intelligence. Those that do it well often result from a good board of directors. The problems we see in the technology industry and others are often the direct result of boards not assuring the necessary elements are always present.

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