Founders Overdose on “Sweets”

 

How can too much of a good thing be very very bad in management? Imbalance, for one, is a perfect example of “overdosing” on what, in isolation, is innocuous. In the Research Triangle Park area of North Carolina, like the Bay area of California, or a certain part of Massachusetts, technology companies abound and the media is in love with the fruits of the labors of the company founders. Certainly, without the contribution of needed jobs, tax revenues, and similar benefits, the local economies in these regions would suffer. But, on a far more local level–that of the management of a team of people–there can be an inherent problem that is both insidious and solvable.

The concentration of too much emphasis on software development skills, for instance, to the exclusion of other needful disciplines can become a company’s undoing in an imperceptible yet profound way. We must acknowledge that, as human beings, we are most comfortable surrounding ourselves with others who think similarly to us, have homogeneous backgrounds, and understand what we’re trying to communicate  quickly. The danger, though, is one of management myopia. Without a team of executives who bring complementary viewpoints–that are different yet legitimate in their own right–it becomes easy to suffer from the group-think phenomenon like a bunch of lemmings.

Organizations that allow themselves to be managed by cookie cutter leaders are often blindsided by development that Porter’s Five Forces, a SWOT analysis, or common sense in the eyes of an outsider could have anticipated. Market shifts–whether in the realm of sales, finance, operations, or a myriad of other subsets–when realized too late can lead to a company’s fall into a type of death spiral. Turnaround practitioners far and wide have witnessed the phenomenon more times than they’d like to admit and cringe upon encountering it because they know it could have been avoided.

One of the great turnaround consultants I studied in performing research that led to the establishment of the Turnaround Management Association was Donald Bibeault. Bibeault wrote that, “A special case of imbalance in the top team–particularly at the board level–is a weak finance function. This may appear through the company as a general phenomenon, resulting in inadequate financial and accounting controls. But even when these systems are perfectly adequate, their message may not be heard at board level because the finance function is not strongly represented there.”

What should we make of such an observation, then, in our own companies? Firstly, that true outside boards of directors with balance can be a great asset to an organization. These veterans have “been there, done that!” Secondly, as one goes about building a team, become more self-aware of the temptation to populate the organization with a clique of robots, who while very intelligent in their domain, are ignorant on many other topics. Thirdly, consider the value of co-founders and mentors whose life experience is very different than one’s own–albeit they should have been successful in whatever they have previously pursued.

Don’t overdose on what is sweet–do what is nutritional for your organization!

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Advice For Entrepreneurs RE: Succession

Sometimes, big company practices need to trickle down to the SMB world. Whether the subject is a hot start-up with co-founders who must one day shed decision-making authority or family-owned businesses, the selection of successors is a critical topic. Without true outside boards of directors, these decisions often become volatile and can ruin relationships as well as cause collateral damage to the company and its valuation. Having seen the drama play out more often than I’d like, I read extensively about ways to “head off at the pass” struggles that need not become an entrepreneur’s undoing.

A law firm client of mine has a nice boutique corporate practice with a penchant for corporate governance topics. Though I subscribe to Google alerts on corporate governance, I also rely on content curators like Beverly J. Conquest (@bconquest) to follow feeds that I cannot daily read. Conquest came across an HBR blog post recently, “Advice For Boards in CEO Selection and Succession Planning” that featured some superb insights from David A. Katz and Laura A. McIntosh. Their original work was featured in the New York Law Journal. Certain excerpts are featured below:

Selecting the chief executive officer and planning for CEO succession are among the most important responsibilities of a company’s board of directors. In ideal circumstances, the succession process will be managed by a successful and trusted incumbent CEO, with the board or a board committee overseeing the process, reviewing the candidates and providing advice throughout. However, in exceptional circumstances, such as when the board lacks full confidence in the incumbent CEO or when a crisis occurs and the normal succession process cannot be utilized, the board will need to take the lead in managing this crucial task…In 2011, the CEO turnover rate increased as compared to the previous two years…Directors facing these challenges should keep in mind that the attitude and smooth functioning of the board are crucial to a sound process and good result, and that the fates of the board and its chosen CEO often are inextricably entwined.

Process Is Key

CEO selection is, first and foremost, about the future. As the adage goes, one picks a general for the next war, not for the last one…We advise that there be a comprehensive discussion at least annually regarding internal candidates and planning for emergency circumstances…Breakout sessions of the independent directors should include regular discussions of the succession plan, so that the lead director can hear the views of the other independent directors privately. Boards should be active in identifying talented leaders so that there is a bench of qualified internal and external candidates at the ready. The directors may wish to seek first-hand exposure to the company’s most promising executives at board and company functions and may consider working with the CEO to establish policies and procedures for the development and evaluation of internal candidates…

In order to set priorities and find candidates who meet their requirements, directors must first establish a well-designed selection process, which may include the advice of counsel and other external consultants. A sound process will enable the board to achieve its goals while at the same time providing a roadmap to keep the directors on course through the inevitable difficulties they will encounter. In the event of disagreements, the process stands as the neutral, pre-agreed path to which the directors and any advisors can return in order to continue progress toward the final selection.

An organized, careful process is necessary to undertake the substantive evaluation of candidates’ capabilities. There is no better guide than past performance; however, in many situations, red flags from top executives’ pasts have been ignored by boards in their selection process, and the choice has, to some extent predictably (in hindsight), been a mistake. When boards feel rushed into selecting a new CEO—which can happen when the company faces a crisis or lacks a succession plan—due diligence can suffer. The board should look for examples in each candidate’s past that bear directly on how the candidate will cope with the future challenges identified by the board.

Two Elements to Consider

There are two key corporate-governance related elements that should be near the top of a board’s list for evaluating potential CEO candidates, particularly when the board is not able to rely on the incumbent CEO to lead the succession planning process. The first is that the new CEO should be a good fit culturally with the board and the company…The tone set by the CEO helps to shape corporate culture and permeates the company’s relationships with investors, employees, customers, suppliers, regulators, local communities and other constituents…The second key element is that the CEO should have a long-term vision for the company that accords with that of the board. A crucial aspect of this is the ability to resist the powerful forces of short-termism…

Healthy Board Dynamics

A healthy board dynamic is essential to an effective succession process and positive result…A 2009 working paper published by the Harvard Business School’s Corporate Governance Initiative observed: “As a practical matter it is difficult, if not impossible, to find directors who possess deep knowledge of a company’s process, products and industries but who can also be considered independent.” This lack of deep experience and expertise can make it more difficult to identify and evaluate candidates from other companies in the relevant industry or even from within the company…

CEO selection is one of the most formidable, as well as one of the most consequential, decisions a board must make. Using a thoughtful selection process, a well-functioning board that has taken the time to consider CEO succession on a regular basis will be in a good position to identify its top priorities and the best-suited candidates should a crisis present itself.