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The C-suite has become the hot seat. With CEOs under enormous
pressure to deliver the outstanding performance investors demand—and to
satisfy other, often conflicting constituencies—it is no wonder that the
pace of CEO turnover is accelerating. The latest Booz Allen Hamilton
CEO succession study found that 15.3% of CEOs worldwide and 16.2% in
North America left office in 2005. That’s an increase since 1995 of 70%
globally and 54% in North America. What’s more, a third of the
departures in the most recent survey were “nonroutine”—that is, they
occurred before the scheduled succession date, usually because of
performance problems.
Typically, the early departure of a CEO leads to the recruitment of
someone thought to be better equipped to fix what the last CEO couldn’t,
or wouldn’t. The new leader arrives with a mandate to change course or,
in the most extreme circumstances, to save a sinking ship. The board
places its confidence in him because of the present dilemma’s similarity
to some previous challenge he dealt with successfully, such as
reshuffling a portfolio, slashing costs, increasing market share, or
negotiating with regulators.
Facing a familiar problem, the CEO can be expected to do what he was
hired to do. Indeed, research presented in “Are Leaders Portable?” by
Boris Groysberg, Andrew N. McLean, and Nitin Nohria (HBR May 2006),
indicates that leaders succeed when the skills demanded in their new
positions directly draw upon the executives’ professional backgrounds
and experiences. But familiar problems are inevitably succeeded by less
familiar ones, for which the specially selected CEO is not quite so
qualified. More often than not, the experiences, skills, and temperament
that yielded triumph in Act I turn out to be unequal to Act II’s
difficulties. In fact, the approaches that worked so brilliantly in Act I
may be the very opposite of what is needed to bring Act II to a happy
resolution.
The approaches that worked so brilliantly for a CEO in Act I may be
the very opposite of what is needed to bring Act II to a happy
resolution.
As the drama unfolds, the CEO has four choices: He can refuse to
change, in which case he will be replaced; he can realize that the next
act requires new skills and learn them; he can downsize or circumscribe
his role to compensate for his deficiencies; or he can line up a
successor who is qualified to fill a role to which the incumbent’s
skills and interests are no longer suited. Hewlett-Packard’s Carly
Fiorina exemplifies the first alternative; Merrill Lynch’s Stanley
O’Neal the second; Google’s Sergey Brin and Larry Page the third; and
Quest Diagnostics’ Ken Freeman the fourth. All but the first option are
reasonable responses to the challenges presented in the second acts of
most CEOs’ tenures. And all but the first require a power of
observation, a propensity for introspection, and a strain of humility
that are, in truth, quite rare in the ranks of the very people who need
those qualities most.
Act II’s Four Variations
Remake your company into one that has no place for you.
Carly Fiorina is a perfect example of a CEO brought in to address a
specific set of problems because of her success in dealing with similar
ones elsewhere. Hewlett-Packard’s board began searching for a new CEO
because the company had become stodgy, inbred, bureaucratic,
uncompetitive, and demoralized. HP’s last groundbreaking innovation, the
ink-jet printer, had been introduced 15 years earlier, in 1984, and
quarterly growth was almost nonexistent. Competitors threatened to
encroach on every segment of HP’s business—Dell in PCs, Lexmark in
printers, Sun Microsystems in servers, and IBM in solutions. So the
board sought a dynamic, first-class communicator who could revive
morale, restart the innovation engine, cut through the bureaucracy, and
justify the reputation on which HP had been undeservedly resting for too
long.
Fiorina filled the bill. Having been president of Lucent’s Global
Service Provider Business, she had done these things before. She set out
to market her vision for HP by making speeches and appearances at
high-profile events such as the World Economic Forum, courting media
attention, meeting with endless groups of HP managers, and, perhaps most
dramatically, becoming the public face of the company by appearing in
its commercials and other advertising. Contributing to her personal
mystique and sharpening HP’s image was her distinction as the first
woman to lead such a large, well-known company.
As outsized as her image were the steps she took to recast the
organization. She laid off thousands of people and consolidated well
over a hundred product groups into about a dozen to reduce redundancies
and speed decision making. But only a major acquisition, she concluded,
could disrupt entrenched routines and catapult HP into a commanding lead
in the personal computer industry. To accomplish this, she was forced
to override a boardroom minority that objected to a merger with Compaq,
and she ignored those who pointed out that mergers of large companies in
the high-tech arena had never worked out.
Today, even her detractors admit that the Compaq acquisition made
sense. Despite boardroom tensions that exploded into a spying scandal,
HP is now enjoying a growing lead over its competitors, including what
was supposed to be an unstoppable Dell. But integrating two
organizations and boosting operating performance in the core businesses
require very different skills from developing a vision, embodying it,
communicating it, and driving it through—Fiorina’s proven strengths. Her
continued public exposure, even after the battle was won, led to
accusations that she was an incorrigible publicity hound. In the end,
her reluctance to delegate led to conflict with the board, which lost
confidence in her.
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Remake your company—then yourself.
In 2003, Stan O’Neal was engaged in deep reflection. He was finishing
his first year as the CEO of Merrill Lynch, and, despite his tremendous
success, he sensed it was time for a change.
Two years earlier, in July 2001, he had been named president of the
company. Six weeks later, he was managing in command-and-control mode,
regrouping the firm after the terrorist attacks of September 11, which
killed three employees and forced the company to evacuate its heavily
damaged headquarters. Additionally, Merrill Lynch was still feeling the
effects of the bursting of the tech bubble a year earlier (and it would
soon be hit with a wave of negative headlines about the Wall Street
research scandal). The challenges required immediate action; O’Neal made
painful and unpopular decisions that would be criticized by some within
Merrill Lynch and second-guessed from the sidelines.
Between 2001 and 2003, O’Neal worked hard to resize and reshape the
firm, cutting costs to cope with lower revenue, reengineering parts of
the business to diversify revenue streams and neutralize the
roller-coaster highs and lows of debt and equity trading, and reining in
expansion plans that had failed to deliver.
O’Neal often found himself in a lonely position: He knew he had to
rethink the firm’s entire business model and challenge the “Mother
Merrill” culture that had become more maternalistic than performance
based. At the same time, he had to improve the morale of a shaken
workforce and retain the attributes of the iconic franchise he had
inherited.
By the summer of 2003, O’Neal’s efforts had paid off, with Merrill
Lynch posting the best first-half results in its nearly century-long
history. With the firm on solid ground, he began to think longer term
about what he would need to do to ensure that Merrill’s future leaders
would not have to face similar problems. He realized that new challenges
would require Merrill’s executives, himself included, to provide a
substantially new kind of leadership. In other words, he understood the
need to make a major shift in leadership skills in Act II, even though
Act I had been a great success.
Working with an outside consultant and his senior management team, he
led a process of feedback and coaching. Together they created the
Merrill Lynch Leadership Model to clarify what they expected of
themselves and other leaders at the firm. The model focuses on four
areas critical to effective leadership: strategic thinking, business
results, people leadership, and personal effectiveness.
The top 11 leaders (including O’Neal), followed by the next 200, then
the next 1,000, received feedback and coaching. Changes were made in
performance evaluation, rewards, talent reviews, and other mechanisms to
support the new model of leadership. By 2006, objective measures
revealed that Merrill’s culture, which had been homogeneous, lenient,
and clubby, had shifted significantly, becoming merit based, rigorous,
and diverse.
Respect your limitations while growing your company.
Larry Page and Sergey Brin founded Google when they were PhD
candidates at Stanford. The uniquely effective Internet search engine
they invented enabled their company to be one of the few healthy
survivors of the dot-com crash. As their background might suggest, the
founders’ strong suit is writing computer code. But their ambitions for
Google go well beyond spurring technical refinements of its core
technology. Google now offers satellite mapping, digitalized libraries,
and its own e-mail service, and its search capabilities extend to e-mail
databases and company intranets. Although Page and Brin were committed
to staying with the company they created, they knew they weren’t
professional managers or marketers or masters of strategy. So in 2001
they brought in a “grown-up,” Eric Schmidt, to operate the company.
Schmidt had been the chairman and CEO of Novell for four years, and
before that he was the chief technology officer at Sun Microsystems,
where he led the development of Java. He is a skilled big-company
executive, a seasoned marketer, and a renowned technology expert in his
own right. With Schmidt as CEO, Page as president for products, and Brin
as president for technology, the company has flourished beyond almost
anyone’s expectations. Indeed, Google provides one of the few examples
of technology-oriented founders making a smooth handoff to a
professional manager.
Remake your company, then move on.
In 1995, Ken Freeman was named chairman and CEO of Corning Clinical
Labs, the ailing medical testing business soon to be spun off from
Corning. Freeman had been a Corning “lifer,” having risen through the
financial side to become controller while still in his early forties. He
then moved through a variety of roles, among them running the company’s
television-glass business and serving as CFO.
Freeman found a business in shambles. Receivables sat on the books
interminably; cash flow was plummeting at an alarming pace. Questionable
lab results and billing practices had made the company (along with
others in the industry) a target of government investigations. Freeman’s
drastic mandate was not to rescue the business but to get it ready to
be sold. However, the troubles were so pronounced that no credible buyer
stepped forward, and Corning was forced to adopt a Plan B: a spin-off
of the clinical labs as an independent public company with Freeman as
its chairman and CEO.
Freeman made clear to his management team that billing practices that
were common in the testing industry threatened the business’s survival.
He quickly installed a rigorous quality process, assembled a new board,
and generally pulled the company together. Having created stability, he
embarked on an expansion program that culminated in the acquisition of
the lab’s largest competitor, SmithKline Beecham Clinical Laboratories.
When the dust settled, the now renamed Quest Diagnostics was the
industry leader in size, geographic reach, market share, and quality.
Its stock price soared. Then, in 1999, with Quest still gathering
momentum, Freeman went out to find a successor and worked with the board
to put in place an orderly succession process. In 2003, at the still
youthful age of 53, Freeman passed the baton to Surya Mohapatra and left
the company he had built.
Why, unlike Fiorina, did Freeman leave before he had to, when in fact
the board, investors, and employees wanted him to stay? Reflecting on
his decision later, Freeman observed that the company’s future growth
would have to be organic (for one thing, Freeman had exhausted the
supply of major acquisition targets). A deep understanding of medical
technology, which Mohapatra possessed and Freeman lacked, was going to
be a more crucial qualification for leading Quest than a flair for
turnaround situations or a gift for deal making, Freeman realized.
But if so, why didn’t Freeman, like O’Neal, decide to turn himself
into the kind of executive Quest required? The difference was that
Freeman felt most alive in the high-pressure situations of crisis and
M&A. Gently moving the tiller from side to side after he had
prevented the vessel from capsizing was Freeman’s idea of boredom. Being
not only an effective executive but a wise one, he didn’t invent or
precipitate crises or make ill-considered acquisitions simply to keep
himself engaged. Instead he went looking for a new arena where he could
find excitement and success. Today he is with KKR, engineering
turnarounds at companies such as Masonite International.
The Obstacles to Coping
CEOs often face enormous challenges in their first months on the job.
In her Act I, Fiorina had to symbolize leadership, as well as lead
effectively, in order to achieve the transformation she sought. In his,
O’Neal had to be almost inhumanly tough to shatter the culture that was
impeding Merrill’s progress. In theirs, Brin and Page had to devise the
algorithms that would produce the most germane search results on the
Internet. And in his, Freeman had to envision a company that in no way
resembled the existing one.
Each of these executives performed brilliantly, as do many other CEOs
who are brought in to fix specific problems. But as predictably as in a
play of Shakespeare’s, a successful CEO’s Act I will end, and a second
act will begin, sometimes imperceptibly. It usually happens before the
first two years are up. (Of course, there are plenty of chief executives
who are unsuited to solving the problems they were hired to overcome
and who fail within the first year and a half; see the article “When
CEOs Step Up to Fail,” by Jay A. Conger and David A. Nadler, in the
Spring 2004 issue of
Sloan Management Review.) A career-testing ordeal arose after two years in O’Neal’s case, three years in Page and Brin’s, and five years in Fiorina’s.
Why do so many high performers—not just those mentioned here but
hundreds of others too—meet their end when Act II begins? There are
several reasons. First, some CEOs are simply oblivious to the shift in
its early stages. The extraordinary commitment they must make to solving
the first set of problems, and their tendency to attack those aspects
most likely to yield to their proven methods, somehow blind them to less
familiar realities, as well as to the new leadership approaches that
are required. Second, some CEOs sense the shift but fail to understand
how much damage they can cause by sticking to their original approaches.
CEOs are notoriously poor observers of their own behavior, and they
rarely notice its unintended consequences or invite feedback. Third,
some recognize the new circumstances and thus the need for a change in
their modes of leadership but are incapable of transforming themselves
enough to make a difference. Finally, some don’t change in Act II
because they don’t want to. Freeman may have been capable of leading
differently in Quest’s next phase—he certainly understood the need to do
so—but making that transformation had little appeal for him.
Some CEOs sense the shift to Act II but fail to understand how much
damage they can cause by sticking to their original approaches.
Leadership style is a function of years of development and
experiences, and it is an outgrowth of personality and character.
Achieving a dramatic change in leadership style is difficult for anyone,
but it’s particularly hard for people in their fifth or sixth decade
who have been responsible for a long string of successes. Personality
and character aside, such people have developed systems for leading, so
to speak, that they can’t bring themselves to jettison. In fact, when
faced with resistance during Act II to their customary modes of acting,
some leaders hang on more tightly than ever to the devices that have
long kept them afloat.
Another way of looking at this phenomenon is that these leaders’
well-worn management techniques have become inseparable from their
prevailing view of themselves. In a series of landmark studies,
organizational psychologist Joseph L. Moses observed the different ways
in which managers deal with emerging and unfamiliar challenges.
“Stylized” leaders, as he called them, cling to old and discredited
approaches that have become part of their identities as executives.
These leaders believe that if they were to feel their way by trial and
error to a new set of responses, they would sacrifice the skills and
personal qualities that gave them their successes and reputations.
“Adaptive” leaders, by contrast, spend time understanding the situations
confronting them and contrive strategies and approaches that fit the
circumstances. Stylized managers can be extremely effective until they
encounter a situation that is too dissimilar to its predecessors to
yield to the proven approach. Not surprisingly, Moses found adaptive
managers to be more effective overall in a range of different
situations.
Psychology and learned behavior, reinforced by experience, are only
half the story, however. The limitations in executives’ cognitive
abilities also have a role to play in CEOs’ Act II reversals. A
longitudinal study published by Andrew D. Henderson, Danny Miller, and
Donald C. Hambrick in May 2006 compared the tenures of 98 CEOs in
branded foods, an industry that the researchers describe as
comparatively stable, with 228 CEOs in computers. The food companies’
performance tended to improve over the course of the CEO’s tenure; in
computers, performance tended to peak early and diminish steadily
thereafter. The authors’ hypothesis is that every CEO comes to the job
with a “relatively fixed” approach—a view of the world and a matching
set of skills. The more dynamic the business environment, the faster
those worldviews and abilities become mismatched to present realities,
both competitive and organizational, and “it will be the rare executive
who can greatly transform his or her mind-set, aptitudes, and skills.”
As the researchers suggest, a senior executive who has built her
career on being the most effective mass producer of the lowest-cost
products would find it extremely difficult to adopt a strategy based on
providing luxury offerings. She would be hampered by her mental habits,
her values, her understanding of and interest in particular kinds of
customers, and her entrenched notions of what works. Executives in the
publishing industry are experiencing those pains right now. Despite
their grand visions of migrating content from print to digital
platforms, the majority of longtime print executives are finding it
difficult to make the wrenching decisions required to facilitate the
transition.
Companies that successfully identify and develop talent recognize
that stylized and otherwise limited managers can be effective if matched
to the right situations. They also recognize that people often need to
be moved laterally when situations change or when it becomes clear that
an executive has been put in the wrong position. But there is no lateral
position in the company to which a CEO can be moved. When a chief
executive is inflexible or unable to see a change in circumstances, the
board must take actions that are inherently unpleasant and disruptive.
Four Steps to Renewal
Despite the personal and professional limitations that affect
executives’ ability to adapt, there are steps executives can take to
discern that they have entered new territory and to respond accordingly.
Here are the four essential ones.
Recognition.
Evidence that your leadership style and approach are no longer
working can take several forms. You may notice that people aren’t
responding as they once did to your speeches, especially those in which
you lay out your vision for the next two or three or five years, and
that your initiatives are faltering. You may also find yourself clashing
with your team or with your board. You may start to feel fatigued and
emotionally disengaged from your work, which has started to seem like a
job rather than a calling. While none of the above by itself would be
proof positive that the ground has shifted, an accumulation of these
factors would be strongly indicative.
Acceptance.
For a successful, confident, and assertive leader, it is tempting to
see failure as the result of others’ negligence or mistakes and to
believe that poor performance merely calls for redoubled courage and
persistence. But such beliefs are often self-deceiving and even
delusional. It is therefore important that leaders rely on more than
just their own impressions. Advice can come from a variety of sources:
the full board, selected directors, or, as in O’Neal’s case, outside
consultants.
Analysis and understanding.
Once you recognize that Act II has arrived and that it requires a new
type of leadership, the next step is to understand the nature of the
shift. What would an Act II of your own making look like, and what are
its implications for your leadership approach? An objective evaluation
is often beneficial.
Decision and action.
I’ve seen CEOs employ a number of different strategies at this stage:
Personal change.
In some cases, the CEO is able to step back, understand the
requirements of Act II, and adjust his approach accordingly, as Stan
O’Neal did. However, this modest-sounding goal requires a rare ability
to reflect on one’s own behavior and a willingness to reveal one’s
weaknesses and admit shortcomings. Then the leader must take on the task
of self-transformation with all the determination and tenacity he
formerly directed at pushing the organization forward. A CEO who can do
that will no longer be the captive of strategies that have outlived
their usefulness.
Structural change.
Page and Brin’s handoff to Schmidt can be seen as a classic case of
redesigning the management structure to complement the strengths of the
top people. Hewlett-Packard’s board appears to have attempted the same
thing with Fiorina. The board recognized the need for a change in
leadership style and initially proposed not to remove Fiorina but to put
in place a structure that would devolve some of her duties to
subordinates better suited to overseeing day-to-day management. Fiorina,
by most reports, rejected this approach, asserting that her own
leadership style was best suited to institutionalizing the changes she
had initiated.
Accelerated succession.
Finally, a leader can acknowledge that the shift has begun and that
it will call for a different chief executive. Such a decision requires a
high degree of self- and situational awareness. Many CEOs suffer from a
misplaced sense of obligation to stick it out and complete the mission,
even when signs are plentiful that hanging around would actually
imperil it. Frankly, in 30 years of working with CEOs, I’ve hardly ever
come across an occasion in which people thought the CEO had chosen to
leave prematurely. The consensus is usually that the CEO has stuck
around too long.
• • •
A smart board and a thorough search process will often turn up the
right person to solve the company’s immediate problems. But today’s
marketplace, in which buying patterns can suddenly shift and new
technologies can materialize out of nowhere, will surely test a new CEO
before long. Removing a maladaptive CEO before his time is messy and
traumatizing for all concerned, including the ranks of employees.
Consequently, boards have a duty to choose and cultivate leaders who can
negotiate the transition from the first act to the second and, for that
matter, from the second to the third, and so on. Moreover, boards can
make sure that up-and-coming executives develop an awareness of, and
receive training for, Act II transitions, so that if and when the
individuals get to the C-suite, they are potentially more adaptive.
Boards can do this by seeing to it that promising executives rotate
through various locations, functions, and businesses; after all,
divisions and subsidiaries present their top managers with Act IIs that
are similar to, if less wrenching than, the crises that face corporate
CEOs.
Such an approach expresses the ideal. In reality, there’s a scarcity
of CEOs who can repeatedly refashion themselves. The board therefore
must respect the limitations of the mere mortal who has served the
company well, if only for a few years. By the same token, proud CEOs
must come to recognize when their time has passed.
A version of this article appeared in the
January 2007 issue of
Harvard Business Review.