Home > Risk > Corporate culture, the good and the bad CEO

Corporate culture, the good and the bad CEO

October 13, 2013 Leave a comment Go to comments

The effect that a CEO can have on corporate culture is, in my experience, not as great as CEOs like to think. However, when their actions stand out and startle, as they do in the two stories I am going to share, they can have a significant impact and shape how employees feel about their leaders and company.

Both companies in these stories failed a few years later, for very different reasons. One failed because of inept management (my opinion); the other in spite of good management, because the company had failed five or ten years earlier to address structural problems leading to high cost and slowing innovation.

In 2003, I was working for a large global company that was experiencing significant pressure from customers to cut costs. As revenue dropped, profits slipped to losses and the company’s position in the market started its slip from #1 to #4.

The new CEO decided that across the board cuts in headcount were needed and perhaps a thousand people lost their jobs. At the same time, he was rebuilding his executive team. He wanted them to be compensated for the turnaround he believed he was going to deliver, so he gave each of them hundreds of thousands of options to purchase shares in the company (then trading around $12) at one tenth of a penny per share. But this was not the action that startled.

At the same time that the company was letting many people go, he invested a million dollars to rebuild the executive floor. Each top executive got a fancy new office, replacing the cubicles previously mandated for every employee, with a new coffee lounge. I mention the coffee lounge because the newly hired COO insisted that if he was going to join the company he needed a high-priced Espresso machine. The lounge, with its precious coffee maker, was off limits to all but the executive suite and their assistants.

I heard talk about the “princes” of the company, the “CEO and his cronies”, and other unflattering references. Any pride that employees might have had in their leadership dissipated, and management at all levels reflected the apparent executive focus on personal reward.

It is perhaps not surprising that my audit team found a lot of financial statement fraud during this period, as managers tampered with results to make their performance look better.

I left the company. In 2005, my new company also started losing revenue and market share. The board recognized that they faced two problems: (a) the pace of innovation was slowing, due at least in part to (in their opinion) poor leadership by the head of engineering; and (b), the cost of a key component was higher than the cost experienced by competitors. While our main competitors had invested years earlier in plants to manufacture close to 100% of their needs for this component, my company had built a small facility – in a high cost area – that could only supply 35% or so of their needs. This component was at the heart of the company’s products and one of the most expensive components.

As a result, existing products carried a higher cost to manufacture than our competitors’ products. We either had to sell them for little profit, or sell very few; we did a bit of both. In addition, our engineering team was unable to design new products that would be cost-effective – a result of a combination of the slowing innovation and the high component cost.

The board acted. They directed the CEO to fire the head of engineering. When the CEO refused, they fired him as well, and the chairman of the board (an experienced CEO in this industry) took over.

The new CEO made a number of excellent decisions, including hiring a first-class head of engineering and best-in-class CFO.

However, the problems were too great to prevent the company’s revenue and profit slide.

The CEO reluctantly decided that the company had to cut cost, and a few hundred people were laid off.

That was not startling.

What did startle was that the CEO held a global all-employee meeting, where he and his executive team did a number of things. First, the CEO apologized to the employees for the company’s prior failures that had led to the need to cut headcount. He explained with honesty and humility the unfortunate need to let valued employees go. Then, he said that he and his #2 were both going to cut their salaries by (if I recall correctly) 15% for at least the next two years, and would forego any bonuses or stock awards.

While the CEO of the first company gave the impression that his priority was his and his team’s personal rewards, the CEO of the second gave the strong impression that his priority was the company and its employees.

People of all generations, creeds, and nationalities respond when others show they matter, when they are listened to, and when they are given respect. They respond with loyalty, dedication, and performance.

When they experience the opposite, that their leaders are only interested in ‘feathering their own nests’, employee loyalty, dedication, and performance are blown away like feathers in the wind.

I welcome your views and comments.

  1. October 14, 2013 at 12:44 AM

    What surprises me about your comment is that you still need to say this. After thousands of articles and millions of words over the last 10 years (and even more) about how to successfully manage a company, people still behave in the same old ways. But people are people and history tells us that they will continue to behave in the same way and carry on making the same mistakes – probably forever.
    I am reminded of the excellent documentary recently on BBC about luxury in ancient Greece where despite really serious efforts to stop people trying to become rich and instead live a ‘normal ‘life, they failed. Even the Spartans who took this very seriously finished up failing and the leaders accumulated huge assets and tried to hide them.
    In a company people can work normally, slowly or quickly dependant on how motivated they feel and a lot of this depends on whether they feel that they are respected and properly treated ( including of course properly remunerated, but this is not in itself the most important).
    100 people can produce an output of 100 if they work normally, but they can produce 120 if they are really motivated – but if they are de-motivated they may finish up producing only 60.So with the same people one can finish up with twice, or half, the output.

  2. October 14, 2013 at 3:46 AM

    I too agree with Graham and can only wonder “so what is new or different in the behaviour of the above two CEO’s?” The first CEO described does not even deserve a comment re his behaviour. Perhaps the board of directors do.

    The second CEO in comparison behaved responsibly re sharing the blame and taking a pay cut but without having knowledge re the financials, etc., it is therefore difficult to know what additional steps he might have taken, to generate a positive result.

  3. Norman Marks
    October 14, 2013 at 8:59 AM

    After the actions of the first CEO, the attitude of the workforce was negative. The executive team started competing with each other as well. But the actions of the second CEO deferred failure as the workforce came together to fight. Spirits were high, which is unusual after layoffs. Unfortunately, the due had already been cast.

  4. October 14, 2013 at 9:50 AM

    Norman, I applaud your effort to link the impact that a CEO can have on corporate culture.

    “People of all generations, creeds, and nationalities respond when others show they matter, when they are listened to, and when they are given respect. They respond with loyalty, dedication, and performance.”

    Within every organization, decision making drives performance. Every employee comes to work every day and makes decisions that impact performance.

    The workplace has many temptations that employees must resist, from the petty impulse to claim credit for someone else’s work, to the unscrupulous lapse of lying in a negotiation, to the criminal act of misrepresenting financial numbers.

    These decisions, at every level of the organization, define the corporate culture and drive performance.

    In 2008, Harvard Business School Professor Robert S. Kaplan and his Palladium Group colleague David P. Norton wrote The Execution Premium: Linking Strategy to Operations for Competitive Advantage. They outline six stages in their management system:
    1. Develop the strategy
    2. Plan the strategy
    3. Align the organization
    4. Plan operations
    5. Monitor and learn
    6. Test and adapt

    Using Kaplan and Norton’s work as a guide, a proactive CEO can follow a process to execute their strategy.

    Step 1: Visualize the strategy.
    Step 2: Communicate strategy.
    Step 3: Identify strategic projects.
    Step 4: Align projects with strategy.
    Step 5: Align individual roles and provide incentives.
    Step 6: Manage projects.
    Step 7: Make decisions.
    Step 8: Measure the strategy.
    Step 9: Report progress.
    Step 10: Reward performance.

    One of the critical steps is to align individual roles and provide incentives that encourage high performance and intraprenuership while enforcing rules and aligning decision making with the company’s goals and strategy.

    The CEO can deploy a number of tools to implement and maintain a high performance culture, including:
    1) Effective policy management (utilizing an online policy library)
    2) Employee assessment surveys
    3) Performance Scorecards
    4) Event management and reporting
    5) Annual certificates to a Code of Conduct

    With the right tools in place, board directors and the leadership team could have the actionable intelligence they need on an ongoing basis to gain confidence in their strategy, their CEO, and how well the organization is doing to execute the strategy.

  5. October 27, 2013 at 3:40 AM

    KF: Clearly, the most effective goals are those that are aligned to the company’s strategy and which appropriately align executive performance with shareholder returns.

  6. September 19, 2014 at 9:50 PM

    I too am surprised that these examples needed to be given. CEO’s by now should have recognized that it is always about THEM and not YOURSELF. Make no mistake, the CEO needs to set the tone for a positive Company culture and the rest of the organization will judge (and respond to) what the CEO Does, not what the CEO SAYS.

  1. October 22, 2013 at 5:04 AM
  2. October 22, 2013 at 4:23 PM
  3. October 23, 2013 at 7:27 AM

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