November
2003 - Second chance for managers
The company has been performing
badly. The analysts are unimpressed; the shareholders
are baying for blood. They want a change of leadership.
As chairman, you ask a headhunter to compare the
potential internal successors with the best outsiders.
The headhunter recommends recruiting from a competitor.
The new chief executive arrives
with a fanfare and the shares jump on expectations
of a dramatic recovery. The company forges ahead
during a honeymoon period when it seems that the
action-oriented boss, who talks up future prospects,
can do no wrong. After a while, the rejuvenated
business loses impetus and treads water before
profits dip once more and the shares slide beneath
the price they were when the boss was appointed.
Three or four years down the
line, the boss departs amid damaging recriminations
about the size of the pay-off. An over-inflated
pay package was part of the initial recruitment
deal. Now it will cushion the failure. Once again
the chairman is calling the search firm and the
cycle is about to repeat itself.
Does any of this sound familiar?
Why have so many companies found themselves caught
up in this destructive cycle, corrosive to the
business and ruinous to careers, not to mention
the associated recruitment expenses and resulting
pay escalation?
These issues were discussed last
week at the Association of Executive Search Consultants'
annual European conference in London. Research
presented by Robert Schuyt, an Amsterdam-based
vice-president with Booz Allen Hamilton, described
the extent to which demands by shareholders for
short-term results are leading to shortening tenures
among chief executives of large companies. Outside
appointments in particular tended to have successes
in the first half of their tenure but did not
sustain it into the second half.
The Booz Allen research, covering
chief executives who left their jobs in 2001 in
some of the world's 2,500 largest companies, is
one of the more comprehensive studies in this
area. It shows that the turnover of chief executives
as a result of poor financial performance in their
companies increased markedly in the latter half
of the 1990s. During the six years to 2001, the
average tenure of CEOs in these companies declined
from 9.5 years to 7.3 years.
The research suggests that most
of the premature departures were dismissals -
although companies will use almost every euphemism
in the book to present a departure as something
less than a failure. But do not be tempted to
believe that a smokescreen is inspired by boardroom
compassion. The failure of a chief executive is
not only bad for the individual concerned, it
also reflects badly on the board that carried
out the initial recruitment.
Yet boards and their chairmen
tend to sail on as if they are immune to the same
external forces that sink chief executives. "The
chief executive is the fall guy but he is often
falling on behalf of others," says John Stork,
head of Stork & May, an outplacement adviser
to senior executives.
You see this in the world of
professional soccer. A struggling club appoints
a manager on a fat fee and the manager knows he
has perhaps less than a season to get results
(and a single game can sometimes decide his future).
The difference between soccer
and business, however, is that in football the
fine margin between success and failure is well
understood and managers can bounce back from unsuccessful
appointments.
The concept of the second chance
does not seem to have permeated British boardrooms.
Mr Stork says he advises some
of his UK clients who have been ousted from their
jobs to seek appointments in the US. "There
seems to be a more forgiving culture in the US
with less personal blame attached to an individual
when things go wrong. Sometimes a company may
not perform because of a single poor decision
by an otherwise excellent executive. I think that
more people deserve to get a second chance but
we don't see many examples of this in the UK,"
he says.
A panel at the conference discussed
a related phenomenon: a reluctance by companies
to reappoint an executive who has left to work
elsewhere.
Surely this kind of policy is
becoming dated? I could understand it in the days
when companies demanded loyalty from their employees
in return for a lifelong career. But too many
companies have abandoned this understanding. Obviously
an executive who treats an employer with contempt
and leaves under a cloud cannot expect to be re-recruited.
But there seems no reason why a company could
not re-engage someone who had left on amicable
terms.
In fact there could be advantages
in employing prodigal executives, since they would
be familiar with the business yet possess new
insights gained during their time away.
Mike Smith, organisation development
director of Masterfood Europe, recalled an executive
in his company who had left on a Friday and was
back in the company the following Friday after
his new appointment had turned sour. "It
was the cheapest re-recruitment I have ever had,"
he said. But such events are rare. People make
career decisions for all kinds of reasons. Too
often, however, resignations are muddied by assumptions
that there has been a clash of personalities.
A few days ago I saw the film
Seabiscuit. Set in the Depression years in the
US, it is about an unmanageable racehorse, a washed-up
trainer, an unruly jockey and an owner abandoned
by his wife. All four could be described as "damaged
goods" but together they forge a winning
team that inspires a generation of out-of work
Americans.
These days we should not be applying
the same assumptions about executives with blemished
CVs. Yet shareholders clamour for perfection.
The problem with companies relying too heavily
on the search business and the image of the executive
as "corporate saviour" is that it ignores
the rarity of transformational yet sustainable
leadership. Shareholders expect chief executives
to run marathons and sprint every step of the
way. It can't be done.
As Stork & May concluded
in a study it carried out earlier this year: "Blame
for company failure can rarely be apportioned
to just one individual, although scapegoat tactics
are used increasingly, allowing the rest of the
board members to distance themselves from a difficult
situation." This cannot be right. It is easy
(if expensive) to fire a chief executive. But
who fires the board? If every departure of a chief
executive from a public company were to trigger
an automatic shareholder review of boardroom performance,
boards might be less inclined to show people the
exit at the first sign of panic.
Perhaps it is time to re-install
the revolving door.
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