Every day as new CEO is a rude awakening. Justâarrived leaders of an organization, in a role that they have aspired to and worked diligently for years to achieve, soon face the stark reality that the highly developed skills that positioned them for this leadership role are of little value to their organizational success. From the first few weeks in the role to five years down the line, the demands of the position are vastly different from the operational leadership skills that produced the record of achievement allowing for advancement to a CEO role. This is surprising and, for many, shockingâgiven the complexity that comes with being a modernâday CEO.
This harsh reality is even more pronounced since the most immediate challenge for all new CEOs, be they outsiders or promoted insiders, is to arrive prepared.
The CEO's job has become exceedingly more challenging than even in the recent past. Many CEOs don't realize how they must prepare themselves for the challenge ahead. The intensity of the leadership challenge, the tsunami of issues and constituents to be addressed, and the limited time and high expectations for immediate results are rarely fully anticipated by new leaders. While they may be aware of the strategic challenge, few anticipate the talent deficits, the competitive market demands, legal nightmares, regulatory gauntlets, and financial conundrums that are integral to the position.
In today's market environment, the CEO's job isn't as simple as leading an organization to deliver a return to shareholders exceeding the cost of capital. Now CEOs must address a vast array of confounding issues, balancing many managerial tradeâoffs: time (to act), talent (to execute), and capital (to finance). New CEOs are expected to be able to respond immediately to a vast number of wideâranging questions that include:
- How do you plan to deliver shortâterm results without sacrificing longâterm sustainability?
- Does your existing organization have the right structure, systems, and talent to deliver these results?
- Is your balance sheet and capital structure sufficient to fund the programs you anticipate needing to launch?
- What do you want to say to the vast array of customers who want to know what you plan to change and how quickly you're going to change the products and services that affect their businesses and interests?
- How well positioned are you within your community and with the political leaders that all believe they have a stake in the decisions that you are about to make?
- How do you plan to position your diverse company to analysts who want to categorize your company into neat segments that align with their predetermined positions of value, growth, and so forth?
- How do you respond to viral social media posts and Twitter traffic that have an uninformed, yet publicly influential impact on internal and external company audiences?
- How do you generate cash flow to fund operations but not attract activists whose models track cash as an early indication of a value play?
- How do you ensure compliance with the vast array of regulatory agencies all dictating everâincreasing numbers of demands?
- How can you remain socially conscious, given that it seems like little time, money, or energy remains for necessary causes?
- How do you keep your board of directors happy and meet the expectations they had in hiring you?
Consider a recently appointed CEOâlet's call him Jack. He arrives at his large organization with big plans for his upcoming tenure. Jack has waited his whole career actively planning and positioning himself for this leadership opportunity to arrive. For years, he's thought about what he would do when he was in charge. Jack is eager to put his extensive global management experience to use; he knows the technological innovations and operational moves that he believes will create a quantum leap in performance. Given his extensive experience, Jack is determined to lead others differently and more effectively than the way he has been managed. He is thrilled the board has elected him, and he is anxious to meet their lofty expectations.
What Jack doesn't know, however, is that his new company is heading into a hurricane of issues: within a month of his appointment, a combination of a competitor's breakthrough products, the weakness of his inherited management team, the demands of the multiple constituents seeking his time and attention, and a failed acquisition has attracted an activist investor who is questioning the quality of the company's strategy and the return from its operations. Jack is forced into firefighting mode, scrambling to respond reactively and quickly realizing that he never was able to deliver on his carefully planned series of technical and operation plans.
Jack's story isn't unusual. An unrelenting demand for fast turnarounds, improved performance, and financial results is commonplace. CEOs must grapple with shareholder requirements, a changing, diversifying workforce, employees striving for professional and personal life balance, and the need for community acceptance/service. Rating agencies, buyâ and sellâside analysts, the everâthreatening presence of activists, and preying private equity (PE) firms all ratchet up the intensity.
On top of that, CEOs are on the clock. They no longer have the luxury of time, the ability to wait for things to sort themselves out. In a fastâchanging environment, seconds count. CEOs need a sharp and clear direction shaped by a vision of the future of the companyâand the path to that vision must be taken quickly.
To meet these challenges, CEOs don't just need to arrive; they need to arrive prepared.
A NEW AND DEMANDING ERA
In the past, CEOs had a much different economic climate with more leisurely timeframes to enact change. Boards of directors often hired them mainly because of their demonstrated past talent, not necessarily their detailed future vision. Many new leaders were expected to have a reasonable amount of timeâoften monthsâto figure out how the company really worked and to develop a prescription for change and begin enacting major new initiatives. Referred to as a âhoneymoon period,â this initial timeframe might involve meeting individually with executives, going on road shows to visit facilities, hosting âlistening toursâ with major channel participants and customers, and generally enjoying a period of reflective thinking. After the honeymoon ended, CEOs could present thoughtful plans and approaches informed by the homework they had done. This is hardly ever the case anymore. Now, traditional timeframes for new CEOs to form a team, diagnose needed changes, and define action plans have been dramatically compressed. In the past, turnarounds necessitated by the previous CEO's failure sometimes required this accelerated approach. Now, even a normal transition of leadership requires decisive and speedy actions.
CEOs are often shocked by this demand for immediate action. If they haven't done their homework or lack a theory in the case that helps them implement change in confusing, complex situations, they may well find themselves unable to actâand in today's environment, inaction is almost always counterproductive and costly to all stakeholders.
In midâ2017, General Electric changed CEOs. After Jeff Immelt's longâplanned departure was executed, the board chose John Flannery to be CEO. In an early interview, Flannery let it be known that it would be approximately four months before new strategy shifts and updates to earnings targets would be announced. During an analysts' conference he said his review would take time but said it had not altered GE's 2017 outlook. The market reacted negatively to the news, driving the stock price down 3% in a single day. The Wall Street Journal quoted Jeff Windau, an analyst at Edward Jones, as saying, âPeople want to get the answers sooner.â Deane Dray, an analyst at RBC Capital, seemed to concur as he was quoted observing that GE would be âin a state of limboâ until the review was finished. The market abhors any vacuum and so fills it with concern and a sense of downside risk, and a negative cycle can be launched.
More concerning, when the turnaround plan was announced incrementally over time, it called for a radical redefinition of the entire company. The shock to many constituents was profound as few were prepared for the step function nature of the suggested changes. The delay also reinforced the resistance to major change that historically always exists. The new CEO's radical change in tone and expectations shook investors, analysts, and shareholders. Ultimately, Flannery lasted less than a year in the role before being replaced by Larry Culp. Partially as a result, GE dropped from the Dow Jones Index and the company prepared to be broken apart, as whole units divested, major layoffs were enacted, and new management was bought in. A rethinking of the entire corporation structure also took place, including a radical resizing of the corporate headquarters. We'll never know, but if Flannery had arrived better preparedâif he had hit the ground running with these plans finalized and ready to be enactedâthe reaction within and outside of GE might have been different.
As difficult as it is for longâtenured CEOs to make fast decisions, it's even harder for those new to the roleâand more new CEOs exist than ever before. A recent Wall Street Journal article noted that in the first five months of 2017, 13 companies with market values in excess of $40 billion had installed new CEOsâsome often quite suddenly. This included such household names as Ford, Caterpillar, Fiat/Chrysler, and AIG. In June of 2017 alone, new CEOs were appointed at GE, Uber, Whirlpool, Buffalo Wild Wings, Perrigo, and Pandora. Of these, only Whirlpool was not facing activist pressure at the time of these management moves.
Why are CEOs under such intense pressure to take quick action? Here are three factors that every CEO should be aware of and prepare themselves for:
- The Impatience of Markets and Investors. Analysts and the broader market were conditioned to allow for a honeymoon period, but the market now demands shorter investment cycles accompanied by actions that are the result of strategic clarity. They want to see forceful personalities prescribing forceful actions. New CEOs have to work in an environment of increased market sophistication, digital transformation, and cuttingâedge modeling and simulations; they also have to deal with increased transparency as a result of social media and the multiplicity of global communication forums/exchanges. Boards that used to have a balanced view of the short and long term, are increasingly forced by today's market context to focus less on longâterm strategic renewal in favor of more immediate actions.
- Emergence of the Private Equity Secondary Market and the Rise of Activism. PE firms now provide an attractive secondary market for unwanted assets, and all manner of activists stand ready to act as a check on slowâacting management. Historically, a new CEO might have had to live with a slow wind down or sale to a strategic buyer of underperforming businesses. Now, private equity provides the means for strategic acceleration. The market has come to expect that CEOs will address underperforming businesses and unwanted assets quickly, in part by using PE firms to market and monetize unwanted assets. This secondary market also enables activists and other market influencers to force divestitures and reshape corporate portfolios faster than in the past. Activism has had a profound effect on boards, and boards in turn have pressured CEOs to respond. A new and growing investor class of activism has emerged with a wide continuum of investors ranging from the âradical and confrontationalâ to those who are âaccommodating but insistent.â Finally, corporate social responsibility groups bring their own form of activism, motivating boards to meet the needs of these stakeholders and avoid the negative press that might accompany their failure to act forcefully.
- Change in Board Attitudes toward CEO Tenure and Selection. Boards and shareholders have never welcomed failure, but they are far less tolerant of it today than in the past. As a result, boards are much more willing to fire CEOs. Getting rid of a CEO used to be anathema for a board because it was a sign of failure of their governance. Now it may be considered a governance strength, and at the very least, it's a more acceptable board behavior. Similarly, boards are looking to hire stars who have âbeen there, done that.â They want to be able to say, âWe hired Julie because she turned around Company X; we...
