Short Term CEOs: The Organization’s Failure to Adapt to Change?
Not only are there strong, short-term financial incentives to protect the core, but it’s also often painful to shift focus from core businesses in which one has, understandably enough, an emotional as well as a financial investment McKinsey & Co.’s Chris Bradley and Clayton O’Toole write.
The average tenure for company CEOs is shortening by two years, from just over eight years to a little more than six and a half years of employment. When I think of this in light of the Kubler-Ross Change Curve, (often applied to organizations) I wonder how many short-term CEOs, fired for performance-based reasons, were not entirely to blame? What if the organization had allowed a reasonable time to adapt to changes to their core business, instead of firing the CEO in a knee-jerk reaction to a declining or stagnant quarterly earnings report?
Change Management and Kubler-Ross Curve
Kubler-Ross designed the change curve back in the 1960’s as a model of the 5 Stages of Grief. The Change Curve has been adapted many times, mainly from the business world in relation to organizational change management.
Change Curve and The Valley of Despair
Above is another adaptation, which I’d like to refer to because it highlights the high and low points in the curve called The Peak of Excitement and The Valley of Despair. The Valley of Despair is the tipping point, when an organization is feeling the fiscal and emotional pain of change. Here the board must choose a path: The Hard Way (stick it out with the current CEO and climb uphill to what they hope is success;) or The Easy Way (go back to the status quo, because change is too painful and risky.) Let’s take a look at examples that demonstrate each path and the outcomes.
General Electrics: Jack Welch to Jeff Immelt
CEO Jack Welch was an aggressive, wild leader of GE for two decades. CNBC writes, “As Warren Buffet is to investing, so Welch is to the corner office.” He fired so many people that he earned the name “Neutron Jack.” His brash, old-boy style during the 80s and 90s worked—it fueled growth and made GE successful. When he retired in 2001, Jeff Immelt—the yin to Welch’s yang—succeeded him.
Immelt’s modern leadership style (‘team members’ v ‘executives; ‘idea jams’ v ‘executive meetings;’ ‘yoga classes’ v ‘golfing at the club’) was fresh and promising…until the 2008 financial crisis when GE’s stock plummeted from $60 a share to below $6. Normally this would signify Immelt’s exit, but the board believed in him and his innovative ideas, even though those ideas were proposing a radical shift in the company’s core business and a hard hit to stock valuations.
Immelt continued to implement his vision for the next decade. Immelt has taken GE from a major player in the financial industry sector back to its roots as an energy and industrial software company, capitalizing on and leading the Internet of Things trend. GE has had impressive revenue growth in its July 2016 reporting. The organization did right by supporting Immelt through the worst part of the change curve. Now it is enjoying the upswing in the curve as it looks to a promising future.
JC Penney: Mike Ullman to Gary Johnson
This example is probably why most boards are shy of radical change. After Mike Ullman retired from JC Penney, the board, led by activist investors, brought on Ron Johnson, who was credited in part for Target’s strong branding success and Apple’s slick retail stores. Johnson shook JC Penney to its core, changing everything about the business at once. Sales plummeted, people lost their jobs and after only 17 months, Johnson was fired and Ullman brought back to save the company from bankruptcy.
While the industry blames Johnson, saying he was an outsider who knew nothing about JC Penney’s customer base, Johnson defends himself, saying that if the company just stuck through the Valley of Despair, prosperity would have come again.
I don’t think that JC Penney would have survived long enough to find out, as this is the case of too much, too soon. Johnson destroyed JC Penney’s core business to the point where the bleeding had to be stopped. Ullman was brought back on to save the company, which he did, even though he still implemented some of the better ideas Johnson put forth, albeit on a much more conservative level.
Apple: Michael Spindler to Gil Amelio
When Apple brought Gil Amelio in as CEO in 1994, it was suffering. Michael Spindler had flooded the market with cheap Macs and Sun was salivating over the prospect of purchasing Apple. Amelio came in, infused the company with cash at the eleventh hour to avoid a sale, eliminated the cheap Macs and brought back in Jobs to help source a new operating system.
That turned out to be his biggest mistake. Jobs didn’t like Amelio and made no secret of his mockery. Amelio was a tech nerd but not in Silicon-Valley-hip-entrepreneur sense. Rather he was a nuts-and-bolts, managerial kind of guy. Without going into detail, Jobs saw that Amelio was ousted 500 days into his term as CEO.
A decade ago, business writers were saying that Amelio was a colossal failure, but fast forward ten years later and hindsight is 20/20. Right after he was hired, Amelio gave an internal address that was called eerily prophetic by Engadget in 2014.
Amelio’s message was that Apple needed to return to its core business. The changes he sought were to simplify, streamline and produce a quality, user-centric product. As the writer from Engadget explains, this is exactly what makes Apple hugely successful today.
A short term CEO might blame the organization for not riding out the valley of despair in the change curve, but the board might blame the CEO for hurting the organization’s core business. In the case of GE, Immelt needed to shift the company’s core business to stay modern and relevant, but he took ten years. Johnson tried to do everything at once and almost destroyed the company. Amelio had some solid ideas, but wasn’t given enough time or grace to carry them out. Jobs ultimately did him in.
Change is risky and a savvy board will decide if it’s worth the risk based on whether or not they believe the CEO can deliver in the long game. With shareholder’s demanding ever-escalating returns, in some cases at unsustainable levels, we are seeing CEOs come and go. When the only benchmark for performance is the short-term bottom line, CEOs may be risk adverse. Companies need to innovate to stay competitive, but are shareholders discouraging disruption if they demand a constant, unrealistic increase in the bottom-line?