It’s the team that counts
By Marcel Côté
With boards of directors becoming more proactive and independent, CEOs seem to be perched on the edge of ejection seats. Directors no longer hesitate to replace the CEO as soon as the company starts to flounder. Their situation isn’t unlike that of professional hockey coaches, one-third of whom are fired each year. When the reason for dismissal is obvious, the decision is simple, as was the case with Nortel’s Frank Dunn. How-ever, most situations aren’t that cut and dried. Could boards be too quick to fire CEOs?
According to research, including in-depth case studies by management guru Jim Collins, the management team is more important than the CEO in ensuring a company’s success. It seems that a CEO’s main contribution is to establish and lead a strong team.
On the other hand, CEOs can be a threat to a company and easily destroy shareholder value. All it takes is one bad decision and a complacent board. Just think of those Caesar-like CEOs who make value-destroying acquisitions. That is what Time Warner CEO Gerald Levin did in 1999 when he secretly negotiated the acquisition of AOL. unfortunately, the transaction destroyed more than two-thirds of the company’s value for its shareholders, as $50 billion of market capitalization for the old Time Warner share-holders went up in smoke in just a few years.
It’s tough to excel when you’re at the top. Collins says there may be many good CEOs but only a few great ones. It takes time to become an outstanding CEO. While the impact of a bad decision is obvious within one or two years, the impact of a good one develops over the long term. The first thing a CEO must do is choose the right team, the second is to give the company a competitive edge — and neither can be achieved overnight.
Because the stakes are so high, a board has to be careful in choosing a CEO. Directors dis-satisfied with an organization’s performance should think hard before replacing the CEO, because he or she may not be responsible for the com-pany’s difficulties. Making a CEO the scapegoat won’t solve the problem, and a successor may not do any better, especially if he or she is recruited from outside.
Why do in-house appointed CEOs have a better chance of success? First, they are familiar with the company and are in a better position to build a sol- id management team. Because internal CEOs often represent continuity, they generally avoid the high-risk behaviour that outsiders, less knowledgeable about the complex corporate environment, often exhibit to signal their arrival. Finally, the transition period, when major decisions are deferred, is shorter when the CEO has been promoted internally.
Directors who must choose between an internal candidate, whose value is a known quantity, and an outside candidate, whose value could prove to be a mirage, are well advised to bet on the candidate from within. That’s not to say they should never recruit outside; there are times when there is no other viable solution, but it should be avoided whenever possible.
For there to be internal candidates, the board and the CEO have to plan for succession. The board’s duty is to make sure the company has a good management team with in-depth knowledge of the issues. Every team member should be replaceable without undue disruptions. In fact, a company’s being forced to recruit its CEO from outside is a sign the board hasn’t done its job.
Research on CEO perfor-mance is very critical of the star system. Although it is known that success depends on the whole team, not on one star, media and analysts are rarely interested in the team-building process. Yet, this is the CEO’s one action that creates the most value.
If a team is just as important as its leader, should a CEO be paid twice as much as the team? In fact, in the past few decades, the astronomical com- pensation packages awarded to CEOs have probably had a negative effect on management teams’ effectiveness and corporate performance. What’s more, a true leader would be concerned about the gap be- tween his or her salary and that of the troops.
So here’s a word of advice to boards that want the organizations they govern to be successful. Ensure that your CEO is less of a star and more of a team player, someone who can choose and motivate the right people for the job, and train or replace the weakest links. Once a good team is in place, be patient.
Marcel Côté is a partner at SECOR Inc. in Montreal |
