The CEO Imperative
A new CEO, recruited from outside, will be the real turnaround agent who will enthuse his team to share his vision and accept rapid changes in work practices.
By Pradip Chanda
The first task of a new board in an under-performing company is to change the way the organisation works. Merely legislating a change in the work content and style are not enough. It requires induction of change agents at all levels, including the top. In fact, the prime responsibility of the board is to find an effective CEO, one who is capable of changing the mindsets of the employees to adapt to the demands of the new environment and help them perform to the best of their ability. The challenges are greater when the situation requires retraining and redeployment of skills and enhancing the knowledge base of the company.
This is not an easy task. Most incumbent CEOs of under-performing companies appear to have fallen out of step with market reality. As the going gets tougher, most end up being micro-managers fussing over routine chores and then justifying their actions by proudly stating that crisis management takes up all their time. Alternatively, they spend their time blaming other external factors for under-performance. The outcome is the total failure of the incumbent CEO, wherein he loses clarity of purpose soon after he loses the respect of his team and this leads to an erosion of authority.
It is unlikely that sick companies will have talent within that can be promoted. High-quality second-line managers would have left for safer havens. Among those who stayed behind would be a fair amount of those jockeying for power, especially as the CEO's authority diminishes. Promoting someone from this club is tantamount to stoking a highly avoidable fire.
To begin with such managers would be comfortable with the work culture of the under-performing company and will show a high degree of tolerance for slackness and inefficiency. Secondly, stuck in the quagmire of crisis management, they would have been insulated from innovations within the industry, making them unfit for the top job. Thirdly, they would be more comfortable looking for incremental improvements, when the demand is for radical changes.
The best bet is to recruit from outside. The new CEO, duly empowered by the board, will be the real change agent in the turnaround process and will enthuse the management and workers to share his turnaround-vision and accept rapid changes in work practices.
In the case of family-owned companies in trouble where family members occupy key executive positions, finding a new CEO will prove to be difficult. Here, the board has to persuade the owners to redefine their roles and continue as significant shareholders but relinquish their right to manage.
Unfortunately such soul searching among owners rarely happens-unless large shareholders and lenders press for it. As it is the shareholder's money that is lost in under-performing companies, they should point out to the owner that he has abdicated the right to manage the company and that the management of the company has to be entrusted to a new CEO.
Have the institutional lenders finally woken up? A recent news item suggests that it may be so. ''A bit of corporate history,'' said the news item, ''was created the other day when the 80 plus lenders to Arvind Mills decided to exercise their collective muscle and restructure the Board, with the right to nominate eight out of twelve directors, including the Chairman.'' However, my delight at reading the news item was diluted when I learnt that the lenders have agreed to make the choice from a panel suggested by the company. That is because such a concession to the present management of an under-performing company imposes unacceptable constraints on the Board's ability to act independently. I wonder how the newly-constituted board of Arvind Mills will address the CEO-selection issue.
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