New CEOs are no longer just pressured to produce excellent results immediately. They need to prepare and obtain key insights and perspectives before they even accept the position and through the preparatory phase as they come on board to the new job, says David Fubini
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 time – often months – to figure out how the company really worked and to develop a prescription for change and begin enacting major new initiatives.
Referred to as a ‘honeymoon period,’ this initial timeframe might involve meeting individually with executives, going on road shows to visit facilities, hosting ‘listening tours’ 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 act – and in today’s environment, inaction is almost always counterproductive and costly to all stakeholders.
In mid-2017, General Electric changed CEOs. After Jeff Immelt’s long-planned departure was executed, the board chose John Flanner to be CEO. In an early interview, Flanner 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: ‘People want to get the answers sooner.’
Deane Dray, an analyst at RBC Capital, seemed to concur as he was quoted observing that GE would be ‘in a state of limbo’ until the review was finished. The market abhors any vacuum and so fills it with concern and a sense of downside risk, and 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 Flanner had arrived better prepared – if he had hit the ground running with these plans finalised and ready to be enacted – the reaction within and outside of GE might have been different.
As difficult as it is for long-tenured CEOs to make fast decisions, it’s even harder for those new to the role – and 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 USD had installed new CEOs – some 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:
1The 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 cutting-edge modelling 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 long-term strategic renewal in favour of more immediate actions.
2Emergence 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 slow-acting 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 monetise 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 ‘radical and confrontational’ to those who are ‘accommodating but insistent.’ 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.
3Change 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 behaviour. Similarly, boards are looking to hire stars who have ‘been there, done that.’
They want to be able to say: ‘We hired Julie because she turned around Company X; we knew she had this capability.’
At the same time, they are increasingly under pressure to question the perceived value of ‘qualified’ internal candidates who have never been CEO.
All this means that CEOs need a different start-up game plan than their predecessors. It’s not just that they are pressured to produce excellent results immediately. It’s that they need to prepare themselves by obtaining key insights and perspectives before they even accept the position and through the preparatory phase as they come on board to the new job. CEOs must use the interview phase as due diligence on the issues and needed operational changes. Listening carefully and thoughtfully even while interviewing for the role is a critical skill, and one too often ignored in the rush to impress.
This is an edited extract from Hidden Truths: What Leaders Need to Hear But Are Rarely Told, by David Fubini (published by Wiley, 2021).
David Fubini is on the faculty at the Harvard Business School. He is a Senior Lecturer and Henry B Arthur Fellow in the Organizational Behavior Faculty Unit and teaches MBAs as well as executives.
He is the leader of the Leading Professional Services Firm Program and is a core faculty member of the Mergers and Acquisitions and Board of Directors Programs for Harvard Business School’s Executive Education Efforts.
Prior to Harvard Business School, David spent 34 years at McKinsey & Company where he was a Senior Partner and Managing Director of the Boston office and founder of its Merger Management Practice.