Reasons for Failure of Chief Executive Officers - Coursework Example

Name of Student Subject No/Course Name of Professor Data Reasons for Failure of Chief Executive Officers Introduction The question on the reason for the failure of Chief Executive Officers (CEOs) is timely given the ongoing global financial crisis that the world economy faces this year which resulted to the fallout of leading corporations and of fast growing companies. Board of Directors (BODs) is compelled to fire CEOs who do not perform at par with their expectations particularly in strengthening the operation of their respective companies. However, not all BODs are willing to fire their CEOs, even if they want to. This happens when cost of firing CEOs are higher compared to its advantages particularly when the firing leads to losses of income among shareholders since these CEOs functions are deeply embedded into operations of corporations (Carolyn, Caroll & Griffth, John, 2007). This behavior of maximizing the value of CEOs even if they perform badly is a bitter pill that the BODs have to swallow in order to deter further corporate crisis. Thus, it is relevant to know the reasons for failures of CEOs to give warning signals on how to avoid these pitfalls and install necessary measures or support system that will help mitigate corporate crisis. It will also help strengthen the way CEOs function in their roles. This paper uses the nine lessons from the failures of CEOs that Glenn Waring (n.d) presented in his article published in Leadership Excellence. These lessons will be presented in the form of factors or reasons contributing to the failures of CEOs. It will be discussed individually expounded by other information gathered from other seven literatures from various authors. Thus, the structure of the paper will present the factors contributing to the reasons for the CEOs failures as headings followed by discussions from these literatures. Nine Reasons for Failures of CEOs 1. Inability to see the bigger picture. There are times that the weights of problems besetting CEOs are wider in scope particularly in a globalize market. Inability to discern the impact of a crisis in this globalize scope and hang on to some core businesses of the corporation that might not work in the face of the crisis being experienced by the company might be detrimental in the overall performance of the corporation which might lead to losses and subsequent failure on the part of the CEO. Another example of this factor for failure is the inability to see the bigger picture company’s growth in the long run by committing legal blunders during startup that eventually will make CEOs lose their hold of their own company. This is particularly true for CEOs of emerging companies. Founder of Regency Coffee, Timothy Tulloch, made this mistake at the start when he lost site of the long term effect of his partnership with Ronald Burton for the expansion of his business without the proper legal documents to layout the procedures and distribution of the partnership in case of its dissolution (Gruner, 1997, p. 64). He was too concerned with getting the money needed for his business expansion and too appreciative of the investment that Burton offered. Eventually their partnership did not last. However, in the absence of agreement for the distribution of shares in case the partnership dissolves, Tulloch ended up giving up the company to Burton which eventually failed. Regency Coffee was billeted as the number 148 of the 500 fast growing companies in the 1990s prior to the crisis. The same thing happened to Mike Mahmoodi who founded NIE International. He was booted out by his own partners from the company he himself set up. He was too busy accepting accolades for his work and expanding its operations that he lost sight of the internal politics going on behind his back leading to his ouster from the company (Gruner, p. 64). The risk to his hold on the company actually started when he gave large equity shares to his partners that its growth in the long run became detrimental to his own hold of the company. 2. Non-compliance to reliable accounting practices. Some CEOs are not comfortable looking at financial indicators of the corporation given their lack of training or in depth understanding on how to use numerous financial indicators as key information to avoid corporate bankruptcy. There are many cases of failed leadership of CEO in the past that are mainly due to non-compliance to reliable accounting standards or misrepresentation of books of accounts to window dress earnings and assets to shareholders and investors. Dave Weigand, the founder of publicly traded Adnet Telemanagement during the 1990s, was a victim of this practice. He was overwhelmed by the amount of investment from Midcom Communications, Inc. that offered to merge with the company that he failed to conduct due diligence to verify the stability and accurateness of the company’s financial practices from various sources (Gruner, p. 65). As a result, Mincom’s stocks plummeted after the consolidation due to restatement of its financials due to change of billing system which was not considered by Weigand when he accepted the offer to consolidate. As a result, the company he built for 15 years dissolved in just 60 days (p. 65). Another clear example is the CEO of Mattel, Jill Barrad that built the growth of the brand Barbie in the market. She bought the Learning Company without considering important data that would corroborate the ineffectiveness of such acquisition leading to troubles besetting the company (Filkelstein, Vogl, 2003, p. 28). American Insurance Group’s (AIG) former CEO Maurice R. Greenberg of 40 years exemplify the case of CEO deviating from standard accounting practices wherein he was forced to resign due to scandal in accounting procedures in 2005 (Byrnes, 2008). His hard work of building AIG into a global network of insurer was put in the dust with this blunder. Consequently, he blamed his successors, Martin Sullivan and Robert Willumstad for not following controls related to management of risks in insuring sub-prime mortgages that led to the crisis faced by AIG this year resulting to it being bailed out by the US government (Byrnes, 2008). 3. Unclear vision. CEOs who lead without a clear corporate vision tumbles at every step or lead the company without any direction. This would even result to destruction of his legacy with the company when the successor he selected is the exact mold of him which might not be good for the company in the long run. Thus, Harry Levinson (1974, p. 53) espouses the CEOs must not choose their successors to avoid the pitfalls of creating a legally of failure to their organizations. The probability of choosing successor from his experience is high alienating other characteristics necessary for the next in line leader (Levinson, p. 55). Reigning CEOs will not be aware of transformations taking place in market condition which is necessary consideration in selecting their successors. On the other hand, they might not be aware of their own strengths that contributed to the success of the company which is an important quality in the next leader. Lastly, they might be obligated to follow the company traditions that molded their style of leaderships which might not actually worked out in future organizational set up of the company. (Levinson, 1974). 4. Indifference. Harvard Business Professor John Kotter aptly said that “The energy level required to build an organization is tremendous” (cited in Gruner, 1997, p. 63). Inability to lead with a heart and mind (Waring, n.d.) to influence employees, suppliers and customers is another pitfall for CEOs. Facing the same issues daily makes management and leadership monotonous and unchallenging but such feelings will be detrimental to companies that are beset by a competitive market requiring constant innovations for maintenance. This was what happened to the founder of Create-A-Check, Linda Kesler, who became indifferent to the operations of her company and relinquish her duties to its President so that she can focus on family and have time to relax. No regular meetings were conducted to update her of what was going on with the company. Also, her oppositions to certain decisions of her appointed President were not heard. In the end, the company get into lots of debts that she have to go back manning its operations to create immediate changes to save it from bankruptcy. (Gruner, 1997, p. 62). The former CEO of Bear Stearns also committed such mistakes who in the end became the last person to know that the company is in a serious crisis and that the Fed is on the point of rescuing the company. He was playing bridge while the BODs are already meeting discussing the rescue plan. (Cohan, 2008). Though, he claimed that there is a conspiracy against him within the company, it still shows a sign of indifference on his part to know what was really going on within the company to respond earlier to the crisis. 5. Ignorance on the details of operation implementation. Inability to get interested with the details of the operation implementation and rely it to subordinates or associates is an inefficient way of leadership style. This makes leadership out of touch with what is going on in the details of corporate operations; hence problems are not address immediately that might balloon into a corporate crisis costing the CEO and the company’s reputation and position. Also, ignorance on these details makes CEOs unprepared to deal with changes in the market place particularly in the advent of globalization. Instead of dealing with this, CEOs create clones of their leadership styles which are currently useful but useless with these future changes. (Cited Dotlich, A.H. Vogl, 2003, p. 27). This is one factor why services of CEOs are short-lived. 6. Diverted attention from central operations. Some CEOs are too focused on acquiring or merging with other companies that it lost focus on their core business. Stephanie Gruner (1997) shared that 95% of failures of fast growing companies are due to problems central to the corporation. These problems are not immediately noticed or addressed since CEOs are busy searching for ways to minimize threats to the operations of their corporations (p. 62) such as acquisitions, mergers or expansion that it ballooned into something bigger and sometimes uncontrollable that the corporation itself suffers. That is what exactly happened to the CEO of Create-a-Check (Grunner, 1997, p. 62) who incurred various expenses to expand its market by hiring telemarketers and creating marketing advertisements which become failures leading to huge losses for the company. Also, their fast growth makes them hungrier for more growth that they move their operations at a faster level without paying attention to details of their operations. Doing this would have helped them lay out measures to protect their own corporate growth. It is estimated that during the 1990s, more than one-fourth of the 500 listed fast growing companies have failed (p. 62) due to CEOs committing such mistake. Thus, its leadership is not in touch with the reality of its own corporate operations. 7. Detached from customers. Inability or unwillingness to connect with customers and the overall market is detrimental to the CEO performance. A clear example is Motorola’s Christopher Galvin who failed to connect with market trends in relation to the emerging of digital communication from analog. Even though they have the data that indicates the market preference is changing from analog to digital, he did not pushed towards the trend. At this time, Motorola already owns the patents for digital cellular phones which they licensed to Nokia and Ericsson giving them direct information on the movement of the market in cellular phone. However, they did not take heed of this market information. In the end, the one they gave license to surpass them in the market. (Finkelstein, Vogl, 2003, p. 29). Leadership action is crucial on this situation for Motorola to retain its hold on the market by acting immediately in response to market’s demand. Johnson and Johnson’s CEO also failed to listen to its cardiologist customers’ feedback about the exorbitant price of its product of cardiovascular stent for angioplasty. They rely on their stature in the market with 90% share and the belief that given this almost monopoly they can dictate their price towards their customers. In the end, the company was flooded with complaints from cardiologists destroying its image in the market. (Filkelstein, Vogl, 2003, p. 30). 8. Detached employee relationship. Mattel’s CEO, Jill Barrad, found it hard to have effective executive subordinates to the point of many of her executives are departing the company; hence during the crisis related to the acquisition of Learning Company she found it hard to get advice or opinions from her people to help her sort out the mess that the company was undergoing. (Filkelstein, Vogl, 2003, p. 28). This is attributed to her behavior of not listening to her employees. Instead she proceeded with decisions alienating her employees. In the end, she failed and her tenure was cut short (Dotlich, Vogl, 2003, p. 28). Former American Airlines CEO, Donald Carty, alienated from relationship with employees that didn’t give him any clue how his employees will react to his decision to design attractive compensation packages to his top executives while negotiating with the employee’s union (Vogl, 2003). This happened because of the lack of relevant frank feedback from his employees or subordinates due to the fact that these people just constantly agree with whatever he say (Dotlich, Vogl, 2003, p. 28). He eventually resigned from his post. Bear Stearn’s former CEO Jimmy Cayne, on the other hand, was the last person to know of the crisis the company was undergoing on its liquidity (Cohan, William, 2008) which is a classic case of losing touch with employees to tell him what is going on. These things happened because the corporate environment created by these CEOs does not encourage truthfulness to be able to discern both the negative and positive sides of the issues being tackled. Thus, in the end they have no one to talk to balance their decisions on certain issues. 9. Inconsistent behavior. Most CEOs say one thing but act the other way which is clearly manifests the difference between the management philosophy and executive behavior. The former espouses listening to your associates and subordinates as part of encouraging interpersonal behavior within the organization while the latter manifests the actual behavior of the CEO. It is important for CEOs to create an environment that encourage subordinates and associates to be “frank, trusting and willing to take risks” (Argyris, Chris, 1973, p.56) so that they will not be detached from their customers and employees and they will not lose site of the center operation of the corporation. His inability to align his behavior towards creating an environment for such openness might hamper the growth of the company and even increase employee turn-over. Analysis of 200 meetings of 50 organizations focusing on management behaviors revealed that CEOs unconsciously demand conformity from their subordinates due to their competitiveness thereby not encouraging them to take risks. Thus, subordinates are afraid to provide feedbacks particularly if it goes against the CEOs ways or beliefs. It was found out that CEOs inability to align his behavior towards his intentions is due to the lack of training to do so; hence it is not within their consciousness. However, they perceived themselves to be single minded in achieving their goals but need continues feedback from subordinates in order to achieve it. (Argyris, 1973, p. 56). Such factors create negative impact to overall changed needed by organizations eventually leads to the failure of the CEO to facilitate its organizational growth. Conclusion Waring’s nine reasons for the failures of CEOs actually summarizes the various reasons or factors highlighted by various authors on the subject. Literatures from 1970s are still relevant to be included in the discussion of these reasons. It only proves that the problems identified by business authors three decades ago are still not overcame by current CEOs; instead they repeatedly committed repeating the same behaviors defined by these authors of long ago to be detrimental to their success as CEOs and the overall success of their organizations. Not acting out their words or intentions still prevalently considered as major issues in the organizations discussed that deter the culture of openness with subordinates and associates to help CEOs weigh their decisions on issues that put at risks their survival and company’s survival in the market. In fact, these behaviors that affect the culture of their organizations is one of the reason why Levinson (1974) espoused that CEOs do not directly name their successors since their manner of selection will be biased towards their own characteristics as leaders that will not be enough to face future challenges for the company. Compliance to sound accounting standards has always been highlighted as key to survival of CEOs since the 1990s. However, its non-compliance still prevails as one of the reasons for CEOs failures. Relying monitoring of sound financial indicators to outside sources like accounting firms makes them indifferent of the operations of the company that in the end will make them the last one to know of the financial disasters that the company is facing just like what happened to Kesler of Clear-A-Check and Jimmy Cayne of Bear Stearns. Also, basic management and marketing principles of being connected to employees and customers continued to be failed by CEOs even though many literatures already espouse such tenets. Sometimes, growth can lead them to ignore these basic but important aspects of their operations which are the basis of their continuous growth. Thus, CEOs must always bear this aspects in the manner in which they operate their functions. Risks are part of CEOs functions. Verging into it entails failures which consequently teach them on how they should behave, decide and relate with issues, employees and markets. However, given the competitive nature of the position these days, one cannot afford to make far reaching failures because it would mean losing their positions without restrategizing to avoid failing again. In the end, the behaviors of CEO carry the heavier weight in avoiding failing the companies and people they work with. Their ability to adopt and show integrity between their words and actions can help facilitate development or change within the organization that will be crucial for its growth. Thus, what comes between failure and success relies on the style of leadership of the CEO. Bibliography Chris Argyris, “The CEOs Behavior: Key to organizational development”, Harvard Business Review, March-April 1973, pp.55-64 Byrnes, Nanette, “Where AIG Went Wrong”, Business Week, Issue 4101, 29 September 2008, pp. 40-42, accessed at http://web.ebscohost.com.ezproxy.libadfa.adfa.edu.au:2048/ehost/detail?vid=1&hid=8&sid=90d4da77-9a50-4478-b18a-187280bb0a21%40sessionmgr7&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=buh&AN=34431257 on 19 November 2008 William D. Cohan, “The Rise and Fall of Jimmy Cayne”, Fortune, Vol. 158, Issue 3, 18 November 2008, pp. 90-104, accessed at http://web.ebscohost.com.ezproxy.libadfa.adfa.edu.au:2048/ehost/detail?vid=1&hid=2&sid=6f7040e8-ed63-439f-82d7-430085735f73%40SRCSM1&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=buh&AN=33650007 on 19 November 2008 Caroll, Carolyn & Griffith, John, “The Retention of CEOs that Make Poor Acquisitions”, Journal of Economics and Finance, Vol. 32, Issue 3, 1 November 2007, pp. 226-242 Stephanie Gruner, “Death by unnatural causes”, Inc, Vol. 19, No. 15, 1997, pp. 60-65, accessed at http://www.inc.com/magazine/19971015/1470.html on 19 November 2008 Harry Levinson, “Don’t Choose Your Successor”, Harvard Business Review, November/December, 1974, pp. 53-62 A.H. Vogl, “Understanding Failure”, Across the Board Interview, July/August 2003, pp. 27-32 Glenn Waring, “Why CEOs Fail: I see 9 reasons”, Leadership Excellence, p. 10 Read More