What Every New CEO Should Know

Bruce Pasternack, Karen Van Nuys, and Donald Perkins
From “Across the Board,” October 1998

So you’ve just been named the CEO of a major corporation. Congratulations! Now what? If you polled your company’s board or owners, they would likely remind you that you were appointed, not anointed. Regardless of how powerful the job may seem from inside the organization, you are ultimately still an employee of the corporation, and you need to add value every day that you draw a paycheck.

Today’s corporate leader faces a set of constituencies whose approval must be earned continually, unlike a crowned monarch who rules by right of inheritance. Perhaps you’re one of the lucky few who has spent the last several years being carefully groomed and prepared by your predecessor to take over the job. But more likely, you’re like most new CEOs, who find themselves feeling less prepared than they expected in the face of the most important challenge of their careers. In either case, you would probably welcome the advice of someone who has been there before and knows firsthand what you’re going through.

Over the past three years, Booz¬∑Allen & Hamilton has researched the issue of how CEOs come into the top job, what factors lead to smoother transitions, where the most common obstacles lie, and how others have managed the transition process. In the course of this research, more than 100 CEOs have reflected on their own transition experiences and the advice they would give to other CEOs coming into the job. Of course, each person’s experience is different, but among all the advice we have heard from CEOs who have been there, these five elements are at or near the top of most lists:

  1. When you know what needs to be done, do it sooner rather than later. But don’t rush into anything.
  2. Act quickly to replace weak managers and those who fail to get on board with your new program.
  3. Develop a plan for prioritizing the demands on your time, and stick to it.
  4. Establish your own relationships with board members, strengthening the board if necessary.
  5. Start looking for your successor.

When you know what needs to be done, do it sooner rather than later. But don’t rush into anything.

Many new CEOs come into the job believing that they have to do something big in the first 100 days of their tenure or risk losing their only window of opportunity to make a lasting impact on the organization. But we have spoken with some CEOs who spent their first several months in the new job learning the business-they didn’t formulate organizational changes and implement the new strategies until after they felt better informed. As the managing director of a large British bank told us, “The `first hundred days’ theory is shallow and tinny-don’t act straightaway. Learn and listen first.” However, most CEOs agree that there is a “honeymoon period” in the first year or so when the organization expects more change and is, therefore, less resistant to transformation.

Although some new CEOs take a few months to define organizational strategy, most know right away what they want the organization to “feel” like. One CEO of a large U.S. resource company recommends institutionalizing at least one organizational value “upon which the entire organization can agree wholeheartedly. For us, that value is safety, especially worker safety. And for me, this is not a cost-based concern or a workers comp issue; I genuinely care about the health and safety of the people who work here. Once we established that common ground, it was possible to enlarge the scope of what could productively be discussed.”

New CEOs often make a point of articulating these new organizational values, norms, and beliefs from day one. One new outside CEO at a large chemical firm knew that the formal, hierarchical organization he had inherited would be unable to compete in new, fast-paced markets. So he immediately began breaking down rigidities with symbolic gestures such as eating in the cafeteria, walking the halls in shirtsleeves, and dropping by managers’ offices unscheduled. Since the entire organization was watching intently, scrutinizing the new CEO’s every move for implied signals, even these details had a big impact.

The organization’s hypersensitivity to a new CEO’s behavior has a downside: Many CEOs lament that, because the organization is watching so closely and is so quick to interpret every word or action as a meaningful signal, nothing can be casual anymore. New CEOs cannot think out loud, cannot just bounce wild ideas off whoever happens to be in the room, cannot simply sit quietly in the back of the room during an operating review. A speculative observation may seem to be an order.

Act quickly to replace weak managers and those who fail to get on board with your new program.

Many new CEOs can quickly divide the top teams they inherit into three distinct categories: Those who clearly should be kept, those who clearly should not, and those in the middle. Although the third group may be small, it usually proves to be the most problematic for new CEOs and the group upon which the CEO spends the most energy. Often, managers in this group have been loyal supporters of the new CEO, or are longtime team players in the organization, but lack the skill and competence levels of the obvious keepers. Alternately, managers in this group may be talented and competent but slow to accept the new CEO’s vision or strategy.

More often than not, CEOs reflect that they spent too much time and effort trying to get these competent but intransigent team members on board rather than removing them right away. The CEO of a U.S. auto supplier described his own experience: “There was one guy who didn’t buy into the agenda early on, but he’d been an amazingly effective change agent in the past. I wanted to give him the benefit of the doubt and kept thinking he’d come around, but he never did. I ended up firing him a year too late and wasting a lot of time and energy.”

In fact, one of the more striking findings from the interviews is that, among all the CEOs who have talked about their early team-building activities, not one has said he regrets moving too quickly to remove uncooperative team members. All those with regrets wish they had acted more rapidly to remove those who did not (or could not) get on board with the new program right away. One energy-company CEO who felt he did move quickly enough to restructure his team still wished he had done so more openly: “I spent six months preaching team behavior and punishing misbehavior behind closed doors. I was doing the right things but should have made them more visible to other members of the team.”

Develop a plan for prioritizing the demands on your time, and stick to it.

Just about every CEO we have talked to was shocked by the intensified demands on his time immediately following the public announcement of his appointment. As one head of a large manufacturing company put it, “It’s as though someone put a big sign over my head that says `Send junk mail here.'” Another noted that, after being announced as the new CEO on Jan. 1, his calendar for the coming year was already half full by Jan. 2. CEOs who have held the job for a while using a number of strategies to deal with these increased time demands.

First and most obviously, many CEOs react by creating more time in their workday to think about the important issues, not just the pressing ones. Plenty of new CEOs come to the office earlier in the morning than they used to; one CEO of a large U.S. resource company turns off his telephone, locks his door, and works from 6 a.m. to 9 a.m. without interruption. Many CEOs go home with briefcases full of reading material-as one new CEO of a Fortune 100 company put it, “I read everything I can get my hands on.”

Another common theme is simply, “Get better at saying no.” This sounds straightforward enough, but the real trick is figuring out which obligations can be turned down or passed along. The tasks of prioritization and delegation, therefore, become central to the new CEO’s operating strategy, and a new CEO must create a culture in the organization that understands delegation and accepts responsibility. Many managers resist making decisions and taking responsibility for them if they believe that the CEO will make the decision (and take the responsibility) instead. Insist that managers make their own decisions.

Demands from outside the firm, for example, to sit on the board of a charitable or community organization, can often be handled similarly. Delegate a vice president to act as your corporate representative on the organization’s board, giving her clear action guidelines and spending limits. Once they understand that the VP has real authority to make decisions and financial commitments on your firm’s behalf, many outside organizations will be satisfied without the CEO’s personal presence after all. If you’re not also delegating the most routine outside requests-including most speaking engagements, trade-association functions, and routine analyst meetings (send the CFO instead)-ask yourself why.

But what are the legitimate responsibilities of the CEO-the issues that really should not be delegated? Every business will have a different list, but those we hear most frequently include changing and molding the corporate culture, communicating with the team and management, building leaders throughout the organization, and dealing with any legal issues that could represent real crises for the firm.

Many CEOs get personally involved in handling significant customer complaints, and several CEOs note that customers are their best source of information about how the organization is really behaving. There are few other places a new CEO can turn for such straightforward feedback. Whether this involvement takes the form of scheduling a personal visit with one customer a month, taking phone calls from important customers with serious gripes, or reading monthly summaries of customer complaints, most CEOs recognize the importance of a direct connection to the customer-information channel.

Increasingly, CEOs seem to be working directly with their largest shareholders, especially institutional investors, in less adversarial relationships than in the past. Several have noted that these constituents are often easier to appease than they initially appear. One CEO of a Latin American bank told us that when he calls large shareholders who have complained, “often they are so shocked that I’m the one on the phone, they forget why they were upset.”

And finally, many experienced CEOs create a regular opportunity to deal directly with employee suggestions and complaints. Using forums such as e-mail or monthly breakfast meetings with a small number of employees, many CEOs find that they get candid and useful assessments of the company’s most important problems and opportunities.

Establish your own relationships with board members, strengthening the board if necessary.

More than any other group, the board of directors is cited by CEOs as their most important constituency. But few new CEOs have much experience working with boards.

The attitudes expressed by new CEOs today about what they want from their boards seem to be changing. Unlike the “puppet boards” installed by CEOs like Occidental Petroleum’s Armand Hammer (who kept signed, undated letters of resignation from each of his directors locked in his desk drawer), CEOs today tell us they want boards who can truly help them keep shareholders happy by helping to plan and direct firm strategy. These days, CEOs want job security not through rubber-stamp boards that are personally indebted to them, but instead through the genuine support of their shareholder-owners that results from having a sound, clearly articulated strategy and executing it well. To that end, CEOs (especially new ones) need their directors to provide real insight, experience, and expertise that apply directly to their business, and to challenge and question the CEO’s ideas and proposals with the kind of vigor that won’t come from anywhere else in the organization.

A good first step is for the new CEO to meet personally with each director, as soon as possible after the appointment, and have an extended discussion about the director’s most pressing concerns, greatest hopes, and best ideas for the company’s future success and for the optimum contribution of the board. Such meetings are most effective if they take place on the director’s “home turf.” This approach generates much more considered input from directors than if the CEO simply announces an open-door policy, and leaves it to directors to come in voluntarily with thoughts and issues. Many CEOs report that their directors had never before been approached in this way but were delighted to have their opinions actively solicited and that the ideas generated were genuinely useful and enlightening.

Next, it is critical that board meetings be designed to generate productive interactions and to give directors maximum opportunity to contribute effectively. Reading materials should be sent to all directors well before meetings; send too much information rather than too little, and let directors choose what not to read. One director we know receives the same clipping services that management does, so he has complete access to uncensored information. Board strategy sessions are important and take time not often available at regular meetings. An annual weekend meeting including some informal social interactions, with spouses, can foster the kind of collaborative atmosphere that characterizes the best boards.

But no meeting design can make up for a weak board. The high expectations facing a new CEO entitle him to ask for and expect real help from the board. If the board cannot provide such help, it is reasonable for the CEO to expect to be able to make changes, including improvements in individual director performance, that require performance appraisals for directors. There are many ways to design these appraisals, and the topic always generates lively discussion among new CEOs.

In choosing new outside board members, it is important to maintain overall balance on the board. Key traits to look for include absolute independence (including financial independence of the director’s fee), demonstrated experience and judgment, willingness to be in the minority (even if a minority of one), diversity of perspective, and chemistry with the rest of the board. Existing directors and the CEO should use the same due diligence in choosing new directors as they would in choosing key employees. Call all references, ask specifically about how candidates work under pressure and get input from any mutual acquaintances. If such scrutiny scares off a potential director, be thankful: Boards are rarely hurt by the directors they don’t attract.

Some tips for getting the board on board:

  • Set aside time at some board meetings for recreational activities such as golf or museum-going, to stimulate social interaction.
  • Encourage a director who expresses particular concerns about a specific division to spend a day with the division president and report back to the board.
  • Ensure that new directors do their homework and come to their first board meeting hyper-prepared and ready to actively participate. This can serve as a spur to incumbent directors who have grown complacent.
  • At least one director on your board should have enough scientific or technical knowledge of the industry to critically evaluate new strategies on technical grounds.

Start looking for your successor

Finally, keep in mind that all the good advice in the world won’t help a CEO who forgets that he was elected, not coronated; ultimately, if shareholders aren’t happy, nobody is. This is more true today than ever: A recent study by Robert Parrino and Laura Starks of the University of Texas at Austin and Mark R. Huson of the University of Alberta reveals that, among firms with stock performance in the bottom industry quartile, the probability that the CEO was forced from office almost tripled between the early 1970s and the early 1990s. One CEO of a large utility company puts it this way: “These days, getting the CEO position is a lot like becoming a professional football coach; when you’re hired, you also know you’ll be fired. The only question is when.”

 

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