5 warning signs for company directors
05 April 2016
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Hello and welcome to another edition of Old Mutual Live Business, my name is Chris Gibbons. The CEO, usually the most watched member of any organisation, rightly or wrongly, but that’s the way it is. What he or she does or says is closely scrutinised, not only by close colleagues in the business. But also by people right through the company and, of course, by the board of directors. It is the board that will ultimately decide on that trickiest of questions, when is it time for the CEO to go?
The problem, of course, with watching something or someone so very closely for a long period of time is that you may be caught staring into the headlights, as it were, and miss the warning signs. But, to make sure that doesn’t happen, the Institute of Directors of South Africa has compiled a list of five warning signs for directors. To make sure you get this most critical of decisions right. Parmi Natesan is Senior Governance Specialist at IODSA. Parmi, thank you for joining us on Old Mutual Live Business. The first of the five, I guess, is the obvious one, flattening corporate performance, talk me through that one.
The first warning sign
Parmi Natesan: Yes, so there was some interesting research by Fox Universities School of Business where they spoke about kind of patterns that CEO’s go through. They say in the beginning of a CEO’s tenure they’re kind of all hyped to take risks, support new initiatives, learn rapidly.
What happens is the company’s performance tends to improve because of that. Then they note that as the tenure lengthens, the CEO tends to turn more inwards and become a bit risk averse. What you’ll find is that company performance actually starts flattening as the tenure increases.
CG: So, when you say flattening corporate performance, you’re talking about the numbers here?
PN: Not only numbers. I think numbers, yes, but also other factors like the company’s ability to even retain and attract staff. It’s almost like the reputation and perception that the outside world has of the entity.
CG: So can it be much more subtle than just the numbers?
PN: Certainly it can.
CG: Some of the other signs are a bit less obvious as well. You mentioned complacency within the executive team?
Watch out for complacency within the executive team
PN: Yes, what you sometimes find and especially if an executive team has been together for long. Is they kind of become complacent and almost start thinking alike. You don’t necessarily see that robust challenge and debate and new ideas.
I think there for me is very critical for the board to really consider when they’re doing the annual performance reviews of the executive team. Is to really start thinking about whether this is the right team to be taking the organisation forward.
What I often find with performance appraisal reviews is they’re pretty much historically based. They’ll talk about how the executive has performed over the last year. But do they take a step back and say, are these executives the right people to take us into the future? To take this company where we want it to be?
CG: If they have been the right team and they are flattening out, can we reignite that because there was a time when these people were very, very good at what they did.
PN: Sure and for me there’s no black and white answer here. You’re not saying: board, get rid of your CEO or executives every couple of years. But all we’re asking is that they really apply their mind, at least annually, to whether the current CEO remains the right person for the job. If not, what remedial steps could be put in place to make that so or is it time to part ways. That unfortunately is one of the decisions that may then be taken.
CG: Parmi, the third of your five warning signs is the emergence of a CEO’s court, what do you mean by that?
What is meant by a CEO’s court
PN: So, kind of leading on from what I said earlier about where the CEO and executives have been together for a long time. They start thinking alike and sometimes what you may find also is the CEO surrounding him or herself with weak executives.
Cause if you think about it, if the CEO has been there for long and is not taking risks and turning inwards etc, really strong executives will then show that CEO up. So it’s kind of a safer position for the CEO to be in, to surround him or herself with weaker executives.
CG: And those weaker executives can often be yes men or yes women.
CG: Lack of innovation is point number four, lack of innovation could be a company killer in this fast changing world.
The need to innovate
PN: For sure, one of the things we kind of found was the pace and extent of change that happens in business today. I think it’s increasingly unrealistic to expect a single individual to possess the right skill set to be an effective leader for an organisation for an extensive period of time. Because of the rate at which things change. For me, innovation, with the level of competition that we have in business, in this country, innovation is so key in having that competitive edge over other businesses.
CG: I’ll come to the question of is there a best time period for a CEO to stay or to leave in a moment or two. But your fifth point, an undesirable corporate culture. This is the fifth warning sign. Lots of disquiet, I assume, unhappy people, backstabbing. People who plain just don’t want to go to work at that organisation anymore.
Avoiding an undesirable corporate culture
PN: Yes, that’s one of the signs that has come up in our research. For me, I guess the takeaway for boards there is really to find ways to interact spontaneously with employees. To assess how the quality of the leadership is perceived and affecting the company.
Because often you’ll find that non-executive directors are mainly exposed to the CEO who sits around the boardroom table with them; and not necessarily that attuned to the rest of the individuals working in the organisation and what the organisation culture is like.
CG: I guess a sixth warning sign might be the Chief Executive who says: no, you directors, you stay in the boardroom, you don’t come near my employees, I’ll deal with them. If you want to know anything about this company, you do it through me. Somebody who is being very defensive in that respect whereas perhaps the right attitude would be, of course, you can talk to anyone in the company that you want to. You are a director, a board director, you have every right to do that.
A defensive director
PN: Yes and I think that’s why also King III recommends in one of its principles of practices that the board has sufficient access to line management and records. We don’t want the CEO to be the only access point for information to the board.
Obviously we say that with caution because we still need to respect the lines of governance and oversight versus management and the board. Non-executive directors shouldn’t get too involved in the operations of the entity. But at the same time, in order to have a good feel for what’s going on in the entity. There are going to be times where they should be having access to management, staff records etc.
CG: Is there then a best time period, a number of years for a CEO to stay at a particular company?
The lifespan of a CEO
PN: So that’s an interesting one because the Temple University study that I mentioned earlier, comes out to say that the optimal CEO tenure is 4.8 years, so close on five years. Coincidentally, that’s very similar to a Fortune magazine study of the US, large US entities. It said the median tenure for CEO’s was 4.9 years in the US.
Interestingly enough, a study was done in Africa by African Advisory Group and that shows that CEO tenure in our region is actually seven years. I wonder if that’s not linked to a perception of skills unavailability that South African companies tend to hold onto their CEO’s for a bit longer than it seems international companies are doing.
CG: Final question Parmi. We address this from a board of directors’ perspective. But if someone sitting, either alongside the CEO, let’s say exco level, maybe just beneath, sees these same symptoms. The five warning signs that you’ve described to us and begins to feel very strongly about it, how should they handle that?
How to handle a tricky situation
PN: I think it’s a very tricky situation to be in because I feel as a member of the executive team or of management, there’s kind of an inherent conflict with almost making judgment on your boss, kind of thing. I think if an individual feels strongly of any of these warning signs, there’s nothing stopping them from raising it. Either through, for example, the Social and Ethics Committee of the organisation which looks after employee wellness, which looks after the culture of the organisation etc or another trusted member of the board.
CG: Have a quiet word with the Chairman.
CG: There you have it, sage advice indeed. Let’s just go over those five points again. The first one, flattening corporate performance, the emergence of a CEO’s court, complacency within the executive team, lack of innovation and an undesirable corporate culture. Five warning signs that it may be time for your CEO to move on. They come to us from Parmi Natesan, Senior Governance Specialist of the IODSA. Parmi, thank you for being with me on Old Mutual Live Business.
PN: Thank you Chris.