Oct 212014

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Dr. Earl R. Smith II

In the second of this series I described how the flowering of hubris had damaged a company’s prospects. The third focused on the effects of an increasingly diffuse value proposition. Both of these had combined to increase pressure on management and cause stakeholders to begin to worry about the future of the company. Now I would like to turn to yet another problem area that had developed and was exacerbated as a result of the first two.

In Battle at the Cottage Gate I described how a recurring conflict develops with a growing company. The combatants are the traditionalist – those who have been with the company longer and have helped build it to its current level – and the futurists – those newer team members who have a more expansive vision for the company.

In this particular case, most of the senior team were on the side of the traditionalists. They liked the way the company was operating – at least when it was operating reasonably well. As the company grew, the team expanded. Most of the newer members had much more experience and were from much larger companies. They were not happy with a thirty-million dollar annual revenue. The pressures developed as the visions diverged.

Battle Lines: The situation was complicated by the fact that the company had taken two tranches of investment. There was a third combatant on the battlefield. The investors were not interested in having their investment evolve into a ‘lifestyle’ company. They were becoming concerned that senior management intended precisely that. And to a large extent they were right.

In my experience management – particularly the CEO – had to reinvent themselves on a regular basis. As a company grows, they have to redefine their roles and renew their vision for the company. In an ideal world, this would occur smoothly. But humans have limitations and proclivities. That that is where the wrinkle comes in.

The senior management – from the CEO down through the top three levels of management – had mostly reached the limits of their ability to grow into the roles demanded by the larger company. They began to drag their feet; trying to keep the company ‘manageable’.

Insurgency: In a three way battle one thing is sure – there is going to be a short stack at the table. The futurists had begun an insurgency. In the early stages, this amounted to private disagreements with the traditionalists. As frustration increased, the conflict became more public. The frustration of the futurists increased as they saw the future prospects of the company dimming. The response from the traditionalists was to try to defuse the problem by eliminating the insurgents. Things got hotter when they attempted to fire one of the leaders of the insurgency.

The senior vice president of business development decided to recruit allies in her battle with the traditionalists – she reached out to the board of directors. The Chairman was a captive of the founders but two seats were occupied by investor representatives. The Board split into traditionalists and futurists. But the futurists on the Board had the whip hand – they had the agreements that were executed when the investments were made. They threatened the traditionalists on the Board with a lawsuit based on their ‘failure to meet their fiduciary obligations to protect and extend shareholder value’. When the traditionalists on the Board began to realize that they were exposed both legally and financially, they had to decide if backing their allies on the management team was worth the risk. They found themselves supporting an argument that the company should not grow as fast as it could – as fast as the futurists (who were much more experienced and better connected than the traditionalists). A number of them became uncomfortable with this dynamic.

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