Oct 212014

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Dr. Earl R. Smith II

Getting to the Root of Things: 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. In the fourth part I turned to yet another problem area that had developed and was exacerbated as a result of the first two – a conflict between the traditionalists and futurists. Now, in this part, I would like to turn to one of the central causes of the range of challenges being faced by the company.

In the first part of this series, I described the call I received from a stakeholder to ‘assess the situation’ at a company that he had invested in. My conclusion was that there were five areas that needed attention. First, based on past modest success, hubris had flowered in the senior management team. Second, without a well vetted strategic plan, the value proposition of the company had become diffuse. Third, the growth of the company had produced two distinct cultures – the traditionalists and the futurists – and these cultures were increasingly at war. In this part I would like to turn to the fourth area – one that, more than any of the others, lies close to the root causes of the difficulties that the company is facing.

Roots, Trunks and Branches: Whenever I encounter complex situations, my first inclination is to sort out the problems based on their relationship to the wellspring – and there always is a wellspring. Many interventions go off track because symptoms are mistaken for causes or derivative causes for root causes. Much effort is saved if the root cause is first identified. It becomes the ‘place to start’ that shows the best chances of actually making progress in solving the range of problems.

It was my judgment that the first three areas described above were either symptoms or derivative causes – they had arisen because of a deeper fault. My fourth area – effective management oversight was needed but lacking – was my favored candidate. I arranged a series of meetings with members of the board of directors. My focus was on understanding their historical role and attitudes towards management, the relationship between the board and management, the directors’ fiduciary obligation to the shareholders, the relationship between sitting directors and the Chairman (in this case the CEO was also Chairman of the Board – an arrangement that I strongly recommend against) and the engagement of the various directors in the current attempts to turn the company around.

Building on Shaky Foundations: The first thing that I discovered was that the basis for service on the board was very loosely negotiated. Members had been ‘invited to join’ the board by the CEO. There was no shareholder involvement and no involvement by the sitting directors in any formal sense. As a result, it was not clear to any of the directors what their actual responsibilities were. In fact, two of the board members described their role as essentially ceremonial and ‘fulfilling certain legal requirements’. This attitude changed when I pointed out that, lacking a good D&O insurance policy (something that the CEO saw as an ‘unnecessary expense’) they were exposed to suits from minority shareholders.

The board was of the very worst kind. It was a rubber stamp for management and a permission slip for the CEO to do essentially whatever he wanted. Members had completely abdicated their fiduciary responsibility to the shareholders and become vassals of the CEO’s spreading cult of self-adoration.

Watching From the Sidelines: As a result of this, the flowering of hubris, diffusion of the value proposition and increasing warfare between the traditionalists and futurists were not seen as the responsibility of the sitting directors. They were reduced to the role of spectators. In fact, if one of the directors had not been a substantial investor in the company, the entire board might have ordered popcorn and sodas while settling down to watch the tragedy that unfolding before their eyes.

When it came to the hubris that flowered within the management team, board members felt subservient and not obligated to provide mentoring. They knew that it was a problem – in fact, they had heard from a number of decision makers within the client base that it was a problem – but they did not accept that they had either the obligation or authority to intervene. As a result, the hubris extended to attitudes between management and board members with the latter being seen as lackeys and ‘butt-boys’.

Management made decisions about expanding the value propositions of the company without serious board review. The board abdicated its responsibility to insist that there be a well developed and red-teamed strategic plan. They did not insist that underlying assumptions be tested or that a through competitive analyses be conducted before resources were committed. There was no sense that the board worked for the shareholders and management worked for the board. The prevailing culture was all ‘cowboy’ – everybody worked for management and only members of the senior team really mattered at all.

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