There is a common misconception, perhaps even held by senior executives themselves, that serious mistakes go unpunished. Certainly the public perception is there’s always another well-remunerated position waiting for executive miscreants. Sydney Finkelstein, the Steven Roth professor of management at the prestigious Tuck School at Dartmouth College, begs to differ.
A study of 51 chief executives of large companies that got into trouble shows only two people managed to find comparable employment following their ignominious departure.
“The others did not,” Finkelstein announces bluntly. It’s not just the chief executives but also the chief financial officers who are in the firing line.
During a succession of scandals — including Enron and Worldcom — in 2000 and 2001, more often than not it was the CFO who ended up on the chain gang, rather than the ultimate boss.
“You’re going to pay a price if you’re there and you don’t do anything about it — there are a number of CFOs that ended up in jail,” says Finkelstein. “Sometimes you can’t pin it on the CEO and the CFO has the primary responsibility for the financial statements and internal accounting.
“Not saying something, not speaking up has serious consequences.”
Staying mum is also bad for business, and one of the frequent mistakes made by executives in underperforming companies identified by Finkelstein during his career in executive education.
This is as true of Enron as it as of more recent disasters at Bear Stearns and, in particular, Lehman Bros. To Finkelstein’s mind, silence is usually a reflection of the culture of an organisation.
“The reality is that time after time — whether it was people who knew about some of the questionable accounting going on or, in other companies that were not involved in illegal activities but had problems, people weren’t asking questions,” he says. “They had a closed culture and that’s a very common element across the board.”
Of course, there is an employment disincentive to speaking up: “People keep their head down because they don’t want to lose their job.”
But, Finkelstein says, “For the CFO, it’s a Catch 22. If you don’t do anything about it you’ll take a reputational hit.”
He’s not talking about being a whistleblower, which would almost constitute career suicide for an accountant: “You don’t want to be in a situation where you have whistleblowers; you want to be in a situation where, if something’s gone wrong, you find out about it in enough time to do something about it.”
One plan at a time
Many mistakes were made during the recent global financial crisis and Finkelstein says some of them were entirely predictable.
Decision-making, for instance, was in some instances woeful. It is common sense, when faced with a crisis, to identify four or five alternative solutions, collect data and analyse the results and discuss the ramifications of each strategy before implementing a plan.
Sadly, more often than not, executives panic then seize on a single solution and then come up with ways to make it work, he says. “Often they justify that solution to others by clinging to data that’s consistent with that solution and disregarding other data that’s not quite so consistent.”
Finkelstein calls this blinkered type of thinking the “one plan at a time” strategy. You don’t have to go far to find an example: Lehman Bros and its chief executive, Dick Fuld.
“He came up with one plan at a time, which was to do everything he could to retain the independence of the company, to not look for a business partner and certainly not sell out to anyone else.”
Compare Fuld’s behaviour with executives at Merrill Lynch, “which was slightly stronger financially than Lehman but it was also weak,” he continues.
“They actively looked for a partner and ended up with Bank of America. We could argue the merits of whether Bank of America did the right thing but from Merrill Lynch’s point of view it was a huge coup. They didn’t go out of business. They found a deep-pocketed saviour of sorts.”
Guardian of resources
Finkelstein asks, “Why didn’t Lehman Bros look for that type of partner so they could continue in business? The answer is this one plan at a time, which is this inability to look at any alternatives.”
Fuld’s assumption was the present crisis was no different to previous calamities from which Lehman emerged intact. In the early 1990s, Lehman was exposed to the market fallout following the Russian default on sovereign bonds and the destruction of Long Term Capital Management; what’s now called the LTCM crisis.
“Fuld, who was the CEO at the time, as well, was going around the offices saying, ‘We got through LTCM, we did it and we’re going to do it again’. There was no understanding that the LTCM crisis was not at all comparable,” explains Finkelstein.
Assumptions can be fatal. Behind every corporate strategy is a set of assumptions and, he says, often these are not discussed in enough detail. Sometimes, different members of the executive team hold a different set of assumptions, even if the conclusion reached is the same.
The CFO, as the guardian of company resources, plays a critical role, to Finkelstein’s mind, in ensuring those assumptions, particularly surrounding the potential cost, are explicit in any strategy.
“The people in that room have primary responsibility for executing on that strategy and if they’re on different mindsets about why they’re doing it, then you can end up executing on that strategy in a very un-cohesive manner.”
Not nailed down
Again, the global financial crisis provides a salutary lesson about the dangers of making the wrong assumption. Until Bear Stearns went down the gurgler, many people believed debt was a good thing, something to be used to get from A to B.
PGG Wrightson’s Craig Norgate, a man with a fearsome reputation for not taking no for an answer, is a good local example. Norgate failed to consider the ramifications of going unconditional on a deal to buy Silver Fern Farms when funding was not nailed down. The company is still struggling with its debt burden as a result.
Finkelstein says CFOs need to “step up and challenge and ask their boss, ‘Why are we doing it this way’?”
Sydney Finkelstein was a keynote speaker at the recent CFO Summit in Auckland.
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