Chasing False “Profits”
An old friend Mark, who is the General Manager of a home furnishings retail store chain, invites me to corporate headquarters to meet his Board of Directors. The Board’s CEO Search Committee is seeking an Interim CEO to prepare him to become their next CEO. Mark says, “I have added your name to the short list, it would be great to work together.”
In earlier discussions, Mark spoke passionately about his dream to become a CEO. With that objective in mind, I offered he is “sitting in the catbird seat” in a job where he can acquire the hands-on skills to expand profits to a comfortable 20% and take sales from $60M to $100M. Doing so I suggest would polish his CEO pedigree and draw favorable attention of many companies. He adds, “I am very very motivated.”
First Step: Meeting the Board
The exciting day arrives. I’m looking forward to meeting other members of the Board Search Committee. We gather around a small, unpretentious table where everyone is seated. Rather surprised at the austere surroundings, I pull up a folding chair to the folding table. After introductions, I am left wondering about the dichotomy of the team before me, the build-up Mark had provided, and the discussion that was to begin.
Second Step: Defining the Business Scenario
The Board details that the company’s 200 employees spread throughout 10 stores had for the past several years experienced flat sales of $60M and a lean gross margin at 20%, which generated a steady $1M-$2M loss. Puzzled by these figures, I didn’t want to say that a 20% gross margin less 30% in operating expenses usually results in a 10% negative, and in this case, a loss of $6M. Then I learn they are also recruiting a CFO.
A casual statement revealed that they had been back-stopping operating losses by stripping money out of the employees’ retirement savings account. Jolted by this comment, I do a double-take because:
This is a “third rail” in executive circles never touched by ethical executives who don’t go wobbly under the pressure to produce profits.
Generally the cannibalization of the retirement fund isn’t communicated to the majority of employees … who would be infuriated to hear that their retirement savings were being drained by the same executives they trusted. Mark hadn’t told employees as well. Then a Board Member announces, “We’re not like the other companies you’ve worked with; we’re in good shape and can continue to lose $1M-$2M a year.”
What is going on here?
Right then I realized it was time to put on my helmet and step into the arena. I asked Mark if there were any recent pressures for the company to seek a CEO at this time. The three members of the Board glanced around the table at one another and replied they couldn’t think of any pain points. I try again to be of service, “Then what has changed?” The most senior Board member explains, “We may want to change … or we may not!”
Again, looking at Mark I ask what has been done to make a profit. Mark proudly explains that “he” recently launched a new mattress line that had been anticipated to grow sales enough to create a profit for the company. When asked about the profits generated during the past year, he said “none so far.” Mark continued that he had single handedly structured the nuts-and-bolts and heavy-lifting phases required to get mattresses in their stores. The inference clearly defined a solo effort; the other Board members sat with blank faces.
Third Step: Stop Running In Front Of Your Dog Team
Let’s slow this down I’m thinking so I tell a story. I began by asking the Board to picture a dog team pulling a sled with the driver in the snow. “Now let’s think of Mark as the driver, running in front of the dog team (the management team) – pulling both the dogs and the sled (the company)”. I agreeably suggest the current power dynamic is backwards. In my experience the desired power dynamic is for the dogs (the leadership team) to run out front – pulling the sled (the company) and Mark (the CEO) riding on the sled.
Presented with this mental illustration, the Board took copious notes and heads nodded in agreement. They saw that their organizational chart with one person controlling everything, running all the departments, and making all the operational changes was actually holding them back from scaling-up the company. For Mark, whose first job was driving a truck with the company 25 years ago, this was a revelation that a CEO can “let go” and then must “manage the managers” who in turn inspire the team to pull the company to the goal-line.
Fourth Step: The Board Refocuses – We Execute Like We Go to War
“Do you have a vision?” the Board asks me. This is testament to the “great man” theory of business which invests a lot of money on one person. Unfortunately looking for a savior opens up a board for manipulation by a charming executive who will glide through recruitment screens. The reality is that business is a craft, we learn by someone looking over our shoulder and making mistakes.
A good CEO instills in company employees a sense of professional aggression – seizing the offense and demonstrated first hand. If the Board and CEO want to crush low financial performance, they must engage in hand-to-hand business combat. A CEO, like a battlefield adviser, should be a force multiplier. They need to share risk and reward, and “get in the mud” with the troops. Only then does the team gradually take pride in its performance under the leadership of their persistent CEO.
Reducing business to “epiphany myths” obscures the qualities that are responsible for business success.
Transformative leaders execute a deep dive into the organization. A fair amount of courage is required of the CEO to crawl into every dark corner of the company, remain open to read environmental clues of emerging trends, and drop treasured beliefs or products when contrary evidence mounts.
In our culture business myths seduce us into believing there is a prophet who will show us a pre-packaged vision. One that doesn’t require hard work or force us to change.
As an example, skateboarders get hurt a lot practicing and they fall breaking bones before mastering a new trick. There is no secret to skateboarding or business. You fall, you break stuff, and you get better. Business people who go the farthest, like world-class skateboarders, embrace breaking as their friend helping them go to the next mastery level.
When analyzing the people accomplishing super-human feats (such as in endurance sports, survival situations, and the military) we see them all go to the edge of their comfort zone then symbolically jump off the cliff – surrendering their pride and “accepting everything just the way it is” – propelling them forward through the walls of their defenses to accomplish the seemingly impossible.
Vulnerability makes the walls we encounter into the open doors we need to walk through.
Mark’s challenge in the company is in a sense to “break down” before “breaking through” to the next level. This is servant leadership – when reality calls the CEO changes whatever it takes within himself to meet the demand. They do the shifting to serve the larger good of the business. That is probably the greatest gift a leader can give their business.
For CEOs…learning is not mandatory and neither is survival.
Decision-Making Formats: Gold Standard for Success
We’re human. We react to our emotions, our personal agendas, and heavy influences from bosses. CEO’s have to instinctively juggle and harness this immense variability to drive organizational change in the preferred direction – requiring breakthroughs in products and processes!
Today a new kind of business solution is sweeping the business community. The old style was based on the premise that people are rational, responding with logic and reason when threatened. As can be seen with Mark’s team, the new format depicts humans not always making rational choices, and at times looking for a “higher power” to make things better.
Entire corporate teams can be guided by the tiny change in a “decision-making format”. These small elegant points of change originate in behavioral economics and are appealing because they show how a cheap change in direction often produces an amplified effect. For Mark’s company the decision-making format called the “profit ratio” was forgotten. Best Practice to get profitable is simply cutting expenses to produce a 20% after-tax profit at the current probably lower sales level. Deep cuts in expenses first taken out of executive payroll from 30%-50% per leader, sends the right signal. People like it when the big boss takes a bigger bite out of his salary than anyone elses.
Decision-making formats enable CEOs to focus on small concrete opportunities to bring about powerful positive change, rather than pulling us toward solving the grand and abstract at 30,000 feet. Mark will rise to the occasion.
(Written by Chas Klivans; Editing by Meg Liddle and Lolly Crowley)