Sunday, July 12, 2009

From Failure to Success: Can Leaders Reinvent Themselves?

All leaders grow corporations but some of them cause their collapse too. Mostly, the same successful leaders who have led the growth of their corporations through their competencies also cause their downfall. Control mechanisms such as boards, stock exchange reporting, share holder meetings have been unable to detect and correct the leadership failures that undo their own successful past. Two questions arise: What are the negative leadership attributes that lead to leadership failures? Can failed leaders rework their success through appropriate corrective actions? The case of Jan Baan answers these two questions but still the underlying leadership behavior is not adequately hypothesized.

Jan Baan : boon and bane for BAAN

BAAN, the ERP company was one of the technology success stories of the 1990s. BAAN benefited from the entrepreneurial and communication skills of the then chief executive officer and founder Jan Baan. A pioneer in ERP technologies of that era, BAAN nevertheless lacked basic management skills, grew under opaque and incorrect accounting practices and, by Jan Baan’s own later time admission, suffered from his ego and greed as a corporate leader. He had to eventually sell the company and exit the board.

The spirit of a pioneer, if he is also an entrepreneur, perhaps cannot be held back. Jan Baan became a VC and helped two established companies with pioneering technologies grow. The first one was WebExpress which pioneered global connectivity and conferencing solutions and the other was TopTier which pioneered portal solutions for ERP systems. WebExpress was sold to CISCO while TopTier was sold to SAP, both for handsome valuations. Both platforms continue to lead with their technologies in the new homes. Presently, Jan Baan is leading his own new entrepreneurial venture, Cordys which is engaged in cloud computing architecture which Google is pursuing as a game-changer.

Jan Baan’s track record with BAAN reflects a hypothesis that a leader fails when ego and greed overshadow his capabilities and competencies. Baan’s later day successes with the three follow-on companies suggests also that a leader can rediscover his touch as long as he retains his core competencies, overcomes his weaknesses and controls his ego and greed.

Leadership decline : causes

Reversing leadership failure through retained competencies and corrected behavior is easier said than done. Very few leaders would have it in them to acknowledge their weaknesses and failures even tacitly and embark upon a plan of professional reconstruction. Leaders of failing organizations often are drawn into seclusion, are distanced from competent but independent executives, are influenced by a servile coterie of incompetent executives and continue to be driven by an imagery of super-performance.

Only when performance becomes hopelessly eroded and stakeholder environment turns openly hostile such leaders recognize that they are confronted with, and confounded by, the worst phase of their careers. Leaders in such situations give up or are forced to give up their companies. The leaders have few options left in such terminal situations; seek external professional help (eg., turnaround consultancy), seek corporate alliances (eg., mergers or investments by larger firms, or take recourse to corporate law (eg., bankruptcy) to pull the chestnuts out of the fire. Few investors or boards, or for that matter the leaders themselves, can consider any other alternative.

It is indeed a personal decision by a leader to decide on the path he or she should take, given a legacy of dramatic growth which is followed by dismal collapse. The leader should recognize that timely admission of failure helps not only his company but also his own stature. From a situation in which events would control him he can then look forward to a possibility of his basic competencies being considered for a genuine revival process. More fundamentally, he should also recognize that he would no longer have implicit trust as in the past; and that he has to earn the trust once again, and with much greater effort.

A failed leader rarely gets a chance to manage a corporate turnaround. This stems from the fact that typically not only he would have contributed to the mess but would, more often than not, be refusing to recognize that that he, in fact, contributed to the mess. The logical and rational part of such leaders is overwhelmed by the emotional and egoistic part, ruling out any chance of voluntary course correction. Many times such leaders and their coterie of executives would continue to lead and manage their corporations till the doomsday without any change in professional style and without any corrective action, hoping rather naively that a dramatic plan or sudden breakthrough would still help them tide over the crisis.
Timely recognition of an impending crisis is as much a hallmark of a true leader as identification of an emerging opportunity is. Why then leaders fail to recognize the crisis so often? Leaders gloss over the emergence of crises because they tend to believe that their leadership is unassailable and the environment is not unmanageable. All the failed chiefs of bankrupt corporations, from Bear Stearns to General Motors, refused to recognize and respond to crises in logical, timely and transparent manner. This refusal syndrome is the common factor in failures of leadership.

This ostrich-like leadership behavior defies logic when one considers that there are several metrics of performance that are available for a leader to easily understand whether his firm is sliding into a crisis situation. These relate to competition, market share, growth rate, customer access, productivity, attrition, and a host of profitability ratios. Some very relevant financial metrics include asset turnover ratio, capital output ratio, debt equity ratio, interest cover, receivables percentage, payables percentage, profitability margins and so on. The catch is that leaders oftentimes view these as functional metrics relevant for functional heads rather than as corporate metrics that are even more applicable to the chief executives themselves. That each of these parameters has a vital bearing on the overall health of the corporation is not recognized by such leaders until it is too late.

Possibly, in some cases, an insecurity of losing managerial control obscures the clarity of thought in failing leaders and spurs them to try to work their way under a façade. A leader who overcomes this vulnerability can possibly recapture his magic, working in collaboration with an intelligent and mentoring board and a positively activist shareholder base. Except in cases of wanton mal-governance and illegitimate activities, a leader can offer himself to revive the company he led to growth first and to collapse next.

Pathways to correction

Even great organizations had failed in the past. IBM of the 1970s and 1980s is a case in point. As IBM historians state its leadership was in disconnect with the market as well its own organization. According to them, “IBM had all the ingredients for failure: arrogance, complacency, bureaucracy, a sense of malaise in the organization." A realization of failure and a new leadership model which emphasized contemporary management processes led to a revival. If a new leadership can achieve corporate revival there is no reason why an existing leader cannot do so, provided he rediscovers himself. A leader in crisis has to bring in positive change as a proactive alternative to being out of the leadership role.

Obviously there are pros and cons of an existing leader trying to retrieve the firm from a crisis vis-à-vis a new leader wielding the broom. Fundamentally, an existing leader can be a successful turnaround manager if he has reformed himself and is willing to live down his past in a transparent manner and redeem the future with constructive creativity. Such a leader will of course require strong support from the investors and board to lead the turnaround. As mentioned earlier, trust for failed leaders would not be forthcoming automatically but has to be sought assiduously. On the other hand, a new leader comes with little baggage of the past and with the full and automatic support of the stakeholders. He can thus take radical actions but, given his relative lack of understanding of the company, runs the risk of throwing the baby with the bathwater. The boards and investors who would have committed unflinching support unconditionally upfront would think twice before questioning the new turnaround leaders all too quickly.

In sum, if a failed leader recognizes a crisis in time and is willing to make a clean break to overcome the crisis there is possibly merit in trusting him on a revival path. There are, several actions a failed leader, his board and the investors can consider to preserve the virtuous part of the past while chiseling away the infamous blemishes and building a new genuine strength in the failed leader.

Fundamentally, the leader has to admit the impending crisis with his board on one hand and with his senior executive ream on the other. Such a move, no doubt, explodes the myth of invincibility and infallibility of single-handed achievement that he has built. But it also helps him to come to terms in a non-egoistic manner with the new reality of a potential failure that could occur if he takes no corrective action in a collaborative manner. This openness should lead to a five-step process of corporate correction: problem definition, solution definition, talent induction, strategic transformation and performance improvement.

Corporate failure is caused by loss of competitiveness vis-à-vis other competitors. Competitiveness is determined by benchmarking the company against the more successful players in the industry in a transparent manner. Benchmarking helps a leader define the problem in a cohesive manner. The leader then has to introspect on the roles played by his leadership style and the available talent pool in the loss of competitiveness. Once the company’s pecking order on the competitiveness parameters is determined, the leader has to put in place a framework of strategies to improve the company on its pecking order.

The turnaround strategy mix could comprise seemingly contradictory activities such as expanding viable businesses, shrinking or spinning off unviable businesses, enhancing asset utilization, selling off wasting assets, investing in new growth engines, retiring incompetent people, inducting new talent, raising fresh finance, driving innovation and creating new management processes. The strategy mix, when implemented in totality by an organization of competent and refurbished talent, would lead to a total strategic transformation of the company. Sustained performance would lead to the reemergence of the company as a healthy and profitable entity, once again firmly on the growth path.

Self-sustaining cash flow is ultimately the fundamental goal of any business -- it makes the company valuable to shareholders, employees, suppliers and customers, and the society at large. A leadership which stays connected with the imperative of business competitiveness is bound to succeed.

Cases of corporate revival through leadership

There are legions of companies that went through growth, mismanagement and performance failure to only prosper again through leadership reform and strategic change. Xerox, HP, Sony, AT&T, IBM, Renault, Nissan are but a few standing examples in the international scene. Lupin, Bata India, Singareni Colleries, HMT, Essar Steel, Balsaras, United Bank of India, Tanishq, Indian Railways, Reliance Communications, Britannia, and scores of other companies had seen turnaround through corrected and spirited leadership in India.

Leaders who presided over the failures of companies should question themselves why they cannot turnaround their own companies if historically other companies could be turned around by existing owners or leaders at least in some cases, and by new owners and leaders in most cases. It is also up to them to analyze as reformed leaders whether they would be able to turnaround their companies despite the negative overhang on their reputation, or try out their competencies in newer, relatively, unbiased settings. Whichever path is chosen, an honest self-evaluation of their leadership role in the corporate collapse is the first step towards that process. There will be two major hurdles in the way of such candid self-evaluation by a leader: firstly, the ego state of the leader and secondly, the obsessive state of his team. It is however a moot question whether failed leaders and their teams would make wise and timely choices in their moments of crisis, and become creators of positive change rather than end up as chapters of a frozen history.

Posted by Dr CB Rao on June 12, 2009

1 comment:

Narayanan said...

There is no doubt leaders can reinvent themselves; a pound of courage and an ounce of luck can turn things around. Given the rate of change in the business environment, it seems prudent to make the assumption every successful leader should be preparing for Act Two. What will help include:

1. Upfront agreement on leading performance indicators between the CEO and the board; periodic dialog inclusive of honest assessment and appropriate course correction.

2. Mandatory "sabbatical" for a fixed period of time wherein the CEO relinquishes the charge with systems in place for the next level of leadership to step up to the plate. This will do 2 things - reduce or eliminate the air of invincibility/infallibility for CEO and provides for some down time (i.e., reflection and introspection). Secondly, provides for on the job training for next level leadership thus preparing them for future challenges.