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Feature

Stephen F. Cooper
Chairman
Kroll Zolfo Cooper LLC

Why CEOs Fail

There are surprisingly common themes in the tales of corporate meltdowns.

By Stephen F. Cooper

Editor’s Note: Stephen Cooper became CEO of Krispy Kreme Doughnuts Inc. on January 18, 2005, when the company announced that Scott Livengood was stepping down as chairman, president and CEO of the troubled company. A specialist in corporate turnarounds, Cooper wrote “Why CEOs Fail” for Directors & Boards in 2002, not long after being named interim chairman of Enron Corp. What follows is an abbreviated version of the article that includes three of what he identified as the “six key factors that can lead a company into troubled waters.”

While the magnitude of the current wave of corporate crises is unprecedented, companies have been failing for decades. With every company there can be unique circumstances that catalyze its collapse: an industry-wide implosion (think telecom), an unrelenting foreign competitor (Japanese automakers), or even an unscrupulous executive (pick one). But fundamentally it is a CEO's job to lead a company to success -- or at least to avoid failure -- and it is the CEO who needs to be held accountable for performance.

As a restructuring specialist and interim executive, I have had the opportunity to see troubled companies from the inside. This position has provided insights into why, where, and in what ways CEOs can fall down on the job.

In fact it is only by examining and understanding what's not working that an enterprise can be rehabilitated. And throughout a wide range of industries -- airlines, telecom, construction services, transportation, retail, energy -- there are surprisingly common themes contributing to mistakes made by chief executives.

Buying into the ‘Rock Star CEO System’
With the rising tide of the economy over the last decade, American businesses have developed a culture of idolizing CEOs. Let's call it the Rock Star CEO System. It's a system that has relied on the myth that the CEO, like a franchise player or one name celebrity brand, is irreplaceable.

It automatically rewards chief executives -- regardless of performance. And it's a system that has brought about ever-growing gains and perks for a class of chief executives -- at the expense of shareholders and employees. As we've seen, maintaining those rock-star-like benefits comes at a price.

Clearly this is an area where boards can lead the way to reforms that restore credibility to corporate governance. For starters, CEO compensation needs to be aligned with performance, as opposed to the "no pain, no pain" insurance granted to many.

And boards need to promote a fundamental cultural shift: from indulging in self promotion to ensuring the long-term health of the enterprise. Remember: No one person is irreplaceable when results are not being produced. After all, you can't win the World Series with a clean-up hitter batting .150.

Unplanned Growth: Ignoring Financial, Operational, and Execution Risks
Expansion is alluring. It makes for newsy headlines. And if it looks good to Wall Street, it can boost a company's stock price. Inadequately planned growth, however, can have disastrous consequences.

Invariably the liquidity risks associated with growth are vastly underestimated. In fact, more than a few restructurings have been born of the acquisition urge, followed by unscalable mountains of debt. After all, in the Rock Star CEO System, many executives have been trained that high risk equals high profile, and they are immune from the risks -- unlike shareholders.

Rather than assume a best-case-scenario outcome for ambitious growth initiatives, boards can help CEOs with an insatiable appetite for risk by offering them repeated doses of healthy skepticism and hard, molecular-level questions. And it should not take a restructuring for a CEO and its board to impose a culture of operating as though cash is king.

Denying That Problems Exist
By far the single most critical factor responsible for CEO failure is management denial. It's not unusual in my business to receive a call midweek from a company that suddenly finds itself unable to meet Friday's payroll. How does this happen at large, multinational companies run by skilled people, who presumably have operating and financial controls in place?

In my experience, surprises of that magnitude are fueled by an ongoing management mindset that leans on reactive excuse-making rather than the proactive ferreting out of problems. Ironically, it can be a company's very success that lulls a CEO into complacency. And in complacency are sown the seeds of mistaking symptoms for causes, shunning bad news, and avoiding tough decisions.

Boards: Your Move
As the American public debates reforms and ethicists focus on moral lapses, boards can perform an invaluable service to all stakeholders: Demand the kind of performance that first-rate CEOs are capable of -- proactive versus reactive leadership that results in enhanced value over the long haul. Ask questions that might rock the boat. Run meetings more like trials and less like pep rallies. And by all means, where warranted, consider a reduction-in-force of some of those Rock Star CEOs.

Stephen F. Cooper is chairman of Kroll Zolfo Cooper LLC. In addition to his new role at Krispy Kreme Doughnuts, he continues to serve as interim CEO of Enron Corp. He has more than 30 years’ experience leading companies through operational and financial restructurings. A longer version of this article originally appeared in the Fall 2002 issue of Directors & Boards. All rights reserved.