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Reader Profile

Al Koch
Managing Director
Alix Partners

Editor's note: Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today. If you'd like to participate in this section in the future, please email Scott Chase.

Slaughtering the Sacred Cow: Knowing when and how to do it painlessly

Nearly every business has sacred cows: those pet projects, orphan subsidiaries, or obsolete procedures that are championed or protected by someone in the company with influence, but that lack rational business sense to most people close enough to the details to have an informed opinion. Sacred cows vary in their age, size, and urgency to be slaughtered. The good news is that most are relatively harmless, but some are definitely problematic, costing a company customers, vendors, market share, and eventually money. Recognizing problem sacred cows and knowing how to send them to pasture are critical tools for an effective director.

Where do sacred cows graze in your company?
A sacred cow can take many forms. It may be a corporate orphan whose performance is lacking – starved for attention, capital, and the managerial know-how needed to fix it. Or it may be a pet project of a senior manager, such as a new product, expansion into a new territory, or development of a different distribution channel. Sacred cows may also be policies, products, or processes that have long outlived their usefulness. Whatever they are, sacred cows are characterized by their lack of “good business sense.”

Directors need to recognize that one or more senior managers are typically the sponsors and protectors of sacred cows, as they are in a position to sustain and possibly even expand them. Often, the CEO is the sponsor, but not always – especially in large companies. Some directors may be surprised to find how easily sacred cows can be tucked away in a company’s nooks and crannies, particularly in their infancy.

I saw my first sacred cow early in my career:an electric pencil sharpener at a stationery products company with no experience or expertise whatsoever in manufacturing electrical products. The CEO loved this product, and his staffers worked overtime to make it look good on paper. To use a different animal metaphor, this proverbial pig needed a lot of lipstick, sapping valuable time, effort, and money from the CEO and his complicit employees.

Senior managers can easily hide and fatten their sacred cows. Expense and revenue allocations are common ways. For example, not charging the project for a fair allocation of expenses or keeping the expense at the corporate level can easily obscure a wasteful project or product. Sharing revenue between operating units or product lines can also disguise a sacred cow. Another way to hide one (or many) is through a business plan built without benchmarks to measure a project’s progression. Such a plan will effectively conceal a pet project spinning its wheels and wasting corporate resources.

One of the most insidious sacred cows stems from management style. Several years ago, I worked with a large company whose CEO loved to devote Monday mornings to a meeting of the executive committee. Every Monday, about twenty senior managers sat around and talked to one another and made elaborate slide presentations to themselves. Everyone but the CEO thought it was a colossal waste of time. Happily, that sacred cow eventually retired along with the CEO.

Hunting the sacred cow
Board members represent the governance of a corporation and not its management, so the question is: when should the board care about sacred cows? In an ideal world, they should always care about them, but telling a CEO not to have weekly executive committee meetings doesn’t seem likely to invite board attention. Of course, that type of activity may be a symptom of a larger problem that is the board’s concern, but at some level, the sacred cow is simply a part of the corporate landscape.

However, the project or process that involves a flawed corporate strategy always requires board scrutiny. I was the president of a manufacturing company whose previous CEO insisted on a vertical integration strategy that included making major investments in controlling retail distribution – despite the conventional wisdom that such a strategy rarely succeeds. Another example is the automotive supplier CEO who convinced himself that a strategy of safety systems instead of air bags was the future. Both companies executed poor strategies, and both companies had bad endings, with one losing over 80% of its shareholder value and the other tumbling into bankruptcy and losing everything. Early intervention by the board might have made a world of difference.

Here are some practical tips to help surface sacred cows, assess their danger to the company, and eradicate them with as little pain as possible:

•    First, be vigilant. It is usually obvious when a senior manager is passionate about something. Observe how others act and react when his or her pet project is discussed. Be alert for a situation promoted by only one person. Oftentimes, others are not on board for good reasons, so keep your antenna up. If you struggle to understand why the senior manager is so defensive when it comes to his or her pet program, you can bet others wonder as well.

•    Next, economics matter. Ask yourself if the numbers make sense. Through careful questioning, the board may reveal expenses not reflected in the financials. If the business plan and its future success seem to keep moving, the board should insist that milestones and accountabilities are established against which progress will be reported. Doing so will bring to light when good money is thrown after bad in the name of feeding the sacred cow.

•    Finally, use your bully pulpit. If you have concerns, air them both with management and in executive session. You may find that others are similarly skeptical, and a feedback and monitoring process should begin. By continuing a regular dialogue with management, the board will unavoidably put a spotlight on the issue. Having to report on the suspected sacred cow each month, demonstrating what’s been accomplished – or, more likely, not – will pressure management to become more disciplined. After all, no one wants to feed a steady diet of failures to the board of directors.

My experience is that a board that builds a track record of maintaining a laser-focus on potential sacred cows will compel management to deal with the issues on their own, and generally on a satisfactory timeline. In other words, the Hawthorne Effect [i] works: when senior managers know the board is concerned, and personal reputations are on the line, management will solve the problems themselves. On a rare occasion, the board may need to exert its authority, but more often than not, rational behavior triumphs and sacred cows go to slaughter.

***
[i] The Hawthorne Effect resulted from studies in the 1920s that demonstrated individual behaviors might be altered when people know they are being studied.

Al Koch is a Managing Director with AlixPartners, an international corporate turnaround and financial advisory firm, as well as a Managing Director with Questor Management Company, a private-equity firm specializing in acquiring and turning around underperforming and troubled companies.

Most recently, Al served as Chairman, interim President and CEO at Champion Enterprises Inc., the world's largest builder of manufactured homes from June 30, 2003 until July 31, 2004. Since joining Champion on June 30th of last year, Al led a major financial and operational restructuring which saw the Company’s market capitalization more than double while operating results have improved from a year-to-date loss of $18 million in 2003 to a profit of $9 million in 2004. And, the Company’s net debt (long-term debt minus cash) has improved from $198 million in 2003 to $100 million at the end of the latest quarter.

Before Champion, he served as interim CFO of the Kmart Corporation, the largest retailer in history to file for bankruptcy. In this position, he provided leadership and credibility to the financial functions, led the development of a multi-year operating business plan and drove financial performance in conformity with the plan. Kmart emerged from Chapter 11 in May 2003. Al’s other assignments included serving as interim CFO of Oxford Health Plans during a financial and accounting systems failure crisis, leading the effort to stabilize the company’s financial functions, create credible reporting, and helping position Oxford to obtain $710 million of new financing that provided the financial strength to assure success of the ensuing operational turnaround.

Al was formerly a partner with Ernst & Young for 14 years, including 7 years as Managing Partner of the firm’s Detroit office. He is a CPA and won the Sells Gold Medal for attaining the highest scores in the United States in that exam. Al holds a bachelor’s degree in Accounting from Elizabethtown College, Elizabethtown, PA. He is a member of the AICPA and MACPA.

Al was a Trustee of the Bloomfield Hills Board of Education for eight years and also served as a Trustee and Chairman of the Finance Committee of the Detroit Medical Center as well as in a variety of Board positions at Harper Hospital, Grace Hospital and Detroit Receiving Hospital; the Detroit Medical Center is a major healthcare system in Southeast Michigan.