Financial Management Training Tips:
Leadership lessons for hard times
A series of interviews with 14 CEOs and chairmen of major
companies sheds light on the foundations of corporate leadership.
JULY 2009 • Dennis Carey, Michael Patsalos-Fox, and Michael Useem
During the current global recession, much attention has been devoted
to the mistakes that sparked the financial management and economic
crisis, in hopes of not repeating them. Less has been given to
what’s been done well amid the turmoil—to learn, for example, how
best to lead a company through these tough times.
To contribute to that understanding, we interviewed the leaders of
14 major companies, all seasoned CEOs or chairmen, asking them to
reflect on what they felt they had learned. We were keen not to
limit their comments to the current recession and therefore also
asked them to consider previous financial management challenges they
had faced in a turnaround or a crisis. The companies they lead are
in different industries, face different challenges, and have
performed quite differently. We are attempting neither to judge
their performance nor to draw up a set of rules on how to lead
through tough times. Instead, what emerges from the interviews is
agreement on some broad principles that can help guide behavior in
the executive suite and the boardroom, as well as interactions with
employees, customers, and investors.
Confront reality
Always question whether the “halo effect” of a business or business
situation is blinding you to what lies on the horizon.—Herbert
Henkel, chairman and CEO of Ingersoll Rand.
Few predicted the magnitude of the current financial management
crisis. But those in the corporate world who first detected—and
accepted—the fact that something was amiss had a distinct advantage
in implementing strategies to help weather the storm.
In the summer of 2008, Ingersoll Rand’s Herbert Henkel noticed that
European orders in the company’s transport refrigeration business
had slumped, even though business was still booming in other
divisions. He was alarmed: a fall in the delivery of perishable
foods surely indicated trouble in the supply chain. “I couldn’t help
thinking, what if that figure really is indicative of what’s out
ahead? What are we going to do about it?”
Henkel, squaring up to what he detected, forecast zero growth in
Europe during the third quarter, though analysts thought he was
“nuts.” His forecast was wrong: growth fell by 15 percent. Yet
Ingersoll Rand got ahead of the curve by quickly putting contingency
plans in place, restructuring, and running down inventory. “Of
course, we still had to go back and do more. But by not ignoring
that one indicator, we did get a head start,” he reflects.
Getting ahead of the curve means taking a hard look at what the
future might hold, and that requires a degree of courage. The point
made by Henkel and others is how difficult it can be for leaders to
take action—and to persuade others to follow their lead—if a
business seems to be thriving.
Eight years ago, when Michael Jackson arrived at AutoNation, for
example, the auto industry was selling as many as 17 million units a
year, but its high fixed costs made him fear what would happen if
the economic environment changed. At his first management meeting,
he therefore announced his desire to find a business model that
would let AutoNation break even if the auto industry sold only 10
million units. He also wanted to understand what would have to
happen for sales to take such a nosedive and how the business would
need to be remodeled to survive. “Everybody looked at me like I had
six heads,” he recalls.
“Eventually, we came to the conclusion that, among other things, it
would take a credit crisis to get volumes that low, because in our
business, nothing moves without credit. So we got out of the finance
and leasing business,” says Jackson. “Without the limitation on risk
we put in place, we would be in deep, serious trouble at the
moment.”
CEOs also need courage to make hard decisions quickly. Phil
Hildebrand, of HealthMarkets, and Steve Miller, of Delphi, both
remarked on the importance of decisiveness to prevent problems from
escalating. But it can be hard to achieve in the absence of perfect
data. “A lot of CEOs are slow to react, and their problems get away
from them,” says Edward Breen, of Tyco International. “You have to
get as much data as quickly as possible. But you will never get all
of it—so you need to make decisions quickly.”
Besides courage, staying ahead of the curve entails having the
mechanisms and governance models that allow companies to confront
realities unimaginably different from those they would ordinarily
expect. Monitoring systems that pick up warning signs are important.
So too is an environment, both physical and psychological, where
alternative interpretations of the signs can be aired and considered
with care and interest.
At Cardinal Health, Kerry Clark wanted to have a better grasp of
such potentially unpleasant realities and felt that historical
practice—employees were given forecasts and simply told to meet
them—was a hindrance. Instead, he made business leaders accountable
for making forecasts and doing everything possible to meet them,
while regularly and openly reviewing them. “It’s all too easy for a
corporate leader to say, ‘Don’t give me more bad news. Just go fix
it,’” muses Clark. “But you have to beat back that kind of attitude
and create an atmosphere where people feel they can talk about the
forecast, how they can improve it, and what resources they might
need.” He says that the new system required a cultural change but is
yielding results—for instance, revealing problems earlier.
Sysco’s Richard Schneiders puts it this way: “You have to be open to
diverse points of view. Given the speed of change, I don’t know how
a business will be able to continue to flourish in the future
without being receptive to different points of view.”
At board meetings, put strategy center stage
The board has been heavily involved in strategy formulation with me,
and we have a better strategy because of it.—Bill Nuti, chairman and
CEO of NCR.
The way CEOs work with their boards has changed fundamentally during
the past year. In tough times, difficult decisions must be made
quickly, so it’s not surprising that many CEO find themselves
communicating more regularly with the board to keep it abreast of
developments. Full board meetings have been supplemented by letters,
e-mails, intranet postings, informal discussions, and conference
calls. At Cardinal Health, “board updates”—conference calls held as
frequently as every two weeks—address questions from board members.
“They weren’t board meetings. There were no minutes. No one was
obliged to attend. But it was very helpful,” says Clark, who sees
the updates as an efficient way to address individual concerns and
increase confidence in the management team.
Many CEOs have already accepted the need for frequent and open
communication with their boards, a practice they say proves its
worth when difficult financial management decisions must be made. If
directors are up to speed, they are better placed to offer both
support and advice. What has changed markedly is the content of
board discussions. In particular, discussions about strategy are no
longer the preserve of a once-a-year off-site meeting. The pace of
change— crisis or no crisis—makes that model unworkable.
Today, at many companies, strategy is on the agenda of every board
meeting. “The world moves at a pace that requires strategy to be
front and center all of the time,” says NCR’s Bill Nuti. “There are
too many variables that come into play in a normal cycle, let alone
this one, that can rapidly change the course of your company, so I
bring strategy up at every single meeting.” Eric Foss, of Pepsi
Bottling, decided to integrate strategy into every board meeting at
the beginning of 2008, before the crisis. It was a fortunate
decision, according to Foss, considering the board’s contribution.
He, like others, is happy to communicate more frequently with a
talented board not just to build its trust but also to benefit from
its experience. Several CEOs said that working to get the right
people with the right experience onto their boards had been a
priority, over the course of several years, for that very reason.
Nuti credits his board with helping him understand the potential
magnitude of the current downturn very quickly. “You get great
research when you can pull information from board members who all
sit on 2 or 3 boards. You’re getting the perspective of 18 different
boards. I was looking for commonality in their feedback and,
fortunately—or unfortunately, in the light of circumstances—there
was a lot of commonality.”
Be transparent with employees . . .
The only way to address uncertainty is to communicate and
communicate. And when you think you’ve just about got to everybody,
then communicate some more.— Terry Lundgren, chairman, president,
and CEO of Macy’s
One legacy of the current downturn will be a reinforced belief in
the value of frequent, transparent communication with employees, and
not just the CEO’s direct reports. The CEOs we interviewed could not
overemphasize the power of openness at all levels.
“At Cardinal, we work hard on internal communications,” says Clark.
“We do a lot of town hall meetings, for example. We used to just do
them around earnings time, but now we do them to discuss any major
initiative that’s under way.” Clark also notes that investor
relations (IR) and internal communications work hand in hand, so
that any information that goes to the investor community is reworked
for employees. “We do a very good job of making sure information
doesn’t get in front of one group without getting in front of the
other.”
Being open about what is happening in a company is partly a question
of integrity: employees deserve honesty. Openness also builds
respect, trust, and solidarity, all of which in turn help employees
stay focused on the task of running the business at a time when
financial rewards might be limited and the future uncertain.
Openness helps build morale as well. A CEO cannot mislead people and
certainly shouldn’t panic them, but explaining problems and the
actions being taken to deal with them builds confidence in the
quality of the CEO’s leadership. “People will take any hill, walk
into the worst situation, if they have faith in your leadership and
know what your strategy and objectives are,” says Tyco’s Breen.
3M’s George Buckley emphasizes, in addition, the need to assure
employees that the CEO has faith in them and that they will not be
blamed for things beyond their control—such as the state of the
economy. “When they’re battling the marketplace, they need to know
you will support them,” he says.
Finally, openness helps ensure that everyone in an organization
understands how to make a difference. When the CEO explains “the
current situation,” says Ingersoll Rand’s Henkel, “people understand
why we need cash both to pay off debt and to be able to continue
making investments. That, for example, makes them think twice about
ordering something just to be on the safe side.”
Yet although the importance of good internal communication is widely
understood, it can slip from the priority list in a crisis. “In hard
times, we ask employees to work harder than ever,” comments P&G’s A.
G. Lafley. “But in hard times, you get caught up with investors,
analysts, the media, suppliers, and retailers. It’s all too easy to
overlook your employees at precisely the time you should be
communicating more with them.”
. . . and investors
Our policy is: “If in doubt, communicate.” We always want to conduct
our business with integrity and forthrightness.—Ron Sugar, chairman
and CEO of Northrop Grumman.
Most CEOs we interviewed have noticed that the amount of time they
spend communicating with investors has risen exponentially of late.
Here too they strive to be as open as possible. “If I’ve learned
anything in the last 18 months, it’s that transparency in troubled
times really matters,” says Travelers’ Jay Fishman. Yet he believes
the crisis has revealed that transparency still goes against the
grain for many people. “If asked to describe this or that exposure,
the advice from many IR departments is to use some formulation that
basically says don’t worry. I’ve tried to resist that. Now is not
the time to tell people not to worry. If you’re in the
financial-services industry, you ought to be able to quantify. I try
to be specific, and we’ve gained credibility as a result.” Pepsi’s
Foss too recommends transparency with investors: “we’re facing up to
our issues” and in this way “demonstrating that we have a management
team that knows what it’s doing.”
But there are caveats. In times of crisis, there can be a tendency
to focus entirely on short-term results—a tendency CEOs should
counter. While acknowledging current difficulties, it is just as
important to emphasize what is being done to build a company’s
longer-term health. Fishman, like others, has spent much time
talking about his company’s mid- and long-term strategy, its efforts
to improve productivity, and his willingness to sacrifice some
short-term performance to create longer-term value.
There is also a feeling among CEOs that not all investors are equal.
While chief executives are acutely aware of disclosure requirements,
some say that their companies would gain very little if they spent
more time with short-term investors. CEOs count themselves lucky
when they feel strategically aligned with long-term investors who
have large holdings. That makes these CEOs believe they have some
breathing space in a crisis, and as a result they may not have to
spend a great deal more time with their investors. But they note how
hard they worked to recruit those investors.
When Jackson took over at AutoNation, for instance, he knew that to
succeed he would have to attract a new shareholder base prepared to
sacrifice some short -term profit for longer-term gain. “The
investors I have now understand the business model, and that’s been
a huge plus. But it didn’t happen by itself,” he points out.
Build and protect the culture
Stay focused on culture, people, and values: it’s the area most
likely to get compromised in this environment.—Eric Foss, chairman
and CEO of Pepsi Bottling Group.
A healthy company enjoys not only strong financials but also a
culture and values that bind it together. Much of what our
interviewees describe as important is driven by corporate
culture—open communication or a focus on a company’s long-term
health, for example. Several CEOs chose to highlight how a strong
culture had helped them in hard times and how important it is not to
sacrifice that culture when a company comes under pressure.
Jackson says that the most critical financial management battle he
waged when he arrived at AutoNation was destroying the “growth at
any cost” culture. “We wanted entrepreneurialism, but we also wanted
the highest standards of integrity.” Over the next three years, he
worked hard to nurture and recruit the right people for the
company’s top 350 positions and to purge the “high-performing money
makers whose risk profile would keep you awake at night.” This
amounted, he says, to a cultural revolution that has delivered a
sustainable competitive advantage—and one that he isn’t about to
jeopardize by shedding his best talent.
Lafley too feels that the culture he worked hard to build at the
beginning of the decade at P&G has paid off. Concerned that the
company had become too inward looking, he flipped that around. “Take
trust. We only ever talked about it in relation to employees. But
what matters most now is that consumers trust our brand, that
shareholders trust our stock, that customers trust us to be the best
supplier, and that suppliers trust us to be their best customer.”
At Travelers, Fishman is proud of the culture he has nurtured, which
rewards returns on capital rather than revenue and has offered some
protection during the financial crisis. “We never criticize anyone
for a transaction not done, not ever—not ever,” he says.
Keep faith with the future
If you don’t invest in the future and don’t plan for the future,
there won’t be one.—George Buckley, chairman, president, and CEO of
3M.
CEOs and their leadership teams need to remain forward looking
despite the near-term pressures their businesses might be facing.
There are opportunities in a crisis, even though that notion is too
lightly bandied around when companies and their employees come under
real stress. Many of the CEOs we interviewed were determined to
ensure that their companies emerge from this recession with a
competitive advantage by setting the course for higher productivity,
acquiring a footprint in a new market, or not squandering a
company’s talent or reputation in pursuit of lower costs.
Likewise, at P&G, Lafley continues to look for growth opportunities
through alliances and acquisitions and is increasing the company’s
investment in R&D and innovation. His efforts require resolve.
“We’re keeping the pedal to the metal on innovation, for example,
but it’s not always easy when people are complaining about your
short-term profit performance. You have to get the balance right
between the present and the future, but we want to come out of this
recession stronger than we went in,” he declares.
Nuti too acknowledges the difficulty of looking to the future while
concentrating on a challenging present. When he arrived at NCR, in
2005, he was concerned that although the company was rightly focused
on cost cutting to regain profitability, it had no plan for the
future. “My challenge, up to and including the last six to eight
months, has been to keep driving the transformation of the company
while still adapting to the realities of the present. You can’t cut
the
things that will impact your ability to reach your vision.” Nuti
suggests using a scalpel rather than an ax. The ax will make the
biggest dent on costs and make you look smart for a while. But the
more precise scalpel can protect a company’s future, even if there
are fewer short-term gains.
Source:
http://www.mckinseyquarterly.com/Leadership_lessons_for_hard_times_2413
Subject: Financial Management
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