Gilt Groupe's CEO on building a team of A players

Ryan believes that a CEO should spend more time on recruiting and managing people than on any other activity, and that the head of HR is one of the most important people in the company. He insists on his freedom to bypass managers and speak with any employee at any time. And he espouses certain talent-management principles, such as that your best people are usually underpaid (reward them with performance pay) and that people leave jobs mainly because they don't like their managers. Recruiting at Gilt Groupe focuses on references more than on résumés and interviews because, Ryan says, resumes only establish basic qualifications for a job, and interviewers can't help being influenced by well-spoken or attractive people. But reference checks need to go beyond the names supplied by a candidate: Employers should dig up people in their networks who are willing to speak candidly.     

Courage as a skill

A division vice president blows the whistle on corruption at the highest levels of his company. A young manager refuses to work on her boss's pet project because she fears it will discredit the organization. A CEO urges his board, despite push back from powerful, hostile members, to invest in environmentally sustainable technology. What is behind such high-risk, often courageous acts? Courage in business, the author has found, seldom resembles the heroic impulsiveness that sometimes surfaces in life-or-death situations. Rather, it is a special kind of calculated risk taking, learned and refined over time. Taking an intelligent gamble requires an understanding of what she calls the "courage calculation": six discrete decision-making processes that make success more likely while averting rash or unproductive behavior. These include setting attainable goals, tipping the power balance in your favor, weighing risks against benefits, and developing contingency plans. Goals may be organizational or personal. Tania Modic had both types in mind when, as a young bank manager, she overstepped her role by traveling to NewYork--on vacation time and on her own money--to revitalize some accounts that her senior colleagues had allowed to languish. Her high-risk maneuver benefited the bank and gained her a promotion. Lieutenant General Claudia J. Kennedy weighed the risks and benefits before deciding to report a fellow officer who had plagiarized a research paper at a professional army school. In her difficult courage calculation, loyalty to army standards proved stronger than the potential discomfort and embarrassment of "snitching" on a fellow officer. When the skills behind courageous decision making align with a personal, organizational, or societal philosophy, managers are empowered to make bold moves that lead to success for their companies and their careers.     

On REIT CEO Compensation: Does Board Structure Matter?

In a perfect world where the board of directors is independent of CEO influence, CEO pay-for-performance compensation contracts should be a function of performance only. If the CEO can influence board structure through his ownership of company stock or chairmanship of the board, however, performance contracts are sub-optimal and agency problems arise, which allow the CEO to extract rent and demand compensation in excess of the equilibrium level. As such, models of compensation contracts must include board and ownership structure variables, in addition to the traditional economic determinants. Our analyses with REITs corroborate this notion. Our data demonstrate that the structure of REIT boards are not independent of CEO influence, and significant agency problems exist allowing the CEO to design boards that reward him at the cost of shareholder wealth. CEO compensation in REITs depends significantly on the usual economic measures of performance including firm size and return on assets; more importantly, CEO compensation is higher in REITs where the board is weak in monitoring because of large size, and older directors; the effect of a blockholder is adverse, however. This study provides additional evidence to the growing literature that observed board structures are ineffective in monitoring and governance.     

Welcome aboard (but don't change a thing)

Cheryl Hailstrom, the CEO of Lakeland Wonders, a manufacturer of high-quality wooden toys, is the first person outside the Swensen family to hold the top job. But she's not a stranger to this 94-year-old company: She'd been the COO of one of its largest customers and had worked with Lakeland to develop many best-selling products. Wally Swensen IV, the previous CEO, chose Cheryl because she knew how to generate profits and because he believed her energy and enthusiasm could take the company to the next level. Yet here she is, nearing her six-month anniversary, wondering why her expansive vision for the company isn't taking hold. She's tried to lead by example: traveling a pounding schedule to visit customers, setting aggressive project deadlines, and proposing a bonus schedule. She has a plan to reach the board's growth goals--going beyond Lakeland's core upscale market and launching into the midmarket with an exclusive toy contract with a new customer. The problem is that while Cheryl's senior managers are giving her the nod on the surface, they're all really dragging their feet. Some fear that offshore outsourcing will hurt their brand, not to mention make for tricky union negotiations. Others are balking at trying a new design firm. Is Cheryl pushing too much change too quickly? Should she bring in outsiders to speedily adopt the changes she envisions and overhaul Lakeland's corporate culture? Or should she keep trying to work with the current team? Commentators Kathleen Calcidise of Apple Retail Stores; executive coach Debra Benton; Dan Cohen, coauthor of The Heart of Change; and consultant Nina Aversano offer advice in this fictional case study.     

The CEO's real legacy

The literature on CEO succession planning is nearly unanimous in its advice: Begin early, look first inside your company for exceptional talent, see that candidates gain experience in all aspects of the business, and help them develop the skills they will need in the top job. It all makes sense and sounds pretty straightforward. Nevertheless, the list of CEOs who last no more than a few years on the job continues to grow. Implicit in many, if not all, of these unceremonious departures is the absence of an effective CEO succession plan. The problem is, most boards simply don't want to talk about CEO succession: Why rock the boat when things are going well? Why risk offending the current CEO? Meanwhile, most CEOs can't imagine that anyone could adequately replace them. In this article, Kenneth W. Freeman, the retired CEO of Quest Diagnostics, discusses his own recent handoff experience (Surya N. Mohapatra became chief executive in May 2004) and offers his approach to succession planning. He says it falls squarely on the incumbent CEO to put ego aside and initiate and actively manage the process of selecting and grooming a successor. Aggressive succession planning is one of the best ways for CEOs to ensure the long-term health of the company, he says. Plus, thinking early and often about a successor will likely improve the chief executive's performance during his tenure. Freeman advocates the textbook rules for succession planning but adds to that list a few more that apply specifically to the incumbent CEO: Insist that the board become engaged in succession planning, look for a successor who is different from you, and make the successor's success your own. After all, Freeman argues, the CEO's true legacy is determined by what happens after he leaves the corner office.     

September 11, 2001. A CEO's story

On the day of the terrorist attacks on New York's World Trade Center, 1,779 employees of Marsh & McLennan Companies had office space in the twin towers, and another 129 were visiting that day. From his office at MMC headquarters in midtown, CEO Jeffrey Greenberg watched in horror as the second plane hit. By the time the towers fell, he had gathered a team of his colleagues to begin to outline how the company would respond. In this first-person account, Greenberg relates what it was like to manage through the unimaginable. The needs of MMC's people, and the families of employees who perished, took top priority. In the midst of chaos and unforeseeable problems, Greenberg and his colleagues improvised ways of communicating and assembled a broad-based program of support. Help appeared from all sides, from people of various ranks, titles, and functional expertise within MMC as well as past chairmen, outside directors, and retired executives. An emergency communications center was immediately set up at MMC headquarters and became a centralized location for messages and information and a memorial to colleagues lost in the attacks. The company arranged for grief counselors and established a family assistance center and a Family Relationship Management Program for those who had lost MMC employees. It has also provided families with access to long-term psychological and financial counseling. At the same time, Greenberg offers lessons about leadership, company culture, and adaptability. He and his colleagues held responsibility for a business beset by operational destruction and financial losses and facing dramatically changed market conditions. Their resolve was not simply to keep it on course but to come back stronger than ever.     

The five messages leaders must manage

If you want to know why so many organizations sink into chaos, look no further than their leaders' mouths. Over and over, leaders present grand, overarching-yet fuzzy-notions of where they think the company is going. They assume everyone shares their definitions of"vision;" "accountability," and "results". The result is often sloppy behavior and misalignment that can cost a company dearly. Effective communication is a leader's most critical tool for doing the essential job of leadership: inspiring the organization to take responsibility for creating a better future. Five topics wield extraordinary influence within a company: organizational structure and hierarchy, financial results, the leader's sense of his or her job, time management, and corporate culture. Properly defined, disseminated, and controlled, these topics give the leader opportunities for increased accountability and substantially better performance. For example, one CEO always keeps communications about hierarchy admirably brief and to the point. When he realized he needed to realign internal resources, he told the staff: "I'm changing the structure of resources so that we can execute more effectively." After unveiling a new organization chart, he said, "It's 10:45. You have until noon to be annoyed, should that be your reaction. At noon, pizza will be served. At one o'clock, we go to work in our new positions." The most effective leaders ask themselves, "What needs to happen today to get where we want to go? What vague belief or notion can I clarify or debunk?" A CEO who communicates precisely to ten direct reports, each of whom communicates with equal precision to 40 other employees, aligns the organization's commitment and energy with a well-understood vision of the firm's real goals and opportunities.     

Board Independence and CEO Turnover

This paper analyzes how board independence affects the CEO's ability to extract rents from the firm. The CEO is assumed to possess private information about his ability, which the board needs in order to decide whether to replace him. If the board is more active in removing low quality CEOs, the incumbent is better able to use his information advantage to extract rents. Since the board cannot commit not to renegotiate the contract, a board that is fully independent from the CEO is more active than is efficient ex ante. For this reason, shareholders are better off if the board of directors lacks some independence. The model predicts that a trend toward greater board independence is associated with subsequent trends toward higher CEO turnover, more generous severance packages, and larger stock option grants.     

The relationships between CEO characteristics and strategic risk-taking in family firms

Abstract

We examine the influences of chief executive officer (CEO) personal characteristics on family firms’ strategic risk-taking. Building on upper echelons theory, we investigate the influences of CEO family relationships, the CEO professional education, other career experiences, tenure, and career horizon have on the risk level a company takes. By analyzing a sample of 107 Italian family firms listed on the Milan Stock Exchange, we find that company’s risk-taking significantly and negatively relates to CEO family relationship and professional education, but positively to CEO career horizon. This provides support to the argument that such CEO personal characteristics are key factors in explaining differences in risk-taking among family firms. Further, our analysis of control variables shows that family firms’ risk-taking relates positively to board size and negatively to company size. These results suggest that company and board characteristics also significantly influence the risk levels taken by a company.     

Confessions of a trusted counselor

Advising CEOs sounds like a dream job, but doing so can be perplexing and perilous. At times, the questions you must ask yourself-about your own motivations and loyalty-can be thornier than the organizational problems that clients face. David Nadler knows, because he has been asking himself such questions for a quarter century while advising the chiefs of more than two dozen corporations. If you're an adviser to CEOs, recognizing the pitfalls of your role may help you sidestep them. And understanding a problem's nuances and implications may help you uncover a solution. The challenges facing consultants include the following: The loyalty dilemma: Is my ultimate responsibility to the CEO, who pays for my services, or to the institution, which pays for his? Today's shorter CEO tenures and greater board oversight have diminished the top leader's power and autonomy; it's now routine for a CEO adviser to have conversations with directors about the CEO's performance. To defuse loyalty issues, the adviser should raise them with the executive at the outset of the relationship. The overidentification dilemma: How do I immerse myself in the CEO's worldview without making it my own? CEOs can be enormously persuasive, but if you don't push back, you're not doing your job. The trick is to ask probing questions without shaking the CEO's confidence that you fully comprehend the forces that shape her views. The friendship dilemma: If the CEO and I like each other, can we-should we-become friends? A successful, long-term advisory relationship with a CEO requires a strong personal connection; in some cases, that becomes a friendship. But the best relationships are characterized by the participants' clear-eyed recognition of each other's frailties-tempered, of course, by genuine affection and easy rapport.     

CEO turnover and the reduction of price sensitivity

We examine managerial compensation and wealth sensitivities around CEO changes. The average new CEO is incentivized to increase the risk of the firm primarily because he holds significantly less stock than his predecessor, and in fact riskier policy choices are subsequently implemented. Similar results are obtained in a subsample of CEO changes that are due to retirements and deaths, which alleviates concerns about endogeneity. Our findings indicate that firms seem to be limited in their ability to mitigate the risk-averse behavior caused by large CEO shareholdings.     

Leading through rough times. An interview with Novell's Eric Schmidt. Interview by Bronwyn Fryer

Few large companies have soared as high, sunk as low, and struggled as long as the 18-year-old networking software maker Novell. For years, the company dominated the market for local area networks, but by 1997, it had faltered due to misguided acquisitions, product missteps, and large unsold inventories. That's when Eric Schmidt arrived from Sun Microsystems to take over as Novell's third CEO. He turned the company around with a deft combination of cost reductions, divestitures, and new product rollouts, and by 1998, it was back in the black. Unfortunately, the good times didn't last, and like most technology companies, Novell is once again struggling with a slowdown in demand. But Schmidt is optimistic about returning Novell to good health, and his strategies suggest ways for other organizations to handle themselves during downturns. He counsels against being overly cautious during such times. It may be necessary to eliminate excess inventory, cut costs, and reduce the size of the staff and the management team in order to stabilize a company. Working to retain those employees whom he calls the "smart people" and keeping them motivated will have long-term payoffs. Further, Schmidt says it is necessary to acknowledge and overcome a "culture of fear," the deadening environment of cynicism in which employees suppress thoughts and feelings because they're worried about layoffs. His additional advice: keep new products coming out to sustain the interest of customers and the press, pay attention to your cash position, stay focused on your desired outcomes, and take heart from other industry leaders.     

改制模式影响董事会特征吗?

本文考察了不同改制模式对于董事会特征的影响。通过分析1997—2000年我国285个国有企业首次公开发行后三年的数据,我们发现控股股东控制上市公司和董事会的动机及监管层政策规定是影响董事会领导层两职状态的重要原因。非完整改造公司中,控股股东更容易违反监管层的有关规定,委派本公司人员在上市公司同时兼任董事长和总经理职位。同时,非完整改造公司董事会的规模较大,董事会的活动强度较低,其激励程度也较低。     

I was greedy,too

Americans are outraged at the greediness of Wall Street analysts, dot-com entrepreneurs, and, most of all, chief executive officers. How could Tyco's Dennis Kozlowski use company funds to throw his wife a million-dollar birthday bash on an Italian island? How could Enron's Ken Lay sell thousands of shares of his company's once high-flying stock just before it crashed, leaving employees with nothing? Even America's most popular domestic guru, Martha Stewart, is suspected of having her hand in the cookie jar. To some extent, our outrage may be justified, writes HBR senior editor Diane Coutu. And yet, it's easy to forget that just a couple years ago these same people were lauded as heroes. Many Americans wanted nothing more, in fact, than to emulate them, to share in their fortunes. Indeed, we spent an enormous amount of time talking and thinking about double-digit returns, IPOs, day trading, and stock options. It could easily be argued that it was public indulgence in corporate money lust that largely created the mess we're now in. It's time to take a hard look at greed, both in its general form and in its peculiarly American incarnation, says Coutu. If Federal Reserve Board chairman Alan Greenspan was correct in telling Congress that "infectious greed" contaminated U.S. business, then we need to try to understand its causes--and how the average American may have contributed to it. Why did so many of us fall prey to greed? With a deep, almost reflexive trust in the free market, are Americans somehow greedier than other peoples? And as we look at the wreckage from the 1990s, can we be sure it won't happen again?     

CEO Turnover and Retention Light: Retaining Former CEOs on the Board

Prior CEO turnover literature characterizes the board's decision as a choice between retaining versus replacing the CEO. We focus instead on the CEO's decision rights and introduce a third option in which the incumbent CEO is removed but retained on the board for an extended period, which we call Retention Light. Firms may benefit from Retention Light because former CEOs possess unique monitoring and advising abilities, but the former CEO could also exploit available decision rights for personal benefit. A Retention Light CEO's decision rights generally exceed those of CEOs who exit the firm entirely but fall short of the rights of a retained CEO. We find that when prior firm performance is better, the former CEO is more likely to be retained on the board (Retention Light) than to exit the firm. However, this relation is weaker when the CEO reaches normal retirement age at which time CEO power becomes more important. We also provide evidence on how the nature of the CEO's bargaining power varies with his personal attributes and board characteristics in its influence on the Retention Light decision. Retention Light firms are more likely than CEO‐exit firms to select a successor CEO with relatively weaker bargaining power. Finally, Retention Light involving a nonfounder CEO is negatively associated with the firm's postturnover financial performance. Overall, Retention Light is a distinct CEO turnover option that has important consequences for board decisions and firm performance.     

A time for growth: an interview with Amgen CEO Kevin Sharer. Interview by Paul Hemp

Fast growth is a nice problem to have--but a hard one to manage well. In this interview, Kevin Sharer, the CEO of biotech giant Amgen, talks about the special challenges leaders face when their companies are on a roll. Sharer, who was also head of marketing at pre-WorldCom MCI and a division head and a staff assistant to Jack Welch at GE, offers insights drawn from his own experience--and from his own self-proclaimed blunders: "I learned the hard way that you need to become credible and enlist support inside the company before you start trying to be a change agent. If you think you're going to make change happen simply by force of personality or position or intellect, you'd better think again." And change there was: Under Sharer's leadership, Amgen overhauled its management team, altered its culture, and launched a couple of blockbuster products. How do chief executives survive in that kind of dizzying environment? "A CEO must always be switching between different altitudes--tasks of different levels of abstraction and specificity," Sharer says. "You might need to spend time working on a redesign of your organizational structure and then quickly switch to drafting a memo to all employees aimed at reinforcing one of the company's values." Having a supportive and capable top team is also key: "A top management team is the most revealing window into a CEO's style, values, and aspirations.... If you don't have the right top team, you won't have the right tiers below them. [The] A players won't work for B players. Maybe with a company like GE, the reputation of the company is so strong that it can attract top people to work for weaker managers. In a new company like Amgen, that won't happen."     

The IT system that couldn't deliver

Diana Sullivan, CIO of Lenox Insurance, thought she had done her job when, after three years of hard work, she had delivered Lifexpress on time and on budget. A sophisticated computer-aided system, it enabled Lenox's 10,000-plus agents to do everything from establish a prospect's financial profile, to select the most appropriate products from the company's myriad policies, to generate all the paperwork needed to close a sale. But now Sullivan's boss, CFO Clay Fontana, seemed to be holding her accountable not only for the creation and implementation of the system but for realizing its business goals as well. And Lenox's CEO, James Bennett, appeared to concur. Two of Lenox's competitors had launched similar systems and were training their agents on them at a faster clip. Fontana and Bennett made it clear they believed it to be Sullivan's problem that Lifexpress wasn't boosting sales productivity as much as management had expected. "It's your system," Fontana had said. "We made this tremendous investment based on your recommendations." A 20-year veteran information systems executive, Sullivan knew going into this job that computers had never been one of Lenox's strengths. And she had taken what she felt were the appropriate steps to bring the company up to speed. In this hypothetical case study, Sullivan and the other top executives at Lenox must decide who should be responsible for realizing the business goals of information technology projects. Should Sullivan have gone about the project in another way? Should Fontana and Bennett be playing more active roles? Five experts weigh in with their advice for Sullivan and for Lenox's management.     

The risky business of hiring stars

With the battle for the best and brightest people heating up again, you're most likely out there looking for first-rate talent in the ranks of your competitors. Chances are, you're sold on the idea of recruiting from outside your organization, since developing people within the firm takes time and money. But the authors, who have tracked the careers of high-flying CEOs, researchers, software developers, and leading professionals, argue that top performers quickly fade after leaving one company for another. To study this phenomenon in greater detail, the authors analyzed the ups and downs of more than 1,000 star stock analysts, a well-defined group for which there are abundant data. The results were striking. After a star moves, not only does her performance plunge, but so does the effectiveness of the group she joins--and the market value of her new company. Moreover, transplanted stars don't stay with their new organizations for long, despite the astronomical salaries firms pay to lure them from rivals. Most companies that hire stars overlook the fact that an executive's performance is not entirely transferable because his personal competencies inevitably include company-specific skills. When the star leaves the old company for the new, he cannot take with him many of the resources that contributed to his achievements. As a result, he is unable to repeat his performance in another company--at least not until he learns to work the new system, which could take years. The authors conclude that companies cannot gain a competitive advantage or successfully grow by hiring stars from outside. Instead, they should focus on cultivating talent from within and do everything possible to retain the stars they create. Firms shouldn't fight the star wars, because winning could be the worst thing that happens to them.     

The leadership team: complementary strengths or conflicting agendas?

Senior leadership teams whose members play complementary roles have been chronicled as far back as Homer's account of the Trojan War: Although King Agamemnon commanded the Greek army, Achilles, Odysseus, and Nestor each played a distinct role in defeating Troy. Today, complementary-leadership structures are common and, in some cases, even institutionalized. Think of a CEO concerned mainly with external issues and a COO who focuses internally. The authors describe four kinds of complementarity: task, expertise, cognitive, and role. The two top executives at the software company Adobe Systems, for example, represent the second kind. As CEO, Bruce Chizen draws on his sales and marketing knowledge, while COO Shantanu Narayen adds his engineering and product development expertise. Roberto Goizueta, formerly the CEO of Coca-Cola, and Douglas Ivester, his COO (who later became CEO), were famous examples of the fourth type: Goizueta, the diplomat, maintained good relations with external stakeholders; Ivester, the warrior, drove the company to defeat the competition. Bringing together two or more people with complementary strengths can compensate for the natural limitations of each. But with the benefits comes the risk of confusion, disagreement about priorities, and turf battles. Leadership succession also presents substantial challenges, especially when a COO or president who has worked in a complementary fashion with the CEO moves into the top role. An organization's board of directors and CEO can manage the risks by fostering a shared vision, common incentives, communication, and trust. They can also ensure smooth succession processes in various ways, such as brokering a gradual transfer of responsibilities or allowing the CEO and the COO to share duties as long as they maintain the logic of complementarity.