The case of the unhealthy hospital

On a cold March morning, Bruce Reid, Blake Memorial Hospital's new CEO, visited the Lorris housing project clinic, one of six off-site clinics operated by Blake Memorial. He was not encouraged by what he saw: peeling paint, leaking pipes, and cramped conditions. When he asked Renée Dawson, the clinic's primary care physician, how she endured the conditions, she just stared at him. "What are my options?" she asked. That was a good question. Blake Memorial was in poor financial health, due to rising costs and stagnating revenue. The hospital's quality of care was also a major problem. In addition, the clinics were losing over $250,000 a year. As Reid worked on Blake Memorial's 1992 budget, he saw he would have to cut some services in order to fund others. One of the services he was considering cutting was the clinic program. But there were a number of conflicting forces that Reid had to consider. On the political front, the recently appointed commissioner of health services said she would challenge Blake Memorial's tax-exempt status if Reid dismantled the clinics. Within the hospital were two warring factions. One wanted more high-tech services for the hospital and favored closing the clinics. "Instead of clinics, we should have a shuttle bus from the housing projects to the hospital," one doctor suggested. The other faction wanted to expand the clinics. "Wherever the service is most needed, that is where the hospital should be," argued the clinics' director. Reid must decide what to cut and what to keep. But to do so, he must first settle on Blake Memorial's long-term mission.(ABSTRACT TRUNCATED AT 250 WORDS)     

The Coffee Pot: A management control exercise

Managers use management control systems to actively steer their organizations towards strategic success. The Coffee Pot is a short, in-class exercise that provides a hands-on opportunity for students to diagnose and solve an organization’s management control issues using Simons’ Levers of Control Framework. The exercise features a chain of coffee shops, a business most students should be familiar with, and asks students to discuss why the new CEO is having trouble improving her firm’s performance, even after she has introduced a winning strategy.     

Top Director Shake‐up: The Link between Chairman and CEO Dismissal in the UK

Abstract:   Most UK companies separate the roles of CEO and Chairman. The former runs the company and the latter runs the board. Using turnover data on 2,180 separate Chairmanships of the top 460 UK firms over the 1990–1998 period, I find that the Chairman is more likely to be replaced when the CEO is dismissed. Detailed data on the dismissal events suggests that Chairman replacement is associated with board restructuring. This may be necessary to bring in different skills and experience which, in turn, might facilitate changes in future corporate decisions. Moreover, I find that the Chairman's previous position, or the type of Chairmanship, does not affect the association between Chairman removal and CEO dismissal. But, the increase in the dismissal likelihood of the Chairman at the time of forced CEO departure is higher when she is involved in the appointment of the failing CEO. This, in turn, can be interpreted as an indication of effective 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.     

CEOs' general managerial skills and corporate risk taking subject to the moderator of CEO tenure

In this study, we examine the relation between chief executive officers' (CEOs') general managerial skills and firms' risk-taking behaviour. We find that generalist CEOs are associated with significantly higher firm risk, with the association decreasing significantly with CEO tenure. We propose the following managerial skills transformation explanation: the longer a CEO stays with a firm, the less general and more firm specific the CEO's skills and knowledge become; therefore, any effect of the CEO's general managerial skills only appears in the early years of tenure.     

When salaries aren't secret

No one seemed to think Treece McDavitt was a malevolent employee. "Just mischievous," one person said. Whatever her motivation, the day before Treece was to leave RightNow!, an off-price women's fashion retailer, the 26-year-old computer wizard accessed HR's files and e-mailed employees' salaries to the entire staff. Now everyone knows what everyone else is making; they are either infuriated that they are making too little or embarrassed that they are making too much. Salary disparities are out there for everyone to see, and CEO Hank Adamson has to do something to smooth things over. Hank's trusted advisers talk extensively with the CEO about his options, ultimately coming down on two sides. Charlie Herald, vice president of human resources, takes a "You get a lemon, you make lemonade" approach: keep making the salaries public to ensure fairness and to push employees to higher performance, he advises. Meanwhile, CFO Harriet Duval sees the need for damage control: apologize, clean up the company's compensation system, and continue to keep--or at least try to keep--salaries private, she says. Should Hank side with Charlie or Harriet? Or perhaps find a compromise between their two views? What should he do about this serious salary debacle? Four commentators offer their advice on the problem presented 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.     

What your leader expects of you

The success of an executive team depends heavily on the relationships the boss has with his or her direct reports. Yet the leadership literature has had little to say about what is expected in those relationships-on either side. Larry Bossidy, formerly the chairman and CEO of Honeywell, and before that of AlliedSignal, shares what he calls "the CEO compact," detailing the behaviors a leader should look for in subordinates and what they should be able to expect in return. A CEO's best people, he says, know when a situation calls for them to get involved. They generate ideas-remembering that some of the best ones may sound crazy at first. They are willing to collaborate, putting the long-term good of the company above short-term goals of their divisions. They step up to lead initiatives, even if the outcome is uncertain. They develop leaders among their people, especially through direct involvement in performance appraisals. They stay current on world events and anticipate how those events may affect the company and its competition. They drive their own growth by exposing themselves to new people and ideas and by accepting demanding assignments. And they sustain these behaviors in bad times as well as good. On the other side of the compact, the boss should provide clarity of direction; set goals and objectives; give frequent, specific, and immediate feedback; be decisive and timely; demonstrate honesty and candor; and offer an equitable compensation plan. Executives who aren't lucky enough to have such a boss can create a compact with their own subordinates, Bossidy says, and demonstrate by example. The result will be to improve team and company performance and accelerate individual growth.     

The CEO as organizational architect: an interview with Xerox's Paul Allaire. Interview by Robert Howard

As chairman and CEO of the Xerox Corporation, Paul Allaire leads a company that is a microcosm of the changes transforming American business. With the introduction of the first plain-paper copier in 1959, Xerox invented a new industry and launched itself on a decade of spectacular growth. But easy growth led Xerox to neglect the fundamentals of its core business, leaving the company vulnerable to low-cost Japanese competition. Starting in the mid-1980s, Xerox embarked on a long-term effort to regain its dominant position in world copier markets and to create a new platform for future growth. Thanks to the company's Leadership through Quality program, Xerox became the first major U.S. company to win back market share from the Japanese. Allaire describes his efforts to take Xerox's corporate transformation to a new level. Since becoming CEO in 1990, he has repositioned Xerox as "the document company" at the intersection of the worlds of paper-based and electronic information. And he has guided the company through a fundamental redesign of what he calls the "organizational architecture" of Xerox's document processing business. Few CEOs have approached the process of organizational redesign as systematically and methodically as Allaire has. He has created a new corporate structure that balances independent business divisions with integrated R&D and customer operations organizations. He has redefined managerial roles and responsibilities, changed the way managers are selected and compensated, and renewed the company's senior management ranks. And he has articulated the new values and behaviors Xerox managers will need to thrive in a more competitive and fast-changing business environment.     

Ending the CEO succession crisis

The CEO succession process is broken. Many companies have no meaningful succession plans, and few of the ones that do are happy with them. CEO tenure is shrinking; in fact, two out of five CEOs fail in their first 18 months. It isn't just that more CEOs are being replaced; it's that they're being replaced badly. The problems extend to every aspect of CEO succession: internal development programs, board supervision, and outside recruitment. While many organizations do a decent job of nurturing middle managers, few have set up the comprehensive programs needed to find the half-dozen true CEO candidates out of the thousands of leaders in their midst. Even more damaging is the failure of boards to devote enough attention to succession. Search committee members often have no experience hiring CEOs; lacking guidance, they supply either the narrowest or the most general of requirements and then fail to vet eitherthe candidates or the recruiters. The result is that too often new CEOs are plucked from the well-worn Rolodexes of a remarkably small number of recruiters. These candidates may be strong in charisma but may lack critical skills or otherwise be a bad fit with the company. The resulting high turnover is particularly damaging, since outside CEOs often bring in their own teams, can cause the company to lose focus, and are especially costly to be rid of. Drawing on over 35 years of experience with CEO succession, the author explains how companies can create a deep pool of internal candidates, how boards can consistently align strategy and leadership development, and how directors can get their money's worth from recruiters. Choosing a CEO should be not one decision but an amalgam ofthousands of decisions made by many people every day over years.     

Micromanager

George Latour considers himself a good leader. As CEO of Retronics, George has a mandate to grow revenues with an eye toward taking the software-engineering firm public by 2006. At the behest of the chairman of the board, he has hired a new marketing director, Shelley Stern--"a thoroughbred" who, the chairman insists, just needs a little training in the business. George does his best to bring his new hire up to speed. He has Shelley sit in on developers' meetings, has her accompany the sales force on client calls, and even has the CFO explain the company's cash flow situation to her. He also takes pains to help her correctly position marketing and press materials. But Shelley never seems to really take the bit. In fact, Shelley considers George's hands-on management style oppressive, and she's dreadfully unhappy. What George sees as efforts to bring her up to speed, like making her go on those sales calls when she has other work to do, she views as signs that he doesn't trust her judgment. What's more, Shelley is spread too thin. Yet when she asks for help--if not additional staff, at least an outside contractor--George asks for a list of everything she's working on and tells her he'll help her prioritize. In this fictional case, a he-said, she-said debate erupts over competing management styles. Four commentators--Jim Goodnight, the CEO of SAS Institute; Mark Goulston, a psychiatrist and the senior vice president at Sherwood Partners; J. Michael Lawrie, the CEO of Siebel Systems; and Craig Chappelow, the senior manager of assessment and development resources at the Center for Creative Leadership--offer their perspectives on the problem and how to solve it.     

Has the likelihood of appointing a CEO with an accounting/finance background changed in the post-Sarbanes Oxley era?

Congress passed the Sarbanes–Oxley Act (SOX) in July 2002 to improve the accuracy and reliability of financial reporting. The Act increased boards of directors’ responsibilities for financial reporting and control. Did it consequently increase boards’ preferences for a CEO with financial experience to protect against the potential reputational and/or legal losses that directors incur when financial scandals happen? We investigated whether newly appointed CEOs in the post-SOX period were more likely to have accounting or finance experience than in the pre-SOX period. Using a sample of 264 CEO changes from 2001 to 2004, we found that the percentage of newly-appointed CEOs with accounting/finance backgrounds significantly increased in the post-SOX period compared to the pre-SOX period. Our results suggest that the events surrounding the passage of the Sarbanes–Oxley Act may have affected the CEO background experience preferred by boards of directors.     

When consultants and clients clash

This fictitious case study explores the issues that surround the relationships between consultants and their clients, as well as the dynamics of a newly merged organization. Susan Barlow, a senior consultant with the Statler Group, dreaded her upcoming status meeting. She had thought it a lucky break when she got assigned to the Kellogg-Champion project. Royce Kellogg, the CEO of the newly merged firm, had engaged the Statler Group for what seemed a simple project: to reconcile the policies and practices of the two former firms now that they had become one. But once on the job, Barlow realized that the issues were much more complex than they had seemed. The new firm needed help badly-but not the kind of help that the client had led Barlow to believe it needed. What would she and Jim Roussos, her partner on the assignment, tell Kellogg at the meeting? Kellogg, for his part, was not looking forward to the status meeting, either. From his point of view, the consultants had caused more problems than they had solved. What's more, he wasn't even dealing with the consultants he had hired. Where was George Gray, the senior partner he had met with originally? Maybe Barlow and Roussos were just too young and inexperienced. Kellogg felt he was getting a raw deal. How would he approach them in the morning? Should he fire them or make an attempt at damage control? Two experts advise the consultants and two advise the client on how to handle the status meeting.     

An analysis of proxy statement leadership structure justification disclosures

The Dodd-Frank Act’s qualitative disclosure requirements have prompted a call in the accounting literature for greater qualitative disclosure scrutiny. In this paper, we investigate the informativeness of qualitative leadership justification disclosures required by Section 972 of the Dodd-Frank Act. The disclosures are divided between justifying combining the CEO and Chairman of the Board (CEO Duality) and splitting these two positions (split structure). We use content analysis in our investigation. We discover that the two types of justifications are very different. The split structure disclosures tend to be ‘boiler plate’ and lack informativeness. In contrast, our tests suggest that CEO Duality justifications are informative. Our tests suggest that disclosures’ intensities in CEO Duality firms are positively associated with an increasing volume of information that supports CEO Duality as the more appropriate leadership structure choice. Additionally, our test results show that leadership disclosures change users risk perception, but only for CEO Duality firms. This suggests that investors believe in and are using the disclosures when making their investment decisions.     

How do independent directors view generalist vs. specialist CEOs? Evidence from an exogenous regulatory shock

Exploiting the passage of the Sarbanes-Oxley Act as a quasi-natural experiment, we explore how independent directors view generalist vs. specialist CEOs. Generalist CEOs possess the general managerial skills that can be applied across firms and industries. Our difference-in-difference estimates show that independent directors view generalist CEOs unfavorably. Firms forced to raise board independence experience a lower increase in CEO general ability than those not required to change board composition. Additional analysis confirms the results, including fixed- and random-effects regressions, propensity score matching, instrumental-variable analysis, and Oster's (2019) technique for testing coefficient stability.     

CEO incentive compensation and stock price momentum

We document strong evidence that CEO incentive compensation can predict the significance of stock price momentum through discretionary accrual and real activities manipulation. The profit of momentum strategy increases with CEO pay-for-performance incentive, but decreases with CEO risk-taking incentive. It also evaluates the effects of information uncertainty on such relationship. The evidence is more significant for firms with older and longer tenured CEOs and firms with more informed traders. The relationship between the profit of momentum strategy and CEO pay-for-performance incentive is stronger among CEOs without the risk-taking incentive. Our results are robust for different sub-samples based on before and after Reg FD and Sarbanes–Oxley Act, even after controlling for the potential endogeneity. Further, our findings are consistent with the information diffusion explanation of momentum and the agency theory that incentivised CEOs tend to manipulate information by smoothing good news, concealing mildly bad news and accelerating the disclosure of extremely bad news.     

Bob's meltdown

Annette Innella is just coming into the lunchroom at Concord Machines when Bob Dunn starts screaming at her. After throwing his lunch tray against the wall, he stomps out, leaving Annette stunned. Naturally, Annette, the new senior VP for knowledge management, is beside herself. She knows her proposal to establish a cross-functional knowledge management committee is progressive thinking for this oldline manufacturer, but Bob's reaction is totally over the line. If Bob stays, she goes--that's all there is to it. Bob is contrite, but he's under a lot of pressure. The general manager of the Services Group, he's just returned from a two-week trip around the globe to gear up his troops to beat revenue targets again, despite shrinking budgets and hiring freezes. And what does he see when he gets back? An e-mail from Annette requesting that two of his best people devote half their time to what he calls her "idiotic" Knowledge Protocols Group. He's carrying the company on his back, and she's throwing this nonsense at him. Graphics specialist Paula Chancellor is surprised. Sure, Bob's gruff, but his staff loves him, and he's the only one of the big shots who ever talks to her. But HR director Nathan Singer is incensed; Bob's never been a team player, Singer complains, and it's time he learned a lesson. CEO Jay Nguyen is in a bind. Bob is his top manager; he brings in all the money. And even though future revenues are going to have to come from somewhere else, Jay is not totally behind Annette's initiative in the current business climate. He can't afford to lose Bob. But if he reins in Annette, it will look like he's condoning Bob's outburst. What should he do? Four commentators offer advice in this fictional case study.     

Managerial Legacies,Entrenchment, and Strategic Inertia

This paper argues that the legacy potential of a firm's strategy is an important determinant of CEO compensation, turnover, and strategy change. A legacy makes CEO replacement expensive, because firm performance can only partially be attributed to a newly employed manager. Boards may therefore optimally allow an incumbent to be entrenched. Moreover, when a firm changes strategy it is optimal to change the CEO, because the incumbent has a vested interest in seeing the new strategy fail. Even though CEOs have no specific skills in our model, legacy issues can explain the empirical association between CEO and strategy change.     

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.     

Second in command: the misunderstood role of the chief operating officer

Asking the question,"What makes a great COO?" is akin to asking "What makes a great candidate for U.S. vice president?" It all depends on the first name on the ticket--the CEO. New research sheds light on this most contingent, and most mysterious, of C-suite jobs. After in-depth conversations with dozens of executives who have held the position and with CEOs who have worked with COOs, the authors have concluded that different views of the COO role arise from the different motives behind creating the position in the first place. There are seven basic reasons why companies decide to hire a COO: to implement the CEO's strategy; to lead a particular initiative, such as a turnaround; to mentor a young, inexperienced CEO; to complement the strengths or make up for the weaknesses of the CEO; to provide a partner to the CEO; to test out a possible successor; or to stave off the defection of a highly valuable executive, particularly to a rival. This tremendous variation implies that there is no standard set of great COO attributes, which makes finding suitable candidates difficult for companies and recruiters alike. Still, certain common success factors came up consistently in the interviews, the most important being building a high level of trust between CEO and COO. Trust comes from meeting obligations on both sides: The COO must truly support the CEO's vision; keep ego in check; and exhibit strong execution, coaching, and coordination skills. The CEO must communicate faithfully, grant real authority and decision rights, and not stymie the COO's career. It's surprising that COOs are not more common. They would be, the authors contend, if there were less confusion surrounding the role. As we continue to demystify that role, more companies will benefit from more effective leadership.