Sunday, January 11, 2015

How Boards expedite the demise of some of the best Companies

We were in absolute-absolute awe of TESCO during my days in the UK, during the hey days of TESCO. The retailer had established itself as the most efficient company, churning out QOQ of phenomenal growth, managing its working capital cycle so beautifully that 3 months of working capital cash (zero debtors and 3 months creditors) allowed it to become the most wealthy real estate company as well. Sir Terry Leahy was regarded as a business icon par excellence and no business management class / case study would go by without the mention of TESCO, its success, its strategy, its leadership and its growth. The customer reward program “clubcard” has been revered as one of the most successful reward/research programs in global retail.

Established in 1977 it spewed a whopping net profit of 3.8 billion in 2011 and attained a market cap of some 100 billion Pounds at its peak.

Circa 2014 overstating of profits, accounting scandal, CEO resigns, Market Cap eroded by 70% and the stakeholders – vendors, employees and most importantly customers lose confidence in one of the best and most talked about companies in British history.

These stories and case studies provide an immense opportunity for CEOs and the Boards to analyse in depth the real causal factors of such mistakes/fiascos and learn fast. And i have come to believe that a greater opportunity lies in failures, bad bosses, bad companies, frauds around oneself as that teaches you what not to do and what not to be. Because the world is full of advisors and teachers who tell you what to do – but not ‘what not to do’.

In the era of ever increasing hierarchies and over paid board members with chip on each of their shoulders, it becomes a compulsion on each and everyone to allegedly perform, review and justify one’s presence in that chain –

And thats where the problem starts. Lets reconstruct what might have actually happened at Tesco.

1    A mom and pop store tries to make it big by focussing on its customer, employees and concentrating on providing value while cutting costs and aiming for superior sales and a respectable growth. (by and large this is the crux of millions of mission and vision statements round the world).

The CEO, a maverick and a confident fellow expands the chain over the next 2 decades to a stratospheric level and achieves some amazing benchmarks in the history of business growth and performance.

After a few good consistent quarters and a few consistent years, the board expands and so do reviewers of the business, each one of them having some success in their pocket in some domain but little or no expertise in retail but having an unbelievable ability and capacity to opine and advise the CEO

From an annual review format, and a distant oversight on the business the board now wants a quarterly review of sales, costs and profitability.

The operational team expands and a reporting division is set up at TESCO to sate the board’s appetite for reams and reams of numbers, data, analysis.

The CEO begins to get a bit edgy as some of his time is now spent in ensuring timely quarterly reporting, new formats of reporting, each of these formats of reporting arising out of each of the reviewers imagination/past-experience and his belief in the effectiveness of these formats.

CEO (ambitious, growth hungry – both personal and organisational, conscientious and diligent) now begins to work harder and smarter than ever before and maintains the pace of growth, trying to outbeat the reasonable industry parameters and ensuring that that the board is happy with reporting and growth and numbers etc.

The board begins to feel that every target, every goalpost that the CEO had been given was seemingly easily achieved, every retail industry benchmark was easily surpassed – so perhaps the CEO needs to run even faster, better and more efficiently and the CEO could do something more and something better than what he has done all this while.

The board members analyse the data even more and come to a conclusion that retail industry needs a greater scrutiny and the company needs to move from a quarterly reporting and review to a monthly review.

CEO by now a bit bewildered and stretched, begins to wonder where to get the next alpha in growth because by now he is concentrating less on the till management, external customer’s sensitivities, he has lesser time for his vendors, he has lesser time for his employees (the greatest asset) and by the time one monthly reporting gets over only to be told by the board that the business could have performed better -  it is time for the next monthly review.

Now the board has become the most important customer, the internal customer and the poor CEO is spending his max time on the internal customer and least on the external. The poor fellow – TESCO’s customer who isn’t now getting the best bang for his buck on the till, who feels that ASDA is doing a better job with customers, who feels that TESCO is losing the grip on the most important stakeholder – its paying customer.

The numbers begin to wane and market metrics begin to flounder and CEO is working the hardest than ever before because he has just been advised by the board that he needs to have a better grip on his numbers and he isn’t reviewing his business closely enough and the board passes a resolution for a weekly review after relying upon a battery of very smart analysts who are now asking questions such as –

Why is Friday sale less than Saturday because UK has historically been a Friday shoppers market.
What marketing initiatives have been implemented between 1600 hrs and 1800 hrs on Friday to ensure that sales are at their expected highest.
Why cant we delay the poor dairy farmers payments from 30 days to 60 days, squeeze the vendor a bit more and improve our working capital cycle.
Why, why, why not???

By now the CEO and the CFO are doing everything else but running the simple grocery chain and looking after their external cash paying customer.

Having lost his own ability and confidence to run his business that he once ran like the king of the jungle the CEO is only making reports, doing number crunching and absorbing advice and suggestions from the all powerful board who are now behaving like  the Sam Waltons of the world.

The CEO and CFO are now on the edge because while they have used their entire competence to do the best that they can possibly do, they can still perform better – as per the board, they aren’t doing enough – as per the board, they are just not analysing the numbers enough – as per the board.

Finally the reporting format of every month every quarter every week becomes so important to pass by that the hapless duo of CEO and CFO having exhausted every arrow in their quiver decide that after all ‘we do get consistent customers’ week on week and month on month and they decide to account future anticipated sales (by a small sum of a quarter of a billion Pounds) in this reporting period (because it has become so bloody important to make the numbers look good for this report – as if this was the last)  and reduce the payables to show higher periodic profits. After all this is the only way that the board will be happy and the share price will reflect the boards effectiveness.

This isn’t only the TESCO story. Every single company that’s over reviewed and over scrutinised is going thru some similar point in its lifecycle and will meet the same fate. And collectively everyone will work and unite to find a fall guy and blame it all on him.

-Subprime crisis of 2008 was a result of greedy executives wanting to perform even better to earn even better bonuses and underwriting junk paper.
-Enron was a result of greed where weather was being bet upon and derivative trades were being exchanged on prediction of weather.

Warren buffet had invested in TESCO and called it his biggest mistake in life (did he not know the TESCO board well enough?)

Buffet meets his CEOs only once a year and sets reasonable and achievable expectations and creates an environment for them to perform.

He allows his rockstars (CEOs) to make mistakes and learn and believes in them as long as he believes that their intentions are correct.

And above all Buffet believes that businesses aren’t built over weeks and quarters but over a lifetime.

No one has had the courage till date to follow his management style and understandably no one on this planet has been able to replicate his success.

Moral:
The world can only grow as much and so can the size of the global economy - only the capitalists will beat the world growth (Thomas Pikkety)
Businesses will go thru spurts and troughs of their lifecycles. Do not view them WoW (week on week), MoM (month on month), QoQ (quarter on quarter)
Build brands that make a difference and last a lifetime. Stop Boards from over scrutiny and from orchestrating the corporation’s demise.
Allow effective CEO s to operate businesses as if it were their own. Dont kill them with specious recommendations and hollow experiences from unrelated industries.

And above all for the success and peace of the planet and suatainable profit of the corporations.........

‘Search for the intrinsically motivated purpose of life rather than extrinsically motivated mindless pursuit of profit’

6 comments:

  1. A thought provoking blog!!! After all in these overly reviewed companies, CEO and CFO will be doing clerical jobs every day or speculating in MS Excel than contributing to the business cause!!

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  2. Very well written. Management/Board reporting indeed occupies a significant bandwidth of the CEO and the finance team often taking away the focus from the primary task of running the business.

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  3. A lot of this is also to do with the fact that bz leaders and boards interests are not aligned . This is so because the mutual trust is missing. This is so because communication is eek and / or is left to text, mails and just artificial meetings at opulent hotels. Boards in there righteousness also do not want there reviews to be taken as illness for bz leaders and pushing them to resort to mis-doings and breach of integrity and making the asset toxic. I have seen this in my previous employer. The two people need to be on the same page and believe that best is being done and someone has to call out that it is indeed good. The trouble is that if the board says well done or i know u tried, the indian bz leader becomes complacent (80%) of them. They risk then performing and the board member looses her negotiating , flexing power to derive the best. If the CEO says well I can do better and the plan is short then he looses his buffer(very prevalent in our mindsets, remember playing time as kids) and has to do more. So the trick lies somewhere in blatant trust. Read the Rice story of how he has seen in last 35 years reviews and there quality not changing ith immelt or welch and that everyone of them has been meaningful because they are enquiring more than just seeking and hence helping rather them only demanding. We can discount a dossier article by 30% but 2/3rd rd will be true. But surely Manu there is a catch in here on how to strike this right and i guess when and where people do they create institutions and not companies alone.

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  4. Good analysis, Manu.

    I remember these verses - can't remember from where:

    "For want of a nail, a shoe was lost
    For want of a shoe, a horse was lost
    For want of a horse, a battle was lost,
    For want of a battle, a war was lost!!"

    In the end, a war is lost for the want of a nail.

    Metaphorical this may be, but in its true sense, that’s what is happening in the race for more.

    Having said that, I also remember reading somewhere: our lives begin to end the day we become silent about things that matter.

    For the best interest of the organization, the CEO and CFO should have stood their ground and refuse to be bogged down in the tactical format of the TESCO operation and continue to maintain a laser-sharp focus on the strategic formula of success it was once known for.

    Shahir

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  5. Well written Manu, the real insight.

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Your comment isimmensely appreciated and will be published for a discussion - soonest. Thanks. manu