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Corporate culture, the good and the bad CEO

The effect that a CEO can have on corporate culture is, in my experience, not as great as CEOs like to think. However, when their actions stand out and startle, as they do in the two stories I am going to share, they can have a significant impact and shape how employees feel about their leaders and company.

Norman Marks
Norman Marks
Both companies in these stories failed a few years later, for very different reasons. One failed because of inept management (my opinion); the other in spite of good management, because the company had failed five or ten years earlier to address structural problems leading to high cost and slowing innovation.

In 2003, I was working for a large global company that was experiencing significant pressure from customers to cut costs. As revenue dropped, profits slipped to losses and the company’s position in the market started its slip from #1 to #4.

The new CEO decided that across the board cuts in headcount were needed and perhaps a thousand people lost their jobs. At the same time, he was rebuilding his executive team. He wanted them to be compensated for the turnaround he believed he was going to deliver, so he gave each of them hundreds of thousands of options to purchase shares in the company (then trading around $12) at one tenth of a penny per share. But this was not the action that startled.

At the same time that the company was letting many people go, he invested a million dollars to rebuild the executive floor. Each top executive got a fancy new office, replacing the cubicles previously mandated for every employee, with a new coffee lounge. I mention the coffee lounge because the newly hired COO insisted that if he was going to join the company he needed a high-priced Espresso machine. The lounge, with its precious coffee maker, was off limits to all but the executive suite and their assistants.

I heard talk about the “princes” of the company, the “CEO and his cronies”, and other unflattering references. Any pride that employees might have had in their leadership dissipated, and management at all levels reflected the apparent executive focus on personal reward.

It is perhaps not surprising that my audit team found a lot of financial statement fraud during this period, as managers tampered with results to make their performance look better.

I left the company. In 2005, my new company also started losing revenue and market share. The board recognized that they faced two problems: (a) the pace of innovation was slowing, due at least in part to (in their opinion) poor leadership by the head of engineering; and (b), the cost of a key component was higher than the cost experienced by competitors. While our main competitors had invested years earlier in plants to manufacture close to 100% of their needs for this component, my company had built a small facility – in a high cost area – that could only supply 35% or so of their needs. This component was at the heart of the company’s products and one of the most expensive components.

As a result, existing products carried a higher cost to manufacture than our competitors’ products. We either had to sell them for little profit, or sell very few; we did a bit of both. In addition, our engineering team was unable to design new products that would be cost-effective – a result of a combination of the slowing innovation and the high component cost.

The board acted. They directed the CEO to fire the head of engineering. When the CEO refused, they fired him as well, and the chairman of the board (an experienced CEO in this industry) took over.

The new CEO made a number of excellent decisions, including hiring a first-class head of engineering and best-in-class CFO.

However, the problems were too great to prevent the company’s revenue and profit slide.

The CEO reluctantly decided that the company had to cut cost, and a few hundred people were laid off.

That was not startling.

What did startle was that the CEO held a global all-employee meeting, where he and his executive team did a number of things. First, the CEO apologized to the employees for the company’s prior failures that had led to the need to cut headcount. He explained with honesty and humility the unfortunate need to let valued employees go. Then, he said that he and his #2 were both going to cut their salaries by (if I recall correctly) 15% for at least the next two years, and would forego any bonuses or stock awards.

While the CEO of the first company gave the impression that his priority was his and his team’s personal rewards, the CEO of the second gave the strong impression that his priority was the company and its employees.

People of all generations, creeds, and nationalities respond when others show they matter, when they are listened to, and when they are given respect. They respond with loyalty, dedication, and performance.

When they experience the opposite, that their leaders are only interested in ‘feathering their own nests’, employee loyalty, dedication, and performance are blown away like feathers in the wind.

I welcome your views and comments.

Norman Marks, CPA, is vice president, governance, risk, and compliance for SAP's BusinessObjects division, and has been a chief audit executive of major global corporations for more than 15 years. He is the contributing editor to Internal Auditor’s “Governance Perspectives” column.

Vendredi 18 Octobre 2013