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January 9, 2009 - Bloomberg Businessweek

Is Your CEO Recession-Capable?

Stephen A. Miles and Nathan Bennett

No chief executive has experience running a business in an economy like today’s. Here’s a game plan for ensuring effective leadership

Confirming what everyone has long sensed, the National Bureau of Economic Research (NBER) recently announced the U.S. economy has been in a recession since December 2007. The Dow Jones industrial average is down more than 35% in the past year; unemployment is up to nearly 7%. This global economic situation is unprecedented, which raises the question: Is your CEO prepared to play by today’s rules or is he or she proficient only at the game played before the recession began?

And how can boards be certain they make decisions about leadership and succession that will properly position the company for the game as it will need to be played tomorrow?

We contend that the competencies required to lead a company effectively have changed. Particularly at risk are the CEOs who are at their best when working at a broad, conceptual level. The sky box is not the place for today’s CEO. Times are too uncertain for leaders like this to chart a course for a company’s future convincingly. Here are the factors you need to consider:

  1. Operational Strength. Given our contention that no one has led through times like these, we certainly can’t claim experience is the key to understanding which CEOs will succeed. There are cases, however, where we think incumbent leaders have the right skill set for the demands of today’s game. Specifically, we believe leaders with strong operational backgrounds—such as Mark Hurd at Hewlett-Packard (HPQ), Jamie Dimon at JPMorgan Chase (JPM), Muhtar Kent at Coca-Cola (KO), and Marius Kloppers at BHP Billiton (BHP)—are best equipped to deal with today’s challenges. These times require leaders capable of digging deep into the details of operations to provide a dispassionate review of the business.
  2. Financial Acumen. Understanding how different decisions about operations will affect the company’s financial position—and vice-versa—is critical. But this capability, as well as operational strength, doesn’t mean leaders are excused from more traditional CEO duties. Indeed, leaders must inspire and motivate the entire organization to ward off a morale contagion that would only exacerbate problems.
  3. The Right Mix. Over the past decade, the CEO’s main responsibility has been selling the company’s vision—to Wall Street, to shareholders, to employees, and to other constituents. This required many to spend as much as 80% of their time on tasks other than running the company. What does the right leader need to look like now? Our work with many global companies leads us to believe the best leader for the foreseeable future is one made of three parts: 20% CEO, 40% COO, and 40% CFO.
  4. Micro-Leadership. The 20%-40%-40% distribution implies the leader can move seamlessly around the company—from up to the sky box down to the manufacturing line—demonstrating what Bill Watkins, CEO of disk-drive maker Seagate (STX), calls “micro-leadership.” The micro-leader deeply understands his or her company independent of the current times and appreciates not just how and why decisions will affect the operation but also their financial consequences. At the same time, the micro- leader is effective at inspiring his or her employees and external constituents around strategy and vision.
  5. Updated Succession. The fundamental shift in the game—and the skill set required to compete effectively—also needs to inform C-suite succession-planning efforts. Companies reviewing their succession planning should consider the 20%-40%-40% skill set as they identify heirs and then groom them. The likelihood, however, is that most companies have developed short lists and identified each potential successor’s gaps based on the old economy. Boards and top management teams must revisit their planning processes to make certain candidates and their development plans reflect the demands of the new economy. It may well be that their previously preferred candidate is no longer viable.
  6. Identification of Assessment Problems. How should boards redefine their succession planning? The effort begins with understanding the faults of executive assessment as practiced now. Too often assessment looks more like a ritual than it does strategy. The former is centered on the execution of a process; the latter requires a deep understanding of what the company is likely to encounter in the future and whether or not executives have—or can develop—the right stuff to lead in a new world. The board has failed its duty when executive assessments become a perfunctory exercise focused on how the company is performing rather than digging into the chinks in executive armor that future battles might expose. Too many boards tiptoe around their CEO and top management teams when it comes to detailed evaluations accompanied by constructive coaching and feedback. Tough, honest evaluation and feedback must include the top of the organizational chart.
  7. Finding and Fixing Weakness. The path forward, a simple two-step process, is too often handled in a cursory way. First, each year the board needs to thoroughly measure the company’s strategic direction and subsequent operational requirements. Companies are not static, nor are the leadership competencies required to succeed. As strategy evolves, can the CEO and likely successors keep up? As one example, even in today’s “cash management is king” economy, many CEOs of Fortune 500 companies are far from being in a position where they touch cash, and as a result they don’t set good examples about how to manage it. If CEOs are to assess the potential risks to their own company, they can’t distance themselves from cash and cash management even when their organization is so big no one would ever think there were risks. The second step is to create and then enforce rigorous development plans to address the weaknesses revealed in current and future succession candidates. The key is to understand the leader’s risk clearly and then to provide support in order to manage it. We challenge boards to ensure that their leadership searches and succession planning efforts are forward looking and, most important, that all candidates have been assessed against both the macroeconomic conditions and the future needs of the business. As the rules of the game change, so too must the qualifications of the players, especially at the very top of corporations.

Nathan Bennett is the Wahlen professor of management at the Georgia Institute of Technology.