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Mitchell and Company recently conducted a
study of the qualities of CEOs that are most likely to harm stock price. We interviewed
100 security analysts and institutional portfolio managers (like those who select stocks
for pension and mutual funds). Here were the seven deadly sins for CEOs of publicly-held
companies. (1) Hiding problems -- This is an example of the Misconception stall because some CEOs believe that investors and analysts only want to hear good news, and a lack of problems -- whether that is true or not. These CEOs see describing a problem as a large failure on their part. Investors report that they expect all companies to have problems, and that hiding such problems just makes the eventual harm to shareholders greater. The key talent for executives is to spot the problems and do something appropriate about them. (3) Not understanding the company's businesses -- This is an increasingly common problem as more and more CEOs are hired from outside the company's industry. This form of "stalled" thinking combines the Misconception and the Communications stalls. Sometimes the CEOs think they know the right answers, and do not. On other occasions, they do know the answers but communicate them poorly to investors. Mitchell and Company has seen clients with both kinds of problems. (4) Using change to hide problems -- This is a form of the Bureaucratic stall. The CEO often has no idea how to solve the underlying problem, but wants to take action to buy a little time with investors and the company's board of directors. This is like plastering over a crack in a wall caused by a poorly-laid foundation settling unevenly. Eventually, the crack will reappear. Accounting rules concerning acquisitions, write-offs, and restructurings make this an attractive course for CEOs. (5) Avoiding change at all cost -- This is another version of the Procrastination stall. These CEOs often also suffer from a poor understanding of what needs to be done, and are afraid of making things worse by taking the wrong actions. (6) Pursuing the wrong strategy -- This is yet another example of the Misconception stall. The company will usually have based its misdirection on a fundamental misunderstanding of what needs to be done. (7) Not being credible because of past statements -- This final problem is also a form of the Communications stall. Errors can be compounded by a Misconception stall that investors only want to hear rosy forecasts of future performance. If you promise that problems are behind you, and the problems recur, it is hard to believe your next promise. A better way to communicate is to share your uncertainties and the risks involved so that investors can make a better judgment of what they should do. You will probably agree that this same list could easily apply to the complaints that CEOs have about those who work for them in their organizations. You can also see the importance of open and candid communications in creating the trust necessary to improve decisions. |
