PRIVATELY HELD BUSINESS -- LEADERSHIP SUCCESSION

A Case Study                                                                                                                                   (as published by Family Business Magazine)                                                        
Three years ago, Malcolm Cooper Jr., second-generation owner of J.K. Adams Company, made a serious assessment of future leadership prospects at his Vermont-based company. Since 1944, the company, which designs and manufactures high-end wooden kitchenware, has been a valued employer and a significant contributor to the vitality of the southern Vermont region.

Cooper’s two sons had always been encouraged to pursue their own dreams, and neither of them had joined the family business. Although J.K. Adams had a talented staff, there was no internal candidate capable of leading the company. Cooper and his wife looked at both the business and their personal interests, and how they envisioned the next phase of their lives.

Entrusting stewardship of the family business to an unknown person outside the family was unsettling. The subsequent path to an ownership transition would involve personal, legal, financial and emotional hurdles, as well as an unclear timeline. But the Coopers recognized that one way or another, ownership of the business would someday have to change hands. Despite the challenges, they realized the advantage of controlling the process.

Cooper, who was 60 when the process began, recently reminisced about his feelings at the time. “Inevitably, time will force us to deal with the succession of our management and the transition of our company’s ownership,” Cooper explains. “I decided to deal with them now, on my time and my terms.”

Starting at the end

In planning for these monumental changes, the Coopers elected to start at the end. They identified their ultimate goal: to keep the company as an asset to the community, as a reliable innovator and supplier to its committed customers, and as a continuing employer. They wanted to balance these considerations with a maximum return for the family’s nearly 70-year investment.

As capable as he was in sustaining the company, Cooper became convinced that J.K. Adams needed someone with broader experience and a new perspective to accelerate the company’s growth, improve its profitability and eventually position it as an attractive investment for a new owner. The company’s core was solid, but it needed innovation and accelerated change to realize its full potential.

Through his industry and community contacts and with the support of his advisory board, he considered a few candidates to come in and lead the day-to-day operations. “We thought we knew what we needed and considered only a limited number of people,” Cooper recalls. “We made a substantial investment to bring in a chief operating officer. But he left for personal reasons before we could address our longer-term plans.”

After this disappointing experience, Cooper realized what he needed was a highly accomplished executive to step into the company as its CEO, a role that he himself would have to relinquish while remaining chairman. The company’s big objectives and the challenges of the economy would not allow for another misstep.

“We carefully chose an executive search firm, experienced with positioning companies of our size, that could also understand the critical business issues,” Cooper says. He worked with the firm to clearly define the CEO role.

The search firm evaluated more than 200 prospects and provided the company with six finalists. Together J.K. Adams and the search firm selected a new CEO. The executive is in place and, with the support of Cooper, key employees and the company’s advisors, he’s quickly coming up to speed.

“Our new CEO has been in place for less than three months, but the progress has been stunning as he’s working his way into all my responsibilities,” Cooper says. “Before he started, and in addition to the CEO job description, I laid out a clear new role for myself that would be supportive [and] provide defined oversight but keep me out of his way on a day-to-day basis. This has made the transition less difficult, but not easy.”

Although it’s hard to entrust a family business to a non-family member, especially someone chosen from outside the company, Cooper continues to follow the path he thoughtfully laid out, keeping the end in view. “Adding a CEO to our company is a significant cost, but when you consider the ROI, it’s a great investment,” Cooper says.

Planning for a sale

Cooper’s studied decisions about selecting new leadership have positioned his company for an eventual ownership transition. Before the CEO search, J.K. Adams had continually upgraded its management team to address changing opportunities. Because a strong team was in place, Cooper needed only to replace himself.

Great leadership is a company asset that will help attract the best new owner. Warren Buffett has said that when Berkshire Hathaway evaluates potential acquisitions, “We look for first-class businesses accompanied by first-class management.”

Over the years, J.K. Adams had been approached several times about a possible sale of the business, but neither the company nor the family was ready. Now that the key succession step has been taken, the family can address a multitude of other essential matters, including:

1. Structuring the ownership of the company, from legal and financial standpoints, to make the most of a transition.

2. Determining the best option for new ownership, or who might best carry forward some of the family’s principal objectives. Options include an investment group, a strategic buyer, an Employee Stock Ownership Plan or a key employee.

3. Ensuring that several years of audited financial results are on hand when discussions with potential acquirers begin, to clearly quantify business performance.

4. Completing a formal valuation of the business to determine a fair price. Done sooner rather than later, the valuation would also reveal opportunities for the company to maximize the value before negotiations with prospective buyers begin.

5. Engaging experienced M&A professionals. Laws and regulations, many of which are subject to change, will influence the structure and value of each transaction; the right professionals can help to protect the family and their post-exit assets.

6. Developing an updated family estate plan.

7. Planning how the family will spend the next phase of their lives. What will that next phase look like when their personal identity is no longer wrapped up in the company?

Cooper is consulting with exit planning specialists who have worked with other families on the intricacies of ownership transfer. Having a talented CEO in place allows him to spend more of his time on assessing transition options and opportunities.

Because he is comfortable with his leadership team and the direction of the business, Cooper is also free to spend more time on his many other commitments and personal activities. Having the right leadership team in place will support him in his personal transition.

There are countless matters to consider. “Like so many second-generation owners, in addition to the company itself, I recognize the legacy of a family business,” Cooper says. “Looking over my shoulder, I still have my father, Malcolm Cooper Sr. He’s been gone for a number of years, but I still feel him assessing every major decision I make. Then looking ahead, I understand too well that an ownership transition will affect far more than my family and our business. This process is very complicated. I’m making the time so I can do the best for our employees, community and customers, as well as my family. To get all this right we can’t be rushed, and we won’t be cornered into a transaction on someone else’s terms.”

 -- Stanley H. Davis, Standish Executive Search

A Trojan Horse: Why the Yahoo! CEO Debacle is Important

In early May, 2012, the public learned that the CEO hired to lead Yahoo! and its $18 billion enterprise was  using a resume that  apparently misrepresented his education credentials.    The incident launched the predictable finger pointing, e.g. an  accusation that somebody else may have changed the resume;  that the resume misstatement was not material; that the untruth  was mitigated by the candidate's prior business experience....    The fact is that the Yahoo! Board and the responsible search  firm seem to have fallen asleep at the switch.  There's no question that the underlying problem here is integrity. However, scan the landscape of any industry or profession and  this issue periodically surfaces.  The best run businesses require  a third party background check on every executive hired, including the details of their employment, credit history, driving  and criminal records, address tracking - and oh yes, their  education credentials.  There are occasional discrepancies that  are resolved by a further review of the information, or by  discontinuing the candidacy of an otherwise impressive  prospect. Should this potential lack of integrity be a concern when looking for an executive who otherwise brings a professional track record, and impressive references? Absolutely!  It may be the lack of a credential, but it's also a matter of integrity.  Like a Trojan horse, once inside  a business an executive's susceptibility to compromise one  small truth can morph into a habit of compromising more  and larger truths.  It's a disease that can (and has)  jeopardized businesses - Enron, Tyco, MF Global,  JP Morgan, and others come quickly to mind.  It impacts  investors, employees, and other stakeholders.  As for  reputable customers and suppliers, they won't sustain a  relationship with a company they can't trust, or with  whom an association may taint their own brand. Yahoo!, its Board members (some who have now left), and shareholders (whose investments were jeopardized) have  been burned or tarnished.  Time will finally establish the  degree to which this single incident will further affect  reputations, and the enterprise. Shaded resumes that are deployed to gain entry into a business are not an executive phenomenon, or even a large  company anomaly.  Take one smaller New England company  that recently filled an operations role with a candidate  recommended to them.  He was a good, reliable worker.  When some reports of inappropriate behavior toward his  female co-workers began to surface, the management  wondered if they should look into his background, which  they hadn't during the recruiting process.  They did, and  discovered that they had engaged a convicted sex offender. Why do people misrepresent their backgrounds?  How do they avoid being detected?  How is it that their hiring is  recommended by credible people?  Why do some  otherwise smart leaders continue to gloss over the entire  history of a candidate when investing in a new executive,  or employee?      Whether a search firm is engaged to recruit an executive, or the company's staff is assigned to fill a junior level position,  the completion of a disciplined third party background check  is essential.  Somewhere, this Trojan horse is positioned outside or already within the walls of yet another company.

Been Down So Long It Looks Like Up To Me *

But maybe this time - finally - I see it right.
Private Sector employment continues a slow trend up. From October to December, the index of consumer confidence was up 57.7%. For every single month over the past two years, activity in the service sector has improved.
We're having strikingly different conversations with colleagues, clients and other business owners in recent months, which contrast with the prior four years when a good stretch was best described to us by one CEO as things being "less bad". During those four years most businesses suffered a profit and revenue dive. Some went into a tail spin never to recover.
However, those who survived "bouncing along the bottom" are now coming back. In contrast to the years of executive hand wringing, recent weeks have brought "we're seeing significant improvement", "we're operating at capacity", and "the last quarter was our best in almost four years". These comments are no longer the exception. Looking at additional numbers may help explain. We've had a month where housing starts were their highest in 18 months. The trade deficit looks better. And when inventories are too low, as they are now, they will be rebuilt - affecting employment, material purchases, and the consequent activity that rebuilding will require.
We don't know whether this uptick is a trend or an event. Vigilance and prudence remain essential. But let's not ignore the same data sources, now indicating a positive direction, which we readily embraced when they were relentlessly negative. And let's not minimize the renewed optimism of the same credible colleagues, clients and business owners on whom we relied when they previously told us how tough things were.
With definitive testimony, trends and fact in hand, what looks like up, may finally be up.
* Richard George Farina, 1966

THE AGE THING

Steve Jobs was 56. John Boehner is 61. Nancy Pelosi is 71. And Warren Buffet recently turned 81. The average age of CEO’s in established businesses hovers around 56 years. The average age of members on Fortune 500 boards is 62.5.

When these leaders are 50, 60 or 70 themselves, do they view the age of candidates as a disqualifier?

I can’t recall an instance where a client company asked us for candidates with less experience, or requested that candidates be below a given age. To the contrary, expertise, track record, and culture fit continually surface as the key requirements. And long, broad experience (often referred to by clients as “gray hair”) is not an uncommon preference.

As an example, Nye Lubricants, an international technology leader that develops and produces engineered lubricants for unique applications, recently filled five key positions for their technology, operations, quality and sales organizations with carefully selected candidates. The average age of the selected candidates is 53 years, the oldest being 62. CEO George Mock III (who himself is 51) observes that “we needed real leaders, who also have an expertise with our technologies and the industries we serve. Why would we compromise our business opportunities solely to attract younger candidates?” Furthermore, “we have to consider who will develop our new technologists and our emerging leaders? In filling a key position, I want someone who’s smart, experienced and current; a real pro who has a solid track record, can understand our business, fits our culture, embraces our strategy, and knows how to lead. Within those parameters if gray hair plays any role, it’s probably a plus.”

But when hiring “gray hair”, how long will the new leader stay on? A preference for younger candidates won’t necessarily increase job tenure. First, and most telling, the average retention of executives of any age is only 5 to 6 years. Second, it’s well recognized that improvements in health and increases in longevity have people working longer and more effectively.

For some seasoned candidates themselves, ageism is a concern. They can’t control their chronological age or the misconceptions of a minority of hiring executives. They can positively impact their appearance, presentation, level of interest, vitality, and currency in their field. But their own concerns about their age can come through in interviews and compromise employers’ views of their long experience, great track record and continuing value. There are numerous factors that affect interviewing success, but this is one where a failure to be competitive for that next opportunity may be self-inflicted.

It’s hard to deny that in some circles there is a prejudice that favors younger candidates. But, for the better organizations, the age thing (older or younger) is not a primary hiring factor or a disqualifier. And where a candidate’s qualifications are made clear, gray hair is likely an asset.

LPs IN AN iPOD WORLD

As businesses share their current challenges and observations, it may be helpful for us to share a few timely comments on leadership staffing, turnover, retention and recruiting.

Staffing

LPs in an iPod World

My LPs weren't adaptable to my 8-track tape player then I couldn't jam my 8-tracks into my new cassette player. My cassette tapes weren't usable in my CD player, and now there's no slot to fit any of them in my iPod.

I've tried to adapt them all but I can't. Each was the media of its time, and they all could still be good. But I've reluctantly dealt with the changes in technology, expectations, compatibility and competition that have left behind my LPs, 8-tracks, cassettes and CDs.

Changes over time may also have made obsolete some of the leaders who were right for their original mission and for your earlier business. Despite your best efforts, and theirs, have they become LP performers in an iPod world?

Turnover

Hooray for Employee Turnover
Yes, we're serious.

As a recovering economy presents your employees with attractive options, their departure will impact employee turnover statistics that many businesses work so hard to minimize. But this is one metric where the numbers are the wrong measure. It's not how many employees you lose, but who you lose.

If you're attentive to your standout performers and provide them better opportunities, challenges and rewards, they'll fight to stay and won't search for options. They'll be less receptive to calls from companies that are in tenacious pursuit of new talent. If differentiating your internal rewards and opportunities means that there's little left for lesser performers, they may voluntarily leave to find a better fit for themselves, thus providing you with a chance to upgrade your organization. Depending on how aggressively you assess and address employee performance, you may thus be driving voluntary turnover. [Topgrading or forced ranking would programmatically identify top players. It would also identify lesser performers for development, or dismissal, thereby driving involuntary turnover and opening targeted opportunities to replace mediocre or non performers.]

So, for the organizations that are seriously upgrading their talent to improve business results or reposition their enterprise, hooray for employee turnover!

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"What we were doing didn't work. The time for providing for everybody, no matter what
their performance, is gone." -- General Motors North America President Mark L. Reuss
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Retention Katy Bar the Door And what about those tempting outside options that may find your standout performers? Optimistic companies now on the rebound are looking for great managers and executives to shepherd them from recessionary caution back to the promise of growth. In the search for talent, these companies are not looking for mediocrity. They're on the hunt for all-stars. They and their agents will dig to find the skilled, knowledgeable, accomplished leaders who are motivated by more than money; have value to sell and the initiative to share it - and who have been given a reason to consider options.

Other companies on the hunt are happy to attract the best leaders that you have. Whether they can is largely up to you.

Recruiting Looking for Love in all the Wrong Places * You may be one of those optimistic companies now in pursuit of great new talent. If you're building your candidate pool solely with active job seekers - those who read and respond to postings - they, not you, are defining your options. If you happen to be a bit more enticing with your postings you could also attract some casual job seekers, those who occasionally peek at available positions. But what you're still missing are the 70% or so of talented potential candidates who aren't looking at all - the untapped mother lode.

You may be diligently fishing for your dinner in the familiar shallows of a nearby pond. Is there an untapped ocean right behind you?

__________

“In the competitive deployment of strategy, capital and people,
great leadership is the ultimate tiebreaker.”
__________

* Song by Bob Morrison, Wanda Mallette & Patti Ryan

PUTTING THE SADDLE ON THE RIGHT HORSE

Stanley H. Davis, Standish Executive Search
Kathryn B. Earle, Touchstone Advisors of Cohasset

When a new venture is just a twinkle in their eyes, most business founders don’t realize that their leadership assets likely won’t meet the eventual needs of their expanding enterprise.

At founding, the owner’s most critical asset is himself. He’s the leader of an embryonic enterprise where the primary capital is his ideas, expertise, creativity, commitment and time. As potential customers, suppliers and investors become interested in the founder’s budding venture, he’ll need to extend himself and engage other people and capital. If he hasn’t before, this promising entrepreneur begins to wonder how big this venture might become, to evaluate what he needs to know but doesn’t, and to consider what his journey from simplicity to complexity may require.

The founder’s recognition that he or she is not an expert in all things – financial, commercial, technical, operational and strategic – brings the realization that some specialized help will be needed. In the venture’s early years, an experienced bookkeeper in the family and a salesperson from down the street may suffice. Continuing success will require additional expertise and, eventually, seasoned managers to oversee and lead varied functions.

Each business stage – conception, launch, growth and maturity – demands different leadership traits; and the need for great leadership transcends changes in ownership or structure. Interest from a potential suitor or the opportunity to acquire another business won’t wait if you don’t already have the right leadership in place. What does this right leadership look like?

1. To begin, when you’re a $10 million business, don’t bring in $10 million talent. Your growing enterprise is already operating at that level. The right leaders are not there for the ride. They’re there to prepare and lead the company into territory that they already understand. They’ve learned from their ‘beginner mistakes’ elsewhere.

2. Don’t settle for talent that’s “good enough for now”. “Now” is temporary. Mediocre talent will generate mediocre results, and mediocrity is not an asset. In fact, select leadership team members who, in their expertise, are better than you are; who will complement and extend your own skills and experience and stretch you to be the best business owner you can be.

3. As a leadership team begins to take shape, make sure that in addition to their business acumen they also fit with you personally, with the culture you want to build, and with other leaders already on board. The multiplier impact of a cohesive team, compared to a collection of individuals, is stunning.

4. Assure that your leaders are organizationally committed, goal oriented and selfless enough to get the best from one another and to hire others of equal talent. (‘A’ players hire ‘A’ players; ‘B’ players hire ‘C’ players.)

5. In your hiring, don’t focus on pedigree (e.g., family or educational background; appearance; impressive yet unrelated activities) but rather on relevant and quantifiable accomplishments, how they were achieved and under what circumstances.

6. Choose leaders of whom you’ll be proud. The value of your business, throughout its life, will be substantially bolstered by the caliber of your leaders. They’ll be evaluated by prospective investors and bankers, and by customers and suppliers who may be considering a long term relationship with your company.

7. At each stage of your company’s growth, be ready for the business and personal challenges that will come with needed leadership transitions. Map out the changes and the essential transfers of responsibilities beforehand. Build a supportive consensus with your internal team and your external stakeholders. Prepare yourself for some difficult changes to your own role.

8. Remember that for any change, acknowledging the need may be the most painful element. It’s not easy. If it seems easy you may have placated yourself with a simple adjustment to your business rather than stepping up to the need for a more substantive change.

9. Prepare to pass the CEO saddle to an even more qualified candidate. If the company’s success exceeds the founder’s ability to manage it well, sustaining the enterprise may depend on honest self-assessment. In our work with one successful business owner who was recruiting his first non-family executives, he observed that his “business got bigger and more complex than we know how to manage”. This was a clear sign that his business was succeeding.

Will you know when your growing business reaches one of those inflection points, when it may have outgrown its current leadership? You may not want to deal with it. You may not even want to acknowledge it. But you will know it. A courageous, insightful and timely response will greatly increase the likelihood of your venture’s continuing success.


Stanley Davis is the Founding Principal at Standish Executive Search.(www.StandishSearch.com). He can be reached at sdavis@StandishSearch.com

Kathryn Earle is the principal executive leadership and business organization consultant at Touchstone Advisors of Cohasset (www.TouchstoneCohasset.com). She can be reached at kathryn.earle@touchstonecohasset.com

AN "EMPLOYEE FREE CHOICE ACT" -- FOR WHOSE BENEFIT?

Historically, Unions have worked to provide enlightenment and social legislation to make US businesses better places to work. Employers have built the enterprises that create jobs and opportunity. The pending Employee Free Choice Act proposes to drastically alter the relationship of these two institutions and the labor organizing process.

Effective business leadership demands a fact-based understanding of issues – especially of the big issues. The proposed Employee Free Choice Act is a big issue.

How does the labor organizing process currently work? In general, the National Labor Relations Act provides that employees may petition their employers to be represented by a union. The employer may recognize the Union at that point or require a secret ballot election to confirm that this is the employees’ choice.

Up until the time that the petition is presented to the employer, organizing and influencing conversations with employees are typically limited to union organizers and other employees. Between the time that a petition is presented and an election is held (if an election is to be held) employers can then converse with and attempt to influence their employees’ votes.

What would the Employee Free Choice Act do?
Most significantly this proposed Act would: eliminate any option for a secret ballot election – a petition presented by a Union would be enough; mandate mediation and arbitration when, within time limits, the parties do not agree on an initial contract; provide for injunctions and penalties.

What are the facts on election results? According to the National Labor Relations Board, 30,507 representation elections have been held in the 13 years since 1997. In 1997 Unions won 51% of these elections, and this percentage continually rose through 2009 when Unions won 66% of elections.

When a Union prevails, are contract terms ever reached? A recent study found that 66% of union election victories have then resulted in agreement on the terms of a first contract.

Do Union and Company organizations have anything in common? Unions and Companies are each businesses focused on their own business performance. In the organizing process, the primary business interest of Companies is to retain their flexibility to manage. The primary business interest of Unions is to increase their membership and dues income. Both, however, claim added altruistic motives.

Do Unions or Companies best protect job security? A common point of the union versus no union debate centers on the creation of job security. In reality, job security is created by neither unions nor companies. Rather, job security is provided by customers who create the demand for a product or service, and are satisfied (or not) by the offering, its quality, delivery and related services.

Does unionization create an opportunity for increased pay? A recognized Union can certainly bargain for its members’ improved wages and benefits. It must approach these opportunities prudently because the competitive business environment will keep employers from paying more than they can afford. If pay and benefits are driven to unaffordable levels an employer may be forced to reduce costs, opt for alternative sources of labor or, in the extreme, opt to exit its business.

Where current labor agreements provide for extreme pay, benefits or work rules is it the Union or the Company that is responsible? Yes. Turn to the signature page of any labor agreement and there are two signature sections – one for the employer and one for the Union. Both agreed to any terms, extreme and otherwise.

Are Unions the victims of their own successes? Over the years Unions have helped to achieve, among other advances, minimum wage, workers compensation and unemployment insurances, improvements in Social Security benefits and job safety and health legislation. These are impressive benefits that government now assures for every Union and non-Union employee. These substantive advances leave far fewer job improvements for unions to promise to their current and potential members.

Are Companies the victims of their own failures? When their work environments provide their employees with limited challenges or limited opportunities for career growth, little or no recognition and appreciation for a job well done and a less than pleasant or welcoming environment, they open themselves to have those matters addressed by a Union. To be sure, an employer who doesn’t address a poor work environment has long been a Union organizer’s best friend.

What are an employee’s options? An employee may have a positive or negative environment in which to work. In either case he or she can accept that environment, or work with or without a union to change it. Alternatively, an employee is not indentured to his/her employer. He /she has the added option of packing up and moving to a better circumstance – even in a weak economy, when it may take them a bit longer.

Do currently recognized Union bargaining units exist because the Union drove them or because of the employers’ practices? While each instance is different, the hope is that the bargaining units exist because that selection was the employees’ preference.

Are employees capable of making this selection? Let’s not make the mistake of assessing people’s intelligence solely based on their job title, income, or even their education, whether they are union leaders, company leaders or employees. With the presence of important information and the absence of undue pressures, employees are quite capable of making the right selection for themselves.

* * * * * *

The intensifying debate over the proposed “Employee Free Choice Act” has been fueled by employers’ and unions’ mutual demonization. The hyperbole, name calling and baiting have effectively obscured facts. As these two big bulls lock horns over their self interests, eyeing the spoils of their contest, employees are left in the shadows – pawns of the ritual. Any real concern for an Employee appears to have ended with the titling of the Act.

So during an organizing drive, who really watches out for employees? Having been badgered by union organizers, managers and fellow employees, the anonymity of the secret ballot may be an employee’s only refuge, and the best protector of their own interests.
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For the first 35 years of his career, Stan Davis's in-house human capital responsibilities included working closely with unions, managements and employees in scores of unionized and non-unionized business environments.

Something's Happening Here. What it is Ain't Exactly Clear

We're told that animals can sense changes in weather patterns and in the earth's sub-surface. We don't know if they can predict shifting patterns in business, but let me help: it's happening.

Over the past two years we've received thousands of resumes from hopeful, unemployed job seekers. While that activity level hasn't changed, what is different is that more of these contacts are coming from employed job sniffers. During the past two years some stayed in positions to insulate themselves from the economic turmoil. Others took jobs that minimally met only immediate pay and benefit needs. They delayed career advancement and pay increases. Now they're beginning to emerge, looking to reclaim challenge, their careers and lost compensation.
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During this time we've also been in continuous conversation with business leaders and owners, consultants, academics and others who recognize that both time and an erratic economy are transforming industries. There are new competitors, products, technologies, customer expectations and business models. The aptitude, skills and knowledge of many current leaders are out-matched by the new challenges, and too many businesses have yet to address their transformation. More owners, boards and CEOs are questioning their organization structure and whether they have the leaders they need. (They believe for the most part they have good people. Their question is, quite appropriately, do they have the right people).
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Like the underemployed executives, many business owners have been waiting for an improved market into which they might sell their businesses. There's always a flow of business sales, but in the past two years that flow was dammed to a trickle as buyers were uncertain, funding was tight, and ready owners waited for better prices. Couple the release of pent up transactions with expiring tax advantages and with the demographic of baby boomer owners desiring to retire, and a surge of business deals may be imminent. (It's estimated that 10,000 baby boomers are retiring every day.)

Owners of family businesses who are considering ownership succession are looking at a number of options besides an open market sale. Among their options are: hiring executives who may buy the business; transitioning the business to the family's next generation; or shifting business ownership to employees. These and other options are not new. What is different is the escalating activity.

A quandary faced by most exiting business owners, especially from family businesses, is in part rooted in a concern for their legacy and for their employees. Will a new owner or leader sustain the business and its reputation? How would a business sale, or its failure, adversely impact loyal employees? Are current executives the right new owners? Might well loved family members, in their succession to ownership, inadvertently and incapably squander their inheritance?
__________________

To sustain their competitiveness, companies have to retain or attract the right talent to lead essential changes. And despite an improving environment for the sale of companies, an owner may be handicapped in executing an optimal transaction if the right leadership isn't in place. (Warren Buffett on purchasing companies: "we look for first-class businesses accompanied by first-class management"). To complicate this matter, there is the growing potential that key employees may be less inclined to stay to experience a business sale's uncertain outcomes.

As we claw our way out of a near depression, equilibrium is shifting. We're in the muddled beginnings of emerging new trends for businesses and for executives.

Something's Happening Here. What It Is Ain't Exactly Clear.


* Buffalo Springfield, 1966

Leaders can make the extraordinary seem ordinary

A Discussion with Dr. Edward Mazze

This article was also recently published by the Providence Business News.

Dr. Edward Mazze is Distinguished University Professor of Business Administration at the University of Rhode Island; a former CEO, a corporate Board member, an author and a celebrated former Dean of four graduate / undergraduate schools of business. He has provided counsel and support to state and national government leaders, family businesses, and corporate executives. With his almost 50 years of business and study, Dr. Mazze offers a distinctly pragmatic perspective on the conduct of business, and more specifically on the leaders who conduct it.

From their series of personal conversations, Stanley Davis shares some of Dr. Mazze’s unique perspectives on selected leadership topics: assessing leadership; pay for non-performance; fatal flaws.

____________________________________________

The leadership thing is a creation from complex stuff. But maybe we make it too complex. At his / her roots, a leader is an ordinary person who has to do extraordinary things. Whether for a business, government or social organization, great leaders evolve from ordinary people who stretch beyond their comfort zone. They take calculated risks, and when even their most prudent risks generate some failures they internalize the lessons.

People who strengthen or grow their own organizations take the time to understand the organizations of clients and suppliers – they get out of their office and off of their golf carts to visit on-site. They hire people who have track records for quantifiable results and then support and grow them further. When it comes time for a pizza for employees they not only buy the pizza, but they sit with employees to enjoy the meal and the conversation, and to appreciate the people.

ASSESSING LEADERSHIP

There are countless ways to assess the leadership qualities we seek for business, politics, sports or our own communities. Recognizing that the ability to assess leaders is an essential proficiency for leaders themselves, a great place to start is with simple measures of great leaders, A.S.K.: attitude, skill and knowledge.

Attitude. We’re regularly reminded of our expectation for ethical behavior when we see the unethical. We know how a single lapse in ethics undercuts long term credibility and trust. A productive attitude embraces and transcends what’s ethical, legal and moral. It includes common decency and constructive opinions. It values relationships with the organization, co-workers, and even competitors. Attitudes of respect, commitment and kindness leave little room for arrogance, help guard against being blindsided, and minimize a potential loss of position or influence. Warren Buffet and Bill Gates remember their roots and make an effort to understand and support the people around and beyond themselves. Their ability to generate respect comes largely from the respect they show for others (just listen to them speak about colleagues and competitors). Without proper regard for peers, bosses and adversaries, a leader will find few allies. Thus standing alone, his / her demise is only a matter of time.

Change in the world is continuous, and it’s accelerating. Yesterday will never return. Successful leaders must engage their energy and curiosity to expand their knowledge and remain current. Without a hunger to understand what’s new, an organization cannot anticipate or respond to globalization, new technologies or evolving competition. The static or unyielding will eventually be discarded by the world in transition.

Skills. Technical, financial, communications and other real skills form a critical foundation for leadership. Yet true leaders do not emerge until we add proficiency for engaging the right assets – capital and people. Deploying these right assets requires additional strategic skills, the foresight to see where the organization needs to move, and the agility to make essential adjustments en route to the results.

An insatiable curiosity to understand cause and effect avoids rushes to judgment based only on the obvious. Dynamic environments require that new and unfamiliar circumstances be considered – not just observed, but scrutinized and questioned. Inquisitiveness drives insight, good strategy and proactive execution. Proactivity is essential to leading. Catching up is not leading.

The skills to convey information and enthusiasm, and to generate a broad based sense for the ownership of results, are honed by the input of others. Listen to what others say, to what they don’t say and, most critically, understand what they mean.

A leader is focused on results and, regardless of results, holds him/herself accountable. One who blames others for shortfalls, or claims all credit for success will eventually perish. Creeping meatballism (the intentional or accidental advancement of a wrong candidate) allows the less competent to rise, but only so far. Easy access to, and rapid transmission of, abundant information will eventually expose the under-skilled.

Knowledge. A leader’s technical grounding should be a given – e.g. marketing, operations, finance, human resources. Acquiring knowledge, in excess of what a single discipline requires, helps to build a broad and valuable perspective. In this process a real leader comes to appreciate the expertise and worth of others.

There are few (if any) problems that someone has not already identified. Leaders who are new to an organization know that the organization was there before them, will be there after them, and that a change in an organization’s leadership won’t immediately transform it. Intentions to develop the best from the staff should not presume that all will immediately jump on board. They each have their own history, attitude and objectives. They may have previously tested some of what their new leader thinks is innovative. A seasoned leader knows that it’s very difficult to get and keep everyone engaged.

There is a humbling recognition that a job title alone does not make a leader. Titles are awarded but leadership is cultivated and earned over time. People who have nurtured positive attitudes, developed valued skills and built a solid knowledge base are all potential leaders, regardless of title. In business, without benefits of title, there are respected informal leaders that may include bright executive assistants, knowledgeable factory workers, seasoned sales people or older employees to whom their colleagues, and even their bosses, may turn for guidance.

Successful leaders appreciate that everyone, regardless of position, works for someone. One may be working for a boss or shareholders, colleagues or
customers. They’re also working for society, the betterment of their profession or industry, and ultimately for the privilege to leave a positive footprint and advance their own values.

Finally, an awareness of their own leadership strengths and shortcomings fuels their continuous self improvement.


PAY FOR NON-PERFORMANCE

When we consider the measure of leadership’s worth, the current structure for Corporate compensation is a very curious matter.

We hire leaders to shepherd critical activities and specific initiatives. To compensate them for meeting these expectations we provide them with a competitive, predetermined base salary with the commitment to a greater reward – a bonus – for exceptional results. But somehow all work becomes focused on receiving a bonus. Wasn’t the base salary itself structured to achieve improved results or change? In overlaying a bonus are we paying twice for the same expected results? Are there different measures of success that drive these two very different elements of compensation?

Our businesses can be wounded by Boards that do not take the time to pragmatically understand compensation, or by CEOs and executive Chairs who themselves benefit from a faulted pay structure. This malady is not well doctored by outside compensation consultants. These consultants are touted as impartial, but their continued engagement is dependant on their satisfying these same boards and executives. (When is the last time that you heard a consultant tell his executive or Board clients that they were over compensated?) For the ultimate in corporate governance and responsibility we think that we can turn to non-executive (outside) Board members. But even their compensation benefits from pay structures that are similarly constructed and monitored.

To justify what they believe are essential pay levels to attract and keep talent, businesses look to marketplace compensation as a key reference point – what are others paying incumbents in similar positions? Unfortunately that marketplace is an epidemic roll-up of these same horrible pay practices. Businesses self-inflict a belief that they have to pay exorbitantly for their talent. They too often construct pay packages for potential new executive hires based on the executive’s current pay, current job title, and relationships (i.e. who they know), rather than a proven, relevant track record. In the proper stewardship of their assets and future, are these businesses making prudent decisions?

Too many leaders themselves have come to see their relative pay packages as a measure for competitive scorekeeping rather than a proportionate reward for real accomplishment. In a growing circle of executives, compensation is a measure of ego, not performance. Why else would they expect multiple millions for, in some cases, tanking their enterprise? Consider the recent examples of some leaders of larger financial services firms. Do they really believe that if we tie their pay to their performance and to the appreciating value of their stock, rather than providing immediate elevated cash payouts, that they won’t be able to feed their children or make their house(es) payments?

Three great compensation questions to ask ourselves, our Boards, our CEOs and our consultants:
- Have you ever assessed your compensation structure and determined that people are over
paid?
- When you hire a new executive and pay a competitive base compensation, for what do you
expect this base compensation is paying?
- If you paid a key executive a $1million bonus today and he / she died on the way home,
would the business open and run profitably tomorrow? Are they irreplaceable?


FATAL FLAWS

If we’re paying leaders the same for performance and nonperformance, for growing a business or tanking a business, how does it all end?

Knowledgeable, skillful leaders with the right attitudes do grow, adapt and flourish. Mediocre or lesser leaders can endure for a time. Some deftly move to a next company and a next big payday before their business implodes (allowing the roof to fall on
their replacements). Still others delay their own judgment day by artfully laying faults on the economy, materials costs, government regulation, unfair competition and even their own hand-picked lieutenants. They may be rescued in time by a next employer who assesses their pedigree solely on their current title, pay package and relationships. In any case, they may position themselves to escape the consequences of failure and find another new beginning.

But many of the less competent leaders don’t escape failure. Some can’t mask their shortcomings or time their escapes. Others blindly allow their strengths to mutate into flaws. For example, broad and expanding skill and knowledge, when coupled with overconfidence and success, can decompose and breed arrogance. Further, the drive for ever greater compensation can mutate to runaway greed, trampling organization objectives and values.

Not all fatal wounds are self inflicted. Leaders who believe that they have no deficiencies will not cultivate the respect of their team or peers (unless, of course, the leaders really are perfect). If they attempt to build a protective wall with a cadre of “yes men” they may find that wall can be breached. Decent team members or other stakeholders whose confidence, values and organization commitment are not eroded will stay, fight for the enterprise, and expose a charlatan.
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The leadership thing is a creation from complex stuff. But let’s not make it too complex. We must do a better job of assessing our leaders. We need to appropriately compensate them based on their performance. And we cannot ignore serious shortcomings.

Businesses' Silent Killer

The thrust to change, sustain or grow an enterprise may awaken an insidious disease that can lie dormant in most of our businesses. We’re confident that our own enterprise will never be afflicted by a debilitating breach of ethics. Hence the astonishment when business misconduct devoured Enron and WorldCom; threatened Tyco and Major League Baseball; and destroyed the personal brands of previously respected governors, senators, Presidents and business executives.

How does acceptable behavior morph into the unethical? Where does unethical behavior morph into the illegal? The lines between the ethical and the unethical are not always clear. Simply put, ethics are the behaviors that define the character of our relationships. They vary by culture and by organization. Businesses that have not clarified their own “code of ethics” risk leaving the line drawing to each individual. In the extreme, the lines that separate the unethical from the illegal are also apparently unclear as we witness that attorneys go to jail too.

Accepted ethical behaviors will vary somewhat by organization, by national culture and by each individual’s perceptions. Leaving ethical definitions to each employee will not absolve an employer of accountability for their behavior.

Getting to the point – put your house in order. Set clear and succinct rules. To assess your own performance:
How would you react to the details of your business conduct if disclosed to your customers, suppliers or employees?
How would the details play in the press?

Assure that your employees know the boundaries of ethical behavior and that these boundaries apply to everyone. Communicate and discuss expectations. You’ll affirm or diminish the rules by your own behavior (you always have an audience). Employees know that you expect results, but do they know how you expect them to be achieved?

Applying the “golden rule” to our relationships will help, but there are conflicts that may compromise the best ethical intentions. Your employees don’t set out to be unethical but if unbounded, any employee could impact your business if he or she:
- Does what’s easy, versus what’s right
- Avoids disclosing a personal or business miscue
- Slips from the telling of white lies into making incremental compromises that eventually cross the line
- Overreaches for financial gain
- Focuses solely on achieving performance metrics
- Follows any questionable example of superiors

And please remember that your brand also can be impacted by those with whom you do business. Example: legitimate financial advisors have been devastated by the good faith investment of their clients’ funds with Bernard Madoff.


At the point you can recognize greed or arrogance in an employee or business partner, the disease has progressed, initial damage has already been done, and the time for rehabilitation has passed. Save your reputation and your business. Sever the relationship quickly. Left unchecked, misconduct will spread – within your business and to your industry. We saw how ethical lapses can lead to intervention (e.g. Sarbanes-Oxley). We now again see scrutiny’s “justification” as the financial services industry faces potential new regulation driven by public disdain for the questionable practices by a few of the industry’s firms.

Company brands are established by offerings, quality, service, ease of doing business, and trust. So, as you focus on financial results, don’t lose sight of the rest. Principled customers, suppliers and employees will not stick around to risk their own brand being tarnished by association with you. They’re all free agents and they all have options.

Business models and our national culture saddle us with a conflict between extreme economic Darwinism and our Puritan roots. Most businesses have found a healthy balance. The prognosis for those who haven’t is not good.