Management

Cautionary Tales

CEO ManagementWhy do Retail Company Boards of Directors Appoint Dysfunctional CEOS — Then Fail to Recognize Their Error Before It’s Too Late?

All publicly held companies have a board of directors whose principal role is to act as a fiduciary on behalf of shareholders. These directors are responsible for oversight of the short-, mid- and long-term health and performance of their companies. Sensitivity to an enterprise’s behavior with regard to its other constituencies—notably customers, team members and business partners—are also part of their brief. Boards of directors are typically made up of accomplished individuals chosen for their integrity, insight and capacity to provide counsel to the chief executive officer. Most individuals are former chief or senior executives. Post Sarbanes Oxley, the 2002 “Public Company Accounting Reform and Investor Protection Act,” financial acumen is mission critical for all boards, especially members who chair or make up a company’s audit committee. It’s most curious, however, that many boards, and almost all retail company’s boards, are devoid of any outside board members with any industry-specific expertise. It’s as if, in the case of retail companies, boards are specifically prohibited from having any outside members with any retail experience whatsoever.

Is This Accidental?

I don’t think so. The simple truth is that many retail CEOs don’t want knowledgeable, inquisitive and potentially critical individuals in their midst. After all, isn’t it far easier to interact with a group that may very well have no clue as to what it is witnessing and being told?

Consider first, though, how board members themselves are selected. Candidates are proffered by retained executive search firms, existing board members and sitting CEOs based upon pedigree, reputation, personal relationships or relationships based upon mutual board memberships in other companies. Without a mandate to fill board seats with members possessed of retail expertise, few if any are even considered, let alone seated. As a result, retail boards are often collections of individually impressive but collectively inadequate overseers.

Sadly, the final selection of a retail chief executive is almost always left to this outside group in the first place. With no one in the room with any retail experience, how can any board truly make a successful and informed decision with regard to the company’s seniormost leadership needs? Yes, there is a widely held view by some that a successful leader in one industry can effortlessly cross over into another. This may work in some businesses. It certainly has not worked well in the retail industry. The litany of failed so-called business athletes is endless. All too often qualified and highly experienced insiders are brushed aside in favor of outsiders who, in many cases, have no credible retail qualifications to offer whatsoever. This, of course, in and of itself represents an abject failure on the part of a sitting or newly deposed CEO and his or her board to properly prepare actionable succession plans in the first place.

If a board then has no meaningful knowledge of the actual inner workings of the industry that its company is engaged in, how can it be expected to understand a job requirements document, and how can it apply that list of skills and experience to the candidates with whom it is presented? Is there something about the retail business that is uniquely different from other industries? Yes, there is. The ongoing creation of successful assortment, pricing and positioning strategies, execution pathways and the care and feeding of large and necessarily diverse populations of associates—all dealing in the infinitely challenging consumer space—is most definitely unique and different. The skills needed to succeed in retailing are specialized, and the elements of effective experience, judgment and common sense needed for success are without parallel.

Unintended Consequences

The outcome of a questionable selection process is sometimes the catastrophic appointment of CEOs who, at the end of the day, do tremendous harm to the business they have been tapped to lead.

Admittedly, a process of selection can never be foolproof, regardless of who is in on it. Outside appointments—like Paul Pressler, who failed at the Gap having come from Disney, or Robert Nardelli, who failed at Home Depot after a successful career at GE, or Charles Conaway, who joined Kmart from CVS and then train-wrecked it—represent decisions on the part of boards that weren’t able to properly connect the dots between their company’s needs and their candidates’ capabilities. Then there is the recklessness that was exhibited by the board at JCPenney in appointing Ron Johnson from Apple. Despite his apparent credibility for the work he did in concert with Steve Jobs at Apple, Johnson had never served as a CEO, had never presided over a massive turnaround and had no meaningful apparel and accessory experience. His tragic 13 month at the helm of JCPenney will, we hope, never be replicated.

Mistakes aren’t limited to outside hires. Insiders, inappropriately selected, can become ‘retail serial killers’ as well. The Sears Roebuck board made a fatal error in selecting Alan Lacy. The Avon board did the same in its selection of Andrea Jung, as did the Target board in elevating Gregg Steinhafel. My underlying complaint, however, is not so much with the vagaries and risks of selection, but with the failure of these and other boards to recognize and deal with the crises they wrought. Unfortunately, without an experienced industry executive in the room, they remain clueless as to the degree of damage their company has sustained until it is too late.

Sometimes dysfunctional CEOs anointed by earnest but ill-prepared boards fail after periods of extraordinary success. I’m sure the board at Abercrombie and Fitch was completely smitten by Mike Jeffries’s performance. After all, he personally created the brand’s unique and successful brand equity and business model. But then, did anyone on that board have any idea what the ramifications of his actions over time would be? They might have been shocked, had they understood the cliff he was driving toward. Most experienced executives in the retail industry saw it coming long before they did.

Did anyone on Target’s board recognize that the store was losing its forward momentum over a period of several years? Did anyone have the insight to challenge CEO Gregg Steinhafel’s completely flawed strategy to enter Canada? A retailer in the room would have readily asked meaningful questions about pricing strategies and logistics capabilities long before the company’s Canadian launch. A retailer in the room would also likely have rejected a strategy to take on a massive 125-store launch all at one time.

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How could the Avon board have failed to understand the ramifications of its CEO Andrea Jung’s constant rounds of restructures, none of which ever resulted in any discernible improvement in the company’s performance… and then, to allow the bribery scandal to remain unresolved for years on end, at a cost to the company of hundreds of millions of dollars? What were they thinking? A retailer in the room would never have tolerated any of this.

When all is said and done, whether a CEO reveals him or herself to be incompetent immediately or downstream in their term, the real failure of retail boards without actual knowledge of the retail business in general, and their retail business in particular, is unconscionable. Just as Sarbanes Oxley explicitly requires financial certification as an underlying requirement of a board’s corporate governance, shouldn’t industry expertise by way of board representation be required in retail, as well?

Retail businesses have always succeeded through the dedicated leadership of a few, acting in concert with, and through, the hard work of many—many, devoted, dedicated team members. Unfortunately, businesses can also be destroyed as a result of the actions of an incompetent CEO working without meaningful supervision and oversight of a knowledgeable, experienced board of directors. As an associate of a retail company without retail experience represented at the board level, you should remain alert to the behavior and performance of your CEO. A supplier to a company operating without adequate oversight should be equally careful, as should every lender or investor in that company’s stock.

We all know the danger of flying aboard a plane with only a single unsupervised pilot in the cockpit.

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