Follow a New Leader if You Want a New Path (John Newman Commentary)

The turnaround myth: CEOs save the day after bad managers steer their companies into trouble.

The reality: New, good (but not necessary “super”) leadership is needed for a full turnaround, regardless of the competency of the old CEO.

The conversations below provide an example of how things may play out with old and new leadership:

Conversation with CEO No. 1 who led company into trouble:

Banker: Your company is in a bad situation.

CEO No. 1: It’s not that bad. We’ve made some big changes. If you’ll just work with us a little longer, things will get better quickly.

Banker: We’ve worked with you and worked with you. It cannot go on forever.

CEO No. 1: You’re right. Not forever. But please, just see us through the next six months.

Banker: Let us take another look at the situation.

Banker (later): We are not happy about your weak balance sheet, but because of our longstanding relationship, we will not foreclose now. However, your loan has moved into a high-risk category and we will have to raise interest rates by two percentage points.

CEO No. 1 (breathing a sigh of relief): Oh, thank you. Thank you so much for your faith in our efforts.

Conversation with new leader (CEO No. 2):

Banker: Your company is in a bad situation.

CEO No. 2: It sure is.

Banker: What are you going to do about it?

CEO No. 2: We have a plan that requires contributions by management, owners, staff, and creditors. Your part involves lowering interest rates by two percentage points.

Banker (after reviewing the plan): It looks like a good plan, but we’re not in a position to lower rates.

CEO No. 2: That’s your call, but please understand that without full participation, the plan fails. We will have to liquidate.

Banker: We do not want you to have to shut down. Let me see what we can do.

Banker (later): I’ll tell you what. If everyone else does their part, then we will reduce the rates as you request.

CEO No. 1 lacks the advantages of a new person. For example, suppose, after the banker opens the conversation with, “Your company is in a bad situation,” No. 1 responds like No. 2, “It sure is.”

If that’s all he says, he sounds either irresponsible (if said lightly), or weighed down by the troubles (if said with a somber tone). Even though it is counterproductive, he’s trying to defend the past. On the other hand, the new guy can say, “It sure is,” and communicate, “There is no point in dwelling on the past. We are stuck on this boat together.”

Dynamics like this play out in many different ways, giving new leaders huge advantages that outweigh the turmoil created by changing leadership during a crisis.

Turnaround outcomes fall into three categories:

Liquidators: The companies did not survive the crisis.

Survivors: They survived and continued to muddle along.

Thrivers: They transformed themselves, and today they are highly successful.

I have worked with 14 deeply troubled companies over the past 20 years. For the first four companies, I tried only to keep them alive. Within this limited goal, we were successful, and they all became Survivors. Then I set my sights higher, viewing the crisis as an opportunity to change the culture of the organization. Of these last 10 jobs, two were liquidated, three became Survivors, and five were converted into Thrivers.

Results correlate with CEO replacement. In seven of the 10 turnarounds, we changed leadership. Five of these seven became Thrivers. Of the three companies that kept CEO No. 1, two had to be liquidated.

In other words, without new leadership, there was only a one in three chance of survival. With a new CEO, not only did all survive, but most became astonishingly successful.

There comes a time for even good skippers to move on. Two of the departing CEOs had actually led successful turnarounds themselves when they were hired many years earlier. They were both talented and dedicated leaders, but the current crisis required new torchbearers.

Don’t find the right replacement the first time? Try again. In one situation, we struggled through four leadership changes in 18 months. Amazingly, the company not only survived all that turmoil, but it flourished once it settled on a CEO. Today, with ten years and another CEO change behind them, the company continues to thrive.

It is certainly possible to succeed with old leadership. Possible, but much, much harder.  

(John Newman of Fayetteville leads turnarounds of troubled companies. He may be reached at [email protected] or www.newmanturnaround.com.)