LEADERSHIP INSIGHTS FROM A C-SUITE VETERAN

G. A. Finch interviews Ronald E. Daly, a former President & CEO of Oce USA Holdings, former President of Donnelley Print Solutions, and a member of corporate boards of directors of US Cellular and SuperValu.

Ronald E.  Daly

Ronald E. Daly

FINCH: For our readers’ context and benefit, you and I have had opportunities to discuss leadership values and insights from our being alums of Leadership Greater Chicago Fellowship program and our both advising Cook County Board President Toni Preckwinkle on policy matters as members of her kitchen cabinet. In these two fora, we have had an opportunity to discuss leadership issues in-depth. One of the things that I learned from you was the concept of initiating radical change to save or right an organization and you have referred to the “burning platform” change strategy that forward business thought leaders have utilized. As you first recounted and as I have since researched its genesis, the “burning platform” metaphor comes from an oil rig worker having to decide to either stay on a burning oil rig and definitely die, or jump into the freezing, flaming-detritus-filled ocean and have a very high likelihood of dying. Either prospect carried a catastrophic risk, but the jump had the slight possibility of prolonged survival.

Oil Rig Explosion

Oil Rig Explosion

This metaphor has been used to capsulize a leader’s dilemma of effecting radical change for the benefit of the business or organization. I know you are a fan of John Kotter’s Change Model. Kotter’s recommendation to create a sense of urgency concerning the necessity of change is akin to the burning platform impetus for radical change. What do you find compelling in Kotter’s change model and why?

DALY: I like Kotter because he is very upfront about the difficulty of achieving transformational change. He advocates a process for attacking any change initiative. He then goes ahead and provides a process. When implementing change there will be forces that stand in the way of success. The major force will be people who object because of fear, comfort with the status quo, or a belief that this, like all prior initiatives, will pass. To get the ball rolling you have to illustrate why your changed state is better than the status quo or that the current state is unsustainable. This is why you start with the burning platform. By the way I like your explanation of the burning platform better than the one I have been using.

FINCH: Have you had to confront your own mega or mini version of burning platforms in organizations in which you played a leadership role and what did you do to effect change?

DALY: Absolutely. I push Kotter as a method to use because I have had success with it. I spent most of my career in the printing business at R R Donnelley. The year I became president of the Telecom Group (1995), my group, like the rest of Donnelley was faced with increasing competition, unstable commodity prices, rapidly changing technology and customers aggressively seeking lower prices. I had an additional hurdle. Our board of directors had decided that Telecom was the most likely business to expand internationally. My boss let me know that I was expected to achieve this expansion without degrading profits from my US business. To finance international growth I had to find a way to make more profit.

From a cultural standpoint Donnelley had a huge problem stemming from internal competition. For a very long time Donnelley had no external competition of our size and scale. The leaders of the business had set up internal competition between printing plants. The objective was to beat the other plants in efficiency so that your operation would be the best place for the sales force to bring sold work. CompetitionthThis competition led to open hostility inside and a lack of attention to what outside competition was doing. Plants were very adept at using different accounting methods to measure throughput so comparisons were difficult. Sharing best practices was a no-no. This had to change.

Over the next five years we were able to implement a new business model. We moved from the focus on being the low-cost provider. This model had us lower costs so we could compete with lower prices. We moved to a model of customer intimacy. This model steered us toward being a solutions provider. In doing so we had to learn so much about our customers that we probably knew more about them than they knew about themselves. In achieving this we became the industry thought leader. We used our knowledge and technology from other Donnelley printing markets to bring new revenue generating products to our customers. Becoming a part of our customer’s revenue equation took pressure off prices we were paid as we got a premium over competition.

On the cost side we shed the ideas that printing was a craft and not a science. Over the next five years we instituted statistical process control, multi variable testing, six sigma and 5S. We saw efficiency improve greatly and quality take huge leaps forward. We put in processes to stabilize our earnings. We developed a common dictionary and implemented activity-based costing that made comparisons and sharing easier.

Business ChartWe used quarterly business reviews, monthly conference calls and yearly leadership conferences to work the communications and cultural side of this change effort. We did lots of round tables to bring employees into the loop. We used a process called OGSM to cascade high-level objectives to the lowest levels of the organization so that every employee knew their role in achieving our goal.

The market knowledge we had allowed us to become intimate with international publishers thirsty for ideas to grow their businesses. We were not a threat as were U S publishers trying to take market share from them. We helped them and we signed contracts to print for them. Being the low price supplier wasn’t what they wanted from us.

Over my seven years in Telecom, we became the most profitable of all the Donnelley printing businesses, we more than doubled the size of the business globally, we were the most efficient directory printer in the world and we were the market leader on four continents. Kotter’s model was instrumental in achieving this.

FINCH: What three things would you advise a brand new CEO beginning his tenure at a different company?

DALY:

1. Do your best to understand the culture. Culture eats strategy for lunch. That doesn’t mean you shouldn’t pursue your strategy but you need to understand the cultural hurdles you face. Then use Kotter.

2. Do a thorough assessment of your management team. You cannot achieve your goals without the proper support and talent.

3. Realize that saying something doesn’t make it so. Too many leaders issue an edict and expect people to fall in line. They don’t, so you must be prepared to be a driver in achieving your goals.Bossth

FINCH: What challenges are different for CEOs in 2014 that were not present ten or even five years ago?

DALY: The concept of maximum shareholder value and activist shareholders are more brutal today than ten years ago. International competition continues to intensify. A problem that concerns me most is the inability of our educational systems to produce adequate human capital to fill the jobs of the future.

FINCH: If you could go back in time to visit your 25-year old self, what one piece of career advice would you give?

DALY: I have been pretty consistent in saying that if you expect your company to invest in you; you must be willing to invest in yourself. I spent eight of ten years in the 1970’s going to night school to achieve an AA, BA and MBA. This helped me move from the factory floor to the executive suite.

If I were to give a second piece of advice it would be, “if you want to influence a culture, you must be a part of that culture.”

FINCH: Do you think American graduate business schools are sufficiently training students to be effective and innovative executives and leaders? What could B-schools be doing better?

DALY: I do not. We do a great job of preparing them to do a job but not necessarily to think. I think more focus on subjects outside of the major would be beneficial for students to have a larger worldview. I would like to see more focus on critical thinking embedded in course work along with more research work and written exams.

FINCH: You have been President and/or CEO of companies and on the boards of directors of two major companies. Are personal relationships and executive search firms the only paths to a corporate board directorship? If so, what can be done to broaden the pool of qualified candidates who are not the “usual suspects” coming from a certain background or gender.Board RoomthCAUQCDTM

DALY: You have nailed it. Boards still rely on relationships and search firms. Too many boards simply look to the usual suspects to find the person to fill the next opening. As much as there is talk about diversity, boards still look for people who look like the ones they have. These new ads may be female or minority but they are very much like the existing members or they won’t be chosen. An alternative place to look may be organizations like Leadership Greater Chicago. This would require a change in focus for LGC however.

FINCH: Finally, when you were a CEO and as a member of corporate boards of directors, what have you observed to be the best way to identify and develop executive talent within an organization?

DALY: The best way is to have a process that evaluates internal talent. The results of this process must be on the radar for every top executive and should be reviewed by the board at least annually. The process should provide development plans for those leaders that are viewed as having upward potential. Development plans should exist for those who are not on a fast track but are deemed essential to managing the enterprise. Finally those who are not deemed essential, nor on a fast track should be given improvement programs. If no improvement, then they should be removed from the organization. Evaluations should be calibrated so a high potential is really of high potential and not listed as such because of an easy rating boss or a personal relationship.

Copyright © 2014 by G. A. Finch. All rights reserved.

MANAGEMENT SUCCESSION PLANNING: BE LIKE A BOY SCOUT AND BE PREPARED

By G. A. FINCH

A client recently asked for advice concerning its creation of a management succession plan.  Given the recent tenth anniversary of 9/11, it was a timely request for assistance.

Who Is Doing Succession Planning

I wanted to update my knowledge of the best practices for management succession and started my due diligence by canvassing four Fortune 500 general counsels, a CEO of a manufacturing company and three management consultants on their management succession plan templates.    This was not a very scientific sampling, but the polling  gave me a sense of what companies were doing or not doing concerning planning for management succession.

Only one of the four Fortune 500 companies had a management succession plan. The other three and the non-Fortune 500 company did not.  Two management consultant companies did not have any templates or experience advising companies on succession plans and the third was working on developing one.

Of course everyone contacted thought it was a good idea to have one and some felt a little sheepish in admitting to not having a plan.  A few of the ones who did not have a management succession plan said that there were occasional conversations at board meetings about resident executive “talent” that could be potential candidates for CEO succession.

Risk Management

We all have heard about major companies whose CEO became seriously ill or suddenly died.  We also have heard where top layers of management have been decimated by catastrophic incidents like the 9/11 terrorist attacks on the World Trade Center Towers.   Hurricane Katrina and the Japanese earthquake/tsunami nuclear power plant meltdown are additional reminders of how unanticipated disasters can wreak havoc on an unprepared company and its region.

Stockholders, investors, employees and major customers certainly want to know what happens in “what if?” scenarios.

Mechanics Of Doing A Plan

In my updated research on management succession plans, I found that there are three avenues a company can take: 1) do its own plan; 2) buy software to do a plan; or 3) hire an outside consultant to help create a plan.

Basically, there are three degrees of planning: A) create a list of successors for important positions and ensure the successors have the leadership/management skills that are aligned with the mission, culture and business strategy of the organization; B) develop an ongoing spreadsheet identifying, evaluating, and training/grooming executives and employees in multiple layers for many critical positions in the company;  or C) set up an elaborate system of back-up infrastructure and contingency plans for command and control in the event of emergencies.

Any one of the above degrees of planning requires a process that ultimately results in a document to which a company can refer when there is an incident of succession.

Do What You Must Do

I suspect many executives and corporate boards feel about succession plans the way many individuals feel about estate planning:  it is an unpleasant reminder of one’s mortality that can be put off until tomorrow.  No one likes to dwell on the time when one will not be around or no longer relevant.

I would wager that when Steve Jobs stepped down from Apple, there was a succession plan in place to ensure a smooth transition.

Does your company have a succession plan?  If not, when?

Executive leadership is doing the tasks that others will not or cannot do.

P.S.: On September 21st, I was at a breakfast seminar on “evaluating board members” and it was pointed out by the panelists that boards of directors are notorious for not doing succession planning.

SAY ON PAY: DODD-FRANK ACT

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) had a recent first anniversary (it became law on July 21, 2010).  The legislation responded to the financial meltdown that occurred toward the end of the last decade and contains the greatest federal legislative financial reforms since the Great Depression of the 1930s.

Dodd-Frank covers a lot of ground.  Noteworthy for executives of public companies are its provisions concerning shareholders’ approval of executive compensation.

At least once every three years, Dodd-Frank gives shareholders the right to an advisory vote on the compensation of “named executive officers,” who are the principal executive officer, the principal financial officer and the three most highly compensated executive officers other than the principal executive officer and principal financial officer.  This vote on executive compensation is commonly called “Say on Pay.”

At least once every six years, Dodd-Frank also authorizes shareholders to have an advisory vote to determine the frequency of shareholders’ vote on executive compensation of a public company, i.e. whether the Say-on-Pay vote should take place every one, two or three years.

Finally, Dodd-Frank provides shareholders an advisory vote on all severance compensation paid to named executive officers (the top five executives mentioned above) upon an acquisition, merger, consolidation or a proposed sale or disposition of all or  substantially all the assets of a public company.  In other words, this is Dodd-Frank’s provision for shareholder approval of so-called “Golden Parachute” compensation.  Dodd-Frank specifically requires the vote on this shareholders’ resolution to approve Golden-Parachute compensation to be separate from any shareholder vote to approve an acquisition, merger, consolidation, etc.

As a result of Dodd-Frank, corporate board compensation committees must be much more rigorous in setting and justifying the compensation paid to the top executives of their respective companies.

JAMES E. NEVELS’ REMARKS AT THE DIRECTORS ROUNDTABLE: CRITICAL ISSUES IN LEADERSHIP

Last week at a breakfast, I had the opportunity to hear James E. Nevels, the non-executive Chairman of the Board of Directors of The Hershey Company.  That’s right, the company that makes so many of the candy bars that I grew up eating and still eat.  I probably average eating two Payday candy bars a week (more often, sadly, the supersized version).   Mr. Nevels spoke on “The Role of the Non-Executive Board Chair.” 

Mr. Nevels chairs the Governance Committee and the Executive Committee of the company.  He also serves on its Compensation and Executive Organization Committee.  He founded and heads The Swarthmore Group, a Philadelphia-based minority owned investment-advisory firm. 

James E. Nevels

Among his many accomplishments, he chaired the Philadelphia School Reform Commission and served as a director of the Federal Reserve Bank of Philadelphia.

Concept of Non-Executive Chairman

A non-executive chairman is unusual in the U.S. and is favored by corporate governance reform activists and thought leaders.  Recently, as a result of  the merger between United Airlines and Continental Airlines, Glenn Tilton, the chairman and CEO of United became the nonexecutive chairman of the new  16-member board and Jeff Smisek, the CEO of Continental became the president and CEO of the combined firm, United Continental Holdings Inc.

The idea behind a non-executive chair is to provide board independence from the CEO and to provide a check and balance on the CEO.  Ideally, the non-executive chair and the CEO should work as a team, the CEO focusing on running the business and the non-executive chair focusing on corporate governance and board functions.  The role of a lead director is similar to the role of a non-executive chairman – they both serve the purpose to provide appropriate controls on the CEO to ensure that the best interests of the shareholders are served.

Tension between CEO and Non-Executive Chairman

Separating the chairman position from the CEO position is a tricky business, because it is natural for a CEO to want to also be chair of the board of directors and to be his own boss with minimal interference from his board.  Also the danger from a management point of view is that senior management may feel it has two masters to serve, the CEO and the non-executive chairman.  In United Continental Holdings case, it will be interesting to see how former United CEO Tilton shares responsibilities with former Continental CEO Smisek.

If done correctly, it is hard to argue against de-concentrating the power of the CEO in order to avoid senior management excesses and wrongful conduct that can destroy a company.

Mr. Nevels had plenty to say about how a non-executive chair should navigate his duties and responsibilities in relation to the CEO, the board, and the company at large.  His comments concerning being a non-executive chair, by definition, would benefit a tiny audience, given the rarity of the position.

However, his comments about being on a corporate board will have greater utility to many readers of this blog.

Board Service

From Mr. Nevels’ talk, I distilled eleven takeaways on board service:

  • Be prepared for each board meeting.
  • Attend board meetings.
  • Understand that just because you are ready to be on a board does not mean you should be on a board.
  • Do not “run” for a board of directors; it is off-putting.
  • Know that you get on boards because of relationships you have developed.
  • Have integrity and cultivate good will, which are keys to being selected for a board and being effective on a board.
  • Do not seek to go on a board for the money; it is the wrong reason; board service well done is time-consuming and a lot of hard work.
  • Do go on a board because you believe in the company and have something to contribute.
  • Be sure to align executive compensation with the company’s financial measures.
  • Listen first and listen more than you speak.
  • Do not put anything on the agenda that you already do not know what the voting outcome will be.

Getting on a Board

One comment I will make on his takeaways is whether one should “push” to get on a board or wait to be “pulled” on a board.  I have heard advocates for each school of thought and I cannot declare one is more correct.  Like a lot of things, it will depend on the circumstances.  For example, some minorities and women would never have gotten on to a corporate board without some organization or person pushing them.  Also, some individuals who heard about a board seat opening, have said “Why not me?” and have sometimes gotten the nod as a result of their expression of keen interest.  One has to intuit one’s way through the particular circumstance.

No One “Deserves” to Be on a Board

I like the notion “that just because you are ready to be on a board does not mean you should be on a board.”  The person must be the right fit.  Despite the wonderful qualities and skill sets a board candidate  may have, there should be no  sense of  “entitlement.”

BUILDING STRONG RELATIONSHIPS BETWEEN BOARDS AND CEOs – LESSONS FROM DONALD PERKINS

I recently went to a special Corporate Governance Breakfast, put on by Chicago United, Shields Meneley Partners,  and Katten Muchin Rosenman LLP,  that featured Donald S. Perkins, former Chairman of Jewel Companies, Inc.  At this intimate Board Roundtable, he spoke on the topic of  board service.Mr. Perkins is an icon in the Chicago business community and a major civic leader.

Don Perkins

Mr. Perkins has served on numerous marquee boards of directors of companies including AON, AT&T, Corning Glass Works, Cummins Engine Company, Eastman Kodak Company, Firestone Tire & Rubber, Inland Steel Industries, Kmart Corporation, Lucent Technologies, Inc., the Putman funds, Springs Industries and Time, Inc. 

He currently serves as chairman of Nanophase Technologies, a director of LaSalle Hotel Properties and a member of the advisory board of ShieldsMenely Partners.  He is a director’s director. 

In his informal talk, he noted the following six points in serving on a board:

  • The hardest thing is to get on the first board; once on one board, then it becomes easier to get on other boards.
  • One must gain some kind of experience that a board or the company can utilize.
  • One must immediately disassociate oneself from a CEO or a senior management team whose reputation can adversely affect one’s own reputation.
  • When one is on a board compensation committee, one must not look at salary and stock in isolation in making comparisons to other similarly situated CEOs; the compensation committee must look at all the compensation and benefits a CEO is receiving  when comparing compensation packages.
  • If one always agrees 100% with management and other board members, one is not doing one’s job.
  • Because shares and controlling interests can change so rapidly, a corporate director’s obligation is more than just increasing shareholder value; other stakeholders, like employees, vendors, customers, and communities should also be taken into account.