Are Leaders Failing Organizations?

Martin Reeves, Simon Levin and Daichi Ueda investigated the longevity of more than 30,000 public firms in the United States over a period 50 year span and the results were stark: businesses are disappearing faster than ever before. Where they found that “public companies have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes. That’s six times the delisting rate of companies 40 years ago. Although we may perceive corporations as enduring institutions, they now die, on average, at a younger age than their employees. And the rise in mortality applies regardless of size, age, or sector. Neither scale nor experience guards against an early demise,” (HBR, 2016, p.48).

 

Reeves, Levin and Ueda “believe that companies are dying younger because they are failing to adapt to the growing complexity of their business environment. Many misread the environment, select the wrong approach to strategy, or fail to support a viable approach with the right behaviors and capabilities,” (p.48).

 

But this is a simple failure in modern day leadership. The business environment hasn’t suddenly become changeable in the 21st century, business environments have always been changing – less we forget the industrial revolution, for example.

 

The problem is that leadership has become ‘lazy’ and reactive in too many instances. Developing dynamic strategies is nothing new – good leaders know that they need an agile, flexible organization to respond to changes in their market place or even outside their market place, when there’s an option to diversify and expand. This is leadership 101.

 

Sadly the basic rules of corporate governance are just being ignored. Look at the UK construction company ‘Carillion’ – who have recently been placed under administration. Fingers are being pointed in all different directions in the blame game – but if we put our feet firmly on the ground, it’s the leadership of Carillion who failed their company, not the UK government, and not anyone else.

 

Too many leaders today want to earn ‘fat’ salaries but don’t want to take the accountability that comes with the ‘job’. This just makes life way too easy and means, without accountability, these mostly ‘white middle aged men’ simply don’t care enough and leave their organizations vulnerable to failure, while living the high life.

 

Reeves, Levin and Ueda do give some tips for organizations to be more aware and agile – but this isn’t rocket science – and the boards of organizations just need to ‘care’ more about their organizations future.

 

Tip One: Organizations need to be realistic about what they can predict and control, what they can shape collaboratively, and what is beyond the reach of managerial influence. A clear example is the financial crisis of 2007-2008, during which risk created by subprime lending in the U.S. real estate market spread catastrophically throughout the global financial system.

 

Tip two: Organizations need to look beyond what their firms own or control, monitoring and addressing complexity outside their firms. CEOs must ensure that their companies contribute positively to the system while receiving benefits sufficient to justify participation. Consider Sony, which brought out the first e-reader three years before Amazon’s but lost decisively to the Kindle and withdrew from the market in 2014. Because it failed to provide a compelling value proposition that would mobilize key components of the publishing ecosystem – authors and publishers – it could offer only 800 titles when its e-reader launched. In contrast, Amazon initially sacrificed profits, selling e-books for less than what it paid publishers. It also invested in digital rights management to spur the growth of the ecosystem. With the support of other stakeholders, it launched with 88,000 e-books ready for download.

 

Tip Three: Leaders must embrace the inconvenient truth that attempts to directly control agents at lower levels of the system often create counterintuitive outcomes at higher levels, such as the stagnation of a strategy or the collapse of an ecosystem. They must avoid relying on simplistic casual models and trying only to directly manage individual behavior, and instead seek to shape the context for behavior.

 

Good tips by Reeves, Levin and Ueda though slightly full of ‘MBA speak’ rather than simple understandable language. Leadership is not rocket science and using fancy language doesn’t change that fact. For me it still goes to the concept suggested by Jim Collins of “having the right people on the bus, getting the wrong people off the bus, and ensuring everyone is in the right seat” – and this is especially true for leadership.

 

Sadly I think too many organizations are in a cycle of bad leaders developing bad leaders – with their employees simply fed up and just doing what they have to do to survive day-to-day. If organizations can’t shake themselves up then shareholders need to start taking some accountability and demanding change.

 

Until organizations get back to a cycle of great leaders developing great leaders, organizations will continue to fail on a regular basis – and the bad, unaccountable leadership will blame anything else but themselves – and we must stop being naïve and believing them.

 

There’s a great quote that states “never push a loyal person to the point where they no longer care” and organizations have been doing this to their employee base for far too long – and suffering from the consequences.

 

Reeves, Levin and Ueda do highlight how “in society, complex adaptive systems require cooperation in order to be robust; where direct control of system participants is rarely possible. Individual interests often conflict, and when individuals pursue their own selfish interests, the system overall becomes weaker, and everyone suffers. Trust and the enforcement of reciprocity combine to provide a mechanism for organizations to overcome this quandary. To leverage the power of trust, leaders should consider how their firms contribute to other stakeholders in their ecosystem. They must ensure that they are adding value to the system even as they seek to maximize profits,” (p.55).

 

For those that can influence the future of organizations – owners, shareholders and corporate boards – let’s pause to assess our leadership and not settle for anything but ‘excellence in leadership’.

 

References:

 

Reeves, M., Levin, S. and Ueda, D. (2016). The Biology of Corporate Survival. Harvard Business Review, Jan-Feb, p.46-55.