The Modern Day CEO?

One of the most endearing and important qualities that uniquely define us as humans is the way we pass on what we’ve learned to subsequent generations. Fortunately, that doesn’t just happen in families. It happens in business, too.

And while one person’s experience may be the next person’s nonsense, there is the occasional rare gem to be cherished and passed on. Fred Wilson, a Venture Capitalist who’s been around a while, has decided to share some advice he received almost 25 years ago from another Venture Capitalist. Who knew Venture Capitalists could be so ancestral?

Anyway, the advice is the answer to the question “What exactly does a CEO do?”

As a sign of the tough economic times and other recent events, the jaded and sarcastic among us might respond with a satirical point of view:

What the public sees in the 21^st Century CEO does (a satirical POV)

Has an inappropriate relationship with a marketing contractor, gets caught, gets fired, walks away with $35 million and a sweet job at his friend’s company. (Mark Hurd former CEO at HP)

Presides over a spectacular environmental disaster, promises to clean it up, whines about the toll it’s taking on him, tells congress he wasn’t involved. (Tony Hayward, former CEO BP)

Fuel the subprime mortgage bubble, hedge against it, get bailed out, pay out record bonuses, and document all of it in emails. (Loyd Blakenfein, CEO Goldman Sachs)

I can go on and on with this trip down memory lane, but we’ve probably heard enough CEO bashing to last us a good long while.

Anyway, according to Wilson, here’s what a CEO does (the Venture Capitalist POV)

Sets the overall vision and strategy of the company and communicates it to all stakeholders.

Recruits, hires, and retains the very best talent for the company.

Makes sure there is always enough cash in the bank.

According to the elder Venture Capitalist, CEO’s should delegate everything else to the management team. Wilson, on the other hand, who uses these metrics to evaluate CEOs, says that, while good CEOs often do more, he doesn’t believe you can be a great CEO unless you do these three things well.

Now, I’ve worked for and with a lot of CEOs over the past 30 years or so. Some of them weren’t terribly good at their jobs. A few were. And while I think Wilson hit the nail on the head, I think it needs to be qualified and expanded on a bit:

What a CEO should do (a personal perspective)

o   Sets the overall vision and strategy of the company and communicates it to all stakeholders. Doesn’t pull it out of his you-know-what, as many do, but derives a unique value proposition from an ongoing strategic process.

o   Makes sure there is always enough cash in the bank. Sets, oversees, and drives the operating and financial model for the company, including profit, expense, and growth targets.

o   Recruits, hires, and retains the very best talent for the company. Ensures the management team is motivated, aligned, and held accountable to achieve the company’s strategic and operating goals.

If a CEO doesn’t do those three things well, he does not have the capacity of a good CEO. I will reserve “great” for CEOs that actually accomplish great things, which would encompass a greater good to society, employees, and the act of passing forward a healthy business to the next generation. 

The Art of Willful Ignorance and the Modern CEO

When I talk with CEOs and business owners, I like to find out what keeps them awake at night, what intractable issues or opportunities disturb their sense of confidence. Of course, each one has industry-specific or company-specific challenges and they are fascinating.

But there’s one problem common to each one of them. They all know it. Only a brave few will talk about it openly: Ignorance.

It doesn’t matter whether the company is large or small, old or young, high tech or blue-collar manufacturing. The reality is that no leader is fully informed of what is happening on his or her watch.

Ignorance Isn’t Bliss

Of course in theory, this should not happen. The chain of command should ensure that information reaches the top. Daily reports should flag critical issues. Balance sheets should indicate significant trends. And they all do - up to a point. The problem is that none of them works quite well enough.

That’s why BP can run unsafe plants and still be taken by surprise when they blow up.

It is why music labels could be blind-sided by the rise of digital downloads.

It is why soft drink companies were surprised by the popularity of vitamin drinks.

It’s why Lehman Brothers and Enron and Citibank and Merrill Lynch had no idea actually how much money they had.

This is why companies are so anxious about what Wikileaks will publish next.

It Can Happen to You

The most tempting thing in the world is to look at that string of business disasters and argue: it was they, not me. It couldn’t happen here. They were just bad leaders, a few bad apples. But the minute you say you don’t have this problem is the minute you know you do.

The problem is willful ignorance: the human propensity to ignore the obvious. It is not just a business problem, of course. We do it in our private lives when we leave those credit card bills unopened or take on a mortgage we can’t afford or insist that tanning salons really won’t cause us any harm.

There are numerous social, structural, organizational and neurological reasons for willful ignorance and I will be blogging about them over the next few weeks. But in the meantime I’d like to hear from you: in your company or department or industry, where are your blind spots?

Care to comment?  You can post on my blog: 

http://businessmanagementcounselingservices.blogspot.com/

Or, write me at stevehomola@gmail.com

I am always interested in what you have to say.

RISK/REWARD System in Business

Risk and reward are related factors in the business world. Any company that chooses to enter the marketplace faces risks, whether financial or operational. Therefore, reward is the benefit achieved when companies mitigate their risk and earns income from their operations.

Systemic Risk

Systemic risk is the collapse of an entire market or industry in the marketplace when one company fails. Businesses face this risk when selling products in a saturated marketplace with large competitors.

Systematic risk is faced by businesses that do not diversify their products or services. Companies can avoid this risk by offering several products in the marketplace and creating multiple revenue streams.

Measuring Risk

Businesses measure risk by comparing their expected rate of return to the normal risk-free rate of return in the marketplace. Formulas like the Capital Asset Pricing Model (CAPM) help businesses determine the amount of reasonable risk by comparing rates of return to the amount of risk in investments.

Mitigating Risk

The first step in earning rewards in business is to mitigate the risk involved in business decisions. Diversifying investment strategies can mitigate risk. Choosing some safe investments or products along with some high risk/reward investments or products will maintain a diversified business strategy.

Achieving Rewards

Businesses achieve rewards when they choose investments that have the highest rewards and the lowest amount of risk. Some investments will have higher risks than others, so businesses will require higher returns on these investments. All business decisions carry risk, so carefully measuring the risk versus the reward is essential when reviewing business opportunities.

We face business decisions every moment of the day. Some business decisions are more important than others.

.                 Your business is at a fork in the road. Which way do you go?

.                 Should I invest more money into the company?

.                 How much of my money should I invest?

.                 Maybe I should sell my business?

.                 Is my business worth saving?

.                 Should I downsize or try to grow?

Unless you are clairvoyant, there’s no way to know for sure whether your business decisions will be the right ones. In the end, we should all have to do the best with the information we have at the time. The business decisions you make based on limited information may not be the business decisions I would make, but the results and consequences from those business decisions will certainly be yours and yours alone. 

Awhile back, I remember a colleague of mine making a statement about my opting to stay the course and continue to conduct business as usual when everyone knew that the environment in which we were now operating was very different and more importantly, unfamiliar.  His statement to me was,” Are you basing your business decisions on facts or feelings?”  When push came to shove, I was basing my business decisions more on feelings rather than facts. 

Since that time, I have found one decision-making tool that I’ve learned to use over the years that helps me organize my thoughts and separate facts from feelings.  I’ve adopted it and applied it to many business scenarios. It’s the risk-reward calculation. In other areas of business, it’s also called a cost-benefit analysis. In layman’s terms, it spells out the probabilities of success and failures based on certain actions.

Here are 5 basic questions you can ask yourself before you make business decisions. The first order of business is to simply stop and take the time to go through this exercise.

5 Essential Questions to Ask Before Making Important Business Decisions

1.     What Are the Potential Rewards? What could you gain by performing action X? It could be a dollar amount, or something less tangible like peace of mind or the respect of your co-workers. In some cases it could be both.

2.     What Value Do You Place on the Potential Rewards?  This question, in some respects, is more important than the first. If you don’t personally value the rewards presented by action X, what’s the point? Even if you are not a numbers person, you should place a numerical weight on each reward factor and come up with a mathematical model for whether or not you should move forward with a particular decision.  In the case of rewards/gains, it becomes essential and critical to calculate the potential dollar amounts from your business decisions.

3.     What Are the Potential Risks?  What risks are inherent in action X?  What could go wrong? What is the likelihood that the risks you’ve outlined could materialize? What is the dollar amount related to each decision risk?

4.     What Value Do You Place on the Potential Risks?  Every risk has to have a potential dollar gain and loss associated with it. If you could potentially lose $50,000 on an investment, you might be fine with that. But if that $50,000 represents all of your capital, you might see things differently. If you’ve just lost you’re your largest client, you might not want to risk any of your capital. Considering best practices and historical proof prior to your discovery for change should be leveraged and weighed in your decision making process as well.

5.     What If you’re Wrong?  Unconsidered variables and unknowns can throw a wrench into your risk-reward calculations. What if the rewards you anticipate don’t materialize?

What if there are risks out there for which you have not accounted? By definition, you cannot enter the proverbial Black Swan into your calculations. For those who aren’t familiar with the term, the reference is to Nassim Taleb’s bestselling book about the highly improbable. (Tangential Mini-Rant: Many have said that the recent (ongoing?) financial crisis was a black swan event.)

The key here is to outline some contingency plans. How will you react if your business decisions don’t pan out? Will you sell or hang on in hopes of a recovery? How will you react if that recovery never happens? How will you react if you are correct and your business decisions yield 20% more than expected? Would you continue to implement calculated risk-reward decision making for the remainder of the business life cycle?  The key is to have a plan in place before these things happen.

These guidelines won’t guarantee a 100% winning decision. Nothing can do that. But at least you’ll know that you’ve based your business decisions on facts not feelings and numbers not notions to increase your chances for success.

In my 15 years of working closely with business owners, I have found those who have sought information from outside of their own reaped the benefits of risk-reward calculations to steer their business towards their goals.

How are you going outside of your own knowledge and experience to calculate your risk-rewards for business decisions?