It is a rare company that realizes it is time to fire the CEO when the financials are good but the business is fundamentally heading for a cliff. For me, I learned this lesson first hand. I had joined the board of a $200million public company that 15 years earlier had single-handily created an industry. The company had innovated, found a business model, grown successfully but now even as revenues continued to grow, the company was slowly but surely dying.
There’s nothing harder than making radical changes when the numbers look great.
The company’s two co-founders had created a new technology and an innovative business strategy. The engineering co-founder had created a consumer electronics security product that created an entirely new category. The other founder, the business guy, managed to get its product legislated into consumer electronics devices. After the initial few years of technical innovation, they found their business model in licensing and over the next decade and a half grew into a $200 million company.
As the revenues grew, engineering continued to pursue sustaining innovations– incremental improvements on its core technologies.
At the same time its business strategy became operational execution focused on licensing and legal to collect royalties.
Over time the co-founder responsible for the original business innovations departed. While a large loss, it wasn’t fatal as the company now was executing a repeatable business model. The new CEO was promoted from inside the company and did an excellent job of running the company. Even though the company was in Silicon Valley, he ran it like it was in Kansas: no frills, no hype, no crazy expenditures, just year after year of increasing revenue and profits. And year after year he managed to come out on top renewing the licensing contracts with Hollywood studios, (who were no pushovers in negotiations). It was impressive.
We Think We Need Some Technology Advice
To their credit, the board and CEO realized that this business model couldn’t continue forever. They acquired a small, innovative company in what they thought was an adjacent market. The acquisition turned out to be a culture clash of titanic proportions, kind of like the irresistible force meets the immovable object, as the great startup founder ran headlong into the excellent operating guy. Neither company really understood what it would take to integrate such different worldviews. (More on this in another post.)
In the middle of this acquisition, both the board (who were finance and Hollywood executives) and the CEO realized that while they were physically in Silicon Valley, they were missing someone familiar with business innovation in technology companies.
This is when I joined the board.
After a few months on the board trying to understand the difficulties of integrating the new acquisition, I realized that this was just a side-show. The real issue was that was that the instincts of the board and CEO were right. There were tectonic shifts happening outside the company – changes in markets, technology, platforms, regulations, etc -and outside their control. Worse, these shifts were outside the company’s control, because unlike the original co-founder, now gone, who managed to get their technology written into legislation, no one was working the same magic on the next generation of digital standards online or in the cloud.
We realized that the company had three to five years left before its licensing business would drop by half. As a board we slowly came to the conclusion we’d have to reinvent the company, and we didn’t have much time. The CEO agreed.
Over the next few years, the company built an internal engineering department, and expanded its business development team in search of a new strategy and new companies to acquire.
To the outside world, things still looked great; year over year, revenue and profits were still increasing.
At each board meeting, we’d hear about new products and approve new acquisitions while we were increasingly worrying about when revenues of our core product would start declining.
The world outside the company was changing faster than we could. The new strategies and acquisitions ended up as slight variations on the ones we were already executing.
We seemed to be out of big ideas.
Time For a Change
The problem was, the company needed to think like a startup again. The current team was too focused and ironically too steeped in our current business to imagine radical reinvention.
We concluded that we needed a new CEO and new board members.
There’s nothing harder than changing strategy with a CEO who the board admires, with revenues seemingly increasing. Yet the consequences of ignoring the shifts in the market, technology and regulation is a going out of business strategy.
This was a tough call for the board as we liked the CEO, and he was the one who had asked us to join the board.
As one could imagine, the existing CEO didn’t agree. “I’ve done everything you guys have asked. Our revenue is still growing and we are acquiring all the new companies.”
While the CEO is the responsible executive for operating the company on a daily basis, ultimately it’s the responsibility of the board of the directors to hire and fire the CEO. The board is responsible to the shareholders and all the stakeholders for the ultimate survival of the company. Our call was that it was going to take a new set of eyes to get the elephant to dance.
The new CEO turned the company on its head, divested most of the acquisitions, made other acquisitions worth billions of dollars, refocused the company, changed out most of the board and senior management.
And he even renamed the company.
Revenue doubled in the last 3 years and the market cap is approaching $4 billion as he reinvented the company.
A tough call but the right one for the shareholders.
- Just because a company is profitable doesn’t mean its core businesses isn’t crumbling under its feet.
- Big companies are dead long before they close the doors.
- Ultimately it’s because the board of directors doesn’t act in time.
- The dilemma is how to make sure that the board is not just a cheerleader for the CEO when the CEO is the primary recruiter for the board.
- Microsoft fits this description. Their failures in multiple markets is no longer just a failure of management but a failure of board governance. (Hard to fix when the major shareholder is the lifelong friend of his handpicked replacement.)