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The 3 challenges every new CEO faces

January 24, 2019
Borderless Leadership

Close to 50 percent of chief executives say that the role was “not what I expected beforehand.” This was one finding from a series of interviews we conducted recently with 20 current and former CEOs of large public companies, including Bupa, Husky Energy, Standard Chartered, ATCO, and Lloyds Banking Group. The goal was to identify some of the challenges and best practices that senior executives should consider when assuming the CEO role in businesses today.

The disconnect between the expectation and the reality of being a CEO — mentioned not only by those in our interviews whose tenure proved to be short and arduous but also by successful leaders — could be one reason why the median tenure of chief executive officers at S&P 500 companies was only five years at the end of 2017, down from six years in 2013. During that five-year period, more than 280 chief executives in the S&P 500 left their positions.

Our interviews confirmed that most CEOs consider the transition challenging, even for seasoned industry professionals. They reference several factors that new CEOs should carefully consider: managing energy and time efficiently, establishing a clear framework for managing relationships with board members and external stakeholders, and ensuring that the right information flows up and out of the organization.

Managing Energy

“Being time-constrained is a given, but the key is managing your energy. I’m very conscious of where I divert and direct my energy, where I get my energy and what saps it,” said Stuart Fletcher, former CEO of Bupa. Like Fletcher, older and more seasoned CEOs understand the critical importance of energy management.

Examples of avoidable issues that CEOs reported were likely to force them to waste time and, more importantly, energy were engagement with disloyal or weak direct reports, poorly designed committee agendas and missions, unnecessarily lengthy reports or presentations, and a tendency for trivial decisions to be referred upwards.

In many cases, the energy drain may be less a question of the time spent than of the attitude taken going in. All CEOs spend a lot of time engaging with the board, for example. Many have found that treating board colleagues as sources of insight and advice rather than an obligation can turn the engagement from a drain into a source of energy. As one CEO told us, “It took a real mindset shift on my part but turning engagements with the board from an energy-draining exercise into a source of support and advice contributed greatly to my personal success and to the feeling that I had advocates around me.”

According to most CEOs, another key factor in supporting better management of time and energy is to establish a strong senior team as early as possible, with many telling us they wished they had moved sooner on filling key positions. “I spent too long working across multiple roles [CEO and previous role], when I should have been bringing in new hires,” said Paul Foster, CEO of Sellafield.

Managing Relationships “Up and Out”

CEOs recognize the importance of building trust and alignment with all stakeholders, with a priority focus on the board, investors, the media, and relevant government contacts. Among those we interviewed, most spend on average about 50% of their time managing “up and out.”

Almost half of that 50% is taken up with board engagement. Nearly all former CEOs who did not focus on developing their relationships with board members wished in hindsight that they had. Left to themselves, board members may be influenced by investors or media outlets that focus on short-term goals, supporting strategies that can deliver near-term results but often at the expense of strategies to build longer-term value. This risk will be especially high with board members who do not really understand a company’s business strategy or opportunities for value creation.

The most successful CEOs we surveyed noted that they dedicate significant time to building and maintaining strong one-on-one relationships with individual directors. One CEO compared success here to a team-building exercise: “The board is very much a team [now]. We work well together to debate issues and make things happen.”

CEOs report that building relationships with investors and other external stakeholders — customers, media, industry contacts, government agencies, and regulators — is often more difficult and time consuming than anticipated. Bill Winters, CEO of Standard Chartered, noted that this process often involves “singular” exposure for the CEO, who cannot rely on the help of other executives. But the payoff can be considerable. Rob Peabody, CEO of Husky Energy, described the process of “managing out” as being able to “write your own scorecard”— with opportunities to build support for long-term goals and patience among investors. Support from external stakeholders related to a CEO’s progress is also more likely to be reflected well in analyst notes and media reports.

CEOs like Peabody readily acknowledge that good relationships with external stakeholders are “two-way streets.” CEOs who frequently connect with investors can use their feedback to improve communication in company presentations and materials and in media interviews. Those who dedicate time building relationships with regulators and legislators are often more alert to changes that could potentially impact their business, allowing them to develop better strategic responses.

Managing Information Flow

Several CEOs referenced the challenge of effectively managing “information asymmetries” in their role. While CEOs typically know more about the company than the board or external stakeholders, they often know less about individual business lines than division managers. The key to success is to be informed without micromanaging.

As they assume leadership roles, many CEOs find it difficult to make decisions without the detailed, day-to-day understanding they had in previous roles as regional, production or division managers. The key to overcoming this challenge is to provide a structure and culture in which the right information flows upwards and outwards to the board and other stakeholders.

As CEOs work to manage the flow of information up, they often need to distinguish between the often-intuitive “tacit” knowledge that insiders generally use to make everyday decisions and the more formal “explicit” knowledge about an issue that the board and outside stakeholders must rely on. To manage up well, a CEO needs to translate intuitive business decisions into a logical framework that fits with the explicit knowledge that board members have accumulated. Board members are less likely to support a decision that appears to be based on intuition, according to many CEOs. Instead, it is often advantageous to explain the logic behind a decision and how it will support the company’s near- or long-term goals.

The impact of asymmetric information is most apparent, and potentially most damaging, in the relationship between CEOs and some external stakeholders. Stock price is often driven in part by the messages a CEO communicates through engagement with investors, analysts, and the media. Learning to control this information flow is considered a key factor in career longevity.

Inexperienced CEOs often revert to old, previously successful behaviors in times of stress, but eventually realize that they are no longer appropriate or effective in their new role. Survey respondents highlighted the need for CEOs to quickly adapt, clearly outline a personal strategy, and regularly evaluate themselves against it. Consistently asking themselves questions such as, “Am I spending too much time on day-to-day management?” “Am I getting the information I need from the business units?” and “Am I spending enough time on individual relationships with board members?” is important and can help identify challenges early or avoid them altogether. They also note that while the job can be isolating there is often help available. New CEOs who find that they are struggling to adjust should consider seeking counsel from a more experienced CEO, senior consultant, or coach to help guide their efforts and increase chances of success.

By Neal H. Kissel and Patrick Foley

Source: HBR

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