2019

Issue 20

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BoardWorks International
Issue 20, 2019

Is Your Board Pulling Your Organisation Into a 'Doom-Loop'

The 'flywheel' effect…

In the last 25 years, much of the research informing our understanding of organisational success (and failure) has come from the stable of Jim Collins. In Good to Great, Collins acknowledged having expected that he and his team would find 'one big thing' a miracle moment that defined companies' breakthrough to success (1). Instead, he found a pattern of successive and at times quite small initiatives that built on each other to produce an almost unstoppable momentum. He likened this to the gradual acceleration of a flywheel.

There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no wrenching revolution. Good to great comes about by a cumulative process – step-by-step, action by action, decision by decision, turn by turn of the flywheel – that adds up to sustained and spectacular results. (2).

Importantly, however, the initiatives, whether big or small, that helped get the flywheel moving, were not random moves. Each time force was applied for organisational change and performance improvement it was in a consistent direction and maintained over an extended period. The organisational leaders whose efforts resulted in the flywheel effect took a long-term view no matter how dire the circumstances they faced in the short term.

…and the 'doom loop'

Collins' research methodology began from the outset with comparisons of companies which once had similar characteristics and operated in similar circumstances but whose subsequent fortunes took a different direction. Some went from 'good to great'. Others behaved in fundamentally different ways and didn’t make that transition.

Typically, less successful companies would push the flywheel in one direction, then stop, change course, and push it a new direction. Then, they would stop, change course again (sometimes even going into reverse), and start to push the flywheel in yet another direction. This erratic pattern prevented any sustained momentum from building. Instead, these companies fell into what Collins and his team christened the 'doom loop'. Doom loop companies were ordinary performers at best and often just disappeared, swallowed up by others.

How board ineffectiveness creates vulnerability to the doom loop

In Good to Great Collins paid scant attention to the impact of governing boards on either the success or relative failure of the companies he studied. (3) However, in studying board effectiveness for over 30 years, my colleagues and I have seen how the actions of boards can easily contribute in significant ways to the 'start-stop-change-repeat' doom loop pattern. No organisation is invulnerable. Even some of the 'great' companies vaunted by Collins in Good to Great have subsequently fallen into a doom loop. It seems no organisation, no matter how great it has been, is immune.

We see boards contributing to doom loop conditions in a range of ways. Mostly, these relate to factors affecting the health and integrity of the board/chief executive relationship. The following are three of the most common.

1. A lack of board clarity about organisational purpose

The first obligation of any governing board is to the well being of the entity it governs. This obligation requires a board to be the guardian of corporate purpose. An organisation's reason for being needs to be stated in a way that everyone in an organisation understands and can be held to account for their commitment to it. A clearly stated corporate purpose is also an essential first step in selecting and retaining the right chief executive and aligning the allocation of resources (including time and effort) to delivering instrumental outcomes in the fulfillment of that purpose.

When this level of clarity and commitment is missing, the inconsistent behaviour of an organisation as it approaches and enters the doom loop state is unsurprising. We see it in executive initiatives (often with explicit board approval) that are peripheral at best to an organisation's primary purpose and core capabilities. Collins' research highlighted, for example, a pattern of unwise acquisitions and mergers in many doom loop comparison companies. (4) Decision making that takes an organisation 'off-piste' is not confined to the business sector. For example, non-profit or ‘for-purpose’ organisations are inherently vulnerable to caving in to the demands of their funders even when those demands are inconsistent with the fulfillment of their core purpose.

2. Poor chief executive selection and retention

Boards often struggle to make good chief executive appointments. (5) One common cause is a lack of directors who have a solid and up-to-date understanding of the true nature and condition of the organisation and, thus, an understanding of the kind of executive leadership it requires.

Another factor is the board mindset that frames the selection process. If there is a sense an outgoing chief executive has failed in some way the inclination of boards is to go looking for a corporate saviour. A problem with corporate saviours, initially at least, is that they are untouchable. When a suitably august being is in place, boards tend to want to sit back to enjoy the reflected glory. As night follows day, however, something will eventually shake its confidence in the chief executive. Having effectively side-lined itself while its 'super CEO' took charge, such a board is in a weak position to judge whether what has spooked it is just a one-off misstep by their chief executive or something more serious.

It is vulnerable, therefore, to what Roger Martin has described as the 'responsibility virus'. (6) A board that is suddenly awakened from a passive, reactive state often feels compelled to wrest control from its chief executive to demonstrate (regardless of the merits) that it is a ‘responsible’ board. This sudden switch from passive to active engagement often results in conflict with the chief executive and another change at the top.

3. Failure to operate an effective chief executive performance management system

Naturally, new chief executives want to distinguish themselves. More often than not, this means assertively differentiating themselves - the direction they pursue, and how - from their predecessor. At the beginning of a new relationship, boards may feel they have no option but to go along with this. In doing so, however, boards sometimes forget they have all the usual obligations of an employer. These include being clear about performance expectations and actively monitoring and providing regular feedback as to whether they are being fulfilled.

A rigorous chief executive performance management system that prescribes desired results and proscribes boundaries within which the chief executive and other staff must operate, is essential. However, having put their chief executive on a pedestal, boards often fail particularly on the boundary setting dimension fearing, in some cases we have seen, that it would be beneath their chief executive’s dignity. The corporate failings surfaced by the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry have surely underlined the eternal truth that 'the ends don't justify the means.'

A weak performance management process might be enjoyed by some chief executives, but it is a false comfort. When a board lacks the courage that comes from a confident assessment of its chief executive’s performance it is vulnerable to criticism of its chief executive. The nature and visibility of their role means chief executives are often directly targeted by stakeholders with contrary agendas. Lack of board support for a chief executive who is well suited to the position and doing a good job undermines mutual trust and confidence between board and chief executive and will likely result in premature resignation, even termination.

Conclusion

These shortcomings are essentially about undue and unnecessary board vulnerability to chief executive aspirations and inclinations. A chief executive should manage with ambition and intent, but an organisation’s future wellbeing is ultimately the responsibility of the board. The problems described above occur where boards end up working for their chief executive, not the chief executive for their board. It is successive chief executives who are directing the business, not their board. When that inversion of the chain of accountability is present, the associated 'start-stop-change-repeat' pattern makes it practically inevitable that the organisation will be doom loop-bound.

Is your board leading or following?

Notes:
(1) Collins' research initially focused on for-profit enterprises but was later extended to 'for-purpose' (i.e. non- commercial entities) where the same conclusions were found to be applicable. See, for example. Good to Great and the Social Sectors (2005).
(2) Jim Collins (2001) Good to Great. London, Random House. Page 165
(3) In Good to Great Collins' single reference to boards was in respect to their role in picking the right chief executive (Collins, 2001, 216)
(4) Successful companies described in Good to Great did make acquisitions but only after the flywheel had built significant momentum. They used acquisitions as a kind of accelerator of flywheel momentum, not as a breakthrough-type creator of it.
(5) See Graeme Nahkies (2018) 'Making a Successful Chief Executive Appointment'. Board Works, #18
(6)Roger Martin (2002) The Responsibility Virus. New York, Basic Books.

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