Disclaimer - Names, geographies, and businesses have been altered to maintain confidentiality.
Small Cap, High Tech
Wresting Control From the Bad Guys
Background
Loomis, a small cap public company, had been public ten years and had yet to produce a profitable quarter. The new CEO had just left a large cap corporation, where he had been my client. When he left, the CEO was unaware that a nontitular board member controlled the company with an iron hand.
The CEO’s efforts to introduce meaningful reform were stymied by the board. He asked my help in transforming the board and the operating entity. We started by surveying the whole company.
Survey
The company was dysfunctional from top to bottom. The performance of the board and executive team harmed the company and barred the possibility of success.
The Board
Nicolas. Nicolas, who never held a titular position, had controlled the board, since the IPO. Daily, by phone, he communicated with senior and middle managers, instructing and monitoring. Rumors said that he day traded the company’s securities.
The second thing Nicolas said to me, during our first talk, “Jonah wasn’t even my second choice for CEO.” I asked who was second. He said, “Another outsider,” I asked who was first. “Kelly, our COO,” he said.
“How did you lose control of that decision?” I asked.
“I got to choose the first 6 CEOs. The board felt it was time they got to choose.”
Adam. Adam was Chairman. He did as Nicolas told him. He was a lawyer and billed much of his work as chairman to the company as legal fees, with Nicolas’ approval. Near the end of the survey, I told Adam, “I have never seen such a dysfunctional corporation or one so harmed by factions.”
He said, “Tell me about it. Most of the time I feel like I am in Bosnia [the world’s hot spot at the time.]” I said that the problem started at the top. Nicolas and Charles had to stop interfering. Jonah needed authority to fire Charles. And, if the rumors were true, Nicolas had to stop trading the company’s security. He said in a loud voice, “Jesus Christ, you are going to say that? You must have very big balls.” I asked why I needed big balls. “I have never seen anyone challenge Nicolas.” I asked for clarification. Did he mean that people confronted Nicolas, but not successfully. He cut me off, “No one dares to challenge him.” I asked him why. He said that he would not talk about it.
At board meetings, Adam voted with Nicolas and a majority voted with them. A majority of that majority seldom did their pre-reading. Those who did little pre-reading said that they were on the board only as a favor to Nicolas, who assured them that they need not do the preparation.
The Executives
Jonah was CEO. He was outraged at what he found in the company and on the board, once he was on board. He was not hopeful about what he could do. He lacked adequate board support to challenge Nicolas.
Jonah began his career as a manufacturing and engineering manager. He had solved many tough manufacturing and engineering problems, of which there were many here.
From above, Jonah was opposed by Nicolas. From below, Jonah, and his team, were sabotaged by Charles.
Kelly was COO, and had been a candidate for CEO. Many thought Kelly was afraid of Nicolas and this undermined his credibility and leadership within the company.
Charles was ‘the son Nicolas never had.” He was Senior Vice President (SVP) of Military Relations. He had been the company’s first CEO. He was still on the board. All five CEO’s, since, had wanted to fire him. As Nicolas told me, “I wouldn’t let one of them fire him.” Charles consistently countermanded orders that came from the management team.
Executives, managers and employees felt caught in the middle. Many believed that Nicolas and Charles would pull another coup, putting Charles back in power. Many feared that once in power, Charles would fire all who had disobeyed him. Charles was famous for firing people on the factory floor and sometimes hiring them back in the parking lot.
Jerome was SVP of Marketing. He lacked most required knowledge of marketing. He did not know what he did not know, although almost everyone else knew. Jonah was still on the fence. Nicolas had hired Jerome over the strong objections of Charles, who was CEO at the tiime.
Harlan headed Product Development and R&D. He hated Jerome, called him a liar. Said that Jerome had no idea what he was doing. Harlan was admired and respected by those who reported to him. Fellow executives mistrusted him. He said bad things about marketing, Jerome, and Jonah to his team. In the stories he told his team, he was the hero and other executives, including Jonah, were the bad guys.
Operations
The company’s primary product line suffered from the highest wastage in their industry. If they had normal wastage they would be profitable. Wastage was proving immune to fixes. Annual turnover on the manufacturing floor was 50%, and had been from the beginning.
Although technical performance of the second product line was competitive, the sales and marketing lacked a coherent strategy, adequate collaterals, and sales support. No systematic prospecting occurred.
The absence of cooperation between product development and marketing was a strategic liability, as was the absence of necessary competence in marketing.
The two product lines mistrusted, disrespected, and discounted each other. The absence of cooperation harmed improvement efforts.
Engineering worked to no known engineering standards. The design and drawings of the company’s capital equipment failed all known standards. This machinery never produced acceptable performance.
What I Did
Meeting with the Executive Team
I presented the findings to Jonah and the executive team.
Everyone agreed about the harm caused by the board, with Nicolas the main culprit and Adam a close second. Everyone but Charles agreed that Charles was a menace who had a lot to contribute.
During the meeting, Charles tried his best. He summarized. He allowed himself to be interrupted by colleagues and consultant. I interrupted his denials and explanations. I asked him to ask for examples. He followed my lead. He would start to explain or deny, then allow himself to be interrupted.
Everyone but Charles, thought Jonah needed explicit board authority to fire Charles if need be.
Kelly and Harlan objected loudly to my notion that acceptable engineering standards were absent. Jonah sided with them, told me, “That is not possible. You are being alarmist.”
Jerome objected angrily when I observed his lack of competence. Jonah aided Jerome. Harlan enthusiastically supported me. Jerome attacked Harlan. I interrupted by pounding a book on the table while shouting, “Stop!”
I imposed round table rules. Everyone must speak in turn. Before one spoke one had to summarize what the last person said, to the last person’s satisfaction.
All agreed that the fight between Jerome and Harlan had to stop. Improvements were not possible with those two positions not cooperating. All agreed that the two product lines needed to cooperate.
The Next Two Days: Meeting with All Executives and Managers
All executives and managers met for two days. Jonah asked if we could use the round table rules, and we did.
Many spoke about Nicolas countermanding management decisions while demanding production and sales data that had nothing to do with his position as director. All who spoke said they felt caught in the middle between Nicolas and Charles on one side and Jonah and the management team on the other. Many felt nothing could improve until this did. Jonah summarized and inquire for over an hour.
Charles was described as yelling and degrading people in public, firing them on the spot, even when he lacked authority. Examples of his countermanding management policy were described. He summarized. Jonah then summarized and inquired for an hour.
Many said they felt discouraged by the fight between Jerome and Harlan. Many felt nothing could improve until that did. The fight between the two product lines erupted during the meeting, giving Jonah his first first-hand experience. Gallows humor prevailed, with a strong link made between speaking up and getting fired. And people spoke up. Jonah summarized and inquired.
I said that under these conditions speaking up took real courage. It showed how much people cared and wanted the company to succeed. “Your morale,” I said, “is essential to a turnaround like this.”
Many described the differences and disagreements between the two product lines. Someone from the other product line summarized each person who spoke. As we summarized and inquired, disagreements morphed into misunderstandings. Some misunderstandings were traced back to differences in technical nomenclature. We started building a common language.
We began a discussion of engineering process which quickly uncovered the absence of acceptable process and standards. Unfortunately, time ran out before we had the same conversation with marketing. Marketing was not addressed again for six months.
Jonah said that yesterday [the meeting with Jonah and his executive team] he had doubted much of what I had said. Today had surfaced information that appeared to confirm much of what I said. Jonah asked me what we should do next. I suggested we take what we had learned to the board. I said that I thought the whole executive team should be at the meeting ready to bear witness to what had been said and learned. Everyone agreed that should be done. Then the gallows humor rose, with me as the butt and victim.
This is where the two-day meeting with executives and managers ended.
Meeting with Nicolas
Nicolas and I dined the night before the board meeting. I describe the way his daily interference harmed the company. I gave examples of Charles disruptions. I said that everyone feared him. Smiling, his elbows aggressively on the table, his face in mine, he shouted, “Good!”
I pounded my fist on the table. The restaurant went quiet. I pointed my finger between his eyes and shouted mutely, “No. That is what is wrong with this company.”
I quoted some of the rumors about his day trading. Leaning close, looking me in the eye, he whispered, “They mean nothing.”
“Nevertheless, I am putting them on the table tomorrow.”
On the way out, I told him that Jonah needed authority to hire and fire all executives. He stopped and faced me, “Ha! Every president of this little company has tried to fire Charles. I didn’t let them and I won’t let the new guy, either.”
The Board Meeting
We sat at a rectangular table. Nicolas sat at an end. I sat next to him, catty-corner. Adam was calling the meeting to order, when Nicolas interrupted, turned to me, and said in a voice heard by the secretaries next door, “You know, I have hired a lot of consultants in my time and I never listened to one of them.” I looked at him, said nothing, and turned back to Adam.
The floor was turned over to me. I described what had happened, so far. I said that the executive team was next door waiting to be called.
While Nicolas fumed, I described his daily interference. I read the rumors about his day trading. I described Charles interference and reported the fear people felt, caught between Nicolas and Charles on the one hand and Jonah and his management team on the other.
The feuds between Jerome and Harlan, Product Development and Manufacturing, and the two product lines were put on the table.
We took a break and the executives joined us. For the first time, the other directors stirred, asking question after question about each issue. After the executives left, directors were heard saying, “I had no idea.” “This is quite a surprise.” “It makes sense, once you think about it.”
They asked what I recommended. “All board communication goes through the CEO’s office. There should be no direct communication between the board and anyone in the company except the CEO, the CFO and General Counsel. All other communication between the board and executives and managers is at the discretion of the CEO. This includes, of course, Nicolas and Adam, as well as the rest of you.” Several directors summarized and inquired. Nicolas interrupted, yelling that ‘it will only happen over my dead body.’
Only Adam and Nicolas voted against the motion supporting my recommendation.
Nicolas interrupted as I voiced my next recommendation, “Fuck all consultants,” he said. I said nothing, turned back to the group and recommended that the CEO be given unilateral authority to hire, fire, promote and re-assign all executives, managers, and employees of the company. At his discretion, and only at his discretion, the CEO may delegate this authority to others. Charles was asked to leave the room.
This time Adam voted with the majority leaving Nicolas as the lone dissenter.
After The Meeting
Jonah
A week later Jonah and I laid out his plan. He needed to communicate internally the two board decisions.
He needed to build his own relationships with individual directors. The company needed to develop its presence on Wall Street and with the banks. Then they would seek new lines of credit while upgrading their investor community.
We disagreed on manufacturing and engineering. He resisted my dire assessment. I told him that I had raised a reasonable doubt. It was his job to do something about it. I encouraged him to go out and see for himself, which he did.
Adam
After the board meeting, Jonah balked at paying the next invoice from Adam, for work he had done as Chairman. By phone, Jonah told Adam that outside counsel had advised against paying the invoice. Because of this opinion, Jonah could not approve payment. Nicolas then called Jonah, insisting that he pay Adam’s invoice. Jonah refused and told Nicolas that the place to pursue the issue further was at the next board meeting. Four more times Adam submitted invoices and Jonah refused approval. Each time Nicolas called and deferred to the Board. Neither Nicolas nor Adam raised the issue with the board. Adam stopped submitting invoices.
Charles
I asked Jonah, “What does Charles need to do different to keep his job, his seat on the board, his place on the executive team?” We role-played Jonah’s answers and anticipated Charles responses. Then we met with Charles.
Jonah said, “You have a tremendous contribution to make, but I cannot afford to keep you if you continue to countermanding legitimate instructions.” Charles summarized. Jonah continued, “For the time being you are to speak to no one below the level of senior vice president without the appropriate senior vice president present.” Charles summarized and asked how he could keep track of what was happening. Jonah said, “That is not your job. Your job is military relations. You should summarize that.” He did.
Jonah said, “We will review how you are doing every Monday morning at my staff meeting. I want to keep you, but you must change. I expect you to make mistakes. But I expect to see serious improvement week after week.”
Jonah, Kelly, and Manufacturing
A month after I encouraged Jonah to see for himself about manufacturing, he called, shaken, and said, “Things are not be as bad as you say they are. But they are much worse than I thought they were.”
I told him how Montgomery, fighting Rommel in North Africa, would move his headquarters to whatever part of the battlefield required attention. This was a key to his success. Assuming a new command, Monty began by teaching his staff how to move his mobile headquarters. I suggested that engineering and manufacturing required his attention. He agreed and he came up with the idea of changing jobs with Kelly. He would oversee engineering and manufacturing while Kelly handled his duties until the problem was fixed.
The next day we raised the issue with Kelly, who surprised me by objecting. He wanted the night to sleep on it. He would give us his answer the next day.
Jonah called the next morning sounding distraught. He said Kelly had something to tell me. Kelly said, “I really fucked up. Last night, on my way out, I saw Heather working late. I went into her office. I thought she liked me. She has given me lots of signals so I asked her if she would sleep with me. She broke into tears and ran out of the room. I had no idea she would get upset. I don’t know what got into me. I thought she had kind of asked me. I am sorry for how I have hurt her and Jonah.”
I said, “Kelly, I am so sorry. But you have it wrong. The person you hurt most here is not Heather or Jonah. It is you. I am so sorry. What happens now?”
Jonah said, “He resigns from the company tomorrow morning. He is to have the letter on Ryan’s desk by close of business today. He leaves our meeting and goes to his lawyer.”
Replacing Kelly with Ben
Jonah was excited about recruiting Ben, “Five years ago, when the region was booming, someone of Ben’s caliber would never consider Loomis. Now, we may be the only job qualified for him in the whole region.” This, Ben said, was why he took the job.
Ben had a sweet disposition and expected rigorous disciplined process. Morale began to rise as soon as he walked in the door. Order seemed to follow in his wake.
He pooh poohed my notion that neither manufacturing nor engineering operated to any known standards. I told him he could save a lot of time starting from scratch. “Begin by documenting what is going on and then figure out what you want to change,” I said.
I predicted that documents produced before he arrived would mislead him. He accused me of being alarmist. I suggested that he see for himself. He did see, but he was sticking to the plan. He predicted it would take two quarters to lower wastage to acceptable levels and raise quality. It took six quarters. No matter how resilient to solution problems proved to be, morale remained high, humor always present. At the end, he agreed that neither had operated by known standards. He wished he had listened to me, but he had been unable to. It was beyond his comprehension how anyone could let such a thing happen.
The Executive Team
For 12 months, I met monthly for two and a half days with Jonah and the executive team. We addressed Harlan and Jerome and the cooperation between Product Development and Marketing, the cooperation between the two product lines, and improvements in manufacturing and engineering.
Ben was constantly frustrated, dumbfounded at his inability to solve his primary problems. “I used to think that me and my guys were pretty smart. I am beginning to doubt that.” His team mates assured him that if he couldn’t do it, then no one could.
We addressed Charles, who, everyone agreed, was trying very hard and producing fewer “incidences.” We reviewed each incident. We looked at alternative ways of relating to Charles during an incident. We looked at alternative ways Charles might act during an incident. We role played the alternatives.
Once it was clear that Ben could do an excellent job with manufacturing and engineering, I suggested that Jonah turn his attention to marketing which was in equally bad shape. He resisted.
As the year moved on, it became more urgent for him to build his presence on Wall Street and develop new banking relationships. These things took time. And, besides, he did not know anything about marketing. “You know more than anyone in marketing. You could start by beginning your search for a new SVP.” Jonah said he did not want to take on Nicolas about Jerome, just yet. He agreed to start a quiet search, not using a firm, but his personal contacts.
Jerome and Harlan kept fighting. Nothing improved. I suggested that Jonah think about how long he would suffer this and what he might do about it. “You may have to choose, one over the other,” I said. He winced, then turned angry. I breathed deeply, let out a sigh and said, “This is hard work. And there is so much of it here. You can do it. You are up to it.”
Jerome self-destructed several months later. A secret condition of employment for his secretary was daily fellatio. Then, to hide money during a divorce, Jerome put lots of it in her account. She began incurring large charges on Jerome’s company credit card. Jerome turned her in and unraveled his own sordid corruption unintentionally.
Just then, Mary Ann, Jonah’s first choice to replace Jerome signed on. Within a quarter, Harlan was fighting with Mary Ann. Jonah, then, fired Harlan.
Two quarters later, Charles brought in a series of government contracts that grew the company from $20M in revenue and 155 people to $100M in revenues and 900 heads in less than eight quarters.
Copyright © 2004-2012 Don Rossmoore