Five ways CEOs destroy value in their firms
Strong profits can cover up bad leadership habits and destroy shareholder value.
2021 is going to be another record year for the industry. The economy is booming. Some version of a federal infrastructure plan is on its way. Demand for A/E services outstrips supply, resulting in higher profits. Firm values are way up. Everything seems pretty, pretty, pretty good. But good times tend to cover up a lot of bad habits and practices. And in some cases, those are destroying shareholder value.
The CEO’s #1 job is to increase shareholder value. Most CEOs understand that explicitly and wake up every day driven to create value for their shareholders (and broader range of stakeholders). Many try to be “good leaders” but don’t really get the connection between their actions and the creation of value. They review the firm’s annual shareholder report like any other employee, seemingly unaware of their disproportionate impact on the results. And then there are those CEOs who by their actions—but mostly inaction—actually destroy shareholder value. And here are the most egregious ways in which they go about doing that.
1. They tolerate dysfunction among their leadership team: Whether it’s turning a blind eye to inappropriate behavior (“Look, I know he shouldn’t do that and that it’s borderline unethical, but his business unit generates 50% of our profit. If I confront him and he leaves, our goose is cooked!”), or shrugging shoulders despite repeated disregard for protocols, or disrespect for others (“Sure, she doesn’t ever prepare an annual business plan or show up for our leadership meetings, but the Fresno office loves her, and I can’t rock that boat”), dysfunction at the top makes it harder for good and necessary decisions to be made quickly. This results in lost opportunities and operational inefficiencies which directly and immediately hit financial performance. Worse, the best people know what’s going on and either leave or become disengaged in such an environment. Either way, value gets destroyed. CEOs doing this need to read The Five Dysfunctions of a Team—and fast.
2. They mistake “family” for “team:” Ask any A/E or environmental employee what they like about their firm, and one of the first things they will say is something like, “I love the family atmosphere here.” And there’s nothing wrong with that—except it’s flat out wrong. They’re confusing “family” for “team.” For employees, that’s not a big deal. However, CEOs who make this mistake automatically protect and reinforce sub-optimal performance: “Look I know her business unit continues to under-perform and she’s unable to fix it, but she’s been with us for over 20 years. She’s like part of the family, and I’m sure 7% profit is good enough.” No, it’s not good enough when the business could be doing 20%. And the CEO who enables sub-standard performance destroys shareholder value. The worst lies are the lies we tell ourselves.
3. They’re too slow to pull the plug: Whether it’s a business unit in a dying market where there is only red ink in the future, or a supposedly innovative idea from a rising leader that’s been sucking cashflow for five years and has shown nothing of the potential originally promised, or an overpriced acquisition that has been an abject integration failure, value-destroying CEOs either wait too long to cut the cord on these losers, or they fail to exit them completely. In many ways these are the most insidious value-destroyers, and they steal future shareholder value, too.
4. They’re content with the “sell time for money” project-by-project business model: They see their competitors investing in recurring revenue streams through digital subscription client interfaces. They recognize that more and more clients are choosing to work with design and environmental firms via digital models and are eager to embrace the subscription model. They may even recognize that exit values for firms that embrace technology and recurring revenue models are higher than for those that do not. And yet, they are unwilling to take the sugar high profits from 2020 and 2021 and invest them in new business models. Happy to kick the can down the road and destroy future shareholder value.
5. They see all overhead as “bad”: There are still CEOs who view Marketing and Human Resources (HR) as expenses rather than investments. Instead of understanding and investing big in the power of their firm’s brand, they focus on seller-doers and rely on work from legacy clients (“Over 80% of our work is from repeat clients!”). Instead of making sure that HR has a seat at the leadership table, they relegate it to a compliance and risk management function. When you see a firm with these dynamics in play, you are observing a CEO who is slowly destroying shareholder value.
The Board’s role: Ultimately, it falls to a firm’s Board of Directors to hold the CEO accountable for his or her performance. They are responsible to the shareholders. But far too often in our industry, the Board is comprised of managers and shareholders who report to the CEO, and this reporting structure muddies the agency relationships necessary to either change the CEO’s behavior or bring in a new CEO who understands how to create—not destroy—value.
This article originally appeared on Morrissey Goodale’s website. Morrissey Goodale is a CFE Media content partner.
Original content can be found at www.morrisseygoodale.com.
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