CAPTURING THE VALUE THAT A CHIEF OPERATING OFFICER CAN BRING

Leaving to become a CEO at another organization – or being promoted to the top job at the organization he or she is with — is perhaps one of the few times you will hear about a Chief Operating Officer. In fact, the COO plays a critical role in an organization and is highly visible within it. These coauthors have identified four conditions or “rights” that boards and organizations must satisfy to make the COO’s role work and add value. They describe these rights in this article and what to do and not to do to make them work.

As is true of many of the challenges managers face, the successful implementation of a COO role is straightforward on the surface. In practice, it takes a tremendous about of discipline on CEO’s part. To make it work, boards and companies simply need to get the four “rights” right: the right reason at the right time with the right person receiving the right support. The trick is in understanding the intricacies associated with the interdependencies among those four elements, thinking them through, and then executing against the plan. In doing so, the most complex is certainly figuring out how to maximize the three fits – between the COO candidate and the COO, the job requirements, and the opportunity itself. Our contention is that when these things are well done, companies will realize a positive return on the investment that getting it right took. Where COOs have failed as individuals or where companies with COOs appear to be underperforming, we suggest these areas are the places to look for correction.

The July 2007 headline from a Reuters article read “Penn Profit Up, But Shares Dive on COO’s Exit”. The story that followed reported that shares in Penn National Gaming fell 11% on the news that the COO, Kevin DeSanctis, was planning to leave to form a new gaming company. It is hardly unusual for a number two to announce plans to pursue a chance to be CEO. What was unusual was the market reaction captured in the Reuters headline. Perhaps investors at Penn are at the fore in recognizing the value that a strong COO can add to a leadership team. When the role is properly designed and executed, the value added is great. The critical task for boards and CEOs is to understand when and how to use the role. Developing that understanding begins with recognizing the ways in which the role is a unique one in the governance of an organization.

The COO role is unique because its incumbent is such a visible leader and follower. The COO leads the execution of the company’s strategy and follows as a trusted ally of the CEO. A second source of the role’s uniqueness is the critical part it plays with regard to on the company’s operational success and consequently its performance. Finally, the role is unique in that unlike other C-level positions, its not ubiquitous – either across companies or over time at one company. COOs leave and their duties are re-distributed – that description of events is not found in reports around the departure of a CFO, for example. And, from what we have seen, it is the only C-level position without annual professional meetings, a trade publication, and the other trappings available to CFOs, CIOs, CTOs, CMOs, and the like. In all, there are a number of open questions about the COO role and its place in company leadership. Here, we describe our efforts to shed some light on two of the most fundamental of these open questions: What does it take for a COO to succeed, and what is it that makes a great COO candidate?

What does it take for a COO to succeed?

From our conversations with executives and search professionals, we have determined that there are four factors critical to the success of the COO role. When the four conditions are satisfied, the role becomes a very powerful one that adds quite meaningfully to the leadership and effectiveness of the company. All it takes, however, for the COO to derail is to have one of the four skipped, rushed, or in some other way poorly executed. For success:

  • The position has to exist for the right reason.
  • The position has to be in place at the right time.
  • The position has to be staffed with the right person.
  • The person has to be provided with the right support.

It should be clear that these four “rights” (reason, time, person, and support) are interdependent. That is, as the reason for the role changes, so do the characteristics of the right person. As the right person changes, so does the content of what constitutes the right support. The central challenge to boards and CEOs who are considering a COO role is to understand (a) how situational the form the role takes must be and (b) how nuanced these interdependencies are. Poor estimations on these two points are, we argue, the root cause of a failed execution of the COO role.

The Right Reason
We have identified seven business justifications that could present the right reason for creating a COO role: to provide day to day leadership in an operationally intensive business, to execute a specific strategic initiative, to mentor a less-experienced CEO, to serve as a complementary asset to the CEO, to essentially co-lead the company along with the CEO, to train as the heir-apparent, and to retain executive talent. Certainly more than one of these reasons could be in place at a given time – and it may be that as the company and its circumstances change that the primary justification for the COO position changes with it. This leads, of course, to a question about the COO incumbent: as the role evolves, will they be able to evolve with it? To the extent that they may not, do the board and the CEO have a development plan in place so that the COO continues to be properly equipped to do the job? Or, will the company follow the example set by Microsoft, which has over the years used different COOs to deliver the specific outcomes demanded at a particular time? Years ago, Jon Shirley provided mentorship and managerial experience early in Bill Gates’ career; later Bob Herbold joined Microsoft from Procter and Gamble to lead a change effort designed to standardize process and systems to ensure continued scalability; recently, Kevin Turner came from Wal-Mart to help the company be more effective in seizing sales and marketing opportunities.

The Right Time
The right time has three elements. First, the business case for the position has to have been carefully thought out and then well-communicated to and accepted by key players in the organization, including the board. The acceptance piece is so critical because the CEO has to be ready to trust and share power. As Carol Bartz, the CEO of Autodesk, said “[Situations where the] CEO just can’t give up the control or doesn’t really want a number two are disastrous for all involved. Sometimes, the CEO realizes intellectually that they want a COO but they can’t operationally have one- they can’t develop enough trust.” This suggests that early in the decision-making process the CEO needs to be pushed hard regarding their acceptance of the role – if they are not confident enough in their own position to have a second in command then they are not ready. Third, the CEO has to be ready to invest time and energy to smoothly bring on board and then develop the COO. Ideally, there is a “pre-boarding” process even before the COO joins the firm. During this time the two executives can begin to develop a productive working relationship. Then, during “on-boarding” the CEO needs to continue to invest time in helping the new COO build some momentum towards the accomplishment of their mission. The better these processes are executed, the higher the likelihood of COO success. These last two points require keen personal insight on the part of the CEO – and additionally an ongoing commitment to the success of the COO. For the CEO, the addition of a COO represents an investment that will only pay a return if the on-boarding process is carefully executed. As Maynard Webb, COO at eBay shared, “There are CEOs who claim to want a strong COO but in the end are too threatened by their role in the company to let them succeed.”

As we noted earlier, the right reason and the right time are intertwined. Both Ed Zander at Motorola and John Brock, while he was CEO at InBev, operate without a COO. One would expect they each realize the potential value of the role when it’s deployed at the right time. After all, Zander was COO at Sun Microsystems and Brock was COO at Cadbury-Schweppes. As CEO, however, each chose to lead without one. In both cases, the rationale was the same: they were outside appointments to the CEO position; they felt they had to learn about the company, build relationships with the entire top management team, learn the operational details, and so on. A COO located “between” them and the rest of the business might have made this more difficult – either they would have been insulated from the action or they might have realized that their efforts to circumvent a COO so they could directly experience what was happening in the firm might have sent confusing signals to others in the company. While it was painful to have so many direct reports, both reported that for the foreseeable future they needed to be close to the operational side of the business. In these cases, a business case for the position could be made (in fact, they both eliminated a COO when they entered the company), but the CEO was not ready – it was not the right time.

The Right Person
The right person can be assessed through considering three types of fit: fit between the CEO and COO; fit between the COO’s skills and the demands of the position; and fit between the COO opportunity itself and the career goals of the candidate.

In the first instance, fit between the CEO and the COO refers to a few things. First of all, there needs to be an interpersonal fit – the two executives need to have mutual respect and trust and, ideally, a liking of one another. Further, it means that the two share a vision of the company’s future, its place in the industry, and how to lead going forward. Finally, it means that there is the right amount of overlap between the knowledge, skills, abilities, experiences, and even preferences held by the two: too little overlap means it will be difficult to build the sort of seamless communication that the effective implementation of the roles requires; too much means that the second position – the COO – is not adding value. Kevin Sharer served as COO at Amgen for seven years before taking over as CEO. He has no immediate plans to add an operations chief because it isn’t clear to him the position would bring something to the partnership that he doesn’t have: the overlap would be too great – the things he likes to do would be too much like that the COO expected to do. In that circumstance they could easily find themselves tripping over one another.

The second sort of fit is straightforward because it is no different than what a manager would assess of any hire – factors like: does the person have the skills it takes to do the job? Do they understand the industry, the competition, and what it takes to execute their role? Will they work effectively within the corporate culture? To assess this, boards and CEOs need to revisit their business justification for the position. Then the question simply becomes one of what goals are they trying to accomplish with the position and to what extent do they have credible evidence that a particular candidate can meet them? Finally, the fit between the opportunity and the candidate concerns the degree to which the candidate sees the opportunity as instrumental to achieving their career goals. The easiest example to consider is one where a COO has as a professional goal the attainment of a CEO position within 3-5 years. A COO position at a firm with a young CEO is not likely to be as instrumental to that candidate as one at a firm with a CEO who is clearly looking to develop an heir. COOs may have a shelf life – that needs to be considered when putting one in place. As Ed Zander said, “After three or four years, my feeling is that you start to think more and more about the CEO decisions…that’s how I knew it was time to move on.” And, to that same point, Dan Rosensweig at Yahoo! commented, “It is a mistake to stay in the job if you actually think that you should have the CEO’s job versus the person in it.”

The Right Support
The right support is perhaps the most situational of the four “rights” we have discussed. What an individual needs to do the COO’s job well is going to be a function of the company’s business goals for the position, the demands present at the time of their service, and their own skills and abilities. That said, there are three elements of support that are always essential. First, it is important that the CEO and COO make investments of time and energy to deepen their mutual trust – it needs to be beyond question. As Joie Gregor from Heidrick and Struggles said, “my guess is that in his worst hour, Michael Dell would not question whether Kevin Rollins had done his homework.” Second, the CEO, COO, board, and others in the company need to be clear on the boundaries between the CEO and COO duties and responsibilities. Most important, though, is the discipline to stick to the boundaries. Steve Reinemund, in describing his time as COO to Roger Enrico at PepsiCo, summed it up quite well saying “we never, ever had a rough spot. That may sound naïve, but I think it is because Roger clearly defined what the role was and what it wasn’t…Many times, the CEO is not disciplined enough to stick to what they laid out as the role.” When the CEO and COO fall off of the same page in regard to their boundaries, the resulting misalignment can cause a great deal of confusion in the company and creates a risk of derailment for each.

Finally, COOs are concerned that the “back door” to the CEO be nailed shut. Though this is the language executives typically used, what it means practically is they want to make sure that the CEO backs their decision making authority. When a COO position is added to an organization, it changes the organizational structure and reporting relationships at the top. Some executives who used to be direct reports to the CEO may now have to work through the COO. And, as Ken Freeman, the former CEO at Quest Diagnostics shared, “until you prove they report to the COO, they are still going to try to reach you for decisions and support.” The trick in practice is not to limit anyone’s access to the CEO, but for the CEO to be able to artfully listen and then defer to the COO’s call – that takes great personal discipline. What needs to be avoided is a problem any parent has experienced – “if Dad says no, let’s go ask Mom.”

 

As is true of many of the challenges managers face, the successful implementation of a COO role is straightforward on the surface. In practice, it takes a tremendous amount of discipline on CEO’s part. To make it work, boards and companies simply need to get the four “rights” right: the right reason at the right time with the right person receiving the right support. The trick is in understanding the intricacies associated with the interdependencies among those four elements, thinking them through, and then executing against the plan. In doing so, the most complex is certainly figuring out how to maximize the three fits – between the COO candidate and the COO, the job requirements, and the opportunity itself. Our contention is that when these things are well done, companies will realize a positive return on the investment that getting it right took. Where COOs have failed as individuals or where companies with COOs appear to be underperforming, we suggest these areas are the places to look for correction.

About the Author

Nathan Bennett is the Senior Associate Dean and a Professor of Management at Georgia Tech, Atlanta, Georgia.

About the Author

Stephen A. Miles is a partner in the Leadership Consulting Practice of Heidrick and Struggles, also in Atlanta, and a coeditor of leaders Talk leadership (Oxford University Press, 2002).

About the Author

Stephen A. Miles is a partner in the Leadership Consulting Practice of Heidrick and Struggles, also in Atlanta, and a coeditor of leaders Talk leadership (Oxford University Press, 2002).

5 responses on “CAPTURING THE VALUE THAT A CHIEF OPERATING OFFICER CAN BRING

  1. Alana Route'

    Hi,

    This article is extremely well written and informative! My only wish is that I would have read this a year ago before I started a position (shortly out of my doctoral program) at a perinatal substance abuse residential treatment facility. The position was a Clinical Program Director, in which I shared similar responsibilities of a COO. Unfortunately, the CEO clearly wasn’t ready and the misalignment between the two roles was evident. I, the ethical one who had roles clearly defined was outnumbered by the CEO and board who were in it solely for the money and didn’t care how many clients they harmed in the process.

    At the end, the learning experience was mine. I have since then, taken a position as a COO for a health clinic with three sites. I’m looking forward to the new position and wanted to commend all of you on this article. It helped me to understand that dynamic and I feel better equipped.

    Best,

    Dr. Alana Route’
    Dr.AlanaRoute@gmail.com

  2. IBJ Editor Tom Watson

    Teboho,
    Thanks for reading IBJ. A board of directors look out for shareholders/stakeholders by overseeing the senior management team, including the COO. Like CEOs,
    a COO can serve on the board as an executive director. In that capacity, the COO’s duties as a director would be similar to other board members and depend upon committee memberships. The executive duties of a COO vary. Generally speaking, they manage day-to-day activities for the CEO, essentially taking charge of running the corporate ship so the captain can watch the horizon and determine strategic course.
    Cheers,
    Tom Watson, Editor

  3. John

    Hi my name is john. I run a start up landscaping design and maintenance company in Kenya Africa. I’m the C.O.O of the company. This article is very good and I will make sure I understand the roles.
    Skype:jonjaygithui
    Thank you

  4. Larry Greenstein

    I am a new emerging COO and trying to gather all the information about the position as possible. I found this article concise and enlightening, one of the better article I have read. Thank for it.

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