While the economic crisis has exposed poorly performing companies, it has most of all exposed poorly performing CEOs. Readers of this article will learn an important lesson: What qualities make a leader the most and what enables those leaders to endure and emerge from the harshest crisis.

Leader or sheep? Across Canada and around the world, that’s the question that many boards of directors and shareholders are asking about their CEO

Before the recent economic crisis, good CEOs – the true “leaders” of business – were glorified in the media, and their management styles and leadership traits became required reading. But recently, the majority of the press has been focused on what the bad ones – the “sheep” – have done wrong.

The line between leader and sheep is a fine one. One of the biggest lessons from the credit crisis is that there are a lot of bad CEOs out there. Leaders of some of the largest, most powerful companies in the world – leaders like Jeff Immelt of General Electric and Fred Goodwin of the Royal Bank of Scotland – were awarded “CEO of the Year” before the crisis, only to be put on lists of the worst CEOs of all-time after the crisis.

Sheep also abound beyond the world of business. Raymond Domenech, the coach of France’s World Cup soccer team, faced mutiny from his players and was excoriated in the French press for failing to lead his superstar players and coach his team to more victories. LeBron James, a two-time Most Valuable Player in the National Basketball Association, was portrayed as lacking leadership by abandoning his hometown team of Cleveland to play with a team made up of superstar players in Miami. And in May of this year, British Prime Minister Gordon Brown was voted out of office for being a weak leader during the global economic crisis.

Perhaps it took a crisis to separate the leaders from the sheep. Chuck Knight, a long-time, former CEO of Emerson Electric, looked forward to recessions because they caused competitive shake outs in his industry and put competitors out of business.

Both leaders and sheep have readily discernable traits. Leaders anticipate change and prepare for it proactively; sheep are reactive and panic in the face of a crisis. Leaders surround themselves with great people; sheep surround themselves with weaker members of their flock.

This paper builds on a series of interviews, case studies and profiles of leading Canadian and international CEOs, as well as research conducted by the SECOR Group’s leadership consulting practice, to identify the traits of CEOs who have been leaders and sheep throughout the recent economic crisis. While the paper focuses on large, publicly traded companies, the lessons can also be applied to family-owned and small to medium-sized businesses, entrepreneurial start-ups and government organizations.

The paper compares and contrasts the leadership styles of leaders and sheep, and offers three recommendations for all business leaders, as well as board directors, to improve performance:

  • Leaders take control of their company’s business strategy, prepare for uncertainties, focus on execution and don’t get caught up in their own legacy
  • Leaders re-double their efforts in building their management teams throughout the major transitions in their tenure
  • Leaders trust their boards to be active, thorough and impartial in executing the succession process, and intimately involved in the transition to new leadership

Leader or Sheep? Critical transitions in a CEO’s tenure

To contrast the leadership traits of leaders and sheep, we have simplified and distilled a CEO’s tenure into three key phases: making an impact on business strategy and execution; building an enduring legacy; and planning and executing the succession process. As shown in Figure 1, the contrast in behavior between leaders and sheep across the three phases is quite dramatic.

Figure 1. Three Leadership Phases of a CEO’s Tenure

Impact Phase

The main reason that CEOs are hired in the first place is to make an impact. Much has been written about 100-day plans, rapid on-boarding strategies, and the importance of making quarterly sales and profitability targets. These are just ways to describe the need for CEOs to achieve impact and results as fast as possible.

Impact can be measured using many different metrics – profitability, customer satisfaction, revenue growth or market share. Great CEOs – the leaders – make an impact across many of them. Warren Buffett, Bill Gates and Steve Jobs have all become household names because they have grown their companies to become industry leaders and in so doing, have made their shareholders rich.

Steve Jobs, for example, has had several impact phases during his career. He started Apple and invented the Macintosh PC. He then left Apple to start NeXT, another computer company. NeXT was eventually bought by Apple and Jobs returned as CEO to invent the iPhone and iPad. Along the way, he also bought a computer graphics company that became Pixar, which produced some of the biggest blockbuster animated films of all-time like Toy Story and Finding Nemo.

In contrast, weaker CEOs – the sheep – failed to make an impact and were forced out. For example, Carly Fiorina, a former CEO of Hewlett-Packard, was fired by her board of directors because of a weak leadership style and her failure to take control of the post-merger integration of Compaq, which H-P had bought. H-P’s share price was $52 when Fiorina started as CEO, but only $21 at the end of her tenure, a loss of over 60%. She has been branded one of the worst CEOs of all-time.

Legacy Phase

Once a CEO has made an impact, their reputation gets cemented based on the results they have achieved. This is where some CEO’s begin to think about their legacy.

Leaders form their legacy by re-doubling their efforts to build their management team and ensuring that their company’s strategy is robust enough to withstand dramatic swings in economic performance or shocks from unexpected external factors.

Sheep, on the other hand, become very concerned about their legacy. Their strategic time horizon shortens, and they often contemplate “one last deal” or “one last reorganization” with which to make their final imprint on their company.

A good example of leader-sheep in action during the legacy phase is the former CEO of Sunbeam, an electric appliance manufacturer, Al Dunlap. Dunlap became famous for leading a series of management turnarounds by aggressively cutting costs, improving profitability of the company in a short period of time, and then selling to a larger competitor. He created huge increases in shareholder value at the companies he led, and gained the moniker of “Chainsaw” Al Dunlap because he laid off so many employees and fired so many managers.

Dunlap joined Sunbeam after turning around Scott Paper and selling it to Kimberly-Clark. He received $100 million for his role in the Scott Paper turnaround, and his reputation was at an all-time high. Dunlap demanded a massive compensation package from Sunbeam, a clear sign of someone who believes in his or her own legacy. However, when he was unable to replicate his success and sell the company, Dunlap falsified Sunbeam’s accounting records and was fired. He was later sued by the SEC for fraud and Sunbeam plunged into bankruptcy. Although a stark example, the Sunbeam story shows how things can go wrong when CEOs drink the Kool-Aid of their own legacy.

Succession Phase

The legacy phase usually doesn’t last very long, and is closely followed by, or overlaps, the succession phase. This is where the Board of Directors needs to assert itself and show leadership in executing the succession process and the transition to a new leader.

Boards can be leaders or sheep as well. As shown in Figure 2, Boards who are leaders manage the transitions at each stage of a CEO’s tenure. During the succession process, Boards must take control of the succession process and run it independently, regardless of how successful or powerful the CEO has been.

Figure 2. Role of the Board of Directors

Boards who are sheep, however, may allow themselves to be browbeaten by the CEO. In some cases, CEOs may be disruptive, or detrimental, to the succession process.

Leaders Take Control of Strategy and Prepare for Contingencies

The impact phase of a CEO’s tenure is the litmus test for leaders and sheep. A CEO either performs in this phase and gets a chance to lead his or her company for a sustained period or is replaced with someone new.

Much of a CEO’s success is dependent on what stage of the business cycle they begin their tenure and how they react to it. As shown in Figure 3, one of the key success factors for a CEO is to have an accurate assessment of where their company is in the business cycle, and what the future holds. Leaders devote a significant amount of time to scenario planning, and developing plans that prepare their companies for many different economic or competitive environments. Sheep will often adopt the herd mentality and follow the status quo strategy put forward by previous leaders.

Figure 3. Anticipatory Leadership Style

Leaders capitalize on the misfortunes of sheep when economic or competitive conditions change. For example, when the largest banks in the U.S. were reeling from the credit crunch, the second-largest bank in Canada, TD Bank, seized the opportunity to leverage previous acquisitions and launched a massive investment program to grow its retail-banking network in New York City, Boston and Washington, DC. The result has been rapid market-share growth in some of the most attractive banking markets in North America.

In contrast, a mismatch in expectations can be deadly. Wall Street leaders who were viewed as impervious to the business cycle suddenly became victims of it, failing to adjust their business strategies ahead of the downturn. AIG, for example, doubled and re-doubled its bet on creating and selling complex financial derivative products that eventually destroyed the company. It failed to recognize when a good business idea went south, and plunged into crisis as a result.

Leaders build high-performing management teams

A key differentiator of performance throughout a CEO’s tenure is team building and empowerment. Leaders take the reins and immediately conduct detailed assessments of their people. They don’t hesitate to cull the flock, putting better or more skilled people into critical roles. Once this has been accomplished, leaders place an inordinate effort on building their teams into high-performers. Although leaders acknowledge that this is a huge time commitment, and that occasionally they incur a bit more risk when they empower a subordinate, the price is worth it when a crunch comes.

Sheep, on the other hand, are less concerned with the strength of their teams. They are often unwilling to encourage debate and open discussion, and will either accept the status quo, or make decisions in isolation. Like sheep, weaker leaders often promote their cronies, or surround themselves with weaker “yes-men.”

Corus Entertainment’s management team’s response to the economic downturn is an example of the anticipatory leadership style required during the impact and legacy phases. John Cassaday, Corus’ CEO, spends significant time working with his management teams and communicating with his employees on how to embrace and live the Corus Entertainment Core Values of Knowledge, Innovation, Initiative, Teamwork and Accountability. Cassaday’s efforts were recognized by Waterstone Human Capital, when Corus was recently selected as one of Canada’s 10 Most Admired Corporate Cultures.

Cassaday and his team recognize that television and radio can be cyclical industries, and they are proactive in planning for unexpected economic turns of fortune. His investments in team building and scenario planning paid dividends in Corus’ performance during the 2009 economic downturn.

With advertisers slashing their budgets, Corus’ board and management team realized that 2009 would be an extremely challenging year. The senior management team focused on its core value of accountability, and came up with the slogan: “Don’t slip back” as the goal for 2009 financial performance. Management believed that if it could achieve the same level of profitability in 2009 as it had in 2008, the company would be able to come out of the crisis in as good, if not better, shape than when it went into the crisis.

Cassaday and his team realized that it would take the collective efforts of the entire company to accomplish their goal. They focused on visible examples and voluntarily accepted pay cuts and caps on bonuses. They then rolled out a road show across the company to talk about the challenges facing the business, and were pleasantly surprised to find that everyone, from administrative organizations through to their labor unions, were willing to follow suit. The result? Corus didn’t slip back. Today, the company is prospering while many of its competitors are struggling.

Vicwest has also prospered through the downturn by redoubling its efforts to execute its strategy and build its team. A medium-sized Canadian company, Vicwest manufactures cladding for commercial buildings and office towers, and also makes silos for storing fertilizer and grain. With significant exposure to both the commercial real estate market and the food industry, Vicwest’s customers were clearly in the crosshairs of the downturn.

Colin Osborne, Vicwest’s CEO and a veteran of Stelco’s restructuring and emergence from bankruptcy in the early 2000s, had experience forming contingency plans, and was well-prepared to lead through the economic crisis. The engine of Vicwest’s success during the downturn was Osborne’s focus on leadership and management succession. Instead of a command and control mindset, Osborne used the downturn to create controlled development experiences for his leadership team. By empowering his people to make decisions and live by the results, Osborne positioned Vicwest to prosper during the downturn and strengthened his management team’s ability to make decisions in difficult times.

The team’s plan for the downturn was simple – focus on Vicwest’s cost-competitiveness, continue to achieve high levels of customer service and expand into international markets. Vicwest stepped up its lean manufacturing program by consolidating selected manufacturing locations. In so doing, the company evolved from single-product plants to flexible, more scalable multi-product plants. To capitalize on volatile commodity prices, Vicwest consolidated its commodity purchasing groups and focused on the big-ticket items – steel, logistics and transportation, and fasteners. Finally, the team recognized that government stimulus funds in international markets would increase demand, so they began to pursue international growth opportunities, particularly in China.

The result of Osborne’s leadership was a banner year in 2009. Vicwest achieved record levels of gross profit and operating cash flow, and its share price appreciated by 41 percent.

The biggest take away from the Corus and Vicwest examples is that for the strongest leaders, a legacy phase doesn’t really exist. That’s because they keep redoubling their efforts in planning for the future and building their teams. For sheep, though, human nature can sometimes get in the way.

Boards play a critical role during transition periods

When a CEO is successful in the impact phase, he or she risks becoming a leader-sheep. CEOs may become celebrities in the media because of rising share prices. The board of directors may become a bit more lax on governance processes, or allow the CEO to appoint one or two of friends as directors. CEOs begin to promote their friends, or stop listening to their people before making major strategic decisions. Subordinates stop coming forward with bad news for fear of being shot as the messenger.

The same phenomena can occur in the succession phase. Leaders completely turn over the succession process to their boards and rely on the judgment of the board about if and when to involve them in the process. Sheep, on the other hand, often interfere with the process. Some hi-jack the process and insist on placing their own preferred candidate into the job. Others steal the limelight and refuse to let go of the reins.

To illustrate the leader-sheep concept during the legacy and succession phases, let’s examine the transition of leadership at General Electric from legendary CEO, Jack Welch, to GE’s current CEO, Jeff Immelt.

There is no question that Jack Welch was an extraordinary CEO and leader during the impact phase of his tenure. GE’s share price grew at a compounded annual rate of almost 23 percent for 19 years, and Welch built GE into a global titan. He diversified GE into entertainment, by acquiring the NBC television network, and transformed GE into a financial services powerhouse by aggressively expanding GE Capital.

Welch was also famous for his management techniques and strategic philosophies. He was adamant that GE should be the Number One or Number Two competitor in any business it competed in; when a business fell behind, he quickly sold it. He believed that GE needed to be the low-cost producer, and became known as “Neutron Jack” for his aggressive approach to cost reduction. But he also believed strongly in training and development, and spent a great deal of his time at GE’s training centres, developing the next generation of GE leaders.

Figure 4. Legacy and Succession at General Electric

As good a CEO as Welch was during his impact phase, his performance thereafter was less than stellar. After having announced his retirement in 1999, Welch exercised a significant amount of influence over the process to choose his successor. By publicizing the succession race, Welch behaved like a wolf in sheep’s clothing and diminished the board’s autonomy. He put significant pressure on the candidates and encouraged heavy speculation in the media. Jeff Immelt won, but two other leading candidates resigned to lead other companies, Robert Nardelli left to lead Home Depot and Jim McNerney went to 3M.

It was during this same period that Welch may have tried for one deal too many to secure his legacy. In the middle of the succession process, Welch launched a huge $45-billion takeover bid for Honeywell, one of GE’s biggest competitors. He also convinced the GE board to extend his retirement date so he could lead the post-merger integration process personally, stating that his successor would not have enough experience to lead GE through such a complex process. In the end, the Honeywell deal fell through due to antitrust concerns by the European Union. Welch, however, remained at the helm until the end of his extended CEO period to mentor Jeff Immelt. GE’s shareholders paid the price for Welch’s legacy and succession leaders-sheep phases, as GE’s share price fell by 27 percent over the two-year period.

Welch’s legacy since leaving GE has not been stellar, either. As shown in Figure 4, GE’s share price has declined continually since he announced his retirement. Was Welch’s fame for his strategic planning expertise duly earned or was he lucky that his tenure as CEO coincided with one of the longest booms in American business history? After leaving GE, the company stumbled badly in the aftermath of 9/11.

Welch’s influence on GE continued after he left. Immelt retained Welch’s strategy of growing GE Capital aggressively, but the strategy eventually caught up with GE in early 2008 just as the credit crunch began. Things came to a head when GE missed its first quarter earnings projection in 2008 because of losses at GE Capital. Welch, now well into his retirement, publicly criticized Immelt for the earnings miss. After first defending GE’s business model (that he created), Jack Welch said that he would “get a gun out and shoot” his successor, Jeffrey Immelt, if Immelt allowed GE to miss earnings targets again.

While GE was undeniably successful during the majority of Jack Welch’s tenure, one has to question how Welch reverted to sheep-like behavior at the end. Did Welch begin to believe his own press? Why did Welch pursue the Honeywell acquisition in the middle of the succession process? Why did the board allow Welch to influence the succession process so much? Why didn’t Immelt and the board conduct a more thorough scenario planning and strategic review process once Welch was gone? Why did Welch feel entitled to comment on his successor’s performance once he had retired?

How to avoid leader-sheep in your company

The downturn has provided a stark lesson about the importance of leadership. Companies and leaders once thought to be invincible have emerged badly scathed. As Warren Buffett says, “only when the tide goes out do you discover who’s been swimming naked.”

What differentiates leaders from sheep? Let’s highlight the dimensions of success:

  • Hope for the best and plan for the worst
    Leaders use multiple strategic-planning time horizons and scenario-planning techniques to always be ready for changes in the business cycle. They can “turn on a dime” and react quickly if the economy deteriorates or if crisis strikes. Sheep can get caught off guard by a sudden downturn or unexpected competitor attack, and their strategic time horizon often shortens as they approach the end of their tenure.
  • Don’t drink the KoolAid
    Leaders grind out the day-to-day execution of their strategies and don’t get caught up in their legacies. Sheep start to believe in their own success and can become complacent or attempt one deal too many. Leaders spend an inordinate amount of time building the capabilities of their management teams. Sheep surround themselves with “yes-men” and don’t solicit, or ignore, the advice of their management team.
  • The board is my shepherd
    Boards of Directors play an important role in the leader-sheep equation. A CEO who exhibits leader-sheep traits can be detrimental to a company’s success. It is a board’s duty to be proactive and assess the CEO’s performance and then react accordingly. In Figure 5, we show a quick leader-sheep scorecard for boards to use at regular intervals, and that provides an early warning as to whether their CEO is showing leader-sheep traits.

Figure 5: Board of Directors Leader-sheep Scorecard

With major economies reeling from high debt levels, Wall Street investment banks’ reputations in question, and a slow-growth recovery deemed to be a best-case scenario, the need for leadership from CEOs has never been greater. CEOs need to get back to the basics of leading their companies, and boards need to make sure that they do it. The time for choosing between leadership and leader-sheep is now.