Each CEO has a unique approach to leadership. In preparing for each CEO Evolution roundtable I perform a lot of research to ensure we uncover the heart of these perspectives with the panelists (this year was Margaret Keane, Bill Simon, and Scott Gillis). Every event has given me new insights and lessons learned on what it means to be a CEO.
Beating the Competition – Who are you really up against?
This year’s research included reading Scott’s Beliefs, Behaviors, and Results: The Chief Executive's Guide to Delivering Superior Shareholder Value (BBR). Co-founder of Galt & Company, Scott consults with Fortune 200 companies and believes the key to achieving superior performance over a long period of time has more to do with internal forces than external. Most CEO’s are able to name their most profitable customers, divisions and segments. When naming these profitable areas, revenues and gross profit are often the first two financial factors thought of. But is using just these two factors a fair assessment of value? When determining the value of a company, it is widely accepted that sustained, repeatable cash flows is the primary measure (i.e. EBITDA). The problem is measuring cash flows in a disaggregated basis is often difficult. For example, the cost of capital (facilities, equipment, and human capital) is often forgotten when assessing cash flows generated from business segments. These costs, referred to as “overhead”, are often not allocated to business segments because to do so would be imprecise and subjective. Further, products, segments, and customers with poor gross profits are tolerated and rationalized as “contributing to corporate overhead.”
The theory that “all revenue is good” can be costly. What if you take a shot at allocating ALL the costs of your business to your business segments? What you will most likely find is that the cash profits of your business come from a smaller portion of your company’s revenues than you think. In fact, according to BBR, only 40% of a company’s revenues increase shareholder value, and 25-30% actually decrease shareholder value. While after the analysis, those top customers and segments you named may still be the most profitable, what about those that are actually costing you money, or are neutral? The underbelly of the business is exposed and the question becomes - how to turn them into profitable businesses? What segments or markets to invest in? Where to put your most talented employees? Which segments are just not worth our time? Sounds like a good summer project no?
Clarity of Message
Creating and maintaining the culture of an organization is one of the most challenging duties of a CEO, and its difficulty is multiplied as the company grows. Bill Simon, CEO of Walmart U.S. from 2010 – 2014, employed 1.2 million people, and said “at any given time, there’s 10,000 people that are doing something you don’t want them to do. How do you stop them or point them in the right direction? It comes from leadership behaviors and clarity of message.”
Walmart’s message is to provide everyday items at the lowest possible costs. The message to employees is “the better you do your job, the more people will want to shop here. Those people will save money shopping here, and be able to provide more for their families.” That message has to the followed by leadership as well, which Bill did with his $4 prescription drug program. After identifying that Walmart’s prescription drug business had incredible profits, Bill proposed to reduce sale prices because making excessive profits was not in accordance with Walmart’s message. An example like that resonates with all employees - from the executive suite to those on the ground in the stores.
Transparency is King
Margaret Keane was head of GE Capital’s credit card division (with private label cards including Walmart and Lowes) during the Great Recession. During that time GE Capital, like other financial institutions, were pulling back credit card lines at a time when consumers needed them most. This did not go over well with GE Capital’s partners, including Walmart, JC Penny and Lowes, said Margaret. “I can say one thing I was proud of - we never made a change unless we sat down with the client. We said, here are the changes that are going in, when they are going in, and what it’s going to do to impact you.” Margaret added, “We’ve been through a lot, 37 years, I call these relationships marriages, because there are going to be good and bad times.”
Indeed, whether you have bad news for a customer, vendor, or the bank that supports your business, transparency early and often will always result in the best outcome.
Leadership takes more than directing from the top, you have to understand your business and your client’s business from all angles, knowing the key challenges and being able to navigate through them to build strong teams and opportunities for growth and profitability. Being a leader is a privilege and I think the price of admission is a commitment to continually learn from others.