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Board To Death: The Story Of A Corporate Demise

16/06/2015 8:20 AM IST | Updated 15/07/2016 8:25 AM IST
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A customer leaves a Tesco Metro supermarket store, operated by Tesco Plc, in London, U.K., on Friday, Aug. 29, 2014. Tesco Plc unexpectedly slashed its dividend and reduced investment as the largest U.K. retailer was squeezed between German discount chains and upscale stores such as Waitrose, driving the stock to the lowest in almost 11 years. Photographer: Chris Ratcliffe/Bloomberg via Getty Images

We were in absolute-absolute awe of TESCO during my days in the UK. The retailer had established itself as an exceedingly efficient company, churning out quarter on quarter of phenomenal growth. It managed its working capital cycle so beautifully that three months of working capital cash (zero debtors and three months' creditors) allowed it to become the most wealthy real-estate company as well. Sir Terry Leahy was regarded as a business icon and no management class/case study was complete without a mention of TESCO, its success, its strategy, its leadership and its growth. The customer reward program "clubcard" has been revered as one of the most successful reward/research programs in global retail.

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Established in 1977, it boasted a whopping net profit of £3.8 billion in 2011 and attained a market cap of some £100 billion at its peak.

Cut to 2014-15 -- overstating of profits, an accounting scandal, the resignation of a CEO, market cap eroded by 70%.

Unsurprisingly, the stakeholders -- vendors, employees and most importantly customers-- lost confidence in one of the best and most talked about companies in British history.

Such case studies provide an immense opportunity for CEOs and boards to analyse in depth the real causal factors of such mistakes/fiascos and learn from them. I believe that nothing holds as many lessons as failures, bad bosses, bad companies and frauds. They teach you what not to do and what not to be, which are lessons that get lost amid the din of advisors and teachers focusing on ideals and "shoulds".

"I believe that nothing holds as many lessons as failures, bad bosses, bad companies and frauds. They teach you what not to do and what not to be..."

In the era of ever-increasing hierarchies and overpaid board members with a chip on each of their shoulders, it becomes compulsory for everyone to justify their presence in that chain.

And that's where the problem starts.

Let's reconstruct what would have actually happened at Tesco.

1.   A mom and pop store tries to make it big by focusing on its customers and employees. It concentrates on providing value while cutting costs and aiming for superior sales and a respectable growth. (By and large this is the crux of millions of mission and vision statements around the world.)

2.    The CEO, a confident maverick, expands the chain over the next two decades to a stratospheric level and achieves some amazing benchmarks in the history of business growth and performance.

3.    After a few good consistent years, the board expands and so do reviewers of the business. These people have success under their belt in some domain or the other, but little or no expertise in retail. They do, however, have an unbelievable ability and capacity to opine and advise the CEO.

4.    From an annual review format, and a distant oversight on the business the board now wants a quarterly review of sales, costs and profitability.

5.    The operational team expands and a reporting division is set up at TESCO to sate the board's appetite for reams and reams of numbers, data, analysis.

6.    The CEO begins to get a bit edgy as some of his time is now spent in ensuring timely quarterly reporting and new formats of reporting that arise out of each of the reviewers' imagination/past-experience and his belief in the effectiveness of these formats.

7.    CEO (ambitious, growth hungry-- both personal and organisational -- conscientious and diligent) now begins to work harder and smarter than ever before and maintains the pace of growth, trying to outperform the reasonable industry parameters and ensuring that the board is happy with reporting and growth and numbers etc.

"Allow an effective CEO to operate a business as if it were their own. Don't kill them with specious recommendations and hollow experiences from unrelated industries."

8.    The board begins to feel that every target, every goalpost that the CEO had been given was seemingly easily achieved, every retail industry benchmark was easily surpassed -- so perhaps the CEO needs to run even faster, better and more efficiently.

9.    The board members analyse the data even more and come to the conclusion that the retail industry needs greater scrutiny and the company needs to move from a quarterly to a monthly review.

10.    The CEO -- by now a bit bewildered and stretched -- begins to wonder where to get the next alpha in growth because now that he is concentrating less on the till management and external customers' sensitivities, he has less time for his vendors and employees (the greatest asset). And when one monthly reporting gets over and he is told by the board that the business could have performed better, it is time for the next monthly review.

11.    By now the board has become the most important customer, the internal customer. The poor CEO is spending all his time on the internal customer and less on paying customers who now feel that they aren't getting enough bang for their buck, and that ASDA is doing a better job of meeting their needs.

12.    The numbers begin to wane and market metrics begin to flounder. The CEO is working harder than ever before because he has just been advised by the board that he needs to have a better grip on his numbers and he isn't reviewing his business closely enough. The board passes a resolution for a weekly review after consulting very smart analysts who are now asking questions such as -

a.   Why is Friday sale less than Saturday because UK has historically been a Friday shoppers market?

b.   What marketing initiatives have been implemented between 1600 hrs and 1800 hrs on Friday to ensure that sales are at their expected highest?

c.   Why can't we delay the dairy farmers' payments from 30 days to 60 days, squeeze the vendor a bit more and improve our working capital cycle?

d.   Why, why, why not???

13.    The CEO and the CFO are now doing everything other than actually running the simple grocery chain and looking after their external cash-paying customer.

14.    Having lost his own confidence to run his business the CEO is only making reports, doing number crunching and absorbing advice and suggestions from the all-powerful board.

15.    The CEO and CFO are now on the edge because while they have used their entire competence to do the best that they can, the board still isn't satisfied. They aren't analysing the numbers enough, warns the board.

16.    Finally the reporting format of every month, every quarter, every week becomes so important that the hapless CEO and CFO, having exhausted every arrow in their quiver, decide that after all they do get consistent customers week on week and month on month. They decide to account future anticipated sales in this reporting period (because it has become so bloody important to make the numbers look good) and reduce the payables to show higher periodic profits. After all, this is the only way that the board will be happy and the share price will reflect its effectiveness.

This isn't only the TESCO story. Every single company that's over-reviewed and over-scrutinised is going through some similar point in its lifecycle and is likely to meet the same fate. And collectively everyone will work and unite to find a fall guy and blame it all on him.

- The subprime crisis of 2008 was a result of greedy executives wanting to perform even better to earn even better bonuses and underwriting junk paper.

- Enron was a result of greed where the weather was being bet upon, and derivative trades were being exchanged on predictions of rain or shine.

Warren Buffet invested in TESCO and called it his biggest mistake (he didn't know the TESCO board well enough).

Buffet meets his CEOs only once a year and sets reasonable and achievable expectations and creates an environment for them to perform.

He allows his rockstars (CEOs) to make mistakes and learn and believes in them as long as he believes that their intentions are correct.

And above all Buffet believes that businesses aren't built over weeks and quarters but over a lifetime.

Few have had the courage to follow his management style or have been able to replicate his success.

Morals of the story

- The world can only grow as much and so can the size of the global economy -- only a handful of capitalists will beat the world growth (Thomas Piketty)

- Businesses will go through spurts and troughs of their lifecycles. Do not view them WoW (week on week), MoM (month on month), QoQ (quarter on quarter).

- Build brands that make a difference and last a lifetime. Stop boards from over-scrutiny and from orchestrating the corporation's demise.

- Allow an effective CEO to operate a business as if it were their own. Don't kill them with specious recommendations and hollow experiences from unrelated industries.

A version of this post first appeared on Manu's blog.

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