2.

Effective Leaders Create Good Company Cultures

At the beginning of this book, in the Warning section, I recounted four reasons why businesses fail:

1. Rudderless Leadership
2. The Lust-to-Lax Syndrome
3. Incompetence
4. Conventional Thinking

This chapter looks at the first—rudderless leadership—in more detail to help you pinpoint why and where your company is weak. We start with leadership because it drives everything else.

Follow the Leader

Skilled managers recognize that the company’s ability to outperform all expectations, virtually all of the time, sits squarely in their wheelhouse. As such, they never rely on a single rule or policy to ensure that products are manufactured or that services are delivered according to plan, to the highest standards, and on budget. Instead, they set up a system of redundancy that sets off fail-safe checks and balances when one or more of the quality steps is missed or ignored.

It’s like a parachute. It has a backup built in that you can open if the primary ripcord fails. This precaution is based on a healthy sense of skepticism that even the best-laid plans will actually come to pass as intended.

In a typical case of blind faith driving a company down the tubes, a prominent restaurant company asked my firm to add firepower to its marketing, shaken as it was by the failure of its new barbeque chain to catch on in the marketplace.

Before we would engage in any form of marketing, we insisted on testing the product, visiting the restaurants unaccompanied by management in order to make sure the food and service were not being upgraded due to the presence of VIPs on the scene. Even though we visited with an open mind (meaning we didn’t let the chef’s world-class reputation color our assessment of the experience), what we found surprised us: the food at the barbecue restaurants was third-rate at best.

This took management by surprise because they:

1. Believed their quality control manager (who was tasked with making certain that the food met the highest standards), who constantly asserted, as revealed in detailed reports, that everything was up to snuff. A respected manager provided comforting reports on the state of the business, only for management to discover that the reports weren’t worth the paper they were printed on. How could this happen? Because no system of redundant quality control was put in place to make sure the reports had validity. Without a redundant system in place, the quality guy could spend his days playing video games, issuing reassuring reports, and no one would know the difference. The fact is, management must insist on a way to check on the person providing the input on the level of quality/standard of performance. Without this, it is like asking your controller how much money is in the corporate account without ever seeing the bank reports. If you want proof of how risky that can be, ask Bernie Madoff’s victims.
2. Never ate the food themselves. The first rule of management is constantly to take the role of a) the lowest ranking employee in your business and b) your customers. Forget the focus groups, management retreats, status reports, and blah, blah, blah. Rolling up your sleeves and getting into the soup now and then is the only way to know if the business sings or if it sucks.

As leaders, the question we must come to grips with is why we allow these blind spots to cloud and distort our field of vision, marring our companies’ performance or, at the very least, leaving us myopic about their shortcomings.

Perhaps we’d do best to look to a man who was a small business owner in Kansas City before he was elevated to the presidency of the United States: Harry S. Truman.

When Truman famously said, “The buck stops here,” he likely didn’t realize that he was providing businesspeople with profound, albeit hard-to-swallow, advice. The failure to live up to that Truman doctrine by accepting personal responsibility for the performance and excellence of our companies is the primary reason businesses that perform poorly find themselves in that unenviable position. When the company becomes lax, dysfunctional, complacent, balkanized—when it fails to thrill and leaves its customers disappointed or heading for the hills—it is always because of the boss’s failure to identify weaknesses and address them decisively.

Incompetence in the Wings: A Leader’s Exit Strategy that is a Trap Door in Disguise

The situation is all too familiar to me and my team. A businessperson strides into my office with a request to develop a marketing initiative immediately or to extinguish an organizational fire. Before we can act intelligently, we need to identify and understand these root causes (“Ready. Fire. Aim.” never works). As we talk through the request and the reasons behind it, the discussion evolves into an archeological dig of a commercial enterprise buried under years of flawed practices, pretenses, and levels of bureaucracy no one knows who started and what value (if any) they add. Someplace beneath the surface lie the real roots of the issues at hand.

The truth is revealed in the following stages:

1. Let’s assume the business owner wants to play a less active role in the company and plans to hand over the reins gradually to a highly competent employee, who will be mentored, positioned, and prepared to buy her out. The owner states that everything is moving along according to plan, but something (she can’t put her finger on it) doesn’t feel exactly right.
2. As we reverse engineer from the goal of a succession plan to the devil that is always in the details, it becomes abundantly clear that the would-be successor is hardly up to the task of running the business. In fact, as he has assumed ever-greater responsibility, the business has faltered, with revenues and profits declining. This is due in great measure to the fact that he has absolutely no feel for customers; instead of building relationships, his incompetence in this area has led to a significant (and clearly worrisome) exodus of once-loyal customers.
3. After some prodding, the company president admits that she knows of her lieutenant’s weaknesses but is confident (“Well,” she admits, “pretty confident”) that he can close the knowledge and experience gaps with the proper training and incentives. And in one audacious and unwarranted leap of faith, she is certain that in short order she can enjoy the fruits of her exit strategy (when the successor buys her out).
4. In the midst of this fantasy (and it is amazing how much the perverse power of “hope springs eternal” damages businesses), the slide in the company’s financial performance continues, customer relationships deteriorate further, and politically motivated cabals divide the company’s personnel into warring camps, virtually all of whom feel that the business is rudderless. And, in a sense, it is: the owner is easing her way out (according to an exit plan based mostly on wishful thinking) at the same time that the successor is proving himself incapable of filling the gap. You spell that scenario B-l-a-c-k H-o-l-e.

There is a void in the business. Why? Because no one is truly in charge. Both the owner and the heir apparent are hoping for the impossible—that some divine force, perhaps a marketing blitz or just plain luck or momentum, will intercede and allow mediocrity to fill in where once there was an entrepreneurial force driving the business forward. The gap this creates leaves employees and customers to fend for themselves.

Every business in this state of affairs sucks. Why? Because leadership is never an option; it is a requirement for scalable and sustainable growth. And simply calling someone a leader, a president, or a managing director does not make her one. She must have the experience, the instincts, and the DNA for it, or the entire structure will fall on its face, taking the exit strategy or the goal of continuous growth along with it.

When that business owner visited me, her instincts were telling her what her brain did not want to process (another common reason companies lose their edge). As a result, she was under tremendous stress because she had one foot out the door of the enterprise she’d built and one foot in. She wanted to work less and play more, but as she did so, she saw the fault lines in sharp relief. The business was suffering, customers were complaining, employees were bickering, the value of the entity was slumping and later nose-diving. In this dangerous scenario, even if the designated successor could buy out the company, the valuation would be less than half (or much worse) of what it was worth when the exit plan was initially hatched.

Clearly, the fact that the exit strategy was a trap door in disguise was now obvious to the company’s owner. Her preference to look the other way is not at all uncommon. One of the primary—and in fact, most painful (because it is so easily remedied)—reasons companies wind up going south in terms of operating and financial performance is because management refuses to accept what is staring directly and ominously in its face. In this case, the president found it far more pleasant to dream about the multiple rewards of the buyout strategy than to come to grips with the fact that her company was deteriorating and that its mounting difficulties could be traced, in good measure, to the leadership gap she created.

It fell to me to rain on her parade, advising her in no uncertain terms that the only legitimate option at her disposal was to forget the exit for now, shut the trapdoor, re-enter the business, and reclaim control. Once the company was thrilling again, we could reconnect with an exit strategy—this time, with the goods to claim a high premium for her shares.

Culture Can Be Cancer

If your company is performing below its potential, chances are good that culture is one of the root causes of the malaise. Culture falls under leadership because as a leader you set the tone at your workplace.

Before we delve into this, allow me to put the subject in context. You’re likely weary of the term culture and for good reason. There’s a lot of talk about corporate culture, most of it hot air, pumped through the halls of business schools, where no one knows anything about the realities of actual business vs. make-believe textbook business. Harvard professors have written tomes on culture, but most of them have never run a business of any kind, so you can feel free to ignore their endless reams of gobbledygook.

That said, we shouldn’t allow the academic boneheads to diminish the importance of culture in managing our companies.

I am concerned with culture because getting your company’s culture right is among the most important things you can do, and talking about it won’t do the trick. Often, it’s just the opposite. I hear speeches, seminars, entire conventions focused on culture, matched in equal measure by a dearth of action. There is too much talk of culture without sufficient substance to support its actual role in your company’s performance. Part of the problem is how culture is defined. So, what do I mean by culture?

The best definition of culture is reflected in a deceptively simple axiom: “Culture is what the employees do when the boss isn’t watching.”

A great example came to me as I was writing this book. One day, I sat down for a very late lunch (4 p.m.) at a joint called The Route 22 Diner in Armonk, New York. It was a bitter January day, the tail end of the New Year’s weekend. The sky was steel gray, the roads were patched with black ice, and most of the town residents were still away on vacation, skiing in Vail or sunning in Barbados.

I could tell when I entered the informal, cozy eatery that the few staff members on duty thought no one would be coming in before they closed up early in the face of a snowstorm that the weather service warned had Armonk in its crosshairs.

As I entered the stone-silent restaurant, I felt as if the staff was going to tell me that lunch was done for the day. I could hear it loud and clear before anyone said a word: “Thanks but no thanks. See you next time.”

But their response was diametrically opposite. Quickly, the young food staff, all in their twenties, snapped into action, turning up the thermostat, offering me a complimentary cup of hot coffee, and taking my order.

I was the only patron in the place and from all indications, it would likely stay that way, but this team was determined to see to it that I was happily ensconced in the warm environment they created for me. I had a wonderful meal of soup and turkey, ordered a mini feast to take home with me, and left the chef and the waitress $50 each. I don’t throw money around, but I do acknowledge excellence and being treated like a family member on a night when the boss was gone and the weather was miserable—I just loved the unexpected hospitality and I knew that the person in charge (who was likely in Barbados himself) understood how to create a winning culture and why it is so crucial to building and growing an exceptional business.

Now ask yourself, how does your team behave when you are not looking? Would they have turned me away or treated me as if I was a guest in their own kitchen?

Great cultures, the kind that drive profitable and growing companies, exhibit the following characteristics:

1. They view the “gold standard” as inadequate. If you can aspire to platinum, the thinking goes, why settle for gold? (In companies that suck, bronze, copper—anything—is deemed just fine.)
2. The employees don’t have jobs; they have signed up for a mission. It’s a U.S. Marine Corps-type culture that views success as the only possible outcome. From my perspective, the dazzling companies—the ones that know how to consistently thrill their clients and customers—function as a fusion of chess players and Marines: instead of simply going through the motions, they develop an ingenious strategy and then execute it like a driven, nonstop force.
3. They are on a journey of constant self-improvement. This refusal to accept the current state of service or quality as good enough is the driver of all great cultures, whether it is a company of two people or 20,000. This determination to succeed beyond normal expectations always pays major dividends. It stems from the leader’s commitment and ability to:

• Establish a thrilling goal.
• Demonstrate how everyone can play an important role in achieving it.
• Work harder than anyone else and be willing to help employees at any level in the company when their plates are full or their energy wanes. (They are like great generals, who march ahead of their troops rather than issuing commands from safe havens.)
• Make certain that the wealth of the company is shared by all who help to generate it.
• Fire those who do not. Cancer destroys companies faster than it kills people.

Forward-Moving vs. Stagnant Companies

Companies with restless, achievement-focused cultures succeed in any economy or competitive scenario. Examine a highly successful company, one that thrives over time, and you will recognize that in addition to its patents, trademarks, and exceptional people, it is driven forward by a proud and relentless culture.

When a business suffers instead from a destructive, cannibalistic culture, the fault lies not with the employees but with the leader who has failed to lead. This always takes a heavy toll on the business.

Here is a case in point. Immediately before 9/11, I met with a prospective client in Dallas. The president and owner of a consumer products manufacturing company had asked me to fly out, tour his plant, and discuss a possible business relationship.

Once a robust enterprise with what seemed to be a the-sky’s-the-limit future, the company had been riddled over the years by a chain reaction of setbacks, including cheap foreign imports and the rise of a savvy class of online competitors. By the time we met, the company’s revenues had fallen 42 percent from its peak, profits had vanished, and the future had gloom and doom written all over it.

On the surface, it seemed like a natural set of disasters had befallen the company. But that wasn’t really true. The truth behind its imminent demise lay in a conversation the president and I had about his unions.

PRESIDENT: We’re a union shop. Two-thirds of our employees are organized.

MS: That has to make the situation even more difficult to address.

PRESIDENT: Not really. We get along very well with our unions. In fact, there’s no tension at all, and we’re quite proud of that.

I was engaged to help turn the company around, and began the process of discovery, which is always a critical first step. It didn’t take me long to put the union issue in perspective. The cordial relationship with the local was due not to its willingness to make deep concessions to a troubled company (and in fact it was not willing to do so) but instead to the passive culture that was the company’s unfortunate hallmark. The president challenged no one, sought to please everyone, and overall presided (if you can call it that) over an entity that blew in the wind rather than collecting itself, revising its founding strategy, moving production offshore, and building a strong e-commerce business.

It was, before I came on the scene and forced holistic change, a culture of acceptance, of neglect, of “hope springs eternal.” The company sucked on every front, but in spite of this, the owner saw himself as a victim as opposed to the blind and benign culprit that he was. In this case—emblematic of so many others—a passive and entitled culture was the enemy within.