The Emperor’s New Clothes

Danish author Hans Christian Andersen might as well have been talking about founders rather than fictional monarchs in his popular story originally published in 1837. All too many times founders fall prey to preferring loyalty rather than the truth from their troops. Founders fool themselves into thinking that loyalty is a type of competency that can’t be found among outsiders. Instead, they might consider they are being told only what they want to hear.

The truth is that founders who fail to upgrade personnel run into the exact problems that Ram Charan, back in 1999 before he was a well-known leadership guru, wrote in Fortune magazine in his study of failed CEOs. His research revealed one fatal shortcoming most failed CEOs shared: failure to take action to change out their direct reports. Almost two decades later, the lesson still resonates and is particularly applicable to founder CEOs.

“So how do CEOs blow it?” Charan wrote with co-author Geoffrey Colvin. “More than any other way, by failure to put the right people in the right jobs — and the related failure to fix people problems in time.” The root problem cited in the article was a failure of emotional strength when it came to holding subordinates accountable. When you fail to fire people who aren’t getting the job done — you fail. The company fails too. “Failed CEOs are often unable to deal with a few key subordinates whose sustained poor performance deeply harms the company,” Charan and Colvin continued. “What is striking, as many CEOs told us, is that they usually know there’s a problem; their inner voice is telling them, but they suppress it. Those around the CEO often recognize the problem first, but the CEO isn’t seeking information from multiple sources. As one CEO says, ‘It was staring me in the face, but I refused to see it.’”

A subordinate can appear just as loyal as ever as the company scales. He might even go out of his way to appear even more loyal as the stakes grow, just to remind the founder of his dedication and commitment. Getting fooled by loyalty parading as competence is about as dangerous a condition as there is. All CEOs fall prey to the loyalty trap, but founders are particularly prone to misplaced loyalty because in the earliest days of entrepreneurial battle, when you are struggling to survive, uniformity of opinion equals uniformity of purpose. Loyalty is a prized quality because staying together, keeping the faith, and riding out the bumps is all that matters. But the early value of loyalty fades as companies grow and the challenges change.

I’ve been known to state the always unpopular axiom that if the composition of your executive team was right at $10 million of revenue, then they clearly are wrong at $50 million (and vice versa). And while I implicitly believe this rule of thumb to be true, it doesn’t mean that any of them are bad. It just means that the game has changed. Like the major league baseball prospect who hits .300 in AA ball but just can’t hit the curve ball in the majors, this new level at which the company plays is quite different and requires new and improved skills. Some, but not all, executives will learn to hit the breaking ball and improve their skills sufficiently to contribute at this level. But most will not. The necessity to replace executives is a natural consequence of growth, and as a founder, you are just going to have to be OK with that. You need to resist that temptation to reward past loyalty with misplaced confidence in subordinates who are not up to the task of helping you fight this next, larger battle. That requires you to gain the “emotional” strength” to objective assess your team and take the required action that Ram Charan found lacking in so many failed CEOs.

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