Case Study: Sidestepping Accountabilities

Issue 98, March 9, 2023

At 2040 we work closely with our clients to bridge theory to practice. Strategy is great, but if you don’t know how to apply the great ideas, it becomes a hard stop to any forward progress. We can get mired down by details, overthinking – and worst of all, not keeping out of our own way. So, back by popular demand, we bring you another case study that you may be able to relate to. It’s a common story about building a brand, a workplace culture, a pathway to profitability – and leadership blinds spots. Enjoy the read and see how you would solve the problems! For more real-life case studies and a playbook for managing an organization in today’s highly volatile digital marketplace, check out our book, The Truth About Transformation.

The Back Story

A young software technology company went public through a SPAC and overnight was infused with many millions of shareholder dollars. The CEO, Gabriel, co-founded his company 12 years ago and has been running the show alongside his original partners. As a public company, he now reports to a board of directors with direct fiduciary responsibility under regulatory oversight. Gabriel fired the chief revenue officer for criticizing the executive team in front of employees, among other reasons. Unhappy, the ex-sales director wrote a vengeful letter to the independent board members outlining a series of activities that he deemed negligent on the part of the CEO and executive management. The board had no choice but to open an internal investigation and retained a prestigious law firm (think, Mueller Investigation) to conduct it. Seven months and over $1.2 million in legal fees later, the executive management team was completely exonerated. The board, however, identified a hostile work culture that needed some immediate remediation, requiring that the CEO get some leadership coaching. It also put in place additional board oversight and “guardrail” mechanisms to ensure that executive management brings about genuine workplace cultural change.

A Board Culture

Gabriel is experiencing growing pains adjusting to running a public company and being accountable to the board. He and his executive team have benefited from the infusion of over $60m and are now under pressure to execute his personal vision and the company’s business plan. Gabriel is also chairman of the board. He only answered to himself and his partners before going public, now he is finding it anxiety-producing when the board routinely questions his judgment and actions.

Each of the board members is an established and highly qualified businessperson, and Gabriel knows there is much he can learn from them. Yet their routine questioning and advice have put him at times on the defensive. It’s true that he launched and grew the business over the first dozen years, but he now realizes that he is most likely at the limit of his abilities and experience to scale the company.

Gabriel is conflicted in transitioning into running a public company. He only knows how to be the leader and owner of a private company. Above all, he is accustomed to making all the key decisions, and now, reporting to a board, he doesn’t have the same control or financial purview that he once did. Stockholders, as partial owners of the company, share in its profit and loss. However, they often have little, if any, say in the business decisions of the company and they have no control over the everyday operations. Instead, it is the company’s board of directors and not the CEO, that is charged with the decision-making responsibility and operational control.

Gabriel knows he must adapt his behavior. He also has to accept that he must meet objective goals, achieve agreed-upon outcomes, and follow established protocols, as stated by the board.

Having been the CEO of a private company all these years has led to Gabriel developing a strong ego and a quick temper. He believes that he has been able to manage his reactive behaviors with his team, but he is finding that he regresses when interacting with individual board members and the entire board. The pressures of strict GAAP financial accounting and legal oversight, brought on by his decision to fire the sales director, are only adding to his stress and defensive posturing with the board.

As a board director, how would you coach the CEO to adhere to established protocols and respect accountabilities without making him feel restrained or disempowered? What other advice could help the CEO?
As one of Gabriel’s direct reports, how would you encourage the CEO to practice self-evaluation to improve his work style and actively manage his default behaviors? Also, how do you help the CEO navigate his new role for the sake of the company’s continued growth?
How would you help the company adjust to its new shareholder accountability structure enabling it to meet the realistic annual growth goals it now must set?
What does the company need to do to make Gabriel understand that he no longer runs the company by himself; he now reports to the board?
As the company is going through change and transformation, what should the company consider and do to ensure success?

Advise and Dissent

In the ex-sales director’s letter to the non-executive board members, he cited the CEO’s intolerance for opinions and positions that run counter to his positions. Employees who disagreed were sidelined, fired, or voluntarily resigned. The board members, in their initial interactions with Gabriel, perceived a strong and competent leader. Yes, everyone has their faults, and running one’s own business surely creates some strong personality traits. Savvy leaders, however, become self-aware of their own faults and actively keep them in check.

The phrase Gabriel used most often to describe problem employees was “You’re not in alignment.” This company-culture phase was often used to justify silencing any dissent from team members around the table. Morale at the company was already running low before the ex-sales director was fired, and further eroded after his termination. Gabriel would catch chatter from time to time about the workplace culture and morale but would quickly dismiss it as not deserving any more thought. The staff (mostly engineers and sales development teams) were getting paid handsomely and needed to focus on the work to scale up the company. Gabriel didn’t believe they needed to feel happy, and he didn’t believe he bore any responsibility for making them happy.

The structure he created is typical for entrepreneurial owners: work hard, limit distractions and be totally committed (“aligned,” as he puts it). He was convinced he knew best and controlling the company and its staff was his sole responsibility. The law firm conducting the review at the behest of the board interviewed 30 staff members across different departments, some of whom were Gabriel’s direct reports and others with a direct or indirect role in the business development group. Across the interviews (and including key customers), the law firm heard the same criticisms of Gabriel over and over again.

According to the report from the law firm to the board, the CEO continues to be oblivious to the culture he is reinforcing. Although the report included only a handful of examples, the board in their private discussions found the report correlated to what they were seeing in their own interactions with Gabriel. He maintained a command-and-control structure over staff to ensure he was always the main idea- and decision-maker.

The board was seriously concerned that Gabriel fired the sales director without checking first with the board, as stipulated in the employment contract. He only informed the board after the fact with the lead general counsel assuring the board it was according to contractual protocols. However, the lead counsel resigned when the investigation started, implicitly stating some level of guilt.

The report also indicated that Gabriel intentionally did not adhere to the contract because he thought the board would veto the firing. The board is now questioning Gabriel’s ethics. Since each board member has a fiduciary responsibility and can be held accountable, the members need to consider their own options. At this point, they do not want to fire Gabriel and replace him. He was the inventor of the tech solution and is the intellectual capital of the company. They decided to defer replacing him to avoid any negative press or nervousness from investors, particularly since the company is on the verge of closing a big deal. They have decided to put a list of recommendations to present to Gabriel and invest in him in the hopes they can help and coach him to become a better leader.

Now it is your turn. How would you answer the questions below? Feel free to reply and share your thoughts with us.

As a board director, what are your personal options?
What known and underlying problems or issues need to be addressed to protect against any investor lawsuits?
How would you present the list of recommendations to the CEO?
Would you remove the CEO as executive chair of the board?
Would you claw back any of Gabriel’s annual bonus, which has not yet been approved by the board?
How would you create a succession plan?
How would you help create a culture that is non-toxic, open, and supportive of diverse opinions?
How would you write the employee handbook to establish clear procedures and protocols? What would you write and codify in organizational policy and procedures, position descriptions, or team structures to ensure a healthy workplace culture?
Are there other options that you could promote that facilitate the organization through this time of change and transition?
How do you ensure a workplace that is open to constructive and critical thinking and dialog?

Get “The Truth about Transformation”

The 2040 construct to change and transformation. What’s the biggest reason organizations fail? They don’t honor, respect, and acknowledge the human factor. We have compiled a playbook for organizations of all sizes to consider all the elements that comprise change and we have included some provocative case studies that illustrate how transformation can quickly derail.