Charles Koch, the CEO of Koch Industries, a family business that makes $115 Billion in sales annually, warned of the trap of overconfidence, “Hubris, arrogance is just one step ahead of loss of integrity.” He added, “Because if you think you’re better than other people, you know more, then you’re going to think as many leaders have, that the rules don’t apply to them. So, they lose their integrity.”
Founders and business leaders must note that the one-man rule is a two-edged sword. In the startup years of Co A, a very capable and determined entrepreneur in the mold of the founder made the business grow and prosper. But over the years, when the business transformed into a complex organization, it was apparent that the business must establish management depth that would empower executives to participate in decision-making. Effectively, the one-man rule has served its purpose.
Unqualified Senior Management Team
When we made a sweep of executive competency, we also discovered that the individuals making up the professional team were copycats. There were several instances where unqualified executives got promoted to senior-level positions because they performed well in one functional area. One of the most glaring decisions that proved costly to Co A was when the founder promoted his Vice President for Sales to Chief Operating Officer (COO) as a reward for outstanding performance in sales.
For two years, the COO was, in reality, a glorified salesman. He knew very little about the other functional areas such as finance, accounting, construction, inventory, risk, and administration. In fairness to the COO, he made every effort to broaden his knowledge in the first six months of his appointment, but mounting pressure to perform eventually took a toll on his ability to manage the organization.
Since he was completely overwhelmed, the COO ended up choosing his comfort zone and concentrated most of his time motivating his sales division but neglecting his more important operating responsibilities. He ended up delegating most of these functions to his subordinates. All this time, his limited skill set kept him from making critical decisions and there were many instances where the founder overturned or bypassed his authority. With the void he created, department heads began engaging in constant power struggles. This tumultuous period further compromised bottom lines.
For Co A, it was clear that a very strong leader steered the business in the wrong direction. The founders’ disregard for NPVs (net present value), IRRs (internal rate of return), and the inept business and product development teams that created flawed concepts were some of the many glaring mistakes. In short, Co A did not care about what the market wanted because the founder relied heavily on his past successes. His management team was mere followers concurring with everything he dished out. Years before C-19, company A already showed signs that it was struggling.
What can we learn from this unfortunate event?
Is this dangerous transition common to family-owned businesses? Yes! In my experience, 8 out of 10 enterprises are going through a similar dilemma. Any corporate transition must be deliberate since many enterprises typically start as informal mom-and-pop businesses. As the business transitions and moves to a more formal setup, it is necessary to consider several factors. First is that founders die, and it is just a matter of time, so the earlier a new talent is developed, the better. Second, the owner/operators, a.k.a. supermen, cannot continue to make all the decisions themselves, especially when facing enormous pressure in a more complex environment. The one-man rule is acceptable only for a small company but never in an environment that is highly competitive. Thirdly, studies have shown that visionaries (of retiring age but refusing to step back) continue to impose their will by virtue of their experience, superior knowledge, and perception that they know better. And lastly, for the business to move forward, it is imperative that the family business provides for management and leadership succession.