The Hard Thing About Hard Things, page 19
Recently, a large company offered to buy one of our portfolio companies. The deal was lucrative and compelling given the portfolio company’s progress to date and revenue level. The founder/CEO (I’ll call him Hamlet—not his real name) thought that selling did not make sense due to the giant market opportunity that he was pursuing, but he still wanted to make sure that he made the best possible choice for investors and employees. Hamlet wanted to reject the offer, but only marginally. To complicate matters, most of the management team and the board thought the opposite. It did not help that the board and the management team were far more experienced than Hamlet. As a result, Hamlet spent many sleepless nights worrying about whether he was right. He realized that it was impossible to know. This did not help him sleep. In the end, Hamlet made the best and most courageous decision he could and did not sell the company. I believe that will prove to be the defining moment of his career.
Interestingly, as soon as Hamlet made the decision, the entire board and executive team immediately embraced the choice. Why? If they wanted to sell the company enough to advise the CEO to give up his dream, how could they reverse themselves so quickly? It turns out that the most important data point driving their earlier preference for selling the company was Hamlet’s initial ambivalence—the team supported the decision they thought the CEO wanted. Hamlet did not realize this and interpreted their desire to sell to be the result of a thorough analysis. Luckily for everybody involved, he had the courage to make the right decision.
The general problem can be seen in the social credit matrix below. The expected social rewards for making the crowd-influenced decision appear better than those for making the decision you think is right:
You are right
You are wrong
You decide against the crowd.
Few remember that you made the decision, but the company succeeds.
Everybody remembers the decision and you are downgraded, ostracized, or fired.
You decide with the crowd.
Everyone who advised you remembers the decision and the company succeeds.
You receive the minimum blame possible for getting it wrong, but the company suffers.
On the surface, it appears that if the decision is a close call, it’s much safer to go with the crowd. In reality, if you fall into this trap, the crowd will influence your thinking and make a 70-30 decision seem like a 51-49 decision. This is why courage is critical.
COURAGE, LIKE CHARACTER, CAN BE DEVELOPED
In all the difficult decisions that I made through the course of running Loudcloud and Opsware, I never once felt brave. In fact, I often felt scared to death. I never lost those feelings, but after much practice I learned to ignore them. That learning process might also be called the courage development process.
In life, everybody faces choices between doing what’s popular, easy, and wrong versus doing what’s lonely, difficult, and right. These decisions intensify when you run a company, because the consequences get magnified a thousandfold. As in life, the excuses for CEOs making the wrong choice are always plentiful.
Life Excuse
CEO Excuse
Other smart people made the same mistake.
It was a close call.
All my friends wanted to do it.
The team was against me and I couldn’t go against the team.
All the cool kids are doing it.
It was industry best practice; I didn’t realize it was illegal.
It wasn’t perfect, so I decided not to compete.
We never achieved total product-market fit, so we never tried to sell our product.
Every time you make the hard, correct decision you become a bit more courageous and every time you make the easy, wrong decision you become a bit more cowardly. If you are CEO, these choices will lead to a courageous or cowardly company.
LAST THOUGHT
Over the past ten years, technological advances have dramatically lowered the financial bar for starting a new company, but the courage bar for building a great company remains as high as it has ever been.
ONES AND TWOS
Jim Collins, in his bestselling book Good to Great, demonstrates through massive research and comprehensive analysis that when it comes to CEO succession, internal candidates dramatically outperform external candidates. The core reason is knowledge. Knowledge of technology, prior decisions, culture, personnel, and more tends to be far more difficult to acquire than the skills required to manage a larger organization. Collins does not, however, explain why internal candidates sometimes fail as well. I will attempt to do so here. I will focus the discussion on two core skills for running an organization: First, knowing what to do. Second, getting the company to do what you know. While being a great CEO requires both skills, most CEOs tend to be more comfortable with one or the other. I call managers who are happier setting the direction of the company Ones and those who more enjoy making the company perform at the highest level Twos.
WHAT ONES LIKE AND DON’T LIKE
Ones like spending most of their time gathering information from a broad variety of sources, from employees to customers to competitors. Ones love making decisions. Although they prefer to have comprehensive information when they make a decision, they comfortably make decisions with very little information when necessary. Ones have great strategic minds and enjoy nothing more than a good game of eight-dimensional chess against their best competitors.
Ones sometimes get bored with many of the important execution details required to run a company, such as process design, goal setting, structured accountability, training, and performance management.
Most founding CEOs tend to be Ones. When founding CEOs fail, a significant reason is that they never invested the time to be competent enough in the Two tasks to direct those activities effectively. The resulting companies become too chaotic to reach their full potential and the CEO ends up being replaced.
WHAT TWOS LIKE AND DON’T LIKE
Twos, on the other hand, thoroughly enjoy the process of making the company run well. They insist upon super-clear goals and strongly prefer not to change goals or direction unless absolutely necessary.
Twos like to participate in strategic discussions but often have difficulty with the strategic thinking process itself. Where a One might be perfectly comfortable spending one day a week reading, studying, and thinking, doing so would make a Two very nervous, because it would not feel like work to them. A Two would get antsy at the thought of all the processes that might be improved, people who might be held accountable to achieving the standard, or sales calls that could be made while he was wasting time just thinking about strategy.
Big decisions worry Twos much more than they worry Ones. Circumstances often force both Ones and Twos to make critical decisions with insufficient data, but Ones generally feel fine about doing that and do not get overly anxious about the consequences. Twos, by contrast, can become highly agitated about such things and sometimes overcomplicate the decision-making process in order to provide a false feeling of thoroughness about the choice.
CEOs who are Twos, despite their love of action, can sometimes bring decision making in a company to a halt.
YOU NEED BOTH CHARACTERISTICS TO BE A GOOD CEO
While people tend to be Ones or Twos, with discipline and hard work natural Twos can be competent at One tasks and Ones can be competent at Two tasks. If a CEO ignores the dimension of management she doesn’t like, she generally fails. Ones end up in chaos and Twos fail to pivot when necessary.
FUNCTIONAL ONES
Often Two executives act as Ones for their functions, but Twos as members of the executive team. For example, the head of sales might easily make all the decisions that are local to the sales organization but prefer to take direction with respect to the overall company plans. This is the best kind of multilayer leadership possible, because directions are clear and decisions are made rapidly with precision.
HOW ORGANIZATIONS TEND TO BE CONSTRUCTED
The primary purpose of the organizational hierarchy in a company is decision-making efficiency. It follows that most CEOs tend to be Ones. If the person at the top of the decision-making hierarchy doesn’t like making extremely complex decisions, the company’s processes will be slow and unwieldy.
If you’re a One, it can be counterproductive to have another One on your staff, because she will want to set her own direction rather than follow yours. This kind of strategic contention can confuse the organization and send employees in opposing directions. As a result, many great One CEOs employ primarily Twos and Functional Ones on their staff.
WHAT HAPPENS AT SUCCESSION?
This brings us to the question of succession. Since most organizations are run by Ones and have a team of Twos (sometimes Functional Ones) reporting to them, replacing the CEO can be extremely tricky. Do you promote someone from the executive staff even though they are likely a Two? Microsoft did this in 2000 when they replaced Bill Gates, a prototypical One, with Steve Ballmer, literally his number two. Or do you reach deep into the organization and pull a One from a level lower where they are likely to exist? General Electric famously did this with Jack Welch in 1981. It was an incredibly bold move by GE—not only did they promote an executive two levels down in the organizational chart past all of his superiors, but in doing so they named the youngest CEO in the history of GE. It’s difficult for most board members to even conceive of the possibility that there is a One deep in the organization who is more qualified to run the company than anyone on the executive staff.
Both methods can be problematic. The first approach leaves the company in the charge of a Two. As the company faces forks in the road, decision making may slow down and the company may lose its edge. In addition, the natural Ones (in Microsoft’s case, stellar executives such as Paul Maritz and Brad Silverberg) will eventually leave.
In scenario two, by promoting someone past everyone on the executive team and making them CEO (as GE did), you will likely cause massive turnover of the executive staff. In fact, in very short order, almost none of the original GE executives remained under Welch. In a diversified conglomerate like GE, this kind of rough transition is possible. For companies in the highly dynamic technology business, the super-high-turnover scenario is more dangerous.
THE BIG CONCLUSION
The big conclusion will be a big disappointment for those looking for an answer. The answer is there is no easy answer. CEO transition is hard. If you bring people in from the outside, you lower your chances for success. If you promote from within, you must deal with the One-Two phenomenon. Ideally, you’ll promote a One and the rest of the executive team will be glad you did. Too bad things are rarely ideal.
FOLLOW THE LEADER
There is no prototype for the perfect CEO. Radically different styles—think Steve Jobs, Bill Campbell, and Andy Grove—can all lead to great outcomes. Perhaps the most important attribute required to be a successful CEO is leadership. So what is leadership and how do we think about it in the context of the CEO job? Are great leaders born or made?
Most people define leadership in the same way that Supreme Court justice Potter Stewart famously defined pornography when he said, “I know it when I see it.” For our purposes, we can generalize this to be the measure of the quality of a leader: the quantity, quality, and diversity of people who want to follow her.
So what makes people want to follow a leader? We look for three key traits:
The ability to articulate the vision
The right kind of ambition
The ability to achieve the vision
Let’s take these in order.
THE ABILITY TO ARTICULATE THE VISION: THE STEVE JOBS ATTRIBUTE
Can the leader articulate a vision that’s interesting, dynamic, and compelling? More important, can the leader do this when things fall apart? More specifically, when the company gets to a point when it does not make financial sense for any employee to continue working there, will the leader be able to articulate a vision that’s compelling enough to make people stay?
I believe Jobs’s greatest achievement as a visionary leader was in getting so many super-talented people to continue following him at NeXT, long after the company lost its patina, and in getting the employees of Apple to buy into his vision when the company was weeks away from bankruptcy. It’s difficult to imagine any other leader being so compelling that he could accomplish these goals back-to-back, and this is why we call this one the Steve Jobs attribute.
THE RIGHT KIND OF AMBITION: THE BILL CAMPBELL ATTRIBUTE
One of the biggest misperceptions in our society is that a prerequisite for becoming a CEO is to be selfish, ruthless, and callous. In fact, the opposite is true and the reason is obvious. The first thing that any successful CEO must do is get really great people to work for her. Smart people do not want to work for people who do not have their interests in mind and in heart.
Most of us have experienced this in our careers: a bright, ambitious, hardworking executive whom nobody good wants to work for and who, as a result, delivers performance far worse than one might imagine.
Truly great leaders create an environment where the employees feel that the CEO cares more about the employees than she cares about herself. In this kind of environment, an amazing thing happens: A huge number of employees believe it’s their company and behave accordingly. As the company grows large, these employees become quality control for the entire organization. They set the work standard that all future employees must live up to. As in, “Hey, you need to do a better job on that data sheet—you are screwing up my company.”
I call this characteristic the Bill Campbell attribute after the man who is the best I’ve ever seen at this. If you talk to people who worked in any of the many organizations that Bill has run, they refer to those organizations as “my organization” or “my company.” A huge part of why he has been so remarkably strong in this dimension of leadership is that he’s completely authentic. He would happily sacrifice his own economics, fame, glory, and rewards for his employees. When you talk to Bill, you get the feeling that he cares deeply about you and what you have to say, because he does. And all of that shows up in his actions and follow-through.
THE ABILITY TO ACHIEVE THE VISION: THE ANDY GROVE ATTRIBUTE
The final leg of our leadership stool is competence, pure and simple. If I buy into the vision and believe that the leader cares about me, do I think she can actually achieve the vision? Will I follow her into the jungle with no map forward or back and trust that she will get me out of there?
I like to refer to this as the Andy Grove attribute. Andy Grove will always be my model of CEO competence. He earned a Ph.D. in electrical engineering, wrote the best management book I’ve ever read (High Output Management), and tirelessly refined his craft. Not only did he write exceptional books on management, but he taught management classes at Intel throughout his tenure.
In his classic book Only the Paranoid Survive, Grove tells how he led Intel through the dramatic transition from the memory business to the microprocessor business. In making that change he walked away from nearly all his revenue. He humbly credits others in the company with coming to the strategic conclusion before he did, but the credit for swiftly and successfully leading the company through the transition goes to Dr. Grove. Changing your primary business as a sixteen-year-old large, public company raises a lot of questions.
Andy describes an incident with one of his employees: “One of them attacked me aggressively, asking, ‘Does it mean that you can conceive of Intel without being in the memory business?’ I swallowed hard and said, ‘Yes, I guess I can.’ All hell broke loose.”
Despite shocking many of his best employees with this radical strategy, ultimately the company trusted Andy. They trusted him to rebuild their company around an entirely new business. That trust turned out to be very well placed.
SO, ARE GREAT LEADERS BORN OR MADE?
Let’s look at this one attribute at a time:
Articulating the vision There is no question that some people are much better storytellers than others. However, it is also true that anybody can greatly improve in this area through focus and hard work. All CEOs should work on the vision component of leadership.
Alignment of interests I am not sure if the Bill Campbell attribute is impossible to learn, but I am pretty sure that it is impossible to teach. Of the three, this one most fits the bill “born not made.”
Ability to achieve the vision This attribute can absolutely be learned; perhaps this is why Andy Grove’s tolerance for incompetence was legendarily low. Indeed, the enemy of competence is sometimes confidence. A CEO should never be so confident that she stops improving her skills.
In the end, some attributes of leadership can be improved more than others, but every CEO should work on all three. Furthermore, each attribute enhances all three. If people trust you, they will listen to your vision even if it is less articulate. If you are super-competent, they will trust you and listen to you. If you can paint a brilliant vision, people will be patient with you as you learn the CEO skills and give you more leeway with respect to their interests.
PEACETIME CEO/WARTIME CEO
Bill Campbell always used to say to me, “Ben, you’re the best CEO that I work with.” This always seemed crazy to me, because he was working with Steve Jobs, Jeff Bezos, and Eric Schmidt at the time while my company was going straight into the wall. One day I called him on it and said, “Bill, why would you say that? Do results not count?” He said, “There are lots of good peacetime CEOs and lots of good wartime CEOs, but almost no CEOs that can function in both peacetime and in wartime. You’re a peacetime/wartime CEO.”
By my calculation, I was a peacetime CEO for three days and wartime CEO for eight years. I still have a hard time shaking the wartime flashbacks. I’m not the only one who has experienced this. Dennis Crowley, the founder of Foursquare, told me that he thinks about this tension—between wartime and peacetime—every day. The same goes for a lot of tech companies.
