• Skip to content
  • Skip to primary sidebar

Right Attitudes

Ideas for Impact

Search Results for: crisis leadership

A Superb Example of Crisis Leadership in Action

May 4, 2020 By Nagesh Belludi Leave a Comment

It is in a crisis that leaders show their mettle. The New York Times notes,

The master class on how to respond [to a crisis] belongs to Jacinda Ardern, the 39-year-old prime minister of New Zealand. On March 21, when New Zealand still had only 52 confirmed cases, she told her fellow citizens what guidelines the government would follow in ramping up its response. Her message was clear: “These decisions will place the most significant restrictions on New Zealanders’ movements in modern history. But it is our best chance to slow the virus and to save lives.” And it was compassionate: “Please be strong, be kind and united against Covid-19.”

Leaders Show Their Mettle During a Crisis Our political leaders’ responses to the current COVID-19 crisis are particularly instructive about how leaders should act in a crisis:

  • Lead from the front. Initiate quick, bold, and responsible action, even when it carries political risk. Don’t be overcome by panic.
  • Think the crisis through. Weigh your options carefully, and then make the call confidently. Stay focused. Don’t let stress impede your problem-solving capabilities.
  • Avert an information vacuum. Any gap in the available information will be filled by guesswork and speculation.
  • Provide an accurate picture of what’s going on. Be transparent and honest right from the beginning. Acknowledging the gravity of the situation and being clear about how you’re going to collectively address the crisis leaves your constituencies with a sense of confidence in your message.
  • Choose your words carefully. Don’t create a false sense of security. Avoid making throwaway comments that might be misconstrued.
  • Communicate often. Fine-tune your message. Update your analysis and reaffirm your assurance of support. Keeping everyone in the loop diffuses fears and uncertainties.
  • Empower employees to be part of the solution. Invite and respond to employees’ feedback and concerns. They’ll need to know they’re being heard.

Idea for Impact: When a crisis hits, constituencies fall back on their leaders for information, answers, confidence, and direction. Set the appropriate tone for the organizational response by being supportive, factual, transparent, open-minded, calm, and decisive.

Filed Under: Effective Communication, Leadership Tagged With: Anxiety, Critical Thinking, Decision-Making, Leadership, Problem Solving, Risk, Winning on the Job

Tylenol Made a Hero of Johnson & Johnson: A Timeless Crisis Management Case Study

March 11, 2021 By Nagesh Belludi Leave a Comment

Crisis needn’t strike a company solely because of its own neglect or disaster. Sometimes, situations emerge where the company can’t be blamed—but the company realizes quickly that it’ll get much blame if it fumbles the ball in its crisis-response.

Ever since cyanide-laced Extra-Strength Tylenol killed seven people in Chicago in 1982, corporate boards and business school students have studied the response of Johnson & Johnson (J&J,) Tylenol’s manufacturer, to learn how to handle crises. The culprits are still unknown almost 40 years later.

Successful Crisis Management: Full Responsibility, Proactive Stance

Good Crisis Management: The 1982 Response of Johnson & Johnson to the Tylenol Scandal In 1982, Tylenol commanded 35 percent of the over-the-counter analgesic market in America. This over-the-counter painkiller was the drugmaker’s best-selling product, and it represented nearly 17 percent of J&J’s profits. When seven people died from consuming the tainted drug, Time magazine wrote of the tragedy’s victims,

Twelve-year-old Mary Kellerman of Elk Grove Village took Extra-Strength Tylenol to ward off a cold that had been dogging her. Mary Reiner, 27… had recently given birth to her fourth child. Paula Prince, 35, a United Airlines stewardess, was found dead in her Chicago apartment, an open bottle of Extra-Strength Tylenol nearby in the bathroom. Says Dr. Kim [the chief of critical care at Northwest Community Hospital]: “The victims never had a chance. Death was certain within minutes.”

A panic ensued about how widespread the contamination may be. Moreover, Americans started to question the safety of over-the-counter medications.

Advertising guru Jerry Della Femina declared Tylenol dead:

I don’t think they can ever sell another product under that name. There may be an advertising person who thinks he can solve this, and if they find him, I want to hire him because then I want him to turn our water cooler into a wine cooler.

The ‘Grand-Daddy’ of Good Crisis Response

  • J&J acted quickly, with complete candidness about what had happened, and immediately sought to remove any source of danger based on the worst-case scenario. Within hours of learning of the deaths, J&J installed toll-free numbers for consumers to get information, sent alerts to healthcare providers nationwide, and stopped advertising the product. J&J recalled 31 million bottles of Tylenol capsules from store shelves and offered replacement products free of charge in the safer tablet form. J&J did not wait for evidence to see whether the contamination might be more widespread.
  • J&J’s leadership was in the lead and seemed in full control throughout the crisis. James Burke, J&J’s chairman, was widely admired for his leadership to pull Tylenol capsules off the market and his forthrightness in dealing with the media. (The Tylenol crisis led the news every night on every station for six weeks.)
  • J&J placed consumers first. J&J spent more than $100 million for the recall and relaunch of Tylenol. The stock had been trading near a 52-week high just before the tragedy, dropped for a time, but recovered to its highs only two months later.
  • J&J accepted responsibility. Burke could have described the disaster in many different ways: as an assault on the company, as a problem somewhere in the process of getting Tylenol from J&J factories to retail stores, or as the acts of a crazed criminal.
  • J&J sought to ensure that measures were taken to prevent as far as possible a recurrence of the problem. J&J introduced tamper-proof packaging (supported by an expanded media campaign) that would make it much more difficult for a similar incident to occur in the future.
  • J&J presented itself prepared to handle the short-term damage in the name of consumer safety. That, more than anything else, established a basis for trust with their customers. Within a year of the disaster, J&J’s share of the analgesic market, which had fallen to 7 percent from 37 percent following the poisoning, had climbed back to 30 percent.

Business Principles Should Hold True in Good Times and Bad

Johnson & Johnson CEO James Burke - Tylenol Scandal and Crisis Management When the second outbreak of poisoning occurred four years after the first, Burke went on national television to declare that J&J would only offer Tylenol in caplets, which could not be pulled apart and resealed without consumers knowing about it.

Burke received the Presidential Medal of Freedom in 2000. He was named one of history’s ten most outstanding CEOs by Fortune magazine in 2003. In Lasting Leadership: What You Can Learn from the Top 25 Business People of Our Times (2004,) Burke emphasized,

J&J credo has always stated that the company is responsible first to its customers, then to its employees, the community and the stockholders, in that order. The credo is all about the consumer. [When those seven deaths occurred,] the credo made it very clear at that point exactly what we were all about. It gave me the ammunition I needed to persuade shareholders and others to spend the $100 million on the recall. The credo helped sell it.

Trust has been an operative word in my life. It embodies almost everything you can strive for that will help you to succeed. You tell me any human relationship that works without trust, whether it is a marriage or a friendship or a social interaction; in the long run, the same thing is true about business.

Idea for Impact: A Crisis Makes a Leader

The first few days after any disaster or crisis can be a make-or-break time for a company’s and its leaders’ reputation. The urgency experienced during a crisis often gives leaders the go-ahead to enact change faster than ever before.

Admittedly, the Tylenol case study is more clear-cut than most crises because, from the get-go, it is clearly evident that criminals, not Johnson & Johnson, were responsible for the poisoning and the withdrawal of Tylenol from stores was comparatively easier to execute.

Filed Under: Leadership, The Great Innovators Tagged With: Crisis Management, Decision-Making, Ethics, Governance, Leadership, Leadership Lessons, Problem Solving, Risk

Leadership is Being Visible at Times of Crises

February 25, 2021 By Nagesh Belludi Leave a Comment

Leadership is Being Visible at Times of Crises It’s terrible optics for an elected official to leave his constituency while it’s in the midst of a crisis.

In a grave slip-up for an ambitious politician, Texas Senator Ted Cruz’s giving a lame excuse initially for his Cancún joint made him look insensitive. He was expected to stay and endure alongside his constituents, who were suffering from Texas’s recent freezing temperatures and blackouts.

Of course, Cruz didn’t do anything that hurt anybody, apart from drawing police resources away to shepherd him through the airport. Cruz’s argument—sensible in its own way—was that all he could do was be in regular communication with state and local officials who’re spearheading the crisis response. After all, Cruz has no formal power in the state administration.

As a comparison, King George and the Queen Mother declined to leave London as bombs shattered their city during World War II. As an expression of concern, and commitment to the Allied cause, they even visited sites destroyed during The Blitz of 1940.

Idea for Impact: Leadership means serving as an anchor during crisis times and being available, connected, and accessible during a crisis. Leaders can’t do everything, and they need to delegate responsibilities. However, entrustment should not entail emotional detachment.

Filed Under: Effective Communication, Leadership, Leading Teams Tagged With: Conflict, Critical Thinking, Decision-Making, Leadership, Leadership Lessons, Mindfulness, Problem Solving, Winning on the Job

This is Not Responsible Leadership: Boeing’s CEO Blames Predecessor

March 12, 2020 By Nagesh Belludi Leave a Comment

David Calhoun, Boeing CEO In January, Boeing’s former Chairman, David Calhoun, became CEO after the board fired Dennis Muilenburg. Less than two months later, in a New York Times interview last week, Calhoun blamed Muilenburg for the misfortunes plaguing Boeing:

  • Asked why he wouldn’t give up his salary (he gets a $7 million bonus if he can get the 737 MAX back into the sky) in light of the 737 MAX-related woes, Calhoun declared, “… ’cause I’m not sure I would have done it [taken the job without a salary].”
  • On Boeing’s systemic culture problem (a steady trickle of revelations has exposed software problems and corners being cut in the engineering and certification processes,) Calhoun characterized the contents of the leaked emails as unacceptable but also downplayed the issue: “… I see a couple of people who wrote horrible emails.”
  • Calhoun has been on Boeing’s board since 2009. While the MAX crisis snowballed and Boeing’s crisis management went from bad to worse, Calhoun took over as the board’s chairman. In that capacity, he fully endorsed Muilenburg saying, “from the vantage point of our board, he has done everything right,” “he didn’t create this problem,” and “shouldn’t resign.” Now, in the last week’s interview, Calhoun had a different take: “Boards are invested in their CEOs until they’re not. We had a backup plan. I am the backup plan.”
  • Acknowledging that Muilenburg boosted production rates before the supply chain was ready, Calhoun declared, “I’ll never be able to judge what motivated Dennis, whether it was a stock price that was going to continue to go up and up, or whether it was just beating the other guy to the next rate increase. If anybody ran over the rainbow for the pot of gold on stock, it would have been him.”

Calhoun and the rest of Boeing’s board of directors were part of the context right from the outset. The roots of Boeing’s current crisis embody decisions made by the company’s leadership over a decade and fully sanctioned by the board. The board is wholly accountable for everything that happens under its authority.

Idea for Impact: Blame is an Accountability Killer

This is not responsible leadership. A true leader doesn’t pass the blame for failure but graciously accepts responsibility for the problems he inherited. Even though Boeing’s lapses may not be traceable directly to him in his capacity as a member of the company’s board, Calhoun should have acknowledged his—and the rest of the board’s—failing to keep an eye on Boeing’s leadership team over the last decade.

Leading with integrity means taking personal responsibility. It’s tempting for people to take flight and avoid the personal consequences of what happened, to reject personal responsibility, and to pass the blame on to other people.

Calhoun could have acknowledged that the board’s actions had a role in the situation. By facing up to these criticisms and admitting that Boeing and it’s board could have done things better, Calhoun could have encouraged others at Boeing to do the same, especially considering that he must overhaul the company culture from the top down.

Filed Under: Effective Communication, Leadership Tagged With: Attitudes, Aviation, Governance, Humility, Integrity, Leadership, Leadership Lessons, Respect

Two Leadership Lessons from Oscar Munoz, United Airlines CEO

December 12, 2019 By Nagesh Belludi 1 Comment

United Airlines announced last week that CEO Oscar Munoz and President Scott Kirby would transition to new roles as executive chairman and CEO respectively in May 2020.

Two Leadership Lessons from United Airlines' CEO, Oscar Munoz Munoz was very good for the airline. He deserves kudos for getting United back on track, for improving the company’s culture, employee morale, brand image, and customer experience, and for hiring Kirby.

  • Munoz, who came to United from the railroad company CSX, had hitherto gained considerable experience while serving for 15 years on United’s (via its predecessor Continental Airlines’s) board. But, when he became CEO in 2015, he stated that he hadn’t realized how bad things had got at United. That admission reflects poorly on his board tenure—board members are expected to be clued up about the day-to-day specifics of the company and have more visibility into the pulse of the company’s culture beyond its senior management. Alas, board members not only owe their cushy jobs to the CEOs and the top leadership but also build long, cozy relationships with them.
  • Munoz will be remembered chiefly for the David Dao incident and the ensuing customer service debacle. The video of Dao being dragged out of his seat screaming was seen around the world. While the dragging was not Munoz’s fault (the underlying problem wasn’t unique to United,) the company’s horrendous response to the incident was. However, Munoz is worthy of praise for using the event as a learning exercise and an impetus for wholesale change in United’s operations and employee culture. In the aftermath of the incident, many customers vowed to boycott United flights, but that sentiment passed as the backlash over the incident waned. Even so, the David Dao incident need not have happened for United’s operational and cultural changes to materialize.

Now then, Scott Kirby is a hardnosed, “Wall Street-first, customer loyalty-last” kinda leader. Even though Kirby has made United an operationally reliable airline, his manic focus on cost-cutting has made him less popular with United’s staff and its frequent fliers. Let’s hope he’ll keep the momentum and preserve the good that Munoz has wrought.

Filed Under: Effective Communication, Leadership, The Great Innovators Tagged With: Aviation, Change Management, Ethics, Governance, Leadership Lessons, Learning, Problem Solving, Transitions, Winning on the Job

How to Prevent a Communications Breakdown During Crisis

November 13, 2017 By Nagesh Belludi Leave a Comment

How to Prevent a Communications Breakdown During Crisis

The ultimate test of a leader’s and an organization’s communication skills is how they deal with a crisis—natural disasters, crisis of confidence, acts of malevolence, strategic errors, acts of deception, management misconduct, and so forth.

It’s not difficult to see why communication is an important element of crisis management: leaders today have to tackle media that is unsympathetic to what it regards as management incompetence, shareholders and customers who are ever more demanding, legislation and regulation that is getting stricter, and competitors eager to pinch customers during times of distress.

Effective crisis communications must be able to have a consistent and clear message and present this message swiftly and regularly following a crisis.

Here are seven elements of effective crisis communication.

  1. Strategic Thinking: Think purposefully about what you want your constituencies (employees, stockholders, customers, suppliers, communities, the media) to know under the given circumstances. Many a routine problem has transformed into a crisis because too many people were told too much and the situation became exaggerated and out of control.
    • What happened
    • Who is responsible
    • Why did it happen
    • Who is affected
    • What should be done
    • Whom can we trust
    • What should we say
    • Who should say it
    • How should we say it
  2. Openness: When a crisis befalls, be prepared to talk about it internally and externally as assertively as you respond to the crisis operationally. Understand the expectations of your constituencies and go beyond what is expected or required. If you are not communicative enough, people may make erroneous assumptions about the crisis. Bad news can travel fast and sell best.
  3. Candor: If your constituencies should know about a crisis that your organization is experiencing, talk about it as quickly and as completely as you can, especially to those most directly affected.
  4. Concern: Keep the people most directly affected by the crisis updated until the crisis is completely resolved. Do not brand a whistle blower a troublemaker.
  5. Sensitivity: At the earliest possible moment, step back and analyze the impact of the crisis. Inform and alert all the constituencies that are affected. Demonstrate concern, compassion, sympathy, remorse, or contrition, whatever the case may require.
  6. Integrity: If you are responsible for the crisis or perceived as such, acknowledge the situation promptly. Be true to your corporate and personal conscience. Share the crisis action plan and seek inputs.
  7. Honesty: Learn from your mistakes and talk openly about what you’ve learned. Demonstrate your commitment to keeping errors and problems from resurfacing.

Idea for Impact: Reputation and goodwill represent a great part of business value. Protect yourself when faced with attacks on your reputation and competence. If you do not communicate effectively and frequently with your constituents, somebody else will. In the absence of information, your constituents can develop their own perceptions of the problem and its implications.

Filed Under: Effective Communication, Leadership Tagged With: Emotions, Leadership, Mindfulness, Relationships, Stress, Worry

One of the Tests of Leadership is the Ability to Sniff out a Fire Quickly

July 18, 2017 By Nagesh Belludi Leave a Comment

One of the tests of leadership is the ability to recognize a problem before it becomes a disaster

I’ve previously stressed the importance of problem-finding as an intellectual skill. I’ve also highlighted why risk analysis and risk reduction should be one of the primary goals of any intellectual process. In this article, I’ll write about being proactive in identifying problems before they evolve into crises.

How Wells Fargo Failed to Recognize a Problem and Address it before it Became a Bigger Problem

As the Wells Fargo accounts scandal unfolded, it was clear that Wells Fargo’s leadership was well aware of the burgeoning problems early on, but failed to act decisively and nip the problem in the bud.

Given impossible sales quotas to reach, Wells Fargo’s “high pressure sales culture” opened as many as two million bank and credit card accounts on behalf of its customers without their consent. Employees were rebuked or even fired for not meeting aggressive cross-selling targets.

Human nature is such that high-pressure demands can deplete the willpower people need to act morally and resist temptations. And such demanding circumstances encourage people to go into defensive mode, engage in self-interested behaviors, and consider only short term benefits and dangers.

Leadership Lessons from the Wells Fargo Accounts Scandal: “A Stitch in Time Indeed Saves Nine”

Leadership Lessons from the Wells Fargo Accounts Scandal Wells Fargo’s leadership reportedly had data about ethical breaches, but they ignored or misjudged the impact of the problem. Wells Fargo even held a two-day ethics workshop in 2014 unequivocally telling their employees not to do that. As per an internal review, managers knew that 1% of employees had been fired for “sales integrity” violations.

Wells Fargo’s leadership didn’t act quickly and decisively to mitigate the effects of the crisis. Warren Buffett, one of the Wells Fargo’s biggest investors, summarized this leadership inaction at the 2017 Berkshire Hathaway annual meeting:

There were three very significant mistakes, but there was one that was worse than all the others … The main problem was that they didn’t act when they learned about it … at some point if there’s a major problem, the CEO will get wind of it. And at that moment, that’s the key to everything, because the CEO has to act. It was a huge, huge, huge error if they were getting, and I’m sure they were getting, some communications and they ignored them or they just sent them back down to somebody down below.

Leadership: “Only the Paranoid Survive”

Andy Grove (1936–2016,) the illustrious cofounder and CEO of Intel, was a famous worrier. At Intel, the focal point of Grove’s leadership style was worry and skepticism. He believed that business success contains the seeds of its own destruction, and that in order for an organization to have longevity, it needs to continue to worry about the future.

'Only the Paranoid Survive' by Andrew S. Grove (ISBN 0385483821) Grove’s principle was immortalized in his famous proclamation, “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” He eloquently explained his worrisome mantra in his bestselling corporate memoir, Only the Paranoid Survive (1996.) He wrote in the preface:

The things I tend to be paranoid about vary. I worry about products getting screwed up, and I worry about products getting introduced prematurely. I worry about factories not performing well, and I worry about having too many factories. I worry about hiring the right people, and I worry about morale slacking off. And, of course, I worry about competitors. I worry about other people figuring out how to do what we do better or cheaper, and displacing us with our customers.

At Intel, worrying about the future created a culture of triumph that propelled change and innovation. Grove never let Intel rest on its laurels and led the company to break boundaries in microprocessor innovation. During his tenure as CEO from 1987—98, Intel’s stock price rose 32% a year. Grove also said, “A corporation is a living organism; it has to continue to shed its skin. Methods have to change. Focus has to change. Values have to change. The sum total of those changes is transformation.”

Idea for Impact: Learn to Sniff out a Fire Better than Anyone Does

The principal tasks of leadership are (1) identifying the biggest risks and opportunities, and (2) allocating organizational resources. Therefore, one of the tests of leadership is the ability to recognize a problem before it becomes a disaster. If identified and addressed early, nearly any problem can be resolved in a way that is beneficial for everyone involved.

Many leaders tend to be reactionary—they claim, “why fix something that isn’t broken.” Even when they see an impending problem, they may assume that the problem “isn’t that big of a deal” and wish the problem will just go away. Alas, many problems never go away; they only get worse.

To become a good leader, be paranoid—always assume that “there’s no smoke without fire.” If, according to Murphy’s Law, everything that can go wrong will go wrong, the paranoid leader has an advantage.

Whenever you are doing anything, have your eyes on the possibility of potential problems and actively mitigate those risks. Never allow a problem to reach gigantic proportions because you can and must recognize and fix it in its early stages.

As the medieval French philosopher and logician Peter Abelard (1079–1142) wrote, “The beginning of wisdom is found in doubting; by doubting we come to the question, and by seeking we may come upon the truth.”

Filed Under: Leadership, Sharpening Your Skills Tagged With: Adversity, Attitudes, Conflict, Creativity, Critical Thinking, Great Manager, Human Resources, Mental Models, Performance Management, Persuasion, Thinking Tools, Thought Process, Winning on the Job

Any Crisis Calls for Constant, Candid Communication

July 3, 2010 By Nagesh Belludi Leave a Comment

As the current crises at Toyota and BP highlight, how you respond to a problem or crisis is the ultimate test of your leadership character. Knowing how to step up your communications efforts to the right levels during disorder can be a powerful tool in managing a crisis. Here are seven key lessons for communicating during crises.

  • Crises call for constant, candid communication Be visible. Communicate and lead from the front. In a crisis, your key constituencies (your board, management, team, government, or the public) insist on hearing from the leader. Stay engaged and maintain consistency of purpose and action. Keep all the lines of communication open.
  • Communicate in real-time and explain your position. If you do not communicate frequently with your key constituents, somebody else will. In the absence of information, people will develop their own perceptions of the problem and its implications. Keeping your constituencies well informed diffuses many suspicions and uncertainties.
  • Be transparent and forthright right from the beginning. Face the realities of the problem and its potential consequences. Acknowledge what you know about the problem or crisis and go into detail about what steps you are taking in response. Proactive communication is reassuring and prevents perceptions of negligence and evasion from becoming realities.
  • Research thoroughly the challenges you face and your options for remedial actions. Be prepared to describe everything that matters at each moment. Carefully administer your communication plan with due consideration to possible litigations and penalties.
  • Be objective and calm. Avoid engaging in finger pointing and playing pass-the-parcel. Avoid criticizing and discrediting the victims or critics. Continuously verbalize empathy and responsibility, and announce plans for early resolutions and restitution.
  • Remember that your attitude sets the tone for the rest of your organization. If you take a defensive position, play victim or engage in finger pointing, the rest of your organization will react the same way. Through your communications, set a positive tone to build confidence within your organization and promote constructive responses.
  • As soon as the crisis dissolves, research and communicate opportunities to make fundamental changes to improve your organization. Reiterate your core values and missions. Revamp internal practices as necessary and follow through on all initiatives to rebuild your credibility. Consider organizational changes and new processes for managing future crises.

Filed Under: Effective Communication, Leadership Tagged With: Conflict, Getting Along, Leadership, Relationships, Skills for Success, Winning on the Job

Our 10 Most Popular Articles of 2021

December 31, 2021 By Nagesh Belludi Leave a Comment

Top Blog Articles of 2021 Here are our most popular exclusive features of 2021. Pass this on to your friends; if they like these, they can sign up to receive our RSS feeds or email updates.

  • If You’re Looking for Bad Luck, You’ll Soon Find It. Luck is sometimes the result of taking appropriate action. And, bad luck is sometimes the result of tempting fate.
  • Be Ready to Discover What You’re Not Looking For. Creativity is a disorderly journey. Much of the time, you may never get where you’re going. You may never find what you hope to find. Stay open to the new and the unexpected.
  • ‘Follow Your Passion’ is Bad Career Advice. It’s easier to pursue your passion if you can afford to work for free. Until then, seek the peace of mind that comes from being able to pay your bills and attaining financial stability.
  • Even the Best Need a Coach. Sometimes you can be too close to things to see the truth. Blind spots are less obvious when things are going well. Coaches can help you “break your actions down and then help you build them back up again.”
  • The Solution to a Problem Often Depends on How You State It. Defining a problem narrowly (“How can we create a better mousetrap?”) will only get you restricted answers. When you define the issue more broadly (“How can we get rid of mice?”) you open up a whole range of possibilities.
  • Consensus is Dangerous. Getting everyone on the same page can produce harmony—of the cult-like variety. Encourage dissent and counterevidence in decision-making.
  • Watch Out for the Availability Bias. Don’t be disproportionately swayed by what you remember. Don’t overreact to the recent facts.
  • Leadership is Being Visible at Times of Crises. Leadership means serving as an anchor during crisis times and being available, connected, and accessible during a crisis.
  • How to Think Your Way Out of a Negative Thought. A thought-out, levelheaded analysis of the situation can unshackle the mind’s echo chamber and nudge you to think your way out of a problem and look beyond it.
  • Witty Comebacks and Smart Responses for Nosy People. Don’t feel rude about quelling impolite boundary-violators. Responding snappishly but firmly will imply that that the issue is not open for further conversation.

And here are some articles of yesteryear that continue to be popular:

  • Lessons on adversity from Charlie Munger
  • The power of negative thinking
  • The Fermi Rule & Guesstimation
  • Fight ignorance, not each other
  • Care less for what other people think
  • Expressive writing can help you heal
  • Don’t let small decisions destroy your productivity
  • How smart companies get smarter
  • How to manage smart, powerful leaders
  • Accidents can happen when you least expect

We wish you all a healthy and prosperous 2022!

Filed Under: Announcements, Sharpening Your Skills Tagged With: Attitudes, Discipline, Risk, Skills for Success, Thinking Tools

Easy Money, Bad Deals, Poor Timing: The General Electric Debacle // Summary of ‘Lights Out’

December 14, 2020 By Nagesh Belludi Leave a Comment

The story arc of the unraveling of General Electric should be familiar to followers of business news over the last two decades. Wall Street Journal reporters Thomas Gryta and Ted Mann’s crisp Lights Out: Pride, Delusion, and the Fall of General Electric (2020) draws together the vital episodes in one impassive narrative. It’s brimming with lessons about the hazards of obsessively focusing on impressing Wall Street.

Decades of Bad Decisions and Careless Oversight Ruined GE

'Lights Out General Electric' by Thomas Gryta (ISBN 035856705X) The fall of General Electric is really the story of how long-time CEO Jeff Immelt got saddled with the doomed legacy of the previous CEO, Jack Welch.

In 2001, Immelt took over a ship that was in trouble but wasn’t sinking yet. Unbeknownst to many analysts and investors—and overlooked by Jack Welch-buffs,—General Electric had been spoiled by greed, lack of transparency, and “lax oversight and buried risks.”

As a rising star, Immelt was part of Welch’s apparatus, perhaps to a smaller extent, at the GE Medical Systems division that Immelt ran previously. Early in his tenure as CEO, Immelt realized the scope of a disaster in the making. However, he didn’t act quickly and decidedly enough to fix the ill-fated ship’s rotten bits.

To focus on the stock’s negative return during Immelt’s 16 years as CEO and pit it against the sixtyfold return over Welch’s 20-year term is myopic. This argument is definitely understandable, yet it is scarcely convincing.

Welch’s good times couldn’t last forever, and Immelt had a tough act to follow. Yes, Welch was a forceful numbers-obsessed management mastermind who transformed GE into the world’s largest, most profitable, and best-admired company during his tenure as CEO. However, many of the mistakes of his corporate strategy manifested years later.

Welch would argue that he pushed his underlings to produce results, not fraud. But even if the CEO didn’t bend the rules himself, Welch cultivated an environment of pressure that incentivized people to do just that.

Welch was fond of saying, “You reinforce the behaviors that you reward. If you reward candor, you’ll get it.” Welch’s playbook rewarded—and got—the worst traits of modern capitalism. In so doing, he sowed the seeds of the company’s tragic decline.

Jack Welch’s Playbook Was Long-term Destructive to GE

Welch had a take-no-prisoners attitude to running GE. He set overly aggressive targets for his managers. He engaged in accounting shenanigans and consistently “managed” the numbers to maintain the myth of consistency and limitless growth. Behind the scenes, Welch’s machination was made possible by crafty-but-legal accounting practices (with auditor KPMG’s blessings, nonetheless,) mazes of financial deals, and murky structures. Welch even underfunded reinsurance reserves by $9.4 billion, helping pump up profits from 1997 to 2001.

Managing financial results wasn’t unique to GE, but the degree of GE’s reliance on the practice was. Management, with its customary swagger, treated the frenzy of last-minute tweaks and transactions each quarter as entirely natural. GE executives have acknowledged that they worked to make sure earnings were always growing in a nice smooth trajectory.

Immelt knew—or came to comprehend—of all this tomfoolery but didn’t break GE’s bad habits swiftly. Specifically, Immelt didn’t dismantle the GE Capital unit, the company’s most significant liability, and it continued to haunt GE. Under pressure, the complex conglomerate structure that Welch had held together during the good times of the ’80s and the ’90s started falling apart towards the end of his tenure.

The winds were shifting on Welch. GE’s share price had soared for years, making it, for a time, the world’s most valuable company. [During Welch’s] final eighteen months, the share price fell 33 percent. … [Bond-market guru Bill Gross commented,] “Institutional investors have wondered why a company can continue to produce 15 percent earnings growth year after year, quarter after quarter.”

An Addiction That Was So Hard to Break

Decades of Bad Decisions and Careless Oversight Ruined General Electric At the heart of General Electric’s fall is how GE Capital came to gain an outsized influence over the parent company and ruined it. Under Jack Welch, GE Capital’s business model of high leverage and “financialization” was resoundingly successful. Financial engineering, e.g., recognizing revenue from long-term service contracts for power-plant repairs and jet-engine maintenance, is not only suspect, but it cannot manufacture results beyond the short term.

GE Capital was the nonbank bank that was embedded in the company’s fabric. Everything that GE produced was leased, rented, or loaned by GE Capital. In other words, the industrial side was sustained by the rise of GE Capital. It was too interlinked to everything else, and that impeded Immelt’s “definancialization” plans.

In the ’90s, Welch embraced the notion that it’s a lot easier to make money in financial services than in industrial manufacturing. The Capital unit provided huge dividends (with enormous risks) while the industrial side was less profitable but more stable.

No wonder, then, that Welch made GE Capital a gargantuan part of GE. GE Capital became the vehicle for his headlong obsession with enhancing pure shareholder value.

Sadly, Welch bet the farm on the continued success of GE Capital. It misused GE’s high-quality credit rating and became a colossal lender and a major shadow bank. Welch’s bet went sour in 2008—GE Capital was the largest commercial paper issuer going into the financial crisis. It needed a $139 billion government bailout, and it has continued to drain the company’s bottom line ever since.

Jeff Immelt focused on pivoting GE towards core industrial businesses. He doubled GE’s investment in R&D. He sold off slower-growth, low-tech, and nonindustrial businesses, but not soon enough. He managed to keep revenues growing and delivered high margins until the financial crisis hit.

Cleaning Up the Mess Left by Welch

Even as Immelt went about restructuring the company around industrial products, he continued to rely on GE Capital “for smoothing out rough quarters and delivering easy profits.” It was a hard addiction to break.

Lights Out acknowledges that Immelt was “playing with a tough hand,” and he knew that “his success would be attributed to his predecessor but his failure would be seen as all his own doing.”

The authors reveal plenty of leadership blind spots. Immelt was a genial and assertive salesperson, and he didn’t like hearing bad news. He didn’t like delivering bad news either.

CEOs are expected to be optimistic, but Immelt was unfailingly overoptimistic. Perhaps his overconfidence was a manifest outcome of the company’s cultural dynamics. Sadly, when a company is doing well, such CEO attributes as optimism, audacity, and foresight that Immelt’s leadership personified are heralded as brilliant, but when things go wrong, they’re the first to get the blame. Results are all that matters.

Some board members … had … a poor impression of Immelt’s deal-making skills. The knock on Immelt was that he chased trends, arrived too late, and paid handsomely. One rival CEO joked that he was “fad surfing.”

At General Electric, Jeff Immelt Made Bad Decisions and Was Slow to Make Changes

Immelt Made Bad Decisions and Was Slow to Make Changes

Immelt spent over $100 billion on ill-timed share buybacks to shore up earnings-per-share and so the stock price. He had a history of overpaying for acquisitions. He was reluctant to back away from deals that he was dead set on, even when the deal’s prospects became dubious during the parleying.

Immelt tended to start negotiations too high, sometimes to the surprise of others involved in the deal, leaving little room for negotiation. It wasn’t uncommon for the board to approve one of Immelt’s deals, only to have him ask for approval to pay more in order to make the deal work. In some ways, this tendency simply reflected Immelt’s experience as a salesman. He’d always needed to close deals, and for a company like GE, paying a little more didn’t seem to cause any concern.

No decision could be more illustrative of Immelt’s fateful deal-making than the one for Alstom, the French power generating equipment company. Immelt set his reputation on that deal because GE Power would be “the centerpiece of his new GE.” Immelt didn’t walk out on the deal even after regulators forced General Electric to divest Alstom’s lucrative service business and take on 30,000 high-cost employees in Europe.

Worst of all, the deal was spectacularly mistimed. With the Alstom purchase, Immelt doubled down on fossil-fuel-fired turbines just as renewables were becoming more cost-competitive. Demand for GE Power’s products collapsed in next to no time, and that unit’s profit plunged 45% in 2017. The whole Alstom transaction turned out to be an out-and-out disaster. In 2018, General Electric took a $22 billion goodwill impairment charge for the Alstom acquisition.

Hope and Optimism Could Take Immelt Only So Far

It’s both easy and unfair to comment on what GE should have done. Immelt’s prospects were seriously encumbered by the September 11 attacks, post-Enron accounting rules, the 2008 financial credit crisis, and a substantial recession that hit the energy industry.

The world in which Jeff Immelt had thought he would be leading GE had been turned upside down. The recession and the uncertainty that followed the terrorist attacks had dampened the global growth on which GE’s industrial businesses depended. And changes to accounting rules in the wake of the Enron scandal, by requiring that the company now account for the vast financial holdings on its balance sheet at GE Capital, had eliminated an easy and reliable source of paper profits to smooth over rough periods.

Lights Out explains how, during the last five years of his tenure, Immelt’s misfortunes piled on. GE Healthcare took a pause (it’s innovative, high-profit machines had become increasingly commoditized.) The GE Renewables business rarely turned a profit. The GE Transportation unit’s sales stagnated. GE Power built an extensive inventory hoping for a return in demand for its large, expensive machines. The merger of GE Oil and Gas with Baker Hughes turned out to be untimely too.

For many investors, GE had lost its mojo. Its lackluster performance, fuzzy financials, and unknown risk just didn’t fit with a lot of investment portfolios.

Leadership Mismanagement, Self-Dealing, Collusion

The deplorable collapse of General Electric, and GE Capital, in particular, was fostered by the board’s abysmal stewardship.

GE’s board was dysfunctional. It comprised too many directors who owed their cushy positions to Welch and Immelt and merely rubber-stamped their strategic actions. As chairman of the board, Immelt promptly cast out Welch-appointed directors who objected to his plans.

As they’d done under Welch, the board usually tended to approve Immelt’s recommendations and follow his lead. Some felt that Immelt manipulated the board, and it was whispered that members were chosen and educated to see the company through his visionary eyes. There was concern that the board didn’t entirely understand how GE worked, and that Immelt was just fine with that. Like many CEOs who are also their company’s chairman, he made sure that his board was aligned with him.

Just last week, GE agreed to a $200 million fine to settle a Securities and Exchange Commission probe into feel-good accounting at its Power and Insurance units.

General Electric Recent CEOs: Jack Welch, Jeff Immelt, John Flannery, Larry Culp

Too Steeped in the GE Culture to Effect a Major Transformation

Immelt was replaced by John Flannery, a finance specialist. Flannery had run the business development team when GE Power bought Alstom. He wasn’t likely to kick off any dramatic changes in GE’s business strategy. His proposals for GE’s transformation were consistent with Immelt’s strategy.

Flannery tried to stop GE’s hemorrhaging of money but wasn’t quick enough either. He showed reluctance—caution perhaps—to take risky and complicated actions that could have been costly or even impossible to reverse.

If Immelt was known for his vaulting optimism, Flannery soon became known for his indecision and endless analysis. Few decisions, even major ones, were final. A critical strategic move, like the separation of a major division, could be made, only to be reassessed at any time. Flannery’s style was quickly grating on top executives who worked with him.

The board got insecure quickly because of widespread public criticism that it had waited too long to remove Immelt. “After sixteen years of Immelt, Flannery thought that he had more time to turn the ship around, but when he looked for support from the board, there was none there.” Fourteen months into his term, Flannery was forced out.

For the first time in its 126-year history, GE, which prided itself as a talent factory, handed the leadership baton to an “outsider” to bring a fresh perspective.

New CEO Lawrence “Larry” Culp is generally admired for his stellar record of accomplishment at Danaher, a smaller industrial conglomerate. “Culp had more experience, and he also had no emotional attachment to GE.” Culp had joined GE’s board six months before and had started questioning the wisdom he’d received from Flannery and his team.

Having an outsider take charge of a storied company marks how much change the board desired. GE may not reclaim its once-celebrated footprint. But it’ll continue to be one of the great American business stories.

Jack Welch’s GE: Everything Worked Until It Didn’t

Recommendation: Must-Read Thomas Gryta and Ted Mann’s excellent Lights Out: Pride, Delusion, and the Fall of General Electric. It’s a great reminder that even America’s most iconic companies—and the world’s leading businesses—can go off the rails if things go wrong.

It wasn’t Immelt’s fault that the entire oil sector had turned south. But he was responsible for GE investors being so openly exposed to the collapse. … He had spent sixteen years at the top and, regardless of what Welch had left for him; he’d had plenty of time to fix it.

Lights Out is a revealing, reasonable, and accessible narrative of how a thriving company was humbled by sheer misfortune and poor leadership.

Jack Welch’s razzle-dazzle capitalism party could last only so long.

Filed Under: Business Stories, Leadership, The Great Innovators Tagged With: General Electric, Jack Welch, Leadership Lessons, Leadership Reading

Next Page »

Primary Sidebar

About: Nagesh Belludi [hire] is a St. Petersburg, Florida-based freethinker, investor, and leadership coach. He specializes in helping executives and companies ensure that the overall quality of their decision-making benefits isn’t compromised by a lack of a big-picture understanding.

Get Updates

Signup for emails

Subscribe via RSS

Contact Nagesh Belludi

Explore

Anxiety Attitudes Balance Biases Books Coaching Conflict Conversations Creativity Critical Thinking Decision-Making Discipline Emotions Entrepreneurs Etiquette Feedback Getting Along Getting Things Done Goals Great Manager Leadership Leadership Lessons Likeability Mental Models Mentoring Mindfulness Motivation Networking Parables Performance Management Persuasion Philosophy Problem Solving Procrastination Relationships Simple Living Skills for Success Social Skills Stress Thinking Tools Thought Process Time Management Winning on the Job Wisdom Worry

RECOMMENDED BOOK:
The Effective Executive

The Effective Executive: Peter Drucker

Management guru Peter Drucker's insightful perspective and suggestions for making executives more effective managers of both themselves and others.

Categories

  • Announcements
  • Belief and Spirituality
  • Business Stories
  • Career Development
  • Effective Communication
  • Great Personalities
  • Health and Well-being
  • Ideas and Insights
  • Inspirational Quotations
  • Leadership
  • Leadership Reading
  • Leading Teams
  • Living the Good Life
  • Managing Business Functions
  • Managing People
  • MBA in a Nutshell
  • Mental Models
  • News Analysis
  • Personal Finance
  • Podcasts
  • Project Management
  • Proverbs & Maxims
  • Sharpening Your Skills
  • The Great Innovators
  • Uncategorized

Recently,

  • Direction + Autonomy = Engagement
  • Beware of Too Much Information
  • Bollywood: An Escapism to a Happier Place
  • What to Do When Your Friend Becomes Your Boss
  • Inspirational Quotations #946
  • Look Back at This Time Last Year
  • Having What You Want

Unless otherwise stated in the individual document, the works above are © Nagesh Belludi under a Creative Commons BY-NC-ND license. You may quote, copy and share them freely, as long as you link back to RightAttitudes.com, don't make money with them, and don't modify the content. Enjoy!