WHEN THE CEO IS A BRILLIANT JERK

Key techniques can help you thrive and successfully govern with a dominant visionary at the helm.

BY MARC J. EPSTEIN, PH.D., AND ROB SHELTON

September 2019 / STRATEGIC FINANCE / 23 teve Jobs was known as a visionary leader at sometimes errant visionaries. Apple, but he also had a reputation for being a We reviewed our own experiences with dominant difficult, cantankerous jerk. Elon Musk, the visionaries, talked to board members and senior executives trailblazer CEO at Tesla, has behaved so errat - with firsthand experience, and researched a long list of ically in the past few years that many have leaders who had proven to be both brainy and obstreperous. Squestioned his ability to lead. Elizabeth In our new book, The Brilliant Jerk Conundrum: Thriving with Holmes, CEO at Theranos, thrilled investors and Governing a Dominant Visionary , we share the findings with her vision to change healthcare but then was charged and focus on seven revolutionary leaders and their compa - with multiple counts of fraud and conspiracy in federal nies: Steve Jobs and Apple, Elon Musk and Tesla, Elizabeth court after investors lost nearly a billion dollars of their Holmes and Theranos, Larry Page and Google, Travis investment in her company (see “Costs of Maverick CEOs” Kalanick and Uber, Jeff Bezos and Amazon, and Ken Lay for more examples ). Travis Kalanick’s leadership at Uber and Enron (see “Seven Dominant Visionaries” ). They repre - changed the city transportation industry, but it also led him sent a wide range of sectors that have seen incredible busi - to be ousted from the company he founded. One exasper - ness growth as well as the spectrum of notorious visionary ated Uber board member proposed adding “No brilliant behaviors. jerks allowed” to Uber’s list of cultural values. How can a board and other corporate leaders tell the dif - The challenge for board members, investors, and ference between an ingenious CEO on track to create employees alike is figuring out how to deal with dominant groundbreaking innovation and one on a destructive path? visionaries like these who are often brilliant, unpre - When a CEO’s actions begin to damage the culture and dictable, difficult to work with, and sometimes downright long-term success of the company, what should the board mean. In our work (with Tony Davila) on the best-selling do? Should it intervene? And if so, when and how? It’s book Making Innovation Work , which covered the devel - tricky. This is the conundrum. The board can’t permit a opment and implementation of an effective innovation toxic culture or the leader’s damaging actions to persist. But strategy in a large organization, we realized there was one neither does it want to kill the creativity and innovation outstanding question —how to support the creative talent that are the key to the rule breaker’s success. of brilliant leaders while still maintaining the necessary Two important lessons emerged from our discussions structure, systems, and guidance required for effective with board members, extensive research, and experience corporate governance. In other words, how can you avoid dealing with the conundrums of multiple brilliant jerks: getting in the way but ensure the rule-breaking CEO 1. The presence of an authoritarian trailblazer doesn’t go haywire and do something weird, illegal, or stu - requires special handling. The traditional corporate gov - pid? We wanted to better understand how middle and ernance principles are needed, but they must be supple - senior managers throughout these organizations could mented with additional practices. With an inspired and harmoniously survive and effectively deal with dominant, highly controlling powerhouse at the helm, boards, investors, and employees need to be ready for a different journey. 2. The best actions to govern, thrive, and survive depend on the type of visionary you’re dealing COSTS OF with. Dominant visionaries aren’t all the same. With some visionaries, MAVERICK CEO s there’s a risk of getting in the way and curtailing the value they could create. When dominant CEOs go off the tracks or create toxic With other types, complacency is a cultures, the costs to individuals and the company can be huge mistake. Left unsupervised, their enormous. The stock price can plummet, customers can be behavior could destroy the company. harmed, and employees can lose their jobs. For example: Who Are These n Volkswagen’s tolerance for breaking the rules and cheating, along Dominant with the lack of leadership from its chairman, Hans Dieter Pötsch, has already Visionaries? cost the company more than $20 billion—and the costs continue to increase. Dominant visionaries show up in new n Wells Fargo’s improper sales practices and fraudulent activities were Silicon Valley start-ups and also in blamed on 5,300 employees before the CEO was fired and the company incurred more established companies. They can more than $1.5 billion in fines and hundreds of millions of dollars in lawsuit costs. be the CEO and founder, or they can be other executives who aren’t afraid to n Enron’s financial scandal ruined the company and many other companies, exercise their power. No matter what including Arthur Andersen. Thousands of employees lost their jobs, and their origin or position, they are charis - $70 billion in shareholder value was destroyed. matic leaders with a disruptive vision. Their magnetic personality and story

24 / STRATEGIC FINANCE / September 2019 SEVEN DOMINANT VISIONARIES

STEVE JOBS A founder of Apple in 1976, fired from the company in 1985, and rehired in 1997, Jobs led the company to amazing growth until his death in 2011 and is regarded as one of the great dominant visionaries of all time. ELON MUSK Since becoming chairman of the board of Tesla in 2004 and CEO in 2008, Musk has led the automobile company to tremendous growth. But he has also been at the forefront of controversy and confrontations with employees, government, competitors, media, and other stakeholders. He has a powerful vision for changing the world and shares it widely with overwhelming confidence, but many question if he’ll succeed. Those betting on his failure have left Tesla one of the most shorted stocks in the world. ELIZABETH HOLMES The 19-year-old Stanford dropout was going to change the world with a new blood-testing system, but it never worked. She put together an all-star board of directors and a billion dollars of investor money but led Theranos to collapse and to her many criminal charges for fraud and conspiracy for misleading investors, policy makers, and the public. LARRY PAGE A cofounder of Google while in his 20s, Page retained voting control of the company even when investors were brought in. But the investors wanted an experienced CEO (Eric Schmidt) to run the company. In 2011, Page was back as CEO and continued growing the company, leading it to great successes. A strong visionary, Page is dominant in all aspects of the company’s operations from products to culture. TRAVIS KALANICK Uber was founded on breaking rules. Kalanick’s business model was an attack on the taxi business—a highly regulated business in most cities. He typically ignored the regulations and plowed forward to great commercial successes. He was highly combative and controversial in both his company actions and personal behavior, leading to his being removed from leadership in 2017. JEFF BEZOS Bezos started Amazon in 1994 and has led its phenomenal growth ever since. Bezos is seen as a tough and demanding boss who has successfully proved all critics wrong when they doubted the long-term profitability and success of what has become the world’s most valuable company. Many consider him to be one of the great business leaders of all time. KEN LAY Lay merged companies in 1985 to become Enron. Under his leadership, Enron became the seventh largest U.S. company and Fortune magazine’s most innovative company, reaching $70 billion in value before becoming the largest bankruptcy in U.S. history in 2001. Its downfall led to senior executives going to jail, other companies also going out of business (including Arthur Andersen ), and billions of dollars of investor losses.

September 2019 / STRATEGIC FINANCE / 25 BAD TRAITS TO WATCH FOR

They are extremely Their powerful They have brilliant tough taskmasters. personalities can turn They can be insights in certain — them into jerks. dangerously but not all —areas of unpredictable. business.

Sometimes they lie. Their braininess can They can be willing to hide gaps in knowledge compromise ethics in and experience. pursuit of success.

attract investors, customers, and employees. They are all 1. Asymmetrical power. Dominant visionaries often confident. But sometimes they have hubris and are over - have almost total control over their boards. Boards are sup - confident. Though there have been some amazing successes posed to be independent, but in many instances the CEO is like Steve Jobs and Jeff Bezos, the history of these eccentric also chairman and able to direct the outcome of all votes. visionary leaders is mixed. While some of these leaders In addition, dual-class ownership structures may provide soar and achieve great success, others crash and burn. the leader with absolute voting control (see “Dual-Class When we look at the spectrum of these extraordinary Ownership” ). leaders, we see brilliance combined with stubbornness and 2. Cult of personality. Many of these leaders are a penchant for breaking rules. Some of these firebrands visionaries with bigger-than-life personalities coupled with start out acting as role models but then their actions deteri - a compelling story of their unique potential to change an orate into unattractive behaviors, sometimes turning them industry and maybe the world. They are quite persuasive into jerks or liars or both (see “Bad Traits to Watch For” ). and able to convince people to follow them. These leaders Many of these leaders often create a view that they have exude confidence in pursuit of their vision and may bully all of the answers and that the board, investors, and people to fall in line. employees should just follow their lead. We call this the 3. Lack of transparency. By controlling the free flow of aura of executive omniscience. information, leaders are often able to block visibility to per - formance data that is critical to effective decision making Executive Omniscience and governance. When the board isn’t provided with essen - tial information and is shielded from a clear picture of When we looked at the recipe typically used by dominant company performance, governance is significantly harmed. visionaries to control their companies, we found three The presence of any of these three elements doesn’t ingredients. guarantee that there will be a problem. There are many

26 / STRATEGIC FINANCE / September 2019 companies that have had overwhelming success with one, two, or all three of these characteristics. But DUAL-CLASS when these are present, it’s a signal there could be a problem. We generally recommend against dual-class ownership unless there is a sunset clause. Leading OWNERSHIP corporate governance practices emphasize the There have been numerous instances in business importance of the free flow of information to the history where corporate founders have established board so that members can make informed decisions. And though charisma is often an important quality in multiple classes of stock so that unequal voting a CEO, when it’s used to sway board members to lose rights permit the founder to maintain corporate their independent thinking and voting, board gover - control through a special class of shares. nance suffers. Thus, with dominant visionaries, addi - tional board actions are often needed. Dodge Brothers’s IPO in 1925 and Ford’s IPO in 1956 are early examples of dual-class systems established to keep family control The Board’s Role while bringing in public shareholders. The board has three core roles and responsibilities: 1. Senior-level staffing and evaluation. This It became increasingly popular with Google’s dual-class listing in includes succession planning, compensation, and 2004 and then was followed by Facebook, Groupon, LinkedIn, and performance evaluations of senior executives. others. The founders often have voting rights of 10 times or more 2. Strategic oversight. This includes the oversight what the public shareholders have. Snap made dual-class–share of both the formulation and the implementation of history by being the first company that issued nonvoting shares in strategy. its IPO. 3. Accountability. This includes governance prac - tices, corporate behavior and ethics, and financial Dual-class shares give founders control so they can resist undue systems like disclosure and internal control. shareholder pressure and pursue their vision. But it gives the These responsibilities can be fulfilled successfully founders disproportionate control and takes power from by implementing leading board governance practices shareholders. To protect the long-term interests of the company, focused on board composition and board processes. some companies establish an end date through sunset provisions The critical board composition criteria relate to com - that phase out the voting control over five to 10 years and restore a petence, ethics, diligence, and independence. In “one share, one vote” structure over time. addition, enhanced board practices relating to com - mittee structure, productive meetings, information availability, and effective performance evaluation systems are critical. But regardless of the guidelines established, it’s important that the board be actively senior leaders and the board of directors may be ignorant of engaged in its serious responsibilities. the abuses. Boards must develop additional practices to deal effec - We found that when ethical and legal violations were tively with the possible voting control that a dominant discovered, many people knew about them but didn’t visionary, due to a strong personality, may exert through a report them. All employees have a responsibility to report dual-class structure and their control over the information these ethical and legal violations, but financial executives flow. Board members must be active, and they must control have special responsibilities because of their roles in disclo - the agenda rather than permitting the CEO to take that role. sure, internal control, accountability, and corporate gover - They must focus carefully on both board composition nance. They should be on the lookout for evidence of a and processes. Board members surely must be competent, toxic culture that should be reported to the board. but they also must be strong, independent, and diligent. Financial executives also must be aggressive in providing And they must ask the tough questions while facilitating the board with guidance on abuses it needs to recognize collaboration and discussion (see “Keys to Governing a (see “Red Flags for the Board” on p. 28 ). Financial execu - Visionary Leader” on p. 29 ). tives must be particularly sensitive to these in providing recommendations to senior leadership and the board to The Role of the Financial protect the long-term interests of the corporation. Executive Keys to Success Financial executives are critical to effective governance practices in most corporations. All senior and middle-level Corporate governance principles and practices are critical managers have a responsibility to report actions and behav - for long-term corporate success. For companies led by iors that are potentially damaging to the company’s future. dominant visionaries, additional practices are necessary. The company must establish avenues for the safe reporting Board members and executives told us one of the keys to of any abuses. This can be difficult, especially when the bad success is knowing just what type of visionary you have to behavior is by the CEO. Without such reporting, however, work with. We recommend building your governance

September 2019 / STRATEGIC FINANCE / 27 RED FLAGS FOR THE BOARD

BLINDING “FIRE ME” OVER- INSENSITIVITY BLIND SPOTS DAZZLE CHALLENGE CONFIDENCE The leader is The CEO doesn’t Slick The CEO The visionary thoughtless and realize his or presentations threatens, “If shows an shows a total her repertoire is and strict control you don’t like it, alarming lack of respect missing important of the agenda fire me,” disregard for for employees’ elements of leave little or no knowing alternate feelings or business savvy room for full well there opinions and needs. or experience. alternate isn’t a succession advice. perspectives. plan in place.

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SECRECY AUTOCRATIC COMPENSATION EXECUTIVE WIMPY BOARD Access to SNUBS FOCUS EXODUS The CEO information and The leader denies An extreme Senior executives influences board ability to contact any other focus is placed leave in droves membership and key people are opinions or on pushing or after a procedures to blocked. agrees to do the board to short stay. minimize dissent something increase and contrary differently but compensation. opinions. subsequently does what she or he wants.

28 / STRATEGIC FINANCE / September 2019 a while is probably fine, but constant jerkiness such as rude KEYS TO and abusive behavior toward employees is a problem. 5. Ferocity: Headstrong leaders are always tough taskmasters. They expect everyone to put everything into GOVERNING A attaining their goals. You should expect some ferocity in your leader, but be mindful that the trait can lead the domi - VISIONARY LEADER nant visionary to become a tyrant. 6. Impulsiveness: You need to determine what can set off the boss or trigger reckless behavior. Many boards wish Close the door: Hold executive sessions they had insight into the CEO’s tendency to jump off the that get to the heart of board involvement. rails before it happened. Board members and executives warned us that con - fronting a dominant visionary needs to be done with care. Mind the gaps: Fill in managerial spaces Some leaders don’t want to listen to contrary opinions. They in the CEO’s repertoire of skills. often don’t want to receive the oversight that boards of directors are supposed to provide—and don’t want to listen Specialize: Add structure and board to suggestions from their senior and middle-level managers. Being confronted in a board meeting or executive session resources to increase collaboration. often results in a defensive reaction. And sometimes the CEO’s responses are downright nasty. Often, a one-on-one Curate the culture: Build board conversation outside of the boardroom or executive meet - ing is the right way to get things done. processes to monitor the company culture Corporate governance principles and practices apply to the CEO is creating. all organizations, in all industries, organizations large and small, public and private, established or new start-up, Be contrarian: Make it standard practice closely held or widely dispersed. But we have found that the application of the core corporate governance principles to have an early discussion of decision and practices must be enhanced when there’s a particularly alternatives. strong leader. A word of caution: The goal isn’t to weaponize the board Expect resistance: Build a process to and constantly constrain the CEO. That could squash the value creation the brainy maverick is expected to bring. The handle disagreements and flare-ups before role of the board, executive team, and investors is to support they happen. the disrupter-in-chief and provide just enough engagement and guidance to keep things from going wrong. Too much interference can destroy value; too little can destroy the Build paths of least resistance: company. Establish one-on-one channels between the Companies and their boards need to use these new board and CEO. approaches to facilitate the tremendous growth that can be created by these leaders while simultaneously providing the governance necessary to minimize destructive behavior. This applies not only to high-profile CEOs but also to other senior managers who are dominant visionaries—and maybe to your boss also. It’s important that each of us takes approach informed by the dominant visionary’s behavioral responsibility for addressing these issues in our company characteristics. ourselves—for the success of our company and for our indi - 1. Brainiac quotient: All dominant visionaries are vidual well-being. SF brainy, but not in the same way. For example, some are technology whizzes while others are fiendishly clever at designing new business models. It’s essential to know what Marc J. Epstein , Ph.D., was, until recently, a full-time business type of genius you’re dealing with. professor (Rice, Harvard, Stanford, INSEAD) and is the author of more 2. Gaps in experience or skills: Even brainiacs have than 20 books and 200 articles as well as a speaker and advisor to strengths, weaknesses, and gaps in experience. You need a leading organizations globally. He also is a member of IMA’s Boston solid appraisal of the leader’s blind spots. Chapter. He can be reached at [email protected] . 3. Propensity to break rules: All dominant visionaries are rule breakers, whether of laws, ethics, or social norms, but some can go to extremes. Knowing just how far the Rob Shelton is a globally recognized Silicon Valley–based consultant, visionary leader will go is essential. author, and speaker on entrepreneurial excellence, innovation 4. Tendency to be a jerk: You need to ascertain just how leadership and governance, and scaling to drive rapid growth. He can much of a jerk the leader can be. Being obstreperous once in be reached at [email protected] .

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