Dr. Earl R. Smith II

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

Past issues of the Wall Street Journal list stock symbols of corporations no longer in business. When companies reach the pinnacle of their industry, a crippling mentality can come to infect the minds of the leadership. Corporate directors become complacent and management loses the zeal to innovate and take chances. Corporations can take time out to enjoy success, but the celebration had better not last longer than a short board of directs meeting and then the work had better begin again.

Historical lessons are important warnings to boards that may fall into the trap of allowing their company to slow down the pace of innovation, watch the command and control structure ossify, fail to oppose a rising sense of entitlement or respond diffidently to the need for change. Keep in mind that a young, unheard of motivated teenager killed Goliath. Europe was nearly conquered by the followers of a failed painter and a country that felt it had something to prove. Every company is in danger of being rendered ‘second tier’ by a more innovative and aggressive competitor – there are no exceptions to this rule.

The dangers to corporate survival can show up in, what at first, seems to be innocuous fashions. Large corporations can find synergy in spreading out the administrative costs over a large number of units sold. Compliance management issues might be delegated to one department of one division for the entire company. The same corporate governance model can be mandated for all divisions or subsidiaries. All of these tactics may seem very logical – but they may lead a company into a pattern of response to challenges that has corrosive strategic effects. When a company grows large, the board had better find a way to shake off apathy and demand creative thinking from its Chairman, Board, CEO and corporate management.

A young company with a high-energy CEO and an aggressive leadership style can often move nimbly to make quick, innovative decisions. Retaining this energy is critical as a company grows in size. Young companies are motivated by the excitement of success, while older established companies can become paralyzed by the fear of change and failure. Corporate boards conducting a leadership assessment must look for the fear factor creeping into the company and slowing down innovation. These assessment programs can be a critical tool in the board’s efforts to maintain a culture of youth and innovation.

Young public companies are bound by Sarbanes-Oxley regulation in the same way as more established ones. However, they frequently take a different approach to managing compliance. They often hire an external advisor for the CEO or Chairman to ensure compliance, and then focus internal resources on product and sales management (their core competency). They rely on the outside expert for advice on compliance management issues. Older companies often feel the need to control regulatory compliance and establish in-house corporate management to handle it. This can result in a one-size-fits-all mentality at the senior level. The lack of independent review – the lack of an external advisor – can often isolate the board and cause management to become less aggressive in the face of needed change.

A good governance practice for a board of directors of an established company often involves asking ‘why not’. CEO’s and directors of large successful companies have to find ways to keep the spark of innovation and the drive for personal growth and leadership development strong in the company’s culture. A company comfortable with it level of performance is doomed to be overtaken by a small nimble company unencumbered by issues outside its core competency.

© Dr. Earl R. Smith II

Related Articles:

• Officer and Director Vetting

• Errors and Omissions Insurance – Necessary Protection of Officers and Directors

• The CEO’s role in board member selection

• Determining Board Compensation Structure

• Characteristics of a Task Oriented Director

• Inspirational Governance

Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

This entry was posted on Tuesday, September 30th, 2008 at 10:07 AM and is filed under Governance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.