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Robin Murray Brown on why the boss who leads a business during the good times may not be the right choice when times are hard.

The fall from grace of one household corporate name or another is a periodic commonplace of the business pages, especially during an economic downturn. When such events happen close together, commentators develop their narrative and report a trend. But the stories behind recent corporate failures have less in common than some have suggested, and cannot be blamed solely on wider economic factors. Moreover, some of the root causes of those failures are not fully addressed. Amid tentative signs of economic recovery, failing to face up to those shortcomings may leave some dangerous weaknesses in and around boardrooms everywhere.

Two examples, with apparently different causes, highlight this issue. By the end of 2011, Eastman Kodak had fallen from a position of overwhelming market dominance in the global photographic film and camera market, with shares trading at over $80, to a Chapter 11 bankruptcy protection filing, overtaken by the digital age and increased competition from lower-cost manufacturing countries.

More recently, America’s largest financial firm (by assets), JP Morgan Chase, disclosed a disastrous trading loss of $2


billion, with the chance of more to come, and saw more than $25 billion wiped off its market capitalisation. But whereas the Kodak collapse happened because the world had changed (and Kodak had failed to change with it), the JP Morgan failure happened in spite of it – and, for that matter, in spite of increased regulation and scrutiny of banking practices. Although seemingly in different worlds, the real failure in both (and plenty of others – think RBS, Enron, Worldcom) is one of leadership. Boards that are ready to take the credit when their companies perform well are frequently slower to recognise their accountability for failure.

We should remember that the best people to lead companies during buoyant economic times may not necessarily be the right leaders in a downturn. Boards also need to set the right tone, ensuring that the culture and values of their company are consistent with their strategy and business model. For example, Kodak had historically been a pioneering, innovative powerhouse, but was subsumed by a cautious, risk-averse culture in which executives were afraid to take risks for fear of making mistakes, even as the market for digital photography grew exponentially. Leadership teams that become justifiably more risk averse during difficult economic times are often ill-equipped to identify and embrace the opportunities which have to be

exploited in a recovery. Not all boards are comfortable with this; perhaps the best will turn out to be those where risk management is viewed as a collective board responsibility, with management teams drawing on the experience of their non-executive directors much as they would on questions of corporate strategy.

There are certainly arguments in favour of less traditional structures in the boardroom. Key areas to look at include the right executive/non-executive balance (and indeed the right level of independence); the correct size of a board; the diversity of backgrounds and experience of the non-executives; and whether the board’s policies and procedures (the reality rather than the theory of corporate governance) provide the right framework for the executive team to deliver the strategy.

Perhaps we will look back in a few years and see a newly rejuvenated Kodak dominating the next phase of the digital era, or discover that JP Morgan was actually boosted by some hedging positions which eventually came good: it would be nice to think so. But boards should not be investing too much in hope alone. They should be thinking very seriously about what the real lessons are from recent corporate failures, and what steps they should take to avoid the same fate.

After all, their shareholders are. BF


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