Stop, Look, Listen!
Before jumping into business deals, do we think our action through?
June 17, 2008
When I was in grade school, I lived in a town in northeastern Pennsylvania that had two industries: coal mining and railroading. I had to walk to school, which was about two miles away. On the way, I had to pass two railroad crossings. I was about 10 years old when we moved into this area. The first day of school, I was taken through a short course about the area and school rules.
One of the first rules I was taught was that if I had to cross a railroad track, I had to follow the sign that marked the crossing. On a post with two lights that turned red when a train was coming was an X-shaped cross with the words "Stop! Look! Listen!" This reminded everyone, pedestrians and automobile traffic, to look out for the trains and to cross only after they followed the instructions.
I think following the instructions on that old railroad sign is as important today as it was then. In order to be safe, take time to stop, look and listen to understand where the danger is and prevent possible injury or death. This advice is especially important in business as has been pointedly brought to our attention by customers, employees, vendors, private owners, corporate leaders and even CEOs of large corporations.
Let me give you a few examples of how useful these three words can be to everyone in business. In the December 2006 Harvard Business Review, there was a case study written by Lisa Burrell entitled "The CEO Who Couldn’t Keep His Foot Out Of His Mouth."
The hypothetical case talks about a CEO who was hired to make a day care providing organization called "Growing Places" more businesslike. His job was to make this company, which was barely surviving from quarter to quarter, into a financially stable and profitable organization. This CEO had generated great ideas and could put them into action, but he didn’t care about being diplomatic. He was in a "touchy, feely" industry but was more interested in the business aspects.
The CEO made inappropriate comments about mothers who breast feed, lesbian adoption and many other sensitive issues. This abusive attitude alienated his staff and clients. Even though the company became more financially solvent, it received a good deal of bad press and the staff and customers were very disenchanted. Thus, the company stock didn’t rise but fell and stockholders started to sell heavily.
The question asked of the readers of the case study was, "Should the CEO be fired?" Three experts who reviewed it all agreed: the CEO must be fired. One said try counseling, but the chances are he will be fired even after counseling.
Real Life Story
Here is an example that really happened. You only have to read the Jan. 15, 2007 issue of Business Week. The cover story was "Blowup At Home Depot, Behind The Dramatic Fall Of An Imperial CEO." This is a real-life situation that exactly parallels the case study in the Harvard Business Review.
CEO Bob Nardelli took Home Depot from a $46 billion company at the time he was hired in 2000 to $81.5 billion in 2005, an average annual growth of 12 percent. Profits more than doubled to $5.8 billion in 2005. In his last year as CEO, he received $38.1 million in salary and bonuses. During this period of great increase in sales and profits, the share price of Home Depot did not increase. That’s six years of no increase in the price of the stock. Lowe’s (a smaller competitor) stock increased 200 percent during that period.
During his tenure, Nardelli streamlined Home Depot operations, modernized the logistics and in-store automation and centralized buying and other corporate functions. However, in all accounts, he was not a humble man. He was driven by business statistics, and he would often say, "Facts are your friends."
Nardelli certainly was not people oriented. Since 2001, 98 percent of Home Depot’s top 170 executives are new to their positions. In fact, 56 percent resigned or were fired. The store employees also were not happy. He reduced the number of full-time employees and hired part-time workers in their places in order to reduce labor costs.
His fatal mistake was to offend the board of directors and stockholders. At the stockholder’s meeting on May 28, 2006, the board of directors were not present, so Nardelli handled the meeting himself. It was a disaster! He gave a short, 15-minute presentation and then allowed only 15 minutes for questions. He limited each question to one minute. A digital clock timed each question and, after one minute, the microphone was turned off. The stockholders were furious, as were the board of directors who were told not to attend the meeting.
During the six years that the stockholders saw no increase in the value of their shares, the CEO received well over $100 million in salary. The board of directors met on Jan. 2, 2007 and announced the company and Nardelli had mutually agreed that he would resign.
The article indicated that, "on the way out the door, Nardelli negotiated another jaw-dropper, a $210 million retirement package." Some people say that he didn’t get a golden parachute, he got a platinum one.
Needless to say, the stockholders were very disturbed with this information. I’m sure some directors won’t be on the board much longer. Perhaps the board members should remember the old railroad sign, Stop! Look! Listen!
It must be very difficult for employees and vendors who gave up raises or had to reduce prices of their products to help Nardelli increase his gross margins from 30 percent in 2000 to 33.8 percent in 2005. At least they know where over $300 million of their money went!
I am very fearful for the well being of our industry when we put a large quantity of our product into mega-retailers that only look at financial figures and strive to buy as low as possible from vendors, making them sell below the cost of production. These chains also keep their overhead costs to a minimum and expect 30 to 35 percent gross margins. They do this at the expense of their vendors, their employees, their customers and even their stockholders so that their CEOs can capture $30 to $50 million a year plus their platinum parachutes of $250 to $500 million if they get fired or resign.
The book The Power of Nice by Linda Kaplan Thaler states, "Being mean is the last millennium." I hope this message spreads to the top management of the mega-chains. I have personally seen buyers for large chain stores, at the command of their bosses, lean on, threaten or intimidate vendors to either do as they demand or be eliminated. They need to stop, look and listen.
CEOs or buyers have to get to their destination on time and be profitable. Running over a vendor to get there is a small price for them to pay. You have to stop, look and listen to be safe.
Also remember that the mega-chains’ CEOs and buyers will someday also be gone. If they don’t pay attention to the Stop! Look! and Listen! sign, they can be run over by the train, too. I hope you will all pay attention to the railroad crossing signs for the sake of vendors, employees, customers, stockholders and for the well being of our whole society.
Will Carlson is a consultant and retired Michigan State University professor; email@example.com.