Beware the Stealth Mandate

The famous comedian Milton Berle had a standard opening routine. After being introduced, he would walk to the front of the stage while everyone cheered. Berle would then bow and extend the palm of his right hand toward the audience to ask people to quiet down. At the same time, he would raise his left hand and repeatedly extend and curl his fingers to beckon everyone to cheer louder. The audience loved it. Indeed, the use of two simple hand gestures to convey conflicting messages can be the foundation for great humor, but an executive who is given one leadership mandate while others are operating under a different, conflicting set of directives would hardly be amused. Unfortunately, that’s what happens at many organizations.

Generally speaking, leadership mandates fall into one of three major categories: continuity, good to great and turnaround. Continuity means business as usual: carrying on policies, procedures and strategies. A typical example is the interim CEO, selected to maintain the status quo until a permanent CEO is found. Good to great refers to Jim Collins’ bestselling book of the same name. A good-to-great mandate is essentially this: We’ve been doing fine, but we can — and need to — do even better. Turnaround means dramatic changes are necessary: No business process, job or strategy is sacred.

A single clear mandate is the goal, but that doesn’t always happen in the workplace. Here’s a classic example. A company looks for a CEO to execute a good-to-great mandate. But after that person is hired, the founder of the firm remains on the board as chairman and major shareholder. As it turns out, the founder is willing to accept only marginal changes in strategy and operations, and because the board doesn’t want to upset him, it blocks many of the CEO’s proposals. In other words, although the CEO was given an explicit good-to-great mandate, the board is operating under a stealth mandate of continuity. After a year of frustration, the CEO is fired and the board begins another search for a new leader to execute the purported good-to-great mandate, all while the stealth mandate that doomed the last CEO remains in play.

Stealth mandates can exist for a number of reasons. Sometimes, as in the previous example, organizational politics are a huge factor. In other instances, the senior management of a company simply might be too dysfunctional to agree upon — let alone communicate to others — a clear and consistent leadership mandate. Often, the problem starts when an executive is hired or promoted; here, basic human nature plays a large role. Specifically, when describing a job or talking about any leadership opportunity, the senior managers at a company would prefer to portray their organization in good-to-great terms, even if that’s not the case. On a related note, companies often are hesitant (rightfully so) to air any dirty laundry because this information might make its way to competitors or investors. So the executive begins in the new position assuming one mandate while the real mandate is kept under wraps.

In large, complex corporations, multiple mandates often can coexist. For example, one of our clients displays a classic good-to-great scenario with respect to operating results. But as far as corporate governance goes, the situation definitely calls for a turnaround. Another client has an overall good-to-great mandate, but two strategic business units are in turnaround mode. The point is that even when multiple mandates are present, they should all be explicit. Otherwise, the executive responsible for executing the purported mandate will find himself constantly locking horns with those in the organization who are operating under the stealth mandate.

Three Crucial Questions

To avoid such situations, executives need to ask three crucial questions about the business unit or organization they head: (1) What needs to be changed within the next 12 months? (2) What needs to be honored or kept within the next 12 months? and (3) What must be avoided at all costs? The honest answers to these questions will reveal the true leadership mandate for a position. Each of the questions should elicit a discussion about technology, business processes, culture and people.

Unfortunately, most job descriptions focus only on the first question (“What needs to be changed?”), thus giving a picture that is one-dimensional and misleading. Any executive also needs the other two dimensions (“What’s to be honored or kept?” and “What must be avoided?”). Here we need to make a distinction between the words “honored” and “kept.” In a turnaround situation, senior management will find little that is worth honoring, but it might want to retain certain things just as a matter of expediency (for instance, “Don’t deal with the purchasing system this year. Focus on the manufacturing operations.”). In contrast, in a true good-to-great business, there will be a consistent message regarding which things are worth honoring.

When an executive suspects he’s been the victim of a stealth mandate, he should ask his boss and others the three crucial questions. (And job candidates should query everyone during their interviews to get the clearest picture of the true mandate for a position.) Any points of inconsistency should be explored further. Obviously, it’s rare that an executive will get an honest response to the question, “What’s to be avoided at all costs?” After all, people don’t like admitting that any corporate sacred cows exist. Nevertheless, if an executive doesn’t even ask the question, he or she more than likely will never know the answer. In our experience, many companies operate not as much behind a thick wall of secrecy as within a “don’t ask, don’t tell” culture. If asked, people will tell, although they may use thinly veiled comments along the lines of “Well, that new product line is the CEO’s pet project.” And if people react negatively to the three questions even being asked, it should raise a red flag.

Mandate Clues

In addition to the responses to the three questions, the true mandate of a business unit or company often can be inferred from various other clues. Two major telltale areas to explore are an organization’s employee compensation system and termination policies.

Compensation System

In companies with a continuity mandate, reward systems tend to be variations of “If it ain’t broke, don’t fix it.” So, for example, a company continues to tie its salary raises to cost-of-living increases, even if this means the firm is falling behind what competitors are paying. The prevailing management view might be something such as, “People always complain that they’re underpaid, but this doesn’t mean we need to change anything. And there’s no need to conduct yet another employee survey because our retention rates are just fine.” At the board level, when CEO compensation continually rises even as shareholder value plummets, primary value.

In good-to-great situations, reward systems tend to be “Yes, and …” conversations that can involve money as well as other nonfinancial benefits, including trips, gifts and recognition. Here’s an example: “Yes, we’ll pay for the certification program, and when you’ve completed it, you’ll receive a bonus. You’ll also be on the fast track for promotion opportunities.” Furthermore, people might be rewarded just for taking important first steps because the company realizes that creating positive behavioral momentum can be just as important as any desired business results.

In turnaround situations, reward systems tend to be variations of “No, not anymore.” For example, employees are told, “Yes, I know we used to provide automatic cost-of-living increases, but we can’t afford that anymore.” Gone, too, are the sales retreats in the Caribbean, the business-class seats for company travel and even the free doughnuts on Friday mornings. Also, in contrast to good-to-great situations, people in turnarounds tend to be rewarded primarily for business results and not necessarily for their attempts at achieving those results.

Termination Policies

In continuity situations, termination policies typically are set up so that they create as little disruption as possible. Thus, departures other than the usual types of resignations or retirements generally are discouraged and, when employees leave, the company tries to fill their positions through internal promotions. When staff positions need to be cut, management encourages people to take early retirement, and departing individuals are sent off with going-away parties that symbolize continuity. For cases in which an employee is fired, the termination is cast as management’s handling of a “bad apple,” someone who was not playing by the company rules (that is, a person who was disruptive to the status quo and bad for continuity).

When a good-to-great mandate is in effect, employees who are no longer qualified, capable or interested in remaining typically are treated with dignity. This often means generous severance packages and an outplacement program that helps them land on their feet. The dignified approach reinforces the good-to-great mandate by acknowledging and rewarding individuals for their past services (those employees are, after all, the people who got the company to where it is). It also provides an incentive for workers to accept the package and leave on good terms rather than remain and passive-aggressively resist change.

A turnaround mandate is a completely different animal. Here, management’s objective is simply to make terminated employees vanish as cheaply as possible with no negative legal consequences for the company. To use a brutally honest analogy, turnaround businesses often treat unwanted employees like physical refuse. That attitude, of course, contradicts the good-to-great mandate. After all, if these people were so valuable to the company up to this point, why are they being treated so poorly now? And what does it say about the culture of the company going forward? In turnaround situations, corporate culture and long-term reputation typically are not high on management’s list of priorities, whereas reducing the burn rate of cash usually is.

A No-Win Situation

In general, stealth mandates are no-win situations, and stealth turnarounds are particularly treacherous. The executive is told that the company or business unit is in good-to-great shape, but once she becomes familiar with the operations, she realizes that she’s dealing with a turnaround. But the situation isn’t acknowledged and cannot be explicitly discussed, so she struggles to implement bold changes to save the business while those around her pretend that all is well.

Unfortunately, stealth turnarounds are more widespread than many would care to admit. One common situation occurs when the former CEO who created the problems is promoted to chairman of the board, and all the subordinates reporting to the new CEO remain loyal to the chairman who hired them. So, naturally, management won’t publicly admit to the fact that the company is in dire straits and needs some drastic measures. Another common stealth turnaround occurs in acquisitions when the two companies involved avoid stating the truth: A stronger firm has taken over a struggling one. Everyone in the industry knows the real story, but the two companies proudly announce a “merger of equals,” and the explicit message given is that the best parts of each organization will be combined to create even greater value for customers and even higher returns for shareholders. In other words, this is a turnaround situation disguised as a good-to-great mandate.

Renegotiating the Mandate

In some cases, companies have perfectly legitimate reasons for disguising the true leadership mandate. An organization might, for example, not want to reveal the depth of its problems to outside job candidates who might end up working for a competitor. In far too many situations, though, the true mandate remains hidden because the current management hasn’t been honest with itself. This is why we recommend that, after an executive assumes a new position, he does his own extensive research regarding what needs to be changed, preserved and avoided. This also holds true for managers who have been in their position for a while but feel like they are constantly butting heads with their boss and colleagues. Could a stealth mandate be the culprit? To investigate whether that’s the case, executives should ask a number of people the core three questions, and different constituencies should be queried, including key customers.

When an executive discovers that a stealth mandate is in play, he needs to renegotiate the mandate. One important goal of that discussion is to establish realistic frameworks that then will become the basis for the executive’s future performance evaluation. All of this is much easier said than done, and management often will resist renegotiating a mandate, particularly if it requires people admitting to some ugly truths. Nevertheless, when an executive continues to operate in the shadow of a stealth mandate, he is setting himself up to fail.

Consider the example discussed earlier of the CEO who was hired with a good-to-great mandate when the founder (and chairman) clearly had continuity in mind. What if the CEO had confronted the board to renegotiate his mandate? Obviously, this would have involved a difficult and potentially contentious discussion, but was the alternative scenario (the CEO running up against a brick wall for months and then being fired) any better? Even if the issue couldn’t be resolved, the CEO at least might have been able to negotiate a more graceful exit that kept his reputation intact. Or, quite possibly, the board might have decided to show the chairman the door, thereby clearing the path for the CEO to implement a true good-to-great mandate. This outcome isn’t as unrealistic as it might sound. In the high-tech industry, the boards of many startups have come to this very same realization that the founder has to go or the organization will stall.

THE FAILURE OF LEADERSHIP is costly. According to Michael Watkins, a professor of organizational behavior at INSEAD, the cost to the company can be estimated at ten times base salary. And this figure only includes measurable costs. It does not include damage to the brand in the eyes of customers, a decrease in investor confidence, the loss of political capital suffered by those who approved the appointment and the time required for management to undergo another search for someone to replace the departing executive. In a different survey, the price of failed leadership was estimated to be as high as 28 times base salary when both direct and indirect costs are considered. And new leaders are particularly vulnerable. Fortune magazine estimates that for U.S. companies hiring a new leader from outside the organization, there is a 40% probability that the person will be gone within 18 months.

We believe a key reason for many of these costly failures is the stealth mandate. Remember Milton Berle’s famous routine of making two hand gestures that were logically inconsistent? Companies that present an executive with one leadership mandate while keeping a second contradictory mandate hidden are doing essentially the same thing. The difference, though, is that the former is the foundation for comedy, while the latter is a setup for tragedy.