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A toxic combination of weak non-executive directors and steadfast denial on the part of the CEO invariably means a business won’t react in time to new market dynamics. This remains a big problem as seemingly bullet-proof brands continue to be usurped by innovative rivals – so how do you prevent the rot of complacency setting into your business?

First off, realise that no-one can afford the luxury of over-confidence in the current climate as the margin for error is ridiculously small when it comes to losing customers. John Kelly, Non-executive Chairman of rail ticket retailer and information provider The Trainline comments that “companies lose touch with customers when they become arrogant and believe they are the market.”

Jon Moulton, Chairman of turnaround company Better Capital, admits to having seen “every kind of incompetence you can imagine”, including CEOs who can’t count, an inability to spot a new competitor, a refusal to look for efficiencies in production, allowing products to become outdated and using obsolete marketing and sales techniques. “Sometimes you get all of this together, but not usually,” he says.

Simon Burke, Chairman of arts and crafts company HobbyCraft, comments that executives sometimes just “don’t notice how their companies are changing and they carry on doing the same old thing and suddenly they find they are out of date and out of step with the market…

“The problems that companies had, like Virgin [Megastores] which became Zavvi and eventually went bust and HMV, which has nearly gone bust, is that they simply haven’t done the work in the early years to prepare themselves and they haven’t been aggressive in being in that market in a meaningful way.”

Whether it’s Kodak, Woolworths or the army of ‘zombie’ companies in the retail, media and technology sectors, it’s evident that somewhere along the way the executives and NEDs have become estranged from the organisation and how it can connect with customers.

Jon says: “When a business gets close to death, the most common thing you see is the separation of the chief executive from the company. I have seen extreme cases where the CEO has built an extra set of doors to stop people getting into his office – honestly, I’ve seen that happen several times.”

Be brave

The answer is to erase complacency and to continually kick the tyres of a business. “Review, review, review,” states John Kelly. “Never think a strategy is ‘done’. Assume it’s wrong and work diligently to make it right, then assume it’s wrong again and repeat the procedure.”

Simon Johnson, UK Managing Director of publisher HarperCollins, says: “Be paranoid and continually question your company’s right to earn a profit in the value chain. Keep monitoring and reacting to the competitive market forces on the horizon and defend and improve your position even when times are good… Don’t get too carried away either by short-term success but instead set and celebrate long-term goals and incentives.”

Although many companies pay lip-service to saying they create an environment which encourages tackling tough questions and being receptive to fresh ideas, very few actually do it well. David Soskin, Chairman of price comparison site mySupermarket, says that large companies in particular have a lot of politics and bureaucracy, both of which prevent boards from seeing the wood from the trees.

He explains: “People in large companies tend to get in a mindset that what they’re doing is the right thing and pursue their own path even when they’re beginning to fail or don’t exit fast enough as they invented it and it’s embarrassing to say 'we got it wrong and a competitor got it right'.”

So even if the writing is clearly on the wall, the culture within a business may be such that people simply don’t know how to react. Julian Birkinshaw, a Criticaleye Thought Leader and Professor of Strategy and Entrepreneurship at London Business School, says: “Kodak’s executives saw digital technology was coming back in the 1980s and they recognised it was a threat to their core business. But they were still very reluctant to push digital because it needed a lot of investment, it offered uncertain returns and it threatened to cannibalise the company’s existing cash-cow business.”

That kind of denial continues to see businesses tailspin into oblivion. David says: “Companies hate cannibalising their own products. That’s why the traditional media companies have declined so rapidly; they didn’t embrace digital as they didn’t want to take advertising revenue from their papers and magazines.”

Julian adds that “the solution is to actively experiment with a new opportunity, typically in a separate unit and to aggressively pursue it, even if it means taking business away from other parts of the company.”

Simon Burke wholeheartedly agrees: “You can’t hold back and cling to a business that you know and love; you have to take the plunge. There used to be a philosophy that being in business meant taking risks every day, whereas now a lot of owners and managers of businesses are very risk averse. You have to be prepared to experiment and gamble – in a calculated way – so that you ensure your business keeps up and that can mean putting existing business at risk.”

It’s here that NEDs often need to step up too. John Kelly says: “Challenge should be in the DNA of the company. You should only recruit NEDs who are brave enough to challenge the executives. They should occasionally throw a grenade into the board debates, even if it’s not valid. Outrageousness should be made a virtue and laziness and complacency should be firing issues.”

Remuneration and bonuses also have to be considered. He continues: “Most boardroom executives are rewarded on short-term objectives and innovation equals risk… Private equity is so much better at attacking these issues than publicly-listed companies. Maybe it’s simply because that rather than encourage bravery, [too many plcs] promote safety through overweening corporate governance.”

Simon Burke comments: “NEDs are in a very good place to promote some of this stuff because they can get a perspective that maybe it isn’t possible to gain if you’re in the thick of running a business… Sadly, I think some boards are so dominant that the non-execs are afraid to provide a challenge; they feel they are rocking the boat and will be ushered off at the next opportunity. That’s a huge waste of talent and also you’re not really doing your job as a non-exec as you’re not just there to vote through the remuneration report.”

Creative structure

The culture has to be right if a company is to effectively attack new markets. Mary Jo Jacobi, a Criticaleye Associate and a Non-executive Director of Mulvaney Capital Management, says: “The key is having strong glue that holds it all together inside the organisation: clear, measurable performance expectations and an understood and embraced culture, plus defined operational parameters and accountabilities.  

“All of this must be underpinned by consistent, simple internal communications, not only from the centre but up, down and across the organisation so that everyone understands the organisation's vision, mission, strategy, plan and success measurements.”

Simon Johnson comments: “The culture must be one that continually encourages experimentation, combined with the rigour to learn effectively about what works, and then you need to be able to scale quickly. Although perhaps counter-intuitive, rigour and clarity in process helps as creativity thrives under clear constraints.”

As ever, it’s execution and delivery that really matter and that's where an organisation has to have the people to be ambassadors of new ideas and the will to question old ones. Andy Dunkley, CEO of Lee Cooper Brands, says: “We have to ensure that we are constantly challenging our team by asking: are we relevant?; do we really know what our business is offering the consumer?; do they value what we are delivering?; can we keep our existing customers happy?  

“The main focus has got to be to continually challenge your own and your team’s assumptions. What you think is safe ground can change very rapidly and you need to consider how this could affect the business.”

Jon Moulton makes a similar point: “The relentless and tedious setting and management of objectives is a very good discipline to make sure that companies don’t get complacent.”

Volatile financial markets and fast evolving industries mean that both larger and entrepreneurial businesses with the right people and attitude can do extremely well. “Never waste a good recession,” says Rob Wirszycz, Non-executive Chairman of IT company Datrix. “It’s the time to steal business from competitors who are in denial.”

That may be easier said than done but the chances of succeeding are greatly enhanced if the executive and non-executive team join forces to stamp out complacency. David says: “Innovation has to be put at the centre of any corporate strategy, no matter what industry you’re in; you’ve constantly got to question what you’re doing and make the necessary steps to change.”

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.