The board and box canyons.

AuthorPalmisano, Robert J.

When good companies find themselves in bad trouble: One CEO'S playbook for navigating safe passage.

IF AMERICA CAN CLAIM an art form besides jazz, I'd argue that it should be the wonderful old cowboy and Indian movies. The ones I liked the best as a youngster usually featured the hapless Westward-bound settlers unknowingly steering their wagon train into a box canyon. As the camera revealed to the audience the hostile Indians hiding in the nearby cliffs, a sense of doom began to build. The occasional stone would tumble from the cliffs, drawing the scout's eyes anxiously upward, tension rising remorselessly. But...we knew what was coming. No escape! The ensuing battle made for good cinematography -- and a fully American form of Greek tragedy, for the result was ordained from the first frame.

Over the years, observing and experiencing how good companies get into trouble, I've reflected on those old movies many times. Companies ride into box canyons, too.

Often, it is a keen sense of purpose, a desire to take the straightest path to an objective, that causes companies to get into trouble -- just as it led those wagon trains into jeopardy. Often, managers and directors don't fully appreciate warning signs until they find themselves in the equivalent of a box canyon. That's why boards have to pay attention: It's their fresh, objective eyes that should be riding scout for any company's wagon train.

When companies do find themselves in such a place, boards get involved. By then, it's often too late. A whole range of factors conspire to aggravate the plight of the troubled firm -- everything from the plaintiff bar to the high and often ignored exit costs that can build up in any business. Too often, there is no retreat.

I have been both victim and rescuer in two such situations. Each situation taught the same lessons.

In the first, I ran a major business segment for an NYSE-listed company. It was a significantly profitable, high-return part of the total company business unit portfolio. Our board was of excellent pedigree -- individually accomplished and collectively well respected. The company posted many years of sequential quarterly growth.

'Very different'

Those of us with P&L responsibility saw a very different organization than the one the board observed, however. We saw a company where operating realities were often camouflaged by aggressive accounting, where the struggle for quarterly profit growth was sometimes a high-wire act, and bonuses...

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