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The 2 biggest risks for every CEO

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Every Chief Executive Officer (CEO) has to deal with risk. It is ultimately his or her responsibility to manage any and all potential hazards to the business, whether internal or external.

In fact, you could easily call him or her the chief risk manager. That’s consistent with former Intel chief executive Andy Grove’s mantra that “only the paranoid survive.” In other words, CEOs should be constantly concerned about identifying and solving for material threats to the business.

While it’s very easy to come up with all kinds of exotic or unlikely dangers a company may face, my experience says that most business successes or failures can be attributed to one of two rather basic risks. By focusing their attention on these two fundamental risks, I believe CEOs can achieve huge returns.

 This requires a disciplined approach. But if you can train yourself to remain vigilant for these risks, you will protect yourself from two of the most common ways that CEOs, and sometimes whole companies, meet their downfall.

Risk 1: Poorly executed strategy

The first risk that threatens every CEO is the possibility that his or her strategy will not be executed effectively. Although some businesses do fail because they lack a good strategy, in my experience it’s much more common that the strategy is fine. It’s the execution that is lacking.

As the sexy, intellectual area of business, strategy gets a lot of ink in the business press. Because of all that attention, most companies are capable of following the established best practices and putting together a strategy that is perfectly capable, if executed, of delivering solid business performance (or they’re able to hire strategy consultants to help formulate the strategy). Within those two little words -- “if executed” -- is where the problem tends to lie.

ceo risk

Execution, I would suggest, is not nearly as well understood as strategy. The tools and best practices in this area have not kept pace with the changing nature of modern work. When manufacturing was the primary industry, a set of best practices developed and were widely adopted to optimize production. The work of business legends like Deming and Drucker formed a core set of knowledge that drove execution forward in the manufacturing space.

Unfortunately, as more and more of the economy shifted to knowledge and services work, the tools and theory around execution failed to keep up.

Knowledge/services work is fundamentally different from manufacturing and tends to impede execution in ways many CEOs don’t anticipate. In a manufacturing operation, I don’t need to ask the guy with a wrench how many cars we are going to build today. I can watch the cars come off the end of the line and know that execution is proceeding.

But knowledge work -- whether software development, operations marketing, consulting, human resources, or any other kind -- is much harder to measure and project. I can’t watch someone work and know when the project will be completed. I can’t readily ensure that execution is aligned with the strategy we set for the organization.

I have to trust that the employee has internalized the strategy, and I have to ask them to communicate clearly about their progress, utilizing their own perspective and expertise to tell me what I need to know: Are we going to deliver what we planned to as a company?

The execution risk has another component: CEOs also have to ensure that different parts of the organization are working together during the execution phase. While there are certainly best practices and tools around functional execution (sales processes, development processes, etc.), these functional areas cannot operate independently; they must cooperate.

The challenge for the CEO is getting all of his or her disparate groups aligned. It does no good for everyone in a rowboat to be rowing quickly unless they’re all rowing in the same direction. Yet it’s quite common to see companies where everyone is working really hard without much getting done. People are executing, but they’re not executing the CEO’s strategy.

What it looks like to manage the execution risk effectively:

  • CEO communicates early and often to the entire team about strategy.
  • CEO breaks down strategy into specific quarterly targets for the organization.
  • CEO collects regular insight from the team on how execution is going and asks whether leaders expect their respective groups to meet established targets.
  • CEO leads weekly executive meetings that center around cross-functional support and cooperation.

Risk 2: Poor talent management team

The second risk is related to the first: the possibility that the company or organization will fail to get the right employees in the right seats to deliver the expected performance. I’m often shocked when I see how little time CEOs devote to this problem. It’s one of the risks that new CEOs in particular often don’t become aware of until it is too late.

In some cases, CEOs developed bad talent-management habits based on previous experiences. Most managers rising up in an organization have little control over who works in their group. While they may be able to fire someone (often only after significant bureaucratic effort), they can’t create positions without multiple approvals from above.

Poaching top performers from other parts of the organization is also frowned upon. Thus, most successful managers learn to play the hand they are dealt. They spend time trying to improve their low performers and only bring in fresh talent when a position opens up.

A real problem develops, however, when they move into the CEO role: They lack the skill set required to select top performers and get them into the right seats within the organization. The old reactive approach just doesn’t work when it’s one of your fundamental responsibilities to provide the business with the right people and make sure they are doing the right things.

On the whole, Fortune 500 companies do an excellent job of attracting high-quality individuals, but these talented employees often end up in the wrong position for their skills and talents. I think many CEOs sense the problem, as evidenced by the number of reorganizations that happen in big companies. Unfortunately, without a system for thinking about people and their strengths, these reorgs rarely pay off, instead generating more random results. CEOs must instead utilize a disciplined system for managing people and optimizing their position in the organization.

What it looks like to manage the talent risk effectively:

  • CEO is constantly on the lookout for top talent to bring on board rather than operating in reactive, seat-filling mode.
  • CEO expects all managers to give quarterly feedback to their direct reports and provide top leadership with confidential A-B-C ratings based on the individual’s performance and potential.
  • CEO knows who the A-players in the organization are and frequently engages with them one on one.
  • CEO works with managers to replace or relocate employees with consistent C ratings.

It would be a pointless exercise to try to take all the risk out of running a business. Nevertheless, you don’t have to let yourself remain vulnerable to these two prevalent CEO risks. I urge you to reflect on how well you’re managing them, and to then devote the necessary time to making sure you have them covered.

Joel Trammell is founder and CEO of Khorus, co-founder and managing partner of Lone Rock Technology Group, and author of “The CEO Tightrope” (Greenleaf Book Group Press, 2014). Contact him at @TheAmericanCEO or joel@khorus.com.

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