Center for Management of Emerging Companies

Evolution of the Organizational Structure

When an organization has just been launched and only a small number of persons are involved there is generally ample opportunity for face-to-face communication among the members of the group and the need for a formal organizational structure is generally low provided that sufficient attention is paid to strategic planning and setting mutually agreed goals and objectives.  As organizations grow from very small (i.e., less than 20 employees) to relatively large (i.e., 80 or more employees), one notes significant changes in the management of workflow and structure becomes an important managerial challenge. At some point the range of activities and tasks that need to be performed within the organization expands to the point where the founders no longer have the time and skill to personally oversee all of them and a key challenge for the firm is the manner in which the founder delegate responsibilities and decision making authority to lower-level managers and new executives who join the founders as organizational leaders.  This report discusses some of the steps that should be taken for an orderly transition.

Leadership Attributes

Extensive time and resources have been devoted to the search for “attributes” and “traits” of effective leaders, as well as characteristics of dysfunctional leaders.  Much of this work has been conducted under the umbrella of settling debates about whether leaders are “born or made” and, to the extent that genes are not totally responsible for leadership success, what strategies can be used to teach people how to execute the behaviors though to be associated with effective leadership.  Leadership is important to the progress and success of emerging companies and this report provides an overview of some of the more interesting research on "leadership attributes" and the conclusions of researchers that their is hope for teaching persons in leadership roles how to execute the behaviors associated with effective leadership.

Organizational Culture Among Early-Stage Silicon Valley Technology Firms

Three years ago we did a post on the influence of founders on the organizational culture of new businesses.  Today we return to that topic with a report that details the fascinating results uncovered during a study of organizational culture among early-stage technology companies in the Silicon Valley undertaken by the Stanford Project on Emerging Companies.

Role of Disclosure and Nominating Committees

While audit committees justifiably attract most of the attention when corporate governance issues are discussed many other board committees also play important roles in providing objective expertise when seeking to resolve various issues relating to the operation of reporting companies.  In this post we discuss the role and administration of disclosure and nominating committees.

Evolution of the Finance Function

The role, size and organizational structure of the finance function will change dramatically as the company evolves and expands it operations into multiple business units and launches activities in new geographical areas.  Learn more about the evolution of the finance function in this report.

Why You Need a Chief Revenue Officer

A number of well-known fast growing companies have created the title of chief revenue officer ("CRO") as part of their executive team.  The CRO is charged with ensuring that the company remains focused on identifying and exploiting all potential revenue streams for the company's products, services and other core competencies (e.g., technology).  In order to accomplish this task the CRO must be given authority to intervene in and oversee the activities of several different departments, each of which will also have its own executive and top management group, including product development, sales, marketing and customer service.  The CRO should be involved in every major new business development project and should have a say in which customers receive top priority and when and how the company sacrifices profitability in order to increase revenues, market share and customer loyalty.  For example, the CRO should commission the research necessary to determine which customers have the highest potential for long-term revenue growth and should work with various functional departments such as sales and customer service to make sure that those customers are serviced properly.  The CRO should also decide whether it is worth pursuing a new sales channel through a discounting strategy that may reduce margins in the short-term yet expose the company and its products to a whole new group of customers.  Obviously the CRO must be highly effective in creating and managing cross-functional teams and reconciling the divergent views of managers in different departments.  It is also essential for the company to provide real incentives for senior managers of departments such as sales and marketing to follow the direction established by the CRO.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

It's Not How Anymore, But Who?

As the company grows, and the number of employees and projects multiples, the founders and members of the senior management team will find it increasingly difficult to stay involved with day-to-day details of operations.  This can be a frustrating, yet necessary, step in the evolution of the company and the founder or senior manager involved and it is necessary for him or her to learn how to trust the other people in the company organization who will be handing the details.  For example, the initial question asked by the CEO may change over time from “How?” to “What?” and then finally just to “Who?, at which point the CEO will be relying on a senior manager or other key employee, or a particular group or department, to come up with the strategy and implementation plans necessary to deal with a particular opportunity or problem in the company’s business environment.  This does not mean that the CEO must or will completely delegate details to others; it simply means that the CEO must learn to be selective about the areas in which he or she will spend the most time.  Most successful CEO’s will have one or more projects in which they are heavily engaged because they recognize the area as being of significant importance to the company and they believe that they can make a substantial personal contribution.  Intense involvement, including a large amount of interaction with other managers and employees, is a good way for a CEO to train others about how he or she sees the company and its preferred cultural values.

Succession Planning for C-Level Executives

A great deal of attention is properly devoted to succession planning for the CEO; however, the directors and the CEO should also be mindful of the impact of the sudden departure of unavailability of other C-level executives who oversee essential areas of the business including marketing, operations, information technology, human resources and finance.  Studies among Fortune 500 companies have quantified the risk that companies may have to replace one or more of the top executives.  For example, turnover among chief financial officers is increasing due, in part, to the escalating demands placed on that position by new laws and regulations pertaining to corporate governance, accounting procedures and internal controls.  It is now common for larger firms to go through multiple CFOs in a relative short period of three to five years.  The CEO of a Fortune 500 company can also expect that he or she will need to find new C-level executives for marketing and information technology multiple times during the typical CEO tenure.

A significant percentage of large firms—Fortune 1000 companies—do not have any formal succession plan in place for executives other than the CEO and typically plead that they simply do not have the time and budget to establish and maintain a leadership development program that will ensure that the company has a pool of qualified and informed candidates who can step easily and quickly into new roles as heads of important functional and business units.  The problem is even more urgent for smaller companies since the senior executives generally have little or no staff support and therefore horde most of the knowledge about key projects relating to the departments.  If they become unavailable there is no one who can quickly fill the gap.  For example, if an emerging company suddenly loses its CFO in the middle of negotiations for a new round of venture capital financing or an expansion of the company’s line of credit with its bank the impact may be disastrous since it will take weeks or months to recreate the knowledge and information that the departed CFO should have been able to provide easily to the funding sources.  The result may be a failure to close a deal or a closing on terms much less favorable to the company than would have been the case if the CFO was still on board or a qualified replacement was readily available when the CFO left. 

A sudden loss of a C-level executive followed by a long period without a replacement can have other adverse effects on a company’s business.  For example, studies show that a lack of a smooth transition for a key executive position, regardless of the reasons therefore, can lead to a loss of confidence in the CEO and other senior executives among the employees who would normally report to the person in that position as well as  deterioration in employee morale and productivity.  In addition, as with the example above regarding negotiations on financing, the lack of leadership causes ongoing projects to stall due to uncertainties about future leadership support.  A correlation has also been found between loss of a C-level executive and erosion of stock prices.  On the other hand, companies which are able to quickly identify qualified replacements from within are much less likely to run into serious problems if there is a need for a change in the executive team.  In fact, a succession plan for C-level executives that relies on talented managers that are already working for the company can be important recruitment and retention tool.

Succession planning for C-level executives should be driven by the CEO and should involve all of the members of the executive team well before there is an urgent and immediate need for a replacement.  One way to make sure that the company is not caught unprepared is to make sure that everyone on the executive team is kept abreast of important projects in other departments.  The goal is to make sure that all executives know what is going on in the company and can step in to run other departments temporarily and contribute to nominations of qualified candidates from inside the company to take over departments on a permanent basis.  The CEO can get others involved by soliciting their input on strategic and business initiatives that require execution across department boundaries including review of annual operating plans, new products and services, acquisitions and major IT projects.  In addition, all C-level executives should be required to meet regularly with senior managers in their departments and actively serve as mentors to develop the skills of potential successors.  C-level executives should be required to provide input to the human resources department on a regular basis on the performance of key subordinates and the company should launch a professional development program that not only creates a possible successor pool but also generates benefits even before participants are asked to move up in the form of lower turnover rates and great enthusiasm about working for the company.

Job Performance Appraisal for Senior Management

A formal appraisal process for the senior management personnel of an emerging company can have several important influences on the relationship between the CEO and the members of his or her “inner circle.”  First and foremost, a performance appraisal is probably the best way to identify the strengths and weaknesses of the manager in particular situations or over the course of the manager’s regular day-to-day activities.  With this information, the appraisal process can be a good opportunity to develop a mutually agreed program to strengthen the weaknesses while simultaneously reinforcing the strengths and finding ways to use those strengths in other areas.  The CEO is therefore able to provide support for senior managers based on a bond of mutual commitment and also is able to provide praise and emotional support to managers that often feel alone and unappreciated given that most of the focus is usually on areas where they need to improve.  A formal appraisal process should also include ways for senior managers to express their own needs and ideas and therefore reduce the possibility of misunderstandings between the CEO and the manager with regard to the personal and professional goals of the manager. 

When designing a formal performance appraisal process for senior managers, the following issues need to be considered -- when and how often the appraisal should be done; what information will be gathered and how it will be gathered; the form and content of the actual evaluation; how should the results of the evaluation be recorded; and how should the results be integrated into the day-to-day activities of the manager during the period following the completion of the review.  While performance and compensation are obviously closely related, it is generally recommended that performance and compensation reviews be done separately if at all possible.  Studies indicate that the benefits of a performance review are often lost when participants are preoccupied with the fact that they are about to receive new information regarding their compensation.  In that case, participants tend to forget that the focus of the performance review should be on their own strengths and weaknesses, and opportunities for improvement and advancement, and become preoccupied with real or perceived comparisons of their performance to others that may arise because of compensation adjustments.  Another issue in the case of poor performers is the negative psychological impact of receiving bad news in the evaluation followed quickly by a disappointment in the compensation arena.

The main choices regarding timing of performance reviews is to do all of the senior managers at the same time or spread the reviews out over the course of the year (e.g., conduct a manager’s review on his or her anniversary date of joining the organization).  If reviews are all done together this will impose a significant workload on the CEO and will likely increase the possibility that managers will be distracted by comparisons.  On the other hand, if reviews are done throughout the year the CEO will be continuously involved in the process and special effort will need to be made to schedule compensation reviews.

When evaluating and communicating information relating to the performance review, the CEO should make every attempt to be systematic, fair and consistent with the methods used for assessment and rewards.  When setting goals during the performance evaluation process the CEO should be sure that the goals set for the manager align fully with the reward system established for the manager.  In addition, the outcomes of the performance review should be communicated both in writing and orally.

Performance problems for senior managers may arise for a number of reasons including lack of the necessary skills, misunderstandings about the goals and objectives, temporary or permanent personal problems, relationships with co-workers and/or the relationship with the CEO.  Solutions vary depending on the type and severity of the problem and should be discussed in detail during the performance review.  For example, as appropriate the CEO may arrange for further support or additional training development or may decide to intervene to resolve issues with co-workers.  In extreme situations it may be necessary to transfer the manager to other duties or even terminate the relationship if the parties mutually decide that there is no better option.  Once the parties have decided on an appropriate plan to address performance weaknesses or other impediments to further improvement, the manager and the CEO should evidence their commitment to the plan both orally and in a brief written memorandum.

Defining the Duties of the Members of the Senior Management Team

One of the most important ways that the CEO of an emerging company can impact how effectively the company and its organizational structure operates is through his or her selection of the members of the senior management team.  In addition to their functional skills and experience, senior managers can support the vision of the CEO by communicating and practicing the attitudes and values associated with the organizational culture preferred by the CEO.  In order to fulfill this role, senior managers must understand culture and organizational structure of the company and the thoughts and directions of the CEO and should have a clear idea of where the company is headed and be committed to that direction.

While recruiting and retaining high quality members for the senior management team is obviously important for the organization, development of job descriptions for senior managers is often neglected.  One reason this occurs is because senior managers often view job descriptions as to restrictive or static to be of much use.  Another concern that a senior manager might have about engaging in developing his or her own job description is that the end product might be used as the basis for a negative performance evaluation or a change in role and responsibilities that might be unacceptable to the manager.  Disadvantages aside, however, it is recommended that an effort be made to write job descriptions for top managers in order to define their specific tasks and objectives.  By preparing job descriptions for senior managers, and reviewing them periodically, the CEO can make sure that the responsibilities and objectives of the managers are properly aligned with each other and with the overall goals of the company.  In addition, job descriptions can provide a direction for each senior manager and a basis for establishing priorities that are mutually agreed upon by the manager and the CEO.  Finally, a job description for a senior management position that has yet to be filled can provide a basis for discussions with prospective candidates.  A job description for a member of the senior management team should focus on the tasks to be done; the goals to be achieved; the challenges to be overcome; and the organizational norms that are to be emphasized.  In addition, the job description should include a list of the information that will be needed in order to evaluate the performance of the manager in relation to the stated duties and responsibilities.