Bar Bulletin

Bar Bulletin

The False Path of the Pied Piper

January 2023 Bar Bulletin

How Incompetent
Leaders Can Destroy Enterprise Value

By Bill Lawrence

Over the years, the business world has seen many great chief executives who have had a positive influence on the business community and on society in general. Having said that, we have also witnessed an alarming number of leaders who are simply unprepared or incompetent. They range from examples like Elizabeth Holmes of Theranos fame to Ken Lay of Enron. And then there is the recent case of Sam Bankman-Fried, the fallen crypto currency king, whose mismanagement and misdeeds have inflicted severe pain on investors.

Incompetent leaders can inflict significant damage — and in the worst cases — single handedly destroy a company. How does this happen? How do incompetent individuals rise to the level of CEO, or other senior management positions? And if they do, why don’t shareholders, counsel, board of directors or other stakeholders deal with the problem before it’s too late?

When Good Intentions Become Bad Outcomes

It is important to understand that most chief executives are not committing crimes or intentionally destroying their company. Many educated and seasoned investors have been captivated by visions, like “effective altruism,” but what happens to those capital inflows behind the curtain, as we now know, reveals a much different picture.

These types of episodes happen more frequently than you might think and there’s a common thread that runs through many of them. The most likely scenario we have seen is where an entrepreneur has a great concept to start a company and seeks rapid growth of the business without the experience or management team capable of executing the strategy.

Early Warning Signs

In most situations, incompetent leaders have similar characteristics that we can quickly identify. For example, they often demonstrate a sense of charisma and confidence. Frequently, however, they do not have the ability to put together a cohesive strategy and, as a result, ultimately push problems down the road.

To a large degree, they tend to be self-centered and narcissistic and only want to talk about what they believe they have accomplished, even when the facts don’t support the narratives. When board members or other stakeholders question their thinking or confront them with the facts, they typically push back and tell them that they don’t understand their business, or blame the company problems on other factors.

Classic Scenarios

One of the classic situations we have seen is when an incompetent leader blames their lender for not increasing their credit line, or worse, providing an extension to the existing line of credit to accommodate their needs. In most cases, it’s not the lender’s fault that their business is not profitable, but an incompetent leader all too often will try to blame them.

Likewise, they may try to blame their attorney for not providing good legal advice for handling a significant business problem. Again, the attorney is most likely providing sound legal advice, just not the counsel that the incompetent CEO wants to hear.

Then, there is the situation where the CEO blames their direct reports for not properly doing their job. They often criticize one or more individuals for not accomplishing certain goals. And, in many cases, while providing criticism, they are not willing to discipline or replace those individuals for a variety of reasons. In reality, incompetent CEOs have a tendency to hire management and staff that have similar characteristics as their own, and as a result, compound the problem of achieving strategic or financial goals.

Getting Off the Beaten Path

As this type of behavior goes on for a period of time, actual operational issues are not addressed and the company’s financial performance declines. And, if the behavior does not change, the company faces a real crisis in incurring multiple months and years of losses that ultimately results in bankruptcy or a receivership.

It’s really important for board members, shareholders, lenders and other stakeholders to challenge leadership at the first sign of trouble. And, the first signs may not be financially related. It most likely will be reflected in a loss of talent, people who will not work for an incompetent leader, or several important key vendors that decide not to do business with the company.

Challenging the CEO to explain why these things are happening may be the first clue that they are not managing the company properly. And, if their answers are not definitive and accompanied by a solid action plan and timelines for improving the situation, it’s another sign that things will likely get worse in the future. Monitoring the CEO’s performance and holding them accountable is vitally important in making sure the company does not continue down a bad path.

Bill Lawrence is a Principal at Seattle-based restructuring and corporate advisory firm Revitalization Partners, which has served as a receiver in more than 30 cases in the Pacific Northwest. He and his partners write regularly about the operational and financial challenges in successfully restructuring companies. Learn more in the firm’s blog as well as its e-book, “Insights to Grow, Build or Save Your Business!”

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