In his column for the Harbus, Professor Trevor Fetter shares his thoughts on the issues facing HBS students.
My intention in this column is to come up with something new and fresh every time, and I will try to deliver on that…going forward. Last month I wrote about the importance of observing examples of leadership during a crisis while we live through a serious set of them in 2020. The morning that issue of the Harbus was published, a very specific example of a common leadership dilemma landed in our inboxes, with a series of stories contrasting the private comments of President Trump about Covid-19 with his public statements in February.
It is on tape. On February 7, the President said to the journalist Bob Woodward about the virus, “It goes through air, Bob. That’s always tougher than the touch. You know, the touch—you don’t have to touch things, right? But the air, you just breathe the air. That’s how it’s passed. And so that’s a very tricky one. That’s a very delicate one. It’s also more deadly than your…strenuous flus.” As we all know, this conversation took place at a time where the President’s public statements portrayed the virus in a more dismissive way. Search for “Trump Downplayed the Virus” and you’ll get 338,000 results.
Reconciling public confidence with private concern is a serious challenge that you will face.
When I read the story about the Woodward/Trump tapes, I was reminded immediately of the video of Ken Lay, Enron’s Chairman, addressing an all-hands meeting in the company’s headquarters in Houston on August 16, 2001, two days after the surprise resignation of the company’s CEO, Jeff Skilling (MBA ’79). The company’s stock, which had reached $90 within the prior year, had dropped in half. Yet Lay was intent upon reassuring those assembled for the meeting, saying “the next few years will be great for Enron and Enron’s employees,” announcing new stock option grants at the current price, which he characterized as “at the bottom or near the bottom,” and summarizing the state of Enron as “our core businesses are extremely strong, and our new businesses are doing great.” What was he thinking? RC LCA spoiler alert: Enron filed for bankruptcy 108 days later.
This triggered another memory of a situation in late 2002 where I was in the room. It was a town hall meeting of a company in free-fall. An analyst had published a report questioning whether the company’s earnings, while real, were sustainable. They were not. The CEO had gone on CNBC to defend the company, and it had not led to greater confidence. It was a rapidly unfolding crisis. The company’s stock had declined by 70% in a week. In the Town Hall meeting at headquarters, he was asked a direct question by a tearful department head: “will there be layoffs?” His answer was definitive: “No. There will be no layoffs.” The layoffs began a couple of months later, and a few months after that most of the people in that meeting, including the CEO, were gone.
Perhaps it is unfair to judge these types of events with hindsight, but that is the only way they are judged. They are not viewed with a fair assessment of what the CEO said based on what he or she knew at the time. In these examples, were these CEOs concealing the truth or hoping a better truth would unfold? Did they lack confidence in the accuracy or completeness of their knowledge of the reality they were facing? Did they deliberately conceal the truth in order to cause others not to panic, trigger a market crash or depression, sell Enron stock, fear losing their jobs, or quit? Perhaps people in these positions get to where they are in part because they are optimists, and their instinct is to see and describe the glass as half full. Perhaps they have built up an ability to ignore reality if it is not the version of reality they want.
Material misstatements and omissions of material facts in financial statements or investor communications cause CEOs to lose lawsuits and lose their jobs, or worse, end up in jail. The ones who survive in the job are well-practiced in communicating with precision when facts are involved. It is not always easy. For example, it is hard to deal with investors’ intense interest in quarterly results. Whether or not the company issues earnings guidance, analysts and investors will develop their own expectations, and missing, meeting, or beating those estimates will drive the stock price, executive compensation, and the perception of management’s skill. You do not see lists of “best” CEOs whose leadership and strategies are brilliant but lead to negative shareholder returns.
So, what should a CEO do when the first month of a quarter comes in well below internal expectations, heightening the risk of a quarterly “miss”? Wait for the second month’s results and hope the shortfall was a blip and not a trend? Disclose the bad news while not telling what the audience really wants to know (i.e., expectations for the quarter)? Take short-term corrective actions to overcome the shortfall that might signal there is trouble and hurt the company longer term? Keep their head down and avoid putting themself in situations where they are asked pointed questions about performance?
Many of you intend to start companies. You will raise money and attract talented colleagues in part by laying out a vision and a plan, and delivering. There will be times when you are not able to deliver the results your investors or your team expects. It may happen outside of the glare of the presidency or public companies with instant and constant feedback from the press, the market, and Wall Street analysts. But that does not make the dilemma of how, when, and whether to communicate bad news any easier.
I suggest that you embrace transparency. “If you tell the truth, you don’t have to remember anything,” a statement attributed to the American author Mark Twain, expresses a strong argument in favor of honesty. Disclosure is a separate question. It may be painful at times to deliver bad or incomplete or ambiguous news, but it is far less punishing than the consequences of being perceived as having concealed or bent the truth after it catches up with you. Your colleagues and investors will trust you more if they believe you are sharing with them what you know. While you are at it, embrace empathy—consider what you would want to hear and how you would want to hear it if you were on the receiving end. The answer is almost always that you would want to know everything as accurately and as early as possible.
The career interlude known as the MBA program would be a good time for you to reflect on how you will handle such a situation. You will be expected to lead with confidence, but you will also occasionally have doubts, or more—actual knowledge that a situation is much worse than most people believe. (And if you never have doubts, that is a far more serious kind of problem…)
If you pursue a career in management, I guarantee this will happen to you. You will be at the podium. The pressure to exude confidence will be intense. You may have doubts, concerns, or knowledge of bad facts. Perhaps you are there because you stepped forward and took the initiative to communicate, but perhaps you are facing a tough question, a cold call from the audience, without warning and at a time you did not expect. What will you say?
Trevor Fetter (MBA ’86) is a Sr. Lecturer in General Management at Harvard Business School. He teaches FRC, LCA, and the SIP: The Life and Role of the CEO. Before joining HBS, he was Chairman and CEO of Tenet Healthcare Corporation, a Fortune 150 company. Earlier in his career, he was CFO of the movie studio MGM and an investment banker. In addition to teaching at HBS, he serves on corporate and non-profit boards and advises several early stage healthcare companies.