This Is Every CEO’s Most Insidious Liability

July 28, 2016, 5:00 PM UTC
Stressed businessman
Photograph -- Getty Images

Robert Siegel is a partner at XSeed Capital and a lecturer in management at Stanford University Graduate School of Business

A common challenge that many companies face at some point is the issue of too much financial debt, which when used properly can be managed as an instrument to help a company grow. However, if the weight of financial debt becomes too great and it builds to an unsustainable level, a company or product can come crashing down under a weight of liabilities that are not paid off in a timely and judicious manner.

I recently realized, however, that as I work with companies of all sizes from the raw startups we fund at XSeed Capital to some of the largest organizations that I teach about at Stanford University, there is another type of debt that might be equally as important to companies, and possibly even harder to pay off the longer it sits on a company’s virtual balance sheet: organizational debt.

Organizational debt is the debt that accrues when a company does not hire the right leaders in functions who can grow and scale as a firm expands and reaches its next stage of size and complexity. This debt can either come from not making a hire that would own certain tasks so that it would free other people to accomplish needed goals, or it can come from hiring people who are too junior to handle added convolutions that arise as a company grows and scales.

When I ran my first startup 18 years ago, one of the most important lessons I learned was that my ability to scale as the CEO was most powerfully impacted by the quality of my direct reports. When I hired people who were better at their various functions than I was, be it managing operations, engineering or sales, I was able to focus on my larger responsibilities as the CEO – raising money, setting the company’s vision and managing key customers and strategic partnerships.

However, the notion of organizational debt is not just an issue for startups. As midsize and larger enterprises face increasing complexities that come from growth or multifarious market dynamics, having people in senior and mid-level manager roles who can handle the increasing challenges and dynamics of complexity may be the single most important variable that can determine the potential of a firm to seize on a market opportunity or to react in a way that ensures its survival.

I lived through this experience when I joined GE in 2004 to run the Video Surveillance division of GE Security. After I arrived, it was clear that before I could spend time working on the product road maps of converting our analog video products to the next generation digital solutions, I needed to overhaul the team that was already there. I spent about 80% of my time in the first nine months having to “coach out” some team members who needed to find new challenges that better fit their skills; I had to move some people into new positions that were better suited for their talents, and I had to hire several new people who could help our organization make the transition required by our customers. The process was long, painful and necessary before we could focus the division on addressing the products and services needed for our changing market.

Today I see signs of unsustainable organizational debt in companies manifest themselves in a multitude of ways. Sometimes I see it when an early-stage CEO tells me that he does not think the company needs a product manager as the firm only has 15 people – the team can take care of the product details or the CEO will determine all of the product’s features. Or if I hear the CEO in a firm of 500 people tell me repeatedly over a two-year period that her team is just not “stepping up” and taking work off of her plate; that she needs to stay involved in many details of existing customers’ problems because she cannot trust her team to manage solutions adequately. Or if a CEO tells me that he is looking to hire a VP Marketing and the search has taken two years to find someone that has the perfect profile to do the job.

In all of these cases (which are but three examples), I realize that the leader is not reducing the organizational debt load and is likely compensating for holes on the team. And the longer the leaders take to solve these organizational problems, the harder it gets to pay down the organizational debt load.

I have seen four best practices both on how to minimize organizational debt and also how to dig one’s way out of a potentially overwhelming situation:

Hire people with their next two jobs in mind

One of the most important tools I learned at GE was the importance of “hiring for runway.” While sometimes a company needs a specific task to be done and companies are looking for a constrained skill set in a hire, if a company is hoping to grow over time, employees will be asked to handle not only increasing complexities of the business, but also to step into new roles that will require increased capabilities. If a company can think and hire for growth and change throughout its life it will be able to take advantage of opportunities with existing personnel when those opportunities arise.

Make sure you understand the responsibilities in your job description when hiring direct reports

If you are the CEO of the company, you might play the role of chief product officer for a period of time, but if your company is going to scale you have to be able to offload some of the main tasks of operating the business sooner rather than later. This gets easier to do if you have someone on board early to help you with certain tasks so that he/she can know how you think and will implement solutions that you are likely to support as he/she makes decisions with greater independence over time.

Make time to recruit

It always takes longer to hire than one wants. If, going into a recruiting process to fill a position, one knows that it may involve looking at 30 candidates for each position – you should ask if are you clearing enough time on your calendar for recruiting? I tell my CEOs that when they have a key hire they may need to spend 30% of their time interviewing, reaching out to people and spreading the word that the company is looking to fill a role. Great candidates do not fall out of the sky – they are hunted, enticed and closed.

Blend experience with youth

This practice is key for both growing firms and also large enterprises. One of the key mantras we use at XSeed is that we want to see our entrepreneurs make original mistakes. Andy Grove was fond of telling employees at Intel that every generation thinks that they discovered sex, which by definition cannot be true as otherwise the species would not be here today. A growing company that brings in seasoned teammates who have already worked at companies in similar life stages can help solve challenges that are endemic to every evolving company. Similarly, larger enterprises need to work constantly to bring in new perspectives and points of view to stimulate renewal. In a world where challenges and opportunities come and go with increasing speed, combining the fresh perspectives of youth with the benefit of pattern recognition from experience can help ensure that a team can operate at optimal performance and minimize inefficiencies.

Ultimately, the role of leadership is to ensure that the right team is on board to compete in the market. Not spending enough time and energy in minimizing organizational debt can be a fatal decision by management that can make the difference between success and failure of a company. Keeping organizational debt manageable and ensuring that it does not grow so large that fixing it causes undue trauma on an organization is one of the most important things that every leader must do throughout the life of a company.

Not actively managing organizational debt is likely to be fatal.

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