Strategic Reviews and the Four Envelopes of CEOs



It is a fact of corporate life that CEOs get fired from time to time. Besides firm performance problems, the stories surrounding these events usually outline a pattern of management problems including leadership, personal style, culture & communication issues, boardroom dissension, clashes with major shareholder and so on. If you want a good example of this pattern just read the New York Times analysis of Ron Johnson’s short tenure as CEO of J.C. Penney in the US. The former Apple high flyer crashed just 17 months into his new role.

Often there is also a pattern in terms of strategy, one that may not be readily obvious but that is, nonetheless, just as problematic. This pattern is best demonstrated by a story I first heard a few years ago – the ‘four envelopes of new CEOs’. It goes like this. And I should warn you, it has a somewhat cynical flavour……….but it seems to resonate well with many people I talk to!

When a new CEO is ‘imported’ into a struggling organisation he/she finds that their predecessor has left them four sealed envelopes, numbered 1 through 4, with specific instructions that each is to be opened in sequence when the pressure on performance from the board and the markets starts to get tough.

Envelope 1 is simple – it says “Blame me!”. Now that’s not rocket science. Any new CEO worth his/her salt will start their reign by blaming their predecessor. Blair Speedy, a journalist with The Australian, calls it ‘page one of the new CEO handbook’.

Envelope 1 is marked by asset write-downs, provisions for extraordinary expenses as the prior CEO’s initiatives are dismantled, raising new capital at a significant discount……..and so on. You’ve seen these lots of times. Envelope 1 is all about “clearing the decks” as I’ve heard numerous CEOs describe it. The encouraging thing about Envelope 1 for new CEOs is that it involves actions that make them look good in their second year! Perhaps that’s why it is so common?

Envelope 2 says “announce a strategic review”.  The outcome of this review is usually a ‘transformational strategy’. Sometimes, the new CEO sets up a formal transformation team or office to communicate and drive the announced changes and revitalise the corporation. Cynics suggest that this is also provides someone to blame if the new strategy doesn’t produce results quickly.

More often than not the transformational strategy involves a major organisational restructure in which the new CEO fires most of the current executive team and brings in replacements from his past life. Sol Trujillo at Telstra brought in his ‘amigos’ from the US while insiders at J.C. Penney referred to the newcomers brought in by Ron Johnson by the acronym AAPLE – Apple & Abercrombie Paid to Lose Earnings. Between the new strategy and the new executive team, the rest of the organisation often spends the next 12 months in utter confusion!

Envelope 3 says “call in the investment bankers”. It generally plays out as making an acquisition which is rationalised as the next step in the transformation strategy. This acquisition generally consumes so much of the CEO’s time and energy (the senior management as well) that it becomes an end in itself. Worse still,  the acquisition initiative becomes a poster child for management’s decision biases, especially escalation of commitment. The firm ends up paying well over the top for the asset and has little chance of getting the targeted return spelled out in the acquisition’s justification, an outcome that accelerates the next envelope. Envelope 3 alternatively plays out as putting the business itself, or significant parts of it, up for sale. Unfortunately, this often leads to a ‘fire sale’ which also serves to accelerate the next envelope.

Envelope 4 simply says “write four envelopes for the next CEO”. If you think I am being too cynical, look at Billabong. It is a great example of the four envelopes story in action. Billabong’s problems really started four or five years ago with its rapid growth in retail outlets. It has been through several CEOs over that period but the cycle has accelerated – the latest round of envelopes has only taken around 18 months to reach its end. Envelope 4 has just been written and shareholder value has dived dramatically.

So, how do you break this cycle? There is certainly no ‘silver bullet’ but in many cases, I believe the ‘four envelopes’ pattern can be avoided if organisations, and especially boards of directors, do a much better job at strategic reviews before they pull the trigger on the CEO.

Strategic reviews bridge the ‘Make Sense, Make Changes Strategic Conversations’ that I have referred to in prior blogs. Unfortunately, in many organisations strategic reviews are a form of corporate theatre where the focus is not on strategy but rather on ‘turf issues’, especially budgets and their underlying initiatives which are fervently defended by ‘management barons’. Dialogue & inquiry, two essential characteristics of strategic reviews, are either diverted by advocacy & faction-fighting or drowned in data overload, usually in the form of huge Power Point decks. Strategic reviews become a game of politics where dominant players, by virtue of information control, personality or position manipulate strategic choices in their favour. The end result is usually entrenchment, a continuation of the status quo rather than collaboration and in depth consideration of alternative ideas.

Fairfax Media is a classic example of entrenchment. Fairfax was famous for its ‘rivers of gold’, the highly profitable revenue stream that came from its classified ads for houses, cars and jobs. Unfortunately, Fairfax is now famous for its inability to come to terms with the digital era and its resultant loss of that revenue stream.

In her recent book, Fairfax: The Rise and Fall, Colleen Ryan laments the “lost years” between 1998 and 2005 when senior management did not understand how Fairfax made its money and failed to make any meaningful investment in digital platforms for the critical cars, jobs and property sales markets.

Eric Beecher continues this theme in his July 2013 article “End of the print run” in The Monthly. He writes about being asked by the Fairfax board in 2004 to develop a report about the company’s business model and its future. Beecher outlined to the board a “catastrophe scenario” in which there was large scale migration of classified advertising to the internet. He argued that, if the board considered the chances of such a scenario at any more than 10%, “it should take decisive action as an insurance policy”. According to Beecher the response from one prominent director (and apparently shared by the others) was that “He didn’t want anyone coming into the boardroom again saying that people will buy houses or cars or look for jobs without this” – he was referring to one of Fairfax’s Saturday broadsheets!

The results speak for themselves. Today Fairfax Media’s market capitalisation is around $A1.1 bill while approximately $9 bill market capitalisation is tied up in Seek, and!!!!

Besides emphasising dialogue and inquiry, my experience is that good strategic reviews form part of an organisation’s formal routines and involve a mindset that strategy is a journey that may need to change in line with emerging results, market changes and new information. These reviews focus on the implications of these changes for the organisation’s business model.  While their frequency depends largely on the turbulence in the organisation’s external & internal environments, the important thing is that they’re held proactively and not just reactively in response to a crisis.

In addition, good strategic reviews are not just the province of the CEO and the senior management team. Board directors are in a unique position to leverage their breadth of experience to bring alternative perspectives and strategic options to the table, and in doing so, enhance the strategic thinking of management. This argument is not limited just to directors, it applies to other management levels in the organisation, to customers, to external advisors and so on………who is involved really depends on the issues to be discussed but the important thing is to ensure that strategic reviews encompass diverse perspectives. As A.G. Lafley & Roger Martin point out in their book ‘Playing to Win: How Strategy really Works’, managers have an in depth knowledge of a particular business which, when combined with breadth of experience from outside the immediate management team, can lead to incredibly powerful strategic thinking.

Good strategic reviews rely on simultaneous loose – tight dialogue. They involve agreement in advance on a limited number of strategic issues for discussion. They also involve a limit on the number of people involved and on the new information that can be brought to the meeting. The whole idea is to encourage a free ranging discussion of a few really important issues by people who can bring diverse & insightful perspectives to those issues, not ‘death by Power Point’. Lafley & Martin talk about a maximum of “three new pages of material” on any one issue. That makes a lot of sense to me!

And, good strategic reviews are just that, they’re strategic in scope, not operational! They are not an exercise in forensic examination of spreadsheets, in detailed number crunching, cash flow forecasts and so on. This type of analysis informs a good strategic review, it comes before and after but not during. The temptation to default to operational reviews focused on the usual suspects is always strong but must be resisted if the scope is to be strategic.

One last point. I have to confess to stretching the truth when I said that I first heard the ‘four envelopes’ story a few years ago. It was actually more like 20 years ago. The unfortunate thing is that the story is as valid today as it was back then. Getting better at Strategic Conversations, especially the Make Sense, Make Changes conversations that underpin strategic reviews is not a silver bullet but it does have the potential to save a lot of trouble for boards, management teams and investors.

Dr. Kevin Hendry is an Industry Fellow with the UQ Business School and a strategy consultant. He spent 20 years with Monsanto where he was Vice President & Managing Director Asia Pacific for the Nutrition & Consumer Products business unit. His PhD focused on the role played by boards of directors in strategy, especially their collaboration with management.