The Role of the COO
By Nathan Bennett, Stephen A. Miles
STANFORD UNIVERSITY PRESS Copyright © 2006 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
Without a second fiddler, there's no orchestra.
This book offers systematic examination of an increasingly critical role in organizations : that of the chief operating officer. Whereas a substantial body of literature focuses on leadership and chief executive officers, written by academics (e.g., The Leadership Challenge, by James Kouzes and Barry Posner; Bad Leadership, by Barbara Kellerman; Good to Great: Why Some Companies Make the Leap and Others Don't, by Jim Collins), consultants (e.g., The Leadership Wheel, by C. Clinton Sidle), and practitioners (e.g., Winning, by Jack Welch; Iacocca: An Autobiography, by Lee Iacocca; Leadership, by Rudy Giuliani; The Source of Success: The Five Enduring Principles at the Heart of Real Leadership, by Peter Georgescu; and Authentic Leadership, by Bill George), there is a dearth of work that focuses on the role of the number two — a role we think is of particular interest because in those companies where the position exists the incumbent is such a visible and important leader and follower.
COOs occupy a position that is unique structurally, strategically, socially, and politically. As a result, many of the challenges faced by incumbents are also unique (e.g., managing the relationship with the CEO and other company leaders, implementing the directions of the CEO). Because the role has not received much attention, we know very little about the reasons behind its creation, how it is enacted in various organizations and shaped by incumbents, or the requisite characteristics of a successful COO. In the following chapters we
(1) clearly articulate the unique characteristics of the COO role, (2) describe the various motives for establishing a COO position, (3) review the challenges associated with successful performance of the COO role, and (4) develop a set of strategies or principles to inform individuals who aspire to serve in such a position some day.
To accomplish these purposes, we rely on a combination of first-person interviews with current and past COOs, case studies that describe various ways organizations have structured leadership with or without a COO role, reviews of the extant research and other writings on the COO role, and interviews with executive search professionals who have placed many high-profile COOs. Our typology demonstrates the breadth of motivation companies have for making the strategic decision to create a COO position. Additionally, we present the major barriers to success in the COO role and consideration of the knowledge, skills, and competencies associated with effective performance of the role. We also consider the areas that it is essential for a CEO to understand in successfully bringing on and then managing a COO, as well as the relationships that the COO must manage, especially those involving the CEO, the board, and other executives. In the end, we offer helpful insights to organizational decision makers confronted with decisions about when and how to create, structure, and staff a COO position, as well as to individuals considering or already occupying a COO role. In doing so, we aim to furnish important insights into the execution issues to which a board and top managers must attend in order to effectively implement this particular leadership configuration.
It is easily argued that the job of CEO has become increasingly demanding in recent years. The reasons driving this are many, but clearly macroeconomic factors such as the complexity of managing a globally competitive business and heightened public concern regarding issues such as corporate social responsibility and financial fraud play a major role. As a result of the pressure the CEO faces to manage relationships with myriad external constituents, many organizations have created a "second in command." Though the precise duties of this second in command, what we call the chief operating officer, vary considerably both from one organization to another and over time within a single firm, an overriding goal is to provide sufficient high-level support to the CEO.
In recent years, the COO has arguably become a more visible member of the top management team. At the same time, there has been little study of the role. Consequently, we do not know much about the organizational circumstances that support creation of a COO position, or about how to properly design the position. We also know little about how myriad contingencies such as environmental, firm, and individual characteristics might determine the precise configuration of roles and responsibilities to invest in a COO position. Just as we do not have a good understanding of the proper definition of the COO role, we do not know much about the knowledge, skills, abilities, competencies, and experiences that might predict the success of an individual in this role. The same applies to what life is like for the incumbent in the role, and the degree to which it prepares — or should prepare — an individual to ultimately serve an organization as a CEO. Finally, we must learn a great deal about how this CEO/COO structure affects organizational performance — does it lead to the results one would likely have sought through establishing the COO role? In fact, the scant research that does exist in this area suggests it may not. In all, whether or not — or when — the designation of a second in command is a good model for leading organizations is an open question, as is how to structure and fill such a position. Our goal in this book is to begin the process of developing a systematic framework to help business leaders understand whether, when, and how to implement and fill a COO position.
THE COO ROLE
As CEOs are expected to spend more and more time outside their organizations, the COO has taken on more and more responsibility for the oversight of daily organizational operations. On the positive side, it can be argued that allowing the CEO to focus on strategic, longer-term challenges the company faces, and creating a role (that of the COO) to lend leadership and oversight to day-to-day company operations, improves the effectiveness of the individuals in both functions. Clearly, the position at the top has grown; to conclude that the responsibilities could be better addressed if divided makes intuitive sense. On the other hand, some have suggested that separating responsibility for strategy formulation from strategy implementation is a major mistake. Further, in some dramatic examples CEOs have used what they would view as a necessary distance from day-to-day operations as an excuse that should protect them from responsibility for misdeeds and unethical or illegal behavior displayed by members of top management. This so-called dummy defense is expected to play a key role in efforts on the part of some high-profile CEOs to avoid penalties for financial fraud that could include jail time: Walter Forbes (CUC International), whom theNew York Times reported felt little need to attend to happenings inside the company; Richard Scrushy (HealthSouth); Bernard J. Ebbers (WorldCom); and Ken Lay and Jeffrey Skilling (Enron). In fact, one consulting firm found that in 2002 only 17 percent of the companies that promoted the COO to CEO replaced the COO. The interpretation of the finding was that it gave evidence that investors want to force the CEO to stay close to the business. In our interviews, we found that several new CEOs did not plan to immediately recruit a COO because they wanted to be close to the business. However, they also indicated that this model may not be sustainable in the long run and that, as they began to think about succession, the appropriateness of the role would likely reemerge.
In our interviews with executives, it quickly became clear that the most critical element in successfully implementing the role is a trusting relationship between the COO and the CEO. As Andrew Waitman said to us, at his company (Celtic House) there is an understanding that the COO (David Adderley) is the person you would want holding the rope, should you find yourself dangling off a cliff — your trust in the person and his or her capabilities is that strong. Charles Wilson, the executive director at Marks and Spencer Group, elaborated on this point in noting that the trust has to be about both personal integrity and competence. In the most positive case, what might be achieved is a productive work arrangement like that described by Heenan and Bennis in their recent book Co-Leaders: The Power of Great Partnerships. This notion has been translated as "two in a box" and is explicitly practiced today by such businesses as Dell (Michael Dell and Kevin Rollins), Microsoft (Bill Gates and Steve Ballmer), and Synopsys (Aart de Geus and Chi-Foo Chan). If two in a box is viewed as the exemplar for leadership at the top of an organization, the other extreme is characterized best by Harry Levinson in a 1993 article; he directly addressed the particular challenges in creating a number two role, noting that:
The relationship between the chief executive officer and the chief operating officer in any organization is fraught with many psychological complexities. Perhaps it is the most difficult of all organizational working relationships because more than others, it is a balancing act on the threshold of power.
The key ingredient for COO effectiveness is often whether the CEO is ready to share power. Unfortunately, some COOs do not realize the CEO is not ready until they are in the position and friction begins to appear in the relationship. We explore the theme throughout this book because clearly organizations must anticipate and avoid the dysfunction that can arise from a poor match between CEO and COO: unhealthy rivalry, defensiveness, overcontrol, rigidity, misconceptions, and doubt.
Until quite recently, academic investigation typically focused only indirectly on COOs. Some explored the characteristics that help a COO become a successful CEO. That is, the research is designed to help predict COOs' performance in their next job, not the current one. A second thread of study explored this role through examining CEO succession. An example of this research considers how COOs as "insiders" fare as CEO, compared to "outsiders." The third cluster of study looked at the COO role in special circumstances where the CEO and COO function as "co-leaders." Most recently, Cannella and Hambrick investigated the factors associated with creating a COO position, as well as the relationship between the presence of a COO and organization performance. Cannella and Hambrick found the relationship to be negative; the presence of a COO was associated with a lower level of organizational performance. This research was widely cited in practitioner publications (see, for example, Industry Week, April 2004), but without much effort to aid in understanding or explain the reason for the counterintuitive finding. Hambrick was quoted as suggesting that companies with COOs are at a disadvantage because either (1) the CEO-COO structure is an inferior one or (2) the presence of a COO is an indicator that the CEO is not capable. Whereas these are the more controversial among plausible explanations, it also clear that many alternative explanations may be salient. Perhaps the COO was a poor choice. Perhaps the effort to demarcate the CEO's work from that of the COO was muddled, poorly designed, or inadequately communicated and the resulting confusion led to poor decisions by members of the organization. Perhaps the efforts of the CEO to smoothly bring the COO on board were inadequate. Perhaps the plan was perfect but the implementation fell short.
In all, the fact that we do not know what makes the CEO-COO structure work suggests that more thought on the subject is warranted. So, although the Cannella and Hambrick study represents a start in an effort to understand the COO role, the fact remains that not much is known about how organizations might best structure the COO role — or, quite frankly, about how to select an effective COO. The prevalence of the role (in the last eighteen months, COO announcements have been made by companies in a range of industries, among them Time Warner, Microsoft, Radio Shack, Airbus, Allstate Insurance, KPMG, Alcatel, Chiron, Nissan Motor, BellSouth, Comcast, MetLife, Viacom, Ford, and Medtronic), combined with general lack of understanding of the role, its context, and the factors associated with its successful execution lend an urgency to this work.
A TYPOLOGY OF COOS
As is the case with many issues, clear definition of the COO is an important place to start. In the broadest sense, this is not difficult: The COO is the second in command and has responsibility for day-to-day operations of a business. The definition is intuitive, but it can be difficult for an outsider to understand who holds this position; sometimes COO and sometimes another title is used to denote the role.
Further, when a reader is immersed in the literature to investigate this more closely, it quickly becomes apparent, even after solving the labeling challenge, that a COO is not a COO is not a COO. In some firms, the COO has a narrow mission to address a specific business need. For example, Microsoft filled Rick Belluzzo's position as COO with Kevin Turner from Wal-Mart after it had been vacant for several years. Turner is expected to use his retail experience to help Microsoft grow the consumer products business. In other enterprises, the COO's role has been nearly that of a Zen master as mentor to a developing CEO. We have observed that the main driver behind the sometimes subtle and sometimes not-so-subtle differences among COO roles is the firm's motive in creating the position. Though these motives should not be viewed as being mutually exclusive, treating them as such makes for a more straightforward initial explanation. Our research identified seven motivations behind creation of the COO position:
1. To provide daily leadership in an operationally intensive business
2. To lead a specific strategic imperative undertaken by management, such as a turnaround, major organizational change, or planned rapid expansion, or to cope with a dynamic environment
3. To serve as a mentor to a young or inexperienced CEO (often a founder)
4. To balance or complement the strengths of the CEO
5. To foster a strong partnership at the top — the two-ina-box model
6. To teach the business to the heir apparent to the current CEO
7. To retain executive talent that other firms may be pursuing, absent an imperative from the business for creating the position
We consider the first two situations — an operationally intensive business and a strategic imperative — to be firmfocused motivation. That is, the claim that the position serves to address a need of the firm has high face validity. The next three situations — COO as mentor, a balance to a CEO, or as part of a two-in-abox partnership at the top of the organization — are what we consider CEO-focusedmotivation. In each instance, the CEO is the most direct beneficiary of the COO position. Finally, we consider cases where the COO position is created to retain talent or develop the heir apparent as COO-focused motivation. Here, the COO is the first beneficiary of the creation.
Examples of firms that appear to represent each motivation may serve to further explain the typology. First, the COO position is nearly ubiquitous in operationally intensive businesses such as the airline, disk drive, and automotive industries. For example, Seagate Technologies, an $8 billion vertically integrated manufacturer of disk drives, now operates with a CEO (Bill Watkins) and a COO (David Wickersham). Previously, Watkins served as the COO for then-CEO Steven Luczo. As this example illustrates, the complexity of managing a vertically integrated global manufacturing enterprise while simultaneously satisfying numerous external commitments placed on a CEO sometimes takes two sets of hands.
Second, organizations have identified individuals and placed them in the COO role as a change agent — with the specific instruction to redirect the company (e.g., a turnaround or radical change). Ray Lane and his work at Oracle serves as a good example of an executive brought in to lead a turnaround, initially for the most troubled geography (United States) and later for the broader organization as the president/COO. At the time of Lane's appointment, Oracle was flirting with bankruptcy and the organizational culture was dysfunctional. Larry Ellison hired Lane (not an obvious candidate) from Booz Allen and Hamilton. As Lane explains,
My position at Oracle, as well as Jeff Henley's [CFO], was created in response to pressure from the Board on Larry Ellison due to the prior year's performance of Oracle. The Board had a concern: whereas Larry was a visionary leader, the company needed more discipline in its operations. To help along those lines, I was brought on board, as was Jeff Henley as CFO. From the beginning, Larry defined the three positions as "the Office of the CEO." Clearly, making this work depends heavily on shared understandings of who is responsible for what and on very effective communication among all involved. (Continues...)
Excerpted from Riding Shotgun by Nathan Bennett, Stephen A. Miles. Copyright © 2006 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of STANFORD UNIVERSITY PRESS.
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