Monday, September 11, 2017

Excavating entrenched management

In the words of Weisbach (1988): "Managerial entrenchment occurs when managers gain so much power that they are able to use the firm to further their own interests rather than the interests of shareholders."

Marc Fors told me this story of excavating entrenched management from American Business Products (ABP), a public company that was comprised of a variety of product groups; from food packaging to stationary and office products to book manufacture. BookCrafters was the book operation and was about $40M in sales and while historically profitable had now been losing money for several years. A new management group had been hired a few years before but the downward slide continued. All efforts to sell the company to other larger competitors had been fruitless. It had to be fixed or would have to be shuttered.

 I was hired as the turnaround CEO and moved to Ann Arbor with my wife and we rented a house in the community. This would be the smallest company I had attempted so far. It was the dominant company in the small town of Chelsea, and its largest employer. It had long been a family operation before being acquired by ABP and had been insulated from the changing realities of the print markets.

 Apart from the usual array of process control, a sales organization and equipment problems, there was a distinct morale issue. After a day or so at the plant HQ offices interviewing key players I began to understand the depth of the morale issue within the ranks. There was little respect or confidence in the new management team that had been hired by ABP. They had come across to the employees as aloof outsiders, more concerned with their own positions, and had not made any progress the 450 employees could see. Some key employees had been demoted or fired to make room for new managers aligned with the new management team, making matters worse as those hires brought a similar attitude and effected no positive change.

I had arrived a day earlier than planned and noticed that the entire management team was out at a “management meeting” at the local private golf club where the company maintained a membership. When they returned the next day I was struck by the lineup of leased company vehicles they all drove – all expensive luxury cars. These guys were out of touch and they had lost the respect of the hourly employees and were not likely to get it back. Morale was low and the rumor was out that I was here to reduce headcount and close the plant.

 After a series of one-on-one meetings with each department head where I was regaled with how much new capital they needed to improve operations I was scheduled to tour the plant with the three key manufacturing managers. A book printing operation is a complex operation of parts and assembly at that time. The skilled trades were on the printing presses, as large as a small house, and they were mostly men. The unskilled trades of assembling parts and operating the bindery were almost 70% women.

 Once out in the factory we walked through the Bindery with its loud clacking machines and all the handworkers gawking at the guys in suits, ostensibly to the center of the operation and to one of the newer printing presses that they wanted me to see and presumably be impressed by, they asked what I wanted to see first that day. I stopped the whole group in the aisle, by a small group packing boxes, and spoke loudly in order to be hard by all: “I want to see the women’s bathrooms.” Chuckles and odd smiles were the response all around and I said, “I’m serious. I want to see them all, one after the other – together as a group” Then I want to see any break room or employee changing area.” “After that, I will decide if we see anything else”

So that is what we did. I made them tour each bathroom and break area with me – making notes of cleanliness, broken faucets, paint problems, chipped and rusty porcelain and the like. It was intended to be obvious to the whole plant. I asked a female worker to take a break, leave her station and come with us – she entered before and made sure we were not disturbing anyone. I went in each bathroom over the course of a couple of hours (there were 12) and spent time in each and went I came out made a point of waving my arms, pointing and gesturing with the group around me.

After the tour, standing in the aisle we started in, I summed it up for the group: “So far, I am not impressed. You would not ask your own wife or daughter to spend time in those bathrooms and I am shocked you have let it go that far. I have to tell you I am not interested in touring anything else, or talking about any new capital for this plant until those bathrooms are fixed. That’s where we start. Productivity comes from people first and equipment second, not the other way around.”

The next day I fired one department head and hired back, as his replacement, a much beloved (and effective) manager that had been demoted. He began work on the refits. He had all the stalls dismantled and repainted by the local auto-body company in short order. Lighting was changed and upgraded. Paint and mirrors replaced and new seating and lockers installed in the break rooms. Fresh food options replaced broken vending machines.

 Over the next two years more progress was made and the sales organization was rebuilt. The plant never experienced the feared reduction in hourly manning – in fact the reverse. Sales grew, new product lines added, and morale and productivity recovered. I then led the sale of BookCrafters to a larger company that had two similar book plants that we merged with and integrated, led by the BookCrafters management team, bringing our management style and priorities with us. BookCrafters grew to become the Book Division of the Sheridan Group, a $500M print company, and is still in operation today in Chelsea Michigan.

4 comments:

  1. “Productivity comes from people first and equipment second, not the other way around.” Human capital, referred to here as employees, are an organizations greatest asset. The health, safety, and well-being of the hands-on producers, the unskilled laborers, should be at the top of an organizations priority list. Something as simple as functional, clean bathrooms, break rooms with seating and lockers, and vending machines with nutritional options says a lot about how management values is employees. Take care of your human capital, show them the same respect you want shown to you, and they will take great pride in what they do for the organization. Good morale is just as contagious as bad morale and management has the ability to set the stage for either. Production and reports will back up whichever one you choose to feed.
    This blog points out, by looking at the treatment of the greatest percent of the staff, something that much of the management overlook when they are devising strategies, pouring over reports, intent on protecting their own individual positions. Management having meetings at the local golf and country club, each driving luxurious leased company vehicles, sends a negative message to the production employees. It easily points out that management, even though running this dominant company and largest employer in Chelsea, continues to have large expense accounts when the company is faced with the position to either come up with a significant turnaround to stay in business or close their doors for good. Of course their actions are going to nurture poor morale amongst the ranks. They are showing a “who cares” attitude.

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  2. Human beings are the most important capital in an organization and the BookCrafters case proves that point. Employees who are treated with respect and feel cared for will become more productive. It shows how important physical surroundings can be for the productivity of employees. There are several studies that elaborate on this point. In an online Forbes article by Jacob Morgan, he references three studies, Gensler's Workplace Index, The Leesman Index, Steelcase, which all draw the relationship between the physical workspace and employee satisfaction. Employees who are happy with their workspace will be happier, more engaged, healthier and more productive. This translates into value not just for employees but also for the bottom line of the company.

    It is important to mention that not only is the physical environment important but so is the cultural environment. In some companies whose cultures are driven to produce financial results forget that there are humans in the production process. Stress has been shown to reduce productivity and affect employee health. (Higginbottom. 2015). Employees reporting higher stress levels took about 4.6 days sick days compared to employees reporting lower stress levels taking about 2.6 sick days.

    Stress is costly. “The American Psychological Association estimates that more than $500 billion is siphoned off from the U.S. economy because of workplace stress, and 550 million workdays are attributed to stress, and it’s estimated that more than 80% of doctor visits are due to stress” (Seppala and Cameron. 2015). The Global Benefits Attitudes survey studied 22,347 employees from 12 countries including the United States. This study found that employees’ level of engagement significantly decreased when employees experience high stress levels. (Higginbottom. 2015).

    References
    Higginbottom, K. (2014, September 11). Workplace stress leads to less productive employees. Forbes. Retrieved on October 3, 2017 from https://www.forbes.com/sites/karenhigginbottom/2014/09/11/workplace-stress-leads-to-less-productive-employees/#48abbeec31d1

    Morgan, J. (2015, December 3). How the physical workspace impacts the employee experience. Forbes. Retrieved on October 3, 20178 from https://www.forbes.com/sites/jacobmorgan/2015/12/03/how-the-physical-workspace-impacts-the-employee-experience/#4bf84ab9779e

    Seppala, E. and Cameron, K. (2015, December 1). Proof that positive work cultures are more productive. Harvard Business Review. Retrieved on October 3, 2017 from https://hbr.org/2015/12/proof-that-positive-work-cultures-are-more-productive

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  3. From Marc Fors’ description, it was obvious the previous leadership of ABP had lost sight of what their role was and they could no longer see the issues or cared to see the issues, and change had to be made. Management entrenchment or worse, leadership thinking they were entitled, or above the employees, with a separate set of rules.

    The turnaround is another example of how culture and human capital are paramount for any high performance organization. An organization’s human capital operates the high cost machinery and controls the effectiveness, quality, and overall performance/output of those large capital investments. Investment in the employees and work environment is just as or even more important to the organization.

    By showing the importance of the employees, specifically the female employees, Marc Fors credibility soared with employees. He showed humility, immediately developed a trust with the employees with his actions, and shared ownership of the organizations issues, all characteristics of a good leader that an employee can follow. Employees have to trust their leadership, but also the leadership has to show trust and have faith in the abilities and efforts of their employees for a successful turnaround (DePree 1992). Trust in new leadership is key and a central component in any turnaround (Covey 1990:DePree2002), and Fors received that from the start at ABP.

    A company is only as good as its employees. Too often everything is looked at except the human asset, the individuals that run the systems, make the products, setup the procedures, and complete the projects. Focus on the human asset first and then a lot of the other issues take care of themselves because the employees feel a true connection to the organization and want to be involved with the successes.

    References:

    Fareed, M, Developing Human Capital for Sustainable Competitive Advantage, International Journal of Economic Perspectives, 2016, Vol 10, Issue 4, 655-673

    O’Kane, C, Cunningham, J, Turnaround leadership core tensions during the company turnaround process, European Management Journal 32 (2014) 963–980,

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