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Since hindsight is 20/20, I can now see that there were signs, even a year ago, that all was not as it appeared in the management of Lernout and Hauspie (LHSP), the 2nd most popular choice for RB candidates, as I explained earlier on this board in "On Track & On Target" (http://boards.fool.com/Message.asp?mid=1381154). But the participants in that first Rule Breaker Seminar were so impressed with the other criteria that they failed to dig deep enough to uncover those warning signs of accounting irregularities in previous positions held by members of the management team who have left that company, which so impressed investors and analysts, in shambles and left shareholders disillusioned and bitter.

To try to get my current Rule Breaker Seminar Team to understand the importance of DD, I posted the following:

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***CEO Failure / Success***

As we are considering how to measure good management, it might be helpful to identify factors most management failure can be traced to. There was an article published in the June 21, 1999 issue of Fortune Magazine entitled "Why CEO's Fail" by Ram Charon and Geoffrey Colvin. http://som.csudh.edu/hmilgrim/mgt590/Why%20CEOs%20Fail.htm

The entire article is based on the premise "Most unsuccessful CEO"s stumble because of one simple, fatal shortcoming." Interestingly, they agree that failure is not the result of either a lack of intelligence or a lack of vision. Most of those who failed were extremely talented and powerful executives. Their failure is explained in the article as ”not getting things done, being indecisive, not delivering on commitments." For those who question the authors' credibility they offer the following:

"We base our conclusions on careful study of several dozen CEO failures we've observed over the decades--through our respective work as a consultant to major corporations and a journalist covering them. The results are beyond doubt."

Most people think CEO's fail because of a character flaw or something they have done wrong. But the authors contend that most of them "tend to be highly intelligent, articulate, dedicated, and accomplished. They worked hard, made sacrifices, and may have performed terrifically for years…." And they make the point that just because a CEO fails at one company that doesn't mean you can write him/her off. Most likely these are such strong executives that they "come back in other roles".

While poor execution is the primary reason CEO's fail, the authors clearly define other causes: "Sometimes they adopt a strategy so flawed that it's doomed, or they refuse to confront reality in their markets, or they antagonize their board. And when a CEO really goes down in flames, there's almost always more than one reason."

The average tenure for CEO's when the article was written was 7-8 years. But with company snapshots available to anyone through information technology, failures can no longer be hidden or covered up for long. So top executives must shoulder the blame and are likely to be fired, or the company is likely to be taken over when performance is poor or consistently below expectations. This insistent demand for results often becomes ruthless when institutional investors are the major stockholders.

One reason CEO's fail to execute is that they don't deal effectively with some of their key subordinates. They are hesitant to let someone go, even if it would be in the company's best interest. They rationalize that the person deserves to stay, for various and sundry reasons, and drag their feet about confronting the problem. Unfortunately that more humane approach could cost the CEO his/her own job, particularly if no action is taken until the problem becomes acute. They make excuses for the subordinate instead of holding him/her accountable. As the authors point out, "The best CEOs never hesitate to fire when they must, but the larger point is that they're deeply interested in people--far more so than failed CEOs are."

Failed CEO's have often removed themselves from the innerworkings of the company and lost their competitive edge. They tend to delegate, instead of getting into the trenches and finding out exactly what is happening. At the end of the article is a list of failed CEO's and their reasons for failure, boiled down to one or a combination of the following:
{1} People Problems
{2} Decision Gridlock
{3} Lifer Syndrome
{4} Bad Earnings News
{5} Missing in Action
{6} Off-the-Deep-End Financials


When you are investigating the CEO of a company you are considering investing in, find out what he/she did where before taking charge of this company. Be sure that impressive former positions and promotions listed on a resume were not reached through the Peter Principle (In a hierarchy, every employee tends to rise to the level of incompetence.)

From my own research and DD (Due Diligence-basically common sense coupled with a reasonable degree of skepticism, based on thorough investigation), I have compiled the following list of criteria I use when evaluating the Chief Executive Officer of a company.

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10 Criteria for Evaluating CEO's Effectiveness

1. Has a clear vision incorporating specific goals for the company and is willing "to take the road less traveled" to reach them
2. Has performance credibility, keeps on track and doesn't lose sight of his/her vision for the company/product
3. Interacts directly with consumers and employees on the front line
4. Appraises progress realistically, deals openly with good and bad news, doesn't hide his head in the sand (denial), and takes competitors seriously
5. Is truly in charge of strategy and managing operations, but works with and is evaluated regularly by a competent board of experts
6. Has assembled an effective management team and holds them accountable
7. Inspires confidence in the company
8. Is willing to make decisions and does not tolerate gridlock
9. Communicates effectively to shareholders, the public and the media
10. Welcomes mutually beneficial strategic alliances

It requires a great deal of time and DD to examine all these criteria. But when we're seriously considering investing our hard-earned money (possibly retirement income), we should be willing to research carefully and thoroughly.

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This week I will review archived Conference Calls, Press Releases, SEC filings, AMSC Company reports and information from other sources as I evaluate the CEO of American Superconductor, Greg Yurek, taking my team through a step by step examination of all of the above criteria. When I have completed that work, I will also post it on this board, since Yurek is one of the primary reasons I believe in AMSC.

Judy
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Judy,
Great post. I look forward to your evaluation.
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