Victory disease

‘You can never have too much of a good thing’ is often quoted, but from
Churchill to Nixon it has, alas, never been true. And nowhere is this more
evident than in business, where success actually breeds failure. Paul Simpson
outlines six classic symptoms of this growing epidemic

If Admiral Isoroku Yamamoto had been alive to witness the recent corporate
scandals, he would have had summed up the likes of WorldCom and Adelphi – the
cable giant whose family founders have been charged with fraud – in two words:
‘victory disease’.

He coined the term in 1941 when Japan decided, despite his reservations, to
bomb Pearl Harbor. Flushed with success, the Japanese forgot its ‘defensive
perimeter’ (which included much of mainland China, the Philippines, Burma and
Malaysia), and attacked the Midway Islands in the central Pacific. The Japanese
lost the battle of Midway in June 1942, lost Yamamoto a year later (his plane
was shot down) and the war by 1945.

It is ironic that one of the political heroes of the war developed the
victory disease in the ensuing peacetime. Winston Churchill, the ultimate
symbol of victory, was soon out of touch with the electorate and the ‘brave new
world of the 1950s’, and was ultimately out of a job.

All this might seem miles from the misdeeds of Adelphi – now suing the Rigas
family which founded it for allegedly treating the company ‘as if it was the
family’s piggy bank’ – or the sudden shocking collapse of Marconi, but the
point is the same. Mankind finds success hard to handle. Triumph can lead to
hubris, large stock options, dubious diversifications, and can fatally weaken a
company’s culture. As Chris Parsons, a principal consultant at HR firm Penna,
says: "We used to say success breeds success, but recent evidence suggests
success breeds greed." Success also, in one of corporate life’s more
bitter ironies, breeds failure.

So what exactly is victory disease? Here are six classic symptoms and the
lessons we can learn from them.

1 Rock star syndrome

Parsons also refers to this as ‘the executive jet effect’. Success changes a
company’s leaders, often in ways that don’t help the leader or company.
"Executives can become obsessed with perks," says Parsons, "and
get isolated from their market." The recurring rise and fall of ‘rock
star’ CEOs may be as natural to the human race as breathing. Several studies
show that people are less likely to make good decisions after several years of

CEOs also get paid like rock stars. Graef Crystal, a US expert on executive
remuneration, says that in 1973, the typical major US chief executive was
earning 45 times as much as the average employee, "now it’s 500 times as

Too many perks, too much money and too much flattery (cover stories in
coffee table business magazines), are familiar ingredients of this corporate cliché.

Some leaders become so synonymous with their companies, says Parsons, it is
unhealthy. "With Richard Branson, you get the benefits of his brand while
at the same time feeling that there is more to Virgin than his image. But
Microsoft is almost synonymous with Bill Gates and that has created problems
for the company."

The right business leader can be lionised to such a degree it reinforces the
inevitable temptation to trust their instincts rather than, say, feedback from
staff on the coalface. "A lot of the behaviour at Enron is just proof that
power really does corrupt," says Parsons.

"If you give executives the kind of stock options where share prices
are key, they will inevitably be driven by the short-term, not the
long-term," says Parsons.

Michael Jensen, the University of Chicago economist who originally devised
stock options, says: "High share prices are to managers what heroin is to
a drug addict. Once you train managers by penalising them for telling the
truth, that kind of unethical behaviour gets extended to all sorts of

HR lessons

Good strategic HR management should ensure managers do not exploit
shareholders. Although the excesses of Enron, Tyco and Adelphi seem
spectacular, they should not obscure the fact that there is an inevitable
tendency, identified in 1986 by Miles Mace in his book, Directors: Myth And
Reality, for directors to represent senior managers, not shareholders. This is
why there is a growing school of thought that recommends boards should be
dominated by outsiders, not insiders.

In most recent high-profile corporate scandals, the board has met the
cynic’s definition of a typical US board – ’10 friends of the CEO and one
minority representative’. So a long-term objective for HR must be to ensure
reasonable diversity of opinion on the board.

HR must also monitor perks and salaries, creating a mechanism which allows
proper scrutiny and lets HR define what is culturally acceptable.

Executives may prefer the simplicity of stock options, but HR must devise a
broader set of criteria which balance short and long term, cash and shares,
basic salary and bonuses, hard and soft goals. For example why not reward
managers for increasing staff retention as well as increasing profits? Such
criteria might have saved some of the companies whose demise has hogged

2 The Nixon effect

When a company or person seems most successful is often the very point at
which things have begun to fall apart. When Richard Nixon was re-elected to the
US presidency in 1972, he won 61 per cent of the vote and carried every state
in the union except Massachusetts. Some aides even discussed repealing the
amendment which limited a president to two terms of office. Yet in 1974, Nixon
was forced to resign for covering up what his aides had dismissed as a ‘third
rate burglary’.

The effect was evident at Enron. As the share price soared towards $90 in
November 2000, Arthur Andersen began, belatedly, to question its accounting

Some historians still argue that, if Nixon had gone to the US soon after his
re-election, admitted things had gone wrong, apologised and cleaned up the
White House, he could have survived. It would have been out of character, but
he could at least have avoided the ignominy of being the first US president
forced to quit.

Enron’s tragic farce includes a similar ‘what if?’. In May 2000, Enron
vice-president Albert Gude told chairman Kenneth Lay "I believe you are in
trouble", complaining about the selfishness of the executives employed by
CEO Jeffrey Skilling. Lay, says Gude, replied: "They are OK guys".

The trouble with cover-ups, political or financial, is they don’t last. In
the fall of Nixon and Enron, Parsons says you can see another trait: "The
leaders stopped listening to people outside their circle and in the long term
that did it for them."

Nixon’s presidency initially rewarded those who would do his bidding
regardless, a path that led inevitably to Watergate. If Rich McGinn had
listened to his staff, he might still be running high-tech group Lucent
Technologies. But he was too busy heeding Wall Street to hear company
scientists who pleaded for Lucent to invest in a critical technology which
rival Nortel pioneered. Nor did he listen to the complaints of his salesforce,
forced to discount products to meet unrealistic growth targets Lucent had
promised Wall Street.

HR lessons

In almost any organisation, the initial response to a crisis is to circle
the wagons. This is especially true in new high-flying companies which have
used a fortress ‘us against them’ mentality to motivate staff. In such
instances, justified criticism from outsiders (press, investigators, peers) is
seen as an attack by ‘them’.

In some cases, the simple act of appointing company ombudsmen might have
averted the crisis or, at least, spotted it before it proved fatal. The moment
of maximum success is often the moment of maximum danger, a point where
established cultural values can be ignored or perverted. An HR department, even
if it feels powerless to stop this change, should be aware of it before anyone

3 The Ajax syndrome

Dutch football team Ajax won three European Cups on the spin in the early
1970s. Yet that legendary team, captained by Johan Cruyff, broke up in 1973
with the football world at its feet.

The fragmentation of Ajax was spectacular, yet confirms the human factors
which make even the most successful teams so fragile – whether they consist of
Dutch footballers or R&D engineers.

The departure of Ajax’s inspirational coach Rinus Michels, who was
headhunted by Barcelona, led to the key event in the team’s collapse: the
players voted, by 13 to three, to sack Cruyff as captain. Cruyff immediately
fled to Barcelona to be followed by Ajax team-mate Johann Neeskens. Ajax would
not win another European trophy until 1987.

Success had changed the dynamics of the Ajax team with Cruyff’s profile and
outspokenness alienating colleagues, and they had hit a glass ceiling in
winning club football’s highest honour three times – there was no goal they
could unite on.

Parsons says successful start-ups reach an equally critical point. "At
first, communication in a start-up is good and informal, decision-making can be
democratic and everybody knows what is different about the company. But as it
grows, that changes. People assume communication is just as good although, as
the company grows, conversations don’t happen in the same way.

New people come in who weren’t part of that culture. The company’s goals can
be less clear – and soon the start-up has to bring in different managers and
change its culture." The mix of old and new can be an oil and water affair
with the founding genius departing and the company deemed to have lost its way.

Ajax’s eclipse also suggests it is easier to motivate people by giving them
a clear, dramatic, aggressive target (to be the best in the world) than it is
to inspire staff to defend that position once it has been won. It is one reason
most mountaineering accidents happen on the way down from the summit, not on
the ascent.

HR lessons

There is a chicken and egg kind of insolubility to this problem. In part,
start-ups flounder because they don’t have an HR strategy, but then they’re too
busy growing to develop one. Still, the attempt to answer a few simple
questions would help alot: What human resources will we need over the next five
years? Do we need different kinds of skills and how are we going to acquire

If your company ever does the equivalent of winning three European Cups in a
row, you shouldn’t be surprised if your ‘star’ staff (as they will see
themselves) move on. But that’s no disaster if you have a new generation of
Cruyffs in the making. Ajax didn’t, and paid the price.

4 The acquisition trail

Marconi’s decision to rebrand itself, ditch its fusty old name GEC and sell
off its defence business seemed, in a post-Cold War world, eminently sensible.
But CEO George Simpson began buying telecoms and high-technology companies as
if they were going out of fashion, which they were. Overcapacity and the costs
of moving to the next generation of mobile phones bedevilled Marconi’s
customers. Marconi didn’t help by insisting, despite dire pronouncements from
rivals, that profits would keep growing – only to admit, months later, it
expected them to fall by half.

The £5bn acquisition trail soon left the company in debt and probably
undermined the company’s culture. "In a well-managed company, an
acquisition should be a trigger to ask serious questions," says Parsons.
"Where do we want to be? Is our strategy still the same? How is this company’s
culture different from ours? One reason so many mergers and acquisitions fail
is that these questions are not asked. And afterwards, instead of having one
company culture, you have a series of sub-cultures where the people who’ve been
acquired still do things their own way. We’ve found cases where one subsidiary
would rather buy from an external supplier than from a sister company."

Marconi might be in better shape if it had bought less and paid less. That
said, its thirst for acquisitions pales compared to Tyco which, at its
acquisitive peak, acquired a business almost every day.

When Marconi shares were worth £12.50, the group devised a set of principles
about its style of doing business and treating staff called The Marconi Way.
More than 9,000 redundancies later, that manifesto must be one of the most
devalued documents in British corporate life.

HR lessons

Three separate studies between 1974 and 1993 showed that roughly one in two
acquisitions fails. Indeed, one study of large US firms’ acquisitions between
1950 and 1986 showed that 53 per cent were subsequently sold off. And they
fail, most often, because senior management adopts a ‘wham bam thank you mam’
approach. Most companies are for sale for a reason: they have some flaw that
needs correcting. But once the deal’s done, management doesn’t carry out the
close work needed to make an acquisition succeed. Acquisitions invariably take
more time and resources to manage than the buyer expects.

There is no excuse for any HR manager not to have factored this into
acquisition planning and many deals come undone in the touchy-feely details
such as the newly acquired staff’s perception of how they are perceived by the
new company. Senior managers often underestimate or fail to predict the way
such acquisitions might change a company culture and it is HR’s job to assess
the implications of acquisitions and create the processes by which staff, at
the existing company and the newly acquired subsidiary, understand and buy into

5 Dubious diversity

Analogies between wars and business are often misleading or just plain
wrong. But one tenet of military theory is worth heeding in corporate life:
diversify at your peril.

In military terms, this means don’t, as Japan did in Second World War,
spread your resources too thinly against too many enemies. Part of the
incremental descent into poor judgement which kills many companies is the
arrogant certainty that because we’re brilliant at delivering widgets, we could
be the best at making cream cakes too.

Having transformed the US gas market, Enron did the same to electricity
before offering financial protection against heatwaves or blizzards. As one
employee said: "We had people who thought they could sell hairballs if
they could find the buyers."

Enron is only the latest company to suffer from that delusion.
Diversification, from Walkmans to Hollywood film studios, forced Sony to pull
out of film-making and write off $2.7bn in 1994, just five years after buying

For Parsons, a change in strategy should pass one simple test: "Can you
explain it simply to your employees or your managers on the front line? If you
can’t, then you have to ask what makes management so sure it’s a good

HR lessons

Most successful companies diversify. Yet seven out of 10 acquisitions that
take the buyer into an unrelated market end up with the acquisition being
resold. While directors debate strategy, HR can be as critical to the success
of such a move. The clash of corporate cultures, the imposition of an inappropriate
management style, the fact the diversifier can’t spell integration let alone
manage the process – these are among the most common reasons diversification
fails. And they are all issues on which HR should lead.

6 Corporate cults

Enron’s Skilling always had a unique take on life. Asked at business school
what he would do if he found out his company’s product might kill customers, he
replied (his old professor remembers): "I’d keep selling the product. My
job as a businessman is to maximise return to the shareholders. It’s the
Government’s job to step in if the product is dangerous."

Skilling made Enron into one of the US’s largest companies. But also,
fatally, into a cult. Enron was, he once declared, "the world’s coolest company".
Like any self-respecting cult, Enron purged the faithful with its famous ritual
firing of one in seven staff at year’s end.

Rakesh Khurama, assistant professor at Harvard Business School (and author
of Corporate Savior: The Irrational Quest for Charismatic CEOs), says:
"Skilling is the perfect example of the perils of charismatic leadership.
Charismatics usually surround themselves with yes-people. Because they can’t
stand criticism the organisation evolves around pleasing them." At Enron,
one trader admitted, "There were no rules, even in our personal lives.
Everything was about the company and supposed to be on the edge – sex, money,
all of it."

Good leaders recognise that their status makes it harder for staff to
deliver bad news. They either, like Winston Churchill, create a mechanism to
make sure such information reaches them (in his case an office of national
statistics) or empower trusted managers to bear bad tidings. Skilling did
neither, but did promote his then secretary (and now wife) Rebecca Carter to
the board, on a $600,000 salary.

Like most cults, Enron imploded. It is tempting to say it couldn’t happen
here. After all, even the most docile non-executive director might wonder if it
was such a good idea to hand out more than three-quarters of your profits in
cash bonuses to directors, as Enron did. But Skilling is not the first business
leader to form his own cult, and he won’t be the last.

HR lessons

John Sullivan, the US electronic HR expert, blames HR, saying: "HR is
responsible for maintaining values and ethical behaviour. Clearly the Enron
culture got out of hand. The ‘new’ culture that evolved (grow the business at
any cost) clearly killed the company." He may have a point. The underlying
theme of Adelphi, Enron, Marconi, Tyco and WorldCom is the failure of companies
to allow their HR departments to fulfil their proper strategic role. Í

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