Smart people, stupid choices: in Chief Executive's quarter century of existence, we've seen CEOs make big mistakes. A few learn from them - Chief Catastrophes - corporate management - Statistical Data Included

Chief Executive, The, August-Sept, 2002 by Catherine Fredman

What were they thinking:

It's a natural response to this year's business headlines, as one CEO after another falls from grace. The consequences have included plunging stock prices, forced exists, company and personal bankruptcy and, in at least two cases, federal indictments.

And yet, the news is nothing new. Alter the names and the dates, and the stories begin to sound awfully similar. The same reasons keep cropping up, too--reasons as old as human nature and as familiar as the seven deadly sins. Because of a power struggle. Because they can't make the hard choices. Because the perspective from the corner office is often so skewed that, as Intel Chairman Andy Grove wrote in Only the Paranoid Survive, "the CEO is the last to know." And, the most damning, because they have power and they can use it.

Over Chief Executive's 25 years of existence, we've seen a lot of smart leaders make really dumb decisions--the kinds of choices that, if they're very lucky, leave them with egg on their faces and, if they're not, with a bunk in a federal penitentiary. But we've also seen CEOs who learned from their mistakes and who used those lessons to propel their companies to greater success. We've put together a list of each, to provide a reminder of the former and encouragement of the latter.

Chief catastrophes: Eight decisions that didn't work LUST. Hanky-panky at Bendix: What was William Agee's major misstep? Was it when the then-42-year-old CEO of the $3.9 billion aerospace manufacturer Bendix leapfrogged 29-year-old Mary Cunningham from executive assistant to vice president for planning in less than 15 months? Or was it when his attempt to squelch rumors about their romantic relationship backfired onto the front page of business journals? Even after two years and Cunningham's departure, the buzz about high-placed hanky-panky helped torpedo Bendix's 1982 attempt to acquire Martin Marietta and, in the process, annihilate Bendix, too. Granted, the inherent hostilities in the takeover bid were exacerbated by clashing cultures and adversaries with sharply different management styles. But the deal-breaker appears to have occurred when Cunningham, now married to Agee, openly advised her husband at a crucial negotiation at Marietta's headquarters. Said one Marietta director at the time, "We'll burn this company to the ground before we let that [woman] have it."

ENVY. Coca-Cola's formula for a public relations disaster: It seemed like a good idea at the time. Over the previous five years, Coke had been losing the Pepsi Challenge in overall sales growth and market share among younger cola drinkers. So, backed by four-and-a-half years of elaborate planning and market research, Coca-Cola ditched its 99-year-old formula in favor of New Coke. Pepsi was so delighted that it declared April 23, 1986, New Coke's debut day, a corporate holiday. Irate lovers of the original Coke called for a resurrection. Coca-Cola announced the return of the original formula--rechristened "Coca-Cola Classic"--less than three months later. ABC interrupted "General Hospital" to break the news and Coca-Cola stock shot up $2.37 a share. New Coke faded to a 0.6 percent market share and by 1990, was renamed "Coke II" and virtually vanished.

GREED. CIGNA learns the cost of integration: It appeared to be a perfect marriage. In 1982, Connecticut General announced that it would combine its strength in health insurance with INA's depth of knowledge in property and casualty claims to form CIGNA. Then merger politics came into play. "There was an enormous amount of 'we-they' right after the merger and very little 'us,'" explains management consultant Steve Drotter, co-author of The Leadership Pipeline. "It was about who had what job and who was going to make the decisions, rather than what was right for the business." As a result, the senior talent in property and casualty insurance were pushed out, people without their experience took over a very complex, high-risk business--and flopped. By 1986, CIGNA became the first company to take a $1 billion-plus write-off. When the news flashed across the Dow Jones wire, one unbelieving insurance analyst was convinced that "those damn fools" at Dow Jones had put the decimal point in the wrong place. CIGNA eventually sold the property and casualty unit at a loss.

GLUTTONY. Biggest dot-bomb Web van bags it: By the time the online grocer bagged its last stack of paper plates on July 9, 2001, it had flushed some $1.2 billion in financing down the drain and laid off all of its 2,000 employees--the largest Internet failure in terms of money invested and workers affected. What is amazing is that all that cash was spent with almost no research into whether consumers would want Webvan's services. Its founder, Louis Borders, believed that "if we build it, they will come." They didn't--but even if they had, they would have been tripped up by an expensive automated-distribution system that included a freezer case with a 100-foot-long, computerized lazy Susan that froze at cold temperatures.