Failing Upwards: Succeed by Screwing Up

Corporate America is full of execs rewarded for failure.

Feb. 7, 2007 — -- We all know the type, whether it's your boss, neighbor or sister-in-law.

That person who screws up at work but somehow keeps landing a great new job or a promotion.

Those lucky devils epitomize the concept of failing upward -- when incompetence is inexplicably rewarded.

The phenomenon is most common in the business world, where the typical scenario plays out like this: A high-paid CEO does a poor job running a company, takes an enormous severance, and lands on his feet with a better job at a bigger corporation.

Recently, there have been several high-profile examples, from Home Depot's Robert Nardelli to NBC's Jeff Zucker.

Last month, Home Depot handed Nardelli a $210 million severance package after the company's stock slid nearly 8 percent during his six-year reign. And the company didn't look too far to find his replacement: It tapped Nardelli's chief strategist, Frank Blake, at a salary that could total $8.9 million.

And this week, NBC's Zucker, who ran the TV network while it sank from No. 1 to No. 4 in the ratings, was promoted to chief executive of the NBC Universal media conglomerate.

While Zucker has been lauded for his success securing the dominance of the "Today" show, he's come under fire from shareholders who feel that the network's ratings slide helped bring down corporate parent General Electric Co.'s stock.

"They're spinning it as a meteoric rise, but they gloss over going from No. 1 to No. 4 and I calculated the stock has gone down 11 percent since [Zucker's boss Jeffrey] Immelt took over," said Peter Cohan, a venture capitalist who's owned stock in GE for decades and blames Immelt for promoting Zucker.

"I mean [GE's previous chairman] Jack Welch has come out and said that he would have fired Zucker. That's how he did things: If somebody wasn't doing their job, he'd get rid of them," Cohan said.

Others who've profited from this trend include PalmOne CEO Todd Bradley and former American Airlines chairman and CEO Don Carty.

Bradley pocketed more than $2.4 million in 2005, when he left PalmOne, which took a second-quarter charge of $3.2 million as a result of its largesse. Soon enough, Bradley was hired by Hewlett Packard to run its PC and handheld business.

Carty was hired last month as Dell's vice chair and CFO despite his embarrassing resignation as the chairman of American Airlines in 2003, after he came under fire for overspending and failing to tell workers about planned executive bonuses and pension protections on the same day that the unions voted on $1.8 billion in job, pay and benefit cuts

It's enough to make shareholders scream and observers scratch their heads.

"You wonder: Why would you hire somebody who failed at a previous job?'" said Joe Weintraub, a professor of management at Babson College. "If they haven't performed well in one function, what makes you think they'll do better now?"

The reasons range from the nature of corporate culture, which tends to reward its own, to the American belief in second chances and focus on short-term success.

"It happens much more frequently than anyone cares to acknowledge," said Ken Siegel, president of The Impact Group, an organizational consulting group. "Typically, people promote people they like. It's a derivative of promoting yourself. It has nothing to do with how well you perform."

That scenario is most common when it comes to choosing who gets the corner office.

"The higher you go up, the less rigorous the situation becomes," Siegel said. "Familiarity breeds some tolerance of incompetence. We typically have more excuses for those internally, and that contributes to reasons why they should be promoted -- 'That $5 million in losses wasn't their fault.'"

The ability to forgive and forget past mistakes is also unique to American corporate culture.

"If you lose money in the states, you write books about how you lost money and other people will hire you," Weintraub said. "That doesn't happen in other countries. In the U.K., banks won't loan you money. In Japan, where it's all about saving face, if you screw up at a company, you're done."

And corporate culture is as much to blame as the performance of individual CEOs.

"You can keep bringing in different CEOs, but it might not change things if the structure of that company is flawed, the way the company manages its business and the way it operates," Weintraub said.

Beyond that, judging CEO performance is not an exact science. Cutting costs may boost the company's stock but hurt it in the long term.

Shareholders blame corporate boards that hire these CEOs and approve their lucrative compensation packages. Often, these boards are made up of fellow executives who know each other and have a vested interest in handing out big pay packages.

"It raises the average for all the others so they approve these dumb deals," said Don Hodges, the president of the Hodges Fund, a mutual fund. "Many times, the directors come on at the behest of the CEO. They probably play golf together so then their loyalty is to him."

In 2002, Hodges was so outraged that ETrade chairman Christos Cotsakos had received an $80 million pay package while the company was losing money that he went to a shareholders meeting and demanded that every board director be fired.

The request was met with silence, but the board finally sacked Cotsakos a few months later -- giving him a $30 million severance.

"He made out like a bandit," Hodges said. "I wrote him a letter and said I had more respect for a bandit who held up a grocery store and risked getting shot."

Needless to say, Cotsakos never responded.