Workplace Issues

How to Avoid Organizational Mood Swings

CFOs and CEOs must learn to balance their messages to employees.
Robert SherMay 16, 2013

Companies that adhere to a CEO mantra of “spend aggressively for growth” can be exhilarating places to work. Yet they can also become environments of gloom, dragged down by debilitating managerial mood swings. When growth falls short of plan, as it often does, the climate can shift rapidly from buoyant to bleak. When that happens, panic can set in and destroy morale. Employees focus on protecting their jobs or getting out, and financial performance plummets.

One example: I recently spoke with a CFO at a hardware manufacturer with $45 million in revenue. He told me that at one point, when the company was profitable and growing, management began reinvesting most of the profits in new products. The CEO and CFO approved hiring at all levels and grew inventory levels significantly. The team rarely heard “no” from their CFO, even as the fundamentals slowly eroded over the course of 18 months. But as bookings and billings fell short of plan, cash started falling and EBITDA went negative. When the CFO finally spoke up, the normally positive CEO grew alarmed, advocating even stronger financial discipline than even the CFO believed was necessary. Their dilemma was how to break the news to the team who had thought everything was fine for so long.

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Too often, the combined voices of the CEO and CFO toggle between “all is good” and “we have a big problem.” Although executives frequently analyze the company’s financial health, they often keep their assessment too close to the chest. When they decide that “things aren’t that bad,” they issue the message, “everything is good.” This approach is too binary, provoking extreme responses from the team, like “spend freely and be happy” or “panic: we might all be laid off.”

The CFO plays a critical role in helping the CEO deliver a blend of both optimistic and pessimistic messages to the rest of the leadership team and the company as a whole. These messages should rarely be just positive or just negative. For example, the CFO might tell the company, “we hit our sales targets this quarter, but we missed on gross margins and need to decrease COGS” or “we’re investing $20 million of our cash in new products this year, but we’re counting on those new products to sell a minimum of $14 million next year.”

In practice, it can be difficult for the same person to deliver the positive message and the cautionary one. One strategy: divide these communications between the CEO and CFO.

Before any communication, the CFO should discuss the messaging approach with the CEO. Both the optimistic perspective and the risk averse perspective are critical. In particular, the management team must determine the optimal positive/negative balance for the quarter, considering the opportunities and challenges facing the company. For example, is it time for a cautionary, “red alert” message (cash is tight, profits are down), or is it time for a “go for growth” message (we have plenty of cash, grab market share)?

Even under the most positive conditions, executives should present the risks of failure. For example, though one of my clients just finished what its leadership team considers a poor quarter, the company’s top-line growth was 19%.  Some companies would be celebrating, but this company’s growth rate was 45% last year, so the client aspires to higher growth.

Even if a firm has plenty of money to invest, it still has a responsibility to demand a high return on that investment. As the CEO stands before the team, spreading excitement and hope that the firm can achieve lofty heights, the CFO must paint the picture of carefully allocated but limited resources, explaining the risks and consequences of underperformance.

As the year rolls on, make sure your team tastes both the sweetness of victory and the sting of setbacks and adversity. Few teams hit every target each month. The ability to face adversity as a team and innovate your way to success is only developed through practice. Contending with small setbacks and adjusting your approach as you go improves business performance as well. Make sure to communicate both wins and setbacks. When significant problems do arise, your entire team will know how to respond in a mature, focused fashion.

Don’t assume all CEOs are optimistic. Most are, but many are not. As CFO, assess how your CEO acts in different circumstances. If he tends to show stress, to panic, or to focus on the downside, you’ll need to shift to the optimistic role. You will assure the team that you are watching the finances, and that the firm has what it needs to succeed if they work both hard and smart.

Assess your leadership team’s level of maturity and experience, and their current mindset. How will they react to a change in messaging?  If they have been hearing that everything is fine over the past several months, but you suddenly tell them you need to make layoffs, they will be shocked. But in  most cases the CFO and CEO should be able to introduce the news incrementally and then start consistently exposing the leadership team to both the ups and the downs. They will mature as a team and respond positively, even in the face of significant difficulties.

Sometimes the CEO and the CFO are collectively either too optimistic or too pessimistic, and they create extreme reactions from the leadership team or among employees.  Projecting too much optimism takes performance pressure off the team, leaving them emotionally unprepared to deal with setbacks in a positive manner. Too much pessimism — usually expressed during setbacks — risks destruction of morale and productivity and flight of the best talent, who may fear layoffs.

The CFO should join with the CEO to formulate and control its message to employees, deliberately balancing optimism with caution.