Undisciplined Pursuit of More Leaves City Facing Bankruptcy

90 miles east of San Francisco lies the city of Stockton, California. You may not have heard of it and you may not know anything about its current situation, but it serves as a reminder of how any organization, not just big businesses, can severely decline if the proper management is not followed. From Collins’ “Five Stages of Decline” we see examples of famous companies, such as Circuit City, Motorola, and Delta Air Lines, that have encountered serious adversity at some point, many of which have failed. Stockton is an entire city which has exhibited the same ill-advised behavior as these companies: undisciplined pursuit of more and the denial of risk and peril. It is now in danger of becoming the largest American city to go bankrupt.

How did this happen? This is so often the question asked by leaders once hard times have arisen. Stockton’s mayor, Ann Johnston, is the first to admit that excessive spending was a bad idea.

“We went on a real spending spree and built the arena, the ballpark, a lot of community infrastructure,” said Johnston.

The city spent over $300 million on these structures with money it didn’t have, but wasn’t worried because the housing boom had made Stockton such a valuable city in terms of Bay Area housing.

“Stockton had become the affordable housing for the Bay Area, so we saw an influx of many Bay Area residents coming to Stockton, buying brand new homes at very reasonable prices,” Johnston said. “And the city leaders thought this was going to continue forever.”

Sound a little like the Toll Brothers situation? It definitely sounds like Stage 3: Denial of Risk and Peril to me. It is amazing that Stockton kept spending money with the belief that the housing boom would never end. When Stockton was in Stage 2: Undisciplined Pursuit of More, it wasn’t just spending and expanding its city, but also offered ridiculously generous salaries and retirement plans to government employees. City officials, along with the police and fire department workers, could retire after short tenures and have the city pay for themselves and their spouses’ insurance for life.

Stockton currently has an unfunded liability of $450 million from its retiree health program, and a $20 million dollar deficit in its $160 million budget. Johnston says that other cities in California are comparing themselves to Stockton, asking themselves if the same thing could happen to them. This is such a serious situation that has crept up on Stockton in a very short period of time. The city is currently making every effort to combat the possibility of bankruptcy. In the last three years, nearly 100 police officers have been let go. Stockton is in the midst of a state-mandated mediation process with bond holders and employee unions now that the city has stopped paying its creditors. Unfortunately, it may be too late.

Collins’ five stages of decline are visible now that Stockton has dug itself into such a deep hole. The city was overconfident in its ability to take advantage of the housing market and erroneously believed the boom would never cease. $300 million of spending and some extravagant retirement packages later, Stockton is in Stage 4: fighting an uphill battle to stay out of bankruptcy. From this example we can see that the stages of decline are very real and applicable to all major organizations. Stockton’s situation has been a wake-up call to other cities around the country, and yet another example of a “business” whose overconfidence and hubris has led it to take outsize risks and deny the consequences of those risks. Whether it can come back from this setback remains to be unseen.

Source: NPR

The Rise of Young CEOs: How Will They Handle Themselves?

A CEO is responsible for choosing his company's identity, for declining certain opportunities and pursuing others. In today's society, companies place more emphasis on competitive advantage and planning that they do on purpose and corporate identity. We have learned that CEOs must demonstrate leadership by using strategy as a way to guide development over time. The purpose of a company must clear and explicit, but the CEO must be open to change; some of the most successful companies today have evolved and adapted their strategies to the changing environment. Strategy defines a firm, a concept that has been lost throughout past decades.

So much responsibility rests on the shoulders of CEOs, yet the business world, especially the technology industry, is witnessing a rise in CEOs of extremely young ages. Facebook's Mark Zuckerberg (27),  Groupon's Andrew Mason (30), and Google's Larry Page (38) are some of the big names highlighting this recent trend. These are all prominent companies that have been extremely successful. However, people are beginning to question the value and reliability of youth in corporate decision-making. These young leaders bring creativity and innovation to their respective companies, but often lack the knowledge and familiarity that experienced CEOs possess as a result of years in the business.

One of the biggest recent news stories has been Zuckerberg's decision to take Facebook public. This is a perfect example of a CEO making a significant change in his company's identity. Facebook has long been successful as a private company, but it has grown so big that entering the public market has become a viable option. The strategic decision to file for an initial public offering (IPO) has been met with both support and criticism. Regardless of whether it was a necessary move or not, it will change the culture of Facebook in the future.

Going public is one of many important decisions that CEOs are faced with. Zuckerberg is not the only young executive to make the change. Eight of the 42 technology and Internet companies that held IPOs in 2011 were led by CEOs under the age of 40. These leaders aren't afraid to make significant changes to positively impact their company, but questions about their maturity and vision for the future are still unanswered.

It is easy to criticize younger executives as being inexperienced and unable to respond to challenges. "Age provides a distinct advantage," management theorist Vivek Wadhwa argues. On the other side, Ben Horowitz of Andreessen & Horowitz argues that young founders and CEOs are better at finding innovative products, and while they might lack the ability to squeeze money out of such products, that skill is much easier to teach. Many times these young CEOs hire more experienced CFOs and employees for guidance and background.

Even outside the technology industry, young CEOs have demonstrated superior leadership and decision-making. Michael Reger (35) of Northern Oil & Gas Inc. had planned on drilling for oil in a field on the fringes of the world oil industry. It was a risky decision, one his father disapproved of and discouraged his son from pursuing. His father had been in the business much longer and had seen serious oil busts and failures. Nonetheless, Michael decided to continue with his decision, which has now become one of the company's greatest advantages.

Young CEOs are changing the world of business, and they are out to prove that their leadership can be effective, regardless of their age. Returning to strategies that emphasize future sustainability and corporate identity will help these young leaders experience success and prosperity in their companies.