The Ceo Trap

The CEO Trap Looking

for

superheroes

to

deliver

sky-high

growth

ensures

disappointment

In the end, after all the superlatives have been exhausted, this fact will loom large in assessing John F. Welch's impact: He lasted. If Welch carries through with his plan to remain as chief executive of General Electric Co. (GE) until the end of 2001, his tenure will reach an even 20 years--an eternity in the dog years by which today's CEOs measure their time. Welch is a Hall of Famer, the Cal Ripken of the executive suite. But the way things are going in the business world, your average major-league rookie would seem to have a better chance of breaking Ripken's consecutive-game record than a new CEO would have of matching Welch's longevity.

Two-thirds of all major companies worldwide have replaced their CEO at least once since 1995, according to a recent survey by consultant Drake Beam Morin Inc. More than 1,000 U.S. CEOs have left office over the past 12 months alone, with one-third of them departing since Sept. 1. The revolving door is even spinning fast at the biggest companies. Statistics compiled by executive-compensation specialist Pearl Meyer & Partners Inc. show that the CEOs of 39 of the 200 largest U.S. companies have left their jobs so far this year, compared with just 23 in 1999.

In recent months, the mounting turnover at the top has taken on the aspect of a crisis as one high-profile boss after another has been fired or forced to resign. What is striking is not just the number of CEOs getting the boot but how little time they were allowed to prove themselves. The combined tenures of Maytag's Lloyd Ward (MYG), Campbell Soup's Dale Morrison (CPB), Procter & Gamble's Durk Jager (PG), Xerox' Richard Thoman (XRX), Lucent Technology's Richard McGinn (LU), and Gillette's Michael Hawley (G) add up to 10 years and 11 months-little more than half of Welch's term of service. All of the recently ousted CEOs made mistakes that contributed to their downfall. Some never should have been promoted in the first place. (You know who you are.) But the fundamental problem is that expectations of CEO performance have been inflated to the point where mere 1

mortals no longer qualify. Call it the CEO trap. Executive recruiter Korn/Ferry International has even taken to advising CEO wannabes to ''develop charisma.'' What's next? ''Grow a third eye''? ''Master telekinesis''? Says Rakesh Khurana, a Harvard Business School assistant professor who is writing a book on CEOs: ''We've made this a superhero job. Boards look at the CEO as a panacea and get fixated on the idea that one single individual will solve all of the company's problems.''

The mythologizing of the CEO began in earnest about 20 years ago, as a wave of Herculean corporate restructurings gave rise to a brash new breed of corporate miracle worker. Lee Iaccoca, ''the man who saved Chrysler Corp.,'' was the prototype (even if he did get a big boost from Uncle Sam). In the 1990s, the techno-savant CEO moved center stage as the likes of Microsoft's William Gates (MSFT), Cisco's John Chambers (CSCO), and Dell Computer's Michael Dell (DELL) kept on logging fantastic growth rates long after their companies became giants. But it is Welch who has come to epitomize the CEO as maximum leader for all seasons-a human dynamo who through sheer force of personality and brilliance of vision can transform any company, no matter how big or complicated, into an engine of perpetual outperformance.

The job of CEO is probably more difficult today than it was when Welch started out, if only because business today is more complex than it was 20 years ago--or even 5 years ago. Markets are ultracompetitive and far-flung, new technology is pervasive, everything happens faster. There is much the corporate leader must master. But the fundamental task of today's CEO is simplicity itself: Get the stock price up. Period. For most of the 1990s, this required only a modicum of CEO charisma. A levitating stock market lifts all stocks, or most of them, anyway. And thanks to stock-option mania, this bull market enabled senior managers to amass the sort of wealth heretofore reserved for corporate founders. But now, economic growth is waning in the U.S. and elsewhere, and the mighty bull has turned tail and run. The technology-heavy Nasdaq index has fallen more than 40% from its high, making this the worst bear market since 1973-74. Unless the market resumes its upward 2

climb soon--or investors lower their expectations--the recent epidemic of CEO firings could presage a bigger executive suite bloodbath to come. The accelerating rate of CEO replacement is not all bad. ''I take it as a good sign, because what it says is boards of directors are tougher on CEOs than they used to be,'' says Donald P. Jacobs, the longtime dean of Northwestern University's Kellogg Graduate School of Management. Drake Beam Morin's data show that the overwhelming majority of the thousands of ex-CEOs created over the past five years effectively dealt themselves out of a job by selling their company. Merger-making no doubt saved many a struggling CEO from the ultimate consequences of his or her missteps, but most of them at least negotiated a premium price for their stockholders--and a sweet severance package for themselves. But at the same time, more and more companies embraced the idea that a superhero CEO was the ticket to transcendent performance. As investors spent most of the 1990s searching for the next Microsoft Corp., so boards of directors with a CEO vacancy to fill lusted for the next Jack Welch--and paid through the nose to find him. Executive-search firm revenues in North America hit $8.7 billion in 1999 from $3.9 billion in 1994, according to Kennedy Information LLC. This increasing reliance on headhunters has exacerbated the tendency to overlook or underestimate homegrown candidates. ''The executive-search industry is not in the business of taking big risks,'' says Jeffrey A. Sonnenfeld, president of the Chief Executive Leadership Institute, an Atlanta-based think tank. ''And they are not in the business of telling you that your answer is inside.'' It is this mainly self-imposed narrowing of the field of CEO possibilities that has given rise to the spurious notion that business is afflicted by a severe talent shortage. ''There's not really a shortage. But we're looking for heroic qualities and unblemished records--and those just don't exist,'' says John Challenger, CEO of Challenger, Gray & Christmas, a Chicago outplacement firm. Scoffs Gerard R. Roche, chairman of search firm Heidrick & Struggles, ''Give me half an hour, and I can give you a half-dozen people'' qualified to fill virtually any CEO spot. Yet in today's increasingly unsettled business climate, boards are more inclined than ever to want to fill the corner office with a superhero. It's a sign of the times that Warren E. Buffett, the 3

eminence grise of value investing, was instrumental in the sacking both of Hawley and M. Douglas Ivestor at Coca-Cola Co. (KO) Buffett, chairman of Berkshire Hathaway Inc., has long epitomized patient capital in an increasingly impatient world. Berkshire owns large positions in Coca-Cola and Gillette Co., and Buffett is on the board of each company. But not even the Sage of Omaha could passively endure the pain inflicted by the collapsing share prices of Coke and Gillette. ''We felt we had a very good person in Hawley,'' Buffett says. ''But we made a decision [that] it was possible to find a better one.'' At some companies these days, the CEO position might just as well be staffed by a temporaryhelp agency. Global Crossing Ltd. (GBLX) has had three CEOs since 1997. The last of them, Leo J. Hindery Jr., earned a formidable reputation in the cable TV business as a top officer of Tele-Communications Inc. But he lasted only seven months as CEO of Global Crossing, resigning in October. At some companies, CEO tenure now is best measured not in months but weeks. Robert O'Leary put in 12 weeks as CEO of PacifiCare Health Systems Inc. (PHSY) before resigning on Oct. 25. Less than two weeks later, homebuilder Walter Industries Inc. (WLT) announced the hiring of its fifth CEO in nine months. Virtually by definition, the firing of a fledgling CEO is a corporate failure that reflects at least as poorly on a company's board of directors and on its previous CEO as it does on the failed successor. That so many of these bungled management transitions are occurring at companies regarded as paragons of corporate governance only reinforces the notion of systemic failure. In too many companies, succession planning has been given short shrift. Instead of developing a corps of candidates over a long period, as General Electric has done, many companies have either gone the executive-search route or singled out one person and put him or her through what amounted to an abbreviated audition. Once those barely seasoned executives take over top billing, they must perform immediately. But in some cases, they inherit companies that have nowhere to go but down. ''Deflating excessive expectations'' or ''letting well enough alone'' does not appear anywhere in the job description of the aspiring superhero CEO. On the other hand, to overpromise and under-deliver

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eventually shreds an exec's reputation, infuriates Wall Street, and quite possibly costs the CEO the job. What does he do? Show why the job commands the big money: Go for it. Campbell Soup brought in Dale Morrison from PepsiCo Inc. (PEP) in 1995 to run its Pepperidge Farm unit and promoted him to succeed David W. Johnson two years later. Johnson, who took charge in 1990, had impressed Wall Street by ramming through to completion what had been a tentative restructuring. Johnson essentially did what Welch did in Act One of his reign at GE: He carved costs out of an old-line operation and raised prices where he could. Campbell's stock price tripled during his tenure, powered by a jump in net profit margins, to 11% from 4.9%. That Johnson was unable to boost the soupmaker's anemic rate of revenue growth was disappointing but unsurprising. Canned soup is not exactly a novelty. Morrison realized that there wasn't much more fat to trim. Raising prices further was an equally hazardous option in the packaged-food market of the late 1990s. So he dedicated himself to selling more soup, Pepperidge Farm cookies, V8 juice, and Godiva chocolates. He promised Wall Street 8% to 10% annual revenue growth--and double-digit growth in earnings per share. Investors liked what they heard, bidding up Campbell shares to $58 in late 1998, Morrison's first full year on the job. But Morrison's forecast was soon exposed as undoable. In fiscal year 1999, net sales fell 4.2%, while earnings per share from continuing operations fell 9.5%. By this February, Campbell's stock had traded down to a four-year low of 26. The next month, Morrison, 51, responded to a rising chorus of complaints and criticism from Wall Street and his own board by resigning. Morrison, now CEO of a small tech firm, ci4net.com Inc., did not return phone calls seeking comment.

Campbell Soup's board responded by persuading Johnson, 68, to return as interim CEO. ''I think we have tried too hard for growth,'' he told The New York Times in July. Even so, Johnson is again attempting to spur growth with a costly investment program in new products and intensified marketing that promises to take a big bite out of earnings over the next year or so. Now trading at about 33, Campbell's stock still faces a long return trip to par. 5

Gary M. Stibel, founder of New England Consulting Group, says Campbell Soup's struggles are symptomatic of a growth delusion that has taken hold not just in the food business but throughout the consumer sector. ''Consumer products companies were promising double-digit growth. Unless you have a silver bullet, this is impossible,'' Stibel says. ''There is no talent shortage. The problem is there is a shortage of guts. Too many CEOs are doing what is necessary to placate the Street at all costs rather than saying: 'This is the way we will grow our business, and you folks just may not want to own as many shares.''' Of course, disappointing Wall Street can accomplish nothing more than dodging the inevitable. Lloyd Ward, who served his apprenticeship at Procter & Gamble and PepsiCo, joined Maytag in 1996 and enjoyed a sparkling three-year run as heir apparent to CEO Leonard A. Hadley. As a division chief and then as president and COO, Ward was credited with transforming staid home appliances into premium-priced growth engines. His definitive new-product success was the Neptune, a front-loading washing machine that blew out of stores despite a $1,000 price tag. By mid-1999, Maytag's stock had tripled. As one of the highest-ranking black executives in the U.S., Ward, then 50, became a business celebrity, appearing on the cover of BUSINESS WEEK just before he replaced Hadley in August, 1999. It was all downhill from there. Four weeks after Ward's promotion, Maytag conceded that it would not meet its third-quarter earnings projections because of flagging sales of low- and midpriced home appliances. Within days, Ward announced an ambitious plan to cut $100 million in costs while developing new global and e-commerce sales channels. But Maytag's share price continued to slide as the industrywide slump in appliance sales worsened and Ward failed to deliver even on scaled-back profit forecasts. In October, the company reported a 27% drop in quarterly profits. By November, Maytag's stock was off 60% from its peak under Hadley. The board demanded Ward's resignation and brought Hadley, 66, out of retirement to fill in temporarily.

Even some Wall Street analysts who had criticized Ward were stunned by how quickly Maytag's board pulled the trigger. ''I think his exit was largely due to bad timing on his ascent to the 6

throne,'' says Efraim P. Levy, a senior analyst at Standard & Poor's Corp. ''Before he showed how successful he could be, he got hit with a surprise.'' Ward also declined to be interviewed. Ward and Morrison were hardly the only CEOs to lose their jobs to the men they thought they had replaced. Procter & Gamble, Lucent, Xerox, and Newel Rubbermaid (NWL) all turned in desperation to familiar faces. But at GE, Welch says he has no intention of making his successor, Jeffrey R. Immelt, a short-timer. At the Nov. 27 press conference at which he anointed Immelt, Welch took a swipe at companies that have made the CEO post into a temp job. ''The idea of a guy coming in on a rescue ship for 24 months...is stupid,'' he said. Welch argued that it takes 10 years, minimum, for a new CEO to make his mark and predicted that Immelt, who is the same age Welch was when he was named CEO, will match his 20-year run at the top. Smiling and relaxed, Immelt seemed to brim with confidence at his coming-out press conference in New York. But no matter how well Immelt does, he will be hard-pressed to match Welch's record, which is a product of lucky timing as well as talent. A treasure trove of underperforming assets such as the old GE can be massively restructured only once. That assignment fell to Welch, whose tenure happened to coincide neatly with an 18-year bull market in stocks. Talk about having the wind at your back. Since 1981, General Electric stock has risen an average of 23.5% a year, easily outpacing the Standard & Poor's 500-stock index. But Welch's overriding claim to fame is that he made GE the world's most valuable company. Its market capitalization is now about $500 billion, compared with $13 billion in 1981. The notion that stock price is the be-all and end-all of corporate--and by extension, CEO-performance by now is so deeply ingrained that it seems to have been handed down on stone tablets. In reality, it is an outgrowth of the go-go 1980s and '90s. The GE that Welch inherited is invariably characterized as a company in need of a good shaking. It was indeed, and yet it is often forgotten that Welch's predecessor and mentor, Reginald H. Jones, was by acclamation the most admired CEO of his era, the inflation-wracked 1970s. In 1981, just as Jones was preparing to step down, the CEOs of America's 500 largest companies were asked to name the country's best executive and best-managed company. 7

Jones and GE each finished first by a wide margin. With one exception (Exxon Corp.), the four companies that topped the poll had underperformed the stock market over the preceding 10 years, a generally dismal time for equities. In fact, GE's price-earnings multiple had plunged from 22 to a paltry 9. Why, then, was Jones so admired by his peers? Dignified and eventempered, he personified the traditional ideal of the CEO as statesman and guided GE to 26 successive quarters of rising earnings through two recessions. At a time of befuddling turbulence, Reg Jones and GE embodied the stability of yesteryear. To Jones's credit, he was shrewd enough to recognize that changing times demanded that he choose a successor of utterly dissimilar personality. Who can say that ''Mad Jack'' doesn't deserve the appellation of America's best CEO? He might even be the manager of the century, as his most extravagant admirers claim. But it is instructive to recall that even Welch made mistakes early in his career that likely would get him fired in today's unforgiving, turbocharged environment. Does ''factory of the future'' ring a bell? It was to be the centerpiece of Welch's bold plan to reverse GE's long decline as a technology innovator. The idea was to tie together a host of high-tech product lines to dominate the nascent field of factory automation. ''Automate, emigrate, or evaporate'' was the factory-automation division's battle cry. Evaporate it did, undone by technical snafus and erroneous projections of customer demand. By 1983, Welch had cut his losses and shifted his hopes to the company's financial-services unit, now known as GE Capital Services, which delivered big time. In switching emphasis from manufacturing to financial services, Welch spurred colossal shareholder gains. On the other hand, General Electric would be an even more economically important company today had Welch succeeded in his aborted attempt to reinvent it as a technology company for the Computer Age. This is not to criticize Welch but to put his achievement in context. To be fair, Welch did oversee the technological updating of the manufacturing businesses that survived his relentless asset pruning--aerospace, plastics, and medical imaging among them.

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Today's CEO probably faces no greater hazard than attempting the transformation of a core business threatened by a disruptive new technology. George M.C. Fisher was prematurely hailed as a savior when he left Motorola Inc. (MOT) and become CEO of Eastman Kodak Co. (EK) in 1993. Fisher put Kodak through the Jack Welch change machine, eliminating thousands of jobs and divesting underperforming units. But he also staked the company's future on a daring plan to meld Kodak's traditional film franchise with a new digital-imaging business. The result to date: tepid sales growth and erratic earnings. In late 1999, Fisher decided to step down as CEO, a year before his employment contract was to expire. (He will remain as chairman through yearend.) Xerox did not give Rick Thoman nearly as much time to show his stuff. Thoman, who had acquitted himself well both at American Express Co. (AXP) and at IBM, imposed a sweeping reorganization of the Xerox sales force that had the effect of separating many veteran sales reps from their best customers. The new CEO's aloof, cerebral demeanor didn't help. In May, Xerox' worried board cut short the Thoman era at 13 months. Thoman too declined to comment. Back came his predecessor, Paul A. Allaire, who reaffirmed the company's commitment to Thoman's strategy of focusing on the sale of high-tech services and solutions for the digitized office. There will be no quick fix at Xerox. Again. To the contrary, the company has issued two earnings warnings since Allaire's return, and the stock continues to scrape bottom, trading at $1 above the split-adjusted initial public offering price in 1959. As the tarnished icons of American industry continue to cope with their epic struggle for survival, CEO instability is giving rise to a new cottage industry. Executive Interim Management is a Dutch company, founded in 1978, that fills executive vacancies with temporary help. Over the years, it has placed some 2,500 senior executives at such companies as Sara Lee (SLEE), Staples (SPLS), Royal Dutch Airlines, Ingersoll Rand (IR), and Cunard. Roger Sweeney, EIM's managing director, says CEO replacements were once comparatively rare but have surged of late and now account for 25% of total assignments. At the moment, some 200 companies are relying on EIM-placed CEOs or presidents. ''We don't see any shortage of opportunity,'' Sweeney says. 9

The world of management consulting abounds with ideas for rethinking the role of the CEO. One prevalent suggestion is to pair the CEO with a nonexecutive chairman who can act both as a mentor and as the manager of the board. This is a long-established tradition in Britain, of course, and has been used effectively by General Motors Corp. (GM) as well as a growing number of dot-com and biotech companies. However, Roger M. Kenny, managing partner at Boardroom Consultants, says the notion of sharing power with an executive chairman generally does not go over well with American CEOs. ''In the American system, there is a bit of an ego issue if you don't have all the titles--president, chairman, and CEO,'' Kenny says. There is nothing like a bear market to tame the executive ego. As much as anything else, the CEO trap was sprung by the late 1990s bull-market euphoria butting up against the sobering macroeconomic realities of 2000. The good thing about distorted markets is that they tend to self-correct, and the market for CEOs should be no exception. It has been a long time since Big Business has been populated by self-satisfied CEOs for life. That's to the good. Now, if only directors can bring themselves to stop wishing on a star.

By Anthony Bianco and Louis Lavelle With Jennifer Merritt in New York, Amy Barrett in Philadelphia, and bureau reports

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