Please check out my Huffington Post article on Mindful Leadership. I had a great opportunity to discuss this subject on CNBC last week with Arianna Huffington, and I followed up with this article: http://www.huffingtonpost.com/bill-george/resilience-through-mindfu_b_2932269.html
This article is a special to the Sunday Star Tribune.
As Minnesota and the nation implement the Affordable Care Act, the Mayo Clinic’s proposal to make Rochester a “destination medical center” is most timely. The proposal has received broad endorsements from Gov. Mark Dayton and members of the Legislature.
Serving on Mayo’s board of trustees this past year, I gained a deeper appreciation of its importance, not just to Minnesota but as a role model for improving the nation’s health.
Unlike most academic health systems, Mayo is not asking for public funds for its $3.5 billion expansion in Rochester. Rather, it is asking the state to allocate about $500 million over 20 years of the new Mayo-generated state tax revenue to help finance the public infrastructure needed to support the growth.
Already the state’s largest employer, Mayo estimates that the destination medical center will create 35,000 to 45,000 new jobs and generate $3 billion in new taxes to the state.
While the proposal works its way through the Legislature, it should inspire a broader vision for Minnesota: to become the Mecca for outstanding health and health care. Health care has long been Minnesota’s strength. We should make it our calling card. Minnesota can become the beacon for the nation in how to create a healthy population by working with the finest health care resources in the country.
Minnesota ranks No. 5 nationally in terms of population health, behind Vermont, Hawaii, New Hampshire and Massachusetts. Why shouldn’t we be No. 1? We’re already ranked first among all states for cardiovascular care, fewest sick days and health status.
On the other hand, we have challenges to reduce obesity (we’re ranked No. 15 among the 50 states) and deaths from cancer (No. 16). Minnesota has woefully underfunded public health with only $43 per person per year, which puts us at No. 48. Dayton should launch a “Healthy Living” initiative focused on healthy eating, regular exercise and reduced stress, alcohol use and smoking, supported by active programs from every health care organization and employer.
Based on Prof. Michael Porter’s theory of economic clusters, Minnesota is well positioned to become the national health care leader. With Mayo as the crown jewel, Minnesota can build on its strong base of providers like the University of Minnesota, Allina Health, Fairview, Park Nicollet, Regions and Health East that deliver outstanding patient care.
We also boast national leaders in health plans — UnitedHealth Group and its Optum Health; HealthPartners, Blue Cross and Blue Shield, and Medica. Mayo and Optum Health recently announced the formation of Optum Labs, a collaborative research initiative to analyze patient outcomes by combining Optum’s claims information with Mayo’s patient data and clinical insights — information essential to move from the current fee-for-service model to reimbursement for health outcomes.
Minnesota also is the birthplace and leader of the medical technology cluster with Medtronic, St. Jude and Boston Scientific, combined with 3M’s prosperous health care business. Just as importantly, there are hundreds of med-tech companies striving to become the next Medtronic.
Finally, Minnesota is the national leader in integrative medicine to improve health and healing. The U’s Center for Spirituality and Healing, Allina’s Institute for Health and Healing, the Marsh, Hazelden and Pathways are national leaders in promoting patient-centered care with healing therapies that emphasize individual responsibility.
Through the collaboration of these exceptional resources — a committed state government, health plans, health care providers and suppliers, and progressive employers — Minnesota should adopt the bold goal of becoming the standard-bearer for the nation’s health. In so doing, we will attract people from all over the nation and the world to Minnesota: to visit, live and improve their health.
When the current legislative session is over, Dayton should convene the state’s health care leaders to devise concrete plans to make this vision a reality.
The year-long saga that has paralyzed electronic retailer Best Buy ended Friday, not with a bang, but with a whimper. Founder Richard Schulze was unable to produce the funds to execute his promised plan to take the company private. While his buyout bid fell short, Schulze in effect has already achieved his goals as Best Buy has new leadership, a renewed growth strategy, and a revived stock price. After 47 years leading Best Buy, now it’s time for Schulze to settle into his role as the largest shareholder, retire fully, and let the new generation of Best Buy leaders restore the company’s greatness.
While Schulze turned over his CEO title to his longtime colleague Brad Anderson from 2002-2009, he never really relinquished his iron-fisted control over Best Buy’s board or its strategy. Anderson did a superb job in building Best Buy during its strongest period of growth, focusing on extending the company’s values and its mission as the nation’s leading electronic retailer. He also fended off competition from Wal-Mart. After seven years at the helm, Anderson turned over the leader’s role to his successor, Brian Dunn, while Schulze took a more active role from his board vantage point. Things at Best Buy deteriorated rapidly under Dunn as the retailer failed to address the growing power of on-line retailers like Amazon and an old boys’ atmosphere seemed to dominate the corporate culture.
Last March the Best Buy board learned from a company executive about Dunn’s inappropriate relationship with a company employee. Dunn was terminated and board member Mike Mikan, grandson of the Minneapolis Lakers great basketball player, was named interim CEO. He immediately embarked on cutting costs to mitigate the company’s declining revenues. Then in May the board found out that Schulze had learned in December in writing about Dunn’s issues but failed to act on them or disclose the letter to his fellow board members.
That was too much even for the usually passive Best Buy board. It stripped Schulze of his chairman’s role, and longtime board member Hakim Tyabji became chair. A month later, Schulze resigned in protest. Tyabji immediately stepped up to his new responsibilities by forming a search committee to identify the right CEO. For his part Mikan intensified his cost-cutting to pare back Best Buy’s enormous retail footprint and bolster his case to be the permanent CEO.
That only seemed to anger Schulze even more. Wounded and embarrassed by losing control over the company he founded, and angry over Mikan’s retrenchment strategy, he announced his intention to offer $26-28 per share to take the company private to regain control in August. The media, always seeking drama, took Schulze’s bait. Press stories largely ignored the reasons Schulze was forced to give up his chairman’s role and played up the angle of the founding hero’s return. But the stock market remained skeptical that Schulze could raise the necessary funds.
Meanwhile, Best Buy stock continued its slide from its March high of $27 per share to $18, as 160,000 employees and millions of customers were left to wonder what the future held for this once prestigious chain.
On August 12, 2013, the Best Buy board announced the appointment of Carlson CEO Hubert Joly. The security analysts and the media were dubious that Joly, with his hospitality background and lack of retail experience, could turn around the company. Having known Joly for a number of years, I immediately believed he was an inspired choice.
A brilliant strategist with an intense work ethic, Joly wasted little time in reshaping the company’s strategy and its leadership. Facing the loss of retail sales to lower-price offers at Amazon, he adopted a “both/and” strategy of combining refreshed retail sales with an aggressive online offering, proposing to match any online offers to in-store shoppers. The key to winning the electronic retail race is Joly’s ace in the hole – Best Buy’s service offerings – a competitive advantage that online retailers simply cannot match. For consumers unable to figure out the complex maze of rapidly changing electronic technology, the Geek Squad is there to help sort it out.
Joly wasted no time in rebuilding Best Buy’s leadership. He split its line operations into retail and online, appointing new heads of each, while moving to eliminate the old boys’ culture that grew under Dunn. He also appointed a highly respected CFO who had held a similar position at William Sonoma. Unimpressed with either Schulze’s proposed bid or Joly’s “Renew Blue” strategy, however, the stock market seemed to expect that Best Buy would continue to decline as its stock fell to $11.29 in late December.
As the new year dawned, Best Buy’s fortunes started to turn. An early January announcement that the decline in its retail sales had been stemmed over the holidays and online revenues had grown 10% sent the clear signal that Joly’s leadership was paying off. From that December low, its stock has increased over 40% to $17.16 as of March 1, 2013. When Schulze failed to deliver his much-anticipated bid by the February 28 deadline, it was clear that this agonizing chapter in Best Buy’s history was over.
Now it is time for a new chapter in Best Buy’s 47-year history. Joly should have free rein to execute his strategy with full support of an undivided board of directors. If he is at all concerned about his net worth, Schulze can let go. If he holds on, he may well benefit as Joly and company carry out the turnaround that no one except Joly believed could happen.
Leadership matters... a great deal. Let's give credit to Joly for having the vision to perceive the winning strategy and quickly take charge to make it happen. Chairman Tyabji deserves recognition also for his courage to appoint an outsider to lead the firm, while the board stood firm in the face of Schulze’s challenges. Instead of declining with a never-ending series of cutbacks as former retail stars like Sears and K-Mart have done, Best Buy is back with new leadership, a new strategy, and renewed passion from its 160,000 employees.
First-time author Steven Snyder has just published a remarkably deep and insightful book about how exceptional leaders learn from their struggles and their failures and have resilience to overcome adversity. Snyder takes many of the ideas from True North to a much deeper level with richer insights. He focuses on staying grounded, becoming resilient in the face of failure, making sense of a chaotic world, and illuminating your blind spots. Snyder demonstrates how you can discover your purpose and meaning through struggle and ultimately by deepening your adaptive energy in order to sustain your leadership throughout your life.
I had the privilege of writing the Foreword for this book. Here are some excerpts from the Foreword:
Do your struggles make you a better leader? Is it necessary to overcome severe challenges to become an outstanding leader? Yes, emphatically, says Steven Snyder in this remarkable book. “Clearly, struggle and leadership are intertwined,” he writes. “Great leaders use failure as a wake-up call.”
That’s a conclusion many would-be leaders are reluctant to accept. In today’s world, society often searches for perfect leaders. When their actions reveal their weaknesses and shortcomings, the general public turns away from them and continues the impossible search for perfection. Media pundits, eager to condemn our leaders, pile on the criticism. Like the two tramps in playwright Samuel Beckett’s “Waiting for Godot,” who are hoping for the savior to lead them out of their misery, the public is still searching for the perfect leader. Instead of stepping up to leadership themselves, many people continue to drift through life and fail to realize their full potential as human beings and as leaders.
In Leadership and the Art of Struggle, Snyder takes an entirely different tack. He believes, as I do, that failure is a great teacher. To learn from it, you must be prepared to face its painful realities and use failure as a learning experience. That’s what Steve Jobs did after getting fired from the company he founded. Had he not been forced to face his own shortcomings, he never could have returned to create the success that led Apple to become the most highly valued company of all time. The same is true of Oprah Winfrey, who had to face the pain of the sexual abuse she encountered as a young girl. When she did so, she changed her message to empowering people and became the most successful media star of her era.
In a room filled with 125 powerful large company CEOs, I once asked Jamie Dimon, JP Morgan’s chairman and CEO, what his defining experience was. Rather than citing his great success at JP Morgan, he replied instantly, “I got fired ... by my mentor of 22 years.” Learning from that experience, Dimon bounced back and become the world’s leading financial services CEO. Forced to face the reality of his bank’s $6 billion in trading losses, he took immediate responsibility. He went on “Meet the Press,” and said, "We made a terrible egregious mistake. We were stupid. There’s almost no excuse for it.”
The realities that Snyder addresses represent a fundamental building block required to develop healthy, effective leaders who are committed to building a society devoted to the well-being of all. Only in acknowledging our own flaws and vulnerabilities can we become authentic leaders who empower people to perform to the best of their abilities.
Shortly after joining the Harvard Business School faculty in 2004, I initiated a research project to determine the characteristics of authentic leaders and the ways they developed their leadership. My HBS colleagues encouraged me to discover the traits, characteristics and styles of these successful leaders. Then my HBS research associate presented me with discouraging news: 1,400 previous studies had been unsuccessful in determining these definitive characteristics, as all failed to establish statistical validity or replicability. Nevertheless, we went ahead with our project. Two skilled researchers and I interviewed 125 leaders ages 23 to 93, generating 3,000 pages of transcripts. To our disappointment, nothing definitive emerged about the leaders’ characteristics. Rather, many leaders said, “Let me just talk about what’s important to me.”
In reviewing the transcripts with our research team, I had a sickening feeling that the inputs might just turn out to be mush. But in rereading the deeply honest and personal stories these leaders told us about themselves, the conclusions literally jumped off the pages at us. It was the life stories of these leaders that shaped their leadership. Their challenging times and crucibles stoked their passion to make a difference through leading. Some of their failures – and nearly all had experienced setbacks and/or great hardships – had resulted from abandoning their roots and not staying grounded in who they were. We labeled these periods as “losing their way.” Others faced challenges not of their own making which nonetheless were life changing. Those who went on to greater success as leaders maintained fidelity to their life stories and who they were – their True North.
When we published these results in my 2007 book, True North, they had great resonance with business and non-profit leaders – from younger managers and middle managers up to senior executives. I was especially surprised that the ideas struck a vital chord with very powerful CEOs as they were so much at variance with what was being written and taught at the time.
Snyder’s book takes these same themes to a much deeper and richer level, as he pushes the limits much farther than I did. He asserts that struggle is an “art to be mastered,” an intrinsic aspect of leadership and an opportunity for leaders to realize their potential. That runs directly contrary to the macho image cultivated by many powerful leaders who deny their weaknesses and vulnerabilities. With that denial, they rob themselves of opportunities for deep introspection and a clearer understanding of themselves. Small wonder that many high-level leaders feel like imposters. One Stanford professor has discovered that the number one fear of top leaders is “being found out.” Thus, it is not surprising that many leaders fail, most often because they cannot face reality and deny they are at risk of causing their own failures.
Snyder takes these fundamental truths of human nature and converts them into a set of well-conceived strategies and practices that enable leaders to become grounded – a phrase that I was too timid to use in True North in 2007 because it sounded soft. Of course, the real work of leaders of getting grounded in their authenticity, their humanity, and their weaknesses and vulnerabilities, as well as their strengths, is exceptionally hard work.
On a personal level, it took me many years to openly acknowledge my shortcomings, weaknesses and vulnerabilities. For that reason, I wound up withholding “the real me” from colleagues at work, coming across as super-confident, aggressive, and completely focused on business results. When I began sharing my weaknesses – being impatient, lacking tact, and often coming across as intimidating – as well as the failures and difficulties I had experienced in my lifetime, I learned that people opened up about themselves and resonated more with my leadership. I accepted that I wasn’t expected to have all the answers and could more frequently admit, “I don’t know.” In being willing to be vulnerable, I found I could acknowledge the fears of being rejected as a leader that went back to high school and college when I lost seven consecutive elections because others didn’t want to work with me.
For many years I tried to deny my weaknesses and blame them on my father, as if I inherited them from him. It didn’t work. When I finally acknowledged that these were my weaknesses, not his, and this was who I was, I felt the burden lifting from me. Only then could I feel comfortable in being myself. These shortcomings are still part of me, but they are far less prominent, and they no longer own me as they once did. As a result, my relations with colleagues, family members and friends have steadily improved.
In understanding how much more people were willing to trust me after that, I recognized that “vulnerability is power,” a favorite saying of author John Hope Bryant in Love Leadership. The paradox is that by acknowledging your vulnerabilities, you retain the power because others are unable to take advantage of you when you try to cover up your shortcomings and fears. At the same time you empower others to become more authentic by acknowledging their vulnerabilities.
In teaching these ideas to senior executives, I often get puzzled looks because they have steeled themselves not to reveal their vulnerabilities out of fear that others might take advantage of them. Of course, the truth is precisely the opposite. In refusing to acknowledge their roles in contributing to the problems around them, many leaders repeat their mistakes rather than learning from them. They may move to another job without ever facing themselves, thinking a fresh start will obviate their difficulties.
As mindfulness expert Jon Kabat-Zinn writes, “Wherever you go, there you are.” In other words, we can change venue but our shortcomings are with us until we acknowledge them to ourselves as well as others. When we do so, our weaknesses steadily diminish and our strengths become more powerful. That’s also the message of the positive psychology movement initiated by Dr. Martin Seligman, which is often falsely construed as burying your past difficulties rather than growing from them.
In this book, Snyder provides specific strategies to deal with these issues. He pairs his strategies with a series of techniques and exercises that enable us to stay grounded and explore new pathways to grow from our experiences. In the end he shows us how to develop the adaptive energy required to prepare for the greater challenges we will face in leadership. Through this rigorous process, we can develop the focus and discipline to work through our issues and, ultimately, to celebrate what really matters in our lives.
Having worked with many leaders who are earnestly embarking on the journey that Snyder takes us on, my advice is not to expect instant results. Being authentically self-aware and mindful of our feelings, emotions and reactions can take many years of hard work as we peel back the layers of that unique person we are. It often takes that much time to learn how to grasp the power we have within us to be the very best we can be.
This is a journey that can be difficult if not impossible to take on your own. We all need a team of fellow pilgrims to help us on the journey as we in turn help them along their paths. As the famous Hindu philosopher J. Krishnamurti wrote, “Relationship is the mirror through which we see ourselves as we really are.” How many people do you have truly open and enduring relationships with? How many of them are willing to hold a mirror up to you?
We need a support team that helps us through the most challenging times of our lives. My team starts with my wife Penny, my faithful companion of 43 years, who has helped an engineer learn about psychology, human nature, and most importantly, myself. I have also learned a great deal from the wisdom of our two sons, Jeff and Jon, my close friends and my colleagues at Harvard Business School.
Other than Penny, nothing has been more constant and helpful than my two True North Groups – my men’s group that has met weekly for 39 years and our couple’s group that has met monthly for 30 years and travelled the world together. We have learned from our personal and professional challenges and helped each other along the way, through good times and especially in difficult times. Do you have a True North Group taking this remarkable journey with you?
Leadership and the Art of Struggle provides you the opportunity to learn from Steven Snyder’s remarkable wisdom and the experiences of his interviewees. It is also a living guide you can return to time after time when new situations arise. You may want to undertake this journey with your support team. That will give you the opportunity to share in each other’s struggles and gain the authenticity and the mastery that characterizes wise leaders.
By going through this process, you will feel more alive, energized and resilient than you ever believed was possible. You will become a better and more authentic leader, your relationships will become stronger and richer, and you will be able to accomplish more.
What more could you ask for in life?
We are creating an exciting new Harvard Business School course, “Leading a Global Enterprise,” for global executives next July 28 - August 2, 2013. It’s a one-week compact course that will help you become a much better global executive. Here is the link for more information: http://bit.ly/TrTCBu. If this fits your interests, we would welcome your participation.
Earlier this month I wrote a blog recommending Whole Foods founder John Mackey’s new book, Conscious Capitalism, as the most important book of the year, perhaps the decade. That's why I wrote its Foreword.
As the book is hitting the business best-seller lists, some people have pushed back because they think John Mackey is anti-union. Let’s take an honest look at what he actually believes:
- “While we believe that the best approach is to avoid the need for unions in the first place, businesses that already have labor unions should strive to engage with them constructively rather than viewing them as adversaries.” He cites Southwest Airlines as “a great example of a company that has had a predominantly positive and win-win relationship with its labor unions.” As Herb Kelleher, former CEO of Southwest Airlines, said, “I just treated them like human beings.” This is what I have always tried to practice in dealing with unionized and non-union employees.
- Whole Foods is a role model for treating its employees well. They are highly motivated, fairly paid with incentives, and have excellent health care and benefits. Walk into any Whole Foods store and talk to the first-line employees, as I have, and you immediately perceive they take great pride in their work and the Whole Foods mission to help people eat healthy foods.
- Not convinced? Then buy John’s book and read Chapter 11, page 157. There he says, “There has been a long history of adversarial relationships between companies and unions. These conflicts usually have been very harmful over the long term to all the stakeholders of the company, including unions and the team members (that is, employees) they represent. To fully flourish, companies must evolve to form win-win partnerships that create value for all stakeholders. This requires the leadership of the company and the union to both become more conscious and adopt a spirit of cooperation and partnership.”
- He goes on to note that unions grew 100 years ago in response to poor working conditions, saying, “There is no question that labor unions primarily came about because of the failure of businesses to care about their workers as human beings.” In my experience, management often gets the union it deserves. If it doesn’t treat its people well and pay them fairly, then employees will unionize and often engage in “win-lose” tactics to force better treatment. On the other hand, if employees are well treated and paid fairly, they do not feel the need for a third-party to represent them.
- Mackey observes, “private-sector union membership peaked at 36% in 1945 but has since declined to 6.9%.” My observation about this decline is not that employees have dropped out of unions or that companies have broken up the unions. Rather, the “win-lose” approach to collective bargaining has caused both companies and entire industries to go out of business. This pattern started with the steel industry, spread through shoes and textiles and then to airlines and automobile companies and their unionized suppliers, as well as some major retailers. Meanwhile, emerging industries, such as computers, semiconductors, IT, pharmaceuticals and medical technology, treat their employees so well that they do not feel a need for a union.
- Contrast this situation with Germany, where employees have “co-determination” with management and the two have pursued “win-win” solutions that benefit both sides and have enabled German companies in the chemical, automobile, auto parts, machine tools and high tech products to become world leaders in spite of the high cost of hourly labor.
- Mackey concludes his rationale about employees by arguing, “A conscious business knows that treating its people well is the right thing to do; it does not need to be coerced into doing so. Unions simply aren’t necessary if a business operates with a stakeholder philosophy and if team members are seen as important stakeholders who should be well compensated, happy, and flourishing in the workplace.”
I find these statements compelling and inspiring. Collectively, they describe a philosophy that is identical to the one we followed at Medtronic. The company's bedrock philosophy is to have employees whose loyalty is to the company and the patients Medtronic serves, and who have a sense of well-being because they are well paid, fairly treated, and have “a means to share in the company’s success.”
Last Tuesday I gave a webinar on “Leading a Global Enterprise” for HBS alums. You may be interested in reviewing the slides I used. Also, please consider attending our new course, “Leading a Global Enterprise,” for global executives next July 28 - August 2, 2013. It’s a one-week compact course that will help you become a much better global executive.
From: McKinsey Quarterly, February 2013
Board governance is frequently discussed and often misunderstood. In this article, I offer an insider’s perspective on the topic. Over the years, I have had the privilege of serving on ten corporate boards, as well as being chairman and CEO of Medtronic, chairman only, and CEO only. I have also observed dozens of boards from outside the boardroom and engaged in numerous confidential conversations with members of these boards about the challenges they faced and how they handled them.
What I have learned from these experiences is that one’s perspective about a board’s governance is strongly influenced by the seat one holds—independent director, chair and CEO, CEO only, or chair only. That’s why it is essential to look at corporate governance through the eyes of each of these positions.
In surveying governance through the lens of different roles, I hope to address a problem in the prevailing dialogue: many of the governance experts exerting power over boards through shareholder proposals, media articles, and legislative actions have never participated in an executive session of a major board. It’s no surprise, therefore, that their proposals deal almost entirely with formal board processes and “check the box” criteria that generally have little to do with the substance of how boards operate.
I worry, in fact, that many of these proposals could weaken the performance of boards by burdening them with an excessive amount of ministerial details. That would be a shame, because corporate boards have made progress since the scandals of recent years, with a new generation of CEOs sharing with boards more openly, listening to them more closely, and working to achieve a healthier balance of power with independent directors.
Role 1: The independent director
The combination of new governance regulations and rising expectations makes serving as an independent director much more important—and difficult—than it was in years past. The greatest challenge these directors face is to stay fully informed about the companies on whose boards they serve.
Information asymmetry is often at the root of this challenge. When directors are truly independent of the companies they serve, they generally lack the wealth of knowledge about the industry or business that their senior-executive counterparts have. Moreover, independent directors typically have limited engagement with the company and its board, meeting perhaps six to eight times a year. Consequently, management has far more information than independent directors can ever absorb. I recall this challenge well: of the nine boards I served on as an independent director—across a range of industries—I had industry-specific knowledge in exactly none of them.
In one instance, I recall asking why a company wanted to implement an aggressive stock-buyback program when it might be better to preserve cash to take advantage of opportunities or to use as a cushion if cash flow turned negative. My question was not well received. The CFO argued that the company had always been able to raise cash when it was needed and had never passed up an opportunity for lack of cash. A fellow director told me that I simply didn’t understand the industry and that stock buybacks were routine. So I backed off.
However, a year later the company became so concerned about volatility in financial markets that it suspended all stock buybacks and began an aggressive program of increasing its liquidity. That was a good thing, because the following year the markets completely shut down when the credit and liquidity crunch occurred. Had the firm not had a large cash reserve, it might have wound up insolvent, like many of its competitors.
Whether or not my questions a year earlier helped nudge management in this direction, I strongly believe that independent directors can provide leadership and contribute to the companies they serve in ways that go beyond meeting the basic legal requirements and fiduciary responsibilities inherent in board service. In addition to asking tough questions, three opportunities stand out.
Be an advocate for sound governance
Independent directors should be advocates—and enforcers—of sound governance principles. This is especially important in challenging times or when the company is in crisis. Too many directors accept board governance as it is, without suggesting the kinds of process improvements that would make a difference; some directors even resist them.
Yet process matters hugely in the boardroom, and not just to make sure a company abides by governance rules. Process steps help to keep board members engaged and able to fulfill their responsibilities and, more important, establish the proper balance of power between management and the board.
Perhaps the most useful aspect of the governance rules passed a decade ago in the United States is the requirement that independent directors meet in executive session without the CEO present. These sessions give directors the opportunity to share concerns about the company and to ask for improved governance steps or additional reviews. They are also a time to discuss privately any concerns that directors have about management and to ensure that directors are fully informed. Finally, the sessions are useful in building chemistry among the independent directors.
Good chemistry is important. The director of a major European company shared with me his frustration when he challenged its CEO and the direction in which the chief executive was moving the company, but received no support—just silence—from his fellow directors. Later, when the board went into executive session without the CEO in the room, the directors around the table unanimously agreed with this director, saying that the CEO was not providing the right leadership or taking the company in a sound direction.
Nearly all independent directors say that selecting the right leadership for a firm is their most important role. Yet in my experience, the time spent on succession is far too limited and the discussion not nearly candid enough. All too often, board members settle for a “hit by a bus” contingency plan. Such plans are crucial, of course, even if just for an interim period. Yet oftentimes the person ultimately identified to lead is just the most obvious interim leader, not the best long-term successor.
To better prepare for succession, boards should have multiple discussions each year to identify the company’s next generation of leaders. They need to create ways to get to know these candidates personally and observe them in crises and under pressure. The board should also create a series of assignments to prepare prospective CEOs and other senior-executive candidates.
If succession isn’t taken seriously, directors may find that when the time comes, they do not have confidence in the internal candidates. Faced with this situation, directors may react—or overreact—by immediately initiating an external search, which bears substantial risks of its own. Outside hires may look good on paper and have been successful elsewhere, but it is not uncommon to find they do not understand the company’s culture and values and do not take the time to identify the people who make the organization run successfully.
The board should instead conduct detailed leadership-succession-planning sessions to review candidates and their progression, ensuring that they have the necessary experiences to get them ready for the top jobs. In these reviews, the age of the potential top leaders matters. They should not be so close in age to the CEO that they would be unable to have a sufficiently long tenure as CEO prior to reaching mandatory retirement, nor can they be so young that there simply isn’t time for them to have the experiences they need for such a major task. Thus, the process of identifying candidates for top roles must start early—typically, with leaders who are barely 30 years old.
On one board on which I served, the long-time CEO, who was doing an excellent job, steadfastly resisted the board’s insistence that he develop potential successors. Frustrated by his inaction, the compensation committee (of which I was not a member) voted to provide him with a special bonus for grooming a prospective successor. He then reluctantly initiated an external search for a chief operating officer.
However, before any candidates were identified, he set up an off-site meeting with the independent directors to recommend that the external search be canceled because “it was causing too much disruption.” Instead, he proposed to the board that he would develop some much younger candidates who not only were several years away from being viable successors but also, in some cases, seemed unlikely ever to make effective CEOs.
That was enough for me. I decided to resign rather than remain part of what I viewed as a charade. The CEO stayed for many more years, eventually stepping down after two decades in the job. Even then, he continued to occupy his CEO office at company headquarters. His successor, who was quite junior to him in age, found that managers routinely took problems and opportunities to the old CEO, thereby undermining the new CEO’s authority.
Leading in crisis
The real test of a board of directors comes when the company is in crisis. Independent directors, in particular, are counted upon to step up to their responsibilities in difficult times. Their accumulated wisdom and judgment are crucial to make sound decisions under the pressure of time and media attention.
The overarching lesson I have distilled from the crises I’ve experienced (among them, the termination or resignation of CEOs, external financial crises such as the 2008 financial-market meltdown, major governmental action against the firm, and an unexpected takeover attempt) is that board members need to understand and trust each other. Only when they can have candid conversations will they ultimately reach a consensus that has positive and far-reaching implications for the company. Trust becomes even more important when meetings are conducted by telephone, which is often the case in crises.
The bottom line for independent directors is that their responsibilities and obligations are so great these days that they cannot serve on a board and expect to preside while fulfilling only the minimum requirements. Rather, independent directors must be fully engaged, do their best to learn the business, and stay connected between meetings. Otherwise, they won’t be prepared to lead when a crisis hits. For many independent directors, this will mean not serving on as many boards as they did in the past—a change that’s appropriate given the time it takes to be an effective board member.
Role 2: CEO with nonexecutive chair
In 1991, I became CEO of Medtronic, two years after joining the company as president and chief operating officer. My predecessor, who had just turned 65, continued as chair of the board. I was quite satisfied with this arrangement. His wealth of experience and wisdom were valuable to me as CEO, and he had the board’s full confidence. He was also more than willing to take on difficult assignments at my request regarding delicate government and legal issues.
This dual structure—the standard model in Europe—is preferred by most governance experts and some regulators. The split clearly distinguishes the role of management (to lead the company) from that of the board chair (to take responsibility for the board and governance).
Yet as obvious as the structure seems in principle, I have seen no evidence or research to demonstrate that split roles create superior performance or even provide greater stability at the top. Anecdotally, the opposite is often the case.
In practice, the model’s effectiveness depends on the relationship between the two individuals in these roles. If they are not squarely in agreement about the direction, leadership, and strategy of the company, an unhealthy separation may emerge within the board, and between management and the board. The result can be a lack of clear direction for the company—a state of affairs that leads to malaise or confusion within the employee ranks and, ultimately, to dissatisfied customers and shareholders. In the worst case, the two leaders engage in a power struggle that paralyzes both management and the board, thus preventing the company from making important decisions and responding quickly to changing conditions.
As much as I initially supported the separation of roles when I became CEO, over time the arrangement became more difficult. For example, some board members seemed confused about whom they should look to for strategic direction, especially in the case of acquisitions. In addition, the chair felt he should be “the eyes and ears of the board” in the company. Over time, this led to some confusion within management about his role. The board was also somewhat confused about whether I reported to him or to the board as a whole, an issue that was never fully clarified. Quite naturally, I felt that I reported to the board as a whole and that my responsibility and authority to lead the company depended on those relationships.
Tension also developed because board members seemed hesitant to give me direct feedback or to talk openly about their concerns. When I became board chair as well as CEO, this tension evaporated quickly, and I found myself spending far less time on board governance. In part, this happened because communication lines opened up and were more direct. By contrast, when the roles had been separate, I found I had to spend more time than I had expected involved in board governance and in responding to issues raised by the board.
Role 3: The dual mandate
North American CEOs strongly prefer the dual mandate of being board chair and CEO, as it puts them squarely in charge and avoids the likelihood of conflicts or power struggles within the boardroom. The downside of this model is that in the past it often encouraged complacency by boards and discouraged them from getting deeply involved in issues until it was too late.
In practical terms, a leader is most effective in dual-mandate roles when he or she starts by keeping independent directors well informed through a combination of telephone updates, monthly progress reports, and candid comments in executive sessions with the independent directors about the real-time issues facing the company. The leader must be responsive to the independent directors’ concerns and either take action on them or put them on the board agenda for discussion by the full board.
Such a leader also must learn to perform a delicate balancing act: facilitating open discussions on the board while at the same time representing management’s position to it. If this individual argues his or her case too strenuously, he or she may shut down thoughtful comments from the independent directors. On the other hand, if the individual acts solely as a facilitator of these discussions, the directors won’t get the full benefit of management’s thinking and rationale.
Having served on several boards with a single leader in the combined roles of chair and CEO, I have learned that a board is most effective when the leader clearly understands the difference between these two roles and bends over backward to respect the board’s independence. This independence extends to the directors’ need to have open discussions without the CEO present, to ensure that important issues are addressed privately.
Similarly, when I had this dual role, I did whatever I could to open up meaningful discussions within the board, especially by drawing out the opinions of its quieter members. This was particularly challenging when the board was discussing important strategic issues or acquisitions and needed the benefit of my judgments and insights. I had to learn to withhold my opinions until others had the opportunity to offer theirs and then work them into the context of my conclusions. Frequently, this meant delaying decisions until the board had time to digest the ideas or management could undertake additional analyses.
One of the benefits the board and I had was an active, capable lead director with whom I could work closely. He did a superb job in guiding the issues of the independent directors and in keeping me fully informed of any concerns and issues the board might have. When it came time to select my successor, he developed a sound process that we both agreed upon and led the board through it.
The rise of the role of lead director, elected by the independent directors, is contributing to a better separation of governance from management. To make the position work effectively, it is essential that this role have a separate job description that is publicly available and respected by the chair and CEO. The most effective lead directors view themselves as “first among equals” and can coordinate the opinions of all directors and facilitate open discussion among them.
Role 4: Non-CEO chair
The role played by a non-CEO board chair will depend heavily on the experience that person brings to the position. If this individual was the previous CEO—a common situation—he or she will bring a wealth of experience, a keen knowledge of the other directors, some strong opinions about what the company needs, and oftentimes a legacy to nourish or at least maintain. Therein lies the difficulty: no matter how hard old CEOs try to restrain themselves, they may have a tendency to overshadow or, worse, override new CEOs.
This problem is exacerbated by independent directors who still rely heavily on the ex-CEO’s opinions and may trust his or her recommendations more than they do those of the current CEO. Still, when former CEOs can restrain themselves, recognize that it is time to let go, and do everything they can to support their successors, they can be very effective in the role of board chair.
In my case at Medtronic, I was committed to a seamless transition with my successor and to ensuring his success and the company’s. Also, the board and I had agreed upon a timetable of just one year for me to serve as chair, so I was clearly in a transitional mode. I was still in my 50s and looking forward to turning my attention to other interests.
Nevertheless, it didn’t take long before I faced a board-level challenge. It came at an off-site board meeting just a month after the CEO transition. For 15 years, dating back to my predecessor’s tenure, Medtronic had pursued publicly announced goals of 15 percent per annum growth in both revenues and profits, compounded over any five-year period. These aggressive goals provided discipline within the company and a consistent benchmark for shareholders. We had been successful in exceeding these goals, but not without risks and challenges.
At a board meeting, however, one of the independent directors argued forcefully that given the company’s larger size, it would be impossible to continue to achieve such high rates of growth. Although I was tempted to jump into the discussion and defend the importance of the goals, I held my fire. My successor held firm, and the company stayed the course.
Many people make a strong case that a former CEO is not the right person to serve as board chair and that he or she should leave the board immediately. An alternate choice could be one of the existing directors, provided there is a well-qualified candidate available. An equally good choice is to appoint someone who has served as chair, CEO, or both at another company. In some countries, the board chair may be an independent attorney or financial expert, but this approach risks ending up with a candidate who has insufficient knowledge of the company, its business, and what it takes to lead it. Regardless of who holds the position, it must have a well-defined job description to keep accountability strong. A nonexecutive chair should be formally evaluated at least annually by fellow board members. Finally, the position should have a defined term of office, after which a new nonexecutive chair is elected or the existing chair is formally reelected.
The diversity of perspectives that board members bring to the role can be a considerable strength for the companies they serve. How can organizations make the most of it? Here are three suggestions.
- The board should acknowledge that no single structure works in all cases. Boards must be pragmatic enough to adapt to the individuals involved rather than put a rigid structure in place.
- All parties, but especially CEOs, should acknowledge different points of view and work to minimize the conflicts that inevitably arise from them. This requires high-level listening skills, the ability to see situations from the other person’s perspective, and the wisdom to understand the basis for the different points of view.
- All directors, but especially CEOs, can benefit from holding different positions, either within the company or on other companies’ boards. Nominating committees should seek out prospective board members with diverse experiences. Boards should also encourage CEOs to serve on at least one outside board to give them the experience of being an independent director and seeing firsthand the challenges outside directors face.
If these basic guidelines are followed, I believe that board governance will improve markedly. As a result, companies will have a steady hand in the boardroom to sustain their achievements through successive generations of leadership and board membership.
During the World Economic Forum, I had the pleasure of participating on a panel on “The Moral Economy” with Mary Robinson, former UN High Commissioner for Human Rights, Jim Wallis, founder of Sojourners, and two outstanding CEOs. Here are some quick takeaways from the discussion:
- Corporations are not about conflicts between investors and societal needs. Their responsibility is Creating Shared Value – a courageous concept promoted by my colleague Michael Porter. “CSV” rebuts Milton Friedman’s doctrine that companies should strive solely to maximize shareholder value.
- Corporations are chartered by society, and so fundamentally they must consider their impact on society. They also have different stakeholders too: customers, employees, investors, government, labor unions, suppliers, and the public. If they “value maximize” to one group (investors) then they destroy the ecosystem they depend on in order to remain competitive.
- Jim Wallis and I both commented that the best way to transcend a system where the corporation is navigating the interests of the different stakeholder groups is through establishing a powerful mission. At Medtronic our mission is to restore people to full life and health. We went from restoring 300,000 new patients per year to 10 million people today.
- Carlos Danel at Compartamos told us that they have set up an internal report card for how they manage metrics that may create tension, such as their value of “transparency to customers” and economic indicators like profitability.
- Similarly, Jonathan Reckford, CEO of Habitat for Humanity, asked a question from the audience about balancing profit versus consumer affordability, particularly in financial services. Each institution has to balance these objectives, but it is more important to realize this is not zero-sum. Through focusing on a powerful mission, we can transcend tradeoffs and actually create more value for each stakeholder group and society as a whole.
- Transcending these individual interests is the work of great leaders. Leaders must align the company around a powerful mission. They must reinforce that mission through measurements and compensation. They must also have confidence to push back on Wall Street, when it has short-term needs (EPS growth) that are incompatible with the long-term health of the company.
Several big themes emerged during the dialogue, including the fact that we have a broken social contract, the need for business to treat each person with respect, and the need to seek out ways to promote the common good through our institutions, including business.
On my part, I asserted that any company that only focuses on creating shareholder value will self-destruct. General Motors, Kodak, K-Mart, and Sears Roebuck all lost their way. They didn’t create shared purpose and values. Leaders cannot run a company just with rules and regulations; instead, they must bring them together around a sense of shared purpose and values. Then they have to align the incentives to reflect these needs.
On Jan. 16, Hewlett-Packard (HPQ) plans to hold a ribbon-cutting to show off an overhauled customer meeting center at its headquarters in Palo Alto. A year in the making, the complex creates a striking first impression. The off-white 1980s-vintage entryway has been updated with an ultra-modern look—lots of open space and blue lighting. Peer through the floor-to-ceiling glass walls, and you see that the space has been rebuilt around an old, bending oak tree in the middle of a courtyard: William Hewlett and David Packard planted it there back in the 1960s. “Without overstating things, this is symbolic of the rebirth of Hewlett-Packard anchored by the foundation of that oak tree,” says Meg Whitman, who works in a cubicle in the same building.
Whitman, HP’s fourth chief executive in two and a half years, is eager to project calm. She tries to have a swim each morning at a public park near her home before heading to the office. In person, she can be playful, dancing in her chair while explaining the country music-themed ringtone on her phone. For the most part, though, she’s direct about her past and HP’s future.
People outside Silicon Valley may know Whitman best for her short-lived political career. After a successful 10 years as CEO of EBay (EBAY), she made an unsuccessful run at the California governor’s office in 2010. She argued with a former housekeeper in the press about how she treated the help and whether or not Whitman knew she had hired an undocumented worker. The squabble was a final kick to the head for a struggling $150 million campaign, but Whitman says she learned a few things about resolve from the experience. “Running for political office was the hardest thing I have ever done,” she says. “When things seem challenging here, I go back to that.”
Things are challenging at HP—more, perhaps, than at any time in its history. Customers are buying less of two of HP’s most important products—PCs and printers—while the company has amassed debt and laid out billions on acquisitions that haven’t worked out. Wall Street analysts have kicked off the New Year by saying that Whitman ought to break up the company. Since August 2010 the company has lost 70 percent of its share price and close to $68 billion in value. Despite being a component of the Dow, HP currently is worth $29 billion, half a billion or so less than Carnival Cruise Lines (CCL), which has roughly one-ninth the revenue. “You just wonder how HP can possibly fall so far so fast,” says William George, a professor at Harvard Business School and board member of ExxonMobil (XOM), Goldman Sachs (GS), and the Mayo Clinic. “You look at HP’s share price and think, ‘Are you kidding me? That’s all it’s worth?’ ”
It’s true that HP has a collection of now commoditized businesses such as PCs, servers, and printers, and that its products look dated in some areas. But many of these businesses remain cash machines, with HP generating more than $12 billion in operating income a year. The disarray at the top of the org chart, though, has just been too much. “This is one of the great corporate destructions of all time,” says George. “They will continue drifting and disappointing their shareholders unless they’re ready to make some really hard decisions.”
Whitman says she’ll make them, but needs time to really change things. “Five years,” she says. “Some people don’t like that answer.”
Before HP, no one had heard of inventing things in a garage and changing the world. “HP is the model for the idea that as a startup you can become one of the biggest and most important companies,” says Leslie Berlin, the project historian for the Silicon Valley Archives at Stanford University. “It’s an idea that’s still vitally important for the Valley.”
Through the years, HP has shifted—not always nimbly, though usually successfully—from producing scientific tools to calculators to PCs to printers to data center gear. Hewlett and Packard mastered the balance of spending enough on R&D to come up with new products, while making lots of money on the old ones.
Along the way, HP crystallized many of the mores of Silicon Valley’s business culture, creating a casual office environment run by engineers, with workers sharing in the company’s performance. “This was a company founded by good men with good employees that built good products,” Berlin says. “It functioned as sort of the moral core of the Valley.”
The roots of HP’s decline go back at least to the 1990s. Carly Fiorina, Mark Hurd’s predecessor and the first outsider hired for the CEO job, spent her tenure doing away with what she saw as stodgy management principles baked into HP’s DNA—such as an abhorrence of large-scale layoffs—that were slowing it down. In 1999, HP sold Agilent Technologies (A), the electronic instruments division closest to HP’s roots.
Two years later, after an acrimonious shareholder battle between Fiorina and Bill Hewlett’s son Walter, HP bought Compaq, the huge personal-computer manufacturer. That deal gave HP great heft but sapped it of a cohesive corporate culture and set it on the path toward becoming a slave to the supply chain rather than a company obsessed with invention. Fiorina was fired in early 2005 after she missed Wall Street’s numbers one time too many; it was under her watch that HP turned into a misfiring conglomerate and introduced the high-level intrigue that has plagued its leadership since.
Most infamously, members of Fiorina’s board leaked information about their meetings to reporters, and company directors then proceeded to spy on HP employees and reporters to figure out who had done the leaking. HP “was considered a bit of a model board for a long time,” says Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance. “When Carly came in, that changed.”
What HP could have used in March 2005 was a unifying principle, if not a return to its foundational identity. What it got was Hurd. A suit-wearing, Baylor football-loving, foul-mouthed alpha male, he had been running NCR (NCR) in Dayton for two years when he took over at HP. Hurd had done well at NCR, which made cash registers, automated teller machines, and, at the time, data warehousing software that the world’s largest companies used to keep track of and analyze their merchandise, customers, and sales.
Few people beyond the Wall Street analysts covering the company had any idea who he was. It would turn out that Hurd was practically a human cash register: Flash a spreadsheet in front of him and he would remember every figure on every line. HP had a dizzying array of businesses—low-profit PCs, printers it virtually gave away to sell ink, high-end supercomputers, software sold via multiyear licenses, and a services arm that charged by the hour.
In short order, businesses such as PCs and servers that often lost money became very profitable. Hurd hit Wall Street’s revenue numbers in 21 out of 22 quarters and increased profits 22 quarters in a row. HP’s revenue rose 63 percent, while its share price doubled. “Mark Hurd was cutting costs and doing a good job of it,” says Jayson Noland, an analyst at Robert W. Baird. “But you can’t cut costs forever, and investors wanted to see growth.”
According to interviews with dozens of former HP executives—almost all of whom refused to speak on the record to avoid alienating the company, but who are fans of Hurd—he came close to operating HP with a founder’s authority. He was for all intents and purposes the CEO, CFO, COO, and head salesman. “Within 30 to 45 days of Mark joining HP, there was not a single person at HP that could say that he had not been affected by Mark in some way,” says Sandeep Johri, a former vice president at the company. “They might not always have been happy about the effect, but they had felt it.”
Any request for outside consultants had to pass Hurd’s desk. HP went from spending about $100 million a year on firms such as McKinsey and Bain & Co. to almost nothing. A yearly bonus system got broken up into quarters; employees who were used to sharing a bonus pool were now meticulously and frequently ranked and rewarded based on their achievements. Hurd called for the lowest 10 percent of performers to be fired each year. He also had all the company’s executives interviewed and then analyzed by Heidrick & Struggles (HSII), an executive recruiting and talent evaluation firm, and personally reviewed the assessments.
If sales of a certain type of printer slowed, the person in charge of the product soon received a brutal, curse-filled reprimand from Hurd. If real estate costs were out of whack in Vietnam or a currency shift in Brazil was hurting server margins, he knew about it. One executive recalls Hurd discovering 715 people in San Diego working on tens of thousands of printer drivers and getting the team pared down to 64 people and a handful of drivers. “It’s hard to believe that in a company of 300,000 people one guy can have that much influence, but he did,” says Johri.
Whatever Hurd’s influence, HP’s board didn’t consider him indispensable, and forced his resignation in August 2010. The board had learned of a complaint sent by a former marketing contractor named Jodie Fisher that accused Hurd of sexual harassment. Hurd denied the allegations and recoiled at the notion of making the complaint public, while a handful of board members accused him of trying to obfuscate his relationship with Fisher. “The board recognizes that this change in leadership is unexpected news for everyone associated with HP, but we have strong leaders driving our businesses, and strong teams of employees driving performance,” HP director Robert Ryan said at the time. An HP investigation into the matter unearthed e-mails between Hurd and Fisher that undermined her harassment claims. HP’s board threw Hurd out anyway.
Three days after he’d resigned as CEO under pressure from the company’s board of directors, Hurd received an e-mail from Steve Jobs. The Apple (AAPL) founder wanted to know if Hurd needed someone to talk to. Jobs had lived through a similar experience decades earlier when Apple’s board turned on him, an analogy Hurd and Jobs’s mutual friend and Oracle (ORCL) CEO Larry Ellison was quick to draw, condemning Hurd’s ouster as “the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago.”
Hurd met Jobs at his home in Palo Alto, according to people who know both men but did not wish to be identified, compromising a personal confidence. The pair spent more than two hours together, Jobs taking Hurd on his customary walk around the tree-lined neighborhood. At numerous points during their conversation, Jobs pleaded with Hurd to do whatever it took to set things right with the board so that Hurd could return. Jobs even offered to write a letter to HP’s directors and to call them up one by one.
Over the previous five years, Hurd had built HP into the largest technology company in the world; sales in 2010 were $126 billion. Shares were on a tear, and profits kept rising. Yet Jobs told Hurd and other friends that he thought the board would unwind HP’s progress and send the company spiraling into chaos.
By offering Hurd counsel, Jobs wasn’t merely lending a friend psychological support. Rather, he was going to bat for the legacy of Bill Hewlett and Dave Packard. A healthy HP, Jobs urged, was essential to a healthy Silicon Valley. “It’s the founding company of the Valley,” says Bill Campbell, the chairman of Intuit (INTU) and an Apple board member. “You don’t want to see it go away.”
Jobs ultimately could not pull off a reconciliation between Hurd and HP. He passed away a little over a year later, but lived long enough to see his prediction borne out. A couple months after Hurd and Jobs talked, HP’s board picked Léo Apotheker as its new chief and tapped Ray Lane as the new chairman. Lane, a member of Silicon Valley’s old guard, took on a major role in restructuring the company—and has served as a constant during HP’s implosion.
As its fortunes have diminished, the new CEOs have tended to blame Hurd. He fired people, got rid of office space, eliminated benefits, and asked employees to do more with less quarter after quarter. The company, in this version of events, had become lean to the point of emaciation. By the end of Hurd’s tenure, HP’s internal technology systems were antiquated, and the company had no attractive products to offer in high-growth areas such as mobile and cloud computing. Moreover, morale had suffered as talented employees were culled via the mandatory ranking system, and top executives found Hurd to be less receptive to new ideas. While many of these criticisms have the ring of truth, they fail to capture why HP’s prospects got so much worse so quickly after Hurd left.
The impression that many people seem to have is that HP’s sales fell off a cliff because it made inadequate products. Not so: HP posted revenue of $126 billion in Hurd’s last year and $120.4 billion in 2012. It remains the dominant seller of corporate computing products in the world. “I see them looking more like a junior IBM (IBM) situation,” says Chris Bertelsen, chief investment officer at Global Financial Private Capital in Sarasota, Fla., which has $1.8 billion in assets under management and has been buying HP stock. “Meg could get this going,” he adds, underscoring that HP’s biggest challenge hasn’t been its core businesses, but its leadership. The company’s struggles are compounded by a debt-laden balance sheet. “It looks like the darkest hour now with the cash issues and the stock down,” says Ed Zander, the former CEO of Motorola. “I think it will survive, but the question is whether HP will be relevant again.”
As Jobs was advising Hurd to patch things up with the HP board, Larry Ellison, Hurd’s friend and tennis buddy, offered him a powerful platform to exact his vengeance. One month after Hurd departed HP, Ellison named him co-president of Oracle, an HP rival in the data center software and hardware business. (Hurd declined to comment for this article. Ellison did not respond to requests for an interview.)
When Hurd left, HP tapped CFO Cathie Lesjak as its interim chief executive officer. She had no aspirations to be CEO, though a number of HP division heads did. In the background, Marc Andreessen, the Netscape co-founder turned venture capitalist, began exerting more influence in his role as a board member and started a hunt for the company’s next leader. Lesjak assured investors and the press that HP would maintain the financial discipline imposed by Hurd, while looking for a replacement who understood software development and sales, and would encourage research and development. HP would stay lean and mean while growing in higher-profit areas and demonstrating more innovation. Instead, a new set of baffling moves followed.
First, Lesjak raised the company’s guidance for the upcoming quarter by about $500 million. Two weeks later, HP kicked off a bidding war with Dell (DELL) for the storage company 3PAR; it ended up paying $2.35 billion. Ten days after that, HP’s board approved a $10 billion share buyback. Following this flurry of activity, HP hired Apotheker as its new CEO and named Ray Lane as a new board member and executive chairman of the company.
Apotheker had spent decades at SAP (SAP), one of the world’s largest software makers, but had recently been let go after a short stint as CEO. Lane is known as an enterprise computing Mr. Fixit. During eight years at Oracle in the ’90s he worked alongside Ellison, helping to repair relationships with customers and imposing discipline on that company’s freewheeling sales culture. When he and Ellison had a falling out, Lane left for Kleiner Perkins Caufield & Byers, one of the Valley’s premier venture capital firms. The Apotheker-Lane combo signaled a shift away from hardware toward the higher-margin realm of business applications.
Apotheker started work in November 2010. In his first month as CEO, he once again hiked HP’s sales forecasts, only for HP to later miss the numbers and begin a pattern of disappointing Wall Street. Meanwhile, Apotheker got teased in the press for not even being in the U.S. to run HP; he was on a global “listening tour,” speaking to customers and HP employees, the company said at the time—not, they insisted, trying to hide from a subpoena to appear in a California lawsuit between Oracle and SAP.
Internally, Apotheker did not make many friends. About half of HP’s executive vice presidents had been competing for his job, and former executives say he did little to reach out and win them over. There were other personality issues, too: Apotheker’s aloof demeanor and his seeming reluctance to dig into HP’s operational minutiae. As one high-ranking former executive in the services business recalls, at his first meeting with Apotheker—to provide the lowdown on the services business—he and a dozen people gathered in a conference room to hear the presentation, only to watch as Apotheker nodded off. The group waited uncomfortably for about 15 minutes. The CEO woke up and, to the gathering’s collective astonishment, said he wanted to move quickly past the financial details of the business, in order to talk about less specific customer satisfaction initiatives. Apotheker’s spokesman Sean Healy responds: “His typical workweek lasted 90 hours, visiting and researching sites long ignored by Palo Alto. With this schedule, it’s possible he drifted off a minute in one of what was hundreds of reviews he attended, in a bid to reorient HP’s long-term focus to metrics behind the financials, such as client satisfaction and product performance.”
Former executives recall how quickly HP returned to its free-spending, pre-Hurd ways. Apotheker dished out companywide raises and invited back the consultants. In part because of the circumstances of Hurd’s departure, many acted as if things he had done needed to be unwound. Apotheker, the former executives say, approved just about any plan if people described it as something Hurd had resisted.
By March 2011, Apotheker had been at HP for four months and finally held a press conference to lay out his plans. HP, he said, would install webOS, the mobile software made by Palm, across its PC and printer line, as well as on all new mobile devices. The company would also make a bold entrance into cloud computing, Apotheker said, even though it had no products at the time to do this.
Five months later, in August, Apotheker abandoned the Palm software plan, and the company announced it would be getting rid of its smartphone and tablet technology. HP also announced that, after being advised by McKinsey, it was considering selling off its $40 billion-per-year PC business. Then it lowered its earnings forecast for the coming quarter. And it was going to acquire Autonomy, a software maker that mines corporate data for legal and regulatory compliance purposes, for $10 billion, or 10 times its annual revenue.
The week of the announcements, Apotheker and his team held nonstop meetings to discuss the plan. At one, communications director Bill Wohl and a public-relations consultant named Joele Frank warned Apotheker that all these shifts would generate a big drop in the company’s stock price and a storm of negative press. Apotheker charged out of the meeting, came back to his office, and threw a chair at Wohl, adding that he didn’t ever want to see Frank in front of the board again, according to one person who was in the room. Apotheker spokesman Healy, who says the chair was more shoved than thrown, responds: “The passage of time clearly is directly related mathematically to exaggeration level.”
One month later, Apotheker was fired and replaced by Meg Whitman.
If HP’s tumultuous past two years can be said to have had an architect, it’s the chairman of the board, Ray Lane. He masterminded the January 2011 board shake-up that brought Whitman on as a director. (Lane, through HP, declined to comment for this article.) During the shuffle, HP tapped five new directors and released four Hurd-era holdovers. According to people familiar with the matter, Lane told directors Robert Ryan—also a director of Citigroup (C) and General Mills (GIS) and a Cornell University trustee—and Lucie Salhany, a former protégée of Barry Diller at Fox, that he needed to remove two anti-Hurd board members to balance the two Hurd loyalists he was removing. Then he proposed throwing a going-away party, these people said. It never happened. “I’m not sure what the hell is going on over there,” says Zander of HP’s board. “When you have all these changes going on, it’s tough to get things done.”
Lane has his defenders. “He’s always been straightforward and easy to deal with,” says Scott McNealy, the former CEO at Sun Microsystems, which counted Oracle as a close partner. McNealy characterizes Lane as an “economic volunteer” who has agreed to spend a large portion of his golden years trying to rescue HP from the abyss. “You are doing that for the good of the company, not to burnish your reputation,” McNealy says.
Several former HP executives disagree sharply with this assessment, characterizing Lane as power-hungry. “You can’t cut Ray Lane any slack because he brought in a lot of these board members who were close to him. The whole idea of a board is to give a company some institutional memory of what the company stands for and how it got there,” says George. “I think they have lost the essence of what they are.”
Since Lane joined HP’s board, the company has bought at least two companies affiliated with Lane. HP paid $350 million for the data analysis company Vertica, which Lane celebrates on his Kleiner bio page, and $1.5 billion for the security technology specialist ArcSight, also a Kleiner investment.
Lane also approved the acquisition of Autonomy, which has blown up. In November, HP said it would write down $8.8 billion of the $10 billion acquisition due to poor sales of the software, while also leveling charges of accounting fraud against Autonomy’s management. (Autonomy founder and former CEO Mike Lynch has denied these charges and set up a website defending Autonomy’s management point by point.)
Like Lane, Whitman has tried to distance herself from the Autonomy decision, telling analysts on a Nov. 20 conference call that the blame lies with Apotheker and former merger and acquisitions head and CTO Shane Robison, who departed in 2011. “The CEO at the time and the head of strategy who led this deal are both gone—Léo Apotheker and Shane Robison,” Whitman said.
Robison declined to be interviewed for this article, but Apotheker pointed the blame squarely back at Lane and the rest of the board in an e-mail to Bloomberg News. “No single CEO is ever able to make a decision on a major acquisition in isolation, particularly at a company as large as HP—and certainly not without the full support of the chairman of the board,” he wrote.
“The narrative is worse than what is actually going on here,” Whitman says. Internally, she has preached frugality and humility. At one meeting with 150 or so top HP executives, she declared, “We are a Marriott company, not the Four Seasons.” When working late, Whitman orders in pizza or Chipotle (CMG). “This is not a fancy pants kind of company,” she says. To prove her point, Whitman removed executive vice presidents from their plush offices and placed them in cubicles.
Whitman has also tried to rally employees and outsiders around innovation. The company has already started to stem market share losses in PCs through a new line of tablets and elegant laptops with detachable screens. The services business, having been retooled, will grow again, and HP will make printing more attractive through a host of Web-based features on its products, according to Whitman.
HP may return to the smartphone business as well. “Ultimately, we have to do that,” Whitman says. “But we have to figure out how to do it without losing a boatload of money.”
She allows that HP can’t make any major acquisitions just now, while insisting that outsiders have overstated the limitations imposed by the company’s cash crunch. “To my predecessors’ credit, they assembled a very powerful set of assets,” Whitman says, ticking off a half-dozen acquisitions. It’s these storage, security, networking, and data analysis companies that HP will use to spice up its data center product lines, which now—at long last—also include a broad suite of cloud computing options. HP has started upgrading its own technology systems around cloud services from Salesforce.com (CRM) and Workday (WDAY) in a bid to save costs and modernize.
Perhaps the most difficult task may be dealing with the talent drain HP has suffered since 2010. Though unwanted exits have slowed under Whitman, at least 120 executives have departed in the last two years, many to rivals. HP has lost its former CTO, head of printers, research chief, head of corporate hardware, head of corporate sales, and chief investment officer. General Motors (GM) recruited away dozens of people from HP’s internal technology team.
On Jan. 4, the investment research division of UBS (UBS)issued a note that many people in the Valley had feared was coming. It led with a discussion of HP’s management, and how it needs to think about breaking up the company. What UBS said it “preferred” would be an “enterprise and PC/printer split” in which HP’s data center business became one company and its PC and printer businesses another. This note added to gossip that was already bubbling in the Valley about rivals and private equity firms sizing up for parts. Several high-ranking executives at Silicon Valley firms confirm that they’ve been analyzing HP’s bits and pieces.
Whitman says HP will remain stronger if kept whole. She portrays HP as the only company that can sell corporations technology stretching from the device through to the data center. The goal in the coming years will be to stitch all these products together through cloud software and convince customers that HP offers the best mix of good-looking, secure, smart computing systems. It’s a winning pitch. Execution, of course, is another matter. “We’ll see how it turns out,” Whitman says. “My view is that it will be one of the great comeback stories in American business.”