Thirty-seven years ago Bill George first convened what might be called a feedback and support lunch club for aspiring executives. Ever since, George and his half-dozen compatriots have met almost every Wednesday to discuss their lives and businesses. He now calls this his True North Group. Read full Sky Magazine article here.
Medtronic’s former Chairman and CEO Bill George has been named the “Top Overall Business Leader” of the past twenty years by Twin Cities Business Magazine. George is currently Professor of Management Practice at Harvard Business School, where he has spent the past ten years teaching leadership to executives and MBAs. During this period he has written four best-selling books, including True North, and has been an active commentator on television and in print on business leadership. He currently serves on the boards of directors of the Mayo Clinic, ExxonMobil and Goldman Sachs, and previously on the boards of Target and Novartis. The Twin Cities Business article notes, “Medtronic’s former CEO and current chairman is perhaps the individual most quoted by other corporate leaders, certainly in the Twin Cities, on effective leadership. Boiled to an essence, his message is “Be who you are,” and he is. Self-effacement and candor are primary virtues in the George canon. He says, “What gives me the most satisfaction from my years (at Medtronic) is that we went from restoring 300,000 people a year to good health to restoring 10 million. That, to me, is the measure of the good you have done.”
From NYTimes DealBook, published August 26, 2013.
Activist investors are making waves in the stock market, but their game has changed. Instead of taking on sluggish, poorly managed businesses, they want to restructure many of the world’s most profitable, best-managed companies. Their targets — PepsiCo, Apple, Target, Whole Foods, Procter & Gamble, Kraft and Dell — represent the gold standard of corporate governance. These companies are run by highly engaged, professional leaders. So why are activists like Carl C. Icahn, William A. Ackman, Nelson Peltz and Ron Burkle taking aim at them?
While activists often cloak their demands in the language of long-term actions, their real goal is a short-term bump in the stock price. They lobby publicly for significant structural changes, hoping to drive up the share price and book quick profits. Then they bail out, leaving corporate management to clean up the mess. Far from shaping up these companies, the activists’ pressure for financial engineering only distracts management from focusing on long-term global competitiveness.
These activists have a keen sense of timing, buying up shares when the stock is down because of near-term events. There is nothing wrong with that. Warren E. Buffett does the same. The difference is that Mr. Buffett invests for the long term in companies like Coca-Cola, Wells Fargo and I.B.M. He says his ideal holding period is “forever,” and he leaves management alone to focus on results.
A relevant example is Mr. Peltz’s demands to restructure PepsiCo. After forcing the spinoff of Kraft’s North American business into a company called Mondelez, Mr. Peltz’s Trian Partners is left holding 3 percent of a company that cannot compete with global leaders like Nestlé and Unilever. So Mr. Peltz wants PepsiCo to buy Mondelez and then split into two companies: beverages and snacks, including Mondelez. This financial engineering makes no sense. Rather, it demonstrates Mr. Peltz’s lack of understanding of what is required to run successful global enterprises.
PepsiCo’s results demonstrate the validity of the “performance with purpose” strategy of its chief executive, Indra K. Nooyi. It recently reported its sixth consecutive quarter of solid organic revenue growth as core earnings per share grew 17 percent and gross margins expanded. Its global portfolio of snacks, beverages and healthy foods has high co-purchase and co-consumption levels, generating $1 billion a year in scale benefits. Ms. Nooyi uses cash flow from traditional beverages to finance investments and growth in emerging markets, innovation and healthy brands, which now account for 20 percent of PepsiCo’s revenue. PepsiCo’s stock is up about 25 percent over the last two years, compared with 11 percent for its archrival, Coca-Cola.
Mr. Peltz is not the only activist going after healthy companies. Here are some other examples:
Mr. Burkle moved in on Whole Foods when its stock was at its 2009 low of $4, having fallen from $39. Whole Foods’ leadership ignored Mr. Burkle’s pressure, stayed true to its mission and strategy, merged with Wild Oats and invested in deluxe new stores while expanding sales at stores open more than a year. Today its stock is above $50 and has traded above $55.
In 2009, Mr. Ackman tried to pressure Target to break up its integrated portfolio of retail, real estate and credit card holdings, mimicking Eddie Lampert’s disastrous strategy at Sears. Target fought back, won 80 percent of shareholder votes in a proxy fight over Mr. Ackman’s proposed board slate and focused on its long-term strategy to compete with Wal-Mart Stores. Since then, Target’s stock is up 64 percent.
Mr. Ackman next bought into J.C. Penney with a stake that now amounts to about 18 percent and hired Ron Johnson from Apple as chief executive. They hastily undertook a complete remake, abandoning traditional customers and losing 30 percent of revenue. When Myron E. Ullman, the former chief executive who was brought back, tried to stabilize the company, Mr. Ackman publicly attacked the board. Finally, the board forced Mr. Ackman to resign, leaving him with an estimated $500 million in losses. To his credit, Mr. Ackman is acknowledging his mistakes.
Procter & Gamble
Mr. Ackman also went after venerable Procter & Gamble and its chief executive, Bob McDonald, proposing questionable short-term actions to drive up the stock price. He personally attacked Mr. McDonald even as the company posted two strong quarters. Under pressure, the board decided to replace Mr. McDonald with his predecessor, A.G. Lafley. Meanwhile, P.&G. continues to lose ground globally to its archrival, Unilever.
Michael S. Dell proposed taking private the company he founded at a 40 percent premium so he could operate it without stock market scrutiny. Hoping to squeeze $1 to $2 more a share out of Mr. Dell, Mr. Icahn bought up Dell stock and proposed his own financial structure. Now the company is in limbo, posting declining results while the ownership struggle continues.
Chief executives are responsible for building their companies for the long term, while delivering near-term results. When economic conditions and market changes put pressure on quarterly results, it takes wise and steady leadership at the top to avoid the pitfalls of cutting investments to achieve quarterly targets. Chief executives who “borrow from tomorrow” to meet today’s numbers inevitably jeopardize the future of their companies. For poignant examples, review the histories of Hewlett-Packard, General Motors, Sears and Kodak.
The best chief executives — including Alan R. Mulally of Ford, Paul Polman of Unilever and Ms. Nooyi of PepsiCo — anticipate short-term challenges but don’t react to them by sacrificing long-term strategies. They know how to compete globally by creating sustainable value for customers and their shareholders.
In attacking well-run companies, activists are overplaying their hand. The only way to sustain growth in shareholder value is by creating competitive advantage to provide superior value for your customers. Corporate leaders should stay laser-focused on this goal.
Steve Ballmer’s announcement today that he will retire as Microsoft’s CEO after 14 years at the helm highlights the challenges high technology companies have in sustaining their success. Ballmer’s tenure was marred because he permitted Microsoft’s Office and Windows businesses to dominate the company. Meanwhile, opportunities in smart phones, search, mobile applications, social media, and on-line videos were ceded to emerging companies from Google to Blackberry, Facebook, Twitter, and YouTube (now part of Google). Led by the return of Bill Gates’ old nemesis, Steve Jobs, Apple has far surpassed Microsoft in every category except PC software. Even there, Jobs was able to finesse Microsoft in creating the iPad that has contributed to the steady decline of the PC business.
To his credit, Ballmer invested heavily in R&D – over $10 billion in the past year – but Microsoft has little to show for it. Like many of its high tech counterparts – Hewlett-Packard, Yahoo, Nokia, Dell, Blackberry, Kodak and Motorola, to name a few – Microsoft has been unable to overcome the dominance of its core business. Thus, it is following a similar path to IBM with mainframe computers in the 1980s. Most likely the crowning blow for Microsoft’s founder-dominated board was the fiasco with Windows 8, its mainstream product update.
Microsoft’s problem is not a technology problem but an organizational one. It is the classic issue addressed by my HBS colleague Clay Christensen in The Innovator’s Dilemma. The dominant business that generates most of the profits gets the bulk of the resources and attracts the best people in the company. Meanwhile, the dominant group squeezes resources for emerging businesses, especially when funds are tight, and focuses its R&D on replacement products, not true innovation. Similar things happened in the pharmaceutical industry which, with the exception of Novartis and J&J, missed the biotech, med tech, and generic revolutions.
We had a similar problem at Medtronic with the dominance of our cardiac rhythm business, made up of pacemakers and defibrillators, which used to account for 80% of revenues and 90% of profits. Seeing the eventual saturation of that market, we used its cash flow to spend heavily to build a series of medical technology businesses through internal ventures and acquisitions. These include neurological disease, spinal disease, cardiovascular disease and diabetes, along with emerging businesses in otolaryngology and urology. Today the latter businesses account for more than 60% of Medtronic’s revenues and make up the bulk of its growth.
Ballmer contributed to Microsoft’s innovation problem by personally dominating its organization, not letting anyone have sufficient authority to counteract the power of the mainstream business. The consequence is that after 14 years – which is four years too long for a high tech CEO to be at the helm – Ballmer is leaving Microsoft with no successor in sight. Shame on the Microsoft board for letting this happen.
So the company is turning to Heidrick and Struggles to propose a successor. Let’s hope the Microsoft board is wiser in the selection process than the Hewlett-Packard board, which four times unsuccessfully went outside its ranks for a new CEO, yet never found a leader who could restore the innovative, egalitarian culture of H-P’s glory days. IBM’s approach should be a role model: it recruited Lou Gerstner, who had no computer background but was a superb strategist and leader, to get the company back on track. Gerstner wisely groomed Sam Palmisano as his successor, turning over the reins after only eight years. In the past decade Palmisano remade IBM into a highly successful enterprise systems and solutions company and groomed an internal successor, Ginny Rometty, to carry on the IBM success story.
Fortunately for Microsoft’s board, there are excellent candidates who could rebuild its innovative spirit. Three in particular come to mind: Jeff Bezos, CEO of Seattle-based Amazon; Cheryl Sandberg, COO of Facebook; and John Donahoe, CEO of eBay. It is unlikely Bezos would make the shift, but Sandberg might welcome the opportunity to become CEO rather than COO. Donahoe is less well known, but has done a superb job in remaking eBay after taking over a declining franchise from former CEO Meg Whitman.
At this writing Microsoft’s future is very much in doubt. For the sake of America’s dominant position in the global high tech field, let’s hope its board goes the route of IBM and not H-P. Doing so will require all the wisdom of Bill Gates and his fellow board members.
This morning I joined guest panelists Lou Bellamy (Penumbra Theater) and Trista Harris (MN Council of Foundations) to discuss "How our failures and challenges enable us to be authentic leaders" with Host Kerri Miller. Full program here. Your feedback is welcome!
Enjoyed joining host Brian Kenny on HBS’s podcast, The Business, to discuss the US Supreme Court decision to repeal the Defense of Marriage Act and the role of business and business leaders in social change. Link to podcast here.
On Friday, the Destination Medical Center board, of which I am Mayo Clinic’s representative, was kicked off by Minnesota Governor Mark Dayton. Over the next 20 years the state of Minnesota will contribute $585 million of tax dollars as part of a $6 billion investment to upgrade Rochester MN and the surrounding area, including a $3+ billion investment by Mayo to make it the nation’s leading medical destination. This is the largest such undertaking ever by the state of Minnesota, and I feel privileged to be part of it. Here is the story and interview by public television on “Almanac”: http://www.mnvideovault.org/mvvPlayer/customPlaylist2.php?id=24745&select_index=0&popup=yes#2.
Great article in USA Today by Chris Woodyard: "Big 3 automakers thrive even as Detroit falters." Despite the economic state of the city of Detroit, profits and hiring of GM, Ford, and Chrysler are up. The Dertoit-based automakers are a bright spot for the city that just last week declared bankruptcy.
Minneapolis St. Paul Business Journal - Bill George, James Campbell, R.T. Rybak join board to oversee giant Mayo expansion
By Katharine Grayson, Minneapolis St. Paul Business Journal
The state in May committed $327 million to support the DMCC initiative, and the legislation called for Mayo to appoint one person to an eight-member board of directors.
Gov. Mark Dayton also appointed four members to the board on Tuesday, including Minneapolis Mayor R.T. Rybak and former Wells Fargo Minnesota CEO James Campbell. The other two Dayton-appointed members are Tina Flint Smith, Dayton's chief of staff, and Susan Rani, president of Minneapolis-based engineering firm Rani Engineering.
George, a professor of management practice at Harvard's business school, serves on the boards of Goldman Sachs and ExxonMobil.
“Mayo Clinic’s decision to invest several billion dollars over the next 20 years and establish its global DMC in Minnesota presents an unprecedented opportunity for our state and the Rochester area specifically,” George said in a press statement.
The city of Rochester's mayor and city council president, as well as a representative from Olmsted County, also will sit on the board.
Great article in Forbes by Anna Secino: "How the DOMA Repeal Benefits Businesses." Wednesday's DOMA repeal eases corporations' ability to extend benefits to all employees and ensure a welcoming workplace. The repeal is likely to increase employee productivity and strengthen recruitment efforts by accepting all employees as they are.