CEO career insurance
Why did Carly Fiorina lose her job at HP and John Chambers at Cisco Systems' job appears secure? Why is Phillip Purcell at Morgan Stanley's position in the midst of a media firestorm while Lee Scott at Wal-Mart's position remains powerful? And why is Michael Eisner on his way out of Disney?
If you clicked on the links to the companies, you'll see that the difference between the secure CEOs and those in danger is not the stock price. Cisco Systems' stock is down more than HP's from its peak (74% vs. 69%). Wal-Mart is down 25% from its peak while Morgan Stanley has fallen 49%. And while Disney has tumbled 33% from its 2000 peak of $42, the company's market value appreciated considerably during Eisner's 20 year tenure.
The financial performance of the companies seems, in part, to explain the variation in CEO job security. For instance, Cisco's revenues have risen 16% since 2000 and its profits climbed 65%; whereas HP's revenues rose 63% since 2000 (in the wake of its Compaq acquisition) but its profit shrank 5%. Meanwhile Morgan Stanley's revenues fell 13% since 2000 while its net income declined 18%; while Wal-Mart's revenues grew 49% on a 63% profit boost. Disney, whose revenues rose 22% over the last five years while climbing from a $158 million loss to a $2.6 billion profit, suggests that the financial performance explanation does not wash.
I believe there's a deeper reason why some CEOs can survive a drop in stock price and others can't: constituent value creation (CVC) -- how well the CEO satisfies the specific requirements of the company's shareholders/board, customers, employees, and communities. CEOs who want to increase their chances of keeping their jobs must win at CVC. John Chambers, whose company's stock has lost 74% of its value in the last five years is winning at CVC and Phil Purcell -- who alienated a vocal group of former Morgan Stanley executives and tossed out high performing bankers -- is not doing so well. As James Stewart illustrates in DisneyWar, Eisner lost his position by alienating parts of his board, key shareholders, top employees, and powerful community members. In short, Eisner destroyed constituent value.
How can a CEO get the kind of career insurance that Chambers enjoys and Eisner squandered? First, the CEO must recognize that each constituent uses different criteria to determine how much value they receive. For example, shareholders care about quantitative factors such as stock price appreciation, return on equity, and revenue growth. Employees seek out a mixture of quantitative criteria, such as pay and bonuses, and qualitative criteria such as management respect, career opportunities, and challenging coworkers. Customers assess a company based on factors such as product quality, selection, and price. And communities look at how well a company supports local causes, abides by the wishes of government officials, and obeys laws and community standards.
Ideally, CEOs would be able to obtain all this information from their subordinates. As a practical matter, in many companies it is difficult for CEOs to rely on the objectivity of the information they receive from their employees. Some CEOs make it clear that they prefer to hear only data that confirms their views -- and those who insist on contradicting the CEO jeopardize their careers. While employees are generally diligent, I believe that their desire for career self preservation can influence how they report on their business activities.
Therefore, in order to understand how well the company meets these different value criteria, the CEO must deputize objective observers who can interview the different constituents, analyze their responses, deliver a report in confidence to the CEO, and recommend actions, as needed, to fix any problems. A CVC review provides CEOs with answers the key questions that shape constituent perceptions -- examples of which follow.
Shareholders/Boards
If you clicked on the links to the companies, you'll see that the difference between the secure CEOs and those in danger is not the stock price. Cisco Systems' stock is down more than HP's from its peak (74% vs. 69%). Wal-Mart is down 25% from its peak while Morgan Stanley has fallen 49%. And while Disney has tumbled 33% from its 2000 peak of $42, the company's market value appreciated considerably during Eisner's 20 year tenure.
The financial performance of the companies seems, in part, to explain the variation in CEO job security. For instance, Cisco's revenues have risen 16% since 2000 and its profits climbed 65%; whereas HP's revenues rose 63% since 2000 (in the wake of its Compaq acquisition) but its profit shrank 5%. Meanwhile Morgan Stanley's revenues fell 13% since 2000 while its net income declined 18%; while Wal-Mart's revenues grew 49% on a 63% profit boost. Disney, whose revenues rose 22% over the last five years while climbing from a $158 million loss to a $2.6 billion profit, suggests that the financial performance explanation does not wash.
I believe there's a deeper reason why some CEOs can survive a drop in stock price and others can't: constituent value creation (CVC) -- how well the CEO satisfies the specific requirements of the company's shareholders/board, customers, employees, and communities. CEOs who want to increase their chances of keeping their jobs must win at CVC. John Chambers, whose company's stock has lost 74% of its value in the last five years is winning at CVC and Phil Purcell -- who alienated a vocal group of former Morgan Stanley executives and tossed out high performing bankers -- is not doing so well. As James Stewart illustrates in DisneyWar, Eisner lost his position by alienating parts of his board, key shareholders, top employees, and powerful community members. In short, Eisner destroyed constituent value.
How can a CEO get the kind of career insurance that Chambers enjoys and Eisner squandered? First, the CEO must recognize that each constituent uses different criteria to determine how much value they receive. For example, shareholders care about quantitative factors such as stock price appreciation, return on equity, and revenue growth. Employees seek out a mixture of quantitative criteria, such as pay and bonuses, and qualitative criteria such as management respect, career opportunities, and challenging coworkers. Customers assess a company based on factors such as product quality, selection, and price. And communities look at how well a company supports local causes, abides by the wishes of government officials, and obeys laws and community standards.
Ideally, CEOs would be able to obtain all this information from their subordinates. As a practical matter, in many companies it is difficult for CEOs to rely on the objectivity of the information they receive from their employees. Some CEOs make it clear that they prefer to hear only data that confirms their views -- and those who insist on contradicting the CEO jeopardize their careers. While employees are generally diligent, I believe that their desire for career self preservation can influence how they report on their business activities.
Therefore, in order to understand how well the company meets these different value criteria, the CEO must deputize objective observers who can interview the different constituents, analyze their responses, deliver a report in confidence to the CEO, and recommend actions, as needed, to fix any problems. A CVC review provides CEOs with answers the key questions that shape constituent perceptions -- examples of which follow.
Shareholders/Boards
- How well is the company's stock performing relative to the market and the company's peer group?
- How strong is the company's revenue, profit, and cash flow growth relative to its peers?
- How well protected is the company from credit, information, legal, competitive, and physical risk?
- How deep is the company's management bench and how motivated is the company's best talent?
- How well is the company balancing short-term execution and longer-term investment in growth opportunities?
Customers
- What are the customer's ranked purchase criteria (e.g., price, quality, and selection)?
- How well does the company satisfy these criteria compared to competing products?
- For criteria which the company satisfies well, what capabilities enable the company to win?
- For criteria which the company does not satisfy well, what capabilities enable competitors to win?
- What can the company do to outperform its competitors in the most important customer purchase criteria?
Employees
- Who are what Bill Roiter calls the company's most valuable people (MVPs)?
- How motivated are the company's MVPs and how likely are they to stay with the company?
- If the MVPs are not sufficiently motivated, what steps could be taken to increase their motivation?
- How satisfied and productive are employees at different levels of the company?
- What steps could the company take to increase their level of satisfaction and productivity?
Communities
- Which government and community leaders are likely to have the most significant impact on the company's growth prospects?
- How do these leaders perceive the company?
- If these leaders' perceptions are not positive, what could the company do to improve their perception?
- Are there leaders who feel threatened by the company and could try to harm the company?
- Are there leaders who would like to help the company? If so, how could the company work with the leaders to create a mutually beneficial outcome?
With answers to these questions, CEOs can make a more informed assessment of how secure their position is. And if there are areas of vulnerability, the information can help the CEO take action to shore up the areas of weakness while tapping into the strengths to enhance their positions.
posted by petercohan at 3:16 PM
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