The Mind of the CEOby Jeffrey E. Garten
Based on extensive and highly personal interviews with forty chief executives around the world-among them GE's Jack Welch, AOL's Steven Case, Intel's Andy Grove, Newscorp's Rupert Murdoch, BP Amoco's John Browne, Nokia's Jorma Olilla, and Toyota's Hiroshi Okuda-The Mind of the CEO takes us on a journey into the innermost thoughts of today's corporate titans and… See more details below
Based on extensive and highly personal interviews with forty chief executives around the world-among them GE's Jack Welch, AOL's Steven Case, Intel's Andy Grove, Newscorp's Rupert Murdoch, BP Amoco's John Browne, Nokia's Jorma Olilla, and Toyota's Hiroshi Okuda-The Mind of the CEO takes us on a journey into the innermost thoughts of today's corporate titans and paints a compelling picture of the strategic and daily challenges facing them. Jeffrey Garten's findings are a challenge to those who are suspicious of corporate power, those who believe CEOs should focus only on enriching shareholders, and even to many CEOs who see their jobs much more narrowly. No one interested in the future can afford not to read, think about, and debate this book.
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The Mind of the CEO
By Jeffrey E. Garten
Perseus Books GroupCopyright ©2002 Jeffrey E. Garten
All right reserved.
Masters of the Universe
or Lost in Space?
Leonard Riggio, chairman and CEO of Barnes & Noble, was talking fast, and his entire compact body seemed to be in a state of animation. We were discussing the business climate and how it was changing. "Put it this way," he said. "Everything is in play."
In those four words he captured the environment in which CEOs operate todaythe possibilities, the vulnerabilities, the uncertainties. Riggio caught, too, the tension between the various jobs that chief executives have to perform as they scramble to lead their companies and as they come to grips with their changing positions in society.
This tension will shape this third industrial revolution that we are all living through. How do the requirements of running a highly competitive and profitable company interact with other pressures on CEOs to build a better global society? One answer is that they really don't; business executives worry about shareholders, customers and employees, while governments and public interest groups deal with the rest of us. But this response is too simplistic. In the real world, CEOsparticularly the kind interviewed for this bookare required toplay roles beyond the narrow scope of their businesses, if for no other reason than that their companies affect the lives of so many people and communities around the world. But how far does this role extend? How far should it extend?
The best starting point for this discussion is something that two CEOs from different countries and industries told me. "Unless you are competitive," said Michael Armstrong, chairman and CEO of AT&T, "then all other issues are moot." Or as Jürgen Schrempp, chairman of Daimler-Chrysler put it, "Only a profitable corporation can think about being a social enterprise, too." Without underestimating the formidable obstacles CEOs face in running successful companies, I will nevertheless argue for a broader conception of business leadership than now exists in the minds of most top executives. While they are naturally riveted on meeting quarterly earnings targets, and while unrelenting attention to shareholders is the best market discipline that anyone has yet conceived of, most top executives still construe their jobs too narrowly. Their critical task is to build value for shareholders over time, not just to please speculators and day traders who buy and sell securities according to the latest headlines. This means that CEOs will not only have to run profitable companies, but they will need to build great institutions that provide customers with superior products and services, create high-quality jobs, and in the process make life better for the population at large. They will also have to devote far more effort to helping to devise the rules under which twenty-first century trade, finance and communications systems will evolve, and to lending a hand to build the institutions that will be the global counterpart to the arrangements on which national economies rest.
There are a number of reasons for this more expansive view of corporate leadership. First, a company will have a better chance of finding and keeping loyal customers and talented employeesthe essential ingredients for creating value in the new economyif it offers brands and creates relationships that can be trusted. This, in turn, requires CEOs to chart and execute a steady course over several years, and not bend like a bough in the wind every time market sentiment shifts.
Second, while everyone might agree that only democratically elected governments have a clear mandate to represent the popular will when it comes to issues like new laws or social institutions, there are some realities that must be taken into account. Public sectors are simply not equipped to do what they ideally should in the midst of today's rapidly changing world. Below the very top levels they lack the talent. And while many national budgets are in surplus today, over time governments will not have the financial or technological resources to keep up with powerful and capricious markets. They are already overwhelmed by the enormity of capital flows across borders, the forces unleashed by the Internet, and the demands of citizens for stronger and more flexible safety nets in the face of changes wrought by globalization.
Third, because we are in a transition between the industrial age and the information age, a large vacuum exists concerning the regulatory framework for the global economy. We have very few of the international institutions that will eventually be required. There is nothing equivalent to a central monetary and banking authority, no global Securities & Exchange Commission, no global Food & Drug Administration, no common set of antitrust procedures. There is an absence of international arrangements for all the new problems that are arising, including environmental protection, labor standards, the Internet, the Human Genome Project and global fraud and corruption. Even what organizations we do havethe International Monetary Fund, the World Trade Organization, the World Bank, the International Labor Organizationare mired in political controversy over what they should be doing, and their operational effectiveness has suffered accordingly.
Fourth, the environment for global business is more fragile than it appears. A powerful political and social backlash is building against continued liberalization of global trade and finance. The protests at the meeting of the World Trade Organization in Seattle in November 1999, and subsequent demonstrations in Washington and in Prague, were just the beginning of a trend in which public interest groups and disaffected citizens around the world are joining together to form a counterweight to what they see as the unbridled power of global companies.
What I will be suggesting, therefore, is that CEOs see themselves in a new light, adopting more of a proactive stance than they have thus far. This isn't just a question of civic-mindedness, for many CEOs have been quite generous in supporting charities and important causes. Nor is it about marginal improvements in exercising "social responsibility" through corporate foundations, because that is definitely happening already. The imperative is not a stepped-up public relations campaign, and it's not a question of lobbying governments more effectively on behalf of business interests.
I am proposing something more far-reaching: CEOs ought to think more broadly about what true business leadership means today. Of course they need to run their companies well, but they ought also to realize that they should take more responsibility for shaping the environment in which they and everyone else can prosper. They should be corporate chief executives, but also business statesmen. The wider mission has as a prerequisite the need for their companies to be competitive and profitable, but it also entails more involvement in building the future regulatory framework of the global economy and working with public authorities to create it and make it work. It includes helping to define the role big corporations ought to play in solving many of our social problems before they become too severe to handle and before multinational companies become scapegoats for causing the problems in the first place. In my interviews, no one asserted that a free market alone, without effective government rules and institutions, would work to the benefit of business and society. They were much less clear about what that framework should consist of, how to establish it, and what their own roles should be.
In advocating a broader and more proactive role for business leaders, I am not equating the private interests of business with the public interest, nor saying that markets are the only mechanisms to deal with the needs of our citizens. I am suggesting that the definition of the public interest has become too complex to draw bright lines between the public and private sectors as we have tended to do in recent years.
We all know, as well, that there is a long history of business pursuing its self-interest in ways that are antithetical to the general welfare. Companies in industries such as oil, automobiles, pharmaceuticals, media, entertainment, and, of course, tobacco have all come under political attack in recent years for charges ranging from fixing prices, to environmental degradation, to marketing music and movies that celebrate violence to children. Even today, with elaborate and sophisticated government regulation in place, there is a substantial amount of fraud and deceit, stimulated in large part by the profit-at-any-cost motive. Of course businesses have been pouring money into political campaigns in an effort to buy political favors, and I am not advocating that government cease its vigilance or slow its attempts to fashion sensible regulations and enforce them vigorously. On the contrary, I believe in stronger and more effective government and in business leaders doing more to police their own activities.
The question is whether the world's most important business leaders can transcend their immediate competitive preoccupations and formidable strategic requirements to create something more for the society in which they operate and on which they depend. There are intense counter-pressures, and it is not at all clear that this can be done. But the assumption of a more substantial leadership role for top business executives is more than a worthy goal. It is essential to the continuation of economic and social progress in this new century.
* * *
Let's step back and reflect on the circumstances that surround today's business leaders. CEOs are at the center of a struggle for the soul of the global company and the soul of societyboth of which are closely linked. In the business world, technology and globalization have created a level of competition that will lead to new categories of winners and losers and force a transformation in how companies are organized and led. The impact of these changes will spill over into the workplace and economy. It will also spread to the political realm as citizens and governments search for new regulatory systems for both the national and global economies.
This is not the first time in modern history that the world has witnessed such a profound and complex interaction between business and society while both were reeling from all manner of new pressures. If you examine the past two industrial revolutionsEngland between 1750 and 1840, and America between the late 1860s and the 1920syou can see many of the same phenomena that we are experiencing today. Then as now, new forms of business and work patterns emerged. England witnessed a large-scale move from farm to factory; in America, local firms expanded nationally for the first time. In past industrial revolutions, the spirit of innovation was unusually intense, with new technologies such as the steam engine, the railroad, the telegraph and the telephone all reinforcing one another and fostering new businesses that were soon organized and managed in new ways. Financial markets grew exponentially, even as they experienced their booms and busts. Immense fortunes were made, and legendary business tycoons such as J. P. Morgan and John D. Rockefeller wielded substantial influence in the business world and beyond. Governments were much smaller in England and America in the eighteenth and nineteenth centuries, and at first what powers they did have were no match for market and technological forces. Yet when public officials felt sufficient political pressures to deal with increased poverty, oppressive working conditions and rules for fair competition, the public sector simultaneously reformed itself and intervened in the economy with substantial effect.
Nevertheless, it is likely that the business and societal challenges of the late twentieth and early twenty-first centuries will be seen as even greater than in previous epochs. Talking to Ron Chernow, the biographer of J. P. Morgan and John D. Rockefeller, I got a clear picture of how things moved slower a century ago and how business leaders had more time to plan their strategies step by step. Chernow noted that Rockefeller often spent hours staring out his office window and just thinking. Yesterday's tycoons paid scant attention to shareholders and disclosed the barest of information to the public. The giants of the Gilded Age wielded near total control over their boards of directors, almost all of whom were insiders or partners in the enterprise.
In those days the media were typically much less investigative than they are now, and unlike current CEOs, the Rockefellers and the Morgans could lead the most private lives, without the pressures of their every move and every decision being reported around the world. Indeed, their situation was in great contrast to the "open book" nature of the lives and activities of today's CEOs and their companies, pressed as they are by shareholders and the public for reams of detailed information on a continuous basis. "Rockefeller didn't have a lot of audiences," said Chernow. "For most of his active life he was completely reclusive and mysterious, really invisible to the general public. And this was typical of a lot of businessmen of the era. Their idea of publicity was no publicity. They had no interest in burnishing their image because there was nothing, from their point of view, to be gained from it. The public was a damned nuisance to them."
Compared to today's CEOs, who are in constant motion between North America, Europe, Asia and Latin America, the titans of yesteryear didn't have to travel abroad, with all the mental and physical strain that entails. Rockefeller built the world's most powerful international oil company without venturing outside the United States until his mid-forties, and then only as a tourist. In the first two industrial revolutions, corporate competition was mostly local, not global.
Business leaders during the second industrial revolution were free of today's government constraints, as well as the pressures of modern corporate governance. "They didn't have income taxes; they kept everything they made," said Harvard Business School historian Richard Tedlow. "Aside from a few railroad companies, you would also have to look long and hard to find a nineteenth-century business leader who was thrown out of his company by a board of directors. Nor was there the pressure from big institutional investors, as there is today."
The life of CEOs was much easier even through most of the post-World War II era. Up until the 1980s, when Japanese companies and corporate raiders upset the existing business order, American companies basked in domestic prosperity, faced no threats from abroad and were under no pressure to change their fundamental business models. It was possible to build a niche and exploit it with a generic strategy. A CEO could choose to be a low-cost producer or an upscale provider. Either way, there were ways to erect barriers to competition. A great brand such as Johnson & Johnson could act as a deterrent to potential rivals. A particular production advantage such as Sony's mastery of miniaturization could keep others out. A regulated monopoly such as the old AT&T could also create a zone of protection. With less competition, the big moves, the big gambles, the dramatic organizational changes were nowhere near as necessary as now.
Indeed, the imperative for today's CEOs is not just to find the right business model but also to keep changing it to meet the pressures of unprecedented competition. It's not just that competition is so fierce but also that in many ways it is qualitatively different. For example, in the 1980s American manufacturers faced an assault by Japanese companies like Toyota and NECcompanies that had mastered quality, inventory control and so on. But at least the American CEOs could study the competition, deconstruct what made it so good and adopt the better features of their rivals' strategies. Today, however, the corporate race is less against some identified competitor than for markets that don't yet exist, for consumer needs that have not yet been identified, for young talent whose full creativity has yet to blossom. There is no rabbit to lead the dogs around the track.
In the past, the elements of corporate competition were simpler. You tried to make a better product, and you aimed for respectable growth in revenues and profits. Today, these achievements still count, but the financial markets, which ruthlessly value and revalue companies on a continuous basis, are looking at much more. It's not enough to have strong growth; hypergrowth is the yardstick. It is not enough to succeed in being within a range of earnings; a CEO must hit or exceed a precise target. It's not enough to make good products; Wall Street is looking also at your business model and asking a host of questions: Is your organization Internet savvy? How fast can you expand your business? How good is your management team? Who are your corporate partners? What kind of intellectual property do you have now and are developing for the future?
Products and services, producers and customers, executives and entrepreneursall are being joined in new ways. Big decisions are being made at warp speed. Nothing is static. Everything is in a state of change.
On a broader societal level, the changes may well be unprecedented, too. Whether or not the Internet is as transforming a technology as, say, the telegraph or the radio, it is spreading around the world much faster than previous path-breaking technologies did. You don't have to argue that globalization is a new phenomenon to conclude that it encompasses more of the globe than ever before and that its roots now run much deeper than during any other time in modern history. The implications of these trends are many, but at least two are highly relevant to the world of today's CEOs. First, more opportunities and also more risks abound than ever when it comes to the future of their companies. After all, the number of new markets will be unprecedented but so will the competition, and so will the pace of technological and political change that will shape the markets themselves. Second, as the world gets smaller, CEOs will be unable to escape involvement in some of the most difficult political, economic and social problems of our times. There will be no way to avoid operating in countries with fragile economies, weak democratic structures and mega-cities with severely overburdened infrastructures. Exploding populations with growing health problems and environmental nightmares will be part of the scene too. There will be a need for more laws, standards and governing institutions in this new world; otherwise, there will be destructive chaos as different economic and cultural systems clash with no mediating or arbitrating arrangements to solve the ensuing problems. There will also be a need to accommodate billions of people who are now very poor, and who may soon be very angry at the global disparities they can now see so clearly for the first time in history because of modern communications. In September 2000, James Wolfensohn, president of the World Bank, gave a quick summary of this grim situation at his organization's annual meeting in Prague. "Something is wrong," he said, "when the average income for the richest twenty countries is thirty-seven times the average for the poorest twentya gap that has more than doubled in the past forty years. Something is wrong when 1.2 billion people still live on less than a dollar a day and 2.8 billion still live on less than two dollars a day." Years ago these kinds of inequalities might have been ignored or finessed. But it's probable now that in a world growing more interdependent by the hour, rich countries in general or global CEOs in particular will have to confront these problems sooner rather than later.
C. Michael Armstrong is Chairman and CEO of AT&T Corporation. After thirty-two years at IBM and four years as CEO of Hughes Electronics, he joined Ma Bell in 1997 with a mandate to bring it into the new economy. I first met him in 1994 when I was the undersecretary of commerce for international trade and he, then at Hughes, had just been appointed chairman of President Clinton's National Export Strategy, with the job of coordinating the input of top American business leaders on the making of U.S. export policy. At the Commerce Department, we had spent weeks preparing an elaborate agenda for the first meeting to help him get started. When the time came to begin, my staff and I were standing around in a government conference room waiting for Armstrong to arrive. We expected him to come with an entourage of assistants; instead he walked in alone and warmly greeted everyone, making the rounds and shaking hands. He radiated the confidence, enthusiasm and energy of a seasoned politician. Then he sat down. I was about to give an overview of the administration's policies and objectives, but I never had a chance. I never even opened the briefing book. "Here's what we're going to do," he said, in a tone that indicated he was already running and we had better catch up. He had arrived with his own agenda, knew exactly what he wanted to accomplish and from the first minute it was his show. His voice was soft and his face often broke into a smile as he talked about what the group's priorities would be, chief among them an effort to rein in the government's inclination to slap unilateral export controls on countries that ran afoul of American foreign policy goals. He came across as "Mike"friendly, accessible. But there was enormous force and clarity in what he was asking the Clinton administration to do. You had the sense that if you were making a movie and said "Get me a CEO," to the casting director, he'd give you Michael Armstrong.
Five years later, when our interview for this book took place, Armstrong was still the picture of a major CEO. "I've seen an awful lot of history made in a relatively short time," he said. "I joined IBM when the most popular form of data processing was punch card accounting, and I saw the evolution of computers from mainframes to PCs. I went to Hughes in 1993, when space was basically a government environment and satellites were used mostly for spying, and helped usher in the era of private commercial space communications. And here at AT&T, I can see the whole world of communications exploding. Remember this: It took radio fifty years to reach fifty million people, it took television thirteen years to reach fifty million people, and it took the Internet half that timesix years or soto reach 100 million people. We are laying enough fiber each day to go around the world twice. Internet traffic is doubling every hundred days. The borders are coming down, and it's an irreversible trend, whether they are tariff borders, monetary borders, political borders, ethnic bordersthey are coming down."
Asked whether there was something different about the extent of change at the beginning of the twenty-first century compared to just a few decades ago, he replied, "Two things are radically different. The pace has been faster. And the global reach has been unprecedented. I don't care whether you are in a Communist country, a kingdom, a dictatorship, of a democracy. The Internet reaches your people and e-commerce reaches your business and your institutions. With your keyboard and your mouse, you can reach the whole world. I think it's a revolution unparalleled in history."
Henry Paulson, chairman and CEO of Goldman Sachs, talks about change from the vantage point of someone who has spent nearly his entire professional life at the same investment bank, with the exception of a few years in the early 1970s in the Pentagon and White House, his first jobs out of Harvard Business School. Paulson and I were classmates at Dartmouth College, where he was an all-Ivy League football lineman. We were also colleagues in the Nixon White House, where, at the age of twenty-six, he became the deputy director of the Domestic Council under John Ehrlichman. I had not seen him except in passing for most of the next two decades, but I had never forgotten an incident that revealed his determination to win at everything he did.
It was January 1973, and we were in the middle of a game of outdoor paddle tennis. I had been playing racket sports since the age of eight, but Paulson was new to the sport. As the game went on, I was maneuvering him from one side of the court to another, back and forth, back and forth. Although he was in great shape, he was tiring, and the cold airit was about ten degrees Fahrenheitmade him short of breath. I was beating him badly, and he asked to stop for a second. No problem, I said, let's just call it a day and pick up the game later. No, he replied, I just need a minute. He then leaned over the side of the court and vomited. Come on, I said, let's go inside. We can continue next weekend. His body was hunched over, his face was flushed. He didn't say anything for what seemed like a long time. Then he slowly straightened up. Okay, he said, I'm ready to continue. I offered again to postpone the match, but he wouldn't hear of it. I worried that he would injure himself and wondered if I should be less aggressive on the court. The thought didn't last long. Within minutes he came on like a raging bull, and I was on the defensiveand he proceeded to demolish me.
A quarter century later, I was sitting across from him in his Wall Street office, a modest room for the chief executive of the world's premiere investment bank. His shirtsleeves were rolled up to the middle of his forearms. He was leaning forward, his words tumbling out faster and faster, his restless energy filling the room. He gave me the impression of being tough and forceful, without the slightest trace of arrogance. In fact, like many of the CEOs I met, he seemed awed by the situation he found himself in, the range of opportunities and problems, the speed with which things changed and decisions had to be made, the amount of sheer gut instinct that had to go into weighty decisions on which billions of dollars and the fate of companies rested. Seeing the way he was leaning forward, I got the sense that he subscribed to a theory, perhaps intuitively, that you had to keep moving forward always. There was no neutral gear, no resting position. "So what's changed in the time you've been at Goldman?" I asked.
"What hasn't?" he replied. "When I came to the firm in 1974, there were very few mergers being done anywhere, and today that market is something on the order of $1 trillion. There were hardly any high-yield or derivatives markets, both of which constitute so much of our business today. Investment bankers dealt with chief financial officers and didn't make presentations to boards of directors, as we routinely do today. We didn't meet with heads of governments, didn't help to restructure whole industrial sectors around the world. When I joined the firm, Goldman had only twelve hundred employees compared to over fifteen thousand today. We had only thirty-two employees overseas and three little foreign outposts, whereas today we have twenty-five offices and at least half of our employees are overseas. Despite all that's happened in the last twenty-five years, the pace over the last five has been the fastest, driven in particular by globalization and technology. I do believe that we are at one of those crossroads in historyan inflection point, to use a clichéin which massive changes are occurring."
Excerpted from The Mind of the CEO by Jeffrey E. Garten Copyright ©2002 by Jeffrey E. Garten. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Meet the Author
Jeffrey E. Garten is dean of the Yale School of Management. He served as U.S. Under Secretary of Commerce for International Trade from 1993 to 1995, and was previously a managing director of the Blackstone Group, a Wall Street investment firm. He is author of A Cold Peace: America, Japan, Germany and the Struggle for Supremacy and has written for the New York Times, Wall Street Journal, Foreign Affairs, and Harvard Business Review. He and his wife, Ina, live in Connecticut and New York.
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