Management final paper

THEGLOBAL

FORTUNE

IT'S A FAMILIAR SCENE AN INDUSTRY UNDER FIRE A CONGRESSIONAL committee demanding answers. A corporate CEO called to teshfy

Yet the famiharttles, in this case, end there When Boeing CEO Bill Allen appeared before a House subcommittee--addressing charges that mihtary aircraft makers had improperly inflated profits at the government's expense--there was no lawyer whispering m his ear There were no notes before hlm. There was no hint that he wasn't personally responsible for Boemg's actions And when he had finished his quietly forthright explanation, there was no question that Boeing--far from gouging the government to pad executives' bonuses--had m fact been laying the foundations for futme greatness, plowing profits into research and development The committee's response now seems ummagmable: It erupted into a standing ovation

That ÿmage, from 1956, kept popping to mind whenever someone asked me about the business meltdowns of 2001 and 2002 What, went the queshons, should be done about governance? What should Congress do9 What should boards do'7 What, what, what9

I usually declined to comment, feeling I had httle to say that had not already been stud But as the Allen image lmgered, I came to reahze that I did have

What extraordina

can teach troubled

BY JIM COLLINS

these leaders

something to say It's just that my answer wasn't a what answer It was who When the debates over governance mechanisms and procedural reform

are all said and done, one question will still tower above all others. Who should we choose to run our corporations? In the 1990s, it's now clear, boards increasingly gave the car keys to the wrong people Like doctors bleeding patients to death m the 1600s, the boards weren't trying to do harm They were stmply using the wrong models

Yet where, these days, are the right models? For good reason, we've become cymcal about CEOs There seem to be no heroes left standing, no one to emulate or behmÿe m. There's an increasingly gloomy sense that we should stmply throw up our hands and gwe up on corporate leadership.

I disagree. Having spent years studying what separates great companies from mediocre ones, I can say unequwocally. There aÿe role models to learn from--albeit not the ones you might expect It's what msptred me to go back to my research and assemble my list of the ten greatest CEOs of all hme.

Who made the cutÿ Some names on the list will be familiar, while several you might expect to see--names ltke Gates, Grove, Welch, and Gerstner--weren't ehglble for a simple reason Great CEOs build JIM COLLINS ÿ the author of Good to Great and co-author of Built to Last

PHOTO ILLUSTRATION BY DWIGHT ESCHLIMAN

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orgamzations that thrive long after they're gone, making it unposslble to judge their performance until they've been out of office at least ten years. That criterion-- legacy--was one of four I used to winnow a umverse of more than 400 CEOs. I also scored the top candidates on impact (presiding over lnnovatlons--whether techmcal or managenalÿthat changed things outside the company's walls), resilience (leading the company through a major transformation or crisis), and financial performance, measured by cumulative stock returns relative to the market (or other financml metrics m the case of pre-IPO compames) durmg the CEO's tenure.

So what, exactly, made these ten so great? Strtkmgly, many of them never thought of themselves as CEO material. The second-greatest CEO on the hst initially refused the job on the grounds that he wasn't quahfied. No 9 described herself as "scared stiff." No. 5 was once told flatly, "You will never be a leader" Striking, too, is the sheer scale of their ttrne frames Surrounded by pressures to manage for the quarter, they managed for the quarter- century---or even three-quarters of a century. The No. 4 CEO shaped a company that would average 15% earnings growth for an astonishing 75 years.

Yet if one thing defines these ten giants, it was their deep sense of con- nectedness to the organazatlons they ran. Unhke CEOs who see themselves principally as members of an executive ehte--an increasingly mobile club whose members measure their pay and privileges agamst othel CEOs'-- this group's ethos was a true corporate ethos, in the original, nonbusmess sense of the word cotpolate "umted or combined into one" They understood the central paradox of excephonal corporate leader- ship: On the one hand, a company depends more on the CEO than on any other mdl- wdual Only the CEO can make the really bÿg decisions Yet a company equally depends on the CEO's understanding that his or her role still represents less than 10% of the total puzzle Much depended on them, but st was never about them.

Inclusion on this hst would surprise, ff not horrify, more than a few of them. But ff the question ts how to identify more of the right leaders--and how a new generation can learn to become the right leaders-- there is no better answei than these ten In an age of dtmlmshed standards, those they set loom larger than ever

No.10o

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IN 1949, 37-YEAR-OLD DAVID PACICARD ATTENDED A meeting of business leaders Fidgeting while they discussed how to squeeze more profit from their compames, he was finally unable to contain htmself. "A company has a greater responsibility than making money for Its stockholders," he asserted Eyes turned toward his mx-foot-five-mch frame.

"We have a responsibility to our employees to recognize their dlgmty as human beings," Packard said, extolhng fus

belief that those who help create wealth have a moral right to share in that wealth

To his elders, Packard's ideas seemed borderline socmlist If not outright dangerous. "I was surprised and shocked that not a single person at that meeting agreed with me," Packard ieflected later. "It was qmte evident they firmly beheved I was not one of them, and obwously not quahfied to run an important enterprise."

That was just fine ruth David Packard. He never wanted to be part of the CEO club; he belonged to the Hewlett-Packard club In an era when bosses dwelt m mahogany-paneled sanctums, Packard took an open-door workspace among hÿs engineers. He practiced what would become famous as "management by walking around." Most radlcat of all for the tune, he shared equity and profits wÿth all employees.

What set Packard apart, m other words, is that he wasn't a person set apart. His idea of a good time, according to a co-worker, was to get together with friends and string barbed ware Despite being one of Silicon Valley's first self-made bflhonaires, he contmued to live m the small, understated house he and his wife had built m 1957 And though he donated (ruth Hewlett) to Stanford Universlty an amount comparable to the present value of Jane and Leland Stanford's original endowment, he never allowed his name to appear on any of its buildings while he

GREATEST CEOS

was ahve By defining himself as an HP man first and a CEO second, Packard did more than demonstrate humlhty. He bmlt a umquely dedicated culture that became a fierce competmve weapon, dehvermg 40 consecutive years of profitable growth

While Packard's values have since waned within HP, he did more to create the DNA of Sthcon Valley than perhaps any other CEO Lÿke the heritage left by the architects of democracy in ancient Athens, the sprat of his and Hewlett's system lives on, far beyond the walls of the restitution they bmlt

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r ON AUG 3, 1963, KATHARINE Graham heard the crack of a gunshot within her house. She ran down- stmrs to discover that her husband, Philip, lay dead

by hÿs own hand. On top of the shock and grief,

Graham faced another burden. Her father had put the Washington Post

Co. in her husband's hands with the idea that he'd pass it along to their children What would become of ÿt now? Graham laid the Issue to rest ÿmmediately' The company would not be sold, she reformed the board. She would assume stewardship

"Steward," however, would not describe Graham's approach to her new role At the tmae, the Washington Post was an undistinguished regional paper, Graham auned for people to speak of It m the same breath as the New York Ttmes. A crucial decision point came In 1971 when she confronted what to do with the Pentagon Papers--a leaked Defense Department study that revealed government deceptions about the Vÿetnam war The Times had already incurred a court mjuncnon for pubhshmg excerpts If the Post published, It risked prosecution under the Espionage Act. That, in turn, could jeopardize the company's pending pubhc stock offering and lucrative telewsÿon hcenses "I would be risking the whole company on this decÿslon," Graham wrote in her memoir, Personal Hÿstoÿy. Yet to opt for assured survival at the cost of the company's soul, she concluded, would be worse than not surviving The Post pubhshed.

Eventually vindicated by the Supreme Court, ÿt was a remarkable decision for an accidental CEO who suffered from lifelong feelings of insecurity, phrases

July 21, 2003 FORTUNE ° 57

GREATEST CEOS

hke "I was terrified" and "I was quaking m my boots" pepper her memoir That anxiety would soon reach a crescendo as Post reporters Bob Woodward and Carl Bernstem doggedly investigated what became known as Watergate Today we take that story's outcome for granted. But at the time, the Post was largely alone in pursuing it In choosing to pubhsh, Graham built a great paper and, m turn, a great company---one that ranks among the 50 best-performing IPOs of the past quarter-century and earned the investment of Warren Buffett. Graham never awarded herself much eredst, insisting that, wsth Watergate, "I never felt there was much choice." But of course, she did choose Courage, it's sa)d, is not the absence of fear, but the abihty to act in its presence By that definition, Katharine Graham may be the most courageous CEO on thss hst.

No. 7 od

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THE EARLY GIANTS OF INDUSTRY TEND TO FALL INTO ONE OF TWO camps Indiwdual innovators (thmk Walt Dssney) and system builders (think John D Rockefeller). 3M's Wilham McKnight fails into neither. Beginning m i929, the bookish accountant fused the two models into something entirely new: a company that turned renovation into a systematsc, repeatable process. While you couldn't predsct exactly what McKnight's system would create, you could predsct with certainty that st would create.

Many know the story of the 3M scientist who blasted a hole m hss basement to house the machine that made hrs httle stscky tabs-- a product that had failed market tests--and how, like a drug dealer, he created a base of addscted users by dsstributing flee samples to headquarters staff. It's one of many 3M stones that celebrate the lone sprat who persists against all odds The oft-overlooked lesson, though, is the "all odds" part It's precssely because 3M entrepreneurs must battle attempts to hll off their ideas that a handful of wumers 1Lke Post-Its emerge Without this creatwe tensson--freedom vs. dtsclpline, mnovanon vs. control--all you have ss chaos, or worse. Enron was a highly innovative culture that lacked dlscspIine, innovating stself right out of existence.

"The test of a first-rate intelligence," wrote F. Scott Fstzgerald, "is the abthty to hold two opposed sdeas in the mind at the same time and shll retain the ability to functson." By that definition, McKnight was not lUSt a first-rate intelhgence, but a genres --a genres whose com- pany was lucky by dessgn

a IN 1981, AS THE stock of Chrysler hit an all-time low, Amersca was beginning its enthrallment with the man hired to save it Lee Iacocca would soon be a nahonal icon-- bestselling author, star of more than 80 commercials, and everyone's Irnage of a turnaround amst.

That same year, as the stock of Fanme Mac hit an all-trine low, a different execu- twe was hired to save the deeply troubled mortgage lender David Maxÿvell would not become a national icon--nor even a

recognizable name. Yet by the ttme both men retired in the early 1990s, Maxwell's Faimie Mae had beat the stock market at a rate more than trace that attained by Chrysler under Iacocca.

More respired than respiring, more dshgent than dazzling, Maxwell took a burning house and not only saved st but built It into a cathedral. Some steps, such as selling off $10 billion m unprofitable mortgages, were classsc fireman stuff. But his deepest gemus was to flame the rebuilding around a rmssion" strengthening America's socml fabric by democraUzmg home owner- ship. If Fannie Mac did sts lob well, people tradmonally ex- cluded from owmng homes --minorities, mxmigrants, single-parent farmhes---could more easily claun their part of the American dream. If turnaround is an art, Maxwell was its Michelangelo.

GREATEST CEOS

No.6

crls s t ASK PEOPLE to single out a courageous CEO action, and many will cite James

Burke's decision to pull Tylenol

capsules off the shelves in response to the cyamde-

poisoning crisis of 1982, taking a $100 mil- lion hlt to earnings along the way. It's a wonderful story But It misses the point,

Burke's ieal defining moment occuned three years before, when he pulled 20 key executives into a room and thumped has finger on a copy of the J&J credo Penned 36 years earlier by R W Johnson Jr., It laid out the "We hold these truths to be self- ewdent" of the Johnson & Johnson Co., among them a b3gher duty to "mothers and all others who use our products "Burke worned that execuhves had come to view the credo as an artifact--interesting, but hardly relevant to the day-to-day challenges of American capitalism

"I said, 'Here's the credo If we're not

going to hve by it, let's tear it off the wall,'" Burke later told Joseph Badaracco and Richard Ellsworth for their book Leadership and the Quest for Integrity. °'We either ought to commat to it or get nd of it "The team sat there a bit stunned, wondering if Burke was serious. He was, and the room erupted Into a debate that ended with a recommitment Burke and his colleagues would conduct similar meetings around the world, restoring the credo as a living document.

No one could have predicted the act of terrorism perpetrated on J&J customers m 1982. But J&J's response was predictable It didn't need to debate whether customer safety outweighed short-term financial concerns, because-the debating was already done. Burke makes the list not because he led J&J through crisis; he makes it because he led m the absence of It.

LOIS SMITH COULD TELL A BIG DECISION WAS AFOOT at IGmberly-Clark whenever she heard the rumbhng of a backhoe in the middle of the night. That was Darwin again, moving rocks from one pile to another Ttus was how her husband mulled over big decisions--and to judge by the huge piles still standing sentmel at Gotrocks Farm m Wisconsin, Smith was a champion muller.

When he became CEO of Kimberly-Clark m 1971, Smith faced a brutal fact. The company languished in mediocrity, the bulk of its capital tied up m giant paper mills. Yet Smith offered no vision statement, no splashy acquisition, no hoopla-laden change program Instead he posed questions What, he pressed his colleagues, could Ktmberly-Clark be passionate about? What could it be best at m the world? What could anprove its economics* For months he contmued to ask questions and move rocks

This was not Smith being mdecislve. Diagnosed with nose and throat cancer shortly after becoming CEO, he told Lois what he'd learned from his illness. "If you have a cancer m your arm, you've got to have the guts to cut offyour arm" He paused "I've made a decision," he continued "We're going to sell the mills"

The decision had grown out of one of Smith's dialogues in which a fellow executive noted that Kleenex, a sideline product, had become a brand synonymous with its category, hke Coke or Band-Aid. In what a Klmberly-Clark dÿrector called the "gutsiest decision I've ever seen a CEO make," Smith jettisoned 100 years of corporate history, right down to the ongmaI mdl in Kunberly, Wls Analysts derided the loss of revenue The stock took a hlt. Folbes predicted disaster But Smith's ruminations had equipped him with quiet steel

A CEO must be wdlmg to act boldly, yet boldness is worthless ff you're wrong. It's an obvaous point, but one routmely ignored by those caught up m the fanfare of big action. Smith grasped that it is better to be right than to be mipresslve.

And Snnth got it right Twenty-five years after becoming CEO, Kmiberly-Clark was the world's No 1 paper-based consumer-products company--its stock outperforming the market by a factor of four over that span--and owned its main rival, Scott Paper, oumght Smith moved rocks and, m the end, moved a rock that nobody thought could be moved.

GREATEST CEOS

No. 4

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LATE ONE afternoon in 1978, Dr. Wil- liam Campbell did what all

great researchers do. He wondered at

the data. While testing a new compound to battle

parasites in animals, he was struck with the Idea that it might be effective against another parasxte---one that causes blind- ness and itching m humans so horrlflC that some victims have committed sumide. Campbell rmght have simply scribbled a note in the files and gone to lunch After all, the potential "customers'--trlbal people m remote tropical locations-- would have no money to buy it. Undaunted, Campbell penned a memo to his employer, Merck & Co., urging pursuit of the idea. Today 30 million pÿople a year receive Mecttzan, the drug msptred by his observation, largely flee of charge

The most exceptional part of the story is that it wasn't an exception "Medicine is for people, not for the profits," George Merck II declared on the cover of Tmw in August 1952--a rule his company observed in dispensing streptomycin to Japanese children following World War II Yet fuzzy-headed moralistic fervor wasn't George Merck. Austere and patrmlan, he simply beheved that the purpose of a corporation is to do something useful, and to do it very well. "And if we have remembered that, the profits have never failed to appear," he explained. "The better we remembered, the larger they have been." It's the mirror image of CEOs whose unhealthy fixations with Wall Street have served neither people nor profits: Merck served shareholders so well precisely because he served others first.

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ansm A BRAZILIAN BUSINESSMAN ONCE TOLD ME how he'd sent letters to the heads of ten U.S. retail- ers in the1980s, asking to vmit to see how they ran a retail operation. Most didn't bother to reply, and those who did sent a pohte "No, thank you." All except Sam Walton.

When the Brazilmn and his colleagues stepped off the plane m Bentonville, Ark., a whxte-hatred man asked ff he could help. "We're looking for Sam Walton," they said, to whmh the man replied, "That's me" Walton led them to hm truck and introduced fus dog, Roy As they rumbled around m the front cab of Walton's pickup, the Brazilian bilhonatres were pummeled with questions Eventually it dawned on them: Walton had inwted them to Bentonvllle so that he could learn about South Amerma Later Walton Vlmted hm friends m Silo Paulo Late one afternoon there was a phone call from the pohce Walton had been crawling around m stores on hm hands and knees measuring aisle widths and had been arrested.

The story encapsulates some of Walton's greatest strengths, notably his hunger for learning But tt also points to hxs biggest habihty his singularly charismatic personality. Companies built around a cult of personality seldom last. After Sam,

would Wal-Mart decline hke a church that loses ItS mspxratlonal pastor'ÿ Yet Walton hunseif refused to let his colorful personalgy dmtract

from his central message to make better things ever more affordable to people of lesser means And before ins death m 1992, he made two brilliant moves to ensure that idea would outlast hun First, he set a goal that he knew would be unachlevable m his lifetime to grow annual sales from less than $30 bilhon to $125 bllhon by the year 2000 Second, so that no personality would become bigger than the idea, he pinked a successor who had seemingly undergone a charisma bypass Under David Glass (above, right), Wal-Mart blew right past the $125 billion goal, clocking in at $165 bilhon in 2000

Walton knew better than anyone the dangers of charismatic leadership. He proved that, like any other handmap, it can be overcome

GREATEST CEOS

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ITS PLANES helped win the war--yet victory m 1945

looked ltke death for Boeing.

Revenues plum- meted more than 90%

as orders for bombers vamshed overmght And bombers, everyone knew, were what Boeing was all about.

Everyone, that IS, but its new leader An understated lawyer who sald he wasn't qualified for the lob, Bdl Allen never saw Boeing as the bomber company. It was the company whose engineers built amazing flying mactunes. In 1952 he bet heavily on a new commercial jet, the 707 At the tram, Boeing had no business being in the commercial market, or at least that's what potential customers said ("You make great bombers up there m Seattle Why don't you stick with that?") Yet Allen's time frames were higger too. He saw that Boeing could compete by changing the industry Under his leadership, Boeing budt the 707, 727, 737, and 747 four of the most successful bets m mdustnal tustory At a board meeting described by Robert Serlmg m Legend & Legacy, a director saÿd that ff the 747 was too big for the market to swallow, Boeing could back out. "Back out?" stiffened Allen "If the Boeing Aircraft Co says we will build this atrplane, we will budd it even ff it takes the resources of the entrre company" Ltke today's CEOs, he endured the swarming gnats who think small" short time frames, penmes per share, a narrow purpose. Allen thought bigger--and left a legacy to match.

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MOST PEOPLE HAVE NEVER HEARD OF CHARLES COFFIN--AND THAT'S the ultimate testimony to his greatness. His predecessor had something to do with ttus. No CEO finds it easy to take over from a founding entrepreneur; now imagine that founder holds patents on the electrm light, the phonograph, the motion pmture, the alkaline battery, and the dissemination of electricity. But Coffin knew his job was not to be the next Thomas Edison--though Coffin, too, would prove a master inventor. His invenhon was the General Electric Co.

Coffin oversaw two social renovations of huge significance: America's first research laboratory and the Idea of systematic management development. While Edison was essentmlly a genres wlth a thousand helpers, Coffin created a system of gemus that did not depend on hma. Ltke the founders of the U.S., he created the ideology and mechanisms that made his institution one of the world's most enduring and widely emulated.

Echson's wouldn't be the only name to overshadow his Coffin's era (1892-1912) became known as the "Stemmetz era," m homage to the brilhant GE electrical engineer Charles P Steinmetz What little name recognition Coffin did enjoy

would then be obliterated by the hkes of Swope, Cordmer, Jones, and Welch--GE CEOs who became grants in thelr own day.

Jack Welch's stature, in particular, reached a pomt where GE was called the House That Jack Built. In fact, Welch was as much a product of GE as vice-versa Certainly Welch vastly tmproved the system, and tustory wall hkely judge him a great executive. He was a master at developing general managers and steadily increasing pmflt per unit of executive talent. But Welch dÿd not invent thÿs concept, he Inherited it.

The same cannot be said of Charles Coffin More than aW other leader, Coffin made GE

into a great company, creating the machine that created

a succession of giants. For that reason, he stands a notch above the CEOs whose names echpsed Ins. He built the stage

on which they all played. []

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