Transcript Ride To Success With Ketchum

September 11:
Management Quality
Administrative
 Books
 Syllabus
 Articles
 Teams
 If
you weren’t here a week ago
 Who
is here?
2
Two Perspectives on Quality of
Management
Slow
and Steady, Boring, Shy
Have to Make Change Fast and
Tell Everyone How Great You
Are
But First, Does it Matter?
3
Methodology
 Analysis
of Fortune’s America’s Most Admired
Companies (AMAC) 1985-2000
– Correlations run on change in mean scores and
changes in financial measures (sales, profits, and
earnings per share.
– Volatility of perceived management quality tested
between two time periods: 1985-1994 and 19952000.
4
Historical Data: Alcoa
10.00
Alcoa
Survey Average
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
5
Reputation and Financial Performance:
Alcoa
EPS
Change in EPS
Correlated with Overall
Reputation
Correlated with Management
Quality
Correlated with Product
Quality
Correlated with financial
soundness
Correlated with
investment value
Correlated with asset use
Correlated with
innovativeness
Correlated with people
Correlated with comm/environ
Overall
rep
Mgmt
qual
Prod
qual
Fin
sound
Invest
value
Asset
Use
Dvlp/keep Comm/
People
Env
Innov
1.0000
0.6862
0.7088
0.3668
0.5741
0.5203
0.6975
0.4394
0.6495 0.5994
0.6862
1.0000
0.8039
0.7256
0.8286
0.8461
0.9005
0.8664
0.9520 0.6877
0.7088
0.8039
1.0000
0.5209
0.5650
0.6264
0.6736
0.5706
0.8340 0.4862
0.3668
0.7256
0.5209
1.0000
0.3713
0.3681
0.6818
0.7419
0.6896 0.5841
0.5741
0.8286
0.5650
0.3713
1.0000
0.9556
0.6480
0.6669
0.7635 0.4705
0.5203
0.8461
0.6264
0.3681
0.9556
1.0000
0.6343
0.6926
0.8353 0.4388
0.6975
0.9005
0.6736
0.6818
0.6480
0.6343
1.0000
0.8669
0.8232 0.5910
0.4394
0.8664
0.5706
0.7419
0.6669
0.6926
0.8669
1.0000
0.7879 0.4425
0.6495
0.9520
0.8340
0.6896
0.7635
0.8353
0.8232
0.7879
1.0000 0.5595
0.5994
0.6877
0.4862
0.5841
0.4705
0.4388
0.5910
0.4425
0.5595 1.0000
6
Historical Data: Fruit of the Loom
10.00
Fruit of the Loom
Survey Average
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
7
Reputation and Financial Performance:
Fruit of the Loom
Change in Profits
Correlated with Overall
Reputation
Correlated with Management
Quality
Correlated with Product
Quality
Correlated with financial
soundness
Correlated with
investment value
Correlated with asset use
Mgmt
Prod
Fin
Invest Asset
Dvlp/keep Comm/
Profits Overall rep qual
qual
sound value
Use
Innov
People
Env
1.0000
0.6714 0.7420 0.4185 0.5990 0.5608 0.5807
0.6158
0.3918 0.3436
0.6714
1.0000
0.9653
0.6876
0.9538 0.9493
0.9220
0.7613
0.8709 0.8786
0.7420
0.9653
1.0000
0.6422
0.9081 0.9257
0.8405
0.7848
0.8704 0.7548
0.4185
0.6876
0.6422
1.0000
0.4978 0.6788
0.5232
0.6948
0.5283 0.5719
0.5990
0.9538
0.9081
0.4978
1.0000 0.8926
0.9428
0.6236
0.8039 0.8677
0.5608
0.9493
0.9257
0.6788
0.8926 1.0000
0.8691
0.6892
0.7800 0.7807
0.5807
0.9220
0.8405
0.5232
0.9428 0.8691
1.0000
0.5296
0.7184 0.9134
0.6158
0.7613
0.7848
0.6948
0.6236 0.6892
0.5296
1.0000
0.6764 0.5064
0.3918
0.8709
0.8704
0.5283
0.8039 0.7800
0.7184
0.6764
1.0000 0.7413
Correlated with comm/environ 0.3436
0.8786
0.7548
0.5719
0.8677 0.7807
0.9134
0.5064
0.7413 1.0000
Correlated with
innovativeness
Correlated with people
8
Historical Data: Airlines
Airlines Cmp
Survey Average
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
9
Reputation and Financial Performance:
Airline Industry
EPS
Change in EPS
Correlated with Overall
Reputation
Correlated with Management
Quality
Correlated with Product
Quality
Correlated with financial
soundness
Correlated with
investment value
Correlated with asset use
Correlated with
innovativeness
Correlated with people
Correlated with comm/environ
Overall
rep
Mgmt
qual
Prod
qual
Fin
sound
Invest
value
Asset
Use
Innov
Dvlp/keep Comm/
People
Env
1.0000
0.8415
0.9057
0.8737
0.6776
0.8658
0.6473
0.9373
0.8835 0.8891
0.8415
1.0000
0.9771
0.8915
0.8851
0.9809
0.9313
0.9733
0.9613 0.8317
0.9057
0.9771
1.0000
0.8324
0.8469
0.9438
0.8689
0.9638
0.9167 0.8656
0.8737
0.8915
0.8324
1.0000
0.8151
0.8571
0.7429
0.8719
0.9783 0.5699
0.6776
0.8851
0.8469
0.8151
1.0000
0.8647
0.8735
0.7600
0.8608 0.5573
0.8658
0.9809
0.9438
0.8571
0.8647
1.0000
0.9464
0.9596
0.9432 0.7901
0.6473
0.9313
0.8689
0.7429
0.8735
0.9464
1.0000
0.8649
0.8422 0.7874
0.9373
0.9733
0.9638
0.8719
0.7600
0.9596
0.8649
1.0000
0.9439 0.8723
0.8835
0.9613
0.9167
0.9783
0.8608
0.9432
0.8422
0.9439
1.0000 0.6886
0.8891
0.8317
0.8656
0.5699
0.5573
0.7901
0.7874
0.8723
0.6886 1.0000
10
Level 5 Leadership
Five Levels





Level 1: Highly Capable Individual – good work,
skills, knowledge
Level 2: Contributing Team Member – makes
the team better through individual efforts
Level 3: Competent Manager – organizes
people and resources
Level 4: Effective Leader – creates commitment
and vigorous pursuit of a higher set of
performance standards
Level 5: Executive – builds enduring greatness
12
Collins – Level Five Leadership
 Lincoln
 Bush
vs. Caesar
vs. Clinton?
 Self-effacing,
 Professional
 Bill
quiet, reserved, shy
will & personal humility
Gates vs. the Millionaire Next Door
13
Professional Will






Ambition is the Institution
Burn the Boats: there is no other option
Focus on the long-term health of the institution,
not the short-term gains
Set up successors well
Value system is focused on the greatness of the
organization
If Lincoln had only wanted peace, not a great
nation, would we be the same today?
14
Personal Humility






Press not important, shuns public adulation
Usually from inside – not an outside savior
Looks at the mirror, not out the window
Apportion credit to others, apportion
responsibility to themselves
Inspires through determination, not charisma
Boring
15
First Who, Then What






Right People on the Bus, Then Start Driving
Who Before What: The Right People are
Everything
Not a Genius with A Thousand Helpers
Vigorous Debate
Not How Much You Pay, But Who You Pay
Rigorous, not Ruthless
– When in doubt, don’t hire
– Make change fast
– Best people on best opportunities
16
A Nation of Grinders – NY Times
Magazine
 In America,
you are rewarded if you:
– Get an education
– Get married and stay married
– Work hard
– Mixed-up – no class consumption
17
“You Got Six Months To
Make Your CEO Look Great”
Key Points
Reputation = $$$$
Management Quality = Reputation
Management Quality is more important than ever
Perceptions of Management Quality are
changing faster than ever
Bottom Line:
You have six months from a management change
to start communicating value or it is over in a year
and a half
19
Importance of Management

Executives and analysts SAY that
management quality is the most important
factor when evaluating a company.
Quality of management
Product/service quality
Employees
Investment value
Financial position
Innovativeness
Asset use
Comm./Envir. Resp.
Stated
Importance
9.3
8.8
8.5
8.2
8.0
7.8
7.9
6.5
20
Today…
 The
relationship between management
quality and overall reputation (both
change in and mean scores) has also
grown stronger.
21
Importance of Management
(Overall Reputation and Management Quality Correlated With One Another)
Correlation
Coefficient
1985-1994
.9516
Correlation
Coefficient
1995-2000
.9961
Liz Claiborne
.8470
.8792
Boeing
.8772
.9514
UST
.9602
.9887
Coca Cola
.6810
.9373
Apparel Companies
.9012
.9862
Aerospace Companies
.9369
.9485
Fruit of the Loom
22
Today…
 Perceived
management quality has
become more volatile.
23
Importance of Management
Management Quality
1985-1995
1996-2000
Average rate of change
1%
2%
Average point change
.06
.11


The average rate of change has doubled.
The change from 1999 to 2000 was the
biggest ever – 4%.
24
Judgment Day
Comes
Faster Than Ever
Among Those Who
Buy Your Stock
Methodology
 1000
interviews conducted with the
general public February 8, 2001 –
February 11, 2001.
 Identified
individual investors were asked
subsequent questions related to the
performance of a Fortune 500 CEO.
 Individual
investors are defined as
people who own stocks.
26
Time Allotted to New CEO
100%
80%
60%
40%
24%
23%
20%
9%
5%
6%
1 1/2 - 2
years
2 - 3 years
9%
7%
0%
6 months or 6 months less
1 year

1 - 1 1/2
years
+ 3 years Never make
judgments
Average = 17 months
27
Compared to 10 Years Ago…
Shorter
39%
About the same
37%
Longer
13%
Don't know
10%
Didn't make 10
years ago
2%
0%

20%
40%
60%
80%
100%
Three times more say shorter than longer
28
Still…
 CEOs
are American Icons!
29
Who Wants To Be A
CEO (Anymore)?
An Investment Community
Perspective
Methodology



Brief Telephone Interviews with Targeted Audience
Conducted in January & February 2001
Market Conditions
– January 31, 2001
• Dow Jones Industrial Average Close: 10,887.36
• NASDAQ Composite Index Close: 2,772.73
– As of 3/16/01
• Dow Jones Industrial Average Close: 9,827.64
• NASDAQ Composite Index: 1,890.74
– Percent Change
• Dow Jones Industrial Average: -9.73%
• NASDAQ Composite Index: -31.81%
31
A Cross Section of Top US Financial
Institutions
32
In your opinion, what is a reasonable timeframe (in months)
for a new CEO to significantly increase shareholder value?
 According
to the
Investment
Community, new
CEO’s have, on
average, 14.5
months to increase
shareholder value
33
Is that time frame shorter, longer or the same as your time
frame say, 10 years ago?
 85%
of participants surveyed feel that this is
a shorter time period than 10 years ago
 Nearly
half believe this time is 1-3 years
shorter than 10 years ago

“More immediate results are
required…Wall Street and
analysts are more involved in
management choice today.”
34
CEO Turnover
 In
the 1990s, a third of CEOs appointed
at 450 major corporations lasted three
years or less
 One
in four companies went through
three or more CEOs
35
Recent CEO Tenures








Jill Barad, Mattel
– 37 Months
John McDonough, Newell Rubbermaid
– 35 Months
M. Douglas Ivester, Coca-Cola
– 28 Months
Robert Knowling, Covad
– 28 Months
Michael Hawley, Gillette
– 17 Months
Durk Jager, Procter & Gamble
– 17 Months
Lloyd Ward, Maytag
– 15 Months
Richard Thoman, Xerox
36
“Why is everyone mad at me?” –
CEO
Earnings
performance
Share price
Litigation/Crisis
Compensation/Golden
Parachute issues
37
Are CEOs generally worth the compensation they receive in
salary and options?
 Fully
one-third of the participants do NOT
believe that CEO’s are generally worth the
compensation they receive in salary and
options
38
CEO Compensation

Top 10 CEO’s by Total Compensation (1999)
• Salary Plus Bonus, and Long-term Comp.
–
–
–
–
–
–
–
–
–
–
CHARLES WANG - COMPUTER ASSOC. INTL. = $655.4 Million
L. DENNIS KOZLOWSKI - TYCO INTL. = $170.0 Million
DAVID POTTRUCK - CHARLES SCHWAB = $127.9 Million
JOHN CHAMBERS - CISCO SYSTEMS = $121.7 Million
STEPHEN CASE - AMERICA ONLINE = $117.1 Million
LOUIS GERSTNER – IBM = $102.3 Million
JACK WELCH - GENERAL ELECTRIC = $93.1 Million
SANFORD WEILL – CITIGROUP = $90.2 Million
PETER KARMANOS JR. – COMPUWARE = $87.5 Million
REUBEN MARK -COLGATE-PALMOLIVE = $85.3 Million
39
CEO Compensation: A Widening Gap
 1989:
$1.2M
– 45 times the blue-collar wage
 1999:
$12.4M
– 475 times the blue-collar wage
40
Should exiting CEOs be paid the “golden parachutes” they
receive in salary and severance?
NO!
41
Should exiting CEOs be paid the “golden parachutes” they
receive in salary and severance?
 Three
out of four participants
feel that exiting CEOs should
NOT be paid these “golden
parachutes”
42
43
Is a troubled company better off appointing an insider or an
outsider as CEO?
 Three
quarters feel that it is better to appoint
an outsider as CEO of a troubled company to
bring in a “Fresh Perspective”
 Current
Environment
– 80% of CEOs are still hired from the inside
44
Would you want to be the CEO of a Fortune 1000 company
today?
 Nearly
two-thirds would NOT like the title of
CEO on their office door or parking space
CEO’s
Office
45
Professional Heartburn
“It
is bad enough being
an analyst!”
46
My Doctor Said…
Communicate
47
Conclusions
 Reputation
has a measurable financial value
 Management quality drives reputation
 Perceived management quality is more
important than ever
You’ve got six months; or
your CEO has no more than
a year and a half.
48
Presentation
Guidelines Redux
Guidelines




Each Team Member Has a Role
Have a Team Leader
Use Any AV Approach that works for you
One-page handout – should include:
– Team members
– Key question(s)
– What you propose

Three Steps:
– What you are going to say
– Say it
– What you just said
50
An Example of An “A”
Team Presentation
Fall 2002
Any guesses as to what this is?
–
–
–
–
–
–
–
–
–
–
–
–
–
Monthly pension to amount to 80% of last salary
Six cars and seven drivers
34 office workers
12-bedroom mansion
Three cooks
2 housekeepers
9 Security Men
Gym
Swimming pool
Sauna
Medical care for him and his family
Pay for trips inside Kenya and abroad
State Funeral upon death
52
Golden Parachute:
 A clause
in an executive's employment
contract specifying that he/she will
receive large benefits in the event that
the company is acquired and the
executive's employment is terminated.
These benefits can take the form of
severance pay, a bonus, stock options, or
a combination thereof.
http://www.investorwords.com/cgi-bin/getword.cgi?2201
53
CEO
Compensation
Brought to you by:
Karen Dwyer
Jerry Roenbeck
Jonathan Gaynor
Tarshia Griffin
Valerie Pitchford
Argument for Large CEO Compensation
 Attract
top management
 Promote
loyalty
 Motivate
long-term financial gain
 Parachutes
 Promote
deter takeovers
stability
55
Not So!

Studies show:
– CEO’s no more likely than average paid
employees to stay based on the
salary/benefits
– Huge compensation packages do not ensure
loyalty
– Stock options can be ineffective
– Takeovers still occurring
– Zero Cost Collaring
56
Let’s Look at the Stats
 Average
US CEO – salary over $2M
 Average
CEO makes 17x the average
American
 CEO’s
of major corporations make 85x the
average American
57
Let’s Look at the Stats
 CEO
Compensation
– Up 212% in the past decade
 Compared
to the
– Factory workers’ up 54%
– Engineers up 73%
– Teacher up 95%
58
Let’s Look at the Stats

CEO payment outdoing inflation
– Satisfactory workers’ pay up 4.7%
– Outstanding workers’ pay up 7.7%
– ½ Fortune 500 made large cuts yet CEO pay surged

1979-89
– Family take home up 9%
– Income of the richest 1% (31% CEO) up 31%
59
Example 1
 Jack
Welch
– 81,000 layoffs in the first 5 years as CEO
– 993 acquisitions
– Apr 4, 1981
• Market Capital up $402.4B
• Revenue $21B
– 20 years later
• Market Capital up 5000%
• Revenue $129.9B
60
Example 1 (cont’d)

Jack Welch Perks
–
–
–
–
–
–
–
–
$80K/mo apartment in Manhattan
$127K/mo in living expenses
$3.5M/yr use 737 Boeing
Courtside Knicks tickets
U.S. Open tickets
Country Club
Restaurant Bills
Security
61
Business Health
 Executive
Compensation packages
contain Perverse Incentives that Hurt
Business
– Why? Incentives to boost stock price and
earnings reports hurt firms in the long run
– How? Downsizing, Demoralization, Reduced
LT investment and inflated accounting
62
Business Health
 Downsizing:
cuts in
manpower increase short term
profits, but ultimately hurt
output
 Demotivation:
Fear of
downsizing leads to lower
productivity while employees
not cut are overloaded with
work
63
Business Health

Reduced Long Term Investment: Cuts
in long term investments like Research
and development & training reduce
expenses but prevent growth

Fraudulent Accounting: Accounting
rules and reports are “bent” aggressively
by executives to inflate earnings, but can
destroy the firm’s credibility or worse
64
It's Clean Up Time
 Self
 New
governance
York Stock Exchange
 Sarbanes-Oxley
Act
65
Awareness


“Enron – itis” has increased public awareness of
CEO compensation packages.
How can public awareness have a hand in
diminishing these “golden parachutes”?
– Be informed about CEO contracts.
• Visit, www.thecorporatelibrary.com/ceos
– Use your knowledge to support organizations and
politicians that want to fight the same battle
66
Where is the
discussion headed?
Will closer scrutiny of corporations be
effective?
 Media
coverage places pressure on large
corporations to respond to the scrutiny
 Statistics
made available give the public
a point of comparison in terms of their
own financial security
 The
recently unemployed (nearly 4200
from Enron and 17,000 from Worldcom)
will demand justice
68
What reform options look promising?
 Grant
stock with restrictions on its future sale
instead of granting options
 Emphasize
long-term rewards for long-term
success
 Penalize
executives who fail to reach
success, as opposed to heavily
compensating them
69
What reform options look promising?





Monitor the role of business funds in political
campaigning
Reform pension laws to stop over exposure to one
stock
Prevent a company from investing its pension funds
in its own stock
Create higher standards of transparency and
disclosure in the audit profession
See for yourself
– http://news.bbc.co.uk/1/hi/business/1854642.stm
– www.corpwatch.org
70
QUESTIONS?
Questions for Discussion





Does Level 5 Leadership Make Sense? Does it
fly in the face of what we often think makes the
best CEO?
If you were to run an “American” business, how
would Collins’ principles apply? What would be
American about it?
How does the Collins model compare to the
CEO-star model implied by the “hurry-up and
communicate” presentation? Who’s right?
What is more American? What is not?
If the face of 9/11, who is a great leader?
72