Tuesday, December 21, 2010

Gen. Georges Doriot's Holiday Party Advice

I first became aware of Gen. Georges Doriot — a famous Harvard Business School professor who is widely acknowledged as the founder of the modern-day venture capital industry — during a conversation with Barbara Hackman Franklin. I was interviewing Barbara for the "Oral History of Corporate Governance" special 25th anniversary issue of Directors & Boards published in 2001, and this was one of her remembrances:

"I certainly don’t recall corporate governance included in any studies at Harvard, although I still find it amusing today to remember that a course taught by one of the most esteemed members of the faculty, Gen. Georges Doriot, was closed to women. We were warned by our counselling professors not to try to sign up for that course because he didn’t take women. When I ran into him many years later, I told him I had wanted to take his course, and what did he think about not allowing women in his class. He looked right at me and said, 'I’m damn proud of that!' ”

Barbara was a good sport and laughed about it when we talked, but I am sure it was not a laughing matter at the time. As one of the first women to graduate from Harvard Business School (which she did in 1964), she and other high-achieving women missed out on taking a class with this renowned individual. As the New York Times stated in its obituary when the General — as he was universally called because he had been a brigadier general in the U.S. Army during World War II — died in 1987, "for four decades [he] was widely credited with inspiring and training more leaders of American corporations than any other person."

The blog Creative Capital, written by Spencer Ante as a follow-on initiative to his book, Creative Capital: Georges Doriot and the Birth of Venture Capital, listed the "Top 10 Aphorisms of Georges Doriot." It is a marvelous set of observations and guidance.

One in particular is quite applicable to this time of year — the Christmas and New Year's holiday season, when parties and festive occasions are in full swing . . . and wine and spirits are flowing freely. Thus, take heed of the General's counsel:

"Never have more than two cocktails on any occasion. If any information is to be exchanged over whiskey, let us get it rather than give it."

That sounds like prudent behavior for executives of all stripes. (Another of the General's top 10 aphorisms is this: "Do not have a banker on your board — in bad times he remembers he is a trustee of someone's money"; but we won't deign to comment on that eyebrow-arching maxim at this feel-good moment when Christmas is almost upon us.)

So on this note of party etiquette from the General, we will close out the "Boards At Their Best" blog for 2010, and wish all our readers of this blog and of Directors & Boards and the monthly e-Briefings a joy-filled holiday season and my very best wishes for a resoundingly strong year in 2011. Be sure to come back and read us in January.

Photo of Gen. Georges Doriot courtesy of Harvard Business School

Thursday, December 16, 2010

Executive Stress: We Have Been on the Case

I venture to claim that there is almost no topic of board governance and leadership that Directors & Boards has failed to address in its 35-year history.

Take executive stress, for example — as in Jeffrey Kindler's stress-related retirement as Pfizer Inc. chairman and CEO, announced last week.

A dip into the Directors & Boards archives — circa 1977, a year after the journal was founded — turns up this article: “Beyond Executive Stress: Board Responsibility for CEO Mental Health,” written by Patricia Aburdene. (Ms. Aburdene went on to co-author the huge bestselling Megatrends series of books, and is now out with Megatrends 2010.)

A pertinent passage that certainly speaks to what just unfolded in Pfizer's boardroom:

A CEO under stress can make a disastrous decision before his condition has deteriorated to the point of breakdown. A tangle of family and marital problems might not affect a chief executive’s performance one iota. But if the business is going downhill too, it could become too much. A strong and competent corporate head is, after all, only human. Says Dr. Gertler of New York’s Stresscontrol Center, “It’s up to the board to keep track of how much stress the CEO is under at any given time” — and how much the CEO is capable of withstanding.

Corporate executives are no more prone to mental problems than any other group and perhaps less so. But because the adverse consequences of mental problems are multiplied by the level in the organization the executive has attained, it is always a cause for concern whenever it occurs among senior management.

At the shop level, it’s hundreds of dollars lost; at the department level, thousands; at the divisional level, millions; and at the corporate level, tens or even hundreds of millions.

The Pfizer board is taking heat now for this sudden succession issue. Did the board wait to long to force the matter? Should the board have separated out the chairman and CEO roles before this to ease the load on their CEO? Such questions naturally arise.

But this incident raises awareness of a little-commented upon role of the board — to monitor the CEO's tolerance for stress and to take action when warranted.

Even in its earliest days Directors & Boards was making this case. But you don't have to be such a longtime reader of the journal to know that we are specialists in pointing boards to the high ground of enlightened engagement with their managements and shareholders.

"The Scream" (2001), illustration by Jean Kristie

Tuesday, December 14, 2010

Russia House: The Pepsi Formula

In the fall of 1990 Directors & Boards Publisher Robert Rock and I traveled to PepsiCo headquarters in Purchase, N.Y. The reason for our trip? The Iron Curtain was coming down, Eastern Europe was opening up as a new market for U.S. goods and services, and Russia was undergoing perestroika — a thawing of relations with the West — all of which boded promisingly for American companies. We wanted to talk to a leader who knew how to penetrate previously closed-off marketplaces for some lessons that would be useful for our journal's readers in pursuing this historic business-development opportunity.

That meant talking to Donald Kendall.

At the time of our visit, Don Kendall was chairman of the executive committee of the PepsiCo board. Earlier in his career, he was the engineer of PepsiCo's breakthroughs in Eastern Europe and the Soviet Union (and in China, too). You can see him pictured above at left with Soviet Premier Nikita Khrushchev and U.S. Vice President Richard Nixon at the historic U.S. Exhibition in Moscow in 1959, where one of the exhibits was famously a display of Pepsi-Cola. Kendall, then the president of Pepsi-Cola International, arranged for that exhibit. Over the next 13 years, he patiently worked to develop a relationship with Soviet officials. Finally, in 1972, the company signed a breakthrough trade agreement providing for the bottling and sale of Pepsi in the U.S.S.R. — the first foreign consumer product to be sold in that nation. By 1990 it was the leading foreign soft drink in the Soviet Union, widely available in restaurants, grocery stores and from street kiosks, and was also the most widely distributed soft drink in Eastern Europe.

Kendall was elected chairman and CEO of the corporation in 1971 and held those positions until 1986. Bob Rock and I spent an hour with this affable veteran of global expansion, capturing his memories of those very early forays into inhospitable markets — asking him everything from what Moscow was like in 1959 to the intricacies of bartering Pepsi for vodka to lessons for CEOs in venturing abroad.

Of course, this recall of our visit with Kendall is prompted by PepsiCo's bold bid for Wimm-Bill-Dann, an offer of $3.8 billion for a two-thirds stake in the dairy and juice company — the largest acquisition by an American company in Russia.

Here are two of the questions we lobbed at Kendall, and his answers give you a taste of how this Pepsi visionary thought about risk and opportunity.

Directors & Boards: Given the current instability in the Soviet Union, would you encourage your colleagues in major Western companies to enter the country at this time?

Kendall: Absolutely. There is no place with greater opportunity. If you wait until you have stability and convertible currency, the opportunity is going to be gone. When you have an opportunity is when there are problems — when everybody is not running there. In running a business you have to take risks. Where there is opportunity there is always risk. If there were no risks in the Soviet Union, someone else would already have the business. So I don't think instability is something that would stop me from going to the Soviet Union. What is going to happen? They are not going back to what they had before. You might have civil unrest. A lot of the republics may end up seceding from the union. But they are going to have some system that will be different. It probably won't end up like the United States or Germany. It will probably end up more of a socialist country. Nobody knows how it is going to end up. But there will be some structure there in which you can continue to operate. Nobody would have dreamed years ago that you would have what's happened in the Soviet Union today. But I believed back then that given the opportunity, we could be successful. We were successful under the old system, so you know we are going to be very successful under the new system.

Directors & Boards: You even held a PepsiCo board meeting in the Soviet Union way back in 1974 — the first U.S. company to do so. Do you think other boards have begun to embrace the opportunities to be found in the Soviet Union and in Eastern Europe? Or is it more of a curiosity?

Kendall: I wanted the board to understand the opportunities. One of the problems we have in the U.S. with our international operations is that a lot of chief executives don't get involved. Somebody said one time that a lot of chief executives are inclined to travel the 'silk stocking' route — they love to go to London, Rome, and Paris. They won't go over to the Soviet Union and conduct negotiations. This will change over time, but if a chief executive — the decision maker — goes over there, he can get something done. Furthermore, you don't get the enthusiasm for something unless the chief executive gets involved. The same is true in China and in a lot of other countries. You must go there and find out what the opportunities are.

Identifying opportunities, measuring risk, making bold moves, and reaping rewards — that was Don Kendall's 'Russia House' formula for Pepsi's growth and success, being applied again in the Wimm-Bill-Dann deal.

Thursday, December 9, 2010

The Annual Meeting as the Art of Romance

As discussed in my previous blog posting, I am underway on a cover story for the first Directors & Boards issue of 2011 that will tee up a major rethink of the annual shareholder meeting — what is wrong with how it is done today and what may be needed to fix it for the governance era ahead.

Which brings me to Steve Ross (pictured).

I have fond memories of Steve Ross from back in the mid-1980s when he was head of Warner Communications. I made some money in Warner stock, which makes for warm recall. And as a shareholder I attended a couple of annual meetings that he ran. I remember them as some of the best annual meetings I have ever sat in on — infused with his outsized "CEO rock star" personality, his ultrasmooth handling of the crowd — and it was quite a crowd in those heady days when a Hollywood studio like Warner Brothers still reigned over the global entertainment industry — and his marvelous presentation of the scope and scale of Warner's businesses.

Connie Bruck, in her superb 1994 biography of Ross, Master of the Game: Steve Ross and the Creation of Time Warner, further amplifies my recall of why Ross was so masterful about so many things in his business dealings — including running an annual meeting. From her book, a telling anecdote, capped by a nicely personal coda:

From the start, Ross prided himself on his shareholders' meetings.

Over the years, he would become more polished, but even in the early days of Kinney Service he came to these events like a natural; showcasing his depth of knowledge about the company, his numerical nimbleness, his salesmanship so consummate that it seemed more about the art of romance than about selling. As he did with other business tasks, Ross made his preparation for these meetings into a game; he challenged his associates to find a question that would stump him, as though he were about to appear on one of his favorite television quiz shows.

He had a strategy for these meetings ("You never play a shareholders' meeting to win, you play to tie") as, it often seemed, he did for everything in life. And once he was on the podium, taking questions from the audience like so many lobbed balls, he seemed to want them to go on forever. "To make him stop answering questions," recalled the company's longtime secretary, Allen Ecker, "you'd have to turn out the lights."

Despite his prowess, however, in later years Ross liked to recount how he had gotten into trouble in one of those early meetings. "We were in the parking business then, and a woman asked why we didn't have a garage at a particular location in Brooklyn," Ross told me. "I gave some response, and she said, 'You're making fun of me because I'm from Brooklyn.' And I said, 'No, no, I'm not doing that at all. I wouldn't do that. I'm from Brooklyn too.'

"Well, after the meeting my mother came up to me. 'Steven.' (She only calls me that when she's angry.) 'Do you know how many years we've been trying to live down that we came from Brooklyn, and now you've come right out and said it, in front of al these people!' "

Hmmm . . . the annual meeting as the "art of romance." Maybe that is one of the fixes that is needed — to have the current generation of chief executives bring a Steve Ross-style verve to this corporate event and return it to a rightful place as a centerpiece for the display of CEO and board leadership.

Tuesday, December 7, 2010

How to Fix the Annual Meeting

It seems that no one — management, boards, shareholders — is happy with how annual meetings are conducted these days. Annual meetings can be a frustrating and often futile exercise — in meeting statutory requirements, yes, but not much else as a worthy vehicle for demonstrating corporate leadership and facilitating shareholder relations.

Thus, the cover story for the first Directors & Boards issue of 2011 will be:

What’s Wrong with the Annual Meeting . . . and How to Fix It

I am going to seek a roundup of opinion on what to do about the annual meeting. The seed of this article idea was planted this past summer when I was a peripheral participant in a study group looking at "Electronic Participation in Shareholder Meetings" — i.e., the pros and cons of virtual annual meetings and the practices necessary to hold a meeting that meets the needs of all parties. This group was organized by a close colleague, Gary Lutin, through The Shareholder Forum initiative that he chairs.

The virtual annual meeting will be an important dimension of the discussion, and possibly factor in as a "key fix" — or maybe not, depending on the input I get from important players who are doing virtual meetings or thinking of going in this direction. Early adopters, and their shareholders, have had some rocky initial experiences with virtual meetings.

And there may be other fixes that we should focus on for reconfiguring the annual meeting for a coming governance era of heightened transparency and disclosure.

Stay tuned. It should make for a lively lead article in the Q1 Directors & Boards.

Photo: A Johnson & Johnson annual meting from the 1970s, courtesy of Kilmer House.

Friday, December 3, 2010

'One Terrible Cost of Leadership'

It is interesting how J. Crew's Mickey Drexler identified a classic leadership characteristic as one of the things he wished he knew when he started out in business (as per my earlier blog post) — the need to ease an executive out of the organization once it is determined that he or she is not up to the job. As Drexler put it, "Let those who aren't working out go quickly."

I first came across this counsel in an interview I edited that Warren Bennis conducted with Dr. Franklin Murphy, which was published as a Q&A article in Directors & Boards in 1982. Dr. Murphy is not a household name today in the annals of corporate leaders, but he was a major figure in the 1960s into the 1980s. He had a most unusual route to the top of a major corporation. Trained as a medical doctor, he began his management career at the University of Kansas, serving as dean of the medical school and then, at age 35, chancellor of the university. He subsequently spent eight years as chancellor of the University of California at Los Angeles. In 1968 he was personally recruited by Norman Chandler, then chairman and CEO of Times Mirror Co., to be his successor.

In 1982 Murphy was chairman of the executive committee of Times Mirror when Bennis spoke with him on “Starting Corporate Life at the Top,” as we titled the article. Here is the key question and answer that identified a classic test of a leader's ability to act:

Bennis: You’ve been in very responsible positions virtually from the start. Are there any costs of responsibilities?

Murphy: Yes, there’s one terrible cost and it’s the one thing in administration that I find the most distasteful by far — and that is when you have to fire somebody. Having to let go a loyal and capable person who just isn’t up to his job is so painful. I brood about that, but it is a price you pay. You’re not just disemploying an individual, you’re affecting a wife, children, a whole group. I must say, if I’m indecisive about anything it’s in that area. But I’ve learned over time that the quicker it’s done, the better it is for all parties.

As Murphy implies, the removal, while it must be done, can be done with a human touch —another classic characteristic of a leader.

Franklin Murphy died in 1994. Portrait of him shown above was done by Directors & Boards to accompany his 1982 article.

Wednesday, December 1, 2010

The Dancing Board Member

The holiday shopping season is off to a rousing start. Crowds were strong on Black Friday, and it appears Cyber Monday set new records.

There can be a governance angle in almost anything. When Y&R consumer expert John Gerzema announced in mid-November that he expected Zappos.com, the online merchandiser of apparel and footwear, "to win the online shoe retailing war with its celebrated customer service" this shopping season, I was just reading Zappos.com Inc. CEO Tony Hsieh's book, Delivering Happiness: A Path to Profits, Passion, and Purpose [Business Plus, 2010].

Here is a choice story he tells in the book. Before becoming CEO of Zappos.com, Hsieh headed LinkExchange, a Web design company he cofounded in 1996. That's where this story takes place:

I’m not quite sure how it started, but we had a really fun tradition at LinkExchange. Once a month, I’d send an email out to the entire company letting them know that we were having an important meeting, and that some of our important investors and board members would be attending, so everyone was required to wear a suit and tie on the day of the meeting.

Everyone except for the most recently hired employees knew that it wasn’t a real business meeting, and that they didn’t actually need to wear a suit and tie. The real reason for the meeting was so that we could initiate and haze all the new employees who had joined LinkExchange in the past month.

So once a month, all the newly hired employees would show up to the office dressed up in suits and ties. There they would realize that they were the target of the companywide practical joke. In the afternoon meeting, all the new hires would be called up to the front of the room to complete some sort of embarrassing task.

After an investment by Sequoia Capital, we asked Sequoia partner and our new board member Michael Moritz to attend our initiation meeting, and we called him up to the front of the room along with the other six employees who had been hired in the past month.

After each person introduced himself, we let them know that in honor of Moritz’s presence, we decided that we wanted everyone to move together in unison to the music that was about to be played.

If you’ve ever read anything in the media about Moritz, he’s generally portrayed as an intelligent, introspective, and proper British journalist-turned-venture-capitalist, so everyone was excited to see that he was willing to stand in front of the room with the other new employees. Someone brought out a boom box and turned on the power as everyone started clapping and cheering. And then music started playing. It was the Macarena.

I don’t think that words can every truly describe what watching Moritz being forced to do the Macarena was like. It ranks up there as one of the strangest sights to behold. Everyone in the entire room was cheering and laughing, and by the end of the song I had tears streaming down my face from laughing so hard.

I remember looking around the room at all the happy faces and thinking to myself, I can’t believe this is real.

Two years after cofounding LinkExchange, Hsieh sold it to Microsoft for $265 million. He then guided Zappos from almost nothing to over $1 billion in gross merchandising sales annually, and got it onto Fortune magazine's "Best Companies to Work for List." And then along came Amazon, which bought Zappos in 2009 for $1.2 billion.

This is an impressive case of how creating customer value creates shareholder value, but maybe Tony Hsieh is on to a new tactic for how a board can help create shareholder value — get the directors up dancing in front of the team.