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Lou Gerstner Takes the Gloves Off

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DQI Bureau
New Update

In less than two months, IBM chairman Louis V Gerstner Jr will retire.

Outside of the Watsons, no other leader has left as big a mark on IBM. Gerstner

has written about his experiences in Who Says Elephants Can’t Dance? Inside

IBM’s Historic Turnaround. The book will be in stores on Nov. 12.

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Recently, a relaxed Gerstner met with BusinessWeek Associate Editor Ira

Sager. For the first time, Gerstner answered critics who have charged that his

turnaround was built on fancy financial footwork.

He also tackled CEO compensation, discussed what’s wrong with the computer

industry, and disclosed a surprise about his future plans: He’s going to study

Chinese history and archaeology. This is an extended, version of the interview

that appeared in the November 18 issue of BusinessWeek.

Q: In those first months after you replaced former IBM CEO John F. Akers,

what was your biggest surprise?



A:
I went into IBM believing that its problems were primarily strategy and

execution. When I got there, I found out that the direction the company needed

to go was pretty clear. This was not a question of picking a direction and

saying: "Charge!" You would do that and turn around and nobody was

following behind you.

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It was an organization of fiefdoms. People had the view that "if this is

not in my interests, I’m not going to participate." I felt I had fallen

down a rabbit hole. That’s when I realized the problems weren’t strategy.

They were: How do I execute that strategy?

Q: In the book, you use the phrase "counter-intuitive

corporation". What do you mean?



A:
There is this view that has been prevalent for as long as I’ve been in

the business world that large companies are slow, ineffective, and that small

companies are faster, better, more entrepreneurial. I don’t buy into that. It’s

harder to make large companies faster, entrepreneurial, more responsive. But it

doesn’t mean they can’t be that way.

This is probably the subject of another management book, but this is all

about creating organizations where knowledge moves in a different way than

control. Large companies have to have elaborate systems of control because there’s

lots of things to count, oversee, report, and add up. You create this kind of

skeleton of an organization, which keeps it upright and moving. But you don’t

want knowledge, which is what people really leverage in a large institution,

moving along the same pathways as control.

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You’ve got to free knowledge so that it moves horizontally in an

organization, not hierarchically, and allows organizations to leverage the fact

that they have a big presence in various markets so they know things. That

knowledge can move across the enterprise. Smaller companies have no way to

leverage information.

Q: Why is it important to make a connection between strategy and corporate

culture?



A:
You must start with a new set of directions, and then you must help the

culture move toward executing the strategy. won’t move

unless it sees the vitality and intellectual underpinning of the strategy.

People said, why doesn’t IBM change? It wasn’t for lack of strategy. It wasn’t

for lack of exhortation on the part of the leadership saying, "We’ve got

to change." Nothing happened.

The culture didn’t want to change. It didn’t buy into the strategy. The

culture, which is made up of all kinds of practices and behaviors in the

institution, fought the change. So what you have to do is go in and change all

the processes that underlie cultural behavior. We changed the compensation

system. We changed the organization system. We said, it doesn’t matter any

more what your unit does, the whole company has to succeed before you get any

payoff.

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Q: Did you change the IBM culture as much as you expected, and do you

think it could slide back into its old ways?



A:
We have fundamentally changed the culture 180 degrees. IBM’ers around

the world, they buy into just as much as they bought into the old

culture. They see the value of it.

Now, if we hadn’t been successful financially and in terms of market share,

they would have said, hey, this isn’t working. But we have created an

integrated $88 billion company with 350,000 people in 160 countries.

There’s a lot of centrifugal force inside this organization that doesn’t

want to go back to the old world.

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Those forces of darkness exist in the company at all times, and they exist in

all enterprises: a tendency to pull away from any kind of central or common

activities. The task for the top management team is to keep this thing moving

and keeping it together and keeping it integrated. It’s going to take

continued attention to keep the culture consistent with the strategy.

Q: In part, you credit your success to the acquisitions you didn’t make.

Why?



A:
If life was so easy that you could just go buy success, there would be a

lot more successful companies in the world. Successful enterprises are built

from the ground up. You can’t assemble them with a bunch of acquisitions.

huge integration problems.

There were few PC companies that we weren’t offered at some point. Why

would we want to double up in the PC business, ever? Telecommunications

companies all over the world proposed joint ventures, affiliations. There were

people who suggested we get in the content business. We turned them all down. We

made lots of acquisitions, but they the strategy we already had.

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Q: You describe executives in this industry as "remarkably detached

from their customers." What’s your beef?



A:
The process of integrating this technology and achieving the benefit is

unbelievably painful for companies. The industry has been all about faster,

faster, more function, more function. Most devastating from a customer point of

view are the lack of standards and the lack of interchangeability. It is truly a

mess. You wouldn’t deliver steel to General Motors in a different form than

every other steel company.

We’re going to have to deliver products to customers in this industry

consistent with an open-standards-based model of computing. Companies are going

to have to learn to compete on that.

Q: Why do you believe Wall Street is too preoccupied with revenue growth

as the measure of corporate success?



A:
The value that some analysts put on revenue vs. what they put on profit

is out of whack. If you can grow real cash earnings, that’s 80% of what you

ought to do, and the revenue component is 20%. People overvalued revenue during

the time when a lot of companies were generating revenue in unsustainable ways.

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Sure, I’d love to have more revenue growth. But I took the position that we

were building a new IBM, and it was going to take 5 to 10 years. It was all

about a new strategy. It was all about a new culture. I was not going to get

distracted because somebody said: "Gee, we’d like to see your revenue a

little higher this year."

Q: Critics have questioned the quality of IBM’s earnings. Why didn’t

you use the book to respond?



A:
Those discussions were not relevant to a book that deals with a 10-year

history. We’ve responded in the last year with a lot more disclosure. We’ve

always told people that we made money on intellectual property, and we always

gave them the number. But they wanted to see it put in the income statement, so

we moved it to the income statement and broke it out.

We’ve always told people in the footnotes what the pension assumptions

were, but they wanted it more frequently and more visibly. So we now give them

more frequent and more visible discussion. For the most part, the issues for IBM

were disclosure. They were never accounting. A couple of the issues that people

have thrown into the bucket of financial engineering I find strange.

Q: Such as?



A:
First, taxes. When I arrived, IBM was paying a huge tax bill every year.

Over an eight-year period, we brought the tax rate down. That’s as much a

responsibility of management as bringing down the cost of information

technology, real estate, and anything else. It’s an expense of running the

business. But for some reason, people think that’s financial engineering.

Secondly, share buyback. There is a huge difference between what we hear from

our owners and from people in the analyst and media sector. Every single time I

have met with owners, they have said to me: "Please don’t take the cash

and go make stupid acquisitions."

What we did with cash is, we funded our growth. We never cut back funding

research. Next, we gave our employees huge increases in compensation. We pulled

down company debt, too.

After we went through that process, we had some cash left. We gave it back to

the shareholders in the most efficient way we could, which is not through

dividends. It’s through share buyback. We did it for 10 years. We always

bought, right through thick and thin. If you were talking about financial

engineering, then you would buy at certain times and not buy at other times.

Q: What do you think about efforts to police corporate behavior?



A:
I’m leery of legislative solutions to what is morality. Look at the

Sarbanes-Oxley Bill. It sweeps up every company in the world that issues debt or

lists a stock on the New York Stock Exchange. It says, you have to have

independent audit committees.

You have companies in Europe and Japan that are not organized this way. The

concept of independence in some cases flies in the face of the law – for a

German company, for example. It has become a trade issue with the eu. Why would

the U.S. want to drive foreign companies out of our capital markets? Our capital

markets are a strategic advantage for us from a geopolitical and trade point of

view.

Q: How do you protect investors and ensure that corporations follow the

rules?



A:
The real mechanism for corporate governance is the active involvement of

the owners. We have very large owners in the form of institutional shareholders

who could exert substantial influence on what goes on in corporations. But the

markets are so liquid here that when they see problems, they sell. If they had

to stay in over a period of time because the cost of getting out was

prohibitive, then maybe you would see a little more oversight. One way is to

make it far more advantageous for people to be long-term rather than short-term

shareholders.

Q: Your $127 million compensation package in 2001, has been criticized as

outrageously generous. Do we need a change in CEO compensation?



A:
Compensation needs to be predominately performance-driven. If CEO

compensation was performance-driven, which I believe it was in IBM’s case,

nobody would ever argue. If the shareholders didn’t make billions and billions

of dollars, I wouldn’t make millions of dollars. My salary was the same for 10

years. It was all performance-based.

The American people have no problem paying great athletes and great actors

lots of money if they’re the best and if they perform well. I hope we’re

going to see a much tougher set of standards by directors that get compensation

tied specifically to corporate performance.

Q: What’s next for you?



A:
I’m going to focus a lot on public education reform. I’m in the

process of trying to set up a commission on the teaching crisis in America. I

have a number of people who have agreed to serve on this commission. I’m

trying to raise some money. Secondly, I’m going to keep my hand in business

with a private equity or small venture company. Then I want to go back to

school.

Q: School?



A:
I’ve been accepted at Cambridge University. I want to study Chinese

history and archaeology. I want to become a student. I want to read Chinese

history and go on a dig.

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