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.
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.
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.
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.
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.
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
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.
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.
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
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.
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.