CEO OF THE YEAR 2005

David wants to take United Technologies higher, faster and farther.

July 1 2005 by JP Donlon


 

For many years, United Technologies and chief executive George David seemed to have labored in the shadow of General Electric and Jack Welch. Both companies are based in Connecticut and both are “conglomerates,” a term neither likes but one which nonetheless marks them as two of a kind.

David may have preferred the lower profile. UTC historically hasn’t marketed its own brand name, preferring instead to emphasize its Otis elevators, Carrier air conditioners, Pratt & Whitney aircraft engines, Sikorsky helicopters and other better-known brands. And David himself generally avoided the media spotlight, while Welch savors the attention to this day.

But UTC will reach $40 billion in sales this year and seems poised for continued double-digit gains at a time when GE has been forced to regroup after Welch’s retirement to find the next leg of growth. UTC, meanwhile, is beginning to spend money to brand itself with the slogan, “This is momentum.” It is projecting earnings-per-share growth this year of 10 to 15 percent. And insiders whisper that it could one day be an $80 billion company or even larger. Clearly, it’s in growth mode.

Moreover, a panel of chief executives has selected George David as Chief Executive‘s 20th CEO of the Year. “He is a highly disciplined manager who works very hard to back winners and prune losers,” says FedEx’s Fred Smith, the 2004 CEO of the Year and chair of this year’s selection committee. “A big part of that is putting a lot of emphasis on management development and training to be able to operate a company as diversified as UTC.”

How does it feel to emerge as a company much more on par with GE? “I never thought we were under their shadow in the first place,” says David. He delights in noting that UTC’s overall shareholder return has been nearly 1,000 percent since 1993 compared with GE’s 560 percent. He also argues that his company’s management disciplines and processes are better than GE’s. And he believes that his 13-year tenure as president and then chief executive has benefited UTC, while hinting that CEO changes at his competitors have caused them to miss opportunities.

On one level, Jack Welch, also a CEO of the Year in 1993, speaks glowingly of David. “I think he’s first rate,” says Welch, co-author of a new book, Winning. “He’s been aggressive and highly focused. He’s done a terrific job with UTC.”

But is UTC in the same league with GE now? “Are you kidding me?” Welch retorts. “They’re a popcorn stand compared with GE.”

All good clean fun. There’s no argument that David, 63, has done an exceptional job since becoming president in 1992 and CEO in 1994. The question for all CEOs is how David has achieved such performance over such a long period. The short answer is that he has combined some of the best Japanese manufacturing techniques with an intense focus on shareholder return (something Japanese companies are not particularly known for). While presiding over a headquarters staff of only 400 people, he has pushed his unique mix of management methods and disciplines through an organization of 210,000 employees. And he’s done it on a truly global scale, with 60 percent of his sales deriving from outside the United States.

A Young Man in Japan
David is highly intellectual, which is no surprise in view of his parentage. His father was Charles Wendell David, who taught history at Bryn Mawr College in Philadelphia and became director of libraries at the University of Pennsylvania. David says his mother, Margaret, was the parent who demanded high achievement from her son.

David went to Harvard, but wasn’t a terribly good student. In fact, he once said he was a “bum” in his undergraduate years. He did graduate in 1965, but Harvard wouldn’t take him for graduate school so he attended the University of Virginia’s Darden School of Business, where the proverbial light bulb went off. He graduated first in his class.

He started working with the Boston Consulting Group, which sent him to Japan in the late 1960s. After seven years of consulting, David gravitated toward working for a client, Otis Elevator. “I sort of fell backward into Otis Elevator, and Otis fell backward into one of the first big hostile takeovers to United Technologies.”

“I was over-titled, overpaid and under-experienced,” he recalls now. “I was sure I was going to get blown up.” But, in fact, he survived. Although he didn’t live in Japan, one of his responsibilities was managing the Otis subsidiary there and he made several trips a year there for 30 years. “I had real exposure to Japanese lean manufacturing and quality assurance methodology,” he says.

In the late 1980s, Otis had quality problems in its joint venture with Matsushita Electric and had to make a major effort to ratchet up performance. David learned even more. Perhaps most importantly, David struck up a relationship with a key Matsushita quality guru, Yuzuru Ito, who became a hero to David. “He retired in his early sixties and he worked for us for six or seven years,” David says. “I think, actually, his career fulfillment happened in UTC, not in Matsushita.”

In 1998, the company created Ito University to help it implement the Achieving Competitive Excellence (ACE) method, which is based on Japanese systems. For example, thousands of “cells” of employees work at the micro level to reduce waste, improve quality of products and services such as repairs, and streamline back-office functions. “Our quality methodology is absolutely Japanese,” David says. “It is a good deal simpler than techniques like Six Sigma.” That’s the statistical process control system Welch championed. David says ACE is deeper, that it gets all employees involved. He argues that more than half of UTC’s gains in shareholder value during his tenure is the result of this “powerful repetitive discipline.”

Making Execs Face Wall Street
But David hasn’t simply copied Japanese methods. He also is passionate about exposing his top operating executives to the full intensity of Wall Street’s demands. Soon after becoming president of UTC, David essentially blew up the structure he inherited. UTC had not clearly matched up subsidiary revenue and costs to understand precisely which was making a profit and which wasn’t. That is a classic failing of large conglomerates. “I’m a tremendous believer in profit-center management,” David says. “You use the discipline of the market to cause the companies to perform.”

So David slashed the overly centralized headquarters bureaucracy and reorganized the accounting system so that each operating unit president could be held accountable. David started having division presidents stand up before analysts to take the heat. And their compensation also was based on the price of UTC shares. All this “has given a shareholder value agenda to the individual operating heads of the company,” says David.

David demands double-digit earnings growth from each of them. The way they typically achieve that is by obtaining, say, 6 or 7 percent sales growth from their businesses. Then they squeeze out costs as part of a relentless process of restructuring. In the language of ACE, the company constantly seeks to achieve “footprint reductions” and to improve “capital turns.” All this helps with the process of “margin expansion.” And the company makes key acquisitions on a regular basis, which also adds to earnings. “This is how the motor runs,” David told analysts recently.

At an analysts meeting, David’s style is sometimes marked by a blizzard of numbers and facts. But at other times, he’s conversant on nonbusiness subjects such as the 18th century English furniture he collects or the 50-foot sailboats he races with a 12-person crew.

David clearly likes to win and clearly likes to be well-compensated for his efforts. He exercised options last year that were due to expire for a total of $83 million, which he argues pales in comparison with the gains that shareholders have received.

Even though he uses financial methods to drive his organization, he warns against relying too much on the numbers game. He argues that deeper values are important. He cares about education, which is one reason his company pays for any course that employees take on any subject, even employees who have been laid off. David also is pushing his company to improve the efficiency of the engines, compressors and other equipment it makes to achieve environmental gains��quot;not just to save the world, but also because it makes business sense. And he and his company have completely avoided financial scandal, which is one reason the magazine’s judges chose David as CEO of the Year.

David thinks of his company in holistic terms, for want of a better phrase. He thinks about the enterprise over very long time horizons. He uses words like “linearity” and “continuity momentum” to describe his philosophy of building a management team that functions smoothly over the long term. “People come to rely upon each other,” he says. “You have the same trusting relationships. You know people; they know you. They can predict you; you can predict them. All that begins to kind of work and it accelerates over the tenure of a CEO. If you have people bouncing in and out every second or third year, that’s not good.”

Ultimately, he thinks of running his company much as he thinks of racing a sailboat. “There’s a lot of agile, high-strength movement that goes on,” he says. “It’s like choreography. What happens if you drop a new person in the boat and you come to tack��quot;that is, change direction��quot;is that people will start bumping into each other. Somebody will get an elbow in the nose. But when the crew has been together, they don’t get elbows in the nose. Business is the same way.”

Sandy Weill, chairman of Citigroup and a former CEO of the Year, says David, who sits on Citi’s board, has the right mix of toughness and sensitivity. “When somebody can’t do the job he’ll try to help, but if that person is not going to make it work, that person won’t be in that job forever,” Weill says. At the same time, “he does a lot of things that employees respect him for. I think he’s a very, very good manager.” Even though David is demanding, he also can listen. “George has a ��receive mode’ as well as the ��send’ mode,” adds Weill.

For all these reasons, George David takes his place among the list of America’s top CEOs.

Q&A

Arguing Against the Trend

David believes that long tenure builds momentum.

UTC Chief Executive George David argues that the best companies learn how to systematically achieve momentum over the long haul. They benefit from CEOs with long tenures, which is at odds with the current trend. Here are highlights of an interview.

How have you achieved such incredible performance?
We have great franchises. You have to consider their tenure and duration. Our companies go back for a very, very long time. They’ve normally been market leaders. Otis Elevator has led its market every year since it was formed. It’s done that over and over for 152 years. Today, it’s probably twice the size of the next nearest competitor.

You also have to consider the tenure of the CEO. Short service runs are two or three years and longer service runs are 12, 13, 14 years. You have to realize that what you do today always builds on the back of what happened before.

How do you drive the organization?
I think the role of the CEO is first of all to set standards. You set a bar and you raise the bar and you’re always pulling. It’s very important in a big multinational, multiproduct company like ourselves to have a powerful financial system. Finance is the look-ahead function in the company. Engineering looks ahead toward products, and marketing looks ahead toward customer requirements. But the fact is that finance is the control system.

How did you expose your business units to shareholder concerns?
One of the things that was very important to us happened around the time that I became the president in 1992. The parent company used to be a much bigger financial entity. It had three times the staff that it has today and it had a much bigger balance sheet and lots of costs and asset categories that today are in the division.

I’m a tremendous believer in profit-center management. The ultimate discipline is to have the customer’s revenues butted up against management’s cost and what you’re looking for is the difference between the two, and then use the discipline of the market to cause the companies to perform. So if you can get profit centers, which means subdivided entities, in a big company like ours, you’re way better off because then you can have an individual manager go after a part of the problem. That’s better than if it’s all centralized and consolidated.

So the people actually running the businesses feel the heat?
Yes. We began to put the division presidents in front of the investor population. Then we lined up so-called measurement or management reporting with segment reporting. We had the presidents of these units stand in front at the analysts meeting.

Do you call UTC a conglomerate?
I don’t know if we like that word. I prefer even multi-industry, multinational. There’s a basic goodness about multi-industry, multinational and here’s what it is: Investors always ask, “Why can’t we make the decisions ourselves about whether we want to invest in Otis Elevator or Pratt & Whitney or Sikorsky?”

My response to that is twofold: First, the one thing they hate worse than not being able to make individual company decisions is they hate surprises. Investors hate bad news. The way you get no bad news is by virtue of having the company be very farflung both geographically and product-wise.

Commercial aviation exploded on September 11, 2001. We had between a quarter and a third of the profitability of the company in commercial aviation and all of that exploded literally in one day. Yet, we went through the succeeding four years with the highest earnings-per-share growth rate of any one of our dozen peer companies including Boeing and General Electric and … Honeywell. We beat them all on earnings-per-share growth.

It was all about balance because what happened was commercial aviation went down, but military aviation went way up. Military aerospace now is a slightly higher percentage of sales than is commercial aerospace in UTC. On top of that, we had the commercial companies that have steadily grown as their percentage of the company and I think it’s up now to 64 percent.

How does geographic diversity help?
We had another meltdown when Asia exploded in 1998. About 18 or 19 percent of our sales were in Asia, but went down to 13 or 14 percent because all of the economies were in drama. And we went right past that. It’s all because of balance in the company.

It’s a powerful element.

How far can you go in sales? People say $80 billion or $100 billion isn’t crazy.
Higher, faster, farther. It’s just like an airplane. I don’t think there’s any limit to what we can do.