First Corporate Scandals, Then Tough Competition
November 7 2004 by Chief Executive
THE key challenge facing chief executives is not the corporate governance scandals of recent years. Rather, an era of new and brutal competition is beginning for many companies, according to Larry Bossidy, the former chief executive of Honeywell and a co-author with Ram Charam of “Confronting Reality: Doing What Matters to Get Things Right” (Crown Business, 2004.) Following are excerpts from a conversation with him:
Q. How have American chief executives been doing as a group?
A. I think they’ve done well. The United States continues to lead in terms of having the most prominent companies in the world. The real question is what they’re going to have to do to remain successful over the next decade.
I see some changes that are going to be required.
Q. Is the era of corporate governance scandals over?
A. It’ll never be over. There will always be, from time to time, situations in which people behave in a way that’s unethical. Frankly, in those cases, they are going to have to be taken to court and dealt with in an aggressive way. So we’d like to think it’s over, but probably not.
Q. Have companies changed the way they operate as a result of the Sarbanes-Oxley Act and other new regulations?
A. I think Sarbanes-Oxley has put some good emphasis on building quality boards and therefore I think both the attentiveness and involvement of the board is probably better today than it was. But Sarbanes-Oxley has brought a lot of bureaucracy.
Q. In your book, you say this is the fifth post-war era in terms of the competitive climate. What are the characteristics of this era?
A. First of all, globalization is here and it’s manifested by overcapacity and increasing commoditization of products, therefore there is difficulty in getting higher prices and certainly difficulty in maintaining margins. The second is an enormous proliferation of credit.
Q. Any other characteristics for this era?
A. The emergence of the power retailers, the Home Depots, the Wal-Marts, the Lowe’s, who on the one hand have given consumers better prices and therefore have made a nice contribution, but on the other hand, they’ve displaced a lot of businesses. That creates paranoia. Five years ago, you and I wouldn’t have guessed that Wal-Mart would be one of the biggest grocers, would be one of the bigger book sales outlets, would be one of the great purveyors of toys, would be among the top jewelers.
Q. Who’s in trouble and hasn’t faced up to it?
A. Maybe it’s too late for autos, steel, rubber and commodity chemicals. We label those industries as structurally defective.
I’d say the one industry on the precipice right now is Big Pharma. There are all kinds of complaints about their pricing in almost every quarter. Here’s a range of companies that provide very needed products. But on the other hand, the American public thinks they pay too much for them compared with their European or Canadian counterparts. The fact also that generic drugs are coming into the market faster than they ever did before is going to create a need for the Big Pharma companies to create a new business model.
Q. Is Raymond V. Gilmartin at Merck, the maker of Vioxx, in trouble?
A. They all are. You take Pfizer, you take Merck, you take Bristol-Myers, you take GlaxoSmith, all of them face the same challenges. I don’t think one of them is more disadvantaged than the others. They’re all looking down the same gun barrel.
Q. Why did they fail to see the changes happening around them?
A. First of all, they’ve been remarkably profitable. Sometimes that provides a comfort that doesn’t exist when you’re fighting for your life every day. Secondly, there wasn’t the hue and cry that exists now in terms of the costs of pharmaceutical drugs. Nor were there the increases in the cost of health care — to the point that it’s a centerpiece of presidential debates and part of every conversation you’re involved in. The world has changed.
Q. How did you stay in touch with the marketplace when you were at Honeywell and Allied Signal?
A. I enjoyed being out and among people. I enjoyed open communications. I also had a healthy sense of paranoia. If I didn’t know what was going on, I was going to get ambushed. I tried to seek out as many different opinions as I could.
Q. Do chief executives need to make structural changes in how they manage their companies to avoid isolation, or is it more an attitudinal thing?
A. More of the latter. You’ll need different characteristics for leadership in the next 10 years. Among them are an unquenching thirst for information and an ability to see your product though the eyes of the customer. People who are willing to change and have the courage to fail, and are willing to change what they’ve put in place, are going to be in demand.
Q. What should chief executives be doing differently to rebuild public trust?
A. First of all, run their companies well. Secondly, make sure that the ethical standards are held to the highest level. And if there are ethical violations, move on them aggressively. Then be a part of the national dialogue. You’ve got to participate, for example, in how you fix the health care problem in this country. Business ought to be part of the dialogue. They’re paying a substantial part of the bill.