Route to the Top
January 1 2005 by Joan Warner
Michael Jordan can still make nonscientific heads spin by describing his Ph.D. thesis. The chief executive of the technology and logistics giant EDS, studying chemical engineering at Princeton University as a young man, elected to write about the absorbability of hydrogen atoms on surfaces. “I never quite finished it,” he admits.
Instead, Jordan joined the Navy, working on Admiral Hyman Rickover’s nuclear submarine program, before moving into the corporate world. He spent a decade as a consultant at McKinsey & Co. and 18 years at PepsiCo, where his titles included president and CEO of PepsiCo WorldWide Foods and CFO of the parent company.
Jordan’s focus shifted from Fritos back to particle physics when, in 1993, he took over as chairman and CEO of Westinghouse Electric, which built the country’s first nuclear power plant, and subsequently transformed the company into CBS. At the helm of EDS since March 2003, with 120,000 employees and revenues above $20 billion, he also has a parallel profession as an entrepreneurial investor via several private equity firms.
As the job of CEO grows more challenging, a diverse portfolio is almost mandatory. “These days, the demands on a chief executive are incredible,” says Ramani Ayer, CEO of The Hartford Financial Services Group. “You need the energy and vitality to think in multiple dimensions. Serving in different capacities deepens your understanding of the business, and that’s pivotal to doing a good job.” Ayer, who has been with Hartford since 1973, started out in operations research. Subsequently, he ran both its property and casualty insurance business and its life insurance and annuity subsidiary before taking the top job in 1997 (see sidebar, right).
Part of the reason chief executives move around more than they used to is that the directors to whom they report are increasingly demanding. “Boards have higher expectations,” says Tom Neff, Spencer Stuart’s U.S. chairman. “They’re setting a higher bar, and they’re quicker on the trigger when things aren’t going well.” Pressure from regulators and institutional investors on the directors themselves has intensified, he adds. “If the board members don’t zero in on underperformance, shareholders will do it for them.”
That means boards are more willing than ever to consider outsiders when shopping for a new CEO, and the survey results prove that directors increasingly get the best person for the job, not necessarily the heir apparent. Over time, CEOs’ tenure at a single company has steadily shortened, from an average of 19 years in 2000 to 16 years in 2004. And among executives at the top 100, fewer and fewer have been at their companies for their entire careers. The percentage of lifers in this group dropped precipitously, to 30 percent in 2004 from 34 percent in 2003 and 40 percent in 1997. “Nobody inside a company today can expect to get the top job without at least some competition from outside,” says Roger Kenny, managing partner at Boardroom Consultants, a New York-based search firm.
An Outsider’s Perspective
Of course, trolling for talent that’s not homegrown is most common when a company needs a serious makeover. Jordan, for example, was part of the famous “Class of ’93,” a year when a number of brand-name companies, including IBM with Lou Gerstner, brought in savior CEOs from other organizations to turn around disappointing performance or solve a crisis. “No insider could have done what I did at Westinghouse or in my current job,” Jordan declares. “It took an outsider to see what was broken and to have the conviction to move quickly.”
But a healthy assortment of professional experiences, many executives feel, is critical even for those who aren’t called on to do major damage control. Mobility between industries is increasingly de rigueur. Take Wells Fargo Chairman and CEO Richard Kovacevich, who started his career at General Mills, then joined Citicorp and decided on the banking trajectory that propelled him into high-ranking positions at Norwest. (See sidebar, page 26.) Kovacevich had worked in General Mills’ mergers division, which came in handy when Norwest and Wells Fargo joined forces in 1998. “There’s no doubt that working for three different companies and in different industries benefited me as a CEO,” notes Kovacevich. “Even within the same company, different experiences are of great value. And even experience in an area you don’t want to pursue makes you better in the one you do.” For example, since Wells Fargo caters to a huge variety of customers, both corporate and individual, Kovacevich feels his diverse background has made him a more responsive banker.
Greater geographic mobility is another accelerating trend among today’s CEOs, as we highlighted in last year’s survey. The overall number of chief executives with international experience rose again in 2004, to 33 percent, from 30 percent in 2003 and just 21 percent in 2002. Among the top 100 CEOs, the trend is even more pronounced: 41 percent of them have spent time abroad.
It makes sense, considering the realities of the global marketplace. Delphi, the Michigan auto components and electronics giant, has 171 manufacturing facilities, 53 sales centers and 42 joint ventures in 41 countries around the world. So, it’s a good thing CEO J.T. Battenberg has personal knowledge of how things work outside the U.S. He spent three years in Belgium as managing director of the Continental Division of General Motors, Delphi’s former parent, and three more years in England as general manager of GM’s overseas truck operations. “It’s been absolutely critical,” he says of his stints abroad. “Prior to those experiences, I was very ethnocentric; then I started learning different languages, different cultures. It changes your thinking. It awakens you to the reality that this is a global world.”
For Michael Eskew, CEO of UPS, the international perspective helped shape not only his career path but also his keen sense of the competitive pressures facing U.S. companies. When he joined the package-delivery company in 1972 as an industrial engineering manager, UPS was in 37 states, he recalls. “My vision was that we’d be in 11 more; I didn’t even consider Alaska and Hawaii. Now, we’re in every country in the world.” The Indiana native was among the first employees in UPS’s international group, working in Germany, and also among the first to work with UPS Airlines.
Today, Eskew travels constantly. As chairman of the U.S.-China Business Council and a member of President Bush’s Export Council, he regularly sees firsthand how other nations, particularly in Asia, are educating the next generation of corporate leaders. And this is where he sees the biggest challenge for the U.S. in the coming years. A true believer in free trade and globalization, Eskew nevertheless worries that America is falling behind in the competitive race, especially when it comes to academic training. It is a topic on which he frequently lectures, on college campuses and before business groups.
Lessons from the €˜Sputnik Kids’
Many of Eskew’s peers voice the same concern. “Government numbers project that by 2010 there will be a shortage of skilled people in the U.S., and that it’s going to be quite severe,” says Delphi’s Battenberg. “There are only 62,000 engineering graduates in the U.S. China graduates 600,000 engineers a year and India graduates 250,000 to 300,000.” Hartford chairman Ayer cites the same numbers and echoes the worry.
Indeed, engineering remains the No. 1 undergraduate degree for our surveyed CEOs, ahead of business administration and economics. Among the top 100, fully one-fifth studied engineering (many, of course, subsequently received M.B.A.s). That’s far from coincidental. Today’s CEOs came of age in the early 1960s, when the U.S. launched the “space race” with the Soviet Union and President Kennedy announced his intention to put a man on the moon. “I was a Sputnik child,” explains Wells Fargo’s Kovacevich, who majored in industrial engineering at Stanford. “If the point of going to college was getting a good job, engineering was the natural thing to do.”
Math, chemistry and the sciences help in business no matter what industry you wind up in, says Kovacevich. “Perhaps the greatest benefit of engineering is what it gives you from a business perspective,” he says, “a way of thinking, analyzing a problem and arriving at a decision. The discipline of engineering can be applied to anything-nonprofits, legal work, anything.”
Jordan, the chemist, agrees. “Being trained as an engineer, you propose a hypothesis and prove whether it’s right or wrong,” he says. “When I joined McKinsey at age 27, that’s how they taught. The scientific method was a powerful tool.”
With Cold War rivalries behind us, other factors will have to spur ambitious future CEOs to the top. Eskew believes the challenge of the space race has given way to the specter of hundreds of thousands of highly skilled, multilingual people in other countries, hungry to create new businesses and reshape existing ones. “We had Sputnik as our motivator,” he says. “Kids today have globalization and worldwide competition. Without looking at the stars, they still need to get motivated to think about science and math.”
At the same time, they’ll have to meet an even higher standard in terms of regulatory compliance and business ethics. Joe Griesedieck, vice chairman at the executive recruiting firm Korn Ferry, says integrity is the first thing he looks for in a CEO candidate. “Boards are more activist than they used to be, clearly driven by Sarbanes-Oxley and by pressure from institutional investors,” he says.
Sitting CEOs are well aware of those pressures. “We should be very concerned with making sure we’re doing the right thing by the customer,” says Hartford Financial’s Ayer. “If you have that foundation, you have to make sure you’re delivering attractive returns for shareholders. After all, you’re competing for global capital. And you have to make sure your environment attracts the best and brightest. You cannot escape the fact today that you’re living in a community. Regulatory expectations and board attention to governance and stewardship place extraordinary demands on the CEO to make sure he’s mindful of all stakeholder concerns. I feel that’s a quantum change since just five years ago.”
Indeed, anecdotal evidence suggests that CEOs have less and less room to make mistakes of any kind. For the first time this year, Chief Executive and Spencer Stuart compiled data on CEO turnover (see box, page 22). Since the data refer only to calendar 2004, they don’t yet pinpoint a trend. Last year, one-tenth of the S&P 500 companies appointed a new chief. Of the 52 newly installed CEOs, 63 percent were internal placements and 42 percent were the result of a predecessor’s retirement.
One trend seems clear, however. “The shelf life of CEOs has gotten shorter in recent years,” says Korn Ferry’s Griesedieck. “It used to be five to 10 years. Now, they’re lucky if it’s three to five. CEOs face tougher sledding than in the past. The pressure they face today, for short-term earnings and from Sarbanes-Oxley, is unlike any other time in history.”
Neff of Spencer Stuart says that, in the past, turnover rates among CEOs largely reflected overall economic vigor. For example, after the dot-com bubble burst, the percentage of S&P 500 companies that fired their chief executives was in the high teens. In “normal” years, he says, the rate is in the 11- to 13-percent range-meaning CEO replacements in 2004 were on the low side.
But that could soon change. For one thing, some companies are deliberately shortening tenure for their chief executives. At Wells Fargo, Kovacevich has put in a rule that the CEO should retire at age 65 or after 10 years, whichever comes first. “I believe, as a rule of thumb, 10 years is about as long as anyone should be CEO,” he says. “If you haven’t gotten the job done then, there’s something wrong with you. And fresh blood is good.”
Kovacevich also thinks that in the future, CEO tenures will shorten even further because the chairman and chief executive roles will increasingly become separated. “So after eight or nine years as CEO, you become non-CEO chairman of the board. That allows a nice transitioning to occur. It gives the successor time to change his or her style, and time to be coached in the job.”
Finally, CEO tenures are getting shorter simply because CEOs are retiring earlier than they used to; the average age in 2004 was 60. Many then take up new careers, as investors or as leaders of nonprofit institutions, out of the harsh light of the public sphere. The paradigm of spending their professional lives at one company or in one function is gradually unraveling. All that means future CEOs will need to be made of tougher stuff if they want to get-and keep-the corner office.
Boards Get More Active in Succession
A new feature of this year’s Route to the Top survey is a profile of CEO turnover, analyzing replacement among the S&P 500′s chief executives. At first glance, the 2004 statistics don’t suggest an unusual amount of tumult: Only 13 percent of companies replaced their CEOs last year, and in the top 100, only 9 percent did so. Retirement was the most common reason given by companies for hiring a new CEO, and most often, the successor came from within the ranks.
But as directors become more activist, recruitment pros say, turnover at the top is speeding up. Tom Neff at Spencer Stuart, who managed the research, points out that while 42 percent of the companies cited retirement as the reason for change, fully half of the companies got a new CEO last year because the former executive “stepped down,” “resigned” or “was forced out”-all of which suggest performance-related issues. “Over the last few years, boards have become more diligent, more performance-driven and more in the spotlight,” he says, “and Sarbox has certainly made them more involved.”
Some experts think boards are paying more attention than ever to succession planning, developing bench strength within the organization long before the sitting CEO nears retirement. And directors also seem more willing to look outside for a successor. “What you’ll see in the future is a lot more benchmarking,” says Roger Kenny of Boardroom Consultants. “You’ll see a stream of external candidates, and boards will be comparing outsiders with potential insiders as part of a regular, planned agenda.”
Kenny thinks that agenda will include increasingly specific criteria for potential CEOs, such as international experience and fluency in technology. In the past, he says, “boards were too polite. They didn’t want to embarrass the old CEO by getting someone completely new.”
Chief executives themselves are remarking on the trend. Predictably, their own experiences color their opinions about home-grown succession versus outside recruitment. Michael Jordan at EDS, with his multicompany career, says that while developing internal talent should be part of every CEO’s job, many companies no longer think it’s risky to bring in an outsider, and that’s a good thing. “We’re seeing more boards drafting the best athlete,” he says. “Proven management skills are more important to them than industry experience.”
By contrast, Wells Fargo’s Richard Kovacevich believes that when directors look externally for a new CEO, it’s a sign that they haven’t done their homework. At his bank, he says, executives “manage by culture,” and bringing in an outsider should be a last resort. “From a governance standpoint, it’s really important to start early in identifying successors,” he says. “If you wait until the last moment and are forced to look outside, that’s a mortal sin. You should know five to 10 years ahead of time if you don’t have someone obvious, and you should groom several candidates.”
There is, of course, a personal side to the whole issue of faster turnover at the top. Jordan notes that the shift to stock options as the principal form of CEO compensation has encouraged executives to make way for new blood sooner, because it no longer necessarily pays to stay in the job for an extra three or four years. These days, an executive who has done a good job has a healthy nest egg to show for it, possibly enough to finance a brand-new professional venture.
“The baby-boom generation is going to define a whole new concept of retirement,” says Ramani Ayer, chairman of Hartford Financial Services. “They believe in lifelong learning. The next 15 years are going to be exciting.” -J.W.