While preparing our article on Best Boards/Worst Boards (see p. 26), Bob Yavitz and I often discussed the factors that really make boards work effectively. We agree that it takes three elements: a confident and open-minded CEO; at least one or two strong, dedicated, and knowledgeable directors; and a considerable amount of organized planning and working together to capture the full benefits of a corporate-governance program.
What concerns me is that all CEOs are not "confident and open-minded" about corporate governance. There are still many chairmen/CEOs who have reservations about the corporate-governance moves under way in boardrooms these days.
"Why should I turn over the selection of new director candidates, the appointment of committee chairmen and members, and control of the board meeting agenda to my outside directors?" they ask. "Why should I be evaluated on my performance by the board unless the directors are similarly measured? Why should I put myself in such a precarious position that the very continuation of my job depends upon the whim of a few outside directors? Leave me alone to choose my own directors, run the board the way I want to, and then let the shareholders judge me on the company's financial results. If they don't like it, they can sell their stock."
These words are seldom spoken aloud, but the actions of certain CEOs and companies indicate that this philosophy sometimes prevails. It seems to be particularly true of a few arrogant CEOs who are overwhelmed with their importance and power; of CEOs who founded their companies; of CEOs who own a great deal of stock; and of CEOs who are insecure in their jobs and fear director criticism.
A few of these CEOs will "get religion" and change their ways, rejuvenate their boards, and give it a good if belated try. A few more may go through the motions of embracing corporate governance. But the mere establishment of a Corporate Governance Committee and having a "once-over-lightly" performance evaluation of the CEO and the board is not, in itself, going to make good corporate governance happen. It won't and can't work until the CEO wants it to.
Most of these recalcitrant CEOs are not going to change their ways-or even pretend to do so. Nothing is going to happen until these CEOs retire or are replaced. I suspect we will have a number of candidates for our "Worst Board" selections for some years to come.
As a long-time corporate observer, I have always had disdain for those executives and especially CEOs-who surround themselves with sycophants and gophers. They seem to be afraid that brighter, stronger people will detract from their luster. I consider it to be a form of weakness and insecurity. And, in time, it usually has a deleterious impact upon the executive's career and the company's operation.
Much the same reasoning applies to boards. The chairmen/CEOs who pack their boards with their executives, their suppliers of goods and services, and their personal friends are giving short shrift to their companies and themselves. They do not have the depth of talent and experience on their boards to give them the kind of counsel they need, especially in times of crisis. When they and their boards become a target of institutional shareholders, should anyone be surprised? Will anybody shed a tear? I don't think so.
The fact remains-and it will always be true that the chairman/CEO is still the key to the success of both the company and the board. No matter how good the board is, without a capable CEO in charge, the company will not reach its competitive potential.
The best combination is when a strong and competent CEO blends his or her leadership skills with a group of informed, participative directors, and, together, they develop a corporate-governance program. They start with a thorough review of the composition and structure of the board. Then they begin the dynamic processes that make the structure come alive. Finally, they learn to interact as they coalesce into an effective working board. When this fortuitous combination of a confident, open-minded CEO and some dedicated, knowledgeable directors is in place, all kinds of good things start to happen and keep on happening.
Formerly the CEO of F.&M. Schaefer (19721977), Robert W Lear is chairman of CE's advisory board. He also teaches at Columbia Business School, where he is an executive-inresidence. He is an independent general partner of Equitable Capital Partners and holds directorships with Scudder Institutional Funds; Korea Fund; and Welsh, Carson, Anderson, Stowe Venture Capital Co.; and is a partner of Lear, Yavitz & Associates.
When the chief executive of France's electrical giant Groupe Schneider was arrested by Belgian authorities last year on questionable charges of forgery and embezzlement, and thrown into jail without so much as a toothbrush, it sounded like a storyline from the latest John Grisham novel. When CEO Didier Pineau-Valencienne was released 12 days later, jumped bail, and became the target of an international arrest warrant, the plot thickened.
Specifically, Pineau-Valencienne was charged with shortchanging a pair of Schneider's Belgian units in an attempt to buy out minority shareholders. By his own description, however, the CEO became a pawn in the supercharged, longstanding debate between France and Belgium about the cross-border power of French industry. The media roiled the mix, delivering a blow-by-blow account of the proceedings and characterizing Pineau-Valencienne-known to associates as DPV-as a European Michael Milken or Ivan Boesky. But perhaps most important, the affair caps a string of corruption cases involving European executives (see sidebar) and underscores that business connections no longer shield continental captains from charges of impropriety the way executive privilege protects heads of state.
The broad corruption sweep, Pineau-Valencienne argues, is fueled by sensationalistic journalists. The only way to sidestep the spotlight, he says in an interview from Schneider's new headquarters in Billancourt, a suburb of Paris, is "to be very clean." Regarding the specifics of his case, the 64-year-old CEO bristles. "The prosecutors claimed there was embezzlement to the detriment of the minority stockholders. The opposite is true. When I came to Schneider, the net value of Cofibel [a Belgian subsidiary] stock was zero. The day I was arrested, it was worth more than 4,000 French francs ($824) per share. How could I have embezzled anything?"
Today, Pineau-Valencienne is trying to put his days as a fugitive behind him: The arrest warrant has been lifted, and the CEO is cooperating with Belgian authorities, returning-incredibly-to provide additional testimony. A five-month audit by international accountants Deloitte Touche Tohmatsu concluded in January that Schneider had committed no wrongdoing, though it held that Jean Verdoot, former managing director of the Belgian subsidiaries Schneider acquired, had embezzled a fraction of the total amount in question.
The wild melee leaves many questions unanswered. Among them: If two European countries can't work together smoothly on a simple business investigation, how can they ever negotiate the complex trade, tariff, and currency arrangements required to dissolve borders and breathe life into fading plans for the European Union?
WANTED: DEAD OR ALIVE
Pineau-Valencienne is an unlikely protagonist in this potboiler-or farce, depending on how you look at it. Educated at Harvard and Dartmouth, he ran the RhÃ´ne Poulenc petrochemicals division for six years before becoming head of Groupe Schneider in 1981. He was named businessman of the year by French business magazine Nouvel Economiste in 1991; honored by the French-American Chamber of Commerce in 1993; tapped to serve on several U.S. blue-chip boards including Bankers Trust, Whirlpool, and the Equitable Cos.; and rumored to be the next head of Patronat, France's employers' federation. Currently, Schneider is one of France's top 25 corporations, with 1994 revenues of $10.1 billion and net profits of $122 million, a 73 percent jump from the previous year. A successful $2.23 billion takeover in 1991 of Square D, a Palatine, IL-based electrical equipment company, gave Schneider a toehold in North America and the ability to hold its own against global competitors such as General Electric and Westinghouse and Europe's Siemens and ABB.
The story began with PineauValencienne's plan to restructure Schneider, a one-time European leader in steel and heavy industry that went on a diversification spree in the 1960s. When Pineau-Valencienne took the reins, he sold off the shipbuilding, ski equipment, fashion, and travel-agency businesses, planning to focus solely on electrical distribution. As part of this ongoing process, he offered in September 1992 to buy out minority shareholders in two fairly unimportant Belgian subsidiaries-Cofibel and Cofimines.
Upon completion of the deal, shareholders complained the companies had been undervalued. Schneider reached an out-of-court agreement with some of them at the end of 1993, but others remained unsatisfied, and a judicial inquiry ensued.
Belgian prosecutors lodged two charges against Pineau-Valencienne and Groupe Schneider: First, they alleged that dividends from Belgian offshore companies had not been distributed to all shareholders, with some 3 billion Belgian francs ($105 million) supposedly funneled into Schneider at the expense of its Belgian subsidiaries between 1988 and 1992. And they alleged that offshore companies and assets worth BFr4.8 billion ($168 million) had been hidden from regulators and shareholders in Cofibel and Cofimines.
In May 1994, Prosecuting Judge Jean-Claude Van Espen asked PineauValencienne to come to Brussels and answer a few questions. After 20 hours of intense questioning, the CEO was thrown into Brussels' Fore't prison for 12 days. The case erupted into a media circus.
French newspapers gleefully accused the Belgians of spite. Les Echos, the Francophone financial daily, called Pineau-Valencienne's arrest audacity, and the leftist French newspaper Liberation led with the headline "Small-time Belgian judge locks away big-time French company chief." Belgium, on the other hand, retorted that French judges would have behaved in exactly the same way if they were not in the pockets of the business establishment.
Edouard Balladur, then prime minister of France, even called Jean-Luc Dehaene, his Belgian counterpart, about the affair, while a group of 35 leading French industrialists-including former Prime Minister Edith Cresson-placed on May 29 a full-page advertisement in Journal du Dimanche supporting PineauValencienne.
"It was such a political issue," says Pineau-Valencienne with a sigh. He flatly calls his case the "revenge of the judges." "When a prosecutor gives information to the media, a judgment is made on you. You may well be innocent, but the public finds you guilty. The prosecutors become the [new] judges, and the media become the guillotine. They not only judge you, they execute you."
So Pineau-Valencienne jumped his bail of FFr2.5 million and refused to return to Brussels for further questioning, subsequently becoming the subject of an international arrest warrant and effectively confined in France (French law does not permit the extradition of a French citizen). "The declaration by the prosecutor was incorrect," Pineau-Valencienne asserts. "We decided to take our time and do a full audit, and when we were ready, we would give the real information. We were not going to be attacked the way we had been in the beginning."
He is proving to be correct. PineauValencienne has returned to Brussels in the meantime and will continue to provide information requested by the Belgian authorities. Pineau Valencienne's protestations to the contrary, the cleanup drive is a healthy attempt to subject business leaders to the same accountability as here in the States. His case undoubtedly was helped by the fact that the five-month independent audit by international accountants Deloitte Touche Tohmatsu concluded in January this year that no funds had been diverted from Schneider's Belgian subsidiaries, nor were the interests of the minority shareholders harmed in any way.
Regarding the complicated arrangements between the Belgian subsidiary and its Zairian mining interests, PineauValencienne says the value of the assets was virtually nil by 1994 when they were sold for a symbolic one franc.
Deloitte Touche Tohmatsu confirmed that an offshore network was set up to protect the company's mining interests in Zaire from political upheaval and possible nationalization. It did, however, conclude that BFr237 million ($8.3 million) had been diverted by Jean Verdoot, managing director of Cofibel and Cofimines in the late 1980s, but offered no further explanation. Groupe Schneider will not comment, saying this issue is still under investigation. In fact, the truth may never be known, as Verdoot died of a heart attack in 1993.
They say time heals all wounds, and Pineau-Valencienne has become somewhat sanguine about the affair. But he worries that there appears to be no easy way to stop what he regards as an unpleasant trend in European business: muckraking.
"I am not blaming the judges," he says. "I am blaming the media who take advantage of a situation to go into a form of journalism they call 'investigative.' I prefer to call it an inquisition."
AFFAIRS OF DISHONOR
Something's rotten in the state of France. Les affaires, as the French press has benignly dubbed 18 months of scandals, have reached the highest ranks of the French business establishment. Even before the strange case of Didier PineauValencienne, France had surpassed Italy as the hotbed of corporate and political impropriety.
Prime Minister Alain JuppÃ© came under attack for accepting cut-price apartments from the Paris Council in what has been called the "flats-for-the-family affair." Pierre Berge, a close friend of former President Francois Mitterrand, has been charged with insider trading during his time at the helm of luxury group Yves Saint Laurent. Pierre Suard, head of diversified telecommunications firm Alcatel Alsthom, was accused of funneling nearly $1 million into home improvement-his own. And the mayors of Lyons and Grenoble are under investigation or in prison on similar charges.
Is this clean sweep driven by media exaggeration, an infection that Groupe Schneider CEO Didier PineauValencienne and others claim is transmitted from the U.S.? Or is it part of an attempt to subject both executives and politicos to more scrutiny, a propensity, one might argue, that also stems from the other side of the Atlantic?
In the past, a blind eye was turn-ed to questionable corporate maneuvers, partly because the careers of the French eminences grises traditionally straddle both public service and business, leading to a blurring-and often, conflict-of interests. The mix is complicated by the fact that the careers of these high-fliers normally take off after graduating from one of the Grandes Ecoles, which produce an inbred, old boy network rivaling that of Harvard Business School or Oxbridge.
Political decentralization in the early '80s also opened the doors to potential conflicts. Larger budgets and new powers were given to regional and local institutions, which could then grant public works contracts to the private sector. Hammered by intense competition, construction and utility companies found that winning contracts hinged on paying kickbacks, often in the form of donations to political parties.
Finally acknowledging such impropriety, France has attempted to control corporate governance. The recent ViÃ©nor report, commissioned by the French government, emphasizes that directors should act as representatives of their companies and not in their personal interests. It proposes more independent directors and the creation of audit, remuneration, and appointment subcommittees.
However, the burning question remains: If Europe has always implicitly condoned corporate misbehavior, why the sudden change? The establishment blames the media. Laurent Fabius, a former French prime minister, is among those who claim gunning for public figures is "a dangerous tendency that comes from America."
But the true answer may lie in the simultaneous reassertions of independence of the French legal system and the press. The leftist papers, of course, never were afraid of tweaking authority. Now it seems mainstream papers are following their lead. The French magistracy, meanwhile, has become less servile to the business establishment.
Cynics argue that following the success of New York Mayor Rudolph Giuliani-who made his career in the '80s by hauling organized crime bosses and Wall Street white-collar criminals into court-his European counterparts want to turn themselves into national stars. And French prosecutors have more to prove than most as they generally have been seen as fawning servants of the elite.
More probably, globalization of business and opening of markets simply is whipping France into shape as international executives seek a level playing field and refuse to tolerate corruption. Whatever the answer, it is evident that justice no longer will be figuratively and literally blind. The lady's tolerance of European business hijinks clearly seems to be on the wane.
Adrian Murdoch is associate editor of London-based WorldLink magazine.
Home health care often is cast as a "mom-and-pop" industry staffed by nurses who visit Grandma's house to check her blood pressure. But that may change with the coupling of Abbey Healthcare Group and the Homedco Group.
As a $1 billion company in a business dominated by smaller players, the merged company, Costa Mesa, CA-based Apria Healthcare Group, hits the ground with sufficient market muscle. But the strong-willed, disparate CEOs of both Abbey and Homedco will retain management roles in the new entity, and some observers wonder whether they will be able to work together.
Downplaying the notion that chemistry is a problem, Abbey's Timothy Aitken and Homedco's Jeremy Jones were models of congeniality during a recent interview, nodding silently in assent to each other's pronouncements. Among the headlines: Jones will handle day-to-day operations as chairman and CEO, while Vice Chairman/ President Aitken focuses on marketing. Larger firms will fare well as cost-conscious managed-care providers seek one-stop shopping with full-service, home-care vendors. Internal cost efficiencies, too, helped compel the Homedco/Abbey combination.
"The merger can produce savings of $50 million a year right away," says Aitken, who predicts Apria will be a $5 billion business in five years. In the session's single difference of opinion, Jones politely takes exception to the revenue forecast. "That answer probably would not have rolled off my lips," he says. "But even if we only do $3.5 billion, that ain't all bad."
The driving force behind the home health-care business is simple: As doctors, hospitals, drug firms, and managed-care providers scramble to cut soaring healthcare costs, it's cheaper to treat many types of ailments outside hospitals. "Home care transfers overhead from the hospital to the patient's home," says Ann Logue, an analyst with San Francisco-based Volpe, Welty & Co., who expects the $22 billion home health-care market to expand at a healthy 10 percent clip this year.
With a client list that includes HMOs and insurers such as United HealthCare, Pacificare, Prudential, Aetna, and Metropolitan, Apria seems poised to capitalize on such growth through each of its major businesses: respiratory therapy, infusion therapy (drug injections and hydration), and medical equipment.
While the battle to slash Medicare spending—more than a third of Apria's business—is just revving up on Capitol Hill, analysts see the company riding out the storm to do around $1.1 billion in revenues this year. That would make it the market leader, ahead of the $1 billion Kimberly QualityCare division of Olsten Corp. and $450 million Coram Healthcare, which recently failed to acquire Lincare Holdings after its stock price hit the skids.
Precise market-share calculations are complicated, because most players don't compete head-to-head on all fronts. But consolidation seems logical as companies seek to provide a breadth of health-care services. Indeed, prior to the $1.2 billion merger, both Homedco and Abbey gobbled up dozens of smaller firms. While 60 percent of home-care services are still being provided by mom-and-pop companies, Jones believes the major, national companies have plenty of room to grow.
"I think they are building a very lean machine to take on the challenge of cost pressures," says Vivian Wohl, managing director of San Francisco-based Robertson, Stephens & Co. "They will be well-positioned in the home health-care industry of the future," with far fewer major players.
Former Abbey CEO Aitken, 50, is a brash investment-banker-turned corporate doctor and the grandson of British newspaper magnate Lord Beaverbrook. In an interview with CE last year, he caustically expounded on his decision to terminate 1,000 employees when he joined Abbey in 1991. Aitken then asked those remaining to give up bonuses, take pay cuts, postpone vacations, and work overtime in an effort to recover from a 1990 loss of $13.8 million. When the restructuring job was done, and Aitken assumed the chairman's position, he pulled the plug on the CEO who succeeded him.
By contrast, Jones, 53, is a conservative Southern Californian who once sold medical equipment out of his station wagon. Though generally reserved, he does have his peevish side. Following a 1993 CE profile, Jones took exception to his portrayal as a critic of the Clinton health-care plan. The result was a polite, but tenacious, letter to the editor.
Negotiating the merger, the executives once found themselves at loggerheads. "We had a disagreement over performance," says Jones. "Abbey had taken some write-offs in the second quarter of 1994, and we found it hard to believe the company could achieve the numbers Tim projected."
Abbey eventually hit the mark, and Jones pulled the trigger last June.
For now, an atmosphere of mutual respect seems to prevail. That's perhaps because Aitken and Jones have a history of working together. "When I got involved with Abbey and the home health-care business, one of the first people I went to see for advice was Jerry," Aitken says.
"Jones is a mild-mannered professional health-care executive, who appears to have less of an ego," says Thomas Snow, an analyst at New York-based Buckingham Research. "Aitken is an outspoken professional dealmaker who probably won't be at Apria for the long haul."
While Aitken typically wears the black hat, says Volpe, Welty's Logue, there should be no misunderstanding:
"Jerry Jones is no pushover," she warns. "No one is going to run roughshod over him."
JEREMY M. JONES,
CHAIRMAN AND CEO, APRIA
Born: Bel Air, MD.
Education: BBA, 1963 University of Iowa (marketing major).
Family: Wife, Pat. Children: KC, 27, and Andy 25.
Boards: On Assignment, National Association of Medical Equipment Services, National Association for Infusion Therapy. First job: Sales representative for American Hospital Supply. Outside Interests: Travel, golf.
Last book read: "Secrets of the Street," by Gene Marcia'. Greatest Influence: His family.
Philosophy: "Have respect for others. Always concentrate, first, on what is most important and that which will produce the greatest result."
Car: 1986 Mercedes Benz 560 SEC.
Biggest challenge: To make sure 1+1 becomes 11 (the merger of Abbey and Homedco).
TIMOTHY M. AITKEN,
VICE CHAIRMAN AND PRESIDENT,
APRIA HEALTHCARE GROUP
Born: United Kingdom.
Education: Repton, England, the Sorbonne in Paris, and McGill University in Montreal. Family: Wife, Sally. Children: Natasha, 23; Brookie, 21; Anoushka, 20; Theodore, 19; Charles, 16.
Boards: Aitken Hume International, Leisure Time international; Securities Centres, plc.; TV-am.
First job: Junior reporter on London Evening Standard.
Outside Interests: Sailboats, politics, and tennis.
Greatest Influence: Lord Beaverbrook, Aitken's grandfather.
Last book read: Margaret Thatcher's autobiography and "Churchill: A Life," by Martin Gilbert.
Guiding principle: Family motto—"Res Mihi Non Me Reybus"— designed by his father's godfather for his grandfather, means "things for me, not me for things."
Greatest mistake: "I was 19 years old. At a formal luncheon, I wanted to tell my grandfather how much I appreciated all that he had done for me. I was inhibited about speaking out, and was constantly being interrupted. I thought I would have the opportunity later in private, but two weeks later my grandfather died."
Best decision: Moving to U.S. at the end of the 1980s.
Highly paid management consultants constantly remind us that employees are our most valuable resource. However, we rarely treat human resources management as strategically important, often overloading the HR department with paperwork and procedures instead of implementing technology such as electronic forms to enhance productivity and streamline work flows.
The three most important HR functions are staffing, training, and development, / but they usually are superseded by producing employee procedure manuals and coordinating sensitivity training seminars to avoid lawsuits against the company. The other problem is that HR systems typically are task-oriented, so they tend to train employees in completing tasks, not in simplifying business processes.
Technology can go a long way toward cutting down time and mistakes in these areas.
Companies would do well to use software to:
- Strive to add value by level. In a multi-unit operation (particularly a retail or service company), CEOs often think of a district manager as simply a location manager times 10, and a regional manager as the district ager times 10. However, your approach should add value at each level: The location manager should have certain responsibilities; the district manager should have the same responsibilities, plus additional ones such as personnel and cost. This moves staff from the concept of location management more easily to the concept of general management-and one that can be facilitated by a central computer system that allows all managers to share information.
- Manage people, not litigation. Your HR department was formed to help attract and retain the best employees. Today, it mostly scrambles to provide documentation when the company is sued. Why do so many companies end up in court? Aside from the fact that lawyers want to relieve you of your wallet, the people doing the hiring and the managing don't have the right tools or information to make good decisions-mainly because they are overwhelmed by the hundreds of rules that apply to the hiring process.
A software package can sort these rules and make them available to human resources managers at the stroke of a key. In addition, the software can guide HR personnel hrough each step in the processes of conducting performance appraisals or disciplining employees.
- Use hiring software. Implementing electronic forms; electronic mail; and hiring software can eliminate paperwork, create a central, universally accessible HR communications/information hub, and codify hiring criteria.Disney Stores uses electronic forms software to cut weeks out of the new employee hiring process by directly inputting information onto the computer system instead of filling out papers and entering the data later.
A major foodservice company uses an automated interviewing package to help location managers ask the correct questions in order to hire the right employees. Based on interviewees' answers to certain questions, the program comes up with additional inquiries. For example, if an interviewee possesses a Bachelor of Science degree and worked for several years in a non-retail environment, the software raises a red flag and prompts the interviewer to ask why that person wants to go into retail now.
Other packages allow a company to formulate a set of rules that describe the type of employee it requires, and all potential employees' credentials can be run against those criteria to determine the best match.
- Implement computer-based training. HR computer systems are great at teaching rote functions, freeing human beings to concentrate on the more personal areas such as on-the-job observation and feedback. For example, Famous Footwear uses an automated tutorial software system to train new employees on particular procedures, such as ringing up sales on the cash register and switching shifts. This allows the location manager to focus on teaching new sales associates how to deal with the public.
Implementing these technologies will help. Implementing them in an integrated way (that is, using automated interviewing, computer-based training, and evaluation software, along with networked electronic mail and electronic forms) will help more. Relegating the HR department to a peripheral place in the corporate structure is a mistake-one that may well drain the bottom line.
Randall K. Fields is chairman and chief executive of Park City Group, a Utah-based developer of the PaperLess Management concept, which utilizes flexible electronic management systems.
Corporate alliances continue to expand at an explosive clip. A new model evaluates partnerships in the airline, biotech, chipmaking, and tobacco industries, yielding insights on what to do and when.
In recent years, corporate alliances involving both public- and private-sector concerns have grown at an explosive clip. Three major forces are driving this trend: growing international competition, the accelerating pace of technological change, and the globalization of markets around the world.
As a result, alliances are being created that yield distinct competitive advantages in three types of markets: sheltered, standard-cycle, and entrepreneurial. Markets and benefits are rarely archetypical. However, the following model may help to clarify the broad range of alliance options and, once established, to sustain advantages amid rapidly changing conditions.
Alliances in slow-cycle, sheltered markets often seek to establish a monopoly, either in terms of geography or products with one-of-a-kind attributes. A product design that is not easily imitated may dominate its market for decades.
Geographic monopolies often involve alliances between public and private concerns. For example, take the recent agreements between Eastern European governments and multinational tobacco companies. These companies provide capital and expertise in return for the right to manufacture and sell both their brands and the local brands they help produce. In so doing, they widen their scope of operations and increase their scale-based advantages.
Such alliances also are common in the energy industry. Countries-particularly those making a transition to a market economy-seek outsiders to maintain and repair their infrastructures and to help them with energy conservation. This generally requires an up-front investment from companies willing to serve these markets, which typically band together in consortia. In exchange, governments grant long-term performance contracts under which operating savings can pay for the initial capital outlay.
Alliances motivated by rents from shielded markets also may be based on technology and aim to create hard-to-imitate products. Oracle Systems has allied itself with Sun Microsystems, Apple Computer, Microsoft, and Hewlett-Packard to develop software applications for its new co-operative-server data base. If successful, the alliance will help make Oracle's product a marketplace standard, reducing the incentives for others to develop competing systems and giving the company a larger, long-term, shielded market. For other alliance members, the payoff is early access to Oracle's system, and a share in the rents its new capabilities offer to users.
Alliances in standard-cycle, oligopolistic markets typically strive to fuse complementary capabilities, combining large teams of workers and establishing large-scale, standardized production and distribution. Competitive advantages in such environments are generated by high volume and tight cost and resource controls.
Scale-driven alliances maximize advantages in industries that serve increasingly global markets or in situations where major national markets are too small to support efficient business operations. Another driver is the increasing cost of technology development, notably in the microelectronics, telecommunications, and airline industries.
Amid significant industry deregulation, many airlines have formed scale-based alliances. American, United, and Delta were on board early with their purchases of the former international routes of PanAm and TWA. Smaller U.S. carriers, such as Northwest, USAir, and Continental, seek alliances with foreign airlines to provide a similar global capability. KLM Royal Dutch Airlines strengthened Northwest through an infusion of equity, while benefits accrued to both companies through the creation of a single framework to coordinate advertising, schedule planning, and pricing. Alliances in the automobile industry-such as that between Ford and Mazda-have followed a similar pattern.
In addition to scale-based benefits, however, Ford sought increased access to the Japanese market, which historically has been difficult to penetrate because of its peculiar distribution system, institutional relationships, and government policies. Xerox expanded its Japanese position through an alliance with Fuji, and the pairings of Merck and Banyu Pharmaceutical; Ely Lilly and Shionogi; and. Caterpillar and Mitsubishi were cut from the same mold.
In the chipmaking business, meanwhile, U.S. and Japanese companies have hooked up to defray mushrooming R&D and production costs. The affiliations of IBM, Siemens, and Toshiba; and Advanced. Micro Devices and Fujitsu were driven by this factor.
Alliances in dynamic, entrepreneurial environments take a different shape and produce different advantages. In such markets, it is critical to move quickly, before the window of economic benefit disappears. Factories often are designed for compressed lives of only two or three years. Product life-cycles, prior to imitation, may be even shorter.
The pharmaceutical industry is among the world's fastest-and the most capital-intensive. In the U.S., corporate R&D expenditures average around 16 percent of sales, and by some estimates, it takes $250 million and 10 years to clear the regulatory process and bring a drug to market. Then, by the time a drug is ready for sale, it typically has only a few years of patent life left.
But collaboration on research and development-with responsibilities often divided on the basis of corporate expertise-increases the likelihood that a research process will yield a marketable commodity and may significantly decrease time to market. Amgen and Genetics Institute were racing to develop an anti-cancer drug, erythropoietin. Both start-ups were strapped for cash, with limited downstream capabilities and no overseas markets. Amgen established two strategic alliances, one with Johnson & Johnson and another with the Kirin Brewery of Japan. Genetics Institute paired with Japan's Chugai Pharmaceutical and Goehringer Mannheim of Germany. The result was a split decision, with Amgen winning the patent battle in the U.S. and Genetics Institute first to market in Japan through Chugai.
Often, restrictive governmental policies or lack of public resources shapes the infusion of new economic benefits through alliance. Moving ahead, as we design public and corporate policies, the clarion call is for cooperation that benefits both sectors.
Both sectors must recognize that corporations drive economic growth. Government can assist by creating the business conditions necessary to nurture alliances that will help firms move profitably into an increasingly complex future.
Elizabeth E. Bailey is the John C. Hower Professor of Public Policy and Management at The Wharton School of the University of Pennsylvania.
Weijian Shan, a former faculty member at The Wharton School, is currently vice president and the business representative to China for Morgan Guaranty Trust in Hong Kong.
Hackers such as Kevin Mitnick, who earlier this year was arrested for breaking into Motorola's computer system, strike fear in the hearts of most corporate managers. But to Kavelle Bajaj, these high-tech outlaws are just another business opportunity.
Bajaj, 44, is president and founder of I-NET, a $235 million technology firm in Bethesda, MD, that helps organizations network and upgrade computers, manage sophisticated digital information, and make sure unauthorized users don't break into their systems. "We're in the business of selling solutions," Bajaj says.
I-Net manages computer operations for the White House and Department of Defense, and counts BP, MCI, and Exxon among its clients. While other firms provide some similar services, none manages and networks all parts of a system as I-NE I does, says analyst Paul Callahan of Cambridge, MA-based Forrester Research.
Bajaj is an unlikely corporate titan. A New Delhi native, she moved to the U.S. in 1974 for an arranged marriage to computer scientist Ken Bajaj. After a few years as a housewife, she took some computer courses and realized businesses would need help networking their PCs and mainframes.
With a $5,000 loan from her husband-who is now I-NET's CFO-and additional financing from a Small Business Administration program allowing minority-
owned companies special access to government contracts, Bajaj hired some computer specialists, and I-NE I got its first contract to upgrade the Department of Commerce's word processors. Since then, the 10-year-old company has continued to grow, weaning itself away from government contracts in recent years and targeting private business. Last year, the company's revenues rose 58 percent from $148 million.
Bajaj doesn't claim to be a techno-wizard; she hasn't even ventured onto the Intemet yet. "I just try to hire the best people and let them do their jobs," she says.
Her goal is to go public in the next year and become a $1 billion company by 2000. Forrester's Callahan believes I-NET runs the risk of being gobbled up if it goes public, but sees $1 billion as "very doable, if the company continues to attract talent as it has."
Bajaj isn't worried. As always, the trick is anticipating companies' needs. "The key to success," she says, "is being on target."
Most CEOs know their way around a balance sheet, but few carry the same liabilities as Jim Hindman's Youth Services International.
Publicly held YSI runs reform schools for troubled youths; most of them are privatized programs formerly administered by state governments.
Since it was launched in 1992, Owings Mills, MD-based YSI has placed more than one delinquent on the straight and narrow. But Hindman relates the story of a YSI graduate who won a scholarship to an Ohio college but chose a school in his former, inner-city neighborhood instead. A few weeks later, the teenager's life ended with three bullet holes in his back.
"We have an epidemic on our hands," says Hindman, himself a reform-school product and the founder of the Jiffy Lube automotive franchise. "We'd better address our children before the problems and burdens they have kill their future."
YSI, with revenues expected to top $34 million in fiscal 1994, operates nine residential and community-based programs in Maryland, Iowa, South Dakota, Tennessee, and Utah. The programs, which accept both boys and girls, revolve around education, staff and peer support groups, recreation, and spiritual discipline. Some students are paid to work at the facility; the elbow grease helps YSI to keep its costs some 25 percent lower than those of state-run programs, which are hamstrung, Hindman says, by union rules demanding staffing ratios of more than twice that of YSI.
Thus far, the approach seems to be working. Net income for the nine months ended March 31 hit $1.4 million, compared with a loss of $1.5 million in the year-earlier period. Analysts expect strong growth to proceed, driven by the continuing privatization of youth facilities and ongoing problems with juvenile crime. Every 27 seconds in the U.S., a minor is arrested for a street crime. Between 1979 and 1990, funding for rehabilitation facilities jumped 146 percent, and the trend is expected to continue under the Clinton administration.
"For the past five years, we have been mining the investment area for opportunities in the privatization and outsourcing field, particularly with emphasis along the education vein," says Jeffrey D. Saut, director of research at Baltimore-based brokerage Ferris, Baker Watts. "We rate YSI a buy."
Hindman says the profit motive offers his managers an extra incentive to provide top-quality services. YSI offers stock options, and it is introducing an employee stock-ownership plan.
"With privatization, you bring to the marketplace the opportunity to be rewarded for a real contribution," says Hindman, 57, a stocky man with brilliant, blue eyes, who seems to embody the tough-talking discipline of Knute Rockne and the compassion of Father Flannigan. "That's something lacking in the public sector."
Not that the rehabilitation business is without its difficulties and risks. When it comes to reform schools, communities often take a "not in my backyard" ap proach. And when dealing with cash-strapped state governments, there is always the possibility of a canceled contract. To offset the effects of any individual loss, Hindman is moving quickly to expand the number of facilities, partly through acquisitions.
Hindman made his first million in the early 1970s buying and selling nursing homes. Semiretired at 40, he landed the head football coaching job at Western Maryland College in 1976. One day, a player complained it was no longer possible for the average person to become a millionaire. Hindman set out to prove him wrong, launching Jiffy Lube and building it to 1,000 outlets within 11 years. In 1990, Pennzoil bought an 80 percent stake in publicly held Jiffy Lube for $35 million. Hindman, a devout Christian who credits his faith for part of his business success, used roughly half of his $2.3 million profit from the deal to launch YSI.
Hindman holds out hope that insurance companies may one day cover the services provided by rehabilitation centers, but he remains confident growth will proceed nonetheless.
"States need to stretch dollars," he says flatly. "Our cost and time efficiencies are one way to do it."
Jeffrey P. Sudikoff, founder, chairman, and CEO of IDB Communications, was on the road promoting his company's initial public offering, when somebody in Boston raised his hand and asked, "Mr. Sudikoff, will you be able to manage this company when you're $50 million in sales?"
"I thought to myself, 'No way,' but I looked him right in the eye and replied, `Absolutely,'" Sudikoff remembers.
For a man who is worth millions, Sudikoff, 38, seems to be uneasy about his success at building a multimillion-dollar international communications corporation. "I'm still here," he says. "Some days that amazes me."
From practically nothing, Sudikoff built IDB into a $310 million global distributor of telephone, radio, and television transmissions services, and mobile satellite communications. Net income jumped 41 percent last year to $12 million.
"In the beginning, we capitalized our business with our personality and our openness, which was charming to our vendors," Sudikoff quips, "and so they allowed us to string them out and capitalize our start-up on their receivables."
Essentially, IDB's business is pumping digits in the form of telephone calls, faxes, and computer data across international satellite and undersea fiber-optic cable pipelines. IDB has no retail operations; the communications it handles come from other carriers. "We are a carrier's carrier; we're in the wholesale business," says Sudikoff, who is quick to point out that he doesn't have an MBA and that he learned about finance on the street.
In size, with just under a two percent market share among international carriers, IDB ranks No. 4, right behind AT&T, MCI, and Sprint. "We used to be No. 6, but we bought Nos. 4 and 5," Sudikoff says, chuckling. In 1992, Sudikoff used IDB stock to purchase WorldCom, a global long-distance provider owned by Swiss giant TeleColumbus. A year later, he purchased TRT Communications from Pacific Telecom.
Lessons learned from acquisitions?
"Don't linger on the process," Sudikoff says. "The first two acquisitions we did, we were smaller and newer than the companies we were purchasing. We forgot we were the acquirer, and that we had the plan. Lingering was costly."
Last month, Sudikoff and IDB faced a crisis. News that the company's auditors, Deloitte & Touche, resigned in a disagreement over first-quarter earnings detailed in an April 26 press release caused the stock price to plummet by half to close at $7 1/8 a share. A shareholder class-action lawsuit quickly followed, alleging that IDB senior managers made misleading financial statements. The Securities and Exchange Commission is looking into the dispute.
"We regret the impact on our shareholders of the resignation of our auditors," Sudikoff says. "But Deloitte & Touche has not called into question its unqualified audit of the results from 1992 or 1993. These events don't change the underlying fundamentals of our growing business."
In its 10-Q form released in May, IDB adjusted first-quarter revenues; cost of sales; and sales, general, and administrative costs. Cost of sales was increased $2.1 million to $72.1 million to reflect adjustments to the original purchase price accounting for recent acquisitions made by the company, although first-quarter net income of $8.8 million-nearly double that of a year earlier-remained the same as in the initial press release. Sudikoff is a corporate mustang with a beard: He hates three-piece suits, enjoys doing things his way, and isn't afraid to change directions. In fact, in May, he and a partner, Joseph M. Cohen, an IDB director, completed the private purchase of a 72 percent stake in the Los Angeles Kings hockey team for $60 million. Previous invitations to join the Young Presidents Organization politely have been refused; he says he's too busy and doesn't have enough time as it is for his wife and two young daughters. Employees at the company's corporate headquarters in the Los Angeles suburb town of Culver City know the only reason they need to wear a coat and tie is if they are going to see a customer. "I think it would be hard to ever work for someone again," Sudikoff says. "Ultimately, I would offend people in another organization. I would get the Ross Perot treatment. I don't follow someone else's drumbeat."
In his college days at Dartmouth, Sudikoff enjoyed being a radio news reporter and director, tinkering behind the scenes with broadcasting and radio transmissions, gaining early recognition during the 1976 New Hampshire presidential race. That led to starting his own company, towing a transmitter around to rock concerts and sending signals to radio stations for live broadcasts.
IDB has been most aggressive in Europe, especially the United Kingdom and Germany, moving into other places where deregulation is occurring or imminent. But in the U.S. market, IDB still faces hurdles.
"We just don't have the resources to put our own Candice Bergen on network television," Sudikoff says, referring to Sprint's television advertising. "So we have to focus our marketing energies and dollars on niches. We want to crawl around their ankles and kick them in the shins."
When he was given the top job at American Express Bank in March 1991, Steven D. Goldstein says, it was "like putting my face on a fire hydrant." Neglected while the parent company took its 1980s roller-coaster ride with Shearson and Lehman, AEB had gained a lot of autonomy, but not much profit. It generally kept a low profile inside and outside Amex. The bank, says Goldstein, 42, "did not feel or act mainstream." Many Americans, in fact, don't even know the bank exists, because it services only foreign clients.
Started in 1919 in Paris and other locations to cash Amex travelers checks, it has grown to have one of the top five international networks of any U.S. bank and has assets of $13.6 billion, with 81 locations in 37 countries. In Greece and India, it is the bank of choice for wealthy entrepreneurs.
But in the U.S., AEB recently was known mainly for its ill-fated purchase of Edmond J. Safra's Trade Development Bank in Geneva. The subsequent Amex feud with Safra ended with an $8 million Amex contribution to Safra's favorite charities and a severe PR setback for then-Amex Chairman James D. Robinson III. When the dust settled, the company shed the Trade Development Bank, and Robinson asked Goldstein to take over at AEB.
By 1991, AEB's net income was heading south to $60 million from $111 million in 1990, and problem loans were over 9 percent. "Within AEB," says Goldstein, the bank's chairman, president, and CEO, "there was a high degree of confusion about what business they were in. Each time they enacted a new strategy, they did not sever the ties with the prior strategy, so you can imagine over time a potpourri of activities, any one of which at some time was in vogue, but later was not. Bank officers and executives had real sympathy with the clients, but they didn't know how many they had, partly because there was no marketing department. They were dealing with lore, rather than facts." Goldstein immediately assembled a team of key people and made a fact-based study of the bank over 90 days. The country managers were asked to meet together for the first time in eight years, and companywide staff evaluations were made. "We substantially raised the bar for performance," Goldstein says. As a result, few of the bank's top managers kept their jobs, and half of the country managers eventually were replaced. Eleven AEB businesses were sold or closed; operations in two countries were shut down; millions of dollars of loans were written off; and in 1992, net income took another hit, down to $19 million after accounting charges. The study prompted AEB to refocus on providing services for wealthy individuals and their businesses, and selected financial institutions. These days, the bank comprises four core businesses: private banking, trade-finance and other commercial services, treasury, and correspondent banking. In addition, AEB is more closely aligned with the overseas strategy of Amex's Travel Related Services, especially in such areas as credit, loans, and banking for foreign Amex cardholders. The bank shuns long-term business loans in favor of fee-based services and trading, and it has decentralized its decision-making process, traditionally coordinated from its New York headquarters.
Goldstein served nine years with Travel Related Services before moving to AEB. A native New Yorker, he graduated from City College and received an MBA from New York University. After a stint with Citicorp, he joined Amex as a TRS VP in 1982 and quickly became the first president of the Amex Centurion Bank a year later. By 1991, he was president of Amex International's Consumer Financial Service Group. "I'm not a banker per se," he admits. "I had demonstrated that I could build and turn around businesses." Indeed. AEB's net income last year jumped to $81 million, and non-performing loans shrank to 3 percent. Nonetheless, AEB comprises only a small part of the Amex machine, and Harvey Golub, chairman and CEO of the parent company, has stated his intention to grow the bank "modestly."
So Goldstein will continue to guide AEB, but would he eventually like to run Amex itself? "Yes," he says, "but the job's not available now."