The loneliness of the Chief Executive Officer: Louis Gerstner and IBM

by | 14 Nov 2009 | Business & Leadership

In his book, Who Says Elephants Can’t Dance, Louis V Gerstner, Jr. says a rather moving and also very insightful thing about the psychology of being a Chief Executive Officer.

Gerstner’s book includes his farewell letter to all staff, confirming his retirement. In it, he says this:

‘When I joined IBM [. . .] the board asked me to focus on one short-term objective: save the company. Given my very limited knowledge of IBM at the time, I quite honestly did not know if that could be done. I certainly didn’t know how long it might take. Well, with the support and leadership of thousands of people, we did turn the company around. That work and my original mandate was largely completed by the mid-nineties. But, along the way something happened – something  that, quite frankly, surprised me – I fell in love with IBM.’

It’s not the falling in love with IBM bit that I find moving: it’s the bit that comes later.

“As much as I meant those words [. . .] I now realise that I was always – even to the end – an outsider. My most senior colleagues [. . .] who worked side by side with me and deserve as much credit as I do for IBM’s renaissance, share a perspective I will never have. They have lived their business careers at IBM. They have seen it all: the glory days, the agony days, the turnaround days.  Their roots are deeper than mine, their experience richer. For me, IBM pre-April 1 1993, is a mansion full of many rooms but without doors. I never entered it. I dreaded going into that house. I had to drive change, and I knew that all the reasons not to change were in those rooms. I can recall numerous occasions in the early days when I would outline a change I thought was necessary, and my team would say: ‘Oh, we tried that before and it didn’t work.’ I couldn’t explore the ‘befores’ or I’d learn all the reasons not to change.” [1]

I love the honesty of those sentences: ‘I dreaded going into that house. I never entered it.”  They express the loneliness of the CEO very well. In that old IBM house is a genuine sense of belonging: camaraderie; the shared pain of difficulties faced together; the awareness of a common heritage and the desire to resist change; the warm bath of familiarity with the way things have always been done. The CEO himself – certainly in the case of the massive cultural change that was needed to prevent IBM’s collapse in the nineteen-nineties – could only stand on the threshold, looking at the brightly-lit human turmoil within. To immerse himself in the culture of the old IBM would be to experience doubt – to see the benefits of the old ways; to worry about what might be lost by such momentous change.

“You owe it to America to take this job.”

Gerstner has earned his place as one of the greatest change agents the corporate world has seen. The scale of the problem facing IBM in the early 1990s has faded from memory and is hard to imagine today.

The company was seen as a finished force in the computer industry: a dying dinosaur being pushed to the edge of extinction by the smaller, nimbler companies that had emerged from the technology revolution of the previous few decades. The large mainframe computer – IBM’s core product – was being eclipsed by the ubiquitous ‘desktop’ computer. IBM seemed to slow and too cumbersome to change; the company’s own favoured survival strategy was to break itself up into smaller, independent operating units.

Mainframe revenues had dropped from $13 billion in 1990 to a projected figure of less than $7 billion in 1993: the year that Gerstner was to take over as CEO, depsite his significant early reluctance to take on a challenge that he was far from convinced was achievable.  Even more scarily, IBM was at serious risk of simply running out of cash. But, in 1993, Gerstner was persuaded to take the job of chairman and CEO of the ailing giant. The head of the IBM recruiting committee made an unusual recruiting ploy: he told Gerstner that he owed it to the United States of America to take the job, and that IBM would, if necessary, get President Bill Clinton to call Gerstner and tell him to take the job. I expect this happens to you all of the time, but it impresses me. The potential failure of IBM was, indeed, seen as something that would represent a failure for corporate America. It was a big deal.

The man who invented the gold credit card

Gerstner got his MBA from Harvard Business School and went straight to work for McKinsey & Co, one of the world’s most prestigious management consultancy firms. Within nine years, he was a senior partner. He joined American Express as Executive VP of their charge card division and is the man who created the Gold and Platinum Amex card services. He became President of Travel Related Services and, after eleven years with American Express, joined RJR Nabisco as chairman and CEO – a role that he didn’t much enjoy.

RJR Nabisco had been created from the merger of food company Nabisco and the R. J. Reynolds Tobacco Company, and had been taken private by a massively leveraged buy-out from the private equity firm Kohlberg Kravis Roberts & Co (KKR). Nearly every other major private equity firm had also been involved in a wild bidding frenzy that saw offers rise from the initial management-sponsored proposal of $70 per share, backed by private equity firm Shearson Lehman Hutton, to the final, successful (and eye-watering) KKR bid of $109 per share. The board used a technicality to accept the KKR offer even though the management team had pushed their own offer as high as $112 per share. The CEO and President of RJR Nabisco, F Ross Johnson, stood to make as much as $100 million from the Shearson Lehman Hutton bid; as it was, his ‘golden parachute’ deal netted him a mere $53 million. Aaah.

One has to question whether Mr Ross Johnson’s main motivation in this whole process was really that of the company’s best interests. Time Magazine ran a cover story on Ross Johnson at the time with the headline: A Game of Greed: This man could pocket $100 million from the largest corporate takeover in history. Has the buyout craze gone too far? Um . . . yes?

Gerstner was left to pick up the pieces. The price had been too high, and the buy-out bubble of the 1980s burst after the RJR Nabisco deal; Gerstner had to shed $11 billion worth of assets in one year.

“That was a difficult time for me”, says Gerstner. “I love building businesses, not disassembling them. However, we all have an opportunity to learn in everything we do. I came away from this experience with a profound appreciation of the importance of cash in corporate performance – ‘free cash flow’ as the single most important measure of corporate soundness and performance.”

And when he took the helm at IBM, Gerstner was well aware that cash at the company was in danger of stopping flowing altogether.

“The last thing IBM needs right now is a vision”

You can take the man out of McKinsey, but you can’t take McKinsey out of the man.  And why would you want to?

When he arrived at IBM , Gerstner saw, first and foremost, a collection of clear-cut business problems. He famously (and not wisely, yet honestly) said to a press conference in July 1993, after his first 100 days, ‘There’s been a  lot of speculation as to when I’m going to deliver a vision of IBM, and what I’d like to say to all of you is that the last thing IBM needs right now is a vision [. . . ] What IBM needs right now is a series of very tough-minded, market driven, highly effective strategies for each of its businesses – strategies that deliver performance in the marketplace and shareholder value.’[2]

USA Today had already reported that IBM stock, down 6% since Gerstner had taken over, “has done nothing because he’s done nothing . . .  clearly he’s not a miracle worker.” [3]

How wrong the press were, on both counts – and how wrong (or self-deprecating) was Gerstner himself.  Or maybe he was just prioritising – as in: ‘first we get this essential stuff sorted out then we start to implement the vision.’  Or maybe he was making a rather nice distinction between ‘vision’ and ‘strategy’. As he says himself:

“During my many years at McKinsey, seeing many different companies, I was always amazed at how many executives thought that ‘vision’ was the same as ‘strategy.’ It’s very easy to develop visions. It’s the same thing as Babe Ruth pointing to the fences. How many do you think hit a home run within the next minute?”[4]

“Culture is the game”

But, in fact, not only did Gerstner devised a precise and entirely practical plan of recovery for IBM, he also had a genuine and quite radical vision for the company’s future: one that was in fact already deeply embedded in the company’s culture, but which had been apparently buried by the avalanche of new technology businesses, all of which just happened to be led by thrusting young men and women who had a vested interest in persuading the world – and IBM itself – that the company was a dinosaur condemned to extinction.

And, at the end, Gerstner had this to say:

“I came to see, in my time at IBM, that culture isn’t just one aspect of the game – it is the game.”[5]

Other blogs on this site will examine both the vision that Gerstner had for IBM – that’s right, the one that he denies having had – and the elegant mechanics of his recovery plan. It’s like watching a master clock-maker take up a broken timepiece and get it working again. But above all, and despite the technical brilliance of his recovery plan (and its common sense, and its occasional radical gambles) it is Gerstner’s ability to lead massive cultural change that impresses.

“The hardest part of these decisions was neither the technological nor the economic transformations required.  It was changing the culture – the mindset and instincts of hundreds of thousands of people who had grown up in an undeniably successful company, but one that had for decades been immune to normal, competitive and economic forces. The challenge was making that workforce live, compete, and win in the real world.  It was like taking a lion raised for all of its life in captivity and suddenly teaching it to survive in the jungle.”[6]

And, to come back to my first point, in order to lead this massive cultural change, Gerstner had to remain always to some extent the outsider, never quite able to enter the mansion with many rooms but no doors.

“I never entered it. I dreaded going into that house. I had to drive change, and I knew that all the reasons not to change were in those rooms.”

[1] Louis Gerstner, Who says elephants can’t dance? Harper Collins, NY, 2002, p 279-281

[2] Ibid., pp 68-69

[3] Ibid., p 57

[4] Ibid., p 222-223

[5] Ibid., p 182

[6] Ibid, p 177

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