Are High-Profile CEOs Effective?

The only thing more difficult than achieving success for startups is predicting who will be successful.   So much of it comes from decisions people make, and that usually starts at the top with the CEO.  Naturally, the traits that make for a good CEO at a startup are very different than what makes for a good CEO of a large corporation, be it publicly-traded or privately-held.  But in either case, you have to ask: are high-profile CEOs effective?

Seven years ago, GE (GE) CEO Jack Welch resigned, and after what must have been the highest profile succession planning process, Jeffrey Immelt was handed the keys to the car - or, shall I say, plane.

Immelt was one of the three lieutenants who were in the public race, along with Jim McNerney and Robert Nardelli. In a very odd and somewhat shocking twist, Immelt was chosen to replace Welch and McNerney and Nardelli were let go.

The idea was: after the grueling race, McNerney and Nardelli would never recover and report properly to Immelt. Right or wrong, it was one more amazing page from Welch’s playbook, which has been replicated but not quite duplicated (or is it the other way around; you know what I mean).

In all fairness, Immelt took over on September 11, 2001. That’s bad timing, to put it mildly. Exasperating matters was the fact that GE was a major jet engine provider and as such the 9/11 attacks affected GE more profoundly due to its exposure to the travel industry. However, like any self-respecting diversified entity, GE was also a supplier of military jet engines… something that - thanks to 9/11 - boomed in the 21st century. In that sense, net-net, you almost have to ask, should GE not have exceeded the market? It has not.

While GE has continued to do well, its stock has languished: the stock is down 25% since 2001, causing some to call for Immelt’s head. Immelt has also faced pressure from some to spin off NBC, which he merged with Vivendi’s Universal.

See our video profile on NBC Universal here, and our post on How Much is NBC Universal here.

This past month, CNBC host Maria Bartiromo sat down with Jim McNerney, who now runs Boeing (BA). He had actually left from GE for 3M, but then was lured to Boeing (he had run GE’s jet engine business, if my memory serves me right). Here is an excerpt and intro to her interview:

 

Boeing (BA) Chairman and CEO Jim McNerney has taken his share of hits lately. The ambitious 787 Dreamliner is about 15 months behind schedule, and in late March, Boeing lost out on a multibillion-dollar contract to build a fleet of refueling tankers for the U.S. Air Force. That deal, which is being protested, went to Northrop Grumman (NOC) and partner EADS (EADS), the European consortium that builds the Airbus and is Boeing’s archrival.

Boeing’s stumbles have caught many by surprise, primarily because McNerney, a disciple of former GE CEO Jack Welch, is held in such high regard. After a stellar 19-year career at GE, McNerney became chairman and CEO of 3M, moving to Boeing as chairman and CEO in 2005. I talked with McNerney on May 22 in Chicago at a conference on competitiveness sponsored by the Commerce Dept.

 

The good news ends there, with McNerney’s past. Sure, Boeing could not have predicted the slowing economy and rising oil prices, but its failure to deliver the Dreamliner in time will serve as McNerney’s achilles heel, in the end.

What about Nardelli? Home Depot (HD) lured Bob Nardelli immediately. To put things mildly, that was an even bigger disaster.

The former GE lieutenant basically bombed the company after earning a payout of $210M to leave on top of $170M in salary since 2001. When he left, the story ran as follows:

 

Home Depot Inc. Chief Executive Officer Robert Nardelli, under fire from investors for earning $225 million while the company’s stock languished, resigned “by mutual agreement,” the world’s largest home-improvement retailer said.Nardelli, 58, will receive $210 million in severance payments, the company said.

Home Depot has lost market share to Lowe’s Cos. (LOW) during Nardelli’s six-year tenure, its shares have declined 7.9 percent and the company is headed for its smallest annual gain in profit in at least nine years.

“Ultimately the board felt the negativity associated with Nardelli was an impediment to his and the company’s success,” said Daniel Popowics, an analyst with Fifth Third Asset Management.

Nardelli, who joined Home Depot from General Electric, became a lightning rod for critics of excessive executive pay. Nardelli was the only board member to appear at the company’s annual meeting last year, where the size of his pay package was questioned.

“I know he’s been under pressure and that there’ve been dissidents in there,” said Marvin Roffman, of Roffman Miller Associates in Philadelphia, which owns Home Depot shares among $410 million in assets. “There had to be some kind of problem with the board.”

 

Nardelli left Home Depot and now runs privately held Chrysler, whom private equity firm Cerberus bought off the hands of Daimler Chrysler, ending that disastrous merger. Chrysler is set to lose $1.6B. To his credit:

 

A source inside Cerberus says that Nardelli will receive only $1 a year in base salary. This person would not go into detail regarding the rest of Nardelli’s pay package, and would only add that Nardelli’s pay will be directly tied to the success of Chrysler’s turnaround…

 

With all due respect to Jeffrey Immelt, he has not fared better.

GE’s stock price in October 2001: $40. GE’s stock price in 2008: $30. For a company worth $300B, everything else is irrelevant, after all. But compared to Nardelli and McNerney, Immelt has been a smashing success, I presume.

This all begs the question: were these men’s track records their downfall? They all came into their new positions with what can only be described as extremely high expectations…

Comments

[strategyleader]

Jack Welch was an exception in GE's successful history. His predecessors took stands but didn't make themselves the center of attraction. In addition, one of the rules of past GE CEOs was that when they retired they left the company. They were not invited to be members of th Board or have an office in the Corporate Headquarters. Welch won't go away and even though he is not part of the GE management team he still thinks he is.
In 2000, before Immelt was appointed a wrote an article for Chief Executive magazine entitled Succeeding a LEGEND, in which I described the problems that Welch's successor would face and how the new CEO could not continue to implement the Welch strategy. Of course this was before September 11th. Immelt has completed changed the GE game plan which was needed. However, I still am concerned about the expectations he has established and is fixation on GOING BIG/ GOING GLOBAL.
Take a look at my website and blog: strategyleader.com, in which I have a continuing assessment of Immelt and his strategy. It is called GEWatcher.
Bill Rothschild, author of global bestseller: The Secret to GE's Success.

[No Moss]

Great article! Fascinating insight. I will say in Immelt's defense that the EPS are up by 50% (2007 vs. 2001). That's not huge growth, but it is something. And in the year immediately prior to Welch's departure (Sept. '00 to Sept '01) the stock fell from $57 to $37.

[DennisTrigubetz]

The above list fails to include GE Capital's Gary Wendt who, after a bitter divorce, left for Conseco (another disaster).

Jack Welch was a highly competent but overrated CEO. His great GE success occurred during a very benign business climate.

All CEOs and upper management look good during fat times. I don't believe Jack would have done any better than Immelt after 9/11.

A contrarian book about Welch is AT ANY COST, by Thomas F O'Boyle.