May 14, 2008
The dominant CEO and the poisoned chalice
Jack Welch noted the other day that: “Nothing is as disgusting to me as some old CEO chirping away about how things are not as good under the new guy as they were under him.”
Mr Welch, the former chairman and chief executive of General Electric, must be disgusted at the moment. The turmoil in markets is bringing out quite a few former chief executives to kvetch about their successors.
The latest is Hank Greenberg, the former chief executive, and all-round dominant figure, at American International Group. Since his departure in 2005, he has been disgruntled but he has now blown his top in a letter to AIG directors.
Several top shareholders of AIG have called me expressing deep concern about the persistent and seemingly endless destruction of value at AIG. They, and I, are deeply distressed by the excessive loss of value . . . US life operations are stagnant, the company has lost its leading and unique market positions in China and Japan . . . in the more than three years since I left, AIG has added 24,000 employees . . . the equivalent of two Army divisions.
Mr Greenberg has a point that Martin Sullivan, his chosen successor, could have done better. But, in general, I think this is a case of a dominant chief executive building a business that no-one else could hope to control adequately and bequeathing to the new CEO a poisoned chalice.
Another example that springs to mind is Citigroup, the conglomerate rolled up by Sandy Weill, which his designated successor Chuck Prince was unable to run adequately. Like Mr Greenberg, Mr Weill regarded this as a result of poor execution rather than flawed design but I am not so sure.
Even Mr Welch has something for which to answer. His comment above came after he criticised Jeff Immelt, his successor at GE, for missing earnings expectations. Mr Welch added that, if the mishap occurred again, “I’d get a gun out and shoot him.”
What Citigroup, AIG and - to a lesser extent - GE have in common is that they were companies that expanded rapidly under charismatic leaders who managed to stifle doubts about where the earnings were coming from, and whether growth was sustainable.
All insurance companies are black boxes - I wrote about banking for some years but find it hard to understand insurance accounting - and AIG was very opaque. Many investors relied on Mr Greenberg’s expertise and detailed grasp of the business.
Citigroup was built through acquisitions and Mr Weill’s top priority was making sure investors were happy. Even so, there were lots of doubts as to whether the machine could keep running indefinitely and Mr Prince had to deal with many regulatory headaches.
Finally, GE under Mr Welch managed to deliver smooth quarterly earnings growth with well-time disposals. But Mr Welch’s GE also depended a lot on the engine of its financial services arm and Mr Immelt has had to work hard to refocus it on non-financial businesses.
In each case, particularly in those of AIG and Citi, it is difficult to see how anyone could easily have stepped into the hot seat. These leaders came to personify their businesses and made themselves difficult to succeed. So, as Mr Welch says, they they lack credibility when they complain about the result.
Have US behemoths like Citi, AIG, GM grown too large to be manageable? Should they be broken up into smaller units? It seems to me that US business has lost its dynamic. “It’s the economy, stupid” - remember?
The current preferred business model seems to be the German KMU (kleine und mittelgrosse Unternehmen) aka small and medium-sized companies, which not infrequently are also family-run, or have been IPO’d but the founding family retains a shareholding.
German chancellor Merkel is now in South America visiting Brazil, Mexico etc. and who is travelling with her? Her political advisors, the press and, occupying a large number of seats in the middle section of her plane are 22 leading German KMU managers.
Posted by: J.J. | May 14th, 2008 at 8:35 am | Report this commentThere are reckoned to be 4300 KMUs in Germany
which are the strongest and most successful.
They are already benefiting from a boom in those countries which are now investing their budget surpluses in infrastructure, renewable energy projects etc.
Russia and Germany - eine Modernisierungspartnerschaft ( a partnership for modernisation). Franz Steinmeier (Germany’s foreign minister) is travelling through Russia, has started in Ekaterinenburg and is working westwards, with a German delegation inc. representatives of the “Mittelstand” (these medium-sized Germnan companies so admired by foreigners for their solid growth and export performance).
President Medvdev wants to establish a middle-class in Russia.
Germany is offering Russia a “Partnership for Modernisation”, unusually wide-ranging, including not only the industrial sector, but also the service sector, the public sector, the legal system, the health sector, the administration of the public and municipal authorities.
Investment by foreigners in “strategic economic sectors of the economy” would be limited by Russia to 25% but “for 90% of German investors that would not be a problem” said Steinmeier acc. to a report in Tagesschau.de
with Germany willing to share its Know-How.
Steinmeier’s aim is to open up opportunities for German KMUs.
Posted by: J.J. | May 14th, 2008 at 6:27 pm | Report this comment